Dialogic Inc. and Broadsoft Inc. supply us with switches for the fixed-line telephony services based on Internet Protocol (“VoIP”). As part of the mentioned above with Ericsson, these services will gradually shift to equipment supplied by Ericsson. and circuit switched calls.
All telecommunications providers with general licenses in Israel have provisions in their licenses requiring them to connect their networks with all other telecommunications networks in Israel. Currently, our network is connected directly with all other telecommunications networks operating in Israel.
We have formal interconnect agreements with all Israeli cellular and with the other fixed-line and voice over cellular companies. The interconnect tariffs are set forth in the Interconnection Regulations that impose a uniform call interconnect tariff for all cellular operators.
Our network is connected directly to Paltel, the Palestinian fixed-line operator, Wataniya, a Palestinian cellular operator, and indirectly to Jawwal, the cellular operator of Paltel. The interconnect tariffs are set out in commercial agreements.
Within the Israeli telecommunications market there are 4 major communication groups: Bezeq, HOT, Cellcom and Partner, as well as a number of smaller operators. See Item "3D.2f"Item 3D.2b Competition resulting from the full service offers by telecommunications groups and additional entrants into the mobile telecommunications market, as well as other actual and potential changes in the competitive environment and communications technologies, may continue to cause a further decrease in mobile and fixed-line service tariffs as well as an increase in subscriber acquisition and retention costs, and may continue to reduce our subscriber base and increase our churn rate, each of which could adversely affect our business and results of operations."
We compete principally on the basis of telecommunications service quality, brand identity, variety of handsets and other equipment, tariffs, value-added services and the quality of customer services.
The table below sets forth an estimate of each operator’s share of total subscribers in the Israeli cellular market at year-end for the years 20132016 to 2017.2020.
* Based on Partner subscriber data, as well as information contained in published reports, and public statements issued by other operators.
In April 2015, the MoC approved a 15-year network sharing agreement between Partner and HOT Mobile pursuant to which the parties created a limited partnership to operate and develop a radio access network to be shared by both parties. See “Item 4B.8 Our Network- Cellular Network Sharing Agreement”.
In May 2013, we signed an MVNO agreement with Telzar with respect to their use of Partner’s network as an MVNO.
In addition, Paltel operates a GSM mobile telephone network under the name “Jawwal” in the Palestinian Administered Areas. Paltel also operates a fixed-line network. Paltel’s GSM network competes with our network in some border coverage overlap areas. A second Palestinian operator, Wataniya launched its GSM network during 2009.
Several service providers offer competitive roaming solutions. The service is offered, among others, by the International Long Distance vendors as well as by specialized enterprises. See also "Item 3D.1i Potential future regulation of roaming services may decrease our roaming revenues and negatively affect our income."
In the fixed-line market, our main competitors are Bezeq, Israel’s largest telecommunications provider and the primary fixed-line operator, HOT Telecom, and other telecommunication services providers, including Cellcom who operate in the fixed-line market. The Bezeq Group, the HOT Group and Cellcom provide cellular telephony services, ILD services, PRI, internet broadband access, ISP services, transmission and data communications services and multi-channel television services.
We compete principally on the basis of the variety of telecommunications services and offers which include bundled and triple service packages, service quality, brand identity, the variety of handsets and other equipment, tariffs and value-added services.
The Ministry of Communications allowed HOT Telecom LLP, HOT Telecommunication and HOT Mobile to sell and market each other’s services and exchange information regarding such marketing activities.
Once an effective wholesale fixed-line market is operating, the Ministry of Communications may cancel the structural separation imposed on the Bezeq and HOT Groups. This will allow the groups to offer attractive bundles that include all of the above services that may result in a loss of market share by Partner in all relevant telecom markets. See “Item 3D.1c3D.1c3D.1a If the structural separation provisions (whichwhich apply to Bezeq and HOT) are not enforced or are removed (in part or in whole) before we have established ourselves in the fixed-line and TV markets, this would adversely affect our business and results of operations.”
In the ILD services market, we compete with Netvision from the Cellcom Group, Bezeq International, Xfone, Hashikma Communications Marketing Ltd., Telzar 019 International Telecommunication Service Ltd, Golan Telecom International Ltd. and HOT Mobile International Telecommunications Ltd.
In the ISP services market, we compete with Netvision, Bezeq International, HOT Net from the HOT Group, Xfone, Triple C Cloud Computing Company Ltd., Telzar 019 International Telecommunication Service Ltd, Qwick linq 011 International Ltd., and 099 Primo Communications Ltd.
In the TV services market, we compete with Yes, a subsidiary of Bezeq, which offers TV services provided via satellite and via OTT; In 2019 Bezeq announced that Yes will migrate its satellite based broadcasting TV services to OTT, HOT that offers TV services provided via cable and via OTT, Cellcom that offers hybrid OTT-DTT TV services and Triple C Cloud Computing Company Ltd. that offers TV services via OTT. In addition, there are international VOD content providers that offer complementary TV content. See also “Item 4B.2 Special characteristics of the Fixed-Line Telecommunications Industry in Israel”.
We depend upon a wide range of information technology systems to support network management, subscriber registration and billing, customer service, marketing and management functions. These systems execute critical tasks for our business, from rating and billing of calls, to monitoring our points of sale and network sites, to managing highly segmented marketing campaigns. We have devoted resources to expanding and enhancing our information technology systems, including Customer Relations Management (“CRM”) systems, which have contributed to our customers’ satisfaction with our service, as well as updating our financial management and accounting system. We believe these systems are an important factor in our business success.
While many of our systems have been developed by third-party vendors, all of them have been modified and refined to suit our particular needs. In certain instances, we have developed critical information technology capabilities internally to meet our specific requirements. In connection with our transformation into a diversified multi-service communications provider, we have completed significant milestones in our CRM upgrade project. In addition, the Company invested resources to improve the quality of the IT processes and billing accuracy.
We are the registered owners of the trademark “Partner” in Israel with respect to telecommunications-related devices and services, as well as additional trademarks. We have also registered several internet Web domain names, including, among others: www.partner.co.il. 012 Smile is the registered owner of several trademarks in Israel with respect to telecommunications-related services that include the numbers “012”. In addition, 012 Smile has registered several internet Web domain names, including, among others, www.012.net and www.012.net.il. Partner is the assignee in a patent application filed in March 2012 that claims a method for delivering short messages originated by roaming prepaid subscribers. A Notice of Allowance was issued for the application in September 2013 and a patent was issued on January 14,in 2014.
In addition, we are a full member of the GSMA Association. In conjunction with the promotion and operation of our GSM network, we have the right to use their relevant intellectual property, such as the GSM trademark and logo, security algorithms, roaming agreement templates, and billing transfer information file formats. We are eligible to remain a member of the GSMA Association for as long as we are licensed to provide GSM service.
We operate within Israel primarily under the Telecommunications Law, the Wireless Telegraphy Ordinance (New Version), 1972 (the “Wireless Telegraphy Ordinance”), the regulations promulgated by the Ministry of Communications and our license.telecommunication licenses. The Ministry of Communications issues the licenses which grant the right to establish and operate mobile telephone and other telecommunication services in Israel, and sets the terms by which such services are provided. The regulatory framework under which we operate consists also of the Companies Law, the Securities Law, the Planning and Building Law, the Consumer Protection Law, 1981, and the Non-Ionizing Radiation Law. Additional areas of Israeli law may be relevant to our operations, including antitrust law, specifically the Economic Competition Law, 1988 (previously titled the Restrictive Trade Practices Law, 1988) the Class Actions Law, 2006, the Centralization Law, 2013 and administrative law.
The principal law governing telecommunications in Israel is the Telecommunications Law and related regulations. The Telecommunications Law prohibits any entity, other than the State of Israel, from providing public telecommunications services without a license issued by the Ministry of Communications.
General licenses, which relate to telecommunications activities over a public network or for the granting of nationwide services or international telecommunications services, have been awarded to the Bezeq Group, to the HOT Group, to four other cellular operators besides Partner and to the international operators. In addition, the Ministry of Communications has granted MVNO licenses to a number of companies. During 2015 and 2016, the Ministry of Communications substituted almost all of the MVNO licenses and all general licenses for ILD services and unique-general licenses for fixed line services, with a single type of general unified license which governs all the services regulated under all of such licenses.
The Ministry of Communications has the authority to amend the terms of any license. The grounds to be considered in connection with such an amendment are government telecommunications policy, public interest, the suitability of the licensee to perform the relevant services, the promotion of competition in the telecommunications market, the level of service and changes in technology. The Ministry of Communications may also make the award of certain benefits, such as new spectrum, conditional upon the licensee’s consent to a license amendment. The Ministry of Communications also has the authority to revoke, limit or suspend a license at the request of the licensee or when the licensee is in breach of a fundamental condition of the license, when the licensee is not granting services under the license or is not granting services at the appropriate grade of service or when the licensee has been declared bankrupt or an order of liquidation has been issued with respect to the licensee. Public interest may also be grounds for the rescission or suspension of a license.
The Ministry of Communications, with the consent of the Ministry of Finance, may also promulgate regulations to determine interconnect tariffs, or formulae for calculating such tariffs. Moreover, the Ministry of Communications may, if interconnecting parties fail to agree on tariffs, or if regulations have not been promulgated, set the interconnect tariff based on cost plus a reasonable profit, a benchmark (derived from relevant retail prices in Israel or abroad), or based on each of the interconnecting networks bearing its own costs.
The Telecommunications Law also includes certain provisions which may be applied by the Ministry of Communications to general licensees, including rights of way which may be accorded to general licensees to facilitate the building of telecommunications networks or systems and a partial immunity against civil liability which may be granted to a general licensee, exempting the licensee, among others, from tort liability with the exception of direct damage caused by the suspension of a telecommunications service and damage stemming from intentional or grossly negligent acts or omissions of the licensee. The Ministry of Communications has applied the partial immunity provisions to us, including immunity in the event that we cause a mistake or change in a telecommunication message, unless resulting from our intentional act or gross negligence. The Ministry of Communications initiated a review to re-evaluate the scope of the immunity provisions.
The Ministry of Communications is authorized to impose significant monetary sanctions on a license holder that breaches a provision of the Telecommunications Law or of its license.
Provisions prohibiting Partner from engaging in anti-competitive practices can be found in our license and in the licenses of the other telecommunications operators, in the various telecommunications regulations and in the Restrictive Trade PracticesEconomic Competition Law. Our license emphasizes the principle of granting users equal access to the systems of each of the operators upon equitable terms. The Telecommunications Law also provides certain protection against disruption of telecommunications services.
The Israeli Securities Authority, or ISA may impose various civil enforcement measures, including financial sanctions, payment to the harmed party, prohibition of the violator from serving as an executive officer for a certain period of time, annulment or suspension of licenses, approvals and permits granted under securities and securities-related laws and adopt an agreed settlement mechanism as an alternative for a criminal or administrative proceeding. In case of a violation by a corporation, the Israeli Securities laws provide for additional responsibility of the Chief Executive Officer in some cases, unless certain conditions have been met, including the existence of procedures for the prevention of the violation, as part of an internal enforcement plan. The Company is prohibited from insuring, paying or indemnifying directors or senior officers for financial sanctions imposed on them subject to certain exemptions set forth in the law.
The Company has implemented an internal enforcement plan and has implemented an internal antitrust enforcement plan intended to ensure that all relevant parties in the Company comply with antitrust laws and regulations. The Company provides ongoing guidance and training to the Company's directors, office holders and relevant employees.
4B.12e - ii | Wholesale Bit Stream internetMoC’s update to Bezeq's wholesale BSA tariffs applicable to its existing copper network |
In December 2020, the MoC published an update to Bezeq’s wholesale tariffs applicable to the BSA (bit stream access) service provided over its existing copper network. The tariffs for this service are composed of a fixed monthly per-line tariff and a variable monthly tariff (which depends on the cumulative peak capacity of data consumed by the relevant subscribers during said month). In its update of these tariffs, the MoC reduced the fixed per-line tariff from 36 NIS per month to 30.6 NIS per month, and substantially reduced the capacity tariff from 10.2 NIS per Mbps per month to 6.5 NIS per Mbps per month.
4B.12e - iii | MoC decision regarding Bezeq’s wholesale BSA tariff applicable to its future fiber-optic network |
In August 2020, the MoC published its decision regarding the maximum tariff that Bezeq will be allowed to charge for access to the BSA (Bitstream Access) service over Bezeq's fiber-optic network. The maximum tariffs have been set as follows - for a line with a speed of up to 550 Mbps the maximum tariff will be NIS 71 per month (excluding VAT) and for a line with a speed of up to 1,100 Mbps the maximum tariff will be NIS 79 per month (excluding VAT). These tariffs shall not include installation fees. These tariffs mark a decrease from the initial tariffs proposed by the MoC in its hearing on this matter (71 NIS for a speed of up to 400 Mbps, and 85 NIS for a speed of up to 1,100 Mbps), however, the initial tariffs proposed were meant to include installation costs.
4B.12e - iv | Upgrade of Bezeq’s existing copper infrastructure to VDSL35b Technology |
In July 2020, Bezeq reported that the MoC has allowed it make use of VDSL35b Technology, According to Bezeq’s report, this technology will allow it to substantially improve internet connection speeds and will allow it to market connections of up to 200 Mbps. Bezeq’s report states that the rollout of this new technology is expected to be limited to approximately 230,000 subscribers. According to the MoC’s approval, the relevant retail offering may be launched four months after the update to the existing interface with wholesale providers is published by Bezeq. Bezeq launched the VDSL35b Technology during November 2020. The launch of this technology allows Bezeq to better respond to FTTH (Fiber to the Home) services offered by the Company, but would also allow the Company to improve the speed of the wholesale infrastructure services it offers, thus improving its TV services.
4B.12e - v | MoC decision regarding the joint use of fiber-optic infrastructure in existing residential buildings |
In July 2020, the MoC published its decision on the joint use and deployment of fiber-optic infrastructure in existing residential buildings. The decision stipulates that the first operator to deploy fiber-optic cables in an existing residential building (with more than 4 apartments) will be required to offer other operators to jointly use those cables in return for them taking part in the costs involved plus a reasonable premium. The first operator to deploy in such buildings will also be required to deploy the infrastructure in such a way as to enable at least one more operator to jointly use such infrastructure (in addition to the operator/operators who have agreed to joint use of the infrastructure).The implementation of this decision involves an agreement between the relevant operators. As of date, the Company has yet to reach an agreement on such joint use with another operator.
4B.12e - vi | Voluntary Tariffs for wholesale BSA service on HOT's infrastructureHot Telecom’s network |
In December 2019, the MoC published a hearing suggesting a substantial reduction to the wholesale BSA (bit stream access) services on HOT Telecom's network. The MoC based its suggested tariffs on a benchmark of HOT Telecom’s existing retail offerings and deducted the estimated retail costs involved in providing these services (a “retail minus” pricing approach). The Company filed its position regarding this hearing and argued for lower tariffs.
In July 2020, the MoC published a decision in which it adopted HOT Telecom’s voluntary proposal for a reduction in its BSA tariffs (in place of the tariffs initially suggested in the MoC’s hearing). For example, the new voluntary tariffs include a reduction in the fixed monthly per-line tariff for a 200 Mbps line (from 55.8 NIS per line to 39 NIS) and a reduction in the variable monthly tariff (from 15.6 NIS per Mbps to 12.5 NIS). The new voluntary tariffs came into effect on July 15, 2020.
4B.12e - vii | Amendment to the Communications Law regarding the deployment of fiber-optic infrastructures in Israel |
Following the recommendations of the Inter-Ministerial team on the deployment of ultra-wide band communications infrastructures and the Minister’s decision regarding these recommendations, in December 2020, an amendment to the Communications Law was published. This amendment lays out the framework and incentives for the deployment of fiber-optic communication infrastructures in Israel and includes the following:
Bezeq will be allowed to choose in which statistical areas it will roll out its fiber-optic network. Within such areas, Bezeq will be required to connect 100% of households to its fiber-optic network within six years. Bezeq is obliges to announce the areas in which it intends to deploy by the end of May 2021 (this period may be extended by the Minister by up to two months) (the “Announcement”);
In the areas where Bezeq decides not to lay a fiber-optic network, another operator will be chosen (by a reverse tender process) to deploy a fiber-optic network to all households in said area. Such operator will receive an incentive for such deployment from a universal service fund and will enjoy exclusivity in deploying a fiber-optic network in this area (but will be obliged to provide other operators with a wholesale BSA (bit stream access) service provided over their fiber-optic network;
The universal service fund incentive plan will be funded by a tax on all relevant telecommunications operators (including Bezeq and Partner) at an annual rate of 0.5% of income (deducting Interconnection fees and fees paid for use of another operators’ network);
In the areas where Bezeq decides not to lay a fiber-optic network, it and its subsidiaries will not be allowed to deploy a fiber-optic network. This prohibition does not apply to business subscribers. Furthermore, the Minister may allow Bezeq to deploy a fiber-optic network to households in such areas provided the number of households in such areas does not exceed 10% of the number of households Bezeq has committed to deploying in its Announcement.
4B.12e - viii | Structural separation provisions applicable to the Bezeq and Hot groups |
In June 2017,2020, the MinistryMoC published the report of the inter-departmental team (“the Team”) tasked with examining the structural separation provisions applicable to the Bezeq and Hot Telecom groups. After weighing the alternatives, and considering the ramifications of canceling the current provisions – the Team recommended not to cancel the current structural separation provisions at this time. The Team’s MoC members were of the opinion that the current provisions applicable to Bezeq have been effective thus far and cancelling them would severely harm competition and the welfare of consumers.
In February 2019, Bezeq filed a petition with the High Court of Justice against the MoC for immediate cancellation of the structural separation within the Bezeq Group. In February 2021, following the recommendation of the Court, Bezeq withdrew its petition.
4B.12e - ix | Approval of the HOT-IBC Merger |
In September 2020, Cellcom announced that it, together with the Israel Infrastructure Fund, entered into an investment transaction with Hot Telecommunication Systems Ltd ("HOT") in IBC Israel Broadband (2013) Ltd (“IBC”). According to Cellcom’s announcement, HOT shall become an equal partner in IBC, and hold indirectly 23.3% of IBC’s share capital. In January 2021, the Competition Commissioner granted its approval for the transaction. In February 2021, The Minister of Communications publishedgranted its approval for the maximum tariffs for HOT's wholesale bit-stream internet access service. The Ministry has yettransaction under the following conditions, among others:
IBC will be required deploy its network to publish1.7 million households within 5 years;
IBC will be required to provide a "shelf offer" to any operator interested in purchasing its decisionsservices. This shelf offer will include the services and the terms specified in IBC’s IRU Agreements with Cellcom and HOT and be subject to a minimum obligation regarding several critical issues which have so far delayed the actual implementationnumber of this wholesale market. In addition, HOT has failedlines to implement some aspectsbe purchased and offer a reduced tariff to any operator purchasing 5% or more of the service and these await enforcement by the Ministry. Therefore, there is still no clear deadline for the implementationnumber of the service.households accessible to IBC’s network;
IBC would also be obliged to offer up to 10% discount on its wholesale prices to any operator who would purchase over 15,000 lines.
4B.12e - iii Hearings and Examinations
4B.12e - x | Hearings and Examinations |
The Ministry of Communications and other regulators have also conducted hearings and examinations on various matters related to our business, such as:
| · | Roaming fees. The Ministry of Communications is evaluating the cost of roaming and may introduce new regulations that would limit fees charged by Israeli cellular companies for calls made by the customers of foreign network operators while they are in Israel and using our network, as well as for calls made by our own customers using their handsets abroad. The Ministry of Communications has requested additional and more specific international roaming data from the cellular companies. Because we consider roaming charges to be a significant source of revenue, such regulatory limits could adversely affect our revenues.
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| · | Roaming services. In August 2014, the Ministry of Communications published a hearing aimed at increasing competition in roaming services abroad currently provided by cellular licensees. As part of the hearing, the Ministry proposed to enable every cellular subscriber to receive roaming services abroad from operators which are not his cellular provider (on top of his cellular operator) while keeping his cellular number. These alternative roaming providers include other cellular licensees, MVNOs, ISPs, ILD licensees and fixed telephony licensees. The Ministry of Communications also suggested determining various measures intended to improve transparency and to limit subscriber payments only to the exact volume of services consumed. Such measures include: all roaming calls abroad (incoming and outgoing) would be billed using time units of 1 second; all roaming data sessions would be billed using volume units of 1KB; the billable duration of all voice calls would be from the second in which the call was connected and until it ended (explicitly excluding any wait period from pushing the “call” button until the call is connected). Because we consider roaming charges to be a significant source of revenue, such regulatory limits could adversely affect our revenues.
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| · | Frequency fees. The Ministry of Communications is conducting a re-assessment of the frequency fees set forth in the law, which includes the assessment as to its economic value, in order to support effective allocation and the utmost utilization of the frequencies.
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| · | Roaming services during emergencies. In September 2012, the Ministry of Communications published a hearing with respect to roaming during a state of emergency or during a significant continuous malfunction in which the Ministry of Communications considers determining that under certain conditions, upon the Minister of Communications’ instruction, cellular operators that have their own network infrastructure, will be required to provide roaming services to the subscribers of other cellular operators that have network infrastructure, whose network has been rendered non-functioning for a significant amount of time following an event resulting from a state of emergency, a telecommunications crisis or during a significant continuous malfunction. The Company submitted its response to the hearing in October 2012. The revenues of the Company would be adversely affected if these proposed new regulations are adopted.
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| · | Intervention in international call market. In October 2013, the Ministry of Communications published a hearing regarding new regulation of the international call market. In the hearing, it was proposed by the Ministry to allow all general licensees (including MVNOs) to provide international call services to their subscribers, with respect to the international destinations which are included in their subscribers’ tariff plans and to international destinations for which the tariff is lower or equal to the tariff of a call on the licensee’s network (“Included Destinations”). The Ministry of Communications also proposed in the hearing that the general licensees (such as cellular operators) would not be allowed to collect an interconnect fee for outgoing international calls. The Company submitted its response to the hearing in January 2014. In October 2014, the Ministry published a secondary hearing on this matter, in which it proposed that all outgoing international calls which are not to Included Destinations, shall be preceded with a voice message stating the tariff of such call and allowing the subscriber to disconnect without being charged. The Company submitted its response to this secondary hearing in October 2014. The revenues of the Company may be adversely affected if the changes proposed in these hearings are adopted.
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| · | Filtering of offensive websites and content. In August 2014, the Ministry of Communications published a hearing regarding proposed amendments to telecommunications licenses granted to various operators, including the Company and its subsidiaries. According to the Telecommunications Law, ISP and cellular licensees, are required to provide a service for filtering of offensive websites and content at no additional cost to the subscriber. The Law also includes provisions which oblige said licensees to inform their subscribers of the dangers of internet use (including offensive websites and content). As part of the hearing, it is proposed to amend the ISP and cellular licenses to include additional requirements to the existing requirements described above. The proposed amendments include, among others, the following matters: (1) detailed specifications of the filtering service; (2) requirements regarding the informational leaflet to be provided to the subscriber; and (3) an obligation to offer filtering software to be installed on any type of terminal equipment. In October 2014, the Company filed its written position seeking to limit the impact of the proposed amendments. In November 2016, the Ministry of Communications sent the operators a request for information regarding the execution of the filtering obligation of offensive websites and content, in light of the complaints received with respect to the implementation of the existing provisions regarding this matter. In this context, the Ministry sought to receive information with respect to, among others, the tools used by the Company to implement the license provisions and the rules and laws by which the filtering is executed. In addition, a number of draft bills have been submitted to the Knesset suggesting broadening the existing requirements regarding content and site filtering.
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| · | Consumer protection-call centers. In August 2014, the Ministry of Communications published a hearing regarding proposed amendments to telecommunications licenses granted to various operators, including the Company and its subsidiaries. As part of the hearing, it is proposed to amend the licenses with respect to the quality of service of the licensees’ call centers. The amendments include, among others, the following matters: the maximum response times for each call and the average daily response times; recording requirement regarding a billing inquiry, termination of all services or termination of a single service calls; and requirement to issue and to publish on the licensees’ websites detailed weekly reports that will include complete data in relation to their conduct regarding response times. The Company submitted its response to the hearing in October 2014. If the final decision in this hearing process will be similar to that suggested in the hearing, the Company may be negatively affected by the results of the hearing.
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| · | Transmission line connections between ISP providers' facilities and fixed-line infrastructure. In April 2015, the Ministry of Communications published a hearing, stating that Bezeq and HOT Telecom (the "infrastructure owners") would not be allowed to oblige ISP providers to purchase "Gigabit Ethernet" services (transmission services which connect ISP's facilities to Bezeq and HOT Telecom's infrastructures) from the infrastructure owners and the ISP providers would be allowed to purchase "Gigabit Ethernet" services from other licensees or perform such connections themselves. As part of the hearing, the Ministry stated that such a practice of the infrastructure owners does not presumably comply with the Telecommunications Law, which states that a licensee will be forbidden to condition the supply of a certain telecommunications service upon the supply of another telecommunications service. The Company submitted its response to this hearing. If the final decision in this hearing process will be as suggested in the hearing, the Company may be positively affected by the results of the hearing.
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4B.12e - iv The Ministry of Communications policyHearings regarding the fixed-line telecommunications sector
In May 2012, the Ministry of Communications published the final policy document with respect to increasing competitiona reform in the fixed-line telecommunicationsstructure of the Internet Market. The fixed internet access market in Israel was historically divided into two tiers of services: infrastructure services and ISP (internet service provider) service. This split was intended to allow entry of new competitors, which provide services over Bezeq's infrastructure. On October 4, 2020, the MoC published a hearing regarding a reform in the structure of the Internet Market (the “First Hearing”). The First Hearing was aimed at ending the split of this segment into two tiers and allowing Bezeq and Hot Telecom to market a unified product (comprised of both infrastructure and ISP components). This proposed reform was not intended to apply to the business sector. According to the First Hearing, the proposed reform was meant to enter into force on January 1, 2022 allowing ISPs to prepare for the change in the structure of this market. The document adoptedCompany has filed its position regarding this hearing. The Company agreed with the main recommendations ofconsumer need for a unified service but has argued that Bezeq and HOT should not be allowed to market the Hayek Committee, a committee formed byunified product before competition (via the MoC to study and make recommendations regarding the Israeli telecommunications market. The main points were as follows:wholesale market) has been based.
| A. | Sale of wholesale services: |
| i. | The two wireline infrastructure operators that provide retail telecommunication services will be required to offer wholesale services to the other telecommunication providers, that will offer services on the owners’ infrastructure (the wholesale market), based on non-discriminatory conditions. |
| ii. | The wholesale services tariffs and the terms of agreement shall be determined through negotiations between the two wireline infrastructure operators and the service providers. An infrastructure owner that reaches an agreement with such other provider shall be required to offer the same terms, without discrimination, to all other providers. Affiliates of the infrastructure owner shall also be allowed to purchase wholesale services as long as these will be provided without discrimination to all other providers. |
| iii. | The Ministry of Communications shall intervene and set the wholesale tariffs and said terms of agreement, in case an agreement has not been reached between the parties within 6 months from the date of the publication of the policy document or if the agreement between the parties includes tariffs or terms that are unreasonable, may harm the competition, may harm the public welfare or may harm the interest of the service provider. |
| i. | Within 9 months of a signed agreement between said parties, the structural separation between the fixed-line infrastructure owner and its international call provider and internet service provider (ISP) affiliates shall be abolished and replaced by an accounting separation. |
| ii. | The Minister of Communications shall consider providing leniencies or abolishing the structural separation (and replacing it with an accounting separation) between the fixed-line infrastructure owner and its affiliated cellular operator, in accordance with the development of the wholesale market and the pace of development of competition based on packaged services that combine fixed-line services and cellular services in the private sector. |
| iii. | In case a proper and appropriate wholesale market does not develop within 24 months from the date of the publication of the policy document, the Minister of Communications shall act to impose a structural separation in the fixed-line infrastructure owners, between the infrastructure and the services provided through this infrastructure to the end-customers. |
| C. | Supervision over Bezeq Tariffs |
Within 6 months fromAfter considering the date such an agreement is signed betweenvarious positions filed in the said parties,First Hearing, On February 23, 2021, the MinistryMoC published a secondary hearing regarding its proposed reform in the structure of Communications shall act to change the manner of supervision over Bezeq tariffs so that the supervision shall be done by setting a maximum tariff.
| i. | The Ministry of Communications shall examine imposing a requirement to offer unbundled television services that are included in services packages that include telecommunication services (fixed-line and mobile) or broadband access services, which means a requirement to provide them at the same tariff as part of a service package or separately. |
| ii. | The abolishing of the structural separation with respect to multi-channel television shall be done if there is a reasonable possibility to provide a basic package of television services through the internet by service providers that do not own fixed-line infrastructure. |
Internet Market (the “Secondary Hearing”).
In June 2013, since no agreement had been achieved according to clause a(iii) above,its Secondary Hearing, the Ministry of Communications published a hearing regarding a basic offering of wholesale services and their prices, that an infrastructure owner shall be required to offerMoC focused on improving the same terms, without discrimination, to all providers. After a long process involving several hearings (regarding the texts of the relevant service portfolios and the prices of said wholesale services), in November 2014, the Ministry of Communications published the decision of the Minister of Communications regarding regulationmechanisms of the wholesale market as the primary tool for broadband fixed-line telecommunications services - defining a format forleveling the supply of wholesale services and setting a tariff for the supply of these services.
Within this framework, the Minister of Communications decided to amend the licenses ofplaying field between the infrastructure owners -(Bezeq and Hot Telecom) and their competitors, the service providers. The MoC proposed several key performance indicators (“KPIs”) that would indicate whether a competitively effective wholesale market has been established. In addition, the MoC suggested that compensation mechanisms for breach of theses KPI’s would be established in order to balance-out any harm to the competitiveness of the service providers caused by discriminatory acts of the Infrastructure owners. The Secondary Hearing proposed a process for establishing enforceable KPIs on the infrastructure owners that would link the successful implementation of these KPIs with the approval for the marketing of a unified product by the infrastructure owners.
Hearing regarding metering of the cellular licenses’ coverage obligations. In order to increase the effective supervision of the cellular licenses’ coverage obligations the MoC proposed to set updated, equal and uniform indices. In order to achieve this stated goal, The MoC suggested several measures including: requiring periodic reports regarding cellular coverage, requiring specific reports (at the polygon level) concerning cellular coverage in response to complaints in this matter.
Hearing regarding data requirements on the consumption of communication services. In order to improve its view of the market and consumer characteristics, the MoC proposed that licensees would be required to provide it with ongoing (monthly) detailed reports concerning all subscribers and the services provided to each of them. This data includes identifying details of the subscriber (such as his address), detail of the service package he is provided with (including the date of subscription and the prices thereof), and detailed data concerning each service provided to the subscriber. Although the MoC stated that it intends to tokenize this data (thus un-personalizing it), we believe this data requirement still raises serious privacy protection issues which the company has specified in its written position regarding this hearing.
| • | Hearing regarding a proposed framework for the shutdown of 2G and 3G cellular networks. In order to improve spectral efficiency, the MoC has published a hearing which proposes a framework for the shutdown of 2G and 3G networks and free up their spectral assets to be used in 4G and 5G networks. The proposed framework includes the following steps: Shutdown of 2G and 3G network by year end 2025; Operators will not be allowed to activate new lines in 2G or 3G technologies beginning July 1st. 2022; No 2G or 3G user-end equipment will be allowed to be imported beginning July 1st. 2021. As part of this the MoC stated that it may terminate the use of the spectrum awarded to us and which is currently used for 2G and 3G. We strongly oppose such moves as they conflict with the terms of the award of such frequencies, will hinder our ability to respond to increased demand and would void any incentive for re-farming of frequencies used by 2G and 3G networks to more advanced networks (4G and 5G). |
Bezeq – Yes merger. In March 2014, the Antitrust Commissioner approved a merger between Bezeq and HOT -its subsidiary, DBS Satellite Services (1998) Ltd. ("Yes"), a multi-channel pay TV provider, subject to certain conditions. These conditions, included, among other things, the following: (1) Bezeq and Yes shall not be a party to prescribeexclusivity arrangements regarding audio-visual content which is not locally produced by it (or for it); and (2) The Bezeq groups TV services are to be provided and sold under equal terms to all of Bezeq’s subscribers, whether they purchase other services from Bezeq or not. Under this condition, if the Bezeq Group chooses to sell a triple-play package at a certain price, it must sell the TV services at a separate price so that the price of the TV services will be the same whether the services were purchased as part of the Triple-play package or whether they were purchased as stand-alone TV services. In November 2020 the Competition Authority published a consultation in which it considered amending the above-mentioned conditions in order to allow the Bezeq Group to sell service portfolio - managed broadband access and wholesale telephony service. The regulations attached to the Minister of Communications’ decision prescribepackages that include television services without the obligation to supplysell the wholesaletelevision services including ancillary services, as well as maximum tariffs (requiringat a separate price that will be uniform for package purchasers and those who do not purchase packages. In addition, the approvalCommissioner considered amending the term prohibiting exclusivity so that it does not apply to the purchase of foreign content. On the other hand, the Commissioner proposed that with regard to sports content and local content that does not fall within the definition of the Minister of Finance) forterm Local Productions, the said wholesale services.original condition will remain in force. The tariffs set at this stage, relate solely to services to be provided by Bezeq. The Ministry of Communications initiatedCompany filed a separate regulation process addressingdetailed position strongly opposing the tariffs for the wholesale services to be provided by HOT, a cable infrastructure owner, as described hereinafter.
In December 2014, Bezeq submitted a petitionproposed amendments to the High Courtmerger conditions. As of Justice againstdate, the MoC and the Minister regarding said decision. In the petition Bezeq claims, among others, that the hearing procedure conducted by the MoC did not comply with the administrative law requirements and that both the wholesale telephony service and the tariffs that were set for the wholesale market services deviate from the Minister’s authority under the Law. The Company was nominated as a respondentCompetition Authority has yet to the petition. If changes are made to the Minister’spublish its decision that cause an increase in the wholesale tariffs or a worsening of the technical and operational standards set by the MoC,on this could negatively affect our results of operations. In October 2015, the Court published a decision, in which the Court rejected Bezeq claims with respect to the feasibility of implementation of a telephony wholesale market. The MoC has since published a consultation with respect to the resale of Bezeq's telephony services during an interim period of approximately one year.matter.
Margin Squeeze - In November 17, 2014, the Ministry of Communications published a hearing to examine the format for preventing a “margin squeeze” by the fixed-line infrastructure owners - Bezeq and HOT - which occurs when an infrastructure owner lowers its retail prices and narrows the margin between its retail prices and the wholesale price of those infrastructure inputs being purchased by service-providers to a level that erodes the service-providers’ margin to the point of eradicating the economic feasibility of continuing their operations, the objective being to push service-providers out of the market. The Company submitted its response to the hearing in December 2014. In August 29, 2017, the Ministry of Communications published a secondary hearing on this subject in which it suggested several changes to the format suggested in the first hearing on this issue. The Company submitted its response to the secondary hearing in November 2017. Should the Ministry of Communications’ decision with regard to the margin squeeze mechanism not prove effective in ensuring the effectiveness of the wholesale market, our profitability and results of operations could be materially adversely affected.
In December 2015, the MoC issued an administrative instruction regarding the use of terminal equipment, as part of the wholesale market services, in order to ensure continuity of the service for the end users. As part of its decision, the MoC established the following arrangements:
4B.12e - xi | o | A service provider which loaned or rented terminal equipment to its subscriber, that later becomes a subscriber of another service provider in the wholesale market, will not be able to prevent or limit the continuity of the subscriber's ordinary use of the terminal equipment, for a period of 21 days;Anti-Trust Regulation. |
| o | The payment to the service provider for the terminal equipment during such interim period will be performed by the subscriber, in a similar manner to its arrangement with its previous service provider (and the subscriber would not pay any payment for such equipment to the new service provider). |
In July 2015, one day before the date of entry into force of the wholesale service of access to passive infrastructure of infrastructure owners, the Ministry of Communications published new instructions regarding the compliance with security requirements in relation to the use of HOT and Bezeq's passive infrastructure, valid until November 1, 2015. According to the instructions, during such period, the performance of the work required for the grant of access to HOT and Bezeq's infrastructure will be made only by the infrastructures owners (Bezeq or HOT) and not by the service providers. In addition, the instructions set restrictions regarding the access to the infrastructure owner's information, concerning the deployment of infrastructure. As part of the Economic Program Law for the years 2017-2018, that was published at the end of December 2016 it was determined, among others, that Bezeq and HOT Telecom will be required to allow other domestic operators including Partner, access to passive infrastructures. Following the enactment of this legislation, Bezeq has begun to partially observe its duty to provide access to its passive infrastructures and deployed several fiber optic cables for licensees using its own personnel.
On October 19, 2017, the Ministry of Communications instructed Bezeq to comply with its existing policy and clarified that it must allow other domestic operators (including Partner) to deploy fiber optic cables with their own contractors (without the need for the use of Bezeq personnel). This change has the potential to substantially increase the speed of deployment of Partner's fiber infrastructure. Bezeq has filed an administrative appeal to the Supreme Court against the MoC's demand for compliance, but its appeal has been rejected on January 29, 2018.
In December 2015, the Ministry of Communications published a hearing with respect to the resale of Bezeq's telephony services in the wholesale market. In the hearing, the Ministry proposed to allow Bezeq to offer telephony services in a resale format, instead of the wholesale telephony service, for a period of 12 months; this, by amendment of Bezeq's general license and adding the said services to the list of services that Bezeq may provide. Respectively, the Ministry is considering amending Bezeq's license so that during this interim period, Bezeq will not be obliged to offer wholesale telephony services. According to the hearing, the payment offered by Bezeq for the resale of services will be derived from the retail prices of Bezeq's attractive minute bundles which are reduced at a rate of 40%, and said reduction should be derived from the average rates for the first and second year tariffs of these bundles. The Company submitted its response to this hearing in the beginning of 2016 in which it argued against the interim arrangement and the MoC authority to set wholesale prices in a license (such regulation requires the setting of regulations to be co-signed by the Minister of Finance). Alternatively, the Company argued that the suggested price for the resale telephony service is too high and does not leave any margin for competition and market entry.
In May 2017, the Ministry of Communications published its decision on this issue and obliged Bezeq to offer its telephony services to other operators in a resale format as of July 2017. The price paid to Bezeq by the operators for the resale telephony was suggested by the Ministry to be set substantially higher than the prices set for the planned full wholesale telephony product.
According to the decision, the date of implementation of the full wholesale telephony service has been postponed at the latest by July 18, 2018. However, the Ministry will consider whether to extend the temporary resale arrangement or to make it permanent in light of the competitive situation over the coming year.
The Ministry allowed interested parties to present their positions regarding the prices set for the resale format and the Company filed its response with the Ministry. The Company argued for lower tariffs for the resale telephony product and insisted that this arrangement can only be a temporary arrangement. The Minister committed that any possible change to the price (that may result from the hearing) would be applied retroactively.
The Ministry has not yet decided on any change to the price of the resale service. At the current price level, such service remains unprofitable and has not been taken up by any service provider.
In order to provide an incentive for Bezeq to implement the wholesale market, the MoC has announced that it intends to cancel the regulations requiring Bezeq to maintain a “structural separation” between its fixed-line and mobile telecommunications operations, and to change the current retail fixed-price tariff control mechanism to a “maximum tariff” one. In 2016, the MoC has published official announcements which indicate its satisfaction with the implementation of the wholesale market reform. We have strongly opposed the factual descriptions and the conclusions in the announcement. Furthermore, in December 2016, the MoC also declared its intention to promote the cancelation of "corporate separation" in the Bezeq Group, subject to a hearing, and to publish a hearing in 2017 suggesting canceling the “structural separation” in the Bezeq Group. The Ministry of Finance, the Anti-Trust Commissioner and the State Comptroller have stated their objection to the implementation of the MoC's intent at this stage. If the MoC removes the structural separation provisions based on its above-mentioned announcements before we have firmly established ourselves in the fixed-line telecommunications services market (in both fixed-line telephony and broadband), Bezeq may be able to propose bundled services more effectively than us, and thereby gain a competitive advantage which would negatively affect our results of operations. Also see "Item 3D.1c3D.1c If the structural separation provisions (which apply to Bezeq and HOT) are not enforced or are removed before we have established ourselves in the fixed-line and TV markets, this would adversely affect our business and results of operations."
4B.12e - v Anti-Trust Regulation.
Pursuant to the Israeli Restrictive Trade PracticesEconomics Competition Law, if the Anti-TrustCompetition Commissioner decides that the Israeli cellular market is oligopolistic, the Director General will have the authority to give instructions to all or some of the participants in our market, in order to, among other objectives, maintain or increase the competition level among the participants, the Director General’s authority would include the ability to issue orders to remove or to ease entry or transfer barriers, to terminate a participant’s activity, or otherwise to regulate the activities of the market. Additionally, the Competition Commissioner authorized to give instructions to a monopoly which is a firm holding over 50% of market share or holding significant market stakes that are not temporary and short term.
4B.12f Our Mobile Telephone License
On April 7, 1998, the Ministry of Communications granted to us a general license to establish and operate a mobile telephone network in Israel as well as offer roaming services outside the State of Israel.
Under the terms of the license, we have provided an $80a NIS 5 million (US$ 2 million) guarantee to the State of Israel to secure the Company’s adherence to the terms of the license.
Our license allocates to us specified frequencies and telephone numbers.
Term. Our license was originally valid for a period of ten years (until April 2008), but has been extended until 2022. At the end of this period, the license may be extended for additional six-yearten-year periods upon our request to the Ministry of Communications, and a confirmation from the Ministry of CommunicationsMoC that we have met the following performance requirements:
| · | observing the provisions of the Telecommunications Law, the Wireless Telegraphy Ordinance, the regulations and the provisions of our license; |
observing the provisions of the Telecommunications Law, the Wireless Telegraphy Ordinance, the regulations and the provisions of our license;
| · | acting to continuously improve our mobile telephone services, their scope, availability, quality and technology, and that there has been no act or omission by us harming or limiting competition in the mobile telephone sector; |
acting to continuously improve our mobile telephone services, their scope, availability, quality and technology, and that there has been no act or omission by us harming or limiting competition in the mobile telephone sector;
| · | having the ability to continue to provide mobile telephone services of a high standard and to implement the required investments in the technological updating of our system in order to improve the scope of such services, as well as their availability and quality; and |
having the ability to continue to provide mobile telephone services of a high standard and to implement the required investments in the technological updating of our system in order to improve the scope of such services, as well as their availability and quality; and
| · | using the spectrum allocated to us efficiently, compared to alternative applications. |
using the spectrum allocated to us efficiently, compared to alternative applications.
We believe that we will be able to receive an extension to the license upon request.
Our license may also be revoked, limited or altered by the Ministry of Communications if we have failed to uphold our obligations under the Telecommunications Law, the Wireless Telegraphy Ordinance or the regulations, or have committed a substantial breach of the license conditions. Examples of the principal undertakings identified in our license in this connection are:
| · | We have illegally ceased, limited or delayed any one of our services; |
| · | Any means of control in Partner or control of Partner has been transferred in contravention of our license; |
| · | We fail to invest the required amounts in the establishment and operation of the mobile radio telephone system in accordance with our undertakings to the Ministry of Communications; |
| · | We have harmed or limited competition in the area of mobile radio telephone services; |
| · | A receiver or temporary liquidator is appointed for us, an order is issued for our winding up or we have decided to voluntarily wind up; or |
| · | Any means of control in Partner or control of Partner has been transferred in contravention of our license; We fail to invest the required amounts in the establishment and operation of the mobile radio telephone system in accordance with our undertakings to the Ministry of Communications; We have harmed or limited competition in the area of mobile radio telephone services; A receiver or temporary liquidator is appointed for us, an order is issued for our winding up or we have decided to voluntarily wind up; or Partner, an Office Holder in Partner or an Interested Party in Partner or an Office Holder in an Interested Party of Partner is an Interested Party in a competing mobile radio telephone operator or is an Office Holder in a competing mobile radio telephone operator or in an interested party in a competing mobile radio telephone operator without first obtaining a permit from the Ministry of Communications to do so or has not fulfilled one of the conditions included in such permit. See “Item 4B.12f Our Mobile Telephone License-Our Permit Regarding Cross Ownership.” |
Our license authorizes us on a non-exclusive basis to establish and operate a mobile telephone network in Israel. The Ministry of Communications amended our license in August 20152020 to include the provision of 4G and 5G services in the 700, 900, 1800, 2100, 2600 and 3500 MHZ spectrum and to allow us access network sharing with HOT Mobile, another cellular operator at a bandwidth of up to 25 MHZ in the 1880 MHZ spectrum.operator.
License Conditions. Our license imposes many conditions on our conduct.
| · | We must at all times be a company registered in Israel. |
We must at all times be a company registered in Israel.
| · | Our founding shareholders and their approved substitutes must hold, in the aggregate, at least 26% of each of our means of control. Furthermore, the maintenance of at least 26% of our means of control by our founding shareholders and their approved substitutes allows Partner to be protected from a license breach that would result from a transfer of shares for which the authorization of the Ministry of Communications was required, but not obtained. |
Our founding shareholders and their approved substitutes must hold, in the aggregate, at least 26% of each of our means of control. Furthermore, the maintenance of at least 26% of our means of control by our founding shareholders and their approved substitutes allows Partner to be protected from a license breach that would result from a transfer of shares for which the authorization of the Ministry of Communications was required, but not obtained.
| · | Israeli entities from among our founding shareholders and their approved substitutes must hold at least 5% of our issued and outstanding share capital and of each of our means of control. “Israeli entities” are defined as individuals who are citizens and residents of Israel and entities formed in Israel and controlled, directly or indirectly, by individuals who are citizens and residents of Israel, provided that indirect control is only through entities formed in Israel, unless otherwise approved by the Israeli Prime Minister or Minister of Communications. |
Until February 2021, at least 5% of our issued and outstanding share capital and of each of our means of control had to have been held by Israeli entities from among our founding shareholders and their approved substitutes See "Item 3D.1l Our cellular telephone license imposes certain obligations on our shareholders and restrictions on who can own our shares. Ensuring compliance with these obligations and restrictions may be outside our control. If the obligations or restrictions are not respected by our shareholders, we could be subject to significant monetary sanctions or lose our license." “Israeli entities” are defined as individuals who are citizens and residents of Israel and entities formed in Israel and controlled, directly or indirectly, by individuals who are citizens and residents of Israel, provided that indirect control is only through entities formed in Israel, unless otherwise approved by the Israeli Prime Minister or Minister of Communications.
Until February 2021, at least 10% of our Board of Directors had to be appointed by Israeli entities, as defined above, provided that if the Board of Directors was comprised of up to 14 members, only one such director must be so appointed, and if the Board of Directors was comprised of between 15 and 24 members, only two such directors must be so appointed. See 3D.1l Our cellular telephone license imposes certain obligations on our shareholders and restrictions on who can own our shares. Ensuring compliance with these obligations and restrictions may be outside our control. If the obligations or restrictions are not respected by our shareholders, we could be subject to significant monetary sanctions or lose our license.
Matters relating to national security shall be dealt with only by a Board of Directors' committee that has been formed for that purpose. The committee includes at least 4 members, of which at least one is an external director. Only directors with the required clearance and those deemed appropriate by Israel’s General Security Service may be members of this committee. Resolutions approved by this committee shall be deemed adopted by the Board of Directors.
The Ministry of Communications shall be entitled to appoint an observer to the Board of Directors and its committees, subject to certain qualifications and confidentiality undertakings.
| · | At least 10% of our Board of Directors must be appointed by Israeli entities, as defined above, provided that if the Board of Directors is comprised of up to 14 members, only one such director must be so appointed, and if the Board of Directors is comprised of between 15 and 24 members, only two such directors must be so appointed. |
| · | Matters relating to national security shall be dealt with only by a Board of Directors' committee that has been formed for that purpose. The committee includes at least 4 members, of which at least one is an external director. Only directors with the required clearance and those deemed appropriate by Israel’s General Security Service may be members of this committee. Resolutions approved by this committee shall be deemed adopted by the Board of Directors. |
| · | The Ministry of Communications shall be entitled to appoint an observer to the Board of Directors and its committees, subject to certain qualifications and confidentiality undertakings. |
Contracting with Customers. Pursuant to our license, we have submitted our standard agreement with customers to the Ministry of Communications for their examination. To date, we have not received any comments from the Ministry of Communications regarding this agreement.
Tariffs. Our license requires us to submit to the Ministry of Communications our tariffs (and any changes in our tariffs) before they enter into effect. Our license allows us to set and change our tariffs for outgoing calls and any other service without approval of the Ministry of Communications. However, the Ministry of Communications may intervene in our tariffs if it finds that our tariffs unreasonably harm consumers or competition.
Payments. Our license specifies the payments we may charge our subscribers. These include one-time installation fees,, one-time SIM card payments,, fixed monthly payments, airtime fees, payments for the use of other telecommunication systems, payments for handset maintenance and payments for additional services. In some of our tariff plans we have chosen to charge only for airtime and use of services. See “Item 4B.5c Tariff Plans.”
Interconnection. Like the licenses of Pelephone, Cellcom and HOT Mobile, our license requires that we interconnect our mobile telephone network to other telecommunications networks operating in Israel, including that of Bezeq and other domestic fixed-line operators, the other mobile telephone operators and the international operators.
Conversely, we must allow other network operators to interconnect to our network. See “Item 4B.8h4B.6h Interconnection”.
Service Approval. The Ministry of Communications has the authority to require us to submit for approval details of any of our services (including details concerning tariffs). In addition, we are required to inform the Ministry of Communications prior to the activation of any service on a specified list of services.
Access to Infrastructure. The Ministry of Communications has the power to require us, like the other telephone operators in Israel, to offer access to our network infrastructure to other operators. We may also be required to permit other operators to provide value-added services using our network.
Universal Service. We are required to provide any service with the same coverage as our existing network. According to our license, we are required to meet certain coverage requirements for our 3G, 4G and 4G5G services.
Territory of License. In May 2000, we were also granted a license from the Israeli Civil Administration, to provide mobile services to the Israeli populated areas in the West Bank. The license is effective until February 1, 2022. The provisions of the general license described above, including as to its extension, generally apply to this license, subject to certain modifications. We believe that that we will be able to receive an extension to this license upon request.
Transfer of license, assets and means of control. Our license may not be transferred, mortgaged or attached without the prior approval of the Ministry of Communications.
We may not sell, lease or mortgage any of the assets which serve for the implementation of our license without the prior approval of the Ministry of Communications, other than in favor of a banking corporation which is legally active in Israel, and in accordance with the conditions of our license.
Our license provides that no direct or indirect control of Partner may be acquired, at one time or through a series of transactions, and no means of control may be transferred in a manner which results in a transfer of control, without the consent of the Ministry of Communications. Furthermore, no direct or indirect holding of 10% or more of any means of control may be transferred or acquired at one time or through a series of transactions, without the consent of the Ministry of Communications. In addition, no shareholder of Partner may permit a lien to be placed on shares of Partner if the foreclosure on such lien would cause a change in the ownership of 10% or more of any of Partner’s means of control unless such foreclosure is made subject to the consent of the Ministry of Communications. For purposes of our license, “means of control” means any of:
• voting rights in Partner;
• the right to appoint a director or managing director of Partner;
• the right to participate in Partner’s profits; or
• the right to share in Partner’s remaining assets after payment of debts when Partner is wound up.
Each of our ordinary shares and ADSs is considered a means of control in Partner.
In addition, Partner, any entity in which Partner is an Interested Party, as defined below, an Office Holder, as defined below, in Partner or an Interested Party in Partner or an Office Holder in an Interested Party in Partner may not be a party to any agreement, arrangement or understanding which may reduce or harm competition in the area of mobile telephone services or any other telecommunications services.
In connection with our initial public offering, our license was amended to provide that our entering into an underwriting agreement for the offering and sale of shares to the public, listing the shares for trading, and depositing shares with the depositary or custodian will not be considered a transfer of any means of control, as defined below. Pursuant to the amendment, if the ADSs (or other “traded means of control,” that is, means of control which have been listed for trade or offered through a prospectus and are held by the public) are transferred or acquired in breach of the restrictions imposed by the license with respect to transfer or acquisition of 10% or more of any means of control, we must notify the Ministry of Communications and request the Ministry’s consent within 21 days of learning of the breach. In addition, should a shareholder, other than a founding shareholder, breach these ownership restrictions, or provisions regarding acquisition of control or cross-ownership or cross-control with other mobile telephone operators or shareholdings or agreements which may reduce or harm competition, its shareholdings will be marked as exceptional shares and will be converted into dormant shares, as long as the Ministry’s consent is required but not obtained, with no rights other than the right to receive dividends and other distributions to shareholders, and to participate in rights offerings.
The dormant shares must be registered as dormant shares in our share registry. Any shareholder seeking to vote at a general meeting of our shareholders must notify us prior to the vote, or, if the vote is by deed of vote, must so indicate on the deed of vote, whether or not the shareholder’s holdings in Partner or the shareholder’s vote requires the consent of the Ministry of Communications due to the restrictions on transfer or acquisition of means of control, or provisions regarding cross-ownership or cross-control with other mobile telephone operators or shareholders. If the shareholder does not provide such certification, his instructions shall be invalid and his vote not counted.
The existence of shareholdings which breach the restrictions of our license in a manner which could cause them to be converted into dormant shares and may otherwise provide grounds for the revocation of our license will not serve in and of themselves as the basis for the revocation of our license so long as:
the founding shareholders or their approved substitutes of Partner continue to hold in the aggregate at least 26% of the means of control of Partner;
our Articles of Association include the provisions described in this paragraph;
we act in accordance with such provisions;
our Articles of Association provide that an ordinary majority of the voting power at the general meeting of Partner is entitled to appoint all the directors of Partner other than external directors.
The dormant share mechanism does not apply to our founding shareholders.
The provisions contained in our license are also contained in our Articles of Association. In addition, our Articles of Association contain similar provisions in the event the holdings of shares by a shareholder breaches ownership limits contained in our license.
Revoking, limiting or altering our license. Our license contains several qualifications that we are required to meet. These conditions are designed primarily to ensure that we maintain at least a specified minimum connection to Israel. Other eligibility requirements address potential conflicts of interest and cross-ownership with other Israeli telecommunications operators. The major eligibility requirements are set forth below. A failure to meet these eligibility requirements may lead the Ministry of Communications to revoke, limit or alter our license, after we have been given an opportunity and have failed to remedy it.
Founding shareholders or their approved substitutes must hold at least 26% of the means of control of Partner.
Israeli entities from among our founding shareholders and their approved substitutes must hold61
Until February 2021, at least 5% of our issued share capital and of each of our means of control had to have been held by Israeli entities from among our founding shareholders and their approved substitutes. See "Item 3D.1l Our cellular telephone license imposes certain obligations on our shareholders and restrictions on who can own our shares. Ensuring compliance with these obligations and restrictions may be outside our control. If the obligations or restrictions are not respected by our shareholders, we could be subject to significant monetary sanctions or lose our license.
The majority of our directors, and our general manager, must be citizens and residents of Israel.
Neither the general manager of Partner nor a director of Partner may continue to serve in office if he has been convicted of certain legal offenses.
No trust fund, insurance company, investment company or pension fund that is an Interested Party in Partner may: (a) hold, either directly or indirectly, more than 5% of any means of control in a competing mobile radio telephone operator without having obtained a permit to do so from the Ministry of Communications, or (b) hold, either directly or indirectly, more than 5% of any means of control in a competing mobile radio telephone operator in accordance with a permit from the MoC, and in addition have a representative or appointee who is an Office Holder in a competing mobile radio telephone operator, unless it has been legally required to do so, or (c) hold, either directly or indirectly, more than 10% of any means of control in a competing mobile radio telephone operator, even if it received a permit to hold up to 10% of such means of control.
No trust fund, insurance company, investment company or a pension fund that is an Interested Party in a competing mobile radio telephone operator may: (a) hold, either directly or indirectly, more than 5% of any means of control in Partner, without having obtained a permit to do so from the Ministry of Communications; or (b) hold, directly or indirectly, more than 5% of any means of control in Partner in accordance with a permit from the Ministry of Communications, and in addition have a representative or appointee who is an Office Holder in Partner, unless it has been legally required to do so; or (c) hold, either directly or indirectly, more than 10% of any means of control in Partner, even if it received a permit to hold up to 10% of such means of control.
Partner, an Office Holder or Interested Party in Partner, or an Office Holder in an Interested Party in Partner does not control a competing mobile radio telephone operator, is not controlled by a competing mobile radio telephone operator, by an Office Holder or an Interested Party in a competing mobile radio telephone operator, by an Office Holder in an Interested Party in a competing mobile radio telephone operator, or by a person or corporation that controls a competing mobile radio telephone operator.
Change in license conditions. Under our license, the Ministry of Communications may change, add to, or remove conditions of our license if certain conditions exist, including:
A change has occurred in the suitability of Partner to implement the actions and services that are the subject of our license.
A change in our license is required in order to ensure effective and fair competition in the telecommunications sector.
A change in our license is required in order to ensure the standards of availability and grade of service required of Partner.
A change in telecommunications technology justifies a modification of our license.
A change in the electromagnetic spectrum needs justifies, in the opinion of the Ministry of Communications, changes in our license.
Considerations of public interest justify modifying our license.
A change in government policy in the telecommunications sector justifies a modification of our license.
A change in our license is required due to its breach by Partner.
During an emergency period, control of Partner’s mobile radio telephone system may be assumed by any lawfully authorized person for the security of the State of Israel to ensure the provisions of necessary service to the public, and some of the spectrum granted to us may be withdrawn. In addition, our license requires us to supply certain services to the Israeli defense and security forces. Furthermore, certain of our senior officers are required to obtain security clearance from Israeli authorities.
For the purposes of this discussion, the following definitions apply:
“Office Holder” means a director, manager, company secretary or any other senior officer that is directly subordinate to the general manager.
“Control” means the ability to, directly or indirectly, direct the activity of a corporation, either alone or jointly with others, whether derived from the governing documents of the corporation, from an agreement, oral or written, from holding any of the means of control in the corporation or in another corporation, or which derives from any other source, and excluding the ability derived solely from holding the office of director or any other office in the corporation. Any person controlling a subsidiary or a corporation held directly by him will be deemed to control any corporation controlled by such subsidiary or by such controlled corporation. It is presumed that a person or corporation controls a corporation if one of the following conditions exist: (1) such person holds, either directly or indirectly, fifty percent (50%) or more of any means of control in the corporation; (2) such person holds, either directly or indirectly, a percentage of any means of control in the corporation which is the largest part in relation to the holdings of the other Interested Parties in the corporation; or (3) such person has the ability to prevent the taking of business decisions in the corporation, with the exception of decisions in the matter of issuance of means of control in a corporation or decisions in the matters of sale or liquidation of most businesses of the corporation, or fundamental changes of these businesses.
“Controlling Corporation” means a company that has control, as defined above, of a foreign mobile radio telephone operator.
“Interested Party” means a person who either directly or indirectly holds 5% or more of any type of means of control, including holding as an agent.
Our Permit Regarding Cross Ownership
Our license generally prohibits cross-control or cross-ownership among competing mobile telephone operators without a permit from the Ministry of Communications. In particular, Partner, an Office Holder or an Interested Party in Partner, as well as an Office Holder in an Interested Party in Partner may not control or hold, directly or indirectly, 5% or more of any means of control of a competing mobile radio telephone operator. Our license also prohibits any competing mobile radio telephone operator or an Office Holder or an Interested Party in a competing mobile radio telephone operator, or an Office Holder in an Interested Party in a competing mobile radio telephone operator or a person or corporation that controls a competing mobile radio telephone operator from either controlling, or being an Interested Party in us.
However, our license, also provides that the Ministry of Communications may permit an Interested Party in Partner to hold, either directly or indirectly, 5% or more in any of the means of control of a competing mobile radio telephone operator if the Ministry of Communications is satisfied that competition will not be harmed, and on the condition that the Interested Party is an Interested Party in Partner only by virtue of a special calculation described in the license and relating to attributed holdings of shareholders deemed to be in control of a corporation.
4B.12g Other Licenses
Domestic Fixed-lineUnified License. In January, 2007, the Ministry of Communications granted Partner Land-Line, Communication Solutions Limited Partnership, which is fully owned by the Company, was granted a general-unified license in 2016 for the provision of domestic fixed-line telecommunications services,, including VoB services using the infrastructure of Bezeq and HOT Telecom to access customers. In February 2016, this license was replaced by the MoC with a general-unified license. In June and December 2016, this license was amended by the MoC to allow, in addition to domestic fixed-line telecommunications services, the provision ofcustomers as well as ILD services, ISP services and end-point services. See Exhibit 4.(a).2.1, which is incorporated herein by reference. The term of the new license is similar to the term of the previous fixed-line license which expires in twenty years from the original grant date in January 20072027 but may be extended by the Ministry of Communications for successive periods of ten years provided that the licensee has complied with the terms of the license and has acted consistently for the enhancement of telecom services and their enhancement. The general conditions of the mobile telephone license described above, generally apply to this license, subject to certain modifications.
We also grantedhave a domestic fixed-linegeneral-unified license to provide fixed-line services to the Israeli populated areas in the West Bank. In July 2016, this license was replaced by a general-unified license.Bank which is valid until January 2027. The general conditions of the general-unified license granted to Partner Land-Line Communication Solutions Limited Partnership by the MoC, generally apply to this license, subject to certain modifications.
012 Telecom was also granted a similar domestic fixed-line license by the Ministry of Communications in December 2005 for 20 years. In February 2016, this license was replaced by the MoC with a general-unified license. The term of the new license is similar to the term of the previous fixed-line license. As part of the unification of the Company’s licenses, in January 2018, the Company filed a request with the Ministry of Communications to terminate this license.
012 Telecom was also granted a license to provide domestic fixed-line services to the Israeli populated areas in the West Bank which was valid until February 2018. This license was replaced in July 2016 with a general-unified license. The general conditions of the general-unified license granted to 012 Telecom by the MoC, generally apply to this license, subject to certain modifications. In January 2018, the Company filed a request with the Ministry of Communications to terminate this license.
ISP License. In March 2001, we received a special license granted by the Ministry of Communications, allowing us through our own facilities to provide internet access to fixed-line network customers. The license is valid until March 31, 2023. We began supplying commercial ISP services beginning in January 2009. We were also granted a special license to provide ISP services to the Israeli populated areas in the West Bank which is valid until March 30, 2023.
012 SmilePHI License. In 2015, P.H.I Networks (2015) Limited Partnership, the limited partnership that we entered into with Hot Mobile received a special license for the provision of radio cellular infrastructure services to other licensees which is valid until August 2025.The license enables PHI to operate the joint network. PHI was also granted a similar ISP license by the Ministry of Communications in December 2009 that is valid until June 2020 and a special license to provide ISPthese services to the Israeli populated areas in the West Bank which is valid until June 2020. In January 2018, the Company filed a request with the Ministry of Communications to terminate this license.August 2025.
ILD License. In December 2009, the Ministry of Communications granted 012 Smile, a license for the provision of ILD services. The license expires in twenty years but may be extended by the Ministry of Communications for successive periods of ten years provided that the licensee has complied with the terms of the license and has acted consistently for the enhancement of telecom services and their enhancement. In February 2016, this license was replaced by the MoC with a general-unified license. The term of the new license is similar to the term of the previous ILD License. In January 2018, the Company filed a request with the Ministry of Communications to terminate this license.
012 Smile was also granted a license for the provision of International Long Distance services to the Israeli populated areas in the West Bank which is valid until February 2018. This license was replaced in July 2016 with a general-unified license. The general conditions of the general-unified license granted to 012 Smile by the MoC, generally apply to this license, subject to certain modifications. In January 2018, the Company filed a request with the Ministry of Communications to terminate this license.
012 Smile was also granted a similar NTP license by the Ministry of Communications in December 2009 that is valid until December 2020. In January 2018, the Company filed a request with the Ministry of Communications to terminate this license.
Other Licenses. The Ministry of Communications has granted us a trade license pursuant to the Wireless Telegraphy Ordinance. This license regulates issues of servicing and trading in equipment, infrastructure and auxiliary equipment for our network. We have also been granted a number of encryption licenses that permit us to deal with means of encryption, as provided in the aforementioned licenses, within the framework of providing mobile radio telephone services to the public.
4B.12h Network Site Permits
Permits of the Ministry of Environmental Protection
On January 1, 2006, the Non-Ionizing Radiation Law (5766-2006), which replaced the Pharmacists (Radioactive Elements and Products) Regulations, 1980 regarding matters that pertain to radiation from cellular sites, was enacted. This law defines the various powers of the Ministry of Environmental Protection as they relate, among others, to the grant of permits for network sites and sets standards for permitted levels of non-ionizing radiation emissions and reporting procedures. Pursuant to this law, most of which entered into effect on January 1, 2007, a request for an operating permit from the Ministry of Environmental Protection with respect to either new sites or existing sites would require a building permit for such site(s). The Ministry of Environmental Protection has adopted the International Radiation Protection Agency’s standard as a basis for the consents it gives for the erection and operation of our antennas. This standard is an international standard based upon a number of years of scientific study.
If we continue to face difficulties in obtaining building permits from the local planning and building committee, we may fail to obtain also operation permits from the Ministry of Environmental Protection. Operation of a network site without a permit from the Ministry of Environmental Protection may result in criminal and civil liability to us or to our officers and directors.
Local Building Permits
The Planning and Building Law requires that we receive a building permit for the construction of most of our antennas. The local committee or local licensing authority in each local authority is authorized to grant building permits, provided such permits are in accordance with National Building Plan No. 36 which came into effect on June 15, 2002. The local committee is made up of members of the local municipal council. The local committee is authorized to delegate certain of its powers to subcommittees on which senior members of the local authority may sit.
The local committee examines the manner in which an application for a building permit conforms to the plans applying to the parcel of land that is the subject of the application, and the extent to which the applicant meets the requirements set forth in the Planning and Building Law. The local committee is authorized to employ technical, vista, and aesthetic considerations in its decision-making process. The local committee may grant building permits that are conditioned upon the quality of the construction of the structure, the safety of flight over the structure, and the external appearance of the structure. Every structure located on a certain parcel of land must satisfy the requirements and definitions set forth in the building plan applicable to such parcel.
On January 3, 2006, the National Council for Planning and Building added a new requirement for obtaining a building permit for network sites: the submission of an undertaking to indemnify the local committee for claims relating to the depreciation of the surrounding property value as a result of the construction or existence of the antenna.
A decision by a local committee not to grant a building permit may be appealed to the District Appeals Committee. A person harmed by the ruling of the District Appeals Committee may have such ruling examined judicially by means of an administrative petition to the District Court sitting as an Administrative Affairs Tribunal.
National Building Plan No. 36
National Building Plan No. 36 which came into effect on June 15, 2002 regulates the growth of telecommunications infrastructure in Israel. Chapter A of National Building Plan No. 36 sets forth the licensing requirements for the construction of mobile radio telephone infrastructure. National Building Plan No. 36 also adopts the radiation emission standards set by the International Radiation Protection Agency which were also previously adopted by the Ministry of Environmental Protection. We believe that we currently comply with these standards regarding our sites. National Building Plan No. 36 is in the process of being changed. On June 1, 2010, the National Council for Planning and Building approved the National Building Plan No. 36/A/1 version that incorporates all of the amendments to National Building Plan No. 36 (“the Amended Plan”).
Current proposed changes impose additional restrictions and/or requirements on the construction and operation of network sites, however the Supreme Court accepted the position of the cellular companies and could, if adopted, harm our ability to construct newruled that in accordance with the Amended Plan, network sites makemay be approved even if these sites are operating in frequencies not specifically detailed in the process of obtaining building permits forfrequency charts attached to the construction and operation of network sites more cumbersome and costly, and may delay the future deployment of our network.Amended Plan.
Under the Non-Ionizing Radiation Law, the National Council for Planning and Building was granted the power to determine the level of indemnification for reduction of property value to be undertaken as a precondition for a cellular company to obtain a building permit for a new or existing network site. As a result, the National Council for Planning and Building has decided that until National Building Plan 36 is amended to reflect a different indemnification amount, cellular companies will be required to undertake to indemnify the building and planning committee for 100% of all losses resulting from claims against the committee. Thus, at present, in order to obtain a building permit for a new or existing network site, we must provide full indemnification for the reduction of property value.
The Amended Plan sets forth the indemnification amounts as a percentage of the value of the depreciated property claims in accordance with the manner in which the licenses were granted as follows: If the license was granted in an expedited licensing route, which is intended for installations that are relatively small in accordance with the Amended Plan criteria, then the cellular companies will be required to compensate the local planning committees in an amount of 100% of the value of the depreciated property claim. If the license was granted in a regular licensing route, which is intended for larger installations in accordance with the Amended Plan criteria, then the cellular companies will be required to compensate the local planning committees in an amount of 80% of the value of the depreciated property claim. The Amended Plan is subject to governmental approval, in accordance with the Planning and Building Law. It is unknown when the government intends to approve the Amended Plan.
These recent developments may have a material adverse effect on our financial condition and results of operations, as well as plans to expand and enhance network coverage. For more information, see “Item 3D.1k In connection with some building permits, we may also be required to indemnify planning committees in respect of claims against them relating to the depreciation of property values that result from the granting of permits for network sites.”
Wireless access devices
We have set up several hundred small communications devices, called wireless access devices, pursuant to a provision in the Telecommunications Law which we and other participants in cellular telecommunications, believe exempts such devices from the need to obtain a building permit. Beginning in 2008, following the filing of a claim that the exemption does not apply to cellular communications devices, the Attorney General filed an opinion regarding this matter stating that the exemption does apply to wireless radio access devices under certain conditions and instructed the Ministry of Interior to prepare regulations setting conditions that would limit the exemption to extraordinary circumstances. Recently, the relevant government ministries have agreed upon the wording of the regulations. The proposed text was submitted for approval to the Economics Committee of the Knesset and during December 2017 a discussion was held before the Committee. The Committee did not have time to review all the provisions of the regulations, and therefore clarified that it would hold another hearing to approve the text, which was also recommended for approval by the National Planning and Building Council. Insofar as the wording is approved in the format submitted to the Economics Committee, it will be very difficult to transfer existing wireless access devices from place to place and also to make changes to existing access devices. Following twoconditions. Two petitions that were filed with the High Court of Justice opposingin opposition to the Attorney General’s recommendationopinion. On October 25, 2018, the Attorney General submitted a request to dismiss the petitions on the grounds that the exemption apply under certain conditions, in September 2010,matter of network sites has been regulated by regulations. On December 23, 2018, the Supreme Court issued an interimand the High Court of Justice dismissed the two petitions and accepted the appeal filed by us as well as our competitors against the district court ruling. In May 2018, the Economics Committee approved the new regulations which were published in October 2018. According to the provisions of the regulations that were approved, in order prohibiting further construction ofto establish a new wireless access devices in cellular networks in reliance ondevice, a short process of licensing is required before the exemption from the requirementcommittee engineer, which constitutes a significant obstacle to obtain a building permit. In February 2011, and in July 2012, the Supreme Court narrowed the scope of the interim injunction so that repair or replacement of existing wireless access devices is permitted under certain conditions that will be determined in a judgment. In March 2016, the Supreme Court further narrowed the scope of the interim injunction that allowed us to make modifications to the existing wireless access devices, including a change to their transmission power and allowed us to change the location of 10% of PHI's wireless access devices to alternative locations without the need for a building permit. If a definitive court judgment holds that the exemption does not apply to cellular devices at all or if the regulations finally approved do not apply the exemption to wireless access devices, this could adversely affect the Company’s existing network. As a result, we may be required to remove existing devices and would not be able to install new devices on the basis of the exemption. Our network capacity and coverage would then be negatively impacted, which could have an adverse effect on our revenue and results of operations.obtaining such approval.
Other Approvals
The construction of our antennas may be subject to the approval of the Civil Aviation Administration which is authorized to ensure that the construction of our antennas does not interfere with air traffic, depending on the height and location of such antennas. The approval of the Israeli Defense Forces is required in order to coordinate site frequencies so that our transmissions do not interfere with the communications of the Israel Defense Forces.
We, like other cellular operators in Israel, provide repeaters, also known as bi-directional amplifiers, to subscribers seeking an interim solution to weak signal reception within specific indoor locations. In light of the lack of a clear policy of the local planning and building authorities, and in light of the practice of the other cellular operators, we have not requested permits under the Planning and Building Law for the repeaters. However, we have received from the Ministry of Communications an approval to connect the repeaters to our communications network. We have also received from the Ministry of Environmental Protection, the permits that are necessary for the repeaters.
In addition, we construct and operate microwave links as part of our transmission network. The various types of microwave links receive permits from the Ministry of Environmental Protection in respect of their radiation level. Based on an exemption in the Telecommunications Law, we believe that building permits are not required for the installation of most of these microwave links on rooftops, but if in the future the courts or the relevant regulator determine that building permits are necessary for the installation of these sites, it could have a negative impact on our ability to deploy additional microwave links, and could hinder the coverage, quality and capacity of our transmission network and our ability to continue to market our Fixed-Line Services effectively.
We have received approval from the Ministry of CommunicationsMoC for selling and distributing all of the handsets and other terminal equipment we sell. The Ministry of Environmental Protection also has authority to regulate the sale of handsets in Israel, and under the Non-Ionizing Radiation Law, certain types of devices, which are radiation sources, including cellular handsets, have been exempted from requiring an approval from the Ministry of Environmental Protection so long as the radiation level emitted during the use of such handsets does not exceed the radiation level permitted under the Non-Ionizing Radiation Law. Since June 2002, we have been required to provide information to purchasers of handsets on the Specific Absorption Rate (“SAR”) levels of the handsets as well as its compliance with certain standards pursuant to a regulation under the Consumer Protection Law. We attach a brochure to each handset that is sold that includes the SAR level of the specific handset. Such brochures are also available at our service centers and the information is also available on the Company’s website. SAR levels are a measurement of non-ionizing radiation that is emitted by a hand-held cellular telephone at its specific rate of absorption by living tissue. While, to the best of our knowledge, the handsets that we market comply with the applicable laws that relate to acceptable SAR levels, we rely on the SAR published by the manufacturer of these handsets and do not perform independent inspections of the SAR levels of these handsets. As the manufacturers’ approvals refer to a prototype handset and not for each and every handset, we have no information as to the actual SAR level of each specific handset and throughout its lifecycle, including in the case of equipment repair.
Under a December 2005 amendment to this procedure, in the event that the SAR level is not measured after the repair of a handset, the repairing entity is required to notify the customer by means of a label affixed to the handset that the SAR may have been altered following the repair, in accordance with the provisions relating to the form of such label set forth in the procedure. A consultant had been retained by the Ministry of CommunicationsMoC to formulate a recommendation regarding the appropriate manner to implement the procedure for repairing handsets but to date the Ministry of CommunicationsMoC has not yet issued any guidelines and given the continued delay we are informinginform our customers that there may be changes in the SAR levels.
In November 2005, a new procedure was adopted by the Ministry of CommunicationsMoC with regard to the importation, marketing, and approval for 2G and 2.5G handsets. Prior to the implementation of the new procedure, suppliers of 2G and 2.5G handsets in Israel were required to obtain an interim, non-binding approval of the handset type from the relevant cellular operators before receiving final approval from the Ministry of CommunicationsMoC to supply such handsets in Israel to such operators. Under the new procedure, handsets that have already received international certification, such as the internationally recognized Global Certification Forum approvalU.S. Federal Communications Commission (FCC) declaration of conformity and the Conformité Européene (CE), prior to their importation into Israel are now exempt from the requirement of receiving an interim, non-binding approval from the relevant cellular operators in Israel. This could expose us to the risk that handsets not reviewed and approved by us may interfere with the operation of our network. The new procedures described above do not apply to 3G handsets, which still require cellular operators to grant an interim, non-binding approval to the Ministry of Communications before the MoC grants its final approval in all circumstances.
In addition, this procedure also called for repaired handsets to comply with all applicable standards required for obtaining handset type approval, including standards relating to the safety, electromagnetic levels, and SAR levels.
4C. Organizational Structure
We currently have (i) five directly held wholly-owned subsidiaries, Partner Future Communications 2000 Ltd., an Israeli corporation; Partner Land-Line Communications Solutions LP, an Israeli limited partnership; Partner Business Communications Solutions, LP, an Israeli limited partnership; Get Cell Communication Products LP (formerly Partner Communication Products 2016 LPLP); 012 Smile; and Iconz Holdings Ltd; (ii) 012 Smile. 012 Smile has aSmile's wholly-owned subsidiary, 012 Telecom Ltd., an Israeli corporation.; and (iii) a 50% interest in PHI. Partner Future Communications 2000 Ltd. serves as the general partner and the Company serves as the limited partner of each of the limited partnerships.
In November 2013, the Company entered into a 15-year Network Sharing Agreement with HOT Mobile. Pursuant to the Network Sharing Agreement, the parties created a 50-50 limited partnership - P.H.I. Networks (2015) Limited Partnership, which will operate and develop a cellular network to be shared by both parties, starting with a pooling of both parties’ radio access network infrastructures to create a single shared radio access network. The parties have also established a 50-50 company under the name Net 4 P.H.I Ltd. to be the general partner of the limited partnership. See “Item 4B.8 Our Network”.
4D. Property, Plant and Equipment
Headquarters
We lease our headquarter facilities in Rosh Ha-ayin, Israel, with a total of approximately 51,177 gross square meters (including parking lots). In the beginning of 2014, anA recent amendment to the lease agreements for its headquarters facility in Rosh Ha’ayin was signed, according to which the lease term is extended until the end of 2024.2034. The rental payments are linked to the Israeli CPI. We also lease call centers in several cities. The leases for each site have different lengths and specific terms. We believe that our current call center facilities are adequate for the foreseeable future, and that we will be able to extend the leases or obtain alternate or additional facilities, if needed, on acceptable commercial terms.
Network
For a description of our telecommunications network, see “Item 4B.8 Our Network” above.
We lease most of the sites where our mobile telecommunications network equipment is installed throughout Israel. At December 31, 2017,2020, we had 3,1093,044 network sites (including micro-sites). The lease agreements relating to our network sites are generally for periods of two to ten years. We have the option to extend the lease periods up to ten years (including the original lease period).
The erection and operation of most of these network sites requires building permits from local or regional zoning authorities, as well as a number of additional permits from governmental and regulatory authorities, and we have had difficulties in obtaining some of these permits.
Difficulties obtaining required permits could continue and therefore affect our ability to maintain cell network sites. In addition, as we grow our subscriber base and seek to improve the range and quality of our services, we need to further expand our network, and difficulties in obtaining required permits may delay, increase the costs or prevent us from achieving these goals in full. See “Item 3D.1j We have had difficulties obtaining some of the building and environmental permits required for the erection and operation of our cellular network sites, and some building permits have not been applied for or may not be fully complied with. These difficulties could have an adverse effect on the coverage, quality and capacity of our network. Operating network sites without building or other required permits, or in a manner that deviates from the applicable permit, may result in criminal or civil liability to us or to our officers and directors.” and “Item 4B.12 Regulation”.
In November 2013, the Company entered into a 15-year Network Sharing Agreement with HOT Mobile. Pursuant to the Network Sharing Agreement, the parties created a 50-50 limited partnership, which is intended to operate and develop a cellular network to be shared by both companies, starting with a pooling of both companies’ radio access network infrastructures to create a single shared pooled radio access network. See “Item 4B.8 Our Network”.
Service Centers and Points of Sale
Lease agreements for our retail stores and service centers are for periods of two to ten years. We have the option to extend the lease agreements for different periods of up to ten additional years (including the original lease period). The average size of our retail stores and service center is approximately 250 square meters. See also note 19 to the consolidated financial statements.
4A.4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following operating and financial review and prospects areis based upon and should be read in conjunction with our financial statements and selected financial data, which appear elsewhere in this report. You should also read the risk factors appearing in Item 3D of this annual reportAnnual Report for a discussion of a number of factors that affect and could affect our financial condition and results of operations.
5A. Operating Results
5A.1 OVERVIEW
5A.1a Key Financial and Operating Data
The table below sets forth a summary of selected financial and operating data for the years ended December 31, 2015, 20162019 and 2017.2020.
| | Year ended December 31, | |
| | 2019 | | | 2020 | |
| | | | | | |
Revenues (NIS million) | | | 3,234 | | | | 3,189 | |
Operating profit (NIS million) | | | 87 | | | | 96 | |
Profit before income taxes (NIS million) | | | 19 | | | | 27 | |
Profit for the year (NIS million) | | | 19 | | | | 17 | |
Capital expenditures (additions) (NIS million) | | | 578 | | | | 595 | |
Net cash provided by operating activities (NIS million) | | | 837 | | | | 786 | |
Net cash used in investing activities (NIS million) | | | (1,181 | ) | | | (581 | ) |
Cellular Subscribers (end of period, thousands) | | | 2,657 | | | | 2,836 | |
Annual cellular churn rate (%) | | | 31 | % | | | 30 | % |
Average monthly revenue per cellular subscriber (ARPU) (NIS) | | | 57 | | | | 51 | |
TV subscribers (end of period, thousands) | | | 188 | | | | 232 | |
Infrastructure-based internet subscribers (end of period, thousands) | | | 268 | | | | 329 | |
Fiber-optic subscribers (end of period, thousands) | | | 76 | | | | 139 | |
Homes Connected (HC) to the fiber-optic infrastructure (end of period, thousands) | | | 324 | | | | 465 | |
| | Year ended December 31, | |
| | 2015 | | | 2016 | | | 2017* | | | 2017** | |
| | | | | | | | | | | | |
Revenues (NIS million) | | | 4,111 | | | | 3,544 | | | | 3,270 | | | | 3,268 | |
Operating profit (NIS million) | | | 107 | | | | 193 | | | | 246 | | | | 315 | |
Income (loss) before taxes (NIS million) | | | (36 | ) | | | 88 | | | | 66 | | | | 135 | |
Profit (loss) for the Year (NIS million) | | | (40 | ) | | | 52 | | | | 61 | | | | 114 | |
Capital expenditures (additions) (NIS million) | | | 271 | | | | 202 | | | | 333 | | | | 417 | |
Cash flows from operating activities (NIS million) | | | 922 | | | | 945 | | | | 897 | | | | 973 | |
Cash flows from investing activities (NIS million) | | | (356 | ) | | | (639 | ) | | | 4 | | | | (72 | ) |
Cellular Subscribers (end of period, thousands) | | | 2,718 | | | | 2,686 | | | | 2,674 | | | | 2,674 | |
Annual cellular churn rate (%) | | | 46 | % | | | 40 | % | | | 38 | % | | | 38 | % |
Average monthly revenue per cellular subscriber (ARPU) (NIS) | | | 69 | | | | 65 | | | | 62 | | | | 62 | |
TV service households (end of period, thousands) | | | - | | | | - | | | | 43 | | | | 43 | |
* | Without the impact of the early adoption of IFRS 15, Revenue from Contracts with Customers in 2017. See “Item 5A.1j Early adoption of IFRS 15 Revenue from Contracts with Customers – change in accounting policy” and also note 2(n) to the consolidated financial statements regarding the early adoption of IFRS 15, Revenue from Contracts with Customers. |
** | Includes the impact of the early adoption of IFRS 15, Revenue from Contracts with Customers. |
NON-GAAP MEASURES
The following non-GAAP measures are used in this report. These measures are not financial measures under IFRS and may not be comparable to other similarly titled measures for other companies. Further, the measures may not be indicative of the Company’s historic operating results nor are they meant to be predictive of potential future results.
Non-GAAP Measure | | Calculation | | Most Comparable IFRS Financial Measure |
Adjusted EBITDA Adjusted EBITDA margin (%) | | Adjusted EBITDA:
Profit (Loss) add Income tax expenses, Finance costs, net, Depreciation and amortization expenses (including amortization of intangible assets, deferred expenses-right of use and impairment charges), Other expenses (mainly amortization of share basedshare-based compensation). Adjusted EBITDA margin (%):
Adjusted EBITDA divided by Total revenues | | Profit (Loss) |
Adjusted Free Cash Flow* | Flow | Adjusted Free Cash Flow:
Cash flows fromNet cash provided by operating activities
deductadd
Cash flows fromNet cash used in investing activities
adddeduct
Short-term investment inProceeds from (investment in) deposits, net
deduct Lease principal payments deduct Lease interest payments | | Cash flows fromNet cash provided by operating activities
lessadd
Cash flows fromNet cash used in investing activities
|
Total Operating Expenses (OPEX) | | Total Operating Expenses:
Cost of service revenues add Selling and marketing expenses add General and administrative expenses add Credit losses deduct Depreciation and amortization expenses deduct Other expenses (mainly amortization of employee share basedshare-based compensation) | | Sum of: Cost of service revenues, Selling and marketing expenses, General and administrative expenses, Credit losses |
Net Debt | | Net Debt:
Current maturities of notes payable and borrowings add Notes payable add Borrowings from banks and others add Financial liability at fair value deduct Cash and cash equivalents deduct Short-term and long-term deposits | | Sum of: Current maturities of notes payable and borrowings, Notes payable, Borrowings from banks, Financial liability at fair value Less Sum of: Cash and otherscash equivalents, Short-term deposits, Long-term deposits |
Various line items “withoutexcluding the impact of the early adoptionimplementation of IFRS 15” | 16 | Line item less the amount of the impact of IFRS 1516 | | The corresponding line item as reported in the Company’s financial statements |
| * | Adjusted Free Cash Flow measure is fully equivalent to Free Cash Flow measure which was provided in reports for prior periods. |
5A.1b Business Developments in 20172020
In 2017, competitionThe results of the year 2020 were materially negatively affected by the COVID-19 crisis which caused a very significant reduction in revenues from roaming services and also negatively affected equipment sales due to the closure of sales points at certain times during the year. Whilst the Company succeeded in mitigating a proportion of the aforementioned effects through proactive cost-cutting measures as well as adjustments in a variety of business areas, including capitalizing on the increase in demand for some of the Company's services as a result of the crisis and shifting our focus towards alternative sales channels, the overall net impact remained materially negative.
Competition in the Israeli telecommunications market remained intense, across both cellular segment services and fixed-line segment services, as well as in the market for equipment and device sales.sales, although the level of intensity across cellular segment services declined compared with the previous year. As a result, the continued substantial price erosion in our principal markets has had a further significant negative impact on the Company’s business results, with total revenues for 2017 decreasing by 8% compared with 2016 and by 21% compared with 2015.results.
Cellular market.As an illustration of the level of competition in the cellular market, approximately 2.51.9 million cellular subscribers are estimated to have switched operators within the Israeli market (with number porting) during 2017, compared with2020; approximately 2.32.2 million subscribers switched in 20162019 and 2.5approximately 2.4 million switched in 2015. The2018. While our annual churn rate for cellular subscribers decreased marginally in 2017 was 38%,2020 to 30% compared with 40%31% in 20162019 and 46%35% in 2015, mainly reflecting the continued intense2018, competition in the cellular subscriber market.market remained intense. Significant price erosion continued to be caused by the amountnumber of cellular subscribers who moved between different rateplansrate plans or airtime packages (generally with a lower monthly fee) within the Company.
Over 2017,2020, the Company's cellular subscriber base declinedincreased net, by approximately 12,000.179,000. The pre-paid subscriber base decreasedincreased by approximately 91,000,50,000, compared with an increase of approximately 6,000 in 2019, while the post-paid subscriber base increased by approximately 79,000.129,000, compared with an approximately 5,000 in 2019. The decreaseincrease in the pre-paidpost-paid subscriber base was largely attributedincluded approximately 25,000 subscribers to a twelve-month data package for modems provided to students by the pre-paidMinistry of Education as part of their COVID-19 crisis program. As part of the same program, a further approximate 42,000 subscribers movingare expected to join the post-paid subscriber packages as a resultbase during the first half of the significant price erosion (and hence increasing attractiveness) in these products, as well to increased competition for pre-paid subscribers. 2021.
At the end of December 2017,2020, the Company’s active cellular subscriber base (including cellular data, and 012 Mobile subscribers)subscribers and M2M subscriptions) was approximately 2.682.84 million, including approximately 2.32.5 million post-paid subscribers or 87%88% of the base, and approximately 354,000341,000 pre-paid subscribers, or 13%12% of the subscriber base. Total cellular market share in Israel (based on the number of subscribers) at the end of 20172020 was estimated to be approximately 25%27%, compared with 26%25% in 2016 and 27% in 2015.2019.
The monthly Average Revenue Per User (ARPU) for cellular subscribers for the year 20172020 was NIS 6251 (US$ 18)16), a decrease of approximately 5%11% from NIS 6557 in 2016.2019. The decrease mainly reflected the impact of the COVID-19 crisis on roaming service revenues and the continued price erosion in the keyof cellular services including airtime, content, data and browsing, due to the persistent fierce competitioncontinued competitive market conditions, which were partially offset by an increase in interconnect revenues due to the cellular market, as well as a decreasesignificant increase in wholesale service revenues as a resultincoming call volumes related to the COVID-19 crisis and the contribution of termination of the Right of Use Agreement with HOT Mobile from the second quarter of 2016. See "Item 5A.1e Right of Use Agreement with HOT Mobile"Partner's value strategy, ‘Partner More’. Overall, cellular service revenues decreased by 6%8% in 20172020 compared with 2016.2019.
Fixed line market. Total fixed line segment service revenues decreasedincreased by 10%7% in 2017,2020, largely as a result of aincreased revenues from TV and internet services. Over 2020, the Company's TV subscriber base increased, net, by approximately 44,000 from approximately 188,000 subscribers at the end of December 2019 to approximately 232,000 subscribers at the end of December 2020. In addition, the number of infrastructure-based internet subscribers increased, net, by approximately 61,000 from approximately 268,000 subscribers at the end of December 2019 to approximately 329,000 subscribers at the end of December 2020, within which the number of fiber-optic subscribers increased net, by approximately 63,000 from approximately 76,000 subscribers at the end of December 2019 to approximately 139,000 subscribers at the end of December 2020. The increase in revenues from TV and internet services was partially offset by the continued decrease in revenues from international calling services (including the market for wholesale international traffic) which werecontinue to be adversely affected both by the increased penetration of internet-based solutions and increased competition from other service providers, and a decrease in inter-segment revenues. In 2017, the Company launched two services under the fixed line segment – Partner TV service (in June 2017) and the commercial phase and accelerated deployment of our fiber optic network in residential areas throughout the country (in August 2017). The launches of Partner TV service and the commercial phase and accelerated deployment of our fiber optic network did not have a significant impact on fixed-line segment revenues in 2017.solutions.
Equipment sales. In addition to a decrease in service revenues, revenuesRevenues from equipment sales decreasedincreased in 20172020 by 13%1%, principally reflecting principally a declinesignificant increases in sales to wholesale customers and in sales of fixed-line equipment for both business and private customers, partially offset by lower volumes of both cellular devices and other non-core equipment including tablets, televisions and other audio visual devices.
See also “Item 5D.2 Outlook” and “Item 3D.2b Our levelretail sales reflecting the closure of indebtedness could adversely affect our business, profits and liquidity. Furthermore, difficulties in generating sustainable cash flow may impair our ability to repay our debt and reducesales points during certain COVID-19-related lockdown periods during the level of indebtedness."year.
Cost reductions and efficiency measures. In order to mitigate the impact of competition on price erosion and decreases in revenues and in profits from services and equipment sales, the Company continued to adjust its cost structure and to implement operational efficiency measures through 2017. This was reflected in a decrease in totalTotal operating expenses. Total operating expenses decreased by NIS 14 million, or one percent, in 20172020 compared with 2019 to a total of NIS 3771,871 million (US$ 582 million) (including cost of service revenues (NIS 2,0832,128 million in 2017)2020) and selling, marketing, and administrative expenses and credit losses (NIS 466459 million in 2017)2020), and excluding depreciation, amortization and impairment expenses and other expenses (mainly amortization of employee share basedshare-based compensation) (NIS 602716 million in 2017)2020); this measure is not a financial measure under IFRS and may not be comparable to other similarly titled measures for other companies). Thiscompanies. The decrease followedmainly reflected a decrease in workforce expenses as part of the cost-cutting measures taken to mitigate the impact of the COVID-19 crisis on revenues, and a decrease in wholesale internet infrastructure access expenses following receipt of a government-mandated refund from Bezeq of approximately NIS 20 million of payments for access to the wholesale internet infrastructure in previous years. The decreases in these expenses were partially offet by increases in interconnect expenses due to the significant increase in outgoing call volumes related to the COVID-19 crisis (in parallel to the increase in incoming call volumes discussed above). See also Items 5A.2a and 5A.2b for a breakdown of total operating expenses in 2016 of NIS 139 million compared with 2015. The decrease in total operating expenses in 2017 mainly reflected decreases (i) in cellular network and cable maintenance and operating lease expenses, (in cost of service revenues) principally as a result of the network sharing agreement with HOT Mobile, (ii) in selling commissions, net (in selling, marketing, general and administrative expenses), principally as a result of the early adoption of IFRS 15 from the beginning of 2017, (iii) in international call expenses (in cost of service revenues), (iv) in bad debts and allowance for doubtful accounts expenses (in selling, marketing, general and administrative expenses), (v) in advertising and marketing expenses (in selling, marketing, general and administrative expenses) and (vi) in other expense items as a result of various efficiency measures. These decreases were partially offset by increases in expenses related to Partner TV service (in cost of service revenues) that was launched during 2017, and in expenses related to internet services (in cost of service revenues).segment.
Profitability. Reported profit in 2017Profit for the year 2020 was NIS 11417 million (US$ 335 million). Without, a decrease of 11% compared with NIS 19 million in 2019. Adjusted EBITDA in 2020 totaled NIS 822 million (US$ 256 million), a decrease of 4% from NIS 853 million in 2019, primarily reflecting the material negative impact of the early adoption of IFRS 15COVID-19 on revenues, partially offset by the decrease in 2017, profit would have been NIS 61 million, an increase of 17% compared with NIS 52 million in 2016. Adjusted EBITDA in 2017 totaled NIS 917 million (US$ 264 million). Without the impact of the early adoption of IFRS 15 in 2017, Adjusted EBITDA would have been NIS 835 million, an increase of 0.1% from NIS 834 million in 2016.total operating expenses.
5A.1c Settlement Agreement with Orange Brand Services Ltd.
In June 2015, the Company announced that it had entered into a settlement agreement with Orange Brand Services Ltd ("Orange") which created a new framework for their relationship and provided both Partner and Orange the right to terminate the brand license agreement which had been in force since 1998. In accordance with the terms of the settlement agreement, the Company received advance payments in a total of €90 million during 2015: €40 million of which was received between the signing of the agreement and the completion of a market study to assess the Company’s position within the dynamics of the Israeli telecommunications services market; and €50 million of which was received in the fourth quarter of 2015, following the Company’s notice to Orange of its decision to terminate the brand license agreement.
As set forth in the settlement agreement, the advance payments were recognized and reconciled evenly on a quarterly basis over a period until the second quarter of 2017, against contingent marketing, sales, customer services and other expenses to be incurred over this period. The income was recorded in the Company’s income statement under “Income with respect to settlement agreement with Orange". For during the years ended December 31, 2015, 2016 and 2017 the Company recognized income with respect to the settlement agreement in an amount, respectively ofas follows: NIS 61 million, NIS 217 million and NIS 108 million (US$ 31 million). Based on a legal opinion provided to the Company, the advance payments are considered compensation payments and are therefore not subject to VAT charges.million.
5A.1d Network Sharing Agreement with HOT Mobile
In November 2013, the Company entered into a 15-year Network Sharing Agreement with HOT Mobile. Pursuant to the Network Sharing Agreement, the parties created a 50-50 limited partnership - P.H.I. Networks (2015) Limited Partnership, which operates and develops a radio access network shared by both parties, starting with a pooling of both parties’ radio access network infrastructures creating a single shared pooled radio access network. See “Item 4B.9 Our Network.“4B.8 OUR NETWORK.”
In February 2016, HOT Mobile exercised its option under the Network Sharing Agreement (“NSA”) to advance the payment date of a onetime amount of NIS 250 million ("Lump Sum"), which was received in 2016. Therefore according to the NSA from April 2016 onward (i) each party bears half of the expenditures relating to the Shared Network, and (ii) the operating costs of the Shared Network are borne according to a pre-determined apportionment mechanism, according to which one half of the operating costs is shared equally by the parties, and one half is divided between the parties according to the relative volume of their respective traffic consumption in the Shared Network ("Capex-Opex Mechanism").
The Lump Sum is recognized as deferred revenue for the cellular segment amortized quarterly in the income statement over a period of eight years, starting with the second quarter of 2016. Eight years has been determined to be the shorter of the expected period of the arrangement or the expected life of the related assets. Accordingly, approximately NIS 23 million and NIS 31 million (US$ 9 million) was amortized to revenues in the income statement during 2016, and 2017, respectively. Until the termination of the eight-year amortization period, approximately NIS 31 million (US$ 10 million) was amortized to revenues in the income statement for each of the Lump Sum will be amortized to our revenues each year.years 2018, 2019 and 2020.
The Network Sharing Agreement provides material financial benefits to Partner in terms of both recognition of the amortized Lump Sum payments and savings in operational expenses and capital investments; however, such financial benefits are dependent on factors set forth in the related risk factor. See “Item3D.2e“Item 3D.2l If the network sharing agreement entered into with HOT Mobile is unilaterally terminated by HOT Mobile earlier than we expect, we will be required to split the shared network with HOT Mobile and the resources, time and expense it may take us to have our own network in a nationwide coverage, would be substantial and could also materially harm our business and the results of operations at such time.”
5A.1e Right of Use Agreement with HOT Mobile
Partner and HOT Mobile entered into a separate RightChange in PHI's governance from January 1, 2019
At the beginning of Use agreement which took effect in November 2013 and remained operational until March 2016. Under the Right of Use agreement, Partner provided services to HOT Mobile in the form of a right of use of Partner’s cellular network. AccordingJanuary 2019, an amendment to the Right of Use agreement, HOTNSA between the Company and Hot Mobile paid Partner fixed base payments with additional variable payments, based,was signed and communicated to the MoC and Anti-trust regulator which, among other things, on traffic volume exceeding a defined threshold. HOT Mobile ceased making payments undercancelled the ROU from April 2016 when the Capex-Opex Mechanism became effective under the Network Sharing Agreement.
Cellular segment revenues recorded relating to the Right of Use agreement totaled approximately NIS 120 million and NIS 51 million for the years 2015 and 2016 respectively.
5A.1f Impairment of Fixed-Line Assets and Goodwill
Impairment of Fixed-Line Assets as of December 31, 2015.
In 2015, the Group decided to cease using the "012 Smile" trade name in 2017. This change in business induced the Group to determine that an indicator of impairment exists for the fixed-line segment. See also information with respect to change in estimate of useful lifeposition of the intangible asset trade nameindependent director mentioned above who acted as a chairman, and no consideration was transferred between the parties in note 4(a)(2) and 4(a)(1)relation to our consolidated financial statements.
Forthis matter. The amendment did not change ownership shares, nor the purpose of the impairment test, the assets were grouped to the lowest level for which there are separately identifiable cash flows (CGU).
(i) The Group reviewed the recoverability of the VOB/ISP assets.CAPEX-OPEX mechanism described above. As a result of the amendment, the control over PHI thereafter is borne 50-50 by the Company and Hot Mobile (the "Parties"), and each nominates an impairment charge inequal number of directors (3 directors). Since, thereafter, decisions about the relevant activities of PHI require the unanimous consent of both Parties, PHI is considered a total amountjoint arrangement controlled by the Parties (joint control).
The activities of NIS 98 million was recognized.the joint arrangement are primarily designed for the provision of output to the Parties. The impairment charge was allocatedjoint arrangement terms give the Parties rights to the assets, and obligations for the liabilities and expenses of PHI. Furthermore the Parties have rights to substantially all of the CGU pro rata, oneconomic benefits of PHI's assets. PHI's liabilities are in substance satisfied by the basiscash flows received from the Parties, as the Parties are substantially the source of cash flows contributing to the continuity of the carrying amountoperations of each asset, provided thatPHI. Starting January 1, 2019, the impairment did not reduce the carrying amount of an asset below the highest ofCompany accounts for its fair value less costs to sell and its value-in-use, and zero. Accordingly, the following impairment charges were recordedrights in the assets of PHI and obligations for the above CGU (see note 13 to our consolidated financial statements):
| (a) | Right of use of international fiber optic cables by NIS 76 million, recorded in cost of revenues;
|
| (b) | Customer relationships by NIS 8 million, recorded in selling and marketing expenses; |
| (c) | Computers and information systems by NIS 7 million, recorded in cost of revenues; |
| (d) | Communication network by NIS 5 million, recorded in cost of revenues; and |
| (e) | Trade name by NIS 2 million, recorded in selling and marketing expenses. |
The recoverable amountliabilities and expenses of PHI as a joint operation, recognizing its share in the assets, liabilities, and expenses of PHI, instead of the VOB/ISP CGUequity method. Starting January 1, 2019 payments with respect to rights to use PHI's fixed assets are presented in the statement of cash flows as cash used in investing activities instead of December 31, 2015 was assessed by management with the assistance of an external independent expert ("Giza Singer Even. Ltd") based on value-in-use calculations, which was NIS 250 million. The value in use calculations use pre-tax cash flow projections covering a five-year period and using extrapolation with specific adjustments expected until 2027, which is the economic life of the main asset of the CGU: thepayments for deferred expenses –used in operating activities. For the years 2016 to 2018, costs of Right of Use (ROU) in PHI’s shared network were presented as deferred expenses. As a result, these costs were included in the cash flows statement under cash flows from operating activities rather than under cash flows used in investing activities. See also notes 2(g) and 9 to the financial statements.
Starting January 1, 2019, payments with respect to rights to use PHI's fixed assets have been presented in the statement of cash flows as cash used in investing activities.
The following table presents the Company's share (50%) in PHI's statement of financial position items that are consolidated to the financial statements as the Company's share in a pre-tax discount ratejoint operation.
| | New Israeli Shekels in millions | |
| | | |
| | Company's share (50%) in PHI's accounts** | | | | | | | |
CURRENT ASSETS | | | | | | | | | |
Cash and cash equivalents | | | * | | | | | | | * | |
Current assets | | | 69 | | | | (62 | ) | | | 7 | |
| | | | | | | | | | | | |
NON CURRENT ASSETS | | | | | | | | | | | | |
Property and equipment and intangible assets | | | 142 | | | | | | | | 142 | |
Lease-right of use | | | 355 | | | | | | | | 355 | |
| | | | | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | | |
Current borrowings from banks | | | 13 | | | | | | | | 13 | |
Trade payables and other current liabilities | | | 55 | | | | | | | | 55 | |
Other current liabilities | | | 65 | | | | | | | | 65 | |
| | | | | | | | | | | | |
NON CURRENT LIABILITIES | | | | | | | | | | | | |
Lease liabilities | | | 290 | | | | | | | | 290 | |
Deferred revenues | | | 142 | | | | (142 | ) | | | | |
| | | | | | | | | | | | |
EQUITY | | | 1 | | | | (1 | ) | | | - | |
* Representing an amount of 12.9%. The value-in-use calculations included all factorsless than NIS 1 million.
** Certain intercompany balances were eliminated in real terms.the presentation of Company's share in PHI's accounts.
The5A.1e Impairment tests
Annual goodwill impairment test was based on assessments of financial performance and future strategies in light of current and expected market and economic conditions. Trends in the economic and financial environment, competition and regulatory authorities' decisions, or changes in competitors’ behavior in response to the economic environment may affect the estimate of recoverable amounts in future periods. See also note 2(i) and note 4(a)(2).
(ii) The Group reviewed the recoverability of the ILD CGU in the fixed lineFixed-Line segment and determined that no impairment exists as of December 31, 2015.
Impairment test of Fixed-Line Goodwill as of December 31, 2015, 2016 and 2017.
Goodwill in the fixed-line segment is allocated to a single group of CGUs which constitute all the operations of the fixed-line segment, in an amount of NIS 407 million.
For the purpose of the goodwill impairment tests in the fixed-line segment as of December 31, 2015, 20162018, 2019 and 20172020, the recoverable amount was assessed by management with the assistance of an external independent experts (2015:"Giza Singer Even. Ltd", 2016, 2017: "BDOexpert (BDO Ziv Haft Consulting & Management Ltd."Ltd.) based on value-in-use calculations. The value-in-use calculations use pre-tax cash flow projections covering a five-year period. Cash flows beyond the five-year period to be generated from continuing use are extrapolated using estimated growth rates. The terminal growth rate represents the long-term average growth rate of the fixed-line communications services business. The key assumptions used are as follows:
| | As of December 31, | | | | |
| | 2015 | | | 2016 | | | 2017 | | | | | | | | | | | | | |
Terminal growth rate | | (negative 0.09%) | | | | 0.5 | % | | | 0.9 | % | | 0.9 | % | | 1 | % | | 1 | % | | 1 | % |
After-tax discount rate | | | 10.3 | % | | | 9.8 | % | | | 9.3 | % | | 9.3 | % | | 9.5 | % | | 8.0 | % | | 7.5 | % |
Pre-tax discount rate | | | 13.4 | % | | | 11.9 | % | | | 11.2 | % | | 11.2 | % | | 11.5 | % | | 9.6 | % | | 9.0 | % |
The impairment tests in the fixed-line segment as of December 31, 2015, 20162018, 2019 and 20172020, were based on assessments of financial performance and future strategies in light of current and expected market and economic conditions. Trends in the economic and financial environment, competition and regulatory authorities' decisions, or changes in competitors’ behavior in response to the economic environment may affect the estimate of recoverable amounts.
As a result of the impairment tests, the Group determined that no goodwill impairment existed as of December 31, 2015, 20162018, 2019 and 2017.2020. See also note 4(a)(3)4(3) and note 2(h) to our consolidated financial statements.
Sensitivity Analysis:
The headroom of the fixed line segment recoverable amount over the carrying amount as of December 31, 2015, 20162018, 2019 and 20172020 was approximately 9%21%, 23%42% and 23%37% respectively. Sensitivity analysis was performed for the recoverable amount as of December 31, 20172020 for a change of the after-tax discount rate within the range of ± 10% multiplied by the variable 9.3% (8.4%7.5% (6.75% to 10.2%8.25%), assuming all other variables constant. Sensitivity analysis was also performed for a change of the terminal permanent growth rate within the range of ± 1% of the variable 0.9% (minus 0.9%1.0% (0% to 1.9%2%), assuming all other variables constant. Results showed that no impairment charge is required for both analyses.
5A.1g Agreement for the Upgrade Interim impairment testsof Our Existing Networks and the Deployment of Fourth Generation Network in Israelnon-financial assets
On October 25, 2010,The economic slowdown in the Company signed an agreement with LM Ericsson Israel Ltd. (“Ericsson”)markets triggered in March 2020 the identification of indicators for impairment of non-financial assets. In particular, the upgradesignificant fall in the volume of its then existing networksinternational travel by the Company's customers has caused a significant decrease in revenues from roaming services, which affected the cellular segment. In addition, the temporary closures of shopping malls and changes in general consumer behavior adversely affected the deploymentvolume of a fourth generation network in Israel (the “Agreement”) for approximately US $100 million. The Agreement includes the upgrade, replacement and the expansionsales of certain parts of the Company’s existing cellular and fixed-line networks and the maintenance of its networks, including enhancement of the Company’s abilities with respect toequipment, which affected the cellular and the fixed-line ISP services it provides. segments.
The initial termCompany tested the recoverable amount of the all-inclusive agreementfixed line segment as of March 31, 2020, based on value-in-use calculations. The recoverable amount was assessed by management with Ericsson ended onthe assistance of an external independent expert (BDO Ziv Haft Consulting & Management Ltd.). The value-in-use calculations use pre-tax cash flow projections covering a five-year period. Cash flows beyond the five-year period to be generated from continuing use are extrapolated using estimated growth rates. The terminal growth rate represents the long-term average growth rate of the fixed-line communications services business. The key assumptions used are as follows:
| |
Terminal growth rate | 1.0% |
After-tax discount rate | 8.25% |
Pre-tax discount rate | 9.9% |
As a result of the impairment test, the Group determined that no impairment existed as of March 31, 2020.
The Company tested as of March 2020 the impairment of the cellular segment assets with the assistance of an external expert (BDO Ziv Haft Consulting & Management Ltd.), using a reasonable approximation of its fair value less costs of selling as its recoverable amount, and determined that no impairment was required. No other adverse changes have been identified since March 2020 with the continuation of the crisis and therefore the Company determined that no impairment indicators existed in respect of the cellular segment assets as of December 31, 2014. We extended, with certain modifications, the maintenance period by additional periods until the end of 2018.2020.
5A.1h5A.1f Significant regulatory developments
For information regarding developments which have had and may have a significant impact on our operating results, see “Item 3D.1 RISKS RELATING TO THE REGULATION OF OUR INDUSTRY” and “Item 4B.13 Regulation”4B.12 REGULATION”.
5A.1g Revenues
We derive revenues from both providing services and selling equipment.
Our principal source of revenues is the cellular segment, deriving from the saleprovision of cellular networkcommunications services to subscribers, including basic cellular telephonysuch as airtime calls, international roaming services, text messaging, internet browsing, value-added and data transfer, content services, roaminghandset repair services and services provided to other operators that use the Company's cellular network.
The fixed-line business segment derives revenues from a variety of fixed-line services that include internet services, ILD services, transmission services, telephony services (including SIP services) and, starting infrom 2017, TV services.
Equipment revenues are derived from the sale and leasing of a variety of communications, digital audio visual and internet-related equipment and other related equipment, including cellular handsets and related cellular devices and accessories, landline phones, business communications equipment, modems, domestic routers, servers smartboxes and related equipment.equipment and more. See also "Item 4B.5 SERVICES AND PRODUCTS".
5A.1j Early adoption of5A.1h IFRS 15 Revenue from Contracts with Customers – change in accounting policy
In the third quarter of 2017, the Group early adopted with a date of initial application of January 1, 2017 (the "transition date") IFRS 15, Revenue from Contracts with Customers, and its clarifications ("IFRS 15", "The Standard") (the standard is effective from January 1, 2018, earlier application is permitted) with a retrospective date of application to January 1, 2017 (the "transision date") using the cumulative effect approach, which effect was immaterial as of the transition date.
The revenue recognition standard IFRS 15, Revenue from Contracts with Customers, and its clarifications outlines a single comprehensive model of accounting for revenue arising from contracts with customers and supersedes IAS 18, Revenue, and IAS 11, Construction contracts (the "previous standards").customers. The model includes five steps for analyzing transactions so as to determine when to recognize revenue and at what amount:
1. | 1) Identifying the contract with the customer. |
2. | Identifying separate performance obligations in the contract.
|
3. | Determining the transaction price.
|
4. | Allocating the transaction price to separate performance obligations.
|
5. | Recognizing revenue when the performance obligations are satisfied. |
In accordance with the model,customer.
2) Identifying separate performance obligations in the Group recognizescontract.
3) Determining the transaction price.
4) Allocating the transaction price to separate performance obligations.
5) Recognizing revenue when it satisfiesthe performance obligations by transferring control overare satisfied.
(1) Identifying the contract with the customer
Two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) are accounted for as a single contract if one or more of the following criteria are met:
a. The contracts are negotiated as a package with a single commercial objective;
b. The amount of consideration to be paid in one contract depends on the price or performance of the other contract;
c. The goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation.
Additions of distinct goods or services at their stand-alone sale price are treated as separate contracts.
(2) Identifying performance obligations
The Group assesses the goods or services topromised in the customers. Revenue is measured based on the consideration that the Group expects to receive for the transfer of the goods or services specified in a contract with the customer taking into account rebates and discounts, excluding amounts collected on behalf of third parties, suchidentifies as value added taxes. The transaction price is also adjusted forperformance obligation any promise to transfer to the effectscustomer one of the time valuefollowing:
(a) Goods or services (or a bundle of money ifgoods or services) that are distinct; or
(b) A series of distinct goods or services that are substantially the contract includes a significant financing component (such as salessame and have the same pattern of equipment with non-current credit arrangements, mainly in 36 monthly installments) and for any consideration payabletransfer to the customer. See also note 2(n) to our consolidated statements. With respect to sales that constitute a revenue arrangement with multiple performance obligations, the transaction price is allocated to separate performance obligations based of their relative stand-alone selling prices, see also note 4(b)(2) to our consolidated statements.
The performance obligationsGoods or services are separately identifiable whereidentified as being distinct when the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer and the Group’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. An option that grants the customer the right to purchase additional goods or services constitutes a separate performance obligation in the contract only if the options grant the customer a material right it would not have received without the original contract.
The performance obligations are mainly services, equipment and options to purchase additional goods or services that provide a material right to the customer.
(3) Determining the transaction price
The transaction price is the amount of consideration that the Group expects to receive for the transfer of the goods or services specified in a contract with the customer, taking into account rebates and discounts, excluding amounts collected on behalf of third parties, such as value added taxes.
The transaction price is also adjusted for the effects of the time value of money if the contract includes a significant financing component (such as sales of equipment with non-current credit arrangements, mainly in 36 monthly installments) and for any consideration payable to the customer. The Group applies a practical expedient in the standard and does not adjust the transaction price for the effects of a significant financing component if, at contract inception, the Group expects the period between customer payment and the transfer of goods or services to be one year or less. The financing component is recognized in other income-net over the period which is calculated according to the effective interest method. See also notes 23 – unwinding of trade receivables and 7(a) to the consolidated financial statements.
(4) Allocating the transaction price to separate performance obligations
In a transaction that constitutes a revenue arrangement with multiple performance obligations, the transaction price is allocated to separate performance obligations based of their relative stand-alone selling prices.
A discount is allocated to one or more, but not all, performance obligations in the contract if (a) the Group regularly sells each distinct good or service (or each bundle of distinct goods or services) in the contract on a stand-alone basis, (b) the Group also regularly sells on a stand-alone basis a bundle (or bundles) of some of those distinct goods or services at a discount to the stand-alone selling prices of the goods or services in each bundle; and (c) the discount attributable to each bundle in 'b' above is substantially the same as the discount in the contract and an analysis of the goods or services in each bundle provides observable evidence of the performance obligation (or performance obligations) to which the entire discount in the contract belongs.
(5) Satisfaction of performance obligations
The Group recognizes revenue when it satisfies performance obligations by transferring control over the goods or services to the customers.
Revenues from services and from providing rights to use the Group's assets, (see note 1(b) in our consolidated financial statements) (either month-by-month or long term arrangements) are recognized over time, as the services are rendered to the customers, since the customer receives and uses the benefits simultaneously, and provided that all other revenue recognition criteria are met.
Revenue from sale of equipment (see note 1(b) in our consolidated financial statements) is recognized at a point of time when the control over the equipment is transferred to the customer (mainly upon delivery) and all other revenue recognition criteria are met.
77(6) Principal – Agent consideration
The Group determines whether it is acting as a principal or as an agent.agent for each performance obligation. The Group is acting as a principal if it controls a promised good or service before they are transferred to a customer. Indicators for acting as a principal include: (1) the Group is primarily responsible for fulfilling the promise to provide the specified good or service, (2) the Group has inventory risk in the specified good or service and (3) the Group has discretion in establishing the price for the specified good or service. On the other hand, the Group is acting as an agent or an intermediary, if these criteria are not met. When the Group is acting as an agent, revenue is recognized in the amount of any fee or commission to which the Group expects to be entitled in exchange for arranging for the other party to provide its goods or services. A Group’s fee or commission might be the net amount of consideration that the Group retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party. The Group determined that it is acting as an agent in respect of certain content services provided by third parties to customers; therefore the revenues recognized from these services are presented on a net basis in the statement of income.
(7) Recognition of receivables
Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. Trade receivables are recognized when the control over the goods or services is transferred to the customer, and at the amount that is unconditional because only the passage of time is required before the payment is due. The applicationGroup holds the trade receivables with the objective to collect the contractual cash flows, and the contractual terms give rise to cash flows that are solely payments of IFRS 15 did not haveprincipal and interest. Therefore they are subsequently measured at amortized cost using the effective interest method. See also note 7 and also note 6(a)(3) to the consolidated financial statements regarding trade receivables credit risk.
(8) Recognition of contract assets and contract liabilities
A contract asset is a material effectGroup’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the measurement and timingpassage of time (for example, the Group’s revenue infuture performance).
A contract liability is a Group’s obligation to transfer goods or services to a customer for which the reporting period, compared toentity has received consideration (or the provisions of the previous standards. Capitalization of contract costs resulted in a significant impactamount is due) from the adoption, see below.customer; therefore the Group records contract liabilities for payments received in advance for services, such as transmission services and pre-paid calling cards, as deferred revenues until such related services are provided.
Transition to the new revenue recognition model:
The Group applied IFRS 15 using the cumulative effect approach asContract assets and contract liabilities arising from the transition date, withoutsame contract are offset and presented as a restatement of comparative figures. As part of the initial implementation of IFRS 15, the Group has chosen to apply the expedients in the transitional provisions, according to which the cumulative effect approach is applied only for contracts not yet complete at the transition date, and therefore there is no change in the accounting treatment for contracts completed at the transition date. The Group also applied the practical expedient of examining the aggregate effect of contracts changes that occurred before the transition date, instead of examining each change separately. Contracts that are renewed on a monthly basis and may be cancelled by the customer at any time, without penalty, were considered completed contracts at the transition date. The transition resulted in an immaterial amount on the statement of financial position as of the transition date, as the cumulative effect as of the transition date was immaterial.single asset or liability.
(9) Other practical expedients implemented:
The Group applies IFRS 15 practical expedient to the revenue model to a portfolio of contracts with similar characteristics if the Group reasonably expects that the financial statement effects of applying the model to the individual contracts within the portfolio would not differ materially.
The Group applies a practical expedient in the standard and measures progress toward completing satisfaction of a performance obligation and recognizes revenue based on billed amounts if the Group has a right to invoice a customer at an amount that corresponds directly with its performance to date; for which, or where the original expected duration of the contract is one year or less, the groupGroup also applies the practical expedient in the standard and does not disclose the transaction price allocated to unsatisfied, or partially unsatisfied, performance obligations, such as constrained variable consideration.
The Group applies a practical expedient in the standard and does not adjust the transaction price for the effects of a significant financing component if, at contract inception, the Group expects the period between customer payment and the transfer of goods or services to be one year or less (see note 23 to our consolidated statements - unwinding of trade receivables and note 7(a) to our consolidated statements). See also disaggregation of revenues in note 22 to our consolidated statements.
The Group applies in certain circumstances where the customer has a material right to acquire future goods or services and those goods or services are similar to the original goods or services in the contract and are provided in accordance with the same terms of the original contract, a practical alternative to estimating the stand-alone selling price of the customer option, and instead allocates the transaction price to the optional goods or services by reference to the goods or services expected to be provided and the corresponding expected consideration.
Recognition of receivables:
A receivable is recognized when the control over the goods or services is transferred to the customer, and the consideration is unconditional because only the passage of time is required before the payment is due. See note 7 to our consolidated statements and also note 6(a)(3) to our consolidated statements regarding trade receivables credit risk.
Recognition of contract assets and contract liabilities:
A contract asset is a Group’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the Group’s future performance).
A contract liability is a Group’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer; therefore the Group records contract liabilities for payments received in advance for services, such as transmission services and pre-paid calling cards, as deferred revenues until such related services are provided.
(10) Capitalization of contract costs:costs
The main effect of the Group’s application of IFRS 15 is the accounting treatment for the incremental costs of obtaining contracts with customers, which in accordance with IFRS 15, are recognized as assets when the costs are incremental to obtaining the contracts,under certain conditions, see notes 2(f)(4) and it is probable that the Group will recover these costs, instead of recognizing these costs in the statement of income as incurred (mainly direct commissions paid to resellers and sales employees for sales and upgrades). The assets are amortized in accordance with the expected service period (mainly over 2-3 years), using the portfolio approach, see note 4(a)(2) to our consolidated statements. IFRS 15 also determines that direct costs of fulfilling a contract which the Group can specifically identify and which produce or improve the Group’s resources that are used for its future performance obligation (and it is probable that the Group will recover these costs) are recognized as assets (together: "contract costs"), see note 11 to ourthe consolidated financial statements. Contract costs that were recognized as assets are presented in the statements of cash flows as part of cash flows used in investing activities. Other costs incurred that would arise regardless of whether a contract
See additional information with a customer was obtained are recognized as an expense when incurred. Underrespect to revenues in note 22(a) to the previous accounting policy, contract costs were not capitalized, and instead, subsidies, in some cases, of sales of handsets to end subscribers at a price below its cost, securing a fixed-term service contract, were capitalized as subscriber acquisition and retention costs (SARC costs). SARC costs were eliminated upon the transition to IFRS 15, see notes 2(f)(5) and 11 to our consolidated financial statements.
Use of judgments and estimates:77
Implementation
5A.1i IFRS 16 Leases
Group as lessee:
Through December 31, 2018 the Group applied IAS 17 to account for leases whereby a significant portion of the risks and rewards of ownership were retained by the lessor were classified as operating leases. Therefore the Group's leases were primarily operating leases which were charged to income statements on a straight-line basis over the lease term, including extending options which were reasonably certain.
The Group applied IFRS 16 Leases from its mandatory adoption date January 1, 2019. The Group applied the simplified transition approach and did not restate comparative amounts for the year prior to first adoption. Right-of-use assets for certain property leases were measured on transition as if the new rules had always been applied. All other right-of-use assets were measured at the amount equal to the lease liability on adoption (adjusted for any prepaid or accrued lease expenses, dismantling and restoring obligations). The reclassifications and the adjustments arising from the new leasing rules are therefore recognized in the opening balance sheet on January 1, 2019.
On adoption of IFRS 16 on January 1, 2019, the Group recognized lease liabilities in relation to leases which had previously been classified as ‘operating leases’ and corresponding right-of-use assets. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of January 1, 2019.
The Group applied the following practical expedients:
• Non-lease components: practical expedient by class of underlying asset not to separate non-lease components (services) from lease components and, instead, account for each lease component and any associated non lease components as a single lease component.
• Discount rate: The lease payments are discounted using the lessee’s incremental borrowing rate, since the interest rate implicit in the lease cannot be readily determined. The lessee’s incremental borrowing rate is the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. However, the Group is using the practical expedient of accounting policy described above requirestogether a portfolio of leases with similar characteristics provided that it is reasonably expected that the effects on the financial statements of applying this standard to the portfolio would not differ materially from applying this Standard to the individual leases within that portfolio. And using a single discount rate to a portfolio of leases with reasonably similar characteristics (such as leases with a similar remaining lease term for a similar class of underlying asset in a similar economic environment). The discount rates were estimated by management with the assistance of an independent external expert.
• Low-value leases: The low-value leases practical expedient is applied and these leases are recognized on a straight-line basis as expense in profit or loss.
The practical expedient for short-term leases is not applied.
Lease liabilities measurement:
Lease liabilities were initially measured on a present value basis of the following lease payments:
fixed payments (including in-substance fixed payments), less any lease incentives receivable
variable lease payment that are based on an index or a rate (such as CPI)
amounts expected to be payable by the lessee under residual value guarantees
the exercise price of a purchase option if the lessee is reasonably certain to exercise discretionthat option
payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option, and
lease payments (principal and interest) to estimatebe made under reasonably certain extension options
The lease liability is subsequently measured according to the expected service periodeffective interest method, with interest costs recognized in the statement of income as incurred. The amount of lease liabilities is increased to reflect the accretion of interest and reduced for the anticipated subscriber churn rate. Changes in such estimates may result inlease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in depreciation and amortization expenses andthe lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset.
The Group is exposed to potential future changes in lease payments based on linkage to the CPI index, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset.
Lease payments are presented in the statement of cash flows under the cash used in financing activities. Lease payments are allocated between principal and finance cost. The finance cost is charged to the statement of income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Right-of-use assets measurement:
Right-of-use assets were measured at cost comprising the following:
the amount of the initial measurement of lease liability
any lease payments made at or before the commencement date less any lease incentives received
any initial direct costs (except for initial application), and
Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term (including reasonably certain extension periods) on a straight-line basis, and adjusted for any remeasurements of lease liabilities. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. As of the adoption date of IFRS 16, the average remaining amortization period is as follows: Cell sites 4.5 years, buildings 6 years, vehicles 2 years. The right-of-use assets are also subject to impairment.
Covid-19-Related Rent Concessions – amendments to IFRS 16
In May 2020, the IASB amended IFRS 16 Leases which provides lessees with an option to treat qualifying rent concessions in the same way as they would if they were not lease modifications. This resulted in accounting for concessions received in an immaterial amount as variable lease payments in the period in which they are granted. The expedient was applied to all qualifying rent concessions.
Group as lessor:
The cellular segment and the fixed-line segment also include leasing of telecommunications, audio visual and related devices. Leases in which the Group does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Lease income from operating leases where the Group is a lessor is recognized in income on a straight-line basis over the lease term. The respective leased assets are included in the balance sheet based on their nature. The Group did not need to make any adjustments to the accounting for assets held as lessor as a result of adopting IFRS 16.
Transition to IFRS 16, Leases:
It results in almost all leases, where the Group is the lessee, being recognized on the balance sheet, as the distinction between operating and finance leases is removed for lessees. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay lease payments are recognized on the statement of financial position. The only exceptions for lessees are short-term (not applied) and low-value leases (applied) which are recognized on a straight-line basis as expense in profit or loss. The statement of income is also affected because operating expense is replaced with interest and depreciation. Operating cash flows is higher as cash payments of the lease liability are classified within financing activities. The accounting for lessors did significantly change and therefore the Group did not need to make any adjustments to the accounting for assets held as lessor under operating leases as a result of the adoption of IFRS 16. The main lease contracts that affected the financial statements are operating leases where the Group leases offices, retail stores and service centers, cell sites, and vehicles, see also notes 2(o), 4(b)(3) and 19 to the consolidated financial statements.
The Group applied the standard from its mandatory adoption date January 1, 2019. The Group applied the simplified transition approach and did not restate comparative amounts for the year prior to first adoption. Right-of-use assets for certain property leases were measured on transition as if the new rules had always been applied. All other right-of-use assets were measured at the amount equal to the lease liability on adoption (adjusted for any prepaid or accrued lease expenses, dismantling and restoring obligations).
As of the transition date, the group applied the following practical expedients:
the lease liability was measured for leases previously classified as an operating leases under IAS 17 at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at the date of initial application;
Accounting together a portfolio of leases with similar characteristics provided that it is reasonably expected that the effects on the financial statements of applying this standard to the portfolio would not differ materially from applying this Standard to the individual leases within that portfolio. And using a single discount rate to a portfolio of leases with reasonably similar characteristics (such as leases with a similar remaining lease term for a similar class of underlying asset in a similar economic environment);
rely on its assessment of whether leases are onerous applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application as an alternative to performing an impairment review;
not reassess whether a contract is, or contains, a lease at the date of initial application, and therefore IFRS 16 was not applied to contracts that were not previously identified as containing a lease.
Initial direct costs were excluded from the measurement of the right-of-use asset at the date of initial application;
use hindsight, such as in determining the lease term if the contract costs asset, see note 4(a)(1)contains options to our consolidated statements.extend or terminate the lease.
Management estimates the stand-alone selling prices of performance obligations, see note 4(b)(2)Quantitative information with respect to our consolidated statements.transition to IFRS16:
The tables below summarize the effects of IFRS 1516 on the consolidated statement of financial position as at December 31, 2017January 1, 2019 and on the consolidated statements of income and cash flows for the year then ended. See also disaggregation of revenues and additional information in note 22 to our consolidated financial statements.for the year ended December 31, 2019.
Effect of change on consolidated statement of financial position:
| | New Israeli Shekels in millions | |
| | | |
| | Previous accounting policy | | | | | | According to IFRS16 as reported | |
Non-current assets - Lease – right of use | | | - | | | | 656 | | | | 656 | |
Non-current assets - Deferred income tax asset | | | 38 | | | | 6 | | | | 44 | |
| | | | | | | | | | | | |
Current liabilities - Lease liabilities | | | - | | | | 137 | | | | 137 | |
Non-current liabilities - Lease liabilities | | | - | | | | 546 | | | | 546 | |
Equity | | | 1,406 | | | | (21 | ) | | | 1,385 | |
| | | | | New Israeli Shekels in millions | |
| | | | | As of December 31, 2017 | |
| | note
| | | Previous accounting policy
| | | Effect of change
| | | According to IFRS 15 as reported | |
Current assets - other receivables and prepaid expenses - Contract assets | | | | | | - | | | | 2 | | | | 2 | |
Non current assets - costs to obtain contracts recognized in intangible assets, net – non-current assets | | | 11,2(f)(5) | | | | - | | | | 71 | | | | 71 | |
Deferred income tax asset | | | 25 | | | | 71 | | | | (16 | ) | | | 55 | |
Current liabilities - other deferred revenues – Contract liabilities | | | 22 | | | | 36 | | | | 4 | | | | 40 | |
Non-current liabilities – other non-current liabilities – Contract liabilities | | | 22 | | | | 6 | | | | - | | | | 6 | |
Deferred revenues from HOT Mobile – Contract liabilities (current and non-current) | | | 22 | | | | 195 | | | | - | | | | 195 | |
Equity | | | | | | | 1,381 | | | | 53 | | | | 1,434 | |
Measurement of lease liability as of January 1, 2019:
| | New Israeli Shekels in millions | |
Operating lease commitments (undiscounted) disclosed as at December 31, 2018 | | | | |
Discounted using the lessee's incremental borrowing rate as of the date of initial application | | | 328 | |
Group's share in PHI's lease liability | | | | |
Lease liability recognized as at January 1, 2019 | | | | |
Of which are: | | | | |
Current lease liabilities | | | 137 | |
Non-current liabilities | | | 546 | |
Effect of change on consolidated statement of income:
| | New Israeli Shekels In millions (except per share data) | |
| | Year ended December 31, 2017 | |
| | Previous accounting policy
| | | Effect of change
| | | According to IFRS 15 as reported | |
Revenues | | | 3,270 | | | | (2 | ) | | | 3,268 | |
Selling and marketing expenses | | | 340 | | | | (71 | ) | | | 269 | |
Operating profit | | | 246 | | | | 69 | | | | 315 | |
Profit before income tax | | | 66 | | | | 69 | | | | 135 | |
Income tax expenses | | | 5 | | | | 16 | | | | 21 | |
Profit for the year | | | 61 | | | | 53 | | | | 114 | |
| | | | | | | | | | | | |
Depreciation and amortization expense | | | 567 | | | | 13 | | | | 580 | |
Basic earnings per share | | | 0.38 | | | | 0.32 | | | | 0.70 | |
Diluted earnings per share | | | 0.37 | | | | 0.32 | | | | 0.69 | |
Effect of change on consolidated statement cash flows:
| | New Israeli Shekels in millions | |
| | Year ended December 31, 2017 | |
| | Previous accounting policy | | | Effect of change | | | According to IFRS 15 as reported | |
Net cash provided by operating activities | | | 897 | | | | 76 | | | | 973 | |
Net cash provided by (used in) investing activities | | | 4 | | | | (76 | ) | | | (72 | ) |
5A.1k5A.1j Cost of Revenues
The principal components of our cost of revenues are:
| · | Transmission, communication and content providers |
| · | Cost of equipment and accessories |
| · | Depreciation and amortization (including impairment) |
| · | Wages, employee benefits expenses and car maintenance |
80
Depreciation and amortization | · | Operating lease, rent and overhead expenses |
Cost of equipment and accessories
| · | Network and cable maintenance |
Wages, employee benefits expenses and car maintenance
Internet infrastructure and service providers
| · | Internet infrastructure and service providers (“ISPs”) |
Network and cable maintenance
Operating lease, rent and overhead expenses
Costs of handling, replacing or repairing equipment
IT support and other operating expenses
| · | Costs of handling, replacing or repairing equipment |
Amortization of deferred expenses - rights of use
| · | Car kit installation, IT support, and general operating expenses |
| · | Amortization of rights of use (including impairment) |
5A.1l5A.1k Selling and Marketing Expenses
The principal components of our selling and marketing expenses are:
• Depreciation and amortization
Wages, employee benefits expenses and car maintenance
• Depreciation and amortization (including impairment)
• Advertising and marketing
• Selling commissions, net
• Operating lease, rent and overhead expenses
5A.1m5A.1l General and Administrative Expenses
The principal components of our general and administrative expenses are:
Wages, employee benefits expenses and car maintenance
Bad debts and allowance for doubtful accountsProfessional fees
Professional feesDepreciation
Credit card and other commissions
Depreciation
5A.1m Credit Losses
5A.1n Income with RespectCredit losses are equivalent to the Settlement Agreement with Orangenet impairment losses on financial and contract assets under IAS1(82).
Income with respect to the Settlement Agreement with Orange consists of recognized payments received by Partner thereunder (see Item "5A.1c Settlement Agreement with Orange Brand Services Ltd."). The recognition of such payments terminated after the second quarter of 2017.81
5A.1o
5A.1n Other Income, Net
The principal componentscomponent of our other income, net, are:is:
Unwinding of trade receivables
Capital gain from sale of property and equipment
5A.1p5A.1o Finance Costs, Net
The principal componentcomponents of our finance expenses is:are:
CPI linkage expensesInterest for lease liabilities
Finance charges for financial liability
The principal components of our finance income are:
Net foreign exchange rate gains
Interest income from cash, cash equivalents
Fair value gain from derivative financials instruments, net and deposits
5A.1q5A.1p Key Cellular Business Indicators (Operating Data)
Our primary key cellular business indicators for the cellular segment are described below.as follows. These indicators are widely used in the cellular telephone service industry to evaluate performance.
Number of subscribersCellular subscriber base
AverageCellular average monthly revenue per subscriber (ARPU)
5A.1rOur primary key business indicators for the fixed-line segment are as follows:
Infrastructure-based internet subscribers
Homes Connected (HC) to the fiber-optic infrastructure
5A.1q Critical Accounting Estimates and Judgments
Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below. See also note 4 to the consolidated financial statements.
5A.1r - i Critical accounting estimates and assumptions | (1) | Assessing the useful lives of assetsnon-financial assets: |
The useful economic lives of the Company’s assetsGroup's property and equipment are an estimate determined by management. The Group defines useful economic life of its assets in terms of the assets’assets' expected utility to the Group. This estimation is based on assumptions of future changes in technology or changes in the Group’sGroup's intended use of these assets, and experience of the Group with similar assets, and legal or contract periods where relevant. The useful economic lives of the Group's intangible assets are an estimate determined by management based on assumptions of future changes in technology, legal rights, experience of customer's behavior, and experience of the Group with similar assets where relevant. The assets estimated economic useful lives are reviewed, and adjusted if appropriate, at least annually. See also note 2(e) and note 2(f) to the consolidated financial statements. See also information with respect to the change in estimate of the useful life of the "012 Smile" trade name in (2) below.
The useful economic lives of contract costs (see notes 2(n) and 2(f)(5) to our consolidated financial statements) are an estimate determined by management. Contract costs are amortized in accordance with the expected service period (mainly over 2-3 years), using the portfolio approach. The assets estimated economic useful lives are reviewed, and adjusted if appropriate, at least annually. See also note 11 to our consolidated financial statements.
Change in accounting estimate:
The Company expected in 2019 that the license would be renewed at a high level of certainty: the Company estimated in 2019 that based on its experience and acquaintance with the communications market in Israel, if current conditions continue, there is a high probability that the license will be extended for the additional term of 6 years. Following this examination, the estimated useful life of the 2G and 3G frequencies was re-evaluated for an additional period of 6 years, thereby ending on February 1, 2028. The effect of these changes on the consolidated financial statements were as follows: the amortization expenses of the cellular license were reduced by NIS 15 million in the fourth quarter of 2019, by NIS 60 million in 2020 and are expected to be reduced in 2021 by approximately NIS 60 million.
On September 29, 2020 the Company's cellular license was amended (amendment number 107), whereby the Company is entitled to request an extension of the license for additional periods of ten years instead of six years, at the discretion of the MoC and the Israeli Civil Administration. See information with respect to the extension provisions in note 1 (c) to the financial statements. On receipt of the license amendment, and with respect to the high probability judgement that remained the same, the estimated life of the 2G and 3G frequencies were re-valuated for an additional period of 4 years, thereby ending on February 1, 2032. The effect of these changes on the consolidated financial statements (in addition to the 2019 abovementioned change in estimate) were as follows: the amortization expenses of the cellular license were reduced in the fourth quarter of 2020 by NIS 2 million, and are expected to be reduced by an annual amount of approximately NIS 8 million in 2021. See also note 2(f)(1) and note 11 to the financial statements.
| (2) | Assessing the recoverable amount for impairment tests of non-financial assets with finite useful lives |
The Group is required to determine at the end of each reporting period whether there is any indication that an asset may be impaired. If indicators for impairment are identified the Group estimates the assets' recoverable amount, which is the higher of an asset's fair value less costs to sell and value in use. The value-in-use calculations require management to make estimates of the projected future cash flows. Determining the estimates of the future cash flows is based on management past experience and best estimate for the economic conditions that will exist over the remaining useful economic life of the Cash Generating Unit ("CGU"). See also note 2(i) to our consolidated financial statements.
NoThe economic slowdown in the markets triggered in March 2020 the identification of indicators for an impairment or reversal of impairment of assets with finite useful lives were identifiednon-financial assets. In particular, the significant fall in 2017.
the volume of international travel by the Company's customers has caused a significant decrease in revenues from roaming services, which affected the cellular segment. In addition, the fourth quartertemporary closures of 2015,shopping malls and changes in general consumer behavior adversely affected the Group decided to cease usingvolume of sales of equipment, which affected the "012 Smile" trade name in 2017. This change in business induced the Group to determine that an indicator of impairment exists forcellular and the fixed-line segment. See note 13(2) tosegments.
The Company tested the consolidated financial statements.
An Impairment test in the fourth quarter of 2015 for the VOB/ISP CGUrecoverable amount of the fixed line segment resulted in an impairment charge to certain assets in a total amountas of NIS 98 million,March 31, 2020, based on the key assumptions described in note 13(2) to the consolidated financial statements.value-in-use calculations. The recoverable amount of the VOB/ISP CGU assets as of December 31, 2015 was assessed by management with the assistance of an external independent expert ("Giza Singer Even. Ltd"(BDO Ziv Haft Consulting & Management Ltd.) based on value-in-use calculations, which was NIS 250 million.. The value in usevalue-in-use calculations use pre-tax cash flow projections covering a five-year period. Cash flows beyond the five-year period andto be generated from continuing use are extrapolated using extrapolation with specific adjustments expected until 2027, which isestimated growth rates. The terminal growth rate represents the economic lifelong-term average growth rate of the main assetfixed-line communications services business. The key assumptions used are as follows:
| | | |
Terminal growth rate | | | 1.0 | % |
After-tax discount rate | | | 8.25 | % |
Pre-tax discount rate | | | 9.9 | % |
As a result of the CGU:impairment test, the deferred expenses – RightGroup determined that no impairment existed as of Use, and a pre-tax discount rateMarch 31, 2020.
The Company tested as of 12.9%. The value-in-use calculations included all factors in real terms. The value-in-useMarch 2020 the impairment of the cellular segment assets with the assistance of the CGU was estimated to exceed thean external independent expert (BDO Ziv Haft Consulting & Management Ltd.), using a reasonable approximation of its fair value less costs to sale.of selling as its recoverable amount, and determined that no impairment was required. No other adverse changes have been identified since March 2020 with the continuation of the crisis and therefore the Company determined that no impairment indicators existed in respect of the cellular segment assets as of December 31, 2020.
The impairment test in the fourth quarter of 2015 was based on assessments of financial performance and future strategies in light of current and expected market and economic conditions. Trends in the economic and financial environment, competition and regulatory authorities' decisions, or changes in competitors’ behavior in response to the economic environment may affect the estimate of recoverable amounts in future periods. See also note 2(i) to our consolidated financial statements.
As a result of the decision in 2015 to cease the usage of the "012 Smile" trade name the Group revised its expected useful life to end in 2017 as a change in accounting estimate. As a result the amortization expenses of the trade name increased in 2015, 2016 and 2017 by NIS 1 million, NIS 16 million and NIS 6 million, respectively. See note 11 to our consolidated financial statements.
Further increaseContinued increases in the level of competition that will continue to pushfor cellular and fixed-line services may bring further downward pressure on prices which may require the Groupus to perform further impairment tests of our assets. Such impairment tests may lead to recording additional significant impairment charges, which could have a material negative impact on the Group'sour operating and net profit.
| (3) | Assessing the recoverable amount of goodwill for impairment tests of goodwill |
Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. The recoverable amount of the fixed line segment to which goodwill has been allocated to have been determined based on value-in-use calculations. For the purpose of the goodwill impairment tests as of December 31, 2015, 2016, 2017, 2018, 2019 and 20172020 the recoverable amount was assessed by management with the assistance of an external independent experts (2015: "Giza Singer Even. Ltd", 2016, 2017: "BDO(BDO Ziv Haft Consulting & Management Ltd."Ltd.) based on value-in-use calculations. The value-in-use calculations use pre-tax cash flow projections covering a five-year period. Cash flows beyond the five-year period to be generated from continuing use are extrapolated using estimated growth rates. The terminal growth rate represents the long-term average growth rate of the fixed-line communications services business.
The key assumptions used in the December, 31, 20172020 test were as follows:
Terminal growth rate 0.9%1.0%
After-tax discount rate 9.3%7.5%
Pre-tax discount rate 11.2%9.0%
The impairment test as of December 31, 20172020 was based on assessments of financial performance and future strategies in light of current and expected market and economic conditions. Trends in the economic and financial environment, competition and regulatory authorities' decisions, or changes in competitors’ behavior in response to the economic environment may affect the estimate of recoverable amounts. See also note 13(1) and note 2(h) to the consolidated financial statements. No impairment charges were recognized in with respect to goodwill in 2015, 2016 and 2017.through the years 2017-2020.
Sensitivity Analysis:Analysis:
The headroom of the fixed line segment recoverable amount over the carrying amount as of December 31, 2015, 20162018, 2019 and 20172020 was approximately 9%21%, 23%42% and 23%37% respectively. Sensitivity analysis was performed for the recoverable amount as of December 31, 20172020 for a change of the after-tax discount rate within the range of ± 10% multiplied by the variable 9.3% (8.4%7.5% (6.75% to 10.2%8.25%), assuming all other variables constant. Sensitivity analysis was also performed for a change of the terminal permanent growth rate within the range of ± 1% of the variable 0.9% (minus 0.9%1.0% (0% to 1.9%2%), assuming all other variables constant. Results showed that no impairment charge is required for both analyses.
| (4) | Assessing allowance for doubtful accountsimpairment of financial assets |
The allowance for credit losses for financial assets is established when there is objective evidence thatbased on assumptions about risk of default and expected loss rates. The Group uses judgment in making these assumptions and selecting the Group will not be able to collect amounts due accordinginputs to the original termsimpairment calculation, based on the Group’s past history, existing market conditions as well as forward-looking estimates at the end of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, or delinquency or default in debtor payments are considered indicators that a trade receivable is impaired.each reporting period. Individual receivables which are known to be uncollectable are written off by reducing the carrying amount directly. The other receivables are assessed collectively. For these receivables the allowance is determinedcollectively, grouped based on percentage of doubtful debtsshared credit risk characteristics and the days past due.
The Group assesses on a forward-looking basis the expected credit losses associated with its debt instruments carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in collection, consideringcredit risk. For trade receivables and contract assets with and without significant financing components, the likelihood of recoverabilityGroup applies IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and period past due. The expected loss rates are based on the agepayment profiles of sales, and the corresponding historical credit losses experienced. The historical loss rates are adjusted to reflect current and forward-looking information on factors affecting the ability of the balances,customers to settle the historical write-off experience net of recoveries, changes in the credit worthiness, and collection trends. The trade receivables are periodically reviewed for impairment.receivables. See notenotes 7, 6(a)(3), 2(j) to the consolidated financial statements.
| (5) | Considering uncertain tax positions |
The assessment of amounts of current and deferred taxes requires the Group's management to take into consideration uncertainties that its tax position will be accepted and of incurring any additional tax expenses. This assessment is based on estimates and assumptions based on interpretation of tax laws and regulations, and the Group's past experience. It is possible that new information will become known in future periods that will cause the final tax outcome to be different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. See also notes 2(p) and note 25 to the consolidated financial statements.
5A.1r - ii Critical judgments in applying the Company’s accounting policies
| (1)(5) | Considering the likelihood of contingent losses and quantifying possible legal settlements: |
Provisions are recorded when a loss is considered probable and can be reasonably estimated. Judgment is necessary in assessing the likelihood that a pending claim or litigation against the Group will succeed, or a liability will arise, quantifying the possible rangebest estimate of final settlement. These judgments are made by management with the support of internal specialists, or with the support of outside consultants such as legal counsel. Because of the inherent uncertainties in this evaluation process, actual results may be different from these estimates. See notes 2(m), 14 and 20 to our consolidatedthe financial statements.
| (2) | Considering contracts with customers with multiple performance obligations |
Some contracts with customers include several performance obligations, and consideration (including any discounts) is allocated to them based on their relative stand-alone selling prices. Management estimates the stand-alone selling price at contract inception based on observable prices of the type of goods and services in similar circumstances to similar customers. Where these are not directly observable, they are estimated based on cost-plus expected margin or adjusted market approach. See also note 2(n) to the consolidated financial statements.
(3) Accounting treatment for the investment in PHI
The Board of Directors of Net 4 P.H.I Ltd., consists of three directors nominated by the Company, three directors nominated by HOT Mobile and one independent director who acts as a chairman. Net 4 P.H.I Ltd. controls PHI. This governance provides that the Company does not control PHI nor does it have joint control over it, and the Company accounts for its investment in PHI according to the equity method, see also note 2(c)(2) and note 9 to the consolidated financial statements.
5A.2 RESULTS OF CONSOLIDATED OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 20172020 COMPARED TO THE YEAR ENDED DECEMBER 31, 20162019
| | | |
| | Year ended December 31, 2020 | |
| | | |
|
| |
|
| | |
| Elimination |
|
| Consolidated |
|
Segment revenue – Services | | | 1,647 | | | | 861 | | | | | | | 2,508 | |
Inter-segment revenue – Services | | | 16 | | | | 132 | | | | (148 | ) | | | | |
Segment revenue – Equipment | | | | | | | | | | | | | | | | |
Total revenues | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Segment cost of revenues – Services | | | 1,272 | | | | 856 | | | | | | | | 2,128 | |
Inter-segment cost of revenues - Services | | | 131 | | | | 17 | | | | (148 | ) | | | | |
Segment cost of revenues – Equipment | | | | | | | | | | | | | | | | |
Cost of revenues | | | | | | | | | | | | | | | | |
Gross profit | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Operating expenses (1) | | | 300 | | | | 159 | | | | | | | | 459 | |
Other income, net | | | | | | | | | | | | | | | | |
Operating profit | | | | | | | | | | | | | | | | |
Adjustments to presentation of Segment Adjusted EBITDA | | | | | | | | | | | | | | | | |
–Depreciation and amortization | | | 450 | | | | 264 | | | | | | | | 714 | |
–Other (2) | | | | | | | | | | | | | | | | |
Segment Adjusted EBITDA (3) | | | | | | | | | | | | | | | | |
Reconciliation of profit for the year to Adjusted EBITDA | | | | | | | | | | | | | | | | |
Profit for the year | | | | | | | | | | | | | | | 17 | |
Depreciation and amortization | | | | | | | | | | | | | | | 714 | |
Finance costs, net | | | | | | | | | | | | | | | 69 | |
Income tax expenses | | | | | | | | | | | | | | | 10 | |
Other (2) | | | | | | | | | | | | | | | | |
Adjusted EBITDA (3) | | | | | | | | | | | | | | | | |
REPORTED RESULTS OF CONSOLIDATED OPERATIONS*
| | New Israeli Shekels | |
| | Year ended December 31, 2017* | |
| | In millions | |
| | Cellular segment | | | Fixed-line segment | | | Elimination | | | Consolidated | |
Segment revenue – Services | | | 1,960 | | | | 622 | | | | | | | 2,582 | |
Inter-segment revenue – Services | | | 18 | | | | 155 | | | | (173 | ) | | | | |
Segment revenue – Equipment | | | 610 | | | | 76 | | | | | | | | 686 | |
Total revenues | | | 2,588 | | | | 853 | | | | (173 | ) | | | 3,268 | |
| | | | | | | | | | | | | | | | |
Segment cost of revenues – Services | | | 1,470 | | | | 613 | | | | | | | | 2,083 | |
Inter-segment cost of revenues - Services | | | 154 | | | | 19 | | | | (173 | ) | | | | |
Segment cost of revenues – Equipment | | | 490 | | | | 54 | | | | | | | | 544 | |
Cost of revenues | | | 2,114 | | | | 686 | | | | (173 | ) | | | 2,627 | |
Gross profit | | | 474 | | | | 167 | | | | | | | | 641 | |
| | | | | | | | | | | | | | | | |
Operating expenses (1) | | | 367 | | | | 98 | | | | | | | | 465 | |
Income with respect to settlementagreement with Orange | | | 108 | | | | | | | | | | | | 108 | |
Other income, net | | | 29 | | | | 2 | | | | | | | | 31 | |
Operating profit | | | 244 | | | | 71 | | | | | | | | 315 | |
Adjustments to presentation of Segment Adjusted EBITDA | | | | | | | | | | | | | | | | |
– Depreciation and amortization | | | 445 | | | | 135 | | | | | | | | 580 | |
– Other (2) | | | 21 | | | | 1 | | | | | | | | 22 | |
Segment Adjusted EBITDA (3) | | | 710 | | | | 207 | | | | | | | | 917 | |
| | | | | | | | | | | | | | | | |
Reconciliation of profit for the year to Adjusted EBITDA | | | | | | | | | | | | | | | | |
Profit for the year | | | | | | | | | | | | | | | 114 | |
Depreciation and amortization | | | | | | | | | | | | | | | 580 | |
Finance costs, net | | | | | | | | | | | | | | | 180 | |
Income tax expenses | | | | | | | | | | | | | | | 21 | |
Other (2) | | | | | | | | | | | | | | | 22 | |
Adjusted EBITDA (3) | | | | | | | | | | | | | | | 917 | |
* See “Item 5A.1j Early adoption of IFRS 15 Revenue from Contracts with Customers – change in accounting policy ” and also note 2(n) and 2(f)(5) to the consolidated financial statements regarding the early adoption of IFRS 15, Revenue from Contracts with Customers. In 2017 costs of obtaining contracts with customers were capitalized in amounts of NIS 64 million and NIS 20 million for the cellular segment and the fixed-line segment, respectively. The adoption of IFRS 15 resulted in an increase in amortization expenses in 2017 for the cellular segment and the fixed-line segment in amounts of NIS 11 million and NIS 2 million, respectively.
| | New Israeli Shekels | | | | |
| | Year ended December 31, 2016 | | | Year ended December 31, 2019 | |
| | In millions | | | | |
| | Cellular segment | | | Fixed-line segment | | | Elimination | | | Consolidated | | | | | | | | | | | | | |
Segment revenue – Services | | | 2,080 | | | | 672 | | | | | | | 2,752 | | |
Inter-segment revenue – Services | | | 19 | | | | 194 | | | | (213 | ) | | | | | |
Segment revenue – Equipment | | | 729 | | | | 63 | | | | | | | | 792 | | |
Segment revenue - Services | | | 1,783 | | | 777 | | | | | | 2,560 | |
Inter-segment revenue - Services | | | 15 | | | 148 | | | (163 | ) | | | |
Segment revenue - Equipment | | | | | | | | | | | | | | | | | |
Total revenues | | | 2,828 | | | | 929 | | | | (213 | ) | | | 3,544 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Segment cost of revenues – Services | | | 1,659 | | | | 617 | | | | | | | | 2,276 | | |
Inter-segment cost of revenues – Services | | | 192 | | | | 21 | | | | (213 | ) | | | | | |
Segment cost of revenues – Equipment | | | 596 | | | | 52 | | | | | | | | 648 | | |
Segment cost of revenues - Services | | | 1,367 | | | 810 | | | | | | 2,177 | |
Inter-segment cost of revenues - Services | | | 147 | | | 16 | | | (163 | ) | | | |
Segment cost of revenues - Equipment | | | | | | | | | | | | | | | | | |
Cost of revenues | | | 2,447 | | | | 690 | | | | (213 | ) | | | 2,924 | | | | | | | | | | | | | | | | | |
Gross profit | | | 381 | | | | 239 | | | | | | | | 620 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Operating expenses (1) | | | 571 | | | | 118 | | | | | | | | 689 | | | 334 | | | 134 | | | | | | 468 | |
Income with respect to settlement agreement with Orange | | | 217 | | | | | | | | | | | | 217 | | |
Other income, net | | | 41 | | | | 4 | | | | | | | | 45 | | | | | | | | | | | | | | | | |
Operating profit | | | 68 | | | | 125 | | | | | | | | 193 | | | | | | | | | | | | | | | | |
Adjustments to presentation of Segment Adjusted EBITDA | | | | | | | | | | | | | | | | | |
Adjustments to presentation of segment Adjusted EBITDA | | | | | | | | | | | | | |
–Depreciation and amortization | | | 447 | | | | 148 | | | | | | | | 595 | | | 542 | | | 209 | | | | | | 751 | |
–Other (2) | | | 47 | | | | (1 | ) | | | | | | | 46 | | | | | | | | | | | | | | | | |
Segment Adjusted EBITDA (3) | | | 562 | | | | 272 | | | | | | | | 834 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Reconciliation of profit for the year to Adjusted EBITDA | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the year | | | | | | | | | | | | | | | 52 | | | | | | | | | | | | 19 | |
Depreciation and amortization | | | | | | | | | | | | | | | 595 | | | | | | | | | | | | 751 | |
Finance costs, net | | | | | | | | | | | | | | | 105 | | | | | | | | | | | | 68 | |
Income tax expenses | | | | | | | | | | | | | | | 36 | | | | | | | | | | | | * | |
Other (2) | | | | | | | | | | | | | | | 46 | | | | | | | | | | | | | | |
Adjusted EBITDA (3) | | | | | | | | | | | | | | | 834 | | | | | | | | | | | | | | |
* Representing an amount of less than 1 million.
(1) Operating expenses include selling and marketing expenses, and general and administrative expenses.expenses and credit losses.
(2) Mainly amortization of employee share basedshare-based compensation.
(3) Adjusted EBITDA as reviewed by the CODM represents Earnings Before Interest (finance costs, net), Taxes, Depreciation and Amortization (including amortization of intangible assets, deferred expenses-right of use and impairment charges) and Other expenses (mainly amortization of share basedshare-based compensation). Adjusted EBITDA is not a financial measure under IFRS and may not be comparable to other similarly titled measures for other companies. Adjusted EBITDA may not be indicative of the Group's historic operating results nor is it meant to be predictive of potential future results. See “Item 5A.1a - NON-GAAP MEASURES” above. The usage of the term "Adjusted EBITDA" is to highlight the fact that the Amortization includes amortization of deferred expenses – right of use and amortization of employee share basedshare-based compensation and impairment charges; it is fully comparable to EBITDA information which has been previously provided for prior periods.charges.
Impact of early adoption of IFRS 15 on statement of income, and reconciliation between Non‑GAAP measures without impact of early adoption of IFRS 15 and most comparable IFRS financial measures:
| | New Israeli Shekels in millions | |
| | Year ended December 31, 2017 | |
| | Previous accounting policy
| | | Effect of change – Cellular segment | | | Effect of change – Fixed-line segment | | | Effect of change – Consolidated | | | According to IFRS 15 as reported | |
Revenues | | | 3,270 | | | | (1 | ) | | | (1 | ) | | | (2 | ) | | | 3,268 | |
Selling and marketing expenses | | | 340 | | | | (53 | ) | | | (18 | ) | | | (71 | ) | | | 269 | |
Operating profit | | | 246 | | | | 52 | | | | 17 | | | | 69 | | | | 315 | |
Profit before income tax | | | 66 | | | | | | | | | | | | 69 | | | | 135 | |
Income tax expenses | | | 5 | | | | | | | | | | | | 16 | | | | 21 | |
Profit for the year | | | 61 | | | | | | | | | | | | 53 | | | | 114 | |
| | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expenses | | | 567 | | | | 11 | | | | 2 | | | | 13 | | | | 580 | |
Total revenues. In 2017,2020, total revenues were NIS 3,2683,189 million (US$ 943992 million), a decrease of 8%1% from NIS 3,5443,234 million in 2016.2019.
Revenues from services. Service revenues in 20172020 totaled NIS 2,5822,508 million (US$ 745780 million), a decrease of 6%2% from NIS 2,7522,560 million in 2016.2019.
Revenues from equipment. Equipment revenues in 20172020 totaled NIS 686681 million (US$ 198212 million), a decreasean increase of 13%1% from NIS 792674 million in 2016, largely2019, principally reflecting a significant decreaseincreases in sales of cellular equipment to wholesale customers and of fixed-line equipment for both business and private customers. These increases in sales were partially offset by lower volumes of bothretail sales of cellular devices and other non-core equipment such as tablets, televisions and other audio visual devices. The decrease mainly reflectedfollowing the impactclosure of some sales points during certain COVID-19-related lockdown periods during the tightening of the Company’s customer credit policy, whereby the Company imposed stricter requirements for customers to be accepted for long term financing plans under which the customer pays for the equipment through monthly payments (generally between 12 and 36 months).year.
Gross profit from service revenues. The gross profit from service revenues in 20172020 was NIS 499380 million (US$ 144118 million), compared with NIS 476383 million in 2016, an increase2019, a decrease of 5%1%. This increase decrease largely reflected the decrease innegative impact of the cost of serviceCOVID-19 on revenues from roaming services, which was partially offset by the smallerpositive contribution from the growth in internet and TV services. In addition, the decrease in service revenues.revenues was partially offset by a decrease in depreciation and amortization expenses, the cost-cutting measures taken to mitigate the impact of the COVID-19 crisis, and the receipt in 2020 of a government-mandated refund from Bezeq of approximately NIS 20 million of payments for access to the wholesale internet infrastructure in previous years. See also note 22 to our consolidated financial statements.
Gross profit from equipment sales. Gross profit from equipment sales in 20172020 was NIS 142145 million (US$ 4145 million), compared with NIS 144 million in 2016, a decrease2019, an increase of 1%. This decreaseThe increase mainly reflected thean increase in gross profit from sales of fixed-line equipment, partially offset by a decrease in gross profit from equipment sales for theof cellular segment which was partially offset by the increase in gross profit from equipment sales for the fixed-line segment. See also “Item 5D.2 Outlook”.equipment.
Selling, marketing, general and administrative expenses.expenses and credit losses. Reported selling,Selling, marketing, general and administrative expenses and credit losses totaled NIS 465459 million (US$ 134142 million) in 2017 following the adoption2020, a decrease of IFRS 15,2% compared with NIS 689468 million in 2016 (before the adoption of IFRS 15), a decrease of 33%.2019. This decrease mainly reflected decreasesthe cost-cutting measures on workforce expenses, whose effect was partially offset by an increase in sales commissionsamortization expenses related to the costs of obtaining contracts with customers under IFRS 15 and an immaterial increase in credit losses reflecting an increase in the provision for expected credit losses as a result of the adoption of IFRS 15, as well as in payroll and related expenses, in bad debts and allowance for doubtful accounts expenses and in advertising and marketing expenses related, in part, to the marketing activities for the rebranding of the Company in 2016. Without the impact of the early adoption of IFRS 15 in 2017, selling, marketing, general and administrative expenses would have been NIS 536 million, a decrease of 22% from NIS 689 million in 2016. COVID-19 crisis.
Total operating expenses ("OPEX"). Total operating expenses amounted to NIS 1,9461,871 million (US$ 561582 million) in 2017. Without the impact of the early adoption of IFRS 15 in 2017, total operating expenses would have been NIS 2,030 million,2020, a decrease of 13%1%, or NIS 29414 million, from 2016. Total operating expenses (“Opex”) (not2019 (OPEX is not a financial measure under IFRS and not necessarily comparable to similarly titled measures for other companies)companies. It includes cost of service revenues (NIS 2,0832,128 million in 2017)2020) and selling, marketing, general and administrative expenses and credit losses (NIS 465459 million in 2017)2020), and excludes depreciation, amortization and impairment expenses and other expenses (mainly amortization of employee share basedshare-based compensation) (NIS 602716 million in 2017)2020)). The decrease mainly reflected a decrease in total operatingworkforce and related expenses in 2017 withoutas part of the cost-cutting measures taken to mitigate the impact of the early adoptionCOVID-19 crisis on revenues, and a decrease in wholesale internet infrastructure access expenses following receipt of IFRS 15 mainly reflected decreases (i)a government-mandated refund from Bezeq of approximately NIS 20 million of payments for access to the wholesale internet infrastructure in cellular networkprevious years and cable maintenance and operating lease expenses (in cost of service revenues) principally as a result of the network sharing agreement with HOT Mobile, (ii)decrease in international callcalling services expenses. The decreases in these expenses (in cost of service revenues), (iii) in bad debts and allowance for doubtful accounts expenses (in selling, marketing and administrative expenses), (iv) in advertising and marketing expenses (in selling, marketing and administrative expenses) and (v) in other expense items as a result of various efficiency measures. These decreases were partially offsetoffet by increases in interconnect expenses due to the significant increase in outgoing call volumes related to Partner TV service (in costthe COVID-19 crisis. See also Items 5A.2a and 5A.2b for a breakdown of service revenues) that was launched during 2017, and intotal operating expenses related to internet services (in cost of service revenues).by segment.
Including depreciation, amortization and impairment expenses and other expenses (mainly amortization of employee share basedshare-based compensation), total operating expenses in 20172020 amounted to NIS 2,5482,587 million (US$ 735805 million). Without the impact of the early adoption of IFRS 15 in 2017, total operating expenses including depreciation, amortization and impairment expenses and other expenses (mainly amortization of employee share based compensation) would have been NIS 2,619 million,, a decrease of 12% 2%, or NIS 58 million, compared with 2016.NIS 2,645 million in 2019. See also note 22 to our consolidated financial statements.
Income with respect to settlement with Orange. In 2017, the Company recorded income with respect to the settlement agreement of the Orange brand agreement in an amount of NIS 108 million (US$ 31 million) compared with NIS 217 million recorded in 2016. As set forth in the settlement agreement, the advance payments received from Orange were recognized and reconciled evenly on a quarterly basis over a period until the second quarter of 2017, against contingent marketing, sales, customer services and other expenses that were incurred over this period. See also "Item 5A.1c Settlement Agreement with Orange Brand Services Ltd.”,“5D.2 Outlook” and note 18 to our consolidated financial statements.
Other income, net. Other income, net, totaled NIS 3130 million (US$ 9 million) in 2017,2020, an increase of 7% compared towith NIS 4528 million in 2016, a decrease of 31%, reflecting a decrease in income from the unwinding of trade receivables.2019. See also note 23 to our consolidated financial statements.
Operating profit. Reported operatingOperating profit for 20172020 was NIS 31596 million (US$ 9130 million). Without the impact of the early adoption of IFRS 15 in 2017, operating profit would have been NIS 246 million, an increase of 27%10% compared with reported operating profit of NIS 19387 million in 2016.2019. The increase in operating profit mainly reflected the decrease in operating expenses including depreciation and amortization expenses, which more than offset the decrease in service revenues.
Finance costs, net. Finance costs, net in 20172020 were NIS 18069 million (US$ 5222 million), an increase of 71%1% compared with NIS 10568 million in 2016.2019. The increase largelymainly reflected the impactone-time expense of the increase in early debt repayment expenses in 2017 ofapproximately NIS 827 million which were mainly relatedrelating to the partial early repayment of borrowingsthe Company’s Notes Series F during 2017the year, partially offset by a decrease in a total amount of NIS 1,283 million (US$ 370 million).lease interest and an increase in interest from cash and deposits. See also “Item 5B Liquidity and Capital Resources.”
Profit (loss) before income tax. Profit before income taxes for 20172020 was NIS 13527 million (US$ 398 million). Without the impact, an increase of the early adoption of IFRS 15 in 2017, profit before income taxes would have been NIS 66 million, a decrease of 25%42% compared with NIS 8819 million in 2016,2019, reflecting the increase in finance costs, net, which more than offset the increase in operating profit.profit.
Income taxes on profit. Income taxes on profit for 2017 wereThe Company recorded income tax expenses of NIS 2110 million (US$ 63 million). Without the impact of the early adoption of IFRS 15 in 2017, income taxes on profit would have been NIS 5 million, for 2020, compared with NIS 36 million in 2016.no income tax expenses for 2019.
An income tax audit ofIn 2019, the Company concluded in 2017, resulted inrecorded a one-time income of NIS 106 million in income tax expenses and in an additional one-time deferred tax income of NIS 9 million, which was recognized in income tax expenses.
The effective tax rate of the Company was 37% in 2017 was 16%2020 compared with 41%0% in 2016, largely reflecting2019, and compared with the one-time factors in 2017 described above. The regular corporate tax rate in Israel of 23% for 2016 was 25%2019 and for 2017 was 24%. The regular corporate2020, largely as a result of non-deductible expenses and the one-time factor in 2019 described immediately above.
Excluding the one-time factor in 2019, the effective tax rate for 2018 and thereafter will be reduced further to 23%of the Company in 2019 would have been 32%.
The Company’s effective tax rate is expected to continue to be higher than the general Israeli corporate tax rate (excluding one-time effects) mainly due to nondeductible expenses. See also note 25 to our consolidated financial statements.
Profit. Reported profitProfit in 20172020 was NIS 11417 million (US$ 335 million). Without the impact, a decrease of the early adoption of IFRS 15 in 2017, profit would have been NIS 61 million, an increase of 17%11% compared with NIS 5219 million in 2016.2019. Based on the weighted average number of shares outstanding during 2017,2020, basic earnings per share or ADS was NIS 0.700.09 (US$ 0.20). Without the impact of the early adoption of IFRS 15 in 2017, basic earnings per share or ADS would have been NIS 0.380.03), compared with NIS 0.330.12 in 2016.2019.
For information regarding potential downward impacts on profits in 2018,2021, see “Item 5D.2 Outlook.”
Adjusted EBITDA. Adjusted EBITDA in 20172020 totaled NIS 917822 million (US$ 264256 million). Without the impact, a decrease of the early adoption of IFRS 15 in 2017, Adjusted EBITDA would have been4% or NIS 83531 million an increase of 0.1% from NIS 834853 million in 2016.2019. As a percentage of total revenues, Adjusted EBITDA in 20172020 was 28%. Without the impact of the early adoption of IFRS 15 in 2017, Adjusted EBITDA as a percentage of total revenues would have been 26% compared with 24% in 2016., unchanged from 2019.
5A.2a Cellular Services Segment
Total revenues. Total revenues for the cellular segment in 20172020 were NIS 2,5882,208 million (US$ 746687 million), a decrease of 8%7% from NIS 2,8282,369 million in 2016.2019.
Revenues from services. Service revenues for the cellular segment in 20172020 totaled NIS 1,9781,663 million (US$ 571517 million), a decrease of 6%8% from NIS 2,0991,798 million in 2016.2019. The decrease was mainly athe result of the negative impact of the COVID-19 crisis, which caused a very significant reduction in revenues from roaming services, and the continued downward pressures on the pricesprice erosion of post-paid and pre-paid cellular services as a resultdue to on-going competitive market conditions. These decreases in service revenues were partially offset by an increase in interconnect revenues due to the significant increase in incoming call volumes related to the COVID-19 crisis and an increase in revenues due to the growth of the continued competition in the cellular market. subscriber base.
As an illustration of the level of competition in the cellular market, approximately 2.51.9 million cellular subscribers are estimated to have switched operators within the Israeli market (with number porting) during 2020; similarly, approximately 2.2 million subscribers switched in 2017,2019 and approximately 2.4 million in 2018. While our annual churn rate for cellular subscribers decreased marginally in 2020 to 30% compared with approximately 2.3 million31% in 20162019 and 2.5 million35% in 2015.
2018, competition in the cellular subscriber market remained intense. Significant price erosion continued to be caused by the amountnumber of cellular subscribers who moved between different rateplans or airtime packages (generally with a lower monthly fee) within the Company.
In addition, cellular segment service revenues for 2017 were negatively affected by a decrease in revenues as a result of the termination of the Right of Use Agreement with HOT Mobile from the second quarter of 2016, for which the Company recorded revenues in an amount of approximately NIS 51 million in 2016. See "Item 5A.1e Right of Use Agreement with HOT Mobile".
Pre-paid cellular subscribers contributed service revenues in a total amount of approximately NIS 146 million (US$ 42 million) in 2017, a decrease of 19% from approximately NIS 180 million in 2016, as a result of the price erosion in pre-paid services and the decrease in the number of pre-paid subscribers, which was largely attributed to pre-paid subscribers moving to post-paid subscriber packages due to the significant price declines (and hence increased attractiveness) for these products.
Revenues from equipment. Revenues from equipment sales for the cellular segment in 20172020 totaled NIS 610545 million (US$ 176170 million), a decrease of 16%5% from NIS 729571 million in 2016,2019, mainly reflecting a decrease in the volume of retail sales mainly due toof cellular equipment following the impactclosure of some sales points during certain COVID-19-related lockdown periods during the tightening of the Company’s customer credit policy, whereby stricter requirements were imposed for customers to be accepted for long term financing plans under which the customer pays for the equipment through monthly payments (generally between 12 and 36 months). The decrease in volume of sales wasyear, partially offset by ana significant increase in revenues from the leasing of cellular handsetsequipment sales to both residential and businesswholesale customers.
Gross profit from equipment sales. The gross profit from equipment sales for the cellular segment in 20172020 was NIS 12094 million (US$ 3529 million), compared with NIS 133107 million in 2016,2019, a decrease of 10%12%. This decrease mainly reflected both the decrease in the volume of equipment sales, as described above, partially offset byin addition to a small increasedecrease in profit margins from sales. See also “Item 5D.2 Outlook”.sales due to a change in the product mix.
Cost of service revenues. The cost of service revenues for the cellular segment (excluding inter-segment costs) decreased by 11%7% from NIS 1,6591,514 million in 20162019 to NIS 1,4701,403 million (US$ 424436 million) in 2017.2020. This decrease mainly reflected decreasesthe decrease in operating lease, rentdepreciation and overheadamortization expenses related to the cellular network, as well as the decrease in workforce and related expenses and in cellular network and cable maintenanceroaming expenses, largely reflectingpartially offset by the impact ofincrease in interconnect expenses due to the network sharing agreement with HOT Mobile, as well as a decreasesignificant increase in expensesoutgoing call volumes related to lower paymentsthe COVID-19 crisis (in parallel to transmission, communication and content providers. The early adoption of IFRS 15the increase in 2017 did not have any impact on the cost of service revenues for the cellular segment.incoming call volumes discussed above). See also note 22 to our consolidated financial statements.
Selling, marketing, general and administrative expenses and credit losses. Selling, marketing, general and administrative expenses and credit losses for the cellular segment in 20172020 amounted to NIS 367300 million (US$ 10693 million). Without the impact of the early adoption of IFRS 15 in 2017, selling, marketing, general and administrative expenses for the cellular segment would have been NIS 420 million,, a decrease of 26%10% from NIS 571334 million in 2016.2019. The decrease mainly reflected decreasesthe decrease in payrollworkforce and related expenses, which were partially offset by increases in bad debtsamortization expenses and allowance for doubtful accounts expenses, which was principally due to the impact of the tightening of the Company’s customer credit policy for handset sales, and in advertising and marketing expenses related, in part, to the marketing activities related to the rebranding of the Company in 2016.losses. See also note 2(n) and note 22 to our consolidated financial statements.
Total operating expenses ("OPEX"). Total operating expenses (OPEX is not a financial measure under IFRS and not necessarily comparable to similarly titled measures for other companies; see "Item 5A.2" for reconciliation on a consolidated basis) for the cellular segment totaled NIS 1,5251,253 million (US$ 440390 million) in 2017. Without the impact of the early adoption of IFRS 15 in 2017, total operating expenses for the cellular segment would have been NIS 1,589 million,2020, a decrease of 18%4% or NIS 33945 million from 2016.NIS 1,298 million in 2019, principally due to the decrease in workforce and related expenses, partially offset by the increase in interconnect expenses discussed above. See also note 22 to our consolidated financial statements. Including depreciation and amortization expenses and other expenses (mainly amortization of employee share basedshare-based compensation), total operating expenses totaled NIS 1,991 million. Without the impact of the early adoption of IFRS 15 in 2017, total operating expenses for the cellular segment including depreciation and amortization expenses and other expenses (mainly amortization of employee share based compensation) would have been NIS 2,0441,703 million (US$ 530 million), a decrease of 16% compared with 2016.
Income with respect to settlement with Orange. In 2017, the Company recorded income with respect to the settlement agreement of the Orange brand agreement in an amount of NIS 108 million (US$ 31 million)8% compared with NIS 2171,848 million recorded in 2016. As set forth in the settlement agreement, the advance payments received from Orange were recognized and reconciled evenly on a quarterly basis over a period until the second quarter of 2017, against contingent marketing, sales, customer services and other expenses that were incurred over this period. See also "Item 5A.1c Settlement Agreement with Orange Brand Services Ltd.” above and note 18 to our consolidated financial statements.2019.
Operating profit. Overall, operating profit for the cellular segment in 20172020 was NIS 24473 million (US$ 7023 million). Without the impact, a decrease of the early adoption of IFRS 15 in 2017, operating profit for the cellular segment would have been NIS 192 million, an increase of 182%5% compared with NIS 6877 million in 2016,2019, mainly reflecting the impact ofdecrease in cellular segment service revenues and the reductiondecrease in total operating expensesgross profit from equipment sales which waswere partially offset by the decreasesdecrease in service revenues, in income with respect to settlement with Orangeoperating expenses including depreciation and in gross profits from cellular segment equipment sales.amortization expenses and other expenses.
Adjusted EBITDA. Adjusted EBITDA for the cellular segment was NIS 710533 million (US$ 205166 million) in 2017. Without the impact2020, a decrease of the early adoption of IFRS 15 in 2017, Adjusted EBITDA for the cellular segment would have been NIS 647 million, an increase of 15%16% from NIS 562635 million in 2016,2019, largely for the same reasons as the increasedecrease in operating profit.profit (excluding depreciation and amortization expenses and other expenses). As a percentage of total cellular revenues, Adjusted EBITDA for the cellular segment in 20172020 was 27%. Without the impact of the early adoption of IFRS 15 in 2017, Adjusted EBITDA for the cellular segment as a percentage of total cellular revenues would have been 25%24% compared with 20%27% in 2016.2019.
5A.2b Fixed-Line Services Segment
Total revenues. Total revenues in 20172020 for the fixed-line segment were NIS 8531,129 million (US$ 246351 million), a decreasean increase of 8%10% compared with NIS 9291,028 million in 2016.2019.
Revenues from services. Service revenues for the fixed-line segment totaled NIS 777993 million (US$ 224309 million) in 2017, a decrease2020, an increase of 10%7% compared with NIS 866925 million in 2016.2019. This decreaseincrease mainly reflected the increase in revenues resulting from the growth in internet and TV services, which was partially offset by a decreasedecline in revenues from international calling services (including the market for wholesale international traffic) which werecontinue to be adversely affected both by the increased penetration of internet-based solutions and increased competition from other service providers, and a decrease in inter-segment revenues.solutions. See also "Item 3D.2o The telecommunications industry is subject to rapid and significant changes in technology and industry structure which could reduce demand for our services." It is estimated that the Company’s subscriber market share in the ISP segment continues to be eroded as a result of the strong competition in the market. The launches of Partner TV service and the commercial phase and accelerated deployment of our fiber optic network did not have a significant impact on fixed-line segment revenues in 2017.
Revenues from equipment. Revenues from equipment sales for the fixed-line segment in 20172020 totaled NIS 76136 million (US$ 2242 million), an increase of 21%32% compared with NIS 63103 million in 2016,2019, mainly reflecting an increase in revenues recorded fromthe volume of sales of audio visualfixed-line equipment for both business and related equipment and devices.private customers.
Gross profit from equipment sales. The gross profit from equipment sales for the fixed-line segment in 20172020 was NIS 2251 million (US$ 616 million), compared with NIS 1137 million in 2016,2019, an increase of 100%38%, again largely a reflection of the impact of an increase in gross profitsales recorded from sales of audio visual and relatedinternet-related equipment and devices.
Cost of service revenues. The cost of service revenues (excluding inter-segment costs) for the fixed-line segment decreasedincreased by 1%6% from NIS 617826 million in 20162019 to NIS 613873 million (US$ 177272 million) in 2017.2020. This decrease increase mainly reflected decreasesincreased expenses related to the growth in internationalfixed-line segment services (including workforce and related expenses and depreciation and amortization expenses) and an increase in interconnect expenses (in parallel to the increase in incoming call expenses, andvolumes discussed in operating lease, rent and overhead expenses,the cellular segment above), partially offset by increasesreceipt of a government-mandated refund from Bezeq of approximately NIS 20 million of payments for access to the wholesale internet infrastructure in expenses related to Partner TV service that was launched during 2017,previous years and a decrease in expenses related to internet services.international calling services expenses. See also note 22 to our consolidated financial statements.
Selling, marketing, general and administrative expenses.expenses and credit losses. Selling, marketing, general and administrative expenses and credit losses for the fixed-line segment in 20172020 amounted to NIS 98159 million (US$ 2849 million). Without the impact, an increase of the early adoption of IFRS 15 in 2017, selling, marketing, general and administrative expenses for the fixed-line segment would have been NIS 116 million, a decrease of 2%19% from NIS 118134 million in 2016.2019. The decrease largelyincrease mainly reflected decreases in payrollincreased workforce and related expenses partially offset by an increase in advertising and marketingdepreciation and amortization expenses related in part, to the marketing activities related to the launch of the Company’s television services during 2017.growth in fixed-line segment services. See also note 22 to our consolidated financial statements.
Total operating expenses ("OPEX"). Total operating expenses (OPEX is not a financial measure under IFRS and not necessarily comparable to similarly titled measures for other companies; see "Item 5A.2 for reconciliation on a consolidated basis) for the fixed-line segment totaled NIS 594766 million (US$ 171238 million) in 2017. Without the impact of the early adoption of IFRS 15 in 2017, total operating expenses for the fixed-line segment would have been NIS 614 million,2020, an increase of 1%2% or NIS 516 million from 2016.NIS 750 million in 2019. See also note 22 to our consolidated financial statements. Including depreciation, amortization and impairment expenses and other expenses (mainly amortization of employee share basedshare-based compensation), total operating expenses totaled NIS 730 million. Without the impact of the early adoption of IFRS 15 in 2017, total operating expenses for the fixed-line segment including depreciation and amortization expenses and other expenses (mainly amortizationtotaled NIS 1,032 million (US$ 321 million), an increase of employee share based compensation) would have been NIS 748 million, a decrease of 1%8% compared with 2016.NIS 960 million in 2019.
Operating profit. Operating profit for the fixed-line segment was NIS 7123 million (US$ 207 million) in 2017. Without the impact2020, an increase of the early adoption of IFRS 15 in 2017, operating profit for the fixed-line segment would have been NIS 54 million, a decrease of 57%130% compared to NIS 12510 million in 2016,2019, mainly reflecting the impact of the decreasegrowth in service revenuesTV and internet services and the increase in gross profit from fixed-line segment equipment sales, which more than offset the increase in total operating expenses partially offset by the increase in gross profit from equipment sales, as explained above. The launchesincluding depreciation, amortization expenses and other expenses (mainly amortization of Partner TV service and the commercial phase and accelerated deployment of our fiber optic network did not have a significant impact on fixed-line segment operating profit in 2017.employee share-based compensation).
Adjusted EBITDA. Adjusted EBITDA for the fixed-line segment was NIS 207289 million (US$ 6090 million) in 2017. Without the impact2020, an increase of the early adoption of IFRS 15 in 2017, Adjusted EBITDA for the fixed-line segment would have been NIS 188 million, a decrease of 31%33% from NIS 272218 million in 2016, for2019. The increase resulted from the same reasons asgrowth in TV and internet services and the decreaseincrease in gross profit from fixed-line equipment sales, which were partially offset by the increase in total operating profit.expenses (excluding depreciation, amortization and impairment expenses and other expenses (mainly amortization of employee share-based compensation)). As a percentage of total fixed-line revenues, Adjusted EBITDA for the fixed-line segment in 20172020 was 24%. Without the impact of the early adoption of IFRS 15 in 2017, Adjusted EBITDA for the fixed-line segment as a percentage of total fixed-line revenues would have been 22%26%, compared with 29%21% in 2016.2019.
5A.3 RESULTS OF CONSOLIDATED OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2016,2019*, COMPARED TO THE YEAR ENDED DECEMBER 31, 20152018
| | New Israeli Shekels | | | New Israeli Shekels | |
| | Year ended December 31, 2015 | | | Year ended December 31, 2018* | |
| | In millions | | | In millions | |
| | Cellular segment | | | Fixed-line segment | | | Elimination | | | Consolidated | | | | | | | | | | | | | |
Segment revenue – Services | | | 2,275 | | | | 717 | | | | | | | 2,992 | | | 1,827 | | | 697 | | | | | | 2,524 | |
Inter-segment revenue – Services | | | 22 | | | | 189 | | | | (211 | ) | | | | | | 16 | | | 155 | | | (171 | ) | | | |
Segment revenue – Equipment | | | 1,051 | | | | 68 | | | | | | | | 1,119 | | | | | | | | | | | | | | | | | |
Total revenues | | | 3,348 | | | | 974 | | | | (211 | ) | | | 4,111 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment cost of revenues – Services | | | 1,856 | | | | 736 | (*) | | | | | | | 2,592 | | | 1,435 | | | 696 | | | | | | 2,131 | |
Inter-segment cost of revenues – Services | | | 187 | | | | 24 | | | | (211 | ) | | | | | |
Inter-segment cost of revenues - Services | | | 154 | | | 17 | | | (171 | ) | | | |
Segment cost of revenues – Equipment | | | 832 | | | | 48 | | | | | | | | 880 | | | | | | | | | | | | | | | | | |
Cost of revenues | | | 2,875 | | | | 808 | | | | (211 | ) | | | 3,472 | | | | | | | | | | | | | | | | | |
Gross profit | | | 473 | | | | 166 | | | | | | | | 639 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses (1) | | | 506 | | | | 134 | (*) | | | | | | | 640 | | | 343 | | | 128 | | | | | | 471 | |
Income with respect to settlement agreement with Orange | | | 61 | | | | | | | | | | | | 61 | | |
Other income, net | | | 44 | | | | 3 | | | | | | | | 47 | | | | | | | | | | | | | | | | |
Operating profit | | | 72 | | | | 35 | | | | | | | | 107 | | | | | | | | | | | | | | | | |
Adjustments to presentation of Segment Adjusted EBITDA | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
–Depreciation and amortization (including impairment charges) | | | 510 | | | | 243 | | | | | | | | 753 | | |
–Depreciation and amortization | | | 442 | | | 150 | | | | | | 592 | |
–Other (2) | | | 15 | | | | 1 | | | | | | | | 16 | | | | | | | | | | | | | | | | |
Segment Adjusted EBITDA (3) | | | 597 | | | | 279 | | | | | | | | 876 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Reconciliation of loss for the year to Adjusted EBITDA | | | | | | | | | | | | | | | | | |
Loss for the year | | | | | | | | | | | | | | | (40 | ) | |
Depreciation and amortization (including impairment charges) | | | | | | | | | | | | | | | 753 | | |
Reconciliation of profit for the year to Adjusted EBITDA | | | | | | | | | | | | | |
Profit for the year | | | | | | | | | | | | 56 | |
Depreciation and amortization | | | | | | | | | | | | 592 | |
Finance costs, net | | | | | | | | | | | | | | | 143 | | | | | | | | | | | | 53 | |
Income tax expenses | | | | | | | | | | | | | | | 4 | | | | | | | | | | | | 7 | |
Other (2) | | | | | | | | | | | | | | | 16 | | | | | | | | | | | | | | |
Adjusted EBITDA (3) | | | | | | | | | | | | | | | 876 | | | | | | | | | | | | | | |
(*) Includes impairment charges in* The results for the fixed-line segment, see note 13 to our consolidated financial statements.year ended December 31, 2019 include the impact of IFRS 16 with effect as of January 1, 2019. See "Item 5A.1i IFRS 16 Leases."
(1) Operating expenses include selling and marketing expenses, and general and administrative expenses.expenses and credit losses.
(2) Mainly amortization of employee share basedshare-based compensation.
(3) Adjusted EBITDA as reviewed by the CODM represents Earnings Before Interest (finance costs, net), Taxes, Depreciation and Amortization (including amortization of intangible assets, deferred expenses-right of use and impairment charges) and Other expenses (mainly amortization of share basedshare-based compensation). Adjusted EBITDA is not a financial measure under IFRS and may not be comparable to other similarly titled measures for other companies. Adjusted EBITDA may not be indicative of the Group's historic operating results nor is it meant to be predictive of potential future results. See “Item 5A.1a - NON-GAAP MEASURES” above. The usage of the term "Adjusted EBITDA" is to highlight the fact that the Amortization includes amortization of deferred expenses – right of use and amortization of employee share basedshare-based compensation and impairment charges.
Total revenues. In 2016,2019, total revenues were NIS 3,5443,234 million, a decrease of 14%1% from NIS 4,1113,259 million in 2015.2018.
Revenues from services. Service revenues in 20162019 totaled NIS 2,7522,560 million, a decreasean increase of 8%1% from NIS 2,9922,524 million in 2015.2018.
Revenues from equipment. Equipment revenues in 20162019 totaled NIS 792674 million, a decrease of 29%8% from NIS 1,119735 million in 2015, largely2018, principally reflecting a decrease in the volumelower sales volumes of equipment sales. This decrease was mainly related to the tightening of the Company’s customer credit policy, whereby stricter requirements were imposed for customers to be accepted for long term financing plans under which the customer pays for the equipment through monthly payments (generally between 12both cellular devices and 36 months).other non-core equipment.
Gross profit from service revenues. The gross profit from service revenues in 20162019 was NIS 476383 million, compared with NIS 400393 million in 2015, an2018, a decrease of 3%. This decrease reflected the increase of 19%. The trend in gross profit from service revenues was positively affected by expenses of NIS 88 million recorded in 2015 due to the impairment charge on the right of use on international fiber optic cables (NIS 76 million), on computers and information systems (NIS 7 million) and on the communication network (NIS 5 million). Compared with gross profit from service revenues excluding the impact of these impairment charges in 2015, gross profit from service revenues in 2016 decreased by 2%, largely reflecting the decrease in service revenues, partially offset by the decrease in the cost of service revenues. See also note 22revenues, largely a result of increased expenses related to our consolidated financial statements.the growth in TV and internet services revenues, which more than offset the increase in service revenues.
Gross profit from equipment sales. Gross profit from equipment sales in 20162019 was NIS 144 million, compared with NIS 239166 million in 2015,2018, a decrease of 40%,13%. This decrease mainly reflecting bothreflected the lower sales volumes, as well a decrease in profit margins for equipment sales due to a change in the product mix.
Selling, marketing, general and administrative expenses and credit losses. Selling, marketing, general and administrative expenses and credit losses totaled NIS 468 million in 2019, a decrease of 1% compared with NIS 471 million in 2018. This decrease mainly reflected the decrease in credit losses, which was principally due to the volumeimpact of equipment sales, as described above, and lower profit margins from sales which resulted largely from the tightening of the Company’s customer credit policy (since profit margins are higher for handset sales with long term financing plans), as well as a changesince 2017 and the decrease in product mix towards products with lower profit margins.
Selling, marketing, generalequipment sales in 2019, which were partially offset by increased depreciation and administrative expenses. Selling, marketing, general and administrativeamortization expenses, totaled NIS 689 million in 2016, an increase of 8% from 2015. Selling, marketing, general and administrative expenses for 2015 included expenses in the amount of NIS 10 million that were recorded following the impairment charge on customer relationships (NIS 8 million) and on the trade name (NIS 2 million). Compared with selling, marketing, general and administrative expenses excluding the impact of these impairment charges in 2015, selling, marketing, general and administrative expenses increased by 9%. This increase mainly reflected an increase in advertising and marketing expenses related, in part, to the marketing activities for the rebranding of the Company, and an increase in bad debts and allowance for doubtful accounts expenses which was mainly related to historical transactions. See also note 22 to our consolidated financial statements.the capitalization of contract costs under IFRS 15.
Total operating expenses ("OPEX"). Total operating expenses amounted to NIS 2,3241,885 million in 2016,2019, a decrease of 6%, or NIS 139111 million, from 2015. Total operating expenses ("Opex")2018 (not a financial measure under IFRS and not necessarily comparable to similarly titled measures for other companies) includes cost of service revenues (NIS 2,2762,177 million in 2016)2019) and selling, marketing, general and administrative expenses and credit losses (NIS 689468 million in 2016)2019), and excludes depreciation, amortization and impairment expenses and other expenses (mainly amortization of employee share basedshare-based compensation) (NIS 641760 million in 2016)2019). The decrease was explained principally by the impact of the implementation of IFRS 16 in 2019 which reduced total operating expenses by NIS 157 million since lease expenses under the standard were replaced by interest and depreciation expenses. Excluding the impact of the implementation of IFRS 16, total operating expenses would have increased by NIS 46 million, primarily reflecting the increase in expenses related to the growth in TV and internet services, including content rights and distribution expenses, wholesale internet infrastructure access expenses and workforce expenses. These increases were partially offet by decreases in other expenses including in credit losses and in international calling services expenses. See also Items 5A.3a and 5A.3b for a breakdown of total operating expenses by segment.
Including depreciation, amortization and impairment expenses and other expenses (mainly amortization of employee share basedshare-based compensation), total operating expenses in 2016 decreased by 8% compared with 2015. See also note 222019 amounted to our consolidated financial statements.
Income with respect to settlement with Orange. In 2016, the Company recorded income with respect to the settlement agreementNIS 2,645 million, an increase of the Orange brand agreement in an amount of2%, or NIS 21743 million, compared with NIS 612,602 million recorded in 2015. As set forth in the settlement agreement, the advance payments received from Orange were recognized and reconciled evenly on a quarterly basis over a period until the second quarter of 2017, against contingent marketing, sales, customer services and other expenses that were incurred over this period. See also Item 5A.1c Settlement Agreement with Orange Brand Services Ltd.”, 5D.2 Outlook and note 18 to our consolidated financial statements.2018.
Other income, net. Other income, net, totaled NIS 4528 million in 2016, compared to NIS 47 million in 2015,2019, unchanged from 2018, as a decreaseresult of 4%, mainly reflecting a decreasethere being no change in income from the unwinding of trade receivables. See also note 23 to our consolidated financial statements.
Operating profit. Reported operatingOperating profit for 20162019 was NIS 19387 million, an increasea decrease of 80%25% compared with reported operating profit of NIS 107116 million in 2015. Compared with2018. The impact of the adoption of IFRS 16 on operating profit for 2015 before the impairment charges described above (NIS 98 million),in 2019 was an increase of NIS 11 million. The decrease in operating profit decreased by 6%.mainly reflected the increase in operating expenses including depreciation and amortization expenses and the decrease in gross profit from equipment sales, which more than offset the increase in service revenues.
Finance costs, net. Finance costs, net in 20162019 were NIS 10568 million, a decreasean increase of 27%28% compared with NIS 14353 million in 2015.2018. The decreaseincrease largely reflected lowerthe impact of the adoption of IFRS 16, which resulted in an increase of NIS 20 million in finance expenses, partially offset by an income from foreign exchange linkage. The negative impact on interest payment expenses due toof the lowerincrease in the average level of debt as well as gains from foreign exchange movements in 20162019 compared with losses from foreign exchangethe average debt in 2015 and lower early debt repayment expenses. This decrease in finance costs2018 was partially offset by higher linkage expenses due to the higher CPI level.lower average debt interest rate. See also “Item 5B Liquidity and Capital Resources.”
Profit (loss) before income tax. Profit before income taxes for 20162019 was NIS 8819 million, a decrease of 70% compared with loss before income tax of NIS 3663 million in 2015. Compared with profit before income tax in 2015 excluding the impact of the impairment charges described above (NIS 98 million), profit before income tax in 2016 increased by 42%,2018, reflecting principally the decrease in finance costs, net which more than offsetboth the decrease in operating profit excluding impairment charges.as well as the increase in finance costs, net.
Income taxes on profit. Income taxes on profitThe Company did not record income tax expenses for 2016 were NIS 36 million,2019, compared towith income taxes on loss of NIS 4 million in 2015. In January 2016, the Law for the Amendment of the Income Tax Ordinance (No. 216) was published, enacting a reduction of corporate tax rate, from 26.5% to 25%, for the year 2016 and thereafter. In addition, in December 2016, the Economic Efficiency Law (Legislative Amendments for Implementing the Economic Policy for the 2017 and 2018 Budget Year), 2016 was published, enacting that the corporate tax rate will be 24% in 2017 and 23% in 2018 and thereafter. These reductions of the corporate tax rate resulted in a reductionexpenses of NIS 7 million in 2018.
In 2019, a one-time income of NIS 6 million was recorded in income tax expenses. In 2018, the Group's deferredCompany recorded a one-time income of NIS 16 million in income tax assets in 2016, which was recognized asexpenses, mainly due to an income tax expense.audit of the Company's subsidiary.
The effective tax rate of the Company was 0% in 2019 compared with 11% in 2018, compared with the regular corporate tax rate in Israel of 23% for 2018 and 2019, largely as a result of the one-time factors described above. Excluding the one-time factors, the effective tax rate of the Company in 2018 and 2019 would have been 37% and 32%, respectively.
Profit (Loss). ReportedProfit in 2019 was NIS 19 million, a decrease of 66% compared with NIS 56 million in 2018. The impact of the adoption of IFRS 16 on profit in 20162019 was NIS 52 million, compared with lossa decrease of NIS 40 million in 2015. Compared with profit in 2015 before impairment charges (NIS 72 million after income tax), profit in 2016 increased by 62%. 9 million. Based on the weighted average number of shares outstanding during 2016,2019, basic earnings per share or ADS was NIS 0.33,0.12, compared to basic loss per share ofwith NIS 0.260.34 in 2015.2018.
Adjusted EBITDA. Adjusted EBITDA in 20162019 totaled NIS 834853 million, a decreasean increase of 5%18% or NIS 131 million from NIS 876722 million in 2015.2018. The impact of the adoption of IFRS 16 on Adjusted EBITDA in 2019 was an increase of NIS 157 million. As a percentage of total revenues, Adjusted EBITDA in 20162019 was 24%,26% compared with 21%22% in 2015.2018.
5A.3a Cellular Services Segment
The impairment charge on fixed-line assets in 2015 did not have any impact on the results for the cellular services segment.
Total revenues. Total revenues for the cellular segment in 20162019 were NIS 2,8282,369 million, a decrease of 16%5% from NIS 3,3482,486 million in 2015.2018.
Revenues from services. Service revenues for the cellular segment in 20162019 totaled NIS 2,0991,798 million, a decrease of 9%2% from NIS 2,2971,843 million in 2015.2018. The decrease was mainly a result of the continued downward pressures on the prices of post-paid and pre-paid cellular services as a result of the continued competition in the cellular market. As an illustration of the continuing high level of competition in the cellular market, approximately 2.32.2 million cellular subscribers are estimated to have switched operators within the Israeli market (with number porting) in 2016, only slightly fewer than the estimated2019; approximately 2.4 million subscribers switched in 2018 and approximately 2.5 million switchersswitched in 2014 and 2015.
2017. Significant price erosion continued to be caused by the amountnumber of cellular subscribers who moved between different rateplans or airtime packages (generally to obtainwith a lower monthly fee) within the Company.
In addition, cellular segment service revenues were negatively affected by a decrease in revenues from wholesale services provided to other operators hosted on the Company’s network, and in particular as a result of the termination of the Right of Use Agreement with HOT Mobile starting from the second quarter of 2016. As a result, revenues arising from the Right of Use Agreement decreased from approximately NIS 120 million in 2015 to approximately NIS 51 million in 2016. See "Item 5A.1e Right of Use Agreement with HOT Mobile.” This decrease was partially offset by the amortization to revenues of the Lump Sum payment from HOT Mobile under the Network Sharing Agreement in an amount of approximately NIS 23 million in 2016.
Pre-paid cellular subscribers contributed service revenues in a total amount of approximately NIS 180 million in 2016, a decrease of 22% from approximately NIS 230 million in 2015. This decrease was a result of the price erosion in pre-paid services and the decrease in the number of pre-paid subscribers, which was largely attributed to pre-paid subscribers moving to post-paid subscriber packages due to the significant price declines (and hence increased attractiveness) for these products.
Revenues from equipment. Revenues from equipment sales for the cellular segment in 20162019 totaled NIS 729571 million, a decrease of 31%11% from NIS 1,051643 million in 2015,2018, mainly reflecting a decrease in the volume of sales, mainly related to the tightening of the Company’s customer credit policy, whereby stricter requirements were imposed for customers to be accepted for long term financing plans, whereby the customer pays for the equipment through monthly payments (generally between 12 and 36 months).sales.
Gross profit from equipment sales. The gross profit from equipment sales for the cellular segment in 20162019 was NIS 133107 million, compared with NIS 219134 million in 2015,2018, a decrease of 39%20%. This decrease mainly reflected both the decrease in the volume of equipment sales, as described above, and lowerin addition to a decrease in profit margins from sales which was also a result of the tightening of the Company’s customer credit policy (since profit margins are higher for sales with long term financing plans), as well asdue to a change in the product mix towards products with lower profit margins.mix.
Cost of service revenues. The cost of service revenues for the cellular segment (excluding inter-segment costs) decreased by 11%5% from NIS 1,8561,589 million in 20152018 to NIS 1,6591,514 million in 2016.2019. This decrease mainly reflected principally decreasesthe decrease in cellular networkdepreciation and cable maintenanceamortization expenses in part related to the implementation of the cost sharing mechanism under the Network Sharing Agreement with HOT Mobile, andcellular network, as well as decreases in expenses related to payments to transmission, communicationcommunications provider expenses and content providers.other expenses.
Selling, marketing, general and administrative expenses and credit losses. Selling, marketing, general and administrative expenses and credit losses for the cellular segment in 20162019 amounted to NIS 571334 million, an increasea decrease of 13%3% from NIS 506343 million in 2015.2018. The increasedecrease mainly reflected an increasethe decrease in credit losses which was principally due to the impact of the tightening of the Company’s customer credit policy for handset sales since 2017, and the decrease in equipment sales in 2019, as well as decreases in workforce expenses and in other expense items, which were partially offset by increases in amortization expenses related to the capitalization of contract costs under IFRS 15, and in advertising and marketing expenses related, in part, to the marketing activities for the rebranding of the Company, and an increase in bad debts and allowances for doubtful accounts expenses which was mainly related to historical transactions. See also note 22 to our consolidated financial statements.expenses.
Total operating expenses ("OPEX"). Total operating expenses (not a financial measure under IFRS and not necessarily comparable to similarly titled measures for other companies; see Item 5A.3 for reconciliation on a consolidated basis) for the cellular segment totaled NIS 1,9281,298 million in 2016,2019, a decrease of 5%12% or NIS 96178 million from 2015.NIS 1,476 million in 2018, principally due to the impact of the implementation of IFRS 16 in 2019 which reduced total operating expenses for the cellular segment by NIS 141 million and the decrease in workforce expenses and in credit losses as described above. See also note 22 to our consolidated financial statements. Including depreciation and amortization expenses and other expenses (mainly amortization of employee share basedshare-based compensation), total operating expenses decreased by 5%.
Income with respect to settlement with Orange. In 2016, the Company recorded income with respect to the settlement agreementtotaled NIS 1,848 million, a decrease of the Orange brand agreement in an amount of NIS 217 million4% compared with NIS 611,932 million recorded in 2015. As set forth in the settlement agreement, the advance payments received from Orange were recognized and reconciled evenly on a quarterly basis over a period until the second quarter of 2017, against contingent marketing, sales, customer services and other expenses that were incurred over this period. See also Item 5A.1c Settlement Agreement with Orange Brand Services Ltd.” above and note 18 to our consolidated financial statements.2018.
Operating profit. Overall, operating profit for the cellular segment in 20162019 was NIS 77 million, an increase of 13% compared with NIS 68 million a decreasein 2018, mainly reflecting reflecting the decreases in total operating expenses and in depreciation and amortization expenses and other expenses (mainly amortization of 6% or NIS 4 million compared with NIS 72 million in 2015, reflectingemployee share-based compensation) (excluding the impact of the decreases in service revenuesimplementation of IFRS 16 on depreciation and gross profits from cellular segment equipment sales,amortization expenses), which were partially offset by the reductiondecreases in totalcellular segment service revenues and in gross profit from cellular segment equipment sales. The overall impact of the adoption of IFRS 16 on operating expenses andprofit for the cellular segment in 2019 was an increase in income with respect to the settlement with Orange.of NIS 10 million.
Adjusted EBITDA. Adjusted EBITDA for the cellular segment was NIS 562635 million in 2016, decreasing by 6%2019, an increase of 21% from NIS 597524 million in 2015,2018, reflecting the impact of the adoption of IFRS 16 which increased Adjusted EBITDA for the same reasonscellular segment by NIS 141 million, as well as the decrease in other total operating profit.expenses, which were partially offset by the decreases in service revenues and in gross profit from cellular segment equipment sales. As a percentage of total cellular revenues, Adjusted EBITDA for the cellular segment in 20162019 was 20%,27% compared with 18%21% in 2015.2018.
5A.3b Fixed-Line Services Segment
Total revenues. Total revenues in 20162019 for the fixed-line segment were NIS 9291,028 million, a decreasean increase of 5%9% compared with NIS 974944 million in 2015.2018.
Revenues from services. Service revenues for the fixed-line segment totaled NIS 866925 million in 2016, a decrease2019, an increase of 4%9% compared with NIS 906852 million in 2015. The decrease2018. This increase mainly reflected an increase in revenues from TV and internet services, partially offset by a decrease in revenues from international callscalling services (including in the market for wholesale international traffic) as well as decreases in revenues from other fixed line services including local lines and ISP services. Our subscriber market share in the ISP segment continueswhich continue to be eroded as a resultadversely affected by the increased penetration of the strong competition in the market from both existing and new service providers.internet-based solutions.
Revenues from equipment. Revenues from equipment sales for the fixed-line segment in 20162019 totaled NIS 63103 million, a decreasean increase of 7%12% compared with NIS 6892 million in 2015. The decrease2018, mainly reflected a decrease in the sale of non-core fixed line equipment, including tablets, televisions, streamers and other audio visual devices, which was partially offset byreflecting an increase in fixed line equipment for business customers includingrevenues recorded from sales of advanced business solutions.internet-related equipment and devices, mainly as a result of the growth in internet services.
Gross profit from equipment sales. The gross profit from equipment sales for the fixed-line segment in 20162019 was NIS 1137 million, compared with NIS 2032 million in 2015,2018, an increase of 16%, again largely a decreasereflection of 45%, mainly reflecting the decreaseimpact of an increase in the salesales recorded from sales of non-core fixed lineinternet-related equipment as described above.and devices.
Cost of service revenues. The cost of service revenues (excluding inter-segment costs) for the fixed-line segment decreasedincreased by 16% from NIS 736713 million in 20152018 to NIS 617826 million in 2016. The cost of service revenues in 2015 was negatively affected by expenses in the amount of NIS 88 million that were recorded following the impairment charge on the right of use on international fiber optic cables (NIS 76 million), on computers and information systems (NIS 7 million) and on the communication network (NIS 5 million). Compared with the cost of service revenues in 2015, excluding the impact of the impairment charges taken for that year, the cost of service revenues in 2016 decreased by 5%, reflecting decreases in transmission and communication provider expenses, salaries and related expenses and in depreciation expenses, partially offset by increases in2019. This increase mainly reflected increased expenses related to payments toTV and internet services (including content expenses, wholesale internet infrastructure access expenses, workforce expenses and service providers. See also note 22 to our consolidated financial statements.depreciation and amortization expenses).
Selling, marketing, general and administrative expenses.expenses and credit losses. Selling, marketing, general and administrative expenses and credit losses for the fixed-line segment in 20162019 amounted to NIS 118134 million, an increase of 5% from NIS 128 million in 2018. The increase mainly reflected increased workforce expenses related to the growth in fixed-line segment services, partially offset by a decrease of 12% from NIS 134 million in 2015. Selling,advertising and marketing general and administrative expenses for 2015 included expenses in the amount of NIS 10 million that were recorded following the impairment charge on customer relationships (NIS 8 million) and on the trade name (NIS 2 million). Compared with selling, marketing, general and administrative expenses excluding the impact of these impairment charges in 2015, the decrease in selling, marketing, general and administrative expenses in 2016 was 5%. See also note 22 to our consolidated financial statements.expenses.
Total operating expenses ("OPEX") ("OPEX"). Total operating expenses (not a financial measure under IFRS and not necessarily comparable to similarly titled measures for other companies; see “Item 5A.23" for reconciliation on a consolidated basis) for the fixed-line segment totaled NIS 750 million in 2019, an increase of 9% or NIS 61 million from NIS 691 million in 2018. The impact of the implementation of IFRS 16 in 2019 reduced total operating expenses for the fixed-line segment totaledby NIS 609 million in 2016, a decrease of 6% or NIS 41 million from 2015.16 million. See also note 22 to our consolidated financial statements. Including depreciation, amortization and impairment expenses and other expenses (mainly amortization of employee share basedshare-based compensation), total operating expenses decreased by 15%.for the fixed-line segment totaled NIS 960 million, an increase of 14% compared with NIS 841 million in 2018.
Operating profit. Operating profit for the fixed-line segment was NIS 12510 million in 2016, an increase2019, a decrease of 257%79% compared to NIS 3548 million in 2015. Operating profit for 2015 included impairment charges,2018, mainly reflecting the increase in total operating expenses including depreciation, amortization expenses and other expenses (mainly amortization of employee share-based compensation), as described above, in the amount of NIS 98 million. Compared with operating profit excluding the impairment charges in 2015, operating profit in 2016 decreased by 6%, mainly reflectingwell as the impact of the decreasesdecrease in service revenues from international calling services, which more than offset the impact of the growth in TV and internet services and the increase in gross profit from fixed-line segment equipment sales, partially offset bysales. The impact of the reductionadoption of IFRS 16 on operating profit for the fixed-line segment in total operating expenses, as explained above.2019 was an increase of NIS 1 million.
Adjusted EBITDA. Adjusted EBITDA for the fixed-line segment decreased by 3%was NIS 218 million in 2019, an increase of 10% from NIS 279198 million in 2015 to NIS 272 million in 2016,2018. The impact of the adoption of IFRS 16 on Adjusted EBITDA for the same reasons asfixed-line segment in 2019 was an increase of NIS 16 million. Adjusted EBITDA excluding the decreaseimpact of IFRS 16 was NIS 202 million, an increase of 2% from 2018, which resulted from the growth in operating profit.TV and internet services and the increase in gross profit from fixed-line equipment sales, which were partially offset by the negative impact from the decline in international calling services. As a percentage of total fixed-line revenues, Adjusted EBITDA for the fixed-line segment in 20162019 was 29%21%, unchanged from 2015.2018.
5A.4 SEASONALITY OF SERVICE REVENUES
OurHistorically, our cellular service revenues and profitability tend to show some seasonal trends over the year, resulting mainly from revenues from roaming services which tend to increase during Jewish holiday periods and during the summer months.
Whilst most of our post-paid cellular tariff plans for private customers are bundles including unlimited amounts of call minutes and SMS, for other cellular subscribers in plans which charge according to usage, airtime minutes and consequently airtime revenues are affected by the number of monthly work days and daylight hours These seasonal trends did not materialize in the day, which varies throughout the year. In addition, airtime revenues for such subscribers are lower in February, which is a shorter than average month. However,year 2020 due to the increased penetration of bundled plans which offer unlimited or fixed amounts of airtime and SMS usage, the impact of such effects has significantly decreased over the last few years.COVID-19 crisis.
There is no assurance that these trends will continue in the future.
| | Three months ended | |
NIS in millions | | March 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | |
| | (Unaudited) | |
Service Revenues | | | | | | | | | | | | |
| | | | | | | | | | | | |
2015 | | | 759 | | | | 757 | | | | 760 | | | | 716 | |
2016 | | | 710 | | | | 692 | | | | 698 | | | | 652 | |
2017 | | | 640 | | | | 646 | | | | 666 | | | | 630 | |
| | Three months ended | |
NIS in millions | | March 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | |
| | (Unaudited) | |
Service Revenues | | | | | | | | | | | | |
| | | | | | | | | | | | |
2018 | | | 625 | | | | 620 | | | | 654 | | | | 625 | |
2019 | | | 624 | | | | 642 | | | | 658 | | | | 636 | |
2020 | | | 629 | | | | 616 | | | | 631 | | | | 632 | |
5A.5 IMPACT OF EXCHANGE RATE FLUCTUATIONS AND INFLATION
Substantially all of our revenues and a majority of our operating expenses are denominated in shekels. However, in recent years, approximately one fifthquarter of our operating expenses (excluding depreciation), including a substantial majority of our handsetdevice and equipment purchases related to end sales to customers, were linked to non-NIS currencies, mainly the US dollar. These expenses related principally to the acquisition of handsets, where the price paid by us is based mainly on US dollars. In addition, a substantial amountpart of our capital expenditures are incurred in, or linked to, non-NIS currencies, mainly the US dollar. See “ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK”.
Our Notes payable series C in a total principal amount of NIS 213 million as of December 31, 2017, are currently in NIS and are linked to the CPI. If the CPI increases, we may not be permitted to raise our tariffs in a manner that would fully compensate for any increase in our finance expenses. In 2017, the CPI increased 0.3 %, which raised our finance costs, net, by NIS 4 million, compared to a CPI decrease of 0.3% in 2016, which reduced our finance costs, net, by NIS 2 million. The CPI for each month is published on the 15th day of the following month; references above to the annual change in CPI for a given year is the change from the CPI published on the 15th day of December of the preceding year to the CPI published on the 15th day of December of the relevant year, which for the purposes of this annual report, covers the twelve months beginning January 1 through December 31 of the relevant year.
5B. Liquidity and Capital Resources
The discussion below first describes our financial indebtedness (Notes payable, long-term borrowings and total financial debt) and capital expenditures, then our dividend payments, and finally our main sources of liquidity.
5B.1 NOTES PAYABLE
As further described below, we have over the years issued a number of series of Notes payable, which we have occasionally repurchased.
In JulyAccording to agreements the Company entered into in December 2017 and January 2018, the Company issued in December 2019, in a framework of a private placement, an aggregate principal amount of NIS 226.75 million of additional Series F Notes to certain Israeli institutional investors.
In January 2019, the Company issued a new Series G Notes, in a principal amount of NIS 255225 million, payable in 5 equalas follows: 4 annual installments onof NIS 22.5 million each, payable in June 25 of each of the years 20202022 through 2024.2025, NIS 45 million payable in June 2026 and NIS 90 million payable in June 2027. The principal bears fixed annual interest of 2.16%4%, payable on a semiannual basisannually on June 25 and December 25.of each year.
In December 2017,2019 and 2020, following partial exercises of option warrants exercisable for Series G Notes (see also "Private placement of option warrants" below), the Company expandedissued Series FG Notes in a total principal amount of NIS 125 million and NIS 174.3 million respectively.
In July 2020, the Company issued in a private placement (not related to the option warrants mentioned above) additional Series G Notes in a principal amount of NIS 389300 million, under the same conditions.conditions as the original series.
TheIn July 2020, the Company has engaged to expandalso executed a partial early redemption of Series F Notes in the future (see "Notes payable issuance commitments" below).a total principal amount of NIS 305 million. The total amount paid was NIS 313 million. The early redemption resulted in additional finance costs of NIS 7 million recorded in July 2020.
All Series Notes payable are unsecured non-convertible and listed for trading on the TASE.
All Series Notes payable have been rated ilA+, on a local scale, by Standard & Poor’s Maalot.
Members of our Board of Directors and senior management may have purchased a portion of the various Series Notes through stock exchange transactions.
The table below sets forth the composition and terms of the Notes payable issued by the Company and outstanding at December 31, 2017:2020:
| | Linkage terms (principal and interest) | Principal amount | | Annual interest rate | | | Interest payment terms | | | Original issuance date | |
| | | | | | | | | | | | | | | | |
Notes payable series C | | CPI | | | 3.35% CPI adj. | | | Semi-annual | | | April 2010 | |
Notes payable series D | | | | 109 | | ‘Makam’(**) plus 1.2% | | | Quarterly | | | April 2010 | |
Notes payable series F | | | | 512 | | 2.16% fixed | | | Semi-annual | | | July 2017 |
Notes payable series G(*) | | 824 | | 4% fixed | | Annual | | January 2019 |
(*) Includes Series G Notes issued pursuant to option warrants described below.
(**) ‘Makam’ is a variable interest that is based on the yield of 12 month government bonds issued by the Government of Israel. The interest is updated on a quarterly basis. The interest rates paid (in annual terms, and including the additional interest of 1.2%) during 20172020 are set forth in the table below:
Period | | Interest rate (Makam+1.2%) | |
October 1, 20172020 to December 30, 20172020 | | | 1.291.25 | % |
July 1, 20172020 to September 30, 20172020 | | | 1.331.23 | % |
March 31, 20172020 to June 30, 20172020 | | | 1.341.41 | % |
December 31, 20162019 to March 30, 20172020 | | | 1.34 | % |
The table below sets forth the payments of principal to be made on our Notes payable at December 31, 20172020 (for payments including interest payments, see "Item 5F Aggregate Contractual Obligations”):
| | 2018 | | | 2019 | | | 2020 | | | 2021 to 2022 | | | | | | Total | |
| | New Israeli Shekels in millions | |
Principal payments of long term indebtedness: | | | | | | | | | | | | | | | | | | |
Notes payable series C (1) | | | 213 | | | | | | | | | | | | | | | | 213 | |
Notes payable series D | | | 109 | | | | 109 | | | | 109 | | | | 110 | | | | | | | 437 | |
Notes payable series F | | | | | | | | | | | 129 | | | | 258 | | | | 257 | | | | 644 | |
Total | | | 322 | | | | 109 | | | | 238 | | | | 368 | | | | 257 | | | | 1,294 | |
Add offering expenses and discounts and premiums | | | | | | | | | | | | | | | | | | | | | | | 4 | |
| | | | | | | | | | | | | | | | | | | | | | | 1,298 | |
(1) Linked to the CPI as of December 31, 2017.
| | | | | | | | | | | | | | | | | | |
| | New Israeli Shekels in millions | |
Principal payments of long-term indebtedness: | | | | | | | | | | | | | | | | | | |
Notes payable series D | | | 109 | | | | | | | | | | | | | | | | 109 | |
Notes payable series F | | | 128 | | | | 128 | | | | 128 | | | | 128 | | | | | | | 512 | |
Notes payable series G | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | | | | | | | | | | | |
Notes payable buy back
The Company did not buy back any Notes in 2017.
The Company's series B, C and E Notes, which are traded on the Tel Aviv Stock Exchange, were partially repurchased (repurchased Notes are considered legally extinguished) in 2016 as follows:
In March 2016, the Company repurchased approximately NIS 43 million par valuePrivate placement of Notes payable series B, at an average transaction price of approximately 1.104 NIS par value. The total amount paid was approximately NIS 48 million.
In March 2016, the Company repurchased approximately NIS 131 million par value of Notes payable series E, at an average transaction price of approximately 1.073 NIS par value. The total amount paid was approximately NIS 141 million.option warrants
In April 2016,2019, the Company repurchased approximately NIS 54 million par value of Notes payable series C, at an average transaction price of approximately 1.136 NIS par value. The total amount paid was approximately NIS 61.5 million.
The buy-back costs of the aforementioned repurchases were recorded as “finance expenses” for 2016issued in an aggregate amount of NIS 12 million.
Notes payable issuance commitments
In September 2017, the Company entered into an agreement with certain Israeli institutional investors, according to which the Company undertook to issue to the institutional investors, and the institutional investors undertook to purchase from the Company, in the framework of a private placement an aggregate2 series of untradeable option warrants that are exercisable for the Company's Series G Notes. The exercise period of the first series was between July 1, 2019 and May 31, 2020 and of the second series is between July 1, 2020 and May 31, 2021. The exercise price is NIS 88 for each Series G notes principal amount of NIS 150 million100. The Series G Notes allotted upon the exercise of additionalan option warrant will be identical in all their rights to the Company's Series F debentures in December 2018.
In December 2017,G Notes immediately upon their allotment, and will be entitled to any payment of interest or other benefit, the effective date of which is due after the allotment date. The Notes allotted as a result of the exercise of option warrants will be registered on the TASE. The total amount received by the Company entered into an agreement with certain Israeli institutional investors, according toon the allotment date of the option warrants (in April 2019) was NIS 37 million.
In 2019 and 2020, following partial exercises of option warrants which are exercisable for Series G Notes, the Company undertook to issue to the institutional investors, and the institutional investors undertook to purchase from the Company,issued Series G Notes in the framework of a private placement, an aggregatetotal principal amount of NIS 126.75125 million of additional Series F debentures in December 2019.
99
and NIS 174.3 million, respectively.In January 2018,
As of the Company entered into an agreement with certain Israeli institutional investors, accordingdate of approval of these financial statements, the total remaining consideration expected to whichbe received (after the Company undertook to issueexercises described above), excluding consideration already received for the allotment of the options, in respect of full exercise of remaining option warrants (and assuming that there will be no change to the institutional investors, and the institutional investors undertook to purchase from the Company, in the framework of a private placement, an aggregate principal amount ofexercise price) is approximately NIS 100 million of additional Series F debentures in December 2019.23 million.
All the loan commitments include provisions which allow the lenders to not provide the loans should any of the events of default defined for the Company's existing loans occur prior to the date for providing the deferred loans. These events of default include non-compliance with the financial covenants set forth below in Item 5B.3, as well as other customary terms.
5B.2 Long-Term BorrowingsLONG-TERM BORROWINGS
The Company has received borrowings from leading Israeli commercial banks and other institutions.banks. The Company may, at its discretion,, prepay the borrowings, subject to certain conditions, including that the Company shall reimburse the lenders for losses sustained by the lenders as a result of the prepayment. The reimbursement is mainly based on the difference between the interest rate that the Company would otherwise pay and the current market interest rate on the prepayment date.
Borrowings as of December 31, 20172020 are set forth below:
| | Annual interest rate | | Interest payment terms | | Original reception date |
Borrowing K(*) | 3.71% fixed | | Quarterly | | March 2015 |
Borrowing L(**) | 4.25% fixed | | Semi-annual | | March 2015 |
Borrowing O(**) | 4.34% fixed | | Quarterly | | December 2017 |
Borrowing P | | 2.38% fixed | | Quarterly | | December 2017 |
Borrowing Q | | 2.5% fixed | | Quarterly | | December 2017 |
(*) The Company intends to early repay borrowing K in 2018.
(**) The Company early repaid the borrowings in March 2018.
The table below sets forth the payments of principal to be made on our borrowings, as of December 31, 20172020 (for payments including interest payments see "Item 5F Aggregate Contractual Obligations”):
| | 2018 | | | 2019 | | | 2020 | | | 2021 to 2022 | | | | | | Total | |
| | New Israeli Shekels in millions | |
Borrowing K(*) | | | 75 | | | | | | | | | | | | | | | | 75 | |
Borrowing L(**) | | | 200 | | | | | | | | | | | | | | | | 200 | |
Borrowing O(**) | | | 100 | | | | | | | | | | | | | | | | 100 | |
Borrowing P | | | 7 | | | | 29 | | | | 29 | | | | 60 | | | | | | | 125 | |
Borrowing Q | | | | | | | 23 | | | | 23 | | | | 45 | | | | 34 | | | | 125 | |
| | | 382 | | | | 52 | | | | 52 | | | | 105 | | | | 34 | | | | 625 | |
| | | | | | | | | | | | | | Total | |
| | New Israeli Shekels in millions | |
Borrowing P | | | 30 | | | | 29 | | | | | | | | | | 59 | |
Borrowing Q | | | 23 | | | | 23 | | | | 23 | | | | 10 | | | | 79 | |
| | | | | | | | | | | | | | | | | | | | |
(*) The Company intends to early repay borrowing K in 2018.
(**) The Company early repaid the borrowings in March 2018.
New borrowingsBorrowings received
In 2017, the Company received long-term loans in an aggregate amount of NIS 350 million, as detailed further below.
Borrowing O: In December 2017, the Company received a long-term loan from a group of institutional corporations in a principal amount of NIS 100 million. The loan was received according to a loan agreement that was signed in November 2014. The loan will bear unlinked interest at the rate of 4.34% per annum. The Company early repaid the loan in March 2018.
Borrowing P: In December 2017, the Company received a long-term loanborrowing from a commercial bank in the principal amount of NIS 125 million. The loan will bearborrowing bears unlinked interest at the rate of 2.38% per annum and will beis paid in quarterly payments over 5 years. The principal will beis paid in quarterly equal payments commencing in December 2018.
Borrowing Q: In December 2017, the Company received a long-term loanborrowing from a commercial bank in the principal amount of NIS 125 million. The loan will bearborrowing bears unlinked interest at the rate of 2.5% per annum and will beis paid in quarterly payments over 6.5 years. The principal will beis paid in quarterly equal payments commencing in March 2019.
Long-term borrowings early repayments
In total, the Company made early repayments of borrowings in 2017 in an aggregate amount of NIS 1,283 million, incurring early repayment expenses in an aggregate amount of NIS 76 million, as further detailed below.
In June 2017, the Company made an early repayment of principal outstanding of borrowings C, D, E, F, G and H in a total amount of NIS 700 million, thus completing full and final repayment of these borrowings.
In July 2017, the Company made an early repayment of principal outstanding of borrowings I and J in a total amount of NIS 175 million, thus completing full and final repayment of these borrowings.
In December 2017, the Company made an early repayment of principal outstanding of borrowings M and N in a total amount of NIS 408 million, thus completing full and final repayment of these borrowings.
In December 2017, theThe Company did not take a borrowing that was contractedreceive new long-term borrowings in November 2014 (a deferred loan) with a group of institutional corporations in a principal amount of NIS 100 million.
The early repayment fees of the aforementioned repayments totaled to an amount of NIS 76 million that were recorded in finance expenses in 2017.
In Marchyears 2018 the Company early repaid borrowings L and O in a total principal amount of NIS 300 million. In addition, the Company intends to early repay borrowings K during 2018, in a total principal amount of NIS 75 million. The early repayments resulted in a change in expected cash flows and the Company recorded in December 2017 additional finance costs of NIS 18 million, mainly due to early repayment fees.through 2020.
5B.3 FINANCIAL COVENANTS
Regarding Series F Notes, Series G Notes, and borrowings P and Q, the Company is required to comply with a financial covenantcovenants that the ratio of Net Debt to Adjusted EBITDA shall not exceed 5. Compliance will be examined and reported on a quarterly basis. For the purpose of the covenant,covenants, Adjusted EBITDA is calculated as the sum total for the last 12 month period, excluding adjustable one-time items. As of December 31, 2017,2020, the ratio of Net Debt to Adjusted EBITDA was 1.0. 0.8.
Additional stipulations regarding Series F Notes and borrowings P and Q mainly include: shareholders'Shareholders' equity shall not decrease below NIS 400 million; themillion and no dividends will be declared if shareholders' equity will be below NIS 650 million regarding Series F notes and borrowing P. Shareholders' equity shall not decrease below NIS 600 million and no dividends will be declared if shareholders' equity will be below NIS 750 million regarding Series G notes. The Company shall not create floating liens subject to certain terms; theterms. The Company has the right for early redemption under certain conditions;conditions. With respect to notes payable series F and series G: the Company shall pay additional annual interest of 0.5% in the case of a two-notch downgrade in the Series F Notes rating and an additional annual interest of 0.25% for each further single-notch downgrade, up to a maximum additional interest of 1%; the Company shall pay additional annual interest of 0.25% during a period in which there is a breach of the financial covenant.covenants; debt rating will not decrease below BBB- for a certain period. In any case, the total maximum additional interest for Series F and G, shall not exceed 1.25% or 1%, respectively. The Group was in compliance with the financial covenantcovenants and the additional stipulations for the year 2017.2020.
Regarding borrowings K, L and O, as of December 31, 2017 (see information about early repayments above) the Company is required to comply with financial covenants on a consolidated basis. Their main provisions are two ratios:
(1) The ratio of (a) the amount of all financial obligations of the Company including bank guarantees that the Company has undertaken ("Total Debt") to (b) EBITDA less Capital Expenditures shall not exceed 6.5 (the ratio as of December 31, 2016 and 2017 was 4.5 and 4.1, respectively); and
(2) The ratio of (a) Total Debt to (b) the EBITDA of the Company shall not exceed 4 (the ratio as of December 31, 2016 and 2017 was 3.4 and 2.2, respectively).
EBITDA is defined as the sum of (a) the net income before extraordinary items, (b) the amount of tax expenses set against the net profits including, without double counting, any provisions for tax expenses, (c) and depreciation and amortization expenses, and (d) any finance costs, net.
Capital Expenditures are defined as any expenditure classified as fixed and intangible asset in the financial statements.
The Group was in compliance with all covenants stipulated for the years 2016 and 2017. The covenants are measured every six months (on June 30, and December 31) on an annualized basis of twelve months and are based on the financial results for the preceding period of twelve months.
The existing loans agreements allow the lenders to demand an immediate repayment of the loans in certain events (events of default), including, among others, a material adverse change in the Company's business and non-compliance with the financial covenants set in those agreements.
The Company provided the lenders with a negative pledge undertaking (i.e., not to pledge any of its assets to a third party), except for a number of exceptions that were agreed upon, including pledge (other than by way of floating charge) in favor of a third party over specific assets or rights of the Company, securing obligations no greater than NIS 100 million in aggregate.
5B.4 TOTAL NET FINANCIAL DEBT
At December 31, 2017,2020, total net financial debt (the sum total of current notes payable and borrowings (NIS 705290 million) and non-current borrowings and notes payable (NIS 1,2181,305 million) and financial liability at fair value (NIS 4 million) less cash and cash equivalents (NIS 867376 million) and less short-term and long-term deposits (NIS 150566 million)) amounted to NIS 906657 million, compared to NIS 1,526957 million (the sum total of current notes payable and borrowings (NIS 498367 million) and non-current borrowings and notes payable (NIS 2,1961,413 million) and financial liability at fair value (NIS 28 million) less cash and cash equivalents (NIS 716299 million) and less short-term deposits (NIS 452552 million)) at December 31, 2016. The decrease in net financial debt compared with 2016 principally reflected the positive adjusted free cash flow generated in 2017 (cash flows from operating activities, net of cash flows used for investment activities less short-term proceeds from deposits, see reconciliation to cash flows below; Adjusted Free Cash Flow is not a financial measure under IFRS and may not be comparable to other similarly titled measures for other companies) net of interest payments and the cash received following the share issuance in June 2017 (see note 21 to the consolidated financial statements). See note 15 to the consolidated financial statements (see also “Item 5B.2 Long-term Borrowings” above).2019.
Reconciliation of cash flows to Adjusted Free Cash Flow | | Year ended December 31, | |
| | 2016 | | | 2017 | |
| | NIS in millions | |
Cash flows from operating activities | | | 945 | | | | 973 | |
Cash flows from investing activities | | | (639 | ) | | | (72 | ) |
Short-term investment in deposits | | | 452 | | | | (302 | ) |
Adjusted Free Cash Flow | | | 758 | | | | 599 | |
At December 31, 2017,2020, the current portion of our total financial debt (including future interest payments during 2018)2021) amounted to NIS 772337 million, as compared to NIS 587407 million at December 31, 2016,2019, and was composed of the amounts set forth in the table below. We intend to fund the repayment of the current portion of our Notes payable, borrowings and interest in 2018,2021, through available cash or operational cash flow, issuance of deferred notes payable, new borrowings, issuance or sale of corporate notes, issuance of shares or a combination of one or more of these resources.
Current Portion Payable in 20182021 as of December 31, 20172020 | | NIS in millions | |
| | | |
Principal on notes payable | | | 322237 | |
Principal on borrowings | | | 38253 | |
| | | | |
Accrued interest on notes payablespayable | | | 2744 | |
Accrued interest on borrowings | | | 413 | |
Total | | | 772337 | |
Capital Expenditures. The telecommunicationscommunications business is highly capital intensive, requiring significant capital to acquire licenses, and to construct and maintain a telecommunications network. Thecommunications networks and to purchase and install subscriber-end equipment. In 2020, capital requirements of our network are determined by the coverage desired, the expected call and data traffic and the desired quality and variety of services. Capital expenditures also included in 2017, expenditures on fiber-optics and related assets, subscriber equipment and installation, licenses, computer and information systems, optic fibers and related assets, subscribers equipment and installation, property, leasehold improvements, furniture and equipment, costs of obtaining contracts with customers (under IFRS 15), and computer software.
For the years 2016 to 2018, costs of Right of Use (ROU) in PHI’s shared network were presented as deferred expenses, and included in the cash flows statement under cash flows from operating activities. See also notes 2(g) and 9 to the financial statements. From January 1, 2019 these investmants are included mainly in cash flows from investing activity.
In the years ended December 31, 2015, 20162018, 2019 and 2017,2020, our capital expenditures as represented by additions to property and equipment and intangible assets, amounted to NIS 271499 million, NIS 202578 million and NIS 333595 million, (without the impact of the early adoption of IFRS 15), respectively. The increase in capital expenditures from 20162019 to 20172020 mainly reflected the increased investmentsinvestment in optic fiber network, andthe fiber-optic infrastructure, the increase in the costs of equipment leased to customers (mainly related to TV services). Includinglicenses including the impactcost of the early adoptionnew 5G frequencies following receipt of IFRS 15the frequencies during the year and the increase in 2017, capital expenditures totaled NIS 417 million (US$ 120 million), including capital expenditures in a total of NIS 84 million from the capitalization of the costs of obtaining contracts under IFRS 15.with customers.
During the years ended December 31, 2019 and 2020, the capital expenditures noted above included NIS 237 million and NIS 251 million (US$78 million), respectively, in our network infrastructure, including in our fiber-optic infrastructure.
At December 31, 2017,2020, our capital expenditure commitments totaled NIS 5 million.64 million, and were related almost entirely to our cellular and fixed-line networks and IT systems. For further information regarding our capital expenditure commitments at December 31, 2017,2020, see “Item 5F Aggregate Contractual Obligations”.
Dividend payments. For the year ending December 31, 2017,2020, the Company did not distribute any dividends.
5B.5 MAIN SOURCES OF LIQUIDITY
Operating cash flows, net of cash flowflows used for investing activities;
Off balance sheet deferred issuance of Notes payable;Untradeable option warrants;
Regular NotesIssuance of notes payable and long-term borrowings.borrowings;
Short term credit facility.
Cash on hand. At December 31, 2017,2020, we had NIS 867376 million in cash on hand, compared to NIS 716299 million at December 31, 2016.2019.
Short-term deposits. At December 31, 2017,2020, we had NIS 150 million in short-term deposits in an amount of NIS 411 million, compared to NIS 452552 million at December 31, 2016.2019.
103Long-term deposits. At December 31, 2020, we had long-term deposits for a period ending in June 2022, in an amount of NIS 155 million. We did not have long-term deposits at December 31, 2019.
Cash generatedflows from operations.operating activities. Cash generatedflows from operationsoperating activities totaled NIS 973786 million (US$ 280244 million) in 2017. Without the impact of the early adoption of IFRS 15 in 2017, cash generated from operations would have been NIS 897 million,2020, a decrease of 5%6% compared with 2016.to NIS 837 million in 2019. The decrease mainly reflected the payment by HOT Mobile in 2016 of the lump sum of NIS 250 million under the Network Sharing Agreement, which was partially offset by an increase in trade payable balances, and by a larger decrease in trade receivables of NIS 283 million in 2017 compared with NIS 226 million in 2016 which was mainly explained by the decrease in the volume of equipment sales under long-term payment plans in 2017 compared with 2016. Adjusted EBITDA.
Adjusted Free Cash Flow for 20172020 was NIS 59972 million (US$ 17322 million), a decreasean increase of 21%47% compared to NIS 75849 million for 2016 (as shown in "Item 5B.4", Adjusted2019 (Adjusted Free Cash Flow is calculated as cash flows from operating activities, net of cash flows from investment activities less short-term investment in deposits;proceeds from (investment in) deposits, net of lease principal payments and lease interest payments; Adjusted Free Cash Flow is not a financial measure under IFRS and may not be comparable to other similarly titled measures for other companies).
Reconciliation of cash flows to Adjusted Free Cash Flow | | Year ended December 31, | |
| | 2019 | | | 2020 | |
| | NIS in millions | |
Net cash provided by operating activities | | | 837 | | | | 786 | |
Net cash used in investing activities | | | (1,181 | ) | | | (581 | ) |
Less investment in deposits, net | | | 552 | | | | 14 | |
Lease principal payments | | | (139 | ) | | | (129 | ) |
Lease interest payments | | | (20 | ) | | | (18 | ) |
Adjusted Free Cash Flow | | | 49 | | | | 72 | |
Existing credit facilities. During 2017 and atAs of December 31, 2017, we did not have any active2020, PHI had a short-term credit facilitiesfacility with banks.a leading Israeli commercial bank in the amount of NIS 100 million. The Group's share in this facility is 50%. The facility is restricted for use by PHI only. As of December 31, 2020 no funds were drawn from this facility.
Notes payable issuance commitments. During 2017 and 2018In April 2019, the Company entered into agreements with Israeliissued in a private placement two series of untradeable option warrants that are exercisable for the Company's Series G Notes. The exercise period of the first series was between July 1, 2019 and May 31, 2020 and of the second series is between July 1, 2020 and May 31, 2021. The Series G Notes allotted upon the exercise of an option warrant will be identical in all their rights to the Company's Series G Notes immediately upon their allotment, and will be entitled to any payment of interest or other benefit, the effective date of which is due after the allotment date. The Notes allotted as a result of the exercise of option warrants will be registered on the TASE. The total amount received by the Company on the allotment date of the option warrants was NIS 37 million.
In 2019 and 2020 and February 2021, following partial exercises of option warrants exercisable for Series G Notes, the Company issued Series G Notes in a total principal amount of NIS 125 million and NIS 174.3 million, respectively.
As of the date of approval of these financial statements, the total remaining consideration expected to be received (after the exercises described above), excluding consideration already received for the allotment of the options, in respect of full exercise of remaining option warrants (and assuming that there will be no change to the exercise price) is approximately NIS 23 million.
Share issuance. In January 2020, the Company issued 19,330,183 shares of the Company to institutional investors, according to which the Company undertook to issue to the institutional investors,following a tender under a shelf offering, and the institutional investors undertook to purchase from the Company, in the frameworkby way of a private placement, additional Series F notes payable. An amount ofplacement. The total net consideration received was approximately NIS 150276 million will be issued in December 2018 and an amount ofwas used for general corporate purposes. The offering expenses totaled NIS 227 million will be issued in December 2019.10 million.
We believe that cash flows from our operations, together with our cash on hand, and our short-term deposits, and the issuance of additional Series F notes payable, will provide us with enough liquidity and resources to fund our on-going operations, expected capital expenditure needs, payment of amounts due on our notes and borrowings, as well as other material commitments, at least for the next 12 months (see also "Item 5F Aggregate Contractual Obligations"). However, the actual amount and timing of our future requirements may differ materially from our current estimates. See also “Item 5D.2 Outlook".
As noted in “Item 3D.1o Our mobile telephone license imposes certain obligations on our shareholders and restrictions on who can own our shares. Ensuring compliance with these obligations and restrictions may be outside our control, and may limit our ability to raise new equity capital. If the obligations or restrictions are not respected by our shareholders, we could lose our license.”, if the Company decides to raise capital, it may face significant difficulties, since the current holdings of Israeli entities (as defined in the license) are approximately 5% and any equity offering to the public or to the Company's employees and office holders will require an equivalent equity offering of shares to Israeli entities, in a manner in which the total Israeli entities founding shareholders' holdings will not be less than 5% of the total issued share capital. Since these Israeli entity shares require pre-approval of the MoC to determine that the receiving shareholder is eligible to be an Israeli entity, they are limited in their capability of transfer to another shareholder. The Company may need to grant a significant discount in an equity offering of these Israeli entity shares. If the Company would be required to raise capital and this issue would prevent it, there could be an adverse impact on our business (e.g. reduction in sales with long term credit arrangements and/or reduction in capital investments).
5C. Research and Development, Patents and Licenses
We are primarily a user rather than a developer of technology. Accordingly, we did not engage in any significant research and development activities during the past three years.
5D. Trend Information
5D.1 RECENT DEVELOPMENTS
See “Item 5D.2 Outlook”. See also recent regulatory developments in “Item 4B.12e Regulatory Developments” and “Item 3D.1 RISKS RELATING TO THE REGULATION OF OUR INDUSTRY”.
5D.2 OUTLOOK
In 2017, competition in the Israeli telecommunications market remained intense, both across cellular segment services and fixed-line segment services, as well as in the market for equipment and device sales. As a result, the continued substantial price erosion in the market had a further significant negative impact on the Company’s business results, with total revenues for 2017 decreasing by 8% compared with 2016.
In addition to a decrease in service revenues, revenues from equipment sales decreased in 2017 by 13%, largely reflecting a decline in sales volumes of both cellular devices and other non-core equipment including tablets, televisions, streamers and other audio visual devices.
Whilst in 20172020, we earned profits of NIS 11417 million (US$ 335 million), profit without the impact compared with profits of NIS 19 million for 2019 and compared with over NIS 50 million for each of the early adoptionyears between 2016 and 2018. Should existing trends continue, our operating results may continue to decline in 2021 and possibly beyond, and may also result in losses, which would adversely affect our financial condition, in particular operating profit and Adjusted Free Cash Flow. See also “Item 3D.2a Largely as a result of IFRS 15substantial and continuing changes in 2017 would have been NIS 61 million (US$ 18 million); profit in 2016 was NIS 52 million. Because theour regulatory and business environment, continues to evolve, generallyour operating financial results, profitability and cash flows have declined significantly in recent years, including a loss for the year 2015. In 2020 we earned profits of NIS 17 million (US$ 5 million) compared with profits of NIS 19 million for 2019 and over NIS 50 million for each of the objective of further increasing competition in the various markets in which we operate, depending on pastyears between 2016 and future regulatory and market developments, these factors2018. Should existing trends continue, our operating results may continue to negatively impactdecline in 2021 and possibly beyond, and may also result in losses, which would adversely affect our financial condition.”
In addition, as for other companies in Israel and around the world, the novel COVID-19 disease continues to pose an unquantifiable threat to our business, through 2018results of operations and beyond.financial position. See also “Item 3D.2a.3D.2d The Coronavirus ("COVID-19") crisis had a material harmful effect on the Company's business in 2020. As of the date of this Annual Report, revenues from roaming services continue to be significantly restrained. Should existing trends continue or worsen, this may have a material harmful effect on our results of operations and financial position for 2021.” For the first quarter of 2021, COVID-19 is expected to continue to have a negative impact on our results as a result of continued near-complete cessation of international travel and the effects of the lockdown in part of the quarter; however, the impact is not expected to differ materially from that in the final quarter of 2020.
Capital expenditures in 2021 are expected to continue to include significant investments in our fiber-optic infrastructure and our TV and internet services, and may be higher than in 2020. Investment in the new 5G cellular network is not expected to have a significant impact on capital expenditures in 2021. The Company’s intention is to complete the major phase of deployment of our fiber-optic infrastructure during the year 2023.
In order
Adjusted Free Cash Flow for 2020 was NIS 72 million (US$ 22 million), an increase of 47% compared to mitigateNIS 49 million for 2019 (as shown in "Item 5B.5 MAIN SOURCES OF LIQUIDITY" is calculated as the impactsum of the competition on the price erosionnet cash provided by operating activities and decreasesnet cash used in service revenuesinvesting activities less proceeds from (investment in) deposits, lease principal payments and in revenues from equipment sales, the Company continued to adjust its cost structure and to implement operational efficiency measures through 2017, which resulted in a decrease in 2017 in total operating expenses, without the impact of the early adoption of IFRS 15, of NIS 294 million (including cost of service revenues (NIS 2,083 million in 2017) and selling, marketing and administrative expenses (NIS 536 million in 2017), and excluding depreciation, amortization and impairment expenses and other expenses (mainly amortization of employee share based compensation) (NIS 589 million in 2017); this measurelease interest payments; Adjusted Free Cash Flow is not a financial measure under IFRS and may not be comparable to other similarly titled measures for other companies). This decrease followed a decrease in total operating expenses in 2016 of NIS 139 million compared with 2015.
The scope for the Company to adjust its cost structure and to implement operational efficiency measures diminishes year by year. In addition, in view of the fact that Partner entered into the television market in mid-2017, the operating expenses for 2017 do not include the full-year impact of the incremental operating expenses related to the television service, including content rights and distribution expenses, wholesale internet infrastructure access expenses and television service-related workforce expenses. Therefore total operating expenses may not decrease to the same extent as was achieved in 2017, or at all, in 2018 and beyond.
Regarding finance costs, net, in 2018, finance costs, net, are expected to be significantly lower in 2018 than in 2017, both reflecting the early debt repayment expenses recorded in 2017 in an amount of NIS 94 million as well as anticipated lower interest expenses as a result of the lower average level of financial debt, as discussed above in "Item 5B.4 Total net financial debt”, and the lower average debt interest rate.
As explained in "5A.2a Cellular Services Segment ” above, 2017 was the final year for which the Company recorded income with respect to the settlement agreement of the Orange brand agreement, in an amount of NIS 108 million (US$ 31 million).
In November 2017, the Company announced that it is holding negotiations with Cellcom Israel Ltd., another Israeli telecommunications operator, regarding a potential long term cooperation agreement for the deployment of a fiber optics infrastructure by both companies. If concluded, the agreement would provide that each party will be entitled to purchase from time to time, as per its needs and at its sole discretion, fiber optic infrastructure services (including Indefeasible Right of Use - IRU) from the other party's present and/or future fiber optics infrastructure in order to connect residential buildings throughout Israel. The agreement, if concluded and executed, will allow the companies to avoid duplicated future deployment, as well as allow the Company to accelerate the deployment rollout of the fiber optics infrastructure while reducing costs and improving its ability to provide quality services, for the benefit of consumers in Israel. At the same time, the Company continues to explore other alternatives to accelerate its deployment of fiber infrastructure. The finalization of the agreement is subject to further negotiations between the parties and if concluded, the execution of the agreement will be subject to the required regulatory approvals.
Regarding liquidity, capital expenditures in 2018 are expected to include increased investments in our fiber optic network and in expenditures related to our television service.
In addition, cash generated from operations in 2018 is not expected to be supported by a change in trade receivables to the same extent as it was in 2017 depending upon the volume of equipment sales under long-term payment plans (as explained Item "4B.7 POST-PAID CUSTOMER CONTRACTS AND CREDIT POLICY", most of our customers pay for equipment devices with long term financing plans whereby the customer pays for the equipment through monthly payments over a period of between 12 and 36 months). Depending on regulatory and other developments in the market as well as the factors discussed here, adjusted free cash flowimpact of the COVID-19 disease crisis on our business and operations, Adjusted Free Cash Flow for 2021 may decline significantlyfurther from the level in 2018 compared2020 and may also be negative. However, we believe that cash flows from our operations, together with 2017.our cash on hand and our short-term deposits totaling nearly NIS 800 million as of December 31, 2020, will provide us with enough liquidity and resources to fund our on-going operations, expected capital expenditure needs, payment of interest and principal due on our notes and borrowings, as well as other material commitments, at least for the next twelve months. However, the actual amount and timing of our future requirements may differ materially from our current estimates.
The statements above under this section regarding trends are “forward-looking” statements. We have based these forward-looking statements on our current knowledge and our present beliefs and expectations regarding possible future events. These forward-looking statements are subject to risks, uncertainties and assumptions about Partner, consumer habits and preferences in mobile telephone usage, trends in the Israeli telecommunications industry in general, possible regulatory and legal developments and trends in general economic conditions. In particular, there is no certainty that an agreement will be reached with Cellcom. For a description of some of the risks we face, see “Item 3D. Key Information – Risk Factors”, “Item 4. Information on the Company”, “Item 5. Operating and Financial Review and Prospects” and “Item 8A. Consolidated Financial Statements and Other Financial Information – Legal and Administrative Proceedings”. In light of these risks, uncertainties and assumptions, the forward-looking events discussed above might not occur, and actual results may differ materially from the results anticipated.
5E. Off-Balance Sheet Arrangements
As of December 31, 2017,2020, the Company provided bank guarantees in a total amount of NIS 12651 million. In addition, the Company provided a guarantee to PHI's debt in an amount of NIS 50 million. For further details, see note 17(5)17 to the consolidated financial statements.
During 2017 and January 2018, the Company entered into an agreement with certain Israeli institutional investors, according to which the Company undertook to issue to the institutional investors, and the institutional investors undertook to purchase from the Company, in the framework of a private placement, an aggregate principal amount of NIS 150 million of additional Series F debentures in December 2018 and NIS 227 million in December 2019. See “5B.2 Long-term Borrowings".
Other than the aforementioned guarantees, and deferred notes payable, there are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. See also “Item 5F Aggregate Contractual Obligations”.
5F. Aggregate Contractual Obligations
Set forth below are our contractual obligations and other commercial commitments (undiscounted) as of December 31, 2017:2020:
| | Payments due by period (NIS in millions) | | | Payments due by period (NIS in millions) | |
Contractual Obligations | | Total | | | 2018 | | | | 2019-2020 | | | | 2021-2022 | | | 2023 and thereafter | | | Total | | | 2021 | | | | 2022-2023 | | | | 2024-2025 | | | 2026 and thereafter | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notes Series C* | | | 220 | | | | 220 | | | | | | | | | | | | | |
Notes Series D* | | | 451 | | | | 115 | | | | 225 | | | | 111 | | | | | | 110 | | | 110 | | | | | | | | | | |
Notes Series F* | | | 707 | | | | 14 | | | | 155 | | | | 275 | | | | 263 | | | 534 | | | 138 | | | 267 | | | 129 | | | | |
Notes Series G* | | | 1,003 | | | 33 | | | 227 | | | 215 | | | 528 | |
Long term borrowings* | | | 681 | | | | 423 | *** | | | 113 | | | | 110 | | | | 35 | | | 143 | | | 56 | | | 77 | | | 10 | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Operating Leases | | | 578 | | | | 158 | | | | 177 | | | | 112 | | | | 131 | | |
Lease liabilities | | | 786 | | | 135 | | | 206 | | | 149 | | | 296 | |
Trade payables | | | 787 | | | | 787 | | | | | | | | | | | | | | | 666 | | | 666 | | | | | | | | | | |
Payables in respect of employees | | | 70 | | | | 70 | | | | | | | | | | | | | | | 38 | | | 38 | | | | | | | | | | |
Other payables | | | 11 | | | | 11 | | | | | | | | | | | | | | | 12 | | | 12 | | | | | | | | | | |
Other non-current liabilities | | | 32 | | | | | | 32 | | | | | | | |
Contribution to defined benefit plan | | | 10 | | | | 10 | | | | | | | | | | | | | | | 7 | | | 7 | | | | | | | | | | |
Commitments to pay for inventory purchases** | | | 818 | | | | 679 | | | | 139 | | | | | | | | | | | 265 | | | 265 | | | | | | | | | | |
Commitments to pay for property, equipment purchases and software elements purchases (capital expenditures)** | | | 5 | | | | 5 | | | | | | | | | | | | | | | 64 | | | 64 | | | | | | | | | | |
Commitments to pay for rights of use of capacities** | | | 207 | | | | 43 | | | | 82 | | | | 82 | | | | | | | 119 | | | 51 | | | 63 | | | 5 | | | | |
Commitment to pay for capacities maintenance ** | | | 52 | | | | 9 | | | | 17 | | | | 17 | | | | 9 | | |
Commitment to pay for capacities maintenance** | | | | 13 | | | | 4 | | | | 9 | | | | | | | | | |
Total Contractual Cash Obligations | | | 4,597 | | | | 2,544 | | | | 908 | | | | 707 | | | | 438 | | | | 3,792 | | | | 1,579 | | | | 881 | | | | 508 | | | | 824 | |
* | * The figures include expected payments of interest on our long-term debt (borrowings and notes payable). |
** See note 17 to the consolidated financial statements
** | See note 17 to the consolidated financial statements. |
*** | Long-term borrowings include L and O in a total principal amount of NIS 300 million as well as the accumulated interest thereon and early repayment fees, that were due during 2018 and were early repaid in March 2018. See also "Item 5B.2 LONG-TERM BORROWINGS".
|
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6A. Directors and Senior Management
6A.1 DIRECTORS
Below is a list of the directors of the Company as of the date of this annual report.
Annual Report.
Name of Director | | Age | | Position |
Osnat Ronen (5) (6) | | | | |
Adam Chesnoff* | | 5258 | | Chairman of the Board of Directors |
Elon Shalev* | | 66 | | Vice-Chairman of the Board of Directors |
Dr. Michael J. Anghel (1)(2)(3)(4)
| | 79 | | Director |
Barry Ben Zeev (1)(2)(3)(4) | | 6669 | | Director |
Fred Gluckman*Richard Hunter | | 47 | | Director |
Barak Pridor* | | 5251 | | Director |
Osnat Ronen Roly Klinger(5) (6)(1)(2)(3)(4)
| | 5561 | | Director |
Yoav Rubinstein*Jonathan Kolodny(1)(2)(3)(4) | | 4451 | | Director |
Arieh Saban*Michal Maron-Brikman(1)(2)(3)(4) | | 7151 | | Director |
Yehuda Saban | | 3841 | | Director |
Arik Steinberg (1)(2)(4) Yossi Shachak | | 5375 | | Director |
Ori Yaron*Yaron | | 5255 | | Director |
Tomer Bar Zeev*Shlomo Zohar(4) | | 4269 | | Director |
| (1) | Member of the Audit Committee |
| (2) | Member of the Compensation Committee |
| (3) | External Director under the Israeli Companies Law (See “Item 6C Board Practices”) |
| (4) | Independent Director under NASDAQ rules and under the Israeli Companies Law |
| (5) | Independent Director under NASDAQ rules |
| (6) | Appointed by the Israeli founding shareholders |
___________________________
* Nominated by S.B. Israel Telecom
Adam ChesnoffOsnat Ronen was appointed tohas been a director in the Board of Directors of Partner effective as of January 29, 2013Company since December 2009 and was appointed to serve as Chairman of the Board of Directors onin November 20, 2013. Mr. Chesnoff serves as the President and Chief Operating Officer of Saban Capital Group, Inc., responsible for overseeing its investment and business activities, including private equity and public market investments. Mr. Chesnoff is a member of the Board of Directors of Univision Communications Inc., the largest Spanish-language media company in the United States; a member of the Board of Directors of Celestial Tiger Entertainment Ltd., an owner and operator of pay television channels across Asia. Mr. Chesnoff2019. She is also a member of the Board of Commissioners of PT Media Nusantara Citra Tbk Ltd., an Indonesian media company. In addition, Mr. Chesnoff served on the Board of Directors of Univision Communications Inc. from 2007 until January 2018 and as Vice-Chairman of the Board of Directors of ProSiebenSat.1 Media AG from 2003 until 2007. From 2005 to 2010, Mr. Chesnoff served on the Board of Directors of Bezeq Israel Telecommunication Company Ltd. Mr. Chesnoff holds a B.A. in economics and management from Tel-Aviv University and an M.B.A from UCLA’s Anderson School of Business.
Elon Shalev was appointed to the Board of Directors of Partner effective as of January 29, 2013 and was appointed to serve as Vice Chairman of the Board of Directors on November 20, 2013. Mr. Shalev serves as a senior advisor to Saban Capital Group, Inc. Mr. Shalev was the founder of Channel 2 news and from 1993 to1995 served as its Chief Executive Officer. From 1996-1999, he served as Editor in Chief of “Yediot Aharonot”, and from 2000 to 2001 he served as Executive Vice President of Discount Investment Corporation Ltd. of the IDB Group. Mr. Shalev was the co-founder of SHL Telemedicine Ltd. and still serves as a director in the company. Mr. Shalev served in the past on the Board of Directors of Bezeq Israel Telecommunication Company Ltd., DBS Satellite Services (1998) Ltd. (Yes) and Bezeq International Company Ltd. Mr. Shalev holds a B.A. in political science from Tel Aviv University.
Dr. Michael J. Anghel was appointed to the Board of Directors of Partner in March 2006. From 1977 to 1999, he led the Discount Investment Corporation Ltd. (of the IDB Group) activities in the fields of technology and communications. Dr. Anghel was instrumental in founding Tevel, one of the first Israeli cable television operators and later in founding Cellcom. In 1999 he founded CAP Ventures, an advanced technology investment company. From 2004 to 2005, Dr. Anghel served as CEO of DCM, the investment banking arm of the Israel Discount Bank. He has been involved in various technology enterprises and has served on the Board of Directors of various major Israeli corporations and financial institutions including Elron, Elbit, Nice, Gilat, American Israeli Paper Mills, Maalot (the Israeli affiliate of Standard and Poor’s), Hapoalim Capital Markets, Syneron Medical Ltd., Dan Hotels Ltd., the Strauss Group and served as the Chairman of the Center for Educational Technology. HeSecurity Committee. Ms. Ronen currently serves on the Board of Directors of Orbotech Ltd., LumusDiscount Capital Underwriters. She also volunteers as a director of the College for Management (Michlala Le-Minhal). Ms. Ronen serves as one of the founders of Wecheck Ltd. and BiolineRx Ltd. Prior to launching his business career, Dr. Anghelserves on the Board of Directors and as President. Ms. Ronen founded FireWind 01 GP in 2015 and has since served as a full-time member of the Recanati Graduate School of Business Administration of the Tel Aviv University, where he taught finance and corporate strategy. He currently servesits general partner until 2019. Ms. Ronen has also served as Chairman of the Tel Aviv University’s Executive Program. Dr. Anghel holds a B.A. in economicsan advisor to Liquidnet, Inc. from the Hebrew University in Jerusalem and an M.B.A. and Ph.D. in finance both from Columbia University in New York.
Tomer Bar Zeev was appointed2013 to 2015. Until March 20, 2021 Ms. Ronen served on the Board of Directors of Fox-Wizel Ltd. Between 2013 and 2018, Ms. Ronen served on the Board of Directors of Mizrahi Tefahot Bank Ltd. as Head of the Audit Committee. Ms. Ronen also served on the Board of Directors of Perion Networks Ltd. during 2016-2017. Ms. Ronen also served as a volunteer on the Board of Directors of Yissum Research Development Company of the Hebrew University of Jerusalem until December 2018. Previously she served as a General Partner effective as of November 21, 2017. Mr. Bar Zeev is the founder of ironSource, a leading digital content company that offers monetization and distribution solutions for app developers, software developers, mobile carriers, and device manufacturers and hasViola Private Equity from 2008 until 2013. From 1994 to 2007, Ms. Ronen served since 2010in various positions at Bank Leumi Le Israel BM, including as the CEO. Mr. Bar ZeevDeputy Chief Executive Officer of Leumi Partners Ltd. from 2001 to 2007 and as Deputy Head of the Subsidiaries Division of the Leumi Group from 1999 to 2001. Between 2004 and 2007, Ms. Ronen also led the strategic planning, deployment and execution of the Bachar Reform, one of Israel’s largest financial reforms, at Leumi Group. As part of the implementation, Ms. Ronen managed the sale of Leumi’s holdings in mutual, provident and training funds. Ms. Ronen served on the Board of Directors of several portfolio companies of Viola including: Amiad Water Systems Ltd., Orad Hi-tech Ltd., Aeronautics Ltd., Degania Medical Ltd. and Matomy Media Group Ltd. Ms. Ronen holds a B.A.B.Sc. in mathematics and computer science from Tel Aviv University and an M.B.A. from the Interdisciplinary Center Herzliya.Recanati School of Business Administration at Tel Aviv University.
Barry Ben Zeev (Woolfson) was appointed to the Board of Directors of Partner in October 2009. He has been providing strategic business consulting services since 2009. Mr. Ben Zeev served as the Deputy-Chief Executive Officer & Chief Financial Officer of Bank Hapoalim in 2008. He joined the bank in 1976 and served in a variety of senior positions in the branch system and the international division including New York. Mr. Ben Zeev served in the following executive positions prior to becoming Deputy-Chief Executive Officer & Chief Financial Officer of Bank Hapoalim: Executive Vice President & Head of International Operations during the years 2001-2002, Deputy-Chief Executive Officer & Head of International Private Banking during the years 2002-2006, Chairman of Poalim Asset Management in the UK and Ireland during the years 2001-2006, Chairman of Bank Hapoalim Switzerland during the years 2002-2006, Deputy Chairman of the Board of Directors of Signature Bank in New York during the years 2001-2002 and Deputy-Chief Executive Officer and Head of Client Asset Management during the years 2006-2007. Mr. Ben Zeev serves on the Board of Directors of the following companies: Ellomay Capital Ltd., Poalim Asset Management UK Ltd., Ben Zeev (Woolfson) Consultants Ltd., Hiron-Commerce Investments & Mivnei Ta’asiya Ltd., Kali Pension Administration Management Ltd. and Altshuler Shaham Provident and Pension Ltd., as an independent director and head of the investment committee. In addition, he serves on the Board of Trustees of the College for Management (Michlala Le-Minhal).He also served as a member of the Board of Directors of the Tel Aviv Stock Exchange during the years 2006-2007.2006-2007 and on the Board of Directors of Ellomay Capital Ltd., as a member of the investment committee of Manof Bereshit during the years 2009-2013 and as an independent director of Poalim Asset Management UK Ltd. during the years 2011-2018. Mr. Ben Zeev holds a B.A. in economics and an M.B.A both from Tel-Aviv University.
Richard Hunter was appointed to the Board of Directors of Partner in November 2019. He is Chairman of the Board of Directors of Holmes Place International Ltd., serves on the Board of Directors of Delta Galil Industries Ltd., Samelt MCA Ltd. and Trigo Vision, and served as a director at SodaStream International Ltd. until their sale to Pepsi Co. Currently Mr. Hunter is a founding partner in Green Lantern, a private equity fund. Previously he served as CEO of McCann Erickson Israel from 2012 until 2016. During the years 2010 until 2012, Mr. Hunter served as Chief Operating Officer of Shufersal Ltd. and as CEO of 013 Netvision from 2007 until 2010. Mr. Hunter is an accounting and financial expert, holds an LL.B from the College of Management, Tel-Aviv and an M.B.A from INSEAD Business School.
108Roly Klinger was appointed to the Board of Directors of Partner in October 2020. She has served since 2018 as an External Director in Delek Royalties (2012) Ltd., as Chairman of the Audit Committee and the Compensation Committee and a member of the finance committee. Ms. Klinger served from 2017 until 2019 as the Director of Refinance, Vice President Legal Counsel and Company Secretary of IBC Israel Broadband Company (2013) Ltd. Ms. Klinger served as Partner's Chief Legal Counsel and Company Secretary from 1998 until 2012 and in 2012 was appointed as Vice President, Legal & Regulatory Affairs, Business Development and Corporate Secretary until 2015. Ms. Klinger holds an LL.B degree from Tel Aviv University, M.A. in Conflict Research Management and Resolution (Research Track), graduated with honors, from The Hebrew University of Jerusalem. Ms. Klinger attended the Advanced Management Program (AMP).
Jonathan Kolodny was appointed to the Board of Directors of Partner effective May 6, 2018. Dr. Kolodny is a General Partner in ION Crossover Partners, a late-stage technology investment fund, which he joined in March of 2018. He also serves on the Board of Directors of BlueVine Capital, Inc. since 2019, and the Board of Directors of Resident Home, Inc. since 2020. Dr. Kolodny served as the CEO of the Keter Group from 2016 to February 2018. Prior to that, he served from 2013 until 2016 as the CEO of Jardin International Holding. During the years 1994 until 2013, Dr. Kolodny served in various senior positions at McKinsey & Company in their overseas as well as local offices founding their office in Israel in 2000 and elected as a Director (senior Partner) of the Firm in 2007. He also served on the Board of Directors of Sodastream International Ltd. from 2015 until its sale to Pepsico at the end of 2018. Dr. Kolodny received a B.A. in Computer Science summa cum laude from Harvard College and a Ph.D. in Cognitive Neuroscience from the University of Cambridge.
Fred GluckmanMichal Marom-Brikman was appointed to the Board of Directors of Partner effective January 29, 2013. Mr. Gluckman has been employed by Saban Capital Group Inc. ("SCG") since 2003 and served as Senior Vice President and Chief Financial Officer from 2010 to 2016, Executive Vice President and Chief Financial Officer since 2016 and2021. She serves on the Board of Directors of several SCG affiliated non-public companies. In addition, Mr. Gluckman serves as the Chief Financial Officer and Executive Vice Presidenta variety of Saban Capital Acquisition Corp. Mr. Gluckman also currently serves as a member of the Board of Directors of Univision Communications Inc., serving on its audit, finance and compensation committees, and as an alternate member of the Board of Directors of Celestial Tiger Entertainment Ltd. serving on its Audit Committee. Mr. Gluckman also serves on the national and west region board of Friends of thecompanies traded both in Israel Defense Forces, serving on the executive, audit and finance committees of the national board. Prior to joining SCG, Mr. Gluckman performed international and domestic tax advisory work in the London and Southern California practices of Deloitte. Mr. Gluckman is an officer and a member of Board of Directors of the Saban Family Foundation and the Cheryl Saban Self-Worth Foundation for Women and Children. Mr. Gluckman holds a BS in Economics from Wharton Business School of the University of Pennsylvania and is a CPA.
Barak Pridor was appointed to the Board of Directors of Partner in February 2016. Mr. Pridor served from 2000 until 2011 as CEO of ClearForest, a software startup that was acquired by Thomson Reuters in 2007. Following the acquisition, Mr. Pridor continued to serve as CEO of ClearForest as well as an Executive Vice President at Thomson Reuters until 2011. Mr. Pridor serves as Chairman ofabroad including, Halman Aldubi Investment House Ltd,, OPC Energy Ltd., Panaxia Pharmaceutical Industries Ltd., Dan Transportation and The Moinian Group. Ms. Marom-Brikman served in the Board of Directors of Applicaster Ltd.,past as a director on the Board of Directors of: Playbuzz Ltd, Beachbumin various companies including: Israel Union Bank Ltd., Origami Logic Inc.Arko Holdings Ltd., BiondVax Pharmaceuticals Ltd., and Sosa TlvElectreon Wireless Ltd. HeMs. Marom-Brikman is also an observer on the Board of Directors of SimilarWeb Ltd. Mr. Pridora certified public accountant in Israel. Ms. Marom-Brikman holds a B.Sc.B.A in MathematicsBusiness Management and Computer ScienceEconomics specializing in accounting from Tel Aviv University and a M.B.A. from INSEAD Business School.
Ms. Osnat Ronen was appointed to the Board of Directors of Partner in December 2009. Ms. Ronen founded FireWind 01 GP in 2015 and has since served as its general partner. Ms. Ronen has also served as an advisor to Liquidnet, Inc. from 2013 to 2015. She previously served as a General Partner of Viola Private Equity from 2008 until 2013. From 1994 to 2007, Ms. Ronen served in various positions at Bank Leumi Le Israel BM, including as the Deputy Chief Executive Officer of Leumi Partners Ltd. from 2001 to 2007 and as Deputy Head of the Subsidiaries Division of the Leumi Group from 1999 to 2001. Between 2004 and 2007, Ms. Ronen also led the strategic planning, deployment and execution of the Bachar Reform, one of Israel’s largest financial reforms, at Leumi Group. As part of the implementation, Ms. Ronen managed the sale of Leumi’s holdings in mutual, provident and training funds. Ms. Ronen currently serves on the Board of Directors of Mizrahi-Tefahot Bank Ltd., Fox-Wizel Ltd. and Perion Network Ltd. She also volunteers as a director of the College forof Management (Michlala Le-Minhal) and Yissum Research Development Company of the Hebrew University of Jerusalem. Ms. Ronen served on the Board of Directors of several portfolio companies of Viola including: Amiad Water Systems Ltd., Orad Hi-tech Ltd., Aeronautics Ltd., Degania Medical Ltd. and Matomy Media Group Ltd and until December 2017 as a director of Perion Networks Ltd. Ms. Ronen holds a B.Sc. in mathematics and computer science from Tel Aviv UniversityAcademic Studies and an M.B.A.M.A in Finance from the Recanati SchoolBaruch College of Business Administration at Tel Aviv University.Management, NYU.
Yoav Rubinstein was appointed to the Board of Directors of Partner effective as of January 29, 2013. Mr. Rubinstein joined SHL Telemedicine Ltd. as Senior Vice President, Head of Global Business Development in March 2012. Previously, Mr. Rubinstein served as an investment professional at Apax Partners for nine years and as Senior Advisor to Saban Capital Group, Inc. Mr. Rubinstein holds a B.A. in business administration from the Interdisciplinary Center in Herzliya.
Arieh Saban was appointed to the Board of Directors of Partner effective as of January 29, 2013. Mr. Saban has served since 2010 as Chairman of the Board of Directors of Saban Brands Israel Ltd. From 1983 until 2002 Mr. Saban served as the CEO of Israel Audio-Visual Corporation, a media distribution, licensing and merchandising agency that he founded. From 2000 until 2002 he served as Chairman of the Board of Directors of Fox Kids Israel, a joint venture with Fox Kids Europe. From 2005 until 2012, Mr. Saban served on the Board of Directors of the following companies: Keshet Broadcasting Ltd., Pelephone Communications Ltd., DBS Satellite Services (1998) Ltd. (Yes) Bezeq Israel Telecommunication Company Ltd. and Bezeq International Company Ltd.
Yehuda Saban was appointed to the Board of Directors of Partner in April 2015. Mr. Saban served between 2011- mid 2015 as Vice President Economics & Regulation and FLNG (Floating Liquefied Natural Gas) manager at Delek Drilling & Avner oil exploration. Previously, Mr. Saban served over 6 years in various capacities with the budget department of the Ministry of Finance as Manager of the Telecommunications and Tourism Unit, Manager of the Budget and Macroeconomics unit and as an economist in the Energy unit. During those years, Mr. Saban was also an active partner in a number of committees and authorities in the energy, telecommunications and infrastructure fields. Mr. Saban serves on the Board of Directors of Israel Opportunity Energy Resources LP and as Chairman of its Compensation and Audit Committee as of June 2015. Mr. Saban also serves as manager of Israeli operations and EVP of Business Development at Ellomay Capital Ltd. Mr. Saban holds a B.A. in Economics & Business Management (graduated with honors) and an M.B.A specializing in Financing, both from the Hebrew University in Jerusalem.
Arie (Arik) SteinbergYossi Shachak was appointed to the Board of Directors of Partner in January 2012.November 2019. Mr. Steinberg serves onShachak is a consultant to boards of directors, and a board member of public and private companies including, the Board of Directors of Leumi PartnersAzrieli Group Ltd., Tefron Ltd., Southern Properties Ltd. and as the Chairman of the Audit Committee. He also serves on the Board of Trustees of the Academic College of Tel-Aviv-Yaffo. Mr. Steinberg served from 2006-2010 as Chairman of the Board of Directors of Psagot Investment House,Emilia Development (O.F.G) Ltd., Mr. Shachak served as well as other companies in the Psagot Group, leading and overseeing the business strategiesPresident of the Psagot Group. Mr. Steinberg servedInstitute of Certified Public Accountants from 1988 to 1992 and as Chairmana director on behalf of York Capital. In addition, he served on the Board of Directors ofpublic at the Tel-Aviv Stock Exchange.Exchange from 1980 to 1986 and from 2000 to 2006. Mr. Steinberg also served between 1999-2003 as Chief Executive OfficerShachak is a certified public accountant and is a graduate of Ilanot Batucha Investment Houseaccounting from the IDB Group, as well as a director of Maalot (the Israeli affiliate of Standard and Poor’s). Prior to that, Mr. Steinberg served as Managing Director of Etgar- Portfolio Management Trust Co. owned by Bank Mizrahi. He also served on the Advisory Boards of Mobileye Technologies and Novotrans Group SA. Mr. Steinberg studied economics at Tel-Aviv University.Hebrew University in Jerusalem.
Ori Yaron was appointed to the Board of Directors of Partner by S.B. Israel Telecom in May 2014. Mr. Yaron practices law and manages Ilan Yaron Law Offices that specializes in the areas of insurance and torts. Mr. Yaron served from 2010 until 2016 as a member of the Board of Directors of the Geophysics Institute and served from 2006 until 2007 as a member of the Board of Directors of Mekorot Development & Enterprise and from 2011 until 2014 as a member of the Board of Directors of Hozei Israel Ltd. Mr. Yaron holds a B.A. in economics and an LL.B. both from Tel-Aviv University and is a member of the Israeli Bar Association.
6A.2 SENIOR MANAGEMENT
Below is a list of the Senior Management of the Company as of the date of this annual report:Annual Report:
Name of Officer | | Age | | Position |
| | | | |
Isaac Benbenisti | | 5356 | | Chief Executive Officer |
Yuval Keinan | | 4346 | | Deputy Chief Executive Officer |
Tamir Amar*Amar | | 4447 | | Chief Financial Officer & VP Fiber-Optics |
Liran Dan | | 42 | | Vice President Strategy & Business Development |
Yaron Eisenstein | | 48 | | Vice President Technologies & IT Division |
Snir Niv* | | 34 | | Vice President Regulations Division |
Einat Rom | | 55 | | Vice President, Human Resources & Administration |
Yakov Truzman | | 50 | | Vice President Business & Sales Division |
Hadar Vismunski-WeinbergVismunski-Weinberg** | | 4447 | | Vice President, Chief Legal Counsel & Corporate Secretary |
Einat Rom | | 52 | | Vice President, Human Resources & Administration |
Zvika Shenfeld | | 45 | | Vice President, Private & Retail Division |
Terry Yaskil** | | 44 | | Vice President Marketing & Growth Engines Division |
Liran Dan | | 39 | | Vice President Strategy & Business Development |
Raz Bartov | | 40 | | Vice President Technologies & IT Division |
Noach Hacker | | 36 | | Vice President Regulations and Fiber Division |
Yakov TruzmanYaskil | | 47 | | Vice President BusinessMarketing & Customer Service Division |
*Effective February 1, 2018, Tamir AmarNovember 2020, Snir Niv replaced David (Dudu) Mizrahi who concluded his term as the Company's Chief Financial Officer on December 26, 2017.
** Effective August 15, 2017, Terry Yaskil replaced Atara Litvak ShachamNoach Hacker as the Company's Vice President Marketing & Growth Engines Division.
Regulation Division
** Hadar Vismunski-Weinberg is expected to be departing from the Company in the coming months.
Isaac Benbenisti was appointed as Chief Executive Officer effective July 1, 2015 after having served as the Deputy CEO of Partner from November 2014.2015. Prior to joining the Company, Mr. Benbenisti served from 2007 until 2014, as the CEO of Bezeq International Ltd. From 2003 through 2006, Mr. Benbenisti served as a director and C.E.O of the System Group and Distribution Channels Division at Hewlett-Packard (HP). Prior to that, he held a variety of managerial positions, including as the CEO of CMS Compucenter Ltd. Mr. Benbenisti holds a B.A. in economics and an M.B.A specializing in finance and marketing, both from the Hebrew University of Jerusalem.
Yuval Keinan was appointed as Deputy CEO effective January 1, 2016, after having served from 2008 until 2015 as the Vice President and CTO of Bezeq, the Israel Telecommunications Corp., Ltd. Prior to that, he served for three years as Vice President technology division, engineering & IT and CTO of Bezeq International Ltd. Mr. Keinan holds a B.Sc. in computer science from Mercy College.
Tamir Amar was appointed as Chief Financial Officer of Partner effective February 1, 2018.2018 and in June 2020 also assumed the position of Vice President Fiber-Optics. Prior to joining the Company, Mr. Amar served since 2013 as the CEO of Vaporjet ltd., a leading and global manufacturer of nonwoven hydroentangled spunlace goods. From 2005 until 2013 he served as the CFO of Raval ACS Ltd., a global public company that fully owns 12 subsidiaries in Israel and abroad and develops, manufactures and sells unique products for the global automotive industry. Mr. Amar holds a B.A. in Economics and Accounting and an M.B.A. specializing in finance from Ben Gurion University.
Hadar Vismunski-WeinbergLiran Dan was appointed as Vice President Strategy and Business Development in October 2015, after having served from 2012 until 2015 as the Director of the Public Diplomacy and Media at the Prime Minister’s office. Prior to that, he held a series of executive positions at Channel 2 News. In his last position, as the V.P. Digital Media, he established the digital desk of Channel 2 News. Mr. Dan holds an Executive M.B.A. degree from Tel-Aviv University, and a B.A. in political science and history from Bar-Ilan University.
Yaron Eisenstein was appointed as Vice President Chief Legal CounselInformation Technologies in August 2019 after having previously served as Head of the Digital and Corporate Secretary effective March 16,Products Department since joining the Company in 2017. Prior to joining the Company, Ms. Vismunski-WeinbergMr. Eisenstein served since 2013from 2016 until 2017 as Vice PresidentCTO and General Counsel- Global R&Dco-founder of Teva Pharmaceutical Industries Ltd. ("Teva"). Between 2007binj.tv and 2013. Ms. Vismunski-Weinbergled the creation of a video platform to create advanced live broadcasts. Previously, he served as Director of Services and Products department in other senior positionsthe technologies division at Teva. Ms. Vismunski-Weinberg holdsBezeq and was responsible for the advancement and development of the company’s digital products, systems development and VoIP services and the BI and data worlds. Mr. Eisenstein has an LL.BM.B.A. from the Hebrew University in Jerusalem.and an M.A. from the Michlala l’Minhal, Rishon L’Zion and Baruch College, New York.
Einat Rom, was appointed as Vice President of Human Resources effective November 1, 2012 after having served as Vice President of Private Customers Division since December 1, 2010. Prior to joining Partner, Mrs. Rom served as Vice President of Service in Better Place Company and prior to that, she served as Vice President of Private Division in Bezeq The Israel Telecommunication Corp. and as Vice President of Service in Pelephone Communications Ltd. Mrs. Rom holds a B.A. in social science from Haifa University.
Zvika ShenfeldSnir Niv was appointed as Vice President Private & Retailof Regulation in October 2020. Before joining Partner he lead for the past 7 years significant reforms in a variety of areas in the Budget Department of the Ministry of Finance, such as, the reform of the ports, the dairy sector, the electricity sector and in the Mekorot company. In his last position, he was managing the country’s budgets for transportation, energy, water and agriculture. Snir has a B.A in Economics with honors (Magna Cum Laude) and a M.B.A. with honors (Summa Cum Laude) in the excellence program at the Hebrew University in Jerusalem.
Yakov Truzman was appointed in May 2019 as Vice President Business and Sales Division, after having served prioras Vice President Business Division from March 2018. Prior to that, Mr. Truzman served as Vice President Business Division at Bynet Data Communications from 2016 until joining the Company. Prior to that, Mr. Truzman served from 2011 until 2015 as the Vice President of Marketing and Content Division, the Acting Head of Marketing, Content and Growth Engines Division and as the deputySales of the head ofHOT Group. During the division since joiningyears 2001 until 2011, Mr. Truzman served in several managerial positions in the Company in March 2012. From 2009 to 2012 he served as the marketing, strategy and business development at Newpan, an electronic home and small appliances distributor and retail chain. From 2006 until 2009, Mr. Shenfeld held various positions at the EurocomCellcom Group, including VP marketing and Business development at Internet Gold and Deputy CEOdepartment manager of MSN Israel. From 2003 until 2006 he served as Marketing Manager of AIG Israel. From 1999 until 2003 he held various economic and marketing positions at 013 Barak ILD.business customers. Mr. ShenfeldTruzman holds a B.A. in behavioral sciences, management and economics from Ben Gurion University.
Hadar Vismunski-Weinberg was appointed as Vice President, Chief Legal Counsel and logistics from Bar Ilan UniversityCorporate Secretary effective March 16, 2017. Prior to joining the Company, Ms. Vismunski-Weinberg served since 2013 as Vice President and General Counsel- Global R&D of Teva Pharmaceutical Industries Ltd. ("Teva"). Between 2007 and 2013 Ms. Vismunski-Weinberg served in other senior positions at Teva. Ms. Vismunski-Weinberg holds an M.B.A.LL.B from the ONO academic center.Hebrew University in Jerusalem.
Terry Yaskil was appointed as Vice President of Marketing and Customer Service Division effective June 2020, after having served as Vice President of Marketing since joining the Company in August 2017. Before joining Partner Ms. Terry Yaskil served as Deputy to the CEO of Zap. Terry managed the customer services division at the Zap Group which was responsible for service and sales, and led the group’s entry into Big Data worlds. Prior to that, Ms. Yaskil served for four years as Vice President Marketing and Advertising for Psagot Investment House Ltd. During the years 2006-2011, Ms. Yaskil served in several senior positions in the Tnuva Group including Manager of the central marketing division of the food corporation and Head of the Group’s headquarters. During the years 2001-2006, Ms. Yaskil served as manager of business marketing at Cellcom. Ms. Yaskil holds a B.A. in behavioral sciences and an M.A. in cognitive psychology, both from Ben Gurion University.
Liran Dan was appointed as Vice President Strategy and Business Development in October 2015, after having served from 2012 until 2015 as the Director of the Public Diplomacy and Media at the Prime Minister’s office. Prior to that, he held a series of executive positions at Channel 2 News. In his last position, as the V.P. Digital Media, he established the digital desk of Channel 2 News. Mr. Dan holds an Executive M.B.A. degree from Tel-Aviv University, and a B.A. in political science and history from Bar-Ilan University.
Raz Bartov was appointed as Vice President Technologies and IT in May 2016 after have served in the Company over the years in various managerial positions and performed a broad spectrum of roles in the various technological units in the IT and engineering departments. Within the scope of his positions, Mr. Bartov took part in leading significant business and technological courses of action in the Company. Prior to joining the Company, Mr. Bartov was employed by Amdocs. Mr. Bartov holds a B.Sc. in computer science from Tel-Aviv University, and an M.B.A. from Ben-Gurion University.
Noach Hacker was appointed as Vice President, Regulation effective September 2016 and in January 2018, was appointed as Vice President, Regulation and Fiber Division. Prior to joining the Company, Mr. Hacker served for over nine years in various capacities with the budget department of the Ministry of Finance as Senior Deputy to the Head of Budgets-Security Affairs, Security Budget Coordinator, Coordinator on the Infrastructure Team and as the Liaison of the Water Sector. Mr. Hacker holds a combined B.A in political science, economics and interdisciplinary studies from Bar Ilan University and an M.A. in political science from Haifa University.
Yakov Truzman was appointed as Vice President Business Division effective March 2018, after serving as Vice President Business Division at Bynet Data Communications from 2016 until joining the Company. Prior to that, Mr. Truzman served from 2011 until 2015 as the Vice President of Sales of the HOT Group. During the years 2001 until 2011, Mr. Truzman served in several managerial positions in the Cellcom Group, including department manager of business customers. Mr. Truzman holds a B.A. in behavioral sciences, management and economics from Ben Gurion University.
Appointments and Resignations
None of the above directors, except for Mr. Arieh Saban, who is the brother of Mr. Haim Saban, the owner and CEO of Saban Capital Group, has any family relationship with any other director or senior manager of the Company. None of the above members of senior management has any family relationship with any other director or senior manager of the Company.
Mr. Arik Steinberg resigned from our Board of Directors effective February 1, 2021.
6B. Compensation
The terms of employment of the CEO are approved by the compensation committee, the Board of Directors and the general meeting of shareholders (by a special majority) and must comply with the Company’s Compensation Policy for Office Holders (as this term is defined in Item 6C.86C.7 below) (except for certain exceptions, as set by the Israeli Companies Law). The “special majority” requires the approval of a majority of the Company’s shareholders participating at the general meeting and voting on the matter and at least one of the following conditions: (i) such majority includes a majority of the votes cast by shareholders who are not controlling parties (as defined in the Israeli Companies Law) in the Company and who do not have a personal interest in the resolution, and who are present and voting (abstentions are disregarded), or (ii) the votes cast against the resolution by shareholders who are not controlling parties and who do not have a personal interest in the resolution, who are present and voting, constitute two percent or less of the outstanding voting power in the Company. The terms of employment of other senior management (Office Holders) are approved by the compensation committee and the Board of Directors, and must comply with the Company’s Compensation Policy (except for certain exceptions, as set by the Israeli Companies Law). See “Item 6C.6b6C.5c COMPENSATION COMMITTEE”. Senior management is generally appointed by the CEO with the approval of the Board of Directors for an indefinite term of office and may be removed by the CEO with the approval of the Board of Directors at any time.
Pursuant to the provisions of the Israeli Companies Law, the compensation policy of a company shall be submitted for the approval of the general meeting of shareholders, at least once every three years. years. We first adopted a compensation policy that sets forth the guidelines and framework for the mode of compensation of the Company’s Office Holders following the approval of the Company’s shareholders, at the extraordinary general meeting of shareholders, held on October 17, 2013 (the “Former Compensation Policy”). A new Compensation Policy was approved by the Company’s shareholders at the annual general meeting of shareholders ("AGM") held on September 28, 2016October 29, 2019 and was amended by the extraordinary meeting of shareholders held on March 18, 2020 and by the annual general meeting of shareholders held on October 29, 2020 (the “Compensation Policy”). The Compensation Policy sets forth the principles and procedures for determining Office Holders’ compensation, including ongoing remuneration, bonuses (including annual bonuses, severance bonuses and special bonuses), equity compensation, indemnification, insurance and release. The Compensation Policy revises the Former Compensation Policy with respect to various matters and issues that needed to be updated and amended since the adoption of the Former Compensation Policy, due to changes in market practices since then, as well as adaption to legislative changes. See Exhibit 15.(b).1.
According to the Compensation Policy, annual bonus payments for our senior management are determined with respect to a given year based on targets set for the Company as a whole, targets set for each of the Company divisions as well as on personal evaluations. The targets for the CEO and the senior management are set by the compensation committee and the Board of Directors generally in accordance with the overall Company objectives. Upon the approval of the Company’s annual results, bonus payments are determined based on the extent to which the Company and division targets have been met, as well as on the personal evaluation of each Office Holder at the discretion of the compensation committee and the Board of Directors, in light of the recommendations made by the Chairman of the Board of Directors with respect to the CEO, and, in light of recommendations made by the CEO, with respect to senior management reporting to the CEO.
Compensation for senior management may also be provided in the form of equity- basedequity-based compensation which includes stock options to purchase our ordinary shares and restricted shares. In 20172020, options were granted to our senior management under the 2004 Amended and Restated Equity Incentive Plan (as this term is defined in Item 6E.2 below) to purchase up to 467,780464,142 of our ordinary shares at a weighted average exercise price of NIS 19.7413.94 (US$ 4) per option with some of the options vesting at the earliest in February 2018.2021. These options will expire at the latest by September 2023.October 2026. In addition, in 2017, 200,8882020, 180,873 restricted shares were granted to our senior management under the 2004 Amended and Restated Equity Incentive Plan, with some of the restricted shares vesting at the earliest in February 2018.January 2020. For more information, see “Item 6E.2 Equity Incentive Plan”.
The aggregate compensation paid, and benefits in kind granted to or accrued on behalf of all our directors and senior management for their services in all capacities to the Company and its subsidiaries during the year ended December 31, 2017,2020, was approximately NIS 3531 million (US$ 10 million). This amount included approximately NIS 3 million (US$ 0.9 million) set aside or accrued to provide pension and retirement benefits on behalf of all our senior management during the year ended December 31, 2017.2020.
CEO Compensation
Mr. Isaac Benbenisti has served as the CEO of the Company since July 1, 2015. The terms of his employment were approved by the Compensation Committee, the Board of Directors and the general meeting of shareholders of the Company. Until December 1, 2015, the CEO was employed though an agreement with a private company, fully owned by him, for the provision of management services to the Company. Following a resolution of the compensation committee to make an immaterial change to the CEO's terms of employment, the CEO's employment format was changed to that of a company employee ("Employment Agreement"). The engagement in the Employment Agreement is for an unlimited time period with the right of each party to terminate upon 6 months prior written notice. In addition to the advance notice period, upon termination, the CEO will be entitled to a 6 month6-month period during which he will receive a salary without being required to provide services.
The CEO's monthly salary (gross) will beis in an amount of NIS 150 thousand, linked to the CPI as of the index June 2015 (at the end of 20172020 the monthly salary (gross) was NIS 150.3 thousand)152.5 thousand). In addition, the CEO will beis entitled to reimbursement for the cost of vehicle use and maintenance as well as accepted related terms that are usually granted to the other office holders in the Company including telephone, food, cellular phone and other benefits in accordance with the Company's compensation policy and procedures (including indemnification, release and insurance arrangements as customary in the Company) and social benefits including sick days, vacation and allocations to plans and funds.
The annual bonus of the CEO is based on two elements: (a) 90% - Company targets (see below) while using the main performance indices determined by the Compensation Committee and Board of Directors after approval of the Company's annual budget, and (b) 10% - CEO performance evaluation for that year by the Compensation Committee and Board of Directors, based on qualitative and quantitative criteria.
The minimum criterion for receiving the annual financial bonus with respect to the CEO, as of the beginning of his said tenure as CEO, is that the Company achieved as least 80% of the Company's targets for the relevant year and in addition, that the total EBITDA shall not have decreased by more than 40%35% of the EBITDA for the year preceding the year in respect of which the bonus is payable.
With respect to the amount of the annual financial bonus, tiers were set to calculate the amount of the bonus according to the CEO's global achievement rate with respect to all of the elements of the annual bonus (a weighted score of the company targets and an evaluation of the CEO's performances), as follows: achievement at a rate lower than 80% will not entitle the CEO to an annual bonus; achievement at a rate between 80%-120% will entitle the CEO to 80%-120% of the annual bonus budget; achievement at a rate that exceed 120% will entitle the CEO to 120% of the annual bonus budget. For the year ending December 31, 2017,2020, the annual bonus budget (100%) for the period during Mr. Benbenisti's tenure as CEO was approximately NIS 1,5031,678 thousand. These sums are linked to the CPI.
The CEO's Company targets for the year 20172020 were determined by the Board of Directors of the Company in January 2017February 2020 based on the annual work plan of the Company for the year. They include sevenincluded eight individual targets: (1) Company EBITDA target with a weight of 30% of the Company's targets (2017(2020 achievement rate: 123%, the target and the achievement rate were calculated according to the previous accounting policy without the impact of IFRS 15 adoption)101%); (2) Free Cash flow target from the ongoing business with a weight of 20%15% of the Company's targets (2017(2020 achievement rate: 186%137%); (3) Net post-paidCellular ARPU Base (2020 achievement rate: 79%) and subscriber target (2020 achievement rate: 200%) with a weight of 15% of the Company's targets; (4) Sale of equipment profits target with a weight of 5% of the Company's targets (2020 achievement rate: 91%); (5) Fixed line income target with a weight of 5% (2020 achievement rate: 99%); (6) TV combined index target ARPU (2020 achievement rate: 97%) and subscriber target (2020 achievement rate: 75%) with a weight of 10% of the Company's targets; (7) Fiber combined index ARPU (2020 achievement rate: 100%) and subscriber target with a weight of 10% of the Company's targets (2017(2020 achievement rate: 37%105%); (4) Cellular ARPU Base(8) Reducing customer complaint target with a weight of 10% of the Company's targets (2017(2020 achievement rate: 101%); (5) TV target (including budget, quality of service and other operational index targets) with a weight of 10% of the Company's targets (2017 achievement rate: 101%); (6) Quality of sales and service with a weight of 10% of the Company's targets (2017 achievement rate: 59%) and (7) Fixed-line service target (meet quality of service targets and other operational index targets that were determined) with a weight of 10% of the Company's targets (2017 achievement rate:101%79%).
With respect to the above Company targets, a threshold and upper limit for achieving the target were determined as follows: achievement at a rate lower than 20% of the target will not allow eligibility for a bonus for that criteria; achievement at a rate between 20% - 200% of the target will allow eligibility at a rate of 20% - 200% for that criteria; achievement at a rate above 200% will allow eligibility of 200% for that criteria. With regard to the Company EBITDA target, an achievement at a rate lower than 80% of the target will not allow eligibility for a bonus for that criteria.
The global achievement rate of the CEO of all of the elements of the annual bonus for 20172020 was 114%102%.
On March 28, 2018,24, 2021, the Board of Directors examined the CEO's achievement of targets and in accordance with the achievement of the said targets, the bonus that will be granted to the CEO for 2017,2020, is in the amount of NIS 1,8041,707 thousand.
CEO Equity Incentive Grant
In accordance with the resolutions of the Compensation Committee,compensation committee, Board of Directors and annual meeting of shareholders, Mr. Benbenisti was granted in 2015, in accordance with the Company's equity incentive plan,Equity Incentive Plan, 1,471,971 options (non-tradeable) of the Company, at an exercise price of NIS 18.08, that constitutes a premium of 5% on the average share price of the Company on the Tel-Aviv Stock Exchange, during the 30 days preceding the grant date. Mr. Benbenisti's granted options vestvested in three tranches: 33% of the entire amount of the options as of October 28, 2016, 33% of the entire amount of options as of October 28, 2017 and the balance of the options as of October 28, 2018. Mr. Benbenisti's eligibility to exercise each of the above detailed tranches will be available to him until October 27, 2021. The fair value of the options as of the grant date according to Black-Scholes model was NIS 8 million.
In addition, in accordance with the resolutions of the compensation committee, Board of Directors and annual meeting of shareholders, Mr. Benbenisti was granted in October 29, 2018, a new equity incentive grant at the value of NIS 6.8 million according to Black-Scholes model, comprised of 50% of the value in options of the Company (non-tradeable) (NIS 3.4 million) and 50% of the value in restricted shares (NIS 3.4 million).
The new equity incentive grant is be comprised of 4 tranches, for a vesting period of 4 years, 1 year for each tranche. The options will be exercisable during a 6-year period as of their vesting date, with an exercise price of NIS 18.86 that constitutes a premium of 5% on the average share price of the Company on the Tel-Aviv Stock Exchange during the 30 days preceding the date of approval by the AGM (October 28, 2018).
With respect to the restricted shares of the CEO's new equity incentive grant, pursuant to the requirement of the Company’s Compensation Policy regarding restricted shares, in addition to the vesting period, performance targets were defined and constitute a precondition to vesting as follows (“Performance Targets”):
First tranche of the restricted shares - achievement of at least 80% of the Company targets in 2019;
Second tranche of the restricted shares - achievement of at least 80% of the Company targets in 2020;
Third tranche of the restricted shares - achievement of at least 80% of the Company targets in 2021;
Fourth tranche of the restricted shares - achievement of at least 80% of the Company targets in 2022.
The vesting conditions for the restricted shares with respect to the Performance Targets also include a mechanism for deferring vesting to the following years in the event of a failure to fulfill a criterion, provided that there is average achievement of the Performance Targets during the vesting period cumulatively.
If the Performance Targets are not achieved by the deadline defined for each tranche as stated above (including the deferred vesting), then the CEO will not be eligible for the restricted shares of that relevant tranche and they will be returned to the Company and classified as treasury shares.
Immaterial amendments to the terms of employment of the CEO
During 2017, the Compensation Committee approved within its powers, in accordance with the Company's Compensation Policy for Office Holders, and the Companies Law, two immaterial amendments to the terms of employment of the CEO. These amendments included an amendment to the cost of the vehicle maintenance component and effective from the year 2018 thereafter, also an amendment to the annual bonus budget (100%), from NIS 1,503 thousand (10 monthly salaries) to NIS 1,653 thousand (11 monthly salaries). The cumulative annual cost of the change with respect to these amendments is 3.6% (in real terms) relative to the cost of all the terms of employment of the CEO for that reporting year.
In June 2019, the Compensation Committee approved within its powers, in accordance with the Company's Compensation Policy for Office Holders, and the Companies Law, an immaterial amendment to the terms of employment of the CEO. This amendment included an amendment to the vehicle class for the CEO.
Highest Office Holder Compensation
| A. | The table below sets forth information regarding compensation on an individual basis for the five Office Holders with the highest compensation for the year 2020. |
The table below sets forth information regarding compensation on an individual basis for the five Office Holders with the highest compensation for the year 2017.
Details of the Compensation Recipient |
| Compensation for services (the compensation amounts are displayed in terms of cost for the Company) (NIS thousands)
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| Other compensation & vehicle (the compensation amounts are displayed in terms of cost for the Company) (NIS thousands) | |
| Total (NIS thousands) |
Name | | Position | | Payroll & Related expenses | | | Annual Bonus | | | Share-based payments | | | Other | | | | |
Isaac Benbenisti | | Chief Executive Officer | | | 2,458 | | | | 1,707 | | | | 1,872 | (1) | | | 194 | (2) | | | 6,231 | (3) |
Yuval Keinan | | Deputy Chief Executive Officer | | | 1,818 | | | | 1,200 | | | | 766 | (4) | | | 128 | (2) | | | 3,912 | |
Tamir Amar | | Chief Financial Officer&VP Fiber-Optics | | | 1,488 | | | | 611 | | | | 388 | (5)(8) | | | 194 | (2) | | | 2,681 | |
Yakov Truzman | | Vice President Business & Sales Division | | | 1,306 | | | | 515 | | | | 424 | (6)(8) | | | 127 | (2) | | | 2,372 | |
Hadar Vismunski-Weinberg | | Legal Counsel & Corporate Secretary | | | 1,092 | | | | 413 | | | | 734 | (7)(8) | | | 128 | | | | 2,367 | |
Details of the Compensation Recipient | | Compensation for services (the compensation amounts are displayed in terms of cost forthe Company) (NIS thousands) | | | Other compensation & vehicle (the compensation amounts are displayed in terms of cost for the Company) (NIS thousands) | | | Total (NIS thousands) | |
Name | | Position | | Payroll & Related expenses | | | Annual Bonus | | | Share based payments | | | Other | | | | |
Isaac Benbenisti | | Chief Executive Officer | | | 2,368 | | | | 1,804 | | | | 2,223(1) (11) | | | | 141(2) | | | | 6,536 | (3) |
Yuval Keinan | | Deputy Chief Executive Officer | | | | | | | | | | | 980(4) (11) | | | | 832(5) | | | | | |
Noach Hacker | | Vice President Regulations and Fiber Division | | | 1,022 | | | | 425 | | | | 1,173(6) (11) | | | | 513(5) | | | | 3,133 | |
Hadar Vismunski-Weinberg | | Vice President, Chief Legal Counsel & Corporate Secretary | | | 920 | | | | | | | | 1,231(7) (11) | | | | 349(8) | | | | | |
Einat Rom | | Vice President, Human Resources & Administration | | | 1,142 | | | | | | | | 893(9) (11) | | | | 103(10) | | | | | |
(1) | In 2014, 137,200 share options were granted to Mr. Isaac Benbenisti in his capacity as Deputy CEO at the time, with a vesting period of up to four years. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.8 million. Mr. Isaac Benbenisti waived these options and they were cancelled when the terms of service and employment of Mr. Benbenisti as the Company's CEO were approved.
In 2015, 1,471,971 share options were granted to Mr. Isaac Benbenisti, in his capacity as the Company's CEO with a vesting period of up to three years at an exercise price of NIS 18.08 that constitutes a premium of 5% on the average share price of the Company on the Tel-Aviv Stock Exchange, during the 30 days preceding the grant date. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 8 million. Mr. Benbenisti's granted options vest in three tranches: 33% of the entire amount of the options as ofon October 28, 2016, 33% of the entire amount of options as ofon October 28, 2017 and the balance of the options as ofon October 28, 2018. Mr. Benbenisti's eligibility to exercise each of the above detailed tranches will be available to him until October 27, 2021. In 2018, 810,027 share options and 194,064 restricted shares were granted to Mr. Isaac Benbenisti, in his capacity as the Company's CEO with a vesting period of up to four years. The exercise price of the options is NIS 18.86 which constitutes a premium of 5% on the average share price of the Company on the Tel-Aviv Stock Exchange, during the 30 days preceding the grant date. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 3.4 million and the fair value of the restricted shares was approximately NIS 3.4 million. Mr. Benbenisti's options and restricted shares vest in four tranches: 25% of the entire amount on October 28, 2019, 25% of the entire amount on October 28, 2020, 25% of the entire amount on October 28, 2021 and the balance on October 28, 2022. Mr. Benbenisti's eligibility to exercise each of the share options above detailed tranches will be available to him until October 27, 2024. With respect to the restricted shares granted to the CEO in 2018, performance targets which constitute a precondition to vesting and a mechanism for deferring vesting were defined as further detailed above under CEO Equity Incentive Grant. |
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(2) | Represents“Other compensation” includes: expenses for retirement that were accumulated during the reporting period of this Annual Report and will be paid only upon retirement and vehicle expenses only.expenses. |
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(3) | For further information regarding the CEO's compensation see above under CEO Compensation. |
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(4) | In 2016, 269,000 share options and 114,000 restricted shares were granted to Mr. Yuval Keinan with a vesting period of up to three years.years and subject to the fulfillment of performance targets. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 1.3 million and the fair value of the restricted shares was approximately NIS 2 million. In 2019, 277,134 share options and 86,889 restricted shares were granted to Mr. Yuval Keinan with a vesting period of up to three years and subject to the fulfillment of performance targets. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.9 million and the fair value of the restricted shares was approximately NIS 1.4 million. |
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(5) | “Other compensation” includes: expenses for retirement thatIn 2018, 245,887 share options and 79,118 restricted shares were accumulated during the reportinggranted to Mr. Tamir Amar with a vesting period of this annual reportup to three years and will be paid only upon retirement, vehicle expenses and a special grant accordingsubject to article 5.5.3the fulfillment of performance targets. The theoretical fair value of the Company's Compensation Policy for Office Holders.
share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.9 million and the fair value of the restricted shares was approximately NIS 1.4 million. |
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(6) | In 2016, 198,8912018, 272,968 share options and 78,46286,451 restricted shares were granted to Mr. Noach HackerYakov Truzman with a vesting period of up to three years.years and subject to the fulfillment of performance targets. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.9 million and the fair value of the restricted shares was approximately NIS 1.4 million. |
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(7) | In 2017, 147,352 share options and 64,183 restricted shares were granted to Ms.Mrs. Hadar Vismunski-Weinberg with a vesting period of up to three years.years and subject to the fulfillment of performance targets. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.9 million and the fair value of the restricted shares was approximately NIS 1.4 million. |
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(8) | "Other compensation" includes: expenses for retirement that were accumulated during the reporting period of this annual report and will be paid only upon retirement and vehicle expenses.
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(9) | In 2014, 68,6002020, 152,078 share options and 29,13061,414 restricted shares were granted to Ms. Einat RomMrs. Hadar Vismunski-Weinberg with a vesting period of up to four years.three years and subject to the fulfillment of performance targets. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.40.7 million and the fair value of the restricted shares was approximately NIS 0.7 million. As of March 21, 2018, the share price was NIS 17.47 whereas the option exercise price (dividend adjusted) is NIS 25.95. As long as the option exercise price is higher than the market share price, the grant of the options has no actual value for Ms. Rom; however a restricted share has the value of the share price. In 2015, additional 161,369 share options and 76,378 restricted shares were granted to Ms. Rom with a vesting period of up to three years. The theoretical fair value of the share options (according to Black-Scholes model) as measured of the grant was approximately NIS 0.9 million and the fair value of the restricted shares was approximately NIS 1.41.0 million.
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(10) | Represents vehicle expenses only.
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(11)(8) | These sums represent the relative portion of the expenses of all option and restricted share allocations recorded during the reported period and include expenses for the 20172020 vesting period of options and restricted shares (including those which have not fully vested yet). |
All options and restricted shares noted above were granted pursuant to the terms of the 2004 Amended and Restated Equity Incentive Plan, among others, with respect to the exercise or earning periods and the expiration date of the options. See “Item 6E.2 EQUITY INCENTIVE PLAN ”.
6C. Board Practices
References in this annual reportAnnual Report to “external directors” are to those directors who meet the definition of external directors under the Israeli Companies Law (“dahatz”), and references in this annual reportAnnual Report to “US independent directors” are to those directors who meet the definition of independence under applicable listing requirements of NASDAQ. References in this annual reportAnnual Report to “Israeli independent directors” are to any director who meets the definition of independence under the Israeli Companies Law (“bilty taluy”).
6C.1 TERMS OF DIRECTORS
Directors are generally elected by the annual general meeting of shareholders to serve (i) for three years, in the case of external directors under the Israeli Companies Law, or (ii) until the next annual general meeting of the shareholders (unless their office becomes vacant earlier, in accordance with the provisions of our Articles of Association). An extraordinary general meeting of shareholders may elect any person as a director, to fill an office which became vacant, or to serve as an additional member to the then existing Board of Directors, or to serve as an external director, or in any event in which the number of the members of the Board of Directors is less than the minimum set in the Articles of Association (seven directors), provided that the maximum number of seventeen directors is not exceeded. Any director elected in such manner (excluding an external director) shall serve in office until the coming annual general meeting of shareholders. The Articles of Association also provide that the Board of Directors, with the approval of a simple majority of the directors, may appoint an additional director to fill a vacancy or to serve as an additional member to the then existing Board of Directors, provided that the maximum number of seventeen directors is not exceeded. Any director elected in such manner shall serve in office until the coming annual general meeting of shareholders and may be re-elected.
Israeli directors are appointed by the Israeli founding shareholders, generally upon a written notice signed by at least two of the Israeli founding shareholders who are the record holders of (i) at least 50% of minimum Israeli holding shares or (ii), who hold in the aggregate the highest number of minimum Israeli holding shares among the Israeli founding shareholders. Any Israeli founding shareholders who have specified connections to a competing mobile radio telephone operator (as defined in the license) of the Company are prohibited from participation in any such appointment. The notice is addressed to our company secretary indicating the appointment until the appointee’s successor is elected by a similar notice. See “10B.3 Rights Attached to Shares”. In 2009, Ms. Osnat Ronen was appointed as a director on behalf of the Israeli founding shareholders.
No director has a service contract with the company or its wholly-owned subsidiaries providing for benefits upon termination of employment.
Our Office Holders (generally senior managers) serve at the discretion of the Board of Directors or until their successors are appointed. See “Item 4B.12f Our Mobile Telephone License” for a description of additional requirements of the composition of our Board of Directors and the appointment of its members.
6C.2 ALTERNATE DIRECTORS
Our Articles of Association provide that a director may appoint an individual to serve as an alternate director. An alternate director may not serve as such unless such person is qualified to serve as a director. In addition, no person who already serves as a director or an alternate director on the Company’s Board of Directors may serve as an alternate director of another director on the Company’s Board of Directors. Under the Israeli Companies Law, an alternate director is generally treated as a director. Under our Articles of Association, an alternate director shall have all the authorities of the director appointing him. The alternate director may not vote at any meeting at which the director appointing him is present. Unless the time period or scope of any such appointment is limited by the appointing director, such appointment shall be effective for all purposes and for an indefinite time, but will expire upon the expiration of the appointing director’s term.
6C.3 EXTERNAL DIRECTORS UNDER THE ISRAELI COMPANIES LAW
The Israeli Companies Law generally requires that Partner shall have at least two external directors on its Board of Directors who meet the independence criteria set by the Israeli Companies Law. The appointment of an external director (for the initial term of three years) under the Israeli Companies Law must be approved by the general meeting of shareholders provided that either: (a) the majority of votes in favor of the appointment shall include at least a majority of the votes of shareholders not constituting controlling parties (as stated in the Israeli Companies Law) in the Company, or those having a personal interest (as defined in the Israeli Companies Law) (other than a personal interest not resulting from their relations with the controlling parties) in the approval of the appointment participating in the vote, which votes shall not include abstaining votes; or (b) the total number of objecting votes of the shareholders mentioned in clause (a) does not exceed 2% of the total voting rights in the company.
Dr. Michael Anghel and Mr. Barry Ben-Zeev, Ms. Roly Klinger, Dr. Jonathan Kolodny and Ms. Michal Marom-Brikman serve as our external directors under the Israeli Companies Law.
In general, external directors may be re-appointed for two additional three-year terms by one of the following mechanisms:
(i) the Board of Directors proposed the nominee and his appointment is approved by the shareholders in the manner required to appoint external directors for their initial term (described above);
(ii) one or more shareholders that hold at least 1% or more of the company’s voting rights proposed the external director for re-appointment, and the nominee is approved by a majority of the votes cast at the shareholders meeting, provided that: (A) the total number of shareholders’ votes at the shareholders meeting shall not include the votes of shareholders who are controlling parties and those having a personal interest in the appointment approval (other than a personal interest not resulting from their relations with the controlling parties) and abstaining votes; (B) the aggregate votes cast by shareholders who are not excluded under clause (A) above in favor of the appointment exceed 2% of the voting rights in the company; and (B) the external director (a) is not a related or competing shareholder, or the relative of such a shareholder, at the time of the appointment and (b) is not affiliated with a related or competing shareholder at the time of the appointment or the two years preceding the appointment (the term “related or competing shareholder” is defined as a shareholder who nominated the external director for reappointment or a material shareholder (a shareholder that holds more than 5% of the shares or voting rights in the company), if at the date of such appointment, any of either such shareholder, the controlling shareholder of such shareholder, or a company controlled by either of them, has business with the company or is a competitor of the company); and
(iii) the external director proposed himself or herself and is approved by the process under clause (ii) above.
Under regulations promulgated under the Israeli Companies Law, certain companies, including dual listed companies, like Partner, may re-appoint external directors for additional three-year terms of up to three years each (beyond the three terms of three years each), provided that all of the following conditions are fulfilled: (1) the Audit Committee and, subsequently, the Board of Directors, approves that, considering the external director’s expertise and special contribution to the work of the Board of Directors and its committees, his re-appointment for an additional term of office is in the best interest of the Company; (2) the re-appointment for the additional term of office is done in conformity with one of the mechanisms described above; (3) prior to approving the re-appointment, the general meeting of shareholders is informed of the duration of the external director’s service as an external director and is presented with the rationale of the Audit Committee and the Board of Directors for extending the external director’s term of office.
The Israeli Companies Law requires that at least one external director has accounting and financial expertise, and that the other external director(s) have professional competence, as determined by the company’s Board of Directors. Under promulgated regulations, a director having accounting and financial expertise is a person who, due to his education, experience and talents, is highly skilled in respect of, and understands, business-accounting matters and financial reports in a manner that enables him to understand in depth the company’s financial statements and to stimulate discussion regarding the manner in which the financial data is presented. Under the regulations, a director having professional competence is a person who has an academic degree in either economics, business administration, accounting, law or public administration or has another academic degree or has other higher education, all in the main business sector of the company or in a relevant area for the Board of Directors position, or has at least five years’ experience in one or more of the following (or a combined five years’ experience in at least two or more of the following): a senior position in the business management of a corporation with a substantial scope of business, a senior public officer or a senior position in the public service or a senior position in the field of the company’s business.
6C.4 FINANCIAL EXPERTS UNDER THE ISRAELI COMPANIES LAW
In accordance with the Israeli Companies Law, Partner’s Board of Directors has determined that the minimum number of directors with “accounting and financial expertise” that Partner believes is appropriate, in light of the particulars of Partner and its activities, is three. Under the Israeli Companies Law, only one of such “experts” is required to be an external director. The Board of Directors has determined that eight of our current directors have “accounting and financial expertise”: Mr. Adam Chesnoff, Mr. Fred Gluckman, Mr. Yoav Rubinstein,Ms. Osnat Ronen, Dr. Michael Anghel,Jonathan Kolodny, Mr. Barry Ben-Zeev (Woolfson), Mr. Richard Hunter, Ms. Osnat Ronen,Michal Marom-Brikman, Mr. Arie SteinbergYossi Shachak, Mr. Yehuda Saban and Mr. Yehuda Saban.Shlomo Zohar.
6C.5 NASDAQ CORPORATE GOVERNANCE RULES AND OUR PRACTICES
Under NASDAQ Rule 5615(a)(3), a foreign private issuer such as the Company may follow its home country practice in lieu of the requirements of the NASDAQ Rule 5600 Series (“Corporate Governance Requirements”), with certain exceptions, provided that it discloses each requirement that it does not follow and describes the home country practice followed in lieu of such requirement. We describe below the areas where we follow our home country practice rather than the NASDAQ Corporate Governance Requirements:
| – | In order to comply with the conditions and restrictions imposed on us by the Ministry of Communications, including in our mobile license, in relation to ownership or control over us, under certain events specified in our Articles of Association, the Board of Directors may determine that certain ordinary shares are dormant shares. Consequently, we received an exemption from NASDAQ with respect to its requirement (now under NASDAQ Rule 5640) that voting rights of existing shareholders of publicly traded common stock registered under Section 12 of the US Securities Exchange Act cannot be disparately reduced or restricted through any corporate action or issuance. |
| – | As permitted under Israeli Companies Law, the Company’s Board of Directors generally proposes director nominees for shareholder approval. The conditions of NASDAQ Rule 5605(e), that director nominees must either be selected or recommended to the Board by the independent directors or a nomination committee comprised solely of independent directors, are thus not satisfied. |
| – | According to applicable Israeli legal requirements, the establishment or amendment of certain stock option or purchase plans requirerequires the approval of the company’s Board of Directors and approval of the shareholders’ meeting only for the grant of equity compensation to the Chief Executive Officer, directors or controlling partners. We received an exemption from the requirement set out in NASDAQ Rule 5635(c) that listed companies receive shareholder approval when certain stock option or purchase plans are to be established or materially amended, or certain other equity compensation arrangement made or materially amended, based on the fact that the NASDAQ requirement is inconsistent with the applicable Israeli legal requirements described above. |
| – | The Israeli Companies Law, requires that at least two members of the Board of Directors satisfy the conditions of ”external directors”, which also satisfies the conditions of an Israeli independent director (“bilty taluy”). TwoFour of our thirteenten directors are external directors and satisfy the conditions of both Israeli independent directors and independent directors according to NASDAQ criteria. Two additional directors, (who are not external directors) satisfy the conditions of independent directors according to NASDAQ criteria, one of whom satisfies the conditions of an Israeli independent director. However,director, therefore the requirement of NASDAQ Rule 5605(b), that a majority of the Board of Directors be comprised of independent directors, is thuspresently satisfied. However, in previous years and possibly in the future, we were and may not satisfied.be in compliance with this NASDAQ requirement, since it is not a requirement under Israeli Companies law as stated above. |
6C.66C.5a BOARD COMMITTEES
The Company’s Articles of Association provide that the Board of Directors may delegate its authorities or any part of them to committees of the Board of Directors as it deems appropriate, subject to the provisions of the Israeli Companies Law. Our Board of Directors has established an audit committee, a compensation committee and a security committee.
6C.6a6C.5b AUDIT COMMITTEE
Pursuant to the rules of the Securities and Exchange Commission (the “SEC”) and the listing requirements of the NASDAQ Global Select Market, as a foreign private issuer, we are required to establish an audit committee consisting only of members who are U.S. “independent” directors as defined by SEC rules. In accordance with the Company’s Audit Committee Charter, our audit committee is responsible among other things, for overseeing the Company’s financial reporting process and the audits of the Company’s financial statements, including monitoring the integrity of the Company’s financial statements and the independence and performance of the Company’s internal and external auditors. Our audit committee is also directly responsible for the appointment, remuneration and oversight of our independent auditor and for establishing procedures for receiving and handling complaints received by the Company regarding accounting, internal controls and audit matters. The Audit Committee also assists the Board in conducting periodic reviews of the Company’s management of cyber risk.
The Israeli Companies Law requires public companies, including Partner, to appoint an audit committee comprised of at least three Board of Directors members, including all the company’s external directors, the majority of whom must be Israeli independent directors and the chairman of the audit committee is required to be an external director. Under the Israeli Companies Law neither the controlling party or his relative, the chairman of the Board of Directors, any director employed by the company or by its controlling party or by an entity controlled by the controlling party, any director who regularly provides services to the company, to its controlling party or to an entity controlled by the controlling party, nor any director who derives most of its income from the controlling party, may be eligible to serve as a member of the audit committee.
The responsibilities of our audit committee under the Israeli Companies Law include, among others, identifying irregularities in the management of the company’s business and approving related party transactions as required by law, determining whether certain related party actions and transactions are “material” or “extraordinary” in connection with their approval procedures (See 6C.96C.8 APPROVAL OF RELATED PARTY TRANSACTIONS AND COMPENSATION), assessing the scope of work and remuneration of the company’s independent auditor, assessing the company’s internal audit system and the performance of its internal auditor and making arrangements regarding the handling of complaints by employees about company’s business management deficiencies and regarding the protection given to employees who have made complaints.
The Company’s audit committee was appointed by our Board of Directors to review our financial statements, in compliance with U.S. legal requirements (as described above) and in compliance with Israeli regulations (from which we are exempt).
Our audit committee is comprised of threefour Board of Directors members: Dr. Michael Anghel (external director), Mr. Barry Ben Zeev (committee chairman; external director), Ms. Roly Klinger (external director), Dr. Jonathan Kolodny (external director) and Mr. Arik Steinberg (Israeli independentMs. Michal Marom-Brikman (external director). All of the audit committee members meet the SEC’s definition of independent directors for the purpose of serving as audit committee members as well as the Israeli Companies Law’s definition of Israeli independent directors. In accordance with the SEC definition of “independent” director, none of them is an affiliated person of Partner or any subsidiary of Partner.
The Board of Directors has determined that all three of our four audit committee members are “audit committee financial experts” as defined by applicable SEC regulations. See “Item 16A Audit Committee Financial Expert” below.
6C.6b6C.5c COMPENSATION COMMITTEE
The Israeli Companies Law requires public companies, including Partner, to appoint a compensation committee comprised of at least three Board of Directors members, including all the company’s external directors who must constitute the majority of its members. Other members of the committee should be directors whose terms of compensation are the same as external directors and the chairman of the compensation committee is required to be an external director.
Under the Israeli Companies Law, the compensation committee’s responsibilities include, among others, recommending to the Board of Directors, a compensation policy for office-holders to be approved by the shareholders of the Company, see “6B Compensation”. The compensation committee also makes recommendations to the Board of Directors once every three years regarding the continuing effectiveness of the compensation policy, reviews modifications to the compensation policy from time to time and its implementation and approves the actual compensation terms of Office Holders which require the compensation committee’s approval according to the relevant provisions of the Israeli Companies Law.
Our compensation committee is comprised of threefour Board of Directors members: Dr. Michael Anghel (external director), Mr. Barry Ben Zeev (committee chairman; external director), Ms. Roly Klinger ((external director), Dr. Jonathan Kolodny (external director) and Mr. Arik Steinberg (Israeli independentMs. Michal Marom-Brikman (external director). All of the compensation committee members meet the SEC’s definition of independent directors for the purpose of serving as the compensation committee members as well as the Israeli Companies Law’s definition of Israeli independent directors. In accordance with the SEC definition of “independent” director, none of them is an affiliated person of Partner or any subsidiary of Partner.
Pursuant to an amendment to our license from April 2005, a Board of Directors committee has been formed to deal with security matters. Only directors with the required clearance and those deemed appropriate by Israel’s General Security Service may be members of this committee. The committee must consist of at least four members, who are subject to the clearance required from the Israeli General Security Service and at least one external director. Where any matter requires a Board of Directors’ resolution and it is a security matter, then the committee should be authorized to discuss and to resolve such security matter and the resolution should bind the Company. However, in cases where the security matter concerned requires review by the Board of Directors or the audit committee according to the Israeli Companies Law or other applicable law, such as a transaction with a related party, it should be submitted for approval in accordance with the requirements of the applicable U.S. law, the Israeli Companies Law and any other applicable laws, provided that, in any case, only directors with security clearance can participate in any forum which will deal with security matters. In April 2005, our Board of Directors approved the formation of the security committee to consist of four Israeli directors, who are subject to Israeli security clearance and security compatibility to be determined by the General Security Service. Currently, Mr. Elon Shalev, Dr. Michael Anghel,Jonathan Kolodny, Ms. Osnat Ronen, Mr. Richard Hunter and Mr. Arieh SabanOri Yaron are members of the security committee.
6C.76C.6 INTERNAL AUDITOR
The Israeli Companies Law requires the Board of Directors of a public company to appoint an internal auditor nominated by the audit committee. A person who does not satisfy certain independence requirements may not be appointed as an internal auditor. The role of the internal auditor is to examine, among other things, the compliance of the company’s conduct with applicable law and orderly business procedures. Our internal auditor is Mr. Yehuda Motro, formerly the internal auditor of the Tel Aviv Stock Exchange.
6C.86C.7 FIDUCIARY DUTIES OF AN OFFICE HOLDER
The Israeli Companies Law governs the duty of care and duty of loyalty which an Office Holder owes to the company. An “Office Holder” is defined in the Israeli Companies Law as a director, general manager, chief executive officer, executive vice president, vice president, or any other person assuming the responsibilities of any of the foregoing positions without regard to such person’s title and other managers directly subordinated to the general manager.
The duty of loyalty requires the Office Holder to act in good faith and in the company’s favor and to avoid any conflict of interest between the Office Holder’s position in the company and personal affairs, and proscribes any competition with the company or the exploitation of any business opportunity of the company in order to receive personal advantages for him or others. This duty also requires him to reveal to the company any information or documents relating to the company’s affairs that the Office Holder has received due to his position as an Office Holder. The duty of care requires an Office Holder to act in a way that a reasonable Office Holder would have acted in the same position and under the same circumstances. This includes the duty to utilize reasonable means to obtain information regarding the advisability of a given action submitted for his approval or performed by virtue of his position and all other relevant information.
6C.9
6C.8 APPROVAL OF RELATED PARTY TRANSACTIONS AND COMPENSATION
6C.9a6C.8a Approval of Related Party Transactions
The Israeli Companies Law requires that a transaction between the company and its Office Holder, and also a transaction between the company and another person in which an Office Holder has a personal interest, requires the approval of the Board of Directors if such a transaction is not an “extraordinary transaction”, although, as permitted by law and subject to any relevant stock exchange rule, our Articles of Association allow our audit committee to approve such a transaction, without the need for approval from the Board of Directors. If such a transaction is an extraordinary transaction (that is, a transaction not in the ordinary course of business, not on market terms, or that is likely to have a material impact on the company’s profitability, assets or liabilities), generally in addition to audit committee approval, the transaction also must be approved by our Board of Directors, and, in certain circumstances, also by the general meeting of shareholders. Under the Israeli Companies Law, an extraordinary transaction between a public company and a controlling party of the company or an extraordinary transaction between a public company and another person, in which the controlling party has a personal interest (including a private placement), and a transaction between a public company and a controlling party or his relative, directly or indirectly, including, without limitation, via an entity controlled by the controlling party, for receiving services by the company (and if the controlling party is also an Office Holder in the company for his terms of service, and if he is an employee of the company (but not an Office Holder in it) his employment in the company) must be approved by the audit committee or the compensation committee if relates to terms of employment (as the case may be), the Board of Directors and the general meeting of shareholders, provided that either: (a) the majority of votes in favor of the transaction shall include at least a majority of the votes of shareholders who do not have a personal interest in approval of the transaction, who participate in the voting, or (b) the total number of objecting votes of the shareholders mentioned in clause (a) does not exceed 2% of the total voting rights in the company.
The audit committee is also authorized to determine, with respect to related party transactions with a controlling shareholder or in which the controlling shareholder has a personal interest, even if they are not extraordinary transactions, an obligation to conduct a competitive process (to be supervised by the audit committee, or any person authorized on its behalf or via any other method approved by the audit committee) or to determine that other processes will be conducted prior to the engagement in such transactions and all in accordance with the type of transaction. The specific criteria for such a process may be determined by the audit committee annually in advance. In addition, the audit committee is authorized to determine the approval process for transactions that are not negligible, as well as determine which types of said transactions would require the approval of the audit committee. “Non-negligible transactions” are defined as related party transactions with a controlling shareholder or in which the controlling shareholder has a personal interest, that the audit committee has deemed not to be an extraordinary transaction, but which have also been classified by the audit committee as a non-negligible transaction. Additionally, the audit committee may decide on such classifications for these types of transactions, based on criteria set annually in advance.
The Israeli Companies Law requires that an Office Holder or a controlling party promptly disclose any personal interest that he has and all related material information known to him, in connection with any existing or proposed transaction by the company. The company may then approve the transaction in accordance with the provisions of its Articles of Association and the Israeli Companies Law. Under the Israeli Companies Law, if the Office Holder or a controlling party has a personal interest in the transaction, an approval that the transaction is in the best interest of the company is required.
In most circumstances, the Israeli Companies Law restricts Office Holders who have a personal interest in a matter which is considered at a meeting of the Board of Directors or the audit committee from being present at such meeting, participating in the discussions or voting on any such matter. An exemption exists in the event that a majority of the directors in the meeting have a personal interest in the matter provided, that in case a majority of the Board of Directors has a personal interest in the matter, the transaction will require the approval of the general meeting of shareholders.
For information concerning the direct and indirect personal interests of certain of our Office Holders and principal shareholders in certain transactions, see “ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS”.
6C.9b
6C.8b Compensation
The terms of employment of Office Holders including compensation, equity awards, severance and other benefits, exemption from liability and indemnification require the approval of the compensation committee and the Board of Directors. The terms of employment of directors and the Chief Executive Officer must also be approved at the general meeting of shareholders by a majority of the Company’s shareholders, provided that (i) such majority includes at least a majority of the shareholders who are not controlling shareholders and who do not have a personal interest in the matter, who participate in the voting (abstentions are disregarded), or (ii) the total number of objecting votes of the shareholders mentioned in clause (i) does not exceed 2% of the total voting rights in the company. Notwithstanding the foregoing, a company may be exempted from receiving shareholder approval with respect to the terms of employment of a candidate for a Chief Executive Officer position, if such candidate meets certain independence criteria, the terms are in line with the Compensation Policy and the compensation committee has determined for specified reasons that shareholder approval would prevent the engagement. See “6C.6b“Item 6C.5c COMPENSATION COMMITTEE”.
Changes to existing terms of employment of Office Holders (other than directors) can be made with the approval of the compensation committee only (following adoption of the Compensation Policy), if the committee determines that the change is not substantially different from the existing terms.
Under the Israeli Companies Law and related regulations, the compensation payable to external directors and Israeli independent directors is subject to certain further limitations.
6C.106C.9 DUTIES OF A SHAREHOLDER
Under the Israeli Companies Law, a shareholder has a general duty to act in good faith and in a customary manner towards the company and the other shareholders and to refrain from improperly exploiting his power in the company, particularly when voting in the general meeting of shareholders on (a) any amendment to the articles of association, (b) an increase of the company’s authorized share capital, (c) a merger, or (d) approval of related party transactions which require shareholder approval. A shareholder should also avoid deprivation of other shareholders.shareholders' rights. In addition, any controlling party, any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder that, pursuant to the provisions of the articles of association, has the power to appoint or prevent an appointment of an Office Holder in the company or any other power towards the company, is under a duty to act in fairness towards the company under the Israeli Companies Law.
6C.116C.10 INDEMNIFICATION AND RELEASE
6C.11a6C.10a Indemnification
As permitted by the Israeli Companies Law, our Articles of Association provide that Partner may indemnify an Office Holder of Partner to the fullest extent permitted by law.
Without derogating from the foregoing, and subject to limitations set forth in the Israeli Securities Law, our Articles of Association specifically provide that Partner may indemnify an Office Holder of Partner for liability or expense he incurs or that is imposed upon him as a result of an action or inaction by him (or together with other Office Holders of Partner) in his capacity as an Office Holder of Partner including (subject to specified conditions) also in advance, as follows:
| 1. | Financial liability incurred by, or imposed upon the Office Holder in favor of another person in accordance with a judgment, including a judgment given in a settlement or a judgment of an arbitrator, approved by an authorized court; |
| 2. | Reasonable legal expenses, including attorney fees, incurred by the Office Holder or which he was ordered to pay by an authorized court in the context of a proceeding filed against him by Partner or on Partner’s behalf or by a third party, in a criminal proceeding in which he was acquitted or in a criminal proceeding in which he was convicted of an offense which does not require criminal intent; |
| 3. | Reasonable legal expenses, including attorney fees, incurred by the Office Holder due to an investigation or proceeding conducted against him by an authority authorized to conduct such investigation or proceeding and which ended without filing of an indictment against him and without the imposition of a financial liability as a substitute for a criminal proceeding or that was ended without filing of an indictment against him but for which he was subject to a financial liability as a substitute for a criminal proceeding relating to an offense which does not require criminal intent, within the meaning of the relevant terms under the law or in connection with a financial sanction(“itzum caspi”); |
| 4. | Payment to an injured party as a result of a violation set forth in Section 52.54(a)(1)(a) of the Israeli Securities Law, including by indemnification in advance or expenses incurred in connection with a proceeding (“halich”) under Chapters H3, H4 or I1 of the Israeli Securities Law, or under Chapter 4 of Part 9 of the Israeli Companies Law, in connection with any affairs, including reasonable legal expenses, which term includes attorney fees, including by indemnification in advance; and |
| 5. | Expenses, including reasonable legal fees, including attorney fees, incurred by an Office Holder with respect to a proceeding in accordance with the Restrictive Trade Practices Law- 1988 ("Restrictive Trade Practices Law"). |
Our Articles of Association also permit us to indemnify any Office Holders of Partner for any other liability or expense in respect of which it is permitted or will be permitted under applicable law to indemnify an Office Holder of Partner.
The Israeli Companies Law and our Articles of Association also permit us to undertake in advance to indemnify an Office Holder with respect for items (2), (3) and (4) above, or any other matter permitted by law. The Israeli Companies Law and our Articles of Association also permit us to undertake in advance to indemnify an Office Holder with respect to item (1) above, provided however, that the undertaking to indemnify is restricted to events which in the opinion of the Board of Directors are anticipated in light of Partner’s activities at the time of granting the undertaking to indemnify, and is limited to a sum or measurement determined by the Board of Directors to be reasonable under the circumstances. The undertaking to indemnify shall specify the events that, in the opinion of the Board of Directors are expected in light of the Company’s actual activity at the time of grant of the undertaking and the sum or measurement which the Board of Directors determined to be reasonable under the circumstances.
The Israeli Companies Law combined with our Articles of Association also permits us to indemnify an Office Holder retroactively for all kinds of events, subject to any applicable law.
In no event may we indemnify an Office Holder for any of the following:
| 1. | a breach of the duty of loyalty toward us, unless the Office Holder acted in good faith and had reasonable grounds to assume that the action would not harm Partner’s interest; |
| 2. | a breach of the duty of care done intentionally or recklessly (“pzizut”) other than if made only by negligence; |
| 3. | an act intended to unlawfully yield a personal profit; |
| 4. | a fine, a civil fine (“knas ezrahi”), a financial sanction (“itzum kaspi”) or a penalty (“kofer”) imposed on him; and |
We have undertaken to indemnify our Office Holders, subject to certain conditions as aforesaid. We consider from time to time the indemnification of our Office Holders, which indemnification will be subject to approval of our compensation committee, Board of Directors and in certain cases, such as indemnification of directors and the CEO, also of our shareholders.
Under the indemnification letters granted to Office Holders prior to the extraordinary general meeting of shareholders held on October 17, 2013 (“October 2013 EGM”), the aggregate indemnification amount payable by us to Office Holders and other indemnified persons pursuant to all letters of indemnification issued to them by us will not exceed the higher of (i) 25% of shareholders equity and (ii) 25% of market capitalization, each measured at the time of indemnification (the “Combined Maximum Indemnity Amount”, and “the Original Indemnification Letter”).
Under the indemnification letters granted to Office Holders after the October 2013 EGM, the aggregate indemnification amount payable by us to Office Holders (including, among others, Office Holders nominated on behalf of Partner in subsidiaries) pursuant to all letters of indemnification issued or that may be issued to them by Partner on or after the October 2013 EGM, for any occurrence of an event set out in such a letter (including an attachment thereto) will not exceed 25% of shareholders equity (according to the latest reviewed or audited financial statements approved by Partner’s Board of Directors prior to approval of the indemnification payment) (“the Revised Indemnification Letter”). However, under the circumstances where indemnification for the same event is to be made in parallel under the Revised Indemnification Letter and to one or more indemnified persons under the Original Indemnification Letter, the maximum indemnity amount for the indemnified persons that received the Revised Indemnification Letter shall be adjusted so it does not exceed the Combined Maximum Indemnity Amount to which any other indemnified person is entitled under the Original Indemnification Letter.
6C.11b6C.10b RELEASE
The Companies Law and our Articles of Association authorize the Company, subject to obtaining the required approvals (of our compensation committee, Board of Directors and in certain cases, such as release of directors and the CEO, also of our shareholders), to release our Office Holders, in advance, from such persons’ liability, entirely or partially, for damage in consequence of the breach of the duty of care toward us as set forth in accordance with any law, including the liabilities and expenses for which the Company may indemnify Office Holders as set forth above, see Item 6C.11a6C.10a Indemnification. Furthermore, the Company may release Office Holders that are controlling shareholders or their relatives, subject to the receipt of the approvals in accordance with any law. Said release will not apply to a resolution or transaction in which the controlling shareholder or any Office Holder in the Company (including other Office Holders than the Office Holder being granted the release) has a personal interest.
Notwithstanding the foregoing, we may not release such person from such person’s liability, resulting from any of the following events: (i) the breach of duty of loyalty towards us; (ii) the breach of duty of care made intentionally or recklessly (“pzizut”), other than if made only by negligence; (iii) an act intended to unlawfully yield a personal profit; (iv) a fine (“knass”), a civil fine (“knass ezrahi”), a financial sanction (“itzum caspi”) or a penalty (“kofer”) imposed upon such person; and (v) the breach of duty of care in a distribution (“haluka”).
In addition to the Original Indemnification Letter and the Revised Indemnification Letter, the Company granted new indemnification and release letters to our Office Holders at the annual general meeting of shareholders held on September 28, 2016.
6C.126C.11 INSURANCE
The Israeli Companies Law and the Company’s Articles of Association authorize the Company (subject to certain exceptions) to enter into an insurance contract, and to arrange and pay all premiums in respect of an insurance contract, for the insurance of the liability of our Office Holders for liabilities the Office Holder incurs as a result of a direct or indirect action or inaction undertaken by such person (or together with other Office Holders of the Company) in his capacity as an Office Holder of the Company for any of the following:
| (1) | The breach of the duty of care towards the Company or towards any other person; |
| (2) | The breach of the duty of loyalty towards the Company provided that the Office Holder has acted in good faith and had reasonable grounds to assume that the action would not harm the Company; |
| (3) | A financial liability imposed on him in favor of another person; |
| (4) | A payment which the office holder is obligated to pay to an injured party as set forth in section 52.54(a)(1)(a) of the Securities Law and expenses that the Office Holder incurred in connection with a proceeding under Chapters H3, H4 or I1 of the Securities Law, or under Chapter 4 of Part 9 of the Israeli Companies Law, in connection with any affairs, including reasonable legal expenses, which term includes attorney fees. |
| (5) | Expenses, including reasonable legal expenses fees, including attorney fees, incurred by the Office Holder with respect to a proceeding in accordance with the Restrictive Trade Practices Law. |
| (6) | Any other matter in respect of which it is permitted or will be permitted under any law to insure the liability of an Office Holder in the Company. |
6D. Employees
At December 31, 2017, we had 2,797 employees on a full time equivalent basis, compared with 2,686 employees at December 31, 2016, and 2,882 at December 31, 2015. The number of full-time equivalent employees at year-end 2014, 20152018, 2019 and 2016,2020, according to their activity, was as follows:
| | At December 31, | | |
| | | 2015** | | | | 2016** | | | | 2017 | | | 2018 | | | 2019** |
| | 2020 | |
| | | | | | | | | | | | | | | | | | | | | |
Customer service* | | | 1,656 | | | | | | | | | | | 1,452 | | | 1,456 | | | 1,370 | |
Sales and sales support* | | | 434 | | | | 457 | | | | 488 | | | 550 | | | 541 | | | 491 | |
Information technology (including Engineering) | | | 369 | | | | 341 | | | | 349 | | |
Information technology | | | 379 | | | 403 | | | 388 | |
Marketing and Content | | | 49 | | | | 47 | | | | 44 | | | 55 | | | 56 | | | 52 | |
Finance | | | 83 | | | | 85 | | | | 80 | | | 83 | | | 88 | | | 85 | |
Human Resources, Administration & Security | | | 96 | | | | 94 | | | | 86 | | | 87 | | | 91 | | | 86 | |
Operations & Logistics | | | 134 | | | | 133 | | | | 127 | | | 124 | | | 136 | | | 122 | |
Remaining operations | | | 61 | | | | 67 | | | | 56 | | | 52 | | | 63 | | | 61 | |
TOTAL | | | 2,882 | | | | 2,686 | | | | 2,797 | | | 2,782 | | | 2,834 | | | 2,655 | *** |
*Many positions in Customer service and Sales and sales support are filled by more than one part-time employee so that the employee headcount for those activities is about 12% greater than the number of full-time equivalents set forth above.
** Due to organizational structure changes during 2017, that included consolidationStarting in 2019, the number of certain divisions andfull-time employees also includes the shiftingnumber of manpower between divisions, we have revisedfull-time employees of PHI on a proportional basis of the 2015 and 2016 numbers to provide comparable information between the years 2015-2017.Company's share in PHI (50%).
In 2017,*** During the first half of 2020, in light of the COVID-19 crisis the Company addedtemporarily reduced the workforce by putting a significant fiber and television activities, including in-house technicians, service and sales representatives, which causednumber of employees on unpaid leave. As of December 31, 2020, due to the COVID-19 pandemic, an increase inadditional 90 full time employees are on unpaid leave from the overall number.Company.
OnThe collective employment agreements that we signed on March 13, 2016 we signed a collective employment agreementand on December 12, 2016 with the employees' representatives and the Histadrut, the employees' union. The agreement includes an organizational chapterunion and that iswere valid for a period of three years (2016-2018) andwere renewed in March 2019. The renewed agreement is valid from January 1, 2019 for a period of three years until December 31, 2021. The Company is expected to begin negotiations during the last quarter of 2021 to renew the collective employment agreement. As in the previous agreements, the organizational chapter includes, among others, provisions regarding manning and changing of positions, termination of employment tenure and a dispute resolution mechanism. The agreement includes an economic chapter that was valid until December 31, 2016 and on December 12, 2016 we signed a new economic chapter that is valid for the years 2017-2018. The economic chapter includes, among others, provisions regarding terms of employment, benefits and welfare. In addition, the economic chapterwelfare and provides for annual bonuses to employees and a profit sharing mechanism provision under certain conditions. The agreement applies to the Company's employees, excluding certain managerial and specific positions. The collective employment agreement also refers to the participation of employees in the Company's profits and regulates the eligibility conditions for receipt of these awards for the years 2017-2018. See also “Item 3D.2h“3D.2j The unionization of our employees has negatively affected and may continue to negatively affect our financial results.”
In addition, we are subject to various Israeli labor laws and practices, as well as orders extending certain provisions of collective bargaining agreements between the Histadrut and the Coordinating Bureau of Economic Organizations, the federation of employers’ organizations. Such laws, agreements and orders cover a wide range of areas and impose minimum employment standards including, working hours, minimum wages, vacation and severance pay, and special issues, such as equal pay for equal work, equal opportunity in employment, and employment of women, youth, disabled persons and army veterans.
Our employees are entitled to a pension insurance, in the amounts as follows (amounts vary according to choice of a pension fund or a manager’s insurance fund): employer provision for pension and compensation: 12.5% - 17.33% of the employee’s salary and employee provision for pension: 6% -7% of the employee’s salary.
We also offer some of our employees the opportunity to participate in a “Continuing Education Fund,” which also functions as a savings plan. Each of the participating employees contributes an amount equal to 2.5% of their salary and we contribute between 5% - 7.5% of such employee’s salary. In addition, in accordance with the collective employment agreement, employees that have been employed for 36 months or more by the Company are entitled to participate in a “Continuing Education Fund,” by contributing an amount equal to 2.5% of their salary and we contribute 7.5% of such employee’s salary.
According to the National Insurance Law, Israeli employers and employees are required to pay predetermined sums to the National Insurance Institute. These contributions entitle the employees to health insurance and benefits in periods of unemployment, work injury, maternity leave, disability, reserve military service, and bankruptcy or winding-up of the employer. We believe that our relations with our employees are good.
Most of our employees participate in a Health Insurance Program which provides additional benefits and coverage which the public health system does not provide. Eligibility to participate in the policy does not depend on seniority or position.
Israeli labor law subjects employers to increased liability, including monetary sanctions and criminal liability, in cases of violations of certain labor laws and certain violations by contractors providing maintenance, security and cleaning services.
In January 2015, the Minimum Wage Law was amended to increase the minimum wage paid to employees in Israel in four installments, from April 2015 to December 2017.
6E. Share Ownership
6E.1 SHARE OWNERSHIP OF DIRECTORS AND SENIOR MANAGEMENT
As of March 1, 2018,2021, to the best of the Company’s knowledge, none of our directors or senior management held more than 1% of our issued and outstanding ordinary shares.shares, including restricted shares, restricted share units (see below for an explanation), and options to acquire ordinary shares, except as set forth in the following paragraph. Directors and senior management do not have different voting rights than other shareholders of the Company.
As of March 1, 2018,2021, our senior management held, in the aggregate, outstanding options to purchase up to 2,646,7454,061,378 of our ordinary shares, of which 1,115,8072,369,835 options were vested and exercisable as of that date, in addition to 480,661546,634 “restricted shares” of which 59,394163,662 restricted shares were vested as of that date (as described in "Item 6E.2 Equity Incentive Plan" below). No individual senior manager holdsAs of such date, the Company's CEO, Mr. Isaac Benbenisti held options and restricted shares together to purchase 1% or more1.05% of our issued and outstanding ordinary shares. No options or restricted shares have been granted to our directors.
The table below sets forth the number of outstanding options held by our senior management of the Company, including the CEO of the Company, according to exercise price and expiration date as of March 1, 2018:2021:
Option expiration Year | | Number of outstanding options held | | | Weighted average exercise price (NIS) | |
2021 | | | 1,240,971 | | | | 17.99 | |
2023 | | | 357,766 | | | | 19.39 | |
2024 | | | 1,605,078 | | | | 18.63 | |
2025 | | | 393,421 | | | | 16.61 | |
2026 | | | 464,142 | | | | 13.94 | |
TOTAL | | | 4,061,378 | | | | 17.77 | |
Weighted average exercise price (NIS) | | | Number of outstanding options held | | | Option expiration Year | |
| 47.97 | | | | 305,370 | | | | 2020 | |
| 17.90 | | | | 1,550,877 | | | | 2021 | |
| 18.71 | | | | 224,183 | | | | 2022 | |
| 19.28 | | | | 320,428 | | | | 2023 | |
| 19.11 | | | | 245,887 | | | | 2024 | |
| 21.71 | | | | 2,646,745 | | | TOTAL | |
Outstanding options to purchase the shares of the Company held by the CEO of the Company:
Option expiration Year
| | Number of outstanding options held | | | Weighted average exercise price (NIS) | |
2021 | | | 971,971 | | | | 18.08 | |
2024 | | | 810,027 | | | | 18.86 | |
TOTAL | | | 1,781,998 | | | | 18.43 | |
6E.2 EQUITY INCENTIVE PLAN
The Amended and Restated 2004 Equity Incentive Plan (formerly known as the 2004 Equity Incentive Plan) (the “Plan”) is intended to promote the interests of the Company and its shareholders by providing employees, directors, officersoffice holders and advisors of the Company with appropriate incentives and rewards to encourage them to enter into and continue in the employ of, or service to, the Company and to acquire a proprietary interest in the long-term success of the Company.
The Plan’s principal terms include:
Exercise price determination. The compensation committee shall determine the option and restricted share unit ("RSU") (as further explained below) exercise price per ordinary share, subject to applicable law, regulations and guidelines. Unless otherwise provided in the grant instrument, the option exercise price shall be paid in NIS and the RSU exercise price shall be zero.
Exercise price adjustment. The exercise price of options shall be reduced in the following events: (1) dividend distribution other than in the ordinary course: by the gross dividend amount so distributed per share, and (2) dividend distribution in the ordinary course: With respect to certain options (depending on the date of the granting of the options), the exercise price shall be reduced by the amount of a dividend in excess of 40% of the Company’s net income for the relevant period per share, or else by the gross dividend amount so distributed per share.
Cashless exercise. Most of the options may be exercised only through a cashless exercise procedure; while holders of other options may choose between cashless exercise and the regular option exercise procedure. In accordance with such cashless exercise, the option holder would receive from the Company, without payment of the exercise price, only the number of shares whose aggregate market value equals the economic gain which the option holder would have realized by selling all the shares purchased at their market price, net of the option exercise. Unless otherwise determined by the committee in the grant instrument, the Company at its sole and absolution discretion may obligate the grantee to pay the nominal value of the ordinary shares issued and in such event the ordinary shares will not be issued (and the options and RSUs will not be exercised) prior to the payment of such nominal value.
Exercise Period. The option holder may exercise all or part of his options at any time after the date of vesting but no later than the expiration of the exercise period, which will not exceed ten years from the date of option grant (considering, if applicable, among others, the provisions of the Compensation Policy) unless shortened pursuant to the terms of the Plan.
Vesting. The vesting schedule of granted securities will be determined by the compensation committee and Board of Directors at their sole discretion and will be detailed in the grant instrument. The committee may set performance targets as a vesting criterion (independently or in combination with other criteria).
Acceleration of vesting and adjustment. In the event of termination of employment following a change of control, vesting of granted securities and exercisability of outstanding granted securities shall be accelerated. Upon the occurrence of any merger, consolidation, reorganization or similar event or transaction (e.g., subdivision or consolidation), equitable changes or adjustments to the number of shares subject to each outstanding option and RSU will be made in order to prevent dilution or enlargement of the option and RSU holders’ rights and appropriate adjustments shall be made in the number and other pertinent elements of any outstanding restricted shares, with respect to which restrictions have not yet lapsed prior to any such change.
Restricted Shares. The Company may grant “restricted shares” to beneficiaries of the Plan. Restricted shares awarded to a grantee are held by the Plan’s trustee in custody for the benefit of the grantee generally until the restrictions thereon have lapsed (e.g., earning period and the other applicable conditions and restrictions under the Plan and the grant instrument under which these restricted shares were awarded). In accordance with the Plan, as long as the restricted shares are held by the trustee, the trustee shall not exercise the voting rights of the underlying ordinary shares at the general meetings of shareholders unless requested to do so by the Company. In such event, the trustee shall vote the underlying ordinary shares proportionally to the shareholders vote and if the vote of public shareholders is counted separately, proportionally to the public shareholders vote. Notwithstanding the foregoing, the Company has reserved the right, upon recommendation of legal counsel, to request the grantee to exercise individually his or her voting rights. In addition, any dividend distributed during the period in which the restricted shares are held by the trustee, is accumulated and transferred to the grantee when the shares have been earned (i.e. when the restrictions lapse).
Except as provided in the immediately preceding paragraph and in the Plan and subject to the terms of the grantee’s relevant grant instrument, the grantee shall have, with respect to his or her restricted shares, all of the rights of a shareholder of the Company, including the right to vote the ordinary shares (endorsed to the trustee as long as the restricted shares are held by the trustee), and the right to receive any dividend thereon (accumulated together with the underlying restricted shares).
Restricted Share Units. The Company may grant “restricted share units” to beneficiaries of the Plan. Restricted share units are options, bearing an exercise price of no more than the underlying share’s nominal value. Upon the lapse of the vesting period of a RSU, such RSU shall automatically become an issued and outstanding share of the Company, subject to certain applicable conditions and restrictions under the Plan and the grant instrument and unless otherwise determined by the Board of Directors, the grantee shall pay to the Company its nominal value as a precondition to the issuance of such share.
Change in Control and other certain events. Upon a Change in Control (as defined in the Plan) transaction of the Company as well as other certain events including a merger, reorganization and consolidation, granted securities shall, at the sole and absolute discretion of the Board of Directors, either solely or in any combination: be substituted for similar granted securities to purchase shares of a successor entity, be assumed by a successor entity, be substituted for similar “phantom” granted securities of the Company or the successor entity, or each non-vested granted securities shall become fully exercisable. In the event that the ordinary shares will no longer be traded on any stock exchange, at the sole and absolute discretion of the Board of Directors, either solely or in any combination: each granted securities shall be substituted for a similar phantom granted securities, or each non-vested granted securities shall become fully exercisable.
Amendment and termination of the Plan. The Plan may generally be altered or amended in any respect by a resolution of the Board of Directors of the Company, subject to the Plan, applicable law and the rules and regulations of any stock exchange applicable from time to time to the Company, by reason of their applicability to its shareholders or otherwise. The Board of Directors may, at any time and from time to time, terminate the Plan in any respect, subject to any applicable approvals or consents that may be otherwise required by law, regulation or agreement, including by reason of their applicability to the shareholders or otherwise, and provided that no termination of the Plan shall adversely affect the terms of any granted security which has already been granted.
Administration of the Plan. The Plan is administered by the compensation committee of the Board of Directors. Subject to the restrictions of the Companies Law, the compensation committee is authorized, among other things, to exercise all the powers and authorities, either specifically granted to it under the Plan or necessary or advisable for the administration of the Plan.
The description of the Plan above is only a summary and is qualified by reference to the full text thereof which has been included as an annex to this annual report.Annual Report. See Exhibit 15.(a).1 incorporated by reference in this annual report.
On November 10, 2015, the Company’s Board of Directors approved the increase in the number of shares which may be granted under the Plan by three million shares, which represented approximately 1.87% of the Company’s issued share capital as of November 10, 2015, up to a total of 22,917,000 ordinary shares.
Annual Report. On March 13, 2016, the Board of Directors approved certain amendments to the Plan. The main amendments to the Plan include: (a) amendment to the cashless exercise formula; (b) the ability to allocate restricted share units to the Company’s employees and office holders; (c) automatic extension of the exercise period due to black-out periods; (d) adjustments to the grantee’s rights under any granted securities due to the occurrence of certain events, including a rights offering; (e) a provision allowing the Company's management bodies to decide to pay a grantee the financial benefit embedded in his equity compensation in cash compensation instead of equity compensation, in certain events in which the Company is unable to issue shares resulting from exercise of options or RSUs or to release any restricted share to a grantee; (f) extension of the exercise period as a result of a change of control event; (g) a provision that allows the Company to limit a grantee from making transactions in the granted securities in connection with any underwritten public offering of the Company and (h) certain exercise restrictions in accordance with the Tel Aviv stock exchange rules. Share options and restricted shares (collectively, “granted securities”) have been granted to employees in accordance with the Plan. The total number of Company shares reserved for issuance upon exercise of all options granted and for earning of all restricted shares granted under the Plan was 22,917,000 shares. Upon exercise each option provides the right to acquire one ordinary share that confers the same rights as the other ordinary shares of the Company. As of December 31, 2017, options to acquire a total of 8,708,483 ordinary shares and 1,344,297 restricted shares are outstanding.
In June 2017, the Company issued 10,178,211 shares of the Company, of which 508,911 shares were issued as Israeli founding shareholder shares. The total net consideration received was approximately NIS 190 million.
On December 26, 2017,November 20, 2018, the Company’s Board of Directors approved the increase in the number of shares which may be granted under the Plan by threeone million shares, which represented approximately 1.75%0.61% of the Company’s issued share capital as of December 26, 2017,November 20, 2018, up to a total of 25,917,00026,917,000 ordinary shares.
In 2017,2020, following the approval of the Company’s Board of Directors, 1,201,3581,035,635 share options and 507,146398,055 restricted shares were granted to senior officers,office holders, managers and other employees of the Company and its subsidiary, compared to 998,4331,232,226 share options and 417,176397,476 restricted shares granted during 2016.2019. The vesting of the options and the earning of the restricted shares granted after June 2014 are subject to vesting or restriction periods and are also subject to performance conditions set by the Company’s organs.
During 2018As of December 31, 2020, options to acquire a total of 7,029,423 ordinary shares and 1,007,423 restricted shares (allocated to a trustee on behalf of the employees under the plan) are outstanding.
From the beginning of 2021 and until March 1, 2018,15, 2021, the Company approved the allocation of 245,887135,518 options and 79,11860,182 restricted shares for one of theour Company's office holders, all in accordance with the Company's Equity Incentive Plan, as amended. The vesting of these options and the earning of these restricted shares are subject to vesting / restriction period of three years from the grant date (one third will vest or be earned in each year), as well as performance conditions set by the Company's organs.
Ordinary shares issuance and repurchase:
In June 2017, the Company issued 10,178,211 shares of the Company, of which 508,911 shares were issued as Israeli founding shareholder shares. The total net consideration received was approximately NIS 190 million.
In January 2020, the Company issued 19,330,183 shares of the Company of which 937,283 shares were issued as Israeli founding shareholder shares. The total net consideration received was approximately NIS 276 million. The offering expenses totaled NIS 10 million.
Through December 31, 2008, the Company purchased its own 4,467,990 shares at the cost of NIS 351 million, and during 2018, the Company purchased its own 6,501,588 shares at the cost of NIS 100 million (upon repurchase the shares were recorded as "treasury shares"). In accordance with the Israeli Companies Law, the treasury shares are considered dormant shares as long as they are held by the Company, and as such, they do not bear any rights (including the right to vote in general meetings of shareholders and to receive dividends) until they are transferred to a third party. Some of the treasury shares were offered to employees under the Plan as restricted shares awards ("RSAs").
As of December 31, 2020, a total of 7,741,784 treasury shares remained of which 1,008,735 were allocated as RSAs to a trustee on behalf of the employees under the Plan. The RSAs offered under the Plan are under the control of the Company until vested under the Plan and therefore are not presented in the financial statements as outstanding shares until vested.
Information in respect of options and restricted shares granted under the Plan is set forth below:
| | Through December 31, 2017 | | | Through December 31, 2020 | |
| | Number of options | | | Number of RSAs1 | | | | | | | |
Granted | | | 31,304,207 | | | | 4,298,768 | | | 36,108,430 | | | 5,907,609 | |
Shares issued upon exercises and vesting | | | (6,430,589 | ) | | | (1,617,518 | ) | | (6,574,778 | ) | | (3,229,106 | ) |
Cancelled upon net exercises, expiration and forfeitures | | | (16,165,135 | ) | | | (1,336,953 | ) | | | | | | | | |
Outstanding | | | 8,708,483 | | | | 1,344,297 | | | 7,029,423 | | | 1,007,423 | |
Of which: | | | | | | | | | | | | | | |
Exercisable | | | 5,190,586 | | | | 26,556 | | | 4,071,714 | | | | |
Vest in 2018 | | | 2,502,089 | | | | 891,309 | | |
Vest in 2019 | | | 667,254 | | | | 280,115 | | |
Vest in 2020 | | | 348,554 | | | | 146,317 | | |
Vest in 2021 | | | 1,788,172 | | | 611,551 | |
Vest in 2022 | | | 800,789 | | | 263,183 | |
Vest in 2023 | | | 368,748 | | | 132,689 | |
1 See Note 21(a) to our consolidated financial statements
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7A. Major Shareholders
The following table, setstogether with the notes hereto set forth certain information as of March 1, 2018,2021, with respect to each person whom we believe to be the beneficial or, if so indicated, registered owner of 5% or more of our ordinary shares. Except where otherwise indicated, we believe, based on information publicly filed with the Securities and Exchange Commission (the "SEC") or furnished to us by the principal shareholders, that the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to such ordinary shares. None of our major shareholders has any different voting rights than any other shareholder. See “Item 10B.3 Rights Attached to Shares”.
Name | | Shares beneficially owned | | | Issued Shares (1)% | | | Issued and Outstanding Shares (1)% | | | Shares beneficially owned | | | Issued Shares (1)% | | | Issued and Outstanding Shares (1)% | |
S.B. Israel Telecom Ltd.(2) | | | 49,862,800 | | | | 29.14 | | | | 29.37 | | | 49,862,800 | | | 26.17 | | | 27.12 | |
Phoenix-Excellence Group (3) | | | 11,692,098 | | | | 6.83 | | | | 6.89 | | | 14,706,330 | | | 7.72 | | | 8.00 | |
Meitav Dash Group (4) | | | 9,125,745 | | | | 5.33 | | | | 5.38 | | | 14,612,353 | | | 7.67 | | | 7.95 | |
Psagot Investment House Ltd. (5) | | | 16,259,246 | | | | 9.50 | | | | 9.58 | | |
Treasury shares (6) | | | 1,335,003 | | | | 0.78 | | | | - | | |
Public (7) | | | 82,820,847 | | | | 48.41 | | | | 48.79 | | |
Menora Mivtachim Group (5) | | | 13,589,742 | | | 7.13 | | | 7.39 | |
Harel Group (6) | | | 12,945,310 | | | 6.79 | | | 7.04 | |
Clal Insurance Group (7) | | | 12,669,049 | | | 6.65 | | | 6.89 | |
Psagot Investment House (8) | | | 9,488,171 | | | 4.98 | | | 5.16 | |
Treasury shares (9) | | | 6,733,049 | | | 3.53 | | | - | |
Public (10) | | | 55,961,953 | | | 29.36 | | | 30.45 | |
Total | | | 171,095,739 | | | | 100.00 | | | | 100.00 | | | 190,568,757 | | | 100.00 | | | 100.00 | |
(1) | As shown above and used throughout this annual report,Annual Report, the term “Issued and Outstanding Shares” does not include any treasury shares held by the Company. Treasury shares, which are included in “Issued Shares”, have no voting, dividend or other rights under the Israeli Companies Law, as long as they are held by the Company (“dormant shares”). |
(2) | S.B. Israel Telecom, an affiliate of Saban Capital Group LLC, a private investment firm, based in Los Angeles, California, specializing in the media, entertainment and communications industries, held on March 1, 2018, approximately 29.37%is the registered owner of our Issued and Outstanding49,862,800 shares and voting rights.in the Company’s share register. On November 11, 2019, S.B. Israel Telecom also purchased from Scailex Corporation Ltd. (“Scailex”) (whichfiled an amendment to its Schedule 13D with the SEC stating that it had no sole or shared voting or dispositive power over any shares of the Company, and that as a result of the Receiver Appointment (as defined in 2016 changed its namethe filed amendment), as of November 12, 2019, the Reporting Persons (as defined in the filed amendment) ceased to “Suny Cellular Communication Ltd.”) 2,983,333beneficially own any ordinary shares representing another, approximately 1.76%of the Company. On November 12, 2019, the District Court of Tel Aviv issued a judicial order which appointed attorney Ehud Sol as receiver (the "Receiver") for all of the Company’s shares held by S.B. Israel Telecom. See "Item 3D.3a Approximately 27.12% of our Issuedissued and Outstandingoutstanding shares and voting rights which shares are to be transferredheld by Scailex to S.B. Israel Telecom free and clear of any lien on one or more future deferred closing dates, subject to the conditions set fortha receiver (under Israeli law), who might not act in the share purchase agreement entered into between Scailex and S.B. Israel Telecom.best interests of the Company or its shareholders." |
(3) | Phoenix Holdings Ltd., an Israeli corporation listed on the Tel Aviv Stock Exchange (“Phoenix”), and Excellence Investments Ltd., an Israeli corporation listed on the Tel Aviv Stock Exchange (“Excellence”), which is controlled by Phoenix, hold shares in the Company directly and through its wholly owned subsidiaries. (Phoenix, Excellence and their subsidiaries collectively, the “Phoenix-Excellence Group”). These holdings are held according to the following segmentation: 1,309,2482,219,702 ordinary shares are held by Excellance Investments, Kesem trust funds, 1,102,000 ordinary shares are held by Provident funds and Management Companies of Provident funds; 467,618 ordinary shares are held by Excellence Trust Funds; 784,501853,045 ordinary shares are held by Excellence ETFs; 554,050993,855 ordinary shares are held by Phoenix "Nostro" accounts; 21,000 ordinary shares are held by Phoenix Pension funds; 98,66627,000 ordinary shares are held by Linked insurance policies of Phoenix; 6,957,483 ordinary shares are held by Partnership for Israeli shares; 499,5329,489,728 ordinary shares are held by Partnership for investing inIsraeli shares. On March 17, 2021, Phoenix-Excellence Group advised the TA 100.Company that subsequent to March 1, 2021, their interest has increased to 16,768,306 ordinary shares. 1,935,000 shares of the 11,692,09816,768,306 shares held by the Phoenix-Excellence Group, representing approximately 1.14%1.058% of our Issued and Outstanding shares and total voting rights, are registered in the Company’s Shareholders Register as part of the shares held by Israeli founding shareholders from among our founding shareholders and their approved substitutes. For further information regarding required holdings by Israeli founding shareholders, see "Item 3D.1l Our cellular telephone license imposes certain obligations on our shareholders and restrictions on who can own our shares. Ensuring compliance with these obligations and restrictions may be outside our control. If the obligations or restrictions are not respected by our shareholders, we could be subject to significant monetary sanctions or lose our license.” |
(4) | Meitav Dash Investments Ltd., an Israeli corporation listed on the Tel Aviv Stock Exchange, holds shares in the Company directly and through its wholly owned subsidiaries (Meitav Dash and their subsidiaries collectively, the “Meitav Dash Group”). These holdings are held according to the following segmentation: 5,403,19510,417,969 ordinary shares are held by Meitav Dash Providentprovident funds; 1,749,613 ordinary shares are held by Meitav DS Mutual Funds; 1,972,9372,658,067 ordinary shares are held by Meitav Dash ETFs. 805,000mutual funds; 1,536,317 ordinary shares are held by Meitav Dash portfolio management. On March 17, 2021, Meitav Dash Group advised the Company that subsequent to March 1, 2021, their interest has decreased to 14,552,713 ordinary shares. 1,313,911 shares of the 9,125,745 shares14,552,713 held by the Meitav Dash Group, representing approximately 0.47%0.719% of our Issued and Outstanding shares and total voting rights, are registered in the Company’s Shareholders Register as part of the shares held by Israeli founding shareholders from among our founding shareholders and their approved substitutes. |
(5) | Psagot Investment HouseMenora Mivtachim Holdings Ltd., an Israeli corporation listed on the Tel Aviv Stock Exchange, holds shares in the Company directly and through its wholly owned subsidiaries (Psagot Investment House(Menora Mivtachim Holdings Ltd. and their subsidiaries collectively, the “Psagot Investment House”“Menora Mivtachim Group”). In accordance with Schedule 13G filed by Psagot Investment House on February 12, 2018, and in accordance with an update received by the Company from Psagot Investment House on March 7, 2018, theseThese holdings are held according to the following segmentation: 5,444,1881,384 ordinary shares are held by portfolio accounts managedMenora holdings; 232,431 ordinary shares are held by "Nostro" insurance; 29,859 ordinary shares are held by "Nostro" Shomera; 13,259,068 ordinary shares are held by Menora Mivtachim Pension and Provident funds. On March 17, 2021, Menora Mivtachim Group advised the Company that subsequent to March 1, 2021, their interest has decreased to 13,571,742 ordinary shares. |
(6) | Harel Insurance Investments & Financial Services Ltd., an Israeli corporation listed on the Tel Aviv Stock Exchange, holds shares in the Company directly and through its subsidiaries (the "Harel Group"). These holdings are held according to the following segmentation: 479,190 ordinary shares are held by "Mivtach"; 593,379 ordinary shares are held by provident funds; 331,941 ordinary shares are held by "Nostro"; 2,557,063 ordinary shares are held by Harel Group mutual funds; and 8,983,737 ordinary shares are held by "Amitim". On March 18, 2021, Harel Group advised the Company that subsequent to March 1, 2021, their interest has decreased to 12,752,334 ordinary shares. 815,531 shares of the 12,572,334 held by Harel Insurance Company Ltd., representing approximately 0.446% of our Issued and Outstanding shares and total voting rights, are registered in the Company’s Shareholders Register as part of the shares held by Israeli founding shareholders from among our founding shareholders and their approved substitutes. |
(7) | Clal Insurance Company Ltd. an Israeli corporation listed on the Tel Aviv Stock Exchange, holds shares in the Company directly and through its subsidiaries. (Clal Insurance Company Ltd. and their subsidiaries collectively, the “Clal Group”). These holdings are held according to the following segmentation: 762,955 ordinary shares are held by "Nostro"; 306,840 ordinary shares are held by "Atudot"; 11,599,254 ordinary shares are held by Clal Israel Pension and Provident funds. |
(8) | Psagot SecuritiesInvestment House, Ltd.; 7,470,372 an Israeli corporation listed on the Tel Aviv Stock Exchange, holds shares in the Company directly and through its subsidiaries. These holdings are held according to the following segmentation: 7,746,322 ordinary shares are held by Psagot ProvidentInvestment House pension and Pension funds; 1,550,515provident funds and 1,746,823 ordinary shares are held by Psagot Mutual Funds; 1,738,012Investment House trust funds. On March 16, 2021, the Psagot Investment House, Ltd. advised the Company that subsequent to March 1, 2021, their interest has increased to 9,626,009 ordinary shares are held by Psagot ETFs ; 56,160 ordinary shares are held by Psagot Insurance.shares. |
(6)(9) | Treasury shares do not have a right to dividends or to vote. During 2008, the Company purchasedrepurchased 4,467,990 of the Company's shares aand during 2018, the Company repurchased an additional 6,501,588 of the Company's shares, as part of a buy-back plan. As ofplans. Since March 1, 2018,2020, the Company has allocated under the Company’s 2004 Amended and Restated Equity Incentive Plan, 1,507,251322,946 restricted shares from the treasury shares to a trustee on behalf of the Company’s employees. See “Item 6E.2 EQUITY INCENTIVE PLAN”. |
(7)(10) | The shares under “Public” include 5,826,6236,254,995 shares held by Israeli founding shareholders from among our founding shareholders and their approved substitutes.substitutes including 937,283 Israeli founding shareholders shares which were issued following a public issuance of the Company shares during January 2020 and were approved by the Ministry of Communications on March 16, 2020. These shares, together with 1,935,000 shares held by the Phoenix-Excellence Group and 805,0001,313,911 shares held by the Meitav Dash Group, represent approximately 5.01%4.99% of our issued shares (approximately 5.05%5.17% of the Issued and Outstanding Shares). Under the terms of our mobile telephone license, theFor further information regarding required holdings by Israeli founding shareholders, from amongsee "Item 3D.1l Our cellular telephone license imposes certain obligations on our founding shareholders and their approved substitutes must hold at least 5% ofrestrictions on who can own our issuedshares. Ensuring compliance with these obligations and outstanding share capital and of each ofrestrictions may be outside our means of control. The Israeli foundingIf the obligations or restrictions are not respected by our shareholders, must meet the requirements of “Israeli entities” which are defined as individuals who are citizens and residents of Israel and entities formed in Israel and controlled, directlywe could be subject to significant monetary sanctions or indirectly, by individuals who are citizens and residents of Israel, provided that indirect control is only through entities formed in Israel, unless otherwise approved by the Minister of Communications.lose our license.” |
As of March 1, 2018,2021, to the best of the Company’s knowledge, none of our directors and senior management held more than 1% of our outstanding ordinary shares; their holdings have been included under “Public” in the table above. For information regarding options held by our senior management to purchase ordinary shares, see “6E- Share Ownership”.
We are not aware of any arrangements that might result in a change in control of our Company.
7A.1 OTHER
On March 1, 2018, 5,418,0222021, 4,866,354 ADSs (equivalent to 5,418,0224,866,354 ordinary shares) or approximately 3.19%2.64% of our total Issued and Outstanding ordinary shares, were held of record by 3424 registered holders in the United States. There were 45 registered holder accounts ofin addition to the 3424 with registered addresses outside of the United States. Certain accounts of record with registered addresses other than in the United States may hold our ordinary shares, in whole or in part, beneficially for United States persons. We are aware that many ADSs and ordinary shares are held of record by brokers and other nominees and accordingly the above numbers are not necessarily representative of the actual number of persons who are beneficial holders of ADSs and ordinary shares, or the number of ADSs and ordinary shares beneficially held by such persons.
7B. Related Party Transactions
7B.1 RELATIONSHIP AGREEMENT
Our Israeli founding shareholders and S.B. Israel Telecom are parties to a Relationship Agreement with S.B. Israel Telecom in relation to itstheir direct holdings of our shares and the rights associated with such holdings. (The Receiver exercising rights over the S.B.Telecom shares has the same rights and responsibilities as S.B. Telecom under the agreement. See "Item 3D.3a Approximately 27.12% of our issued and outstanding shares and voting rights are held by a receiver (under Israeli law), who might not act in the best interests of the Company or its shareholders." See Exhibit 4.(a).1.2.1. incorporated by reference in this annual report.Annual Report.
License Conditions: Required Minimum Israeli and Founding Shareholder Percentages
The parties to the Relationship Agreement have agreed that they shall at all times comply with the terms of our license requiring that our founding shareholders or their approved substitutes hold in aggregate at least 26% of our means of control, and that our Israeli founding shareholders or their approved substitutes (from among the founding shareholders and their approved substitutes) hold at least 5% of our means of control. See “Item 4B.12f Our Mobile Telephone License.”
Compulsory Transfer in the Event of Default
If a party to the Relationship Agreement commits certain events of default described in the agreement, it may be required to offer its shares to the other parties on a pre-emptive basis. Events of default for this purpose include a breach of the Relationship Agreement which has a material adverse effect on Partner, and in the case of such breach, the purchase price at which the shares are to be sold will be market value less a 17.5% discount.
Term and Termination
The Relationship Agreement continues in full force and effect until we are wound up or cease to exist unless terminated earlier by the parties. The Relationship Agreement will terminate in relation to any individual party after it ceases to hold any share beneficially if it is required to comply with the minimum holding requirements for founding shareholders or Israeli founding shareholders, as applicable, and the transfer of the shares was not made in breach of the Relationship Agreement.
Related agreement among Israeli founding shareholders
A shareholders agreement among the Israeli founding shareholders, or their approved substitutes, purports to establish the procedures, rights and obligations with respect to the appointment of the Israeli director. The Company’s position, which is based among others upon a legal opinion from outside counsel, is that the arrangement set in this agreement with respect to the procedures, rights and obligations pertaining to the appointment of the Israeli director is not valid and the Company does not give effect to that arrangement and it acts according to the provision of its license and Articles of Association in connection with the appointment of the Israeli director. In November 2014, the agreement was amended and among other things, Israeli founding shareholders were removed from the Shareholders Agreement, leaving only Scailex (whose shares in the Company that constitute the holdings of Israeli founding shareholders are controlled by a court appointed receiver in light of Scailex’s failure to comply with its obligations to its noteholders for the benefit of Scailex’s noteholders) and Suny Electronics Ltd. (whose shares in the Company are mortgaged to a trustee on behalf of Suny's noteholders and constitute part of the holdings of Israeli founding shareholders) as parties to the Shareholders Agreement.
7B.2 REGISTRATION RIGHTS
On October 17, 2013, following approval of our general meeting of shareholders, we have entered into a registration rights agreement with S.B. Israel Telecom, our principal shareholder, in which we granted S.B. Israel Telecom:
(1) the right to require us to register ordinary shares held by them under the US Securities Act and to freely dispose of their shares in the U.S. public market. We have agreed that, upon request from S.B. Israel Telecom, we will file a registration statement under the US Securities Act to register ordinary shares held by them, subject to a maximum of one request in any 6-month period and to certain other limitations. There is no limit to the number of registrations that can be requested under the registration rights agreement. The minimum amount of shares that must be included in any registration requested under the registration rights agreement is 2.65% of our outstanding shares.
(2) the right to include their ordinary shares in any registration statement covering offerings of ordinary shares by us.
The registration rights agreement will terminate upon the earlier of October 16, 2018, and such time as the holder can sell its ordinary shares into the United States public market pursuant to an exemption from the registration requirements of the Securities Act without regard to holding period, volume or manner-of-sale limitations.
7B.3 TRANSACTIONS WITH PHI
Pursuant to the Network Sharing Agreement between the Company and the limited partnership PHI, the Company has transactions during the normal course of business with PHI. See "Item 4B.8a4B.6a Overview- cellular network sharing", "Item 5B.4 Total net financial debt " and also note 26(d)9 to the consolidated financial statements.
7C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
8A. Consolidated Financial Statements and Other Financial Information
Audited financial statements for the three fiscal years ended December 31, 2017,2020, are included under “Item 18. Financial Statements.”
8A.1 LEGAL AND ADMINISTRATIVE PROCEEDINGS
In addition to the legal proceedings discussed below, weWe are party to a number of legal and administrative proceedings arising in the ordinary course of our business.business, in addition to the legal proceedings specifically discussed below. We do not currently expect the outcome of such matters individually or in the aggregate to have a material adverse effect upon our business and financial condition, results of operations and cash flows.
We have been named as defendants in a number of civil and criminal proceedings related to our network infrastructure and consumer claims regarding, for example, our tariff plans and billing methods, which may result in civil liabilities or criminal penalties against us or our officersoffice holders and directors. In addition, we have also been named as defendants in a number of proceedings regarding breaches of our license and legal provisions of various laws including the Consumer Protection Law, Privacy Act and others. Plaintiffs in some of these proceedings have successfully sought or are seeking certification as class actions. The costs that may result from these lawsuits are only accrued for when it is more likely than not that a liability, resulting from past events, will be incurred and the amount of that liability can be quantified or estimated within a reasonable range. The amount of the provisions recorded is based on a case-by-case assessment of the risk level, and events arising during the course of legal proceedings may require a reassessment of this risk. The Company’s assessment of risk is based both on the advice of counsel and on the Company’s estimate of the probable settlement amounts that are expected to be incurred, if such settlements are agreed by both parties.incurred. Based on its best judgment of the merits or lack thereof of the class actions described in the first three lists below, the likely range of damages which may be involved, and any provisions made in respect thereof in the Company’s balance sheet, the Company does not currently believe that the outcome of these class actions, individually or in the aggregate, will have a material negative effect on its financial condition or results of operation. See note 20 to the consolidated financial statements for further information regarding litigation and proceedings of which we are currently aware. See also “Item 3D.2p3D.2g We are exposed to, and currently engaged in, a variety of legal proceedings, including class actions and requests to approve lawsuits as class actions related primarily to our network infrastructure and consumer claims.actions.”
The litigations described below involve claims for which requests for certification as class actions and class actions were filed and which specify ana material amount of damages and which we consider mayor have a potentially material effect onbeen previously reported by the Company. The total amount of pending claims (claims which have not been dismissed by the Court or settled) made by plaintiffs in the litigations described below is NIS 2.182.05 billion.
1. | On September 7, 2010, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company unlawfully charges its customers for services of various content providers, which are sent through text messages (SMS). The total amount claimed from the Company was estimated by the plaintiffs to be approximately NIS 405 million. The claim was certified as a class action in December 2016. In February 2017, the plaintiffs filed an appeal to the Supreme Court, regarding the definition of the group of customers. Partner estimates that even if the claim will be decided in favor of the approved group of customers (as defined by the District Court), the damages that Partner will be required to pay for, will be immaterial.
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2. | On July 15, 2014, a claim and a motion to certify the claim as a class action were filed against the Company and against additional cellular operators and content providers. The claim alleges that the cellular operators, including the Company, breached legal provisions and provisions of their licenses and thereby created a platform that led to the customers’ damages alleged in the claim. The total amount claimed against all of the defendants is estimated by the plaintiffapplicant to be approximately NIS 300 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
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2. | On November 12, 2015, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that Partner required their customers to purchase a router and/or a call adaptor and/orSmartbox device which is terminal equipment as a condition for using its fixed-line telephony services, an action which would not be in accordance with the provisions of its licenses. The total amount claimed against Partner is estimated by the plaintiff to be approximately NIS 116 million. TheIn February 2019, the Court approved the request to certify the claim is still in its preliminary stage of the motion to be certified as a class action. with certain changes. In March 2019, the Company filed an appeal of this decision. In February 2020, the Supreme Court dismissed the appeal request that was filed and the claim was reverted back to the District Court and the proceedings have resumed. |
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4.3. | On November 12, 2015, a claim and a motion to certify the claim as a class action were filed against 012 Smile. The claim alleges that 012 Smile required their customers to purchase a router and/or a call adaptor and/orSmartbox device which is terminal equipment as a condition for using its fixed-line telephony services, an action which would not be in accordance with the provisions of its licenses. The total amount claimed against 012 Smile is estimated by the plaintiff to be approximately NIS 64 million. Themillion. In February 2019, the Court approved the request to certify the claim is still in its preliminary stage of the motion to be certified as a class action. action with certain changes. In March 2019, the Company filed an appeal of this decision. In February 2020, the Supreme Court dismissed the appeal request that was filed and the claim was reverted back to the District Court and the proceedings have resumed. |
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5.4. | On January 4, 2016, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that Partner charges its customers the full price of telecommunication packages that are intended for use abroad despite the fact that the packages are not fully utilized and does not allow customers to transfer the balance to the next trip abroad or to receive a credit for the balance. The total amount claimed against Partner is estimated by the plaintiffapplicant to be approximately NIS 234 million. The claim is stillIn April 2020, the Court dismissed the case and in its preliminary stageJune 2020 the plaintiffs filed an appeal of the motion to be certified as a class action. this decision. |
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6.5. | On April 2, 2017,November 20, 2016, a claim and a motion to certify the claim as a class action were filed against the Company. The claim allegesOn February 17, 2021, the applicant filed an amended motion that claimed, among others,other things, that Partner overchargesthe Company breached legal provisions when it does not update its customers without their consent for serviceswho purchased equipment from the Company in a credit transaction regarding the required interest rate and/or that they did not order andit does not respond to customersspecify the cash price and/or that apply in writing regarding the overcharge contrary to its license.it notes an incorrect interest rate. The total amount claimed against Partner is estimated by the plaintiffapplicant to be approximately NIS 60157.5 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
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7.6. | On October 24, 2017, a claim and a motion to certify the claim as a class action were filed against the Company and another cellular operator. The claim alleges that Partner harms the privacy of its customers by unlawfully using their location data. The total amount claimed against Partner is estimated by the plaintiffapplicant to be approximately NIS 1 billion. The claim is still in its preliminary stage of the motion to be certified as a class action. |
With respect to the following claims which totaled an amount of NIS 843 million, claims totaling NIS 250 million have been dismissed. With regards to the remaining claims, the Company has reached settlement agreements (as noted below, some settlement agreements are still subject to Court approval) and the Company does not believe that they will have a material adverse effect on the Company individually or in the aggregate.
1. | On April 12, 2010, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleged that the Company charged its customers for certain content services without their consent. The total amount claimed from the Company was estimated by the plaintiffs to be approximately NIS 343 million. In March 2016, the parties filed a request to approve a settlement agreement and are waiting for the Court's decision. |
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2. | On November 13, 2013, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleged that the Company increased tariffs for its customers not in accordance with their agreements. The total amount claimed from Partner was estimated by the plaintiff to be NIS 150 million. The parties filed a settlement agreement in October 2015 which was approved by the Court in November 2017. |
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3. | On March 24, 2014, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleged that the Company did not include in the severance pay calculation for its employees various components that constitute an addition to the salary for the severance pay calculation and thereby acted unlawfully. The total amount claimed from Partner was estimated by the plaintiff to be approximately NIS 100 million. In November 2015, the plaintiff filed an amended claim and a motion to certify the claim as a class action. In November 2017, the parties filed a revised settlement agreement and waiting for the Court's decision. |
4.7. | On September 7, 2015, a claim and a motion to certify the claim as a class action were filed against the Company and 012 Smile. The claim alleges that Partner and 012 Smile overcharge its customers according to a special tariff for overseas call destinations that are defined by the Company as special tariff destinations despite the fact that they are fixed-line destinations. The total amount claimed against Partner and 012 Smile if the lawsuit is certified as a class action was not stated by the plaintiff. In April 2017, the parties filed an agreed upon withdrawal request which was approved by the Court. |
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5. | On September 11, 2016,15, 2020, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that Partner automatically charges itsthe Company unlawfully sent advertisement messages to customers that usedid not agree to receive such messages. The claim also alleges that advertisement messages were sent without including the maximum volumepossibility for the recipients to remove themselves from the Company's mailing lists or did not include means of their data packages, for additional data volume, without their consent.contacting the Company or did not clarify that this is an advertisement and that the recipients had a right to send a refusal to receive the message and that the Company continued to send advertisement messages to customers that requested to be removed from the mailing lists. The total amount claimed against Partnerthe Company was not stated by the applicants (however the claim was estimated by the applicants to be over NIS 2.5 million). The claim is still in its preliminary stage of the motion to be certified as a class action. |
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8. | On November 1, 2020, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company unlawfully displays advertising POP UP messages before and during TV services constitute spam. The total amount claimed against the Company is estimated by the plaintiffapplicants to be approximately NIS 250175 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
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9. | On November 2, 2020, a claim and a motion to certify the claim as a class action were filed against the Company and two of its subsidiaries, 012 Smile Telecom Ltd. and 012 Telecom Ltd. as well as against another operator. The claim alleges that the Company as well as the other respondents charged its customers a fee for ISP service after they began receiving this service from another company and that the respondents did not provide the service in return for payment. The total amount claimed from the Company was estimated by the applicants to be approximately NIS 2.5 million (however the claim was estimated by the applicants to be tens of millions of Shekels). The claim is still in its preliminary stage of the motion to be certified as a class action. |
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10. | On November 2, 2020, a claim and a motion to certify the claim as a class action were filed against the Company and 012 Telecom Ltd. The claim alleges that the Company charged its customers a fee for ISP service after they began receiving this service from another company and that the respondents did not provide the service in return for payment. The total amount claimed against the Company was not stated by the applicants (however the claim was estimated by the applicants to be over NIS 2.5 million). The claim is still in its preliminary stage of the motion to be certified as a class action. |
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11. | On December 15, 2020, a claim and a motion to certify the claim as a class action were filed against the Company and 012 Smile Telecom Ltd. The claim alleges that the Company charged its customers a fee for anti-virus and/or anti- spam services for email boxes while they did not use these services and that the Company does not keep records of their requests to receive these services. The total amount claimed against the Company was not stated by the applicant (however the claim was estimated by the applicant to be over NIS 2.5 million). The claim is still in its preliminary stage of the motion to be certified as a class action. |
With respect to the following claims that have previously been reported, the Company has reached settlement agreements or agreed upon withdrawals or the applicant has unilaterally withdrawn (as noted below, some of which are still subject to Court approval).
1. | On September 7, 2010, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company unlawfully charges its customers for services of various content providers, which are sent through text messages (SMS). The total amount claimed from the Company was estimated by the plaintiffs to be approximately NIS 405 million. The claim was certified as a class action in December 2016. In AugustJanuary 2017, the plaintiffs filed an appeal to the Supreme Court, regarding the definition of the group of customers. In November 2018, the Supreme Court dismissed the claim.appeal and the claim was reverted back to the District Court. In February 2020, a settlement agreement was filed with the Court. |
The litigations described below involve claims for which requests for certification as class actions were filed and which do not claim any specific amount of damages. Based on its best judgment of the merits or lack thereof of the class actions described below, the likely range of damages which may be involved, and any provisions made in respect thereof in the Company’s balance sheet, the Company does not currently believe that the outcome of these class actions, individually or in the aggregate, will have a material negative effect on its financial situation.
1.2. | On July 14, 2010, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that Partner is breaching its contractual and/or legal obligation and/or is acting negligently by charging V.A.T for roaming services that are consumed abroad. The plaintiffapplicant demands to return the total amount of V.A.T that was charged by Partner for roaming services that were consumed abroad. The plaintiffapplicant also pursued an injunction that will order Partner to stop charging VA.T for roaming services that are consumed abroad. In August 2014, the claim was dismissed and in October 2014, the plaintiffapplicant filed an appeal with the Supreme Court. The hearing was held in May 2016 before an expanded panel of seven judges and the parties are waitingSupreme Court accepted the appeal in July 2017 and dismissed the District Court's decisions. The claim was reverted back to the District Court. In March 2020, a settlement agreement was filed for the Court's decision.approval. |
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2.3. | On August 8, 2012, a claim and a motion to certify the claim as a class action were filed against 012 Smile and another Internet Service Provider. The claim alleges that the defendantsrespondents breached certain provisions of their licenses by not offering their services at a unified tariff to allthe same type of customers. The total amount claimed against 012 Smile, if the lawsuit is certified as a class action, was not stated by the plaintiff. The claim is still in its preliminary stage ofapplicant. In December 2019, the Court dismissed the motion and in January 2020, an appeal was filed with the Supreme Court. Following a hearing held in the Supreme Court, the applicant filed a request to be certified as a class action.expunge their appeal and on February 16, 2021, the Court expunged their appeal. |
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5. | On November 17, 2019, a claim and a motion to certify the claim as a class action were filed against the Company and two additional cellular operators. The claim alleges that the Company, as well as the other respondents collected money from its customers for content services for third parties, by using the means of payment that were given to the Company for the purpose of the cellular invoice payment for content services, without receiving consent from these customers prior to the charge, and/or without having documentation with respect to the customers' consent, unlawfully and against its license provisions and/or without the Company first ensuring that the customers received a document that complies with the Consumer Protection Law regarding the specific transaction for which it intends to collect money from them. The total amount claimed from each of the respondents if the lawsuit is recognized as a class action is NIS 400 million in addition to compensation in the amount of NIS 500 for each one of the group members for non-monetary damages which were allegedly caused to them. The group on whose behalf the claim was filed is all Partner subscribers who made such payments from September 2003 until the date that Partner is found to have stopped charging customers for such content services (from this group a group of customers charged for certain content services were excluded in light of other court decisions). In December 2020, the applicants notified that they wish to withdraw from the proceedings and the Court has yet to rule on the matter. |
The litigations described below involve claims for which requests for certification as class actions were filed and which do not claim any specific aggregate amount of damages to the relevant group in the claim.
1. | On May 6,4, 2015, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges, that Partner discriminated between its cellular customers, including between new customers and existing customers, by offering the same type of customers, different terms, an action which would not be in accordance with the provisions of its license. The plaintiffapplicant noted that it cannot estimate the total amount claimed in the lawsuit, if the lawsuit is certified as a class action. The claim is still in its preliminary stage ofIn December 2019, the Court dismissed the motion to be certified as a class action. |
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4. | On February 24, 2016, a claim and a motion to certify the claim as a class action werein January 2020, an appeal was filed against the Company. The claim alleges that the Company harasses recipients by sending advertising messages without receiving their prior approval for this. In addition, the content of the advertisements does not comply with the legal provisions, among others, with respect to the fact that most of the advertising messages do not easily include an option to remove or send a refusal notice. The total amount claimed against the Company if the lawsuit is certified as a class action was not stated by the plaintiff. The claim is still in its preliminary stage of the motion to be certified as a class action.Supreme Court. |
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2. | On April 21, 2016, a claim and a motion to certify the claim as a class action were filed against 012 Smile. The claim alleges that the infrastructure included in the 012 Smile's infrastructureplans does not support data speeds that the Company publishes to its customers. The total amount claimed against the Company if the lawsuit is certified as a class action was not stated by the plaintiff. Theplaintiffs. In January 2021, the Court approved the request to certify the claim is still in its preliminary stage of the motion to be certified as a class action. |
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6. | On November 1, 2016, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company sends text messages regarding the volume rate of data packages, which unlawfully include advertisement content, intended to encourage purchasing another data package. The total amount claimed against the Company if the lawsuit is certified as a class action was not stated by the plaintiff. The claim is still in its preliminary stage of the motion to be certified as a class action. |
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7.3. | On September 11, 2016, a claim and a motion to certify the claim as a class action were filed against 012 Smile and two other international long distance operators. The claim alleges that the defendantsrespondents charged excessive tariffs from occasional customers for each long distance call minute, contrary to the Telecommunications Law (Telecommunications and Broadcasting), that allows a licensee to charge reasonable payment for a telecommunication service that it provides. The total amount claimed against 012 Smile if the lawsuit is certified as a class action was not stated by the plaintiff. The claim is still in its preliminary stage ofapplicant. In July 2019, the Court dismissed the motion to be certified as a class action.and in October 2019, an appeal was filed with the Supreme Court. |
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8.4. | On September 29, 2016,24, 2017, a claim and a motion to certify the claim as a class action were filed against the Company.Company and Partner Land-Line. The claim alleges that Partner refundedthe infrastructure included in the Company's plan does not support data speeds that the Company publishes to its customers, in cases where it was apparent that they were overcharged, not in accordance with legal provisions. In addition, the claim alleges that Partner charges some of its customers that subscribe to the "One" service for the provision of this special service even though it was terminated.customers. The plaintiffapplicant noted that it cannot estimate the total amount claimed in the lawsuit, should the lawsuit be certified as a class action. The claim is still in its preliminary stage of the motion to be certified as a class action. |
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9.5. | On September 19, 2017,August 6, 2018, a claim and a motion to certify the claim as a class action were filed against the Company.Company and 012 Smile and at a later date, following a revision to the motion, also against Partner Land-Line. The claim alleges that Partner breachesthe respondents unlawfully charge its license with respect to coordination of technician visitscustomers different and higher rates for internet malfunction repairs. The plaintiff notedinternational calls that it cannot estimate the total amount claimedare not included in the lawsuit, should the lawsuit be certified as a class action. The claim is stilltheir tariff plans, than those set forth in its preliminary stage ofcustomer tariff chart on the motion to be certified as a class action. |
With respect to the following claims, we have begun to assess the risk involved for the Company but at this stage in our analysis we are unable to evaluate, with any degree of certainty, the probability of success of the lawsuit or the range of potential exposure, if any.
1. | On April 25, 2017, a claim and a motion to certify the claim as a class action were filed against the Company.012 Smile website. The claim alleges that Partner misled its customers with respect to certain cellular plans that were represented as including international call minutes while in fact Partner charged its customers that joined these plans for international calls. The plaintiffapplicants noted that it cannot estimate the total amount claimed in the lawsuit, should the lawsuit be certified as a class action. The claim is still in its preliminary stage of the motion to be certified as a class action. |
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2.6. | On September 24, 2017,April 11, 2019, a claim and a motion to certify the claim as a class action were filed against the Company and additional telecommunication service companies. The claim alleges that the Company, as well as the other respondents, breached their obligations under the law and their license and does not inform its customers as required regarding a free content filtering service and prioritizes a paid service over a free service and the filtering service does not meet the legal requirements and those of the license and is ineffective. The total amount claimed against the respondents if the lawsuit is recognized as a class action, was not stated by the applicants. The claim is still in its preliminary stage of the motion to be certified as a class action. |
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7. | On July 4, 2019, a claim and a motion to certify the claim as a class action were filed against the Company and two additional cellular operators. The claim alleges that the Company charges its customers for voicemail service without receiving their prior express consent for this service and for its charge and without a contractual right. The total amount claimed against the respondents if the lawsuit is recognized as a class action, was not stated by the applicants. The claim is still in its preliminary stage of the motion to be certified as a class action. |
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8. | On April 1, 2020, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that Partner's infrastructure does not support data speeds that the Company publishes tounlawfully charges its customers.customers for anti-virus services that without their consent. The plaintiff noted that it cannot estimate the total amount claimed infrom the lawsuit, shouldCompany was not stated by the lawsuitapplicant but was estimated by the applicant to be certified as a class action.at least tens of millions of NIS. The claim is still in its preliminary stage of the motion to be certified as a class action. |
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9. | On November 26, 2020, a claim and a motion to certify the claim as a class action were filed against the Company and three of its subsidiaries. The claim alleges that the Company unlawfully reduced the operating hours of its customer service centers. The total amount claimed against the Company if the lawsuit is recognized as a class action, was not stated by the applicants. The claim is still in its preliminary stage of the motion to be certified as a class action. |
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10. | On January 25, 2021, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company does not disclose interest rates to customers that purchase items in credit transactions prior to the conclusion of the transaction. The total amount claimed against the Company was not stated by the applicant (however the claim was estimated by the applicant to be over NIS 2.5 million). The claim is still in its preliminary stage of the motion to be certified as a class action. |
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11. | On February 25, 2021, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges, among others, that the Company provided its customers with TV service for viewing through a free application, as an ancillary benefit to other services and that the Company began charging customers for the TV service upon the cancellation of the ancillary service. The total amount claimed against the Company was not stated by the applicant (however the claim was estimated by the applicant to be over NIS 2.5 million). The claim is still in its preliminary stage of the motion to be certified as a class action. |
During 2017, no new
Finally, as we reported on March 19, 2019, the Israeli Tax Authority ("ITA") is conducting an investigation that involves document collection and the questioning of among others, several current and former Company employees. The investigation is seeking to determine whether there have been violations of the Eilat Free Trade Zone Law regarding the sale of cellular phones in the city of Eilat. The Company is fully cooperating with the ITA. At this stage, the Company is unable to estimate the impact of the investigation on the Company, its results and its condition, if any.
As of December 31, 2020, one criminal proceedings were broughtproceeding was pending against us concerning the erection of network sites without building permits. As of December 31, 2017, two criminal proceedings were pending against us concerning the erection of network sites without building permits, none of which was pending against our officers and directors. We are currently negotiating with the relevant local authorities to reach a settlement regarding the relocation of affected sites or obtaining building permits for those sites. Settlements of previous criminal proceedings brought against us resulted in Partner, but not its officersoffice holders or directors, admitting guilt and paying a fine, and also resulted in the imposition of demolition orders for the relevant sites, the execution of which have been stayed for a period of time to allow us to obtain the necessary permits or to relocate the relevant network site.
8A.2 DIVIDEND DISTRIBUTION POLICY
Our Articles of Association allow for our Board of Directors to approve all future dividend distributions, without the need for shareholder approval, subject to the provisions governing dividends under the Israeli Companies Law.
The Board of Directors resolved on September 19, 2012, to assess dividend distributions (and their scope) from time to time, by reference to, among other factors, the Company’s cash flow, profitability, debt level, debt coverage ratios and the business environment in general. For the years ended December 31, 2015, 2016 and 2017, no dividend was declared by the Company.No dividends have been distributed since 2013. For risks relating to future payments of dividends, see “Item 3D.2v Based on a decision of the Board of Directors in 2012, dividend distributions are assessed from time to time on the basis of various factors.3D.2u There can be no assurance that dividends will be declared or, if they are, at what level. No dividends have been distributed since 2013.2013, although we repurchased 6,501,588 shares of the Company in 2018 for a cost of NIS 100 million.”
We intend to pay any dividends which may be declared in shekels. Under current Israeli regulations, any dividends or other distributions paid in respect of ordinary shares may be freely repatriated in non-Israeli currencies at the rate of exchange prevailing at the time of conversion, provided that Israeli income tax has been paid on or withheld from such dividends. Because exchange rates between the shekel and the US dollar fluctuate continuously, a holder of ADSs will be subject to currency fluctuation generally and, particularly, between the date when dividends are declared and the date dividends are paid.
8B. Changes
No significant change has occurred since December 31, 2017,2020, except as otherwise disclosed in this annual report.thisAnnual Report. See also "Item 3D.2d The Coronavirus ("COVID-19") crisis had a material harmful effect on the Company's business in 2020. As of the date of this Annual Report, revenues from roaming services continue to be significantly restrained. Should existing trends continue or worsen, this may have a material harmful effect on our results of operations and financial position for 2021.", and “Item 5D.2 Outlook”.
ITEM 9. THE OFFER AND LISTING
9A. Offer and Listing Details
Our capital consists of ordinary shares, which are traded on the Tel Aviv Stock Exchange under the symbol “PTNR”. American Depositary Shares (“ADSs”), each representing one of the Company’s ordinary shares, are quoted on the NASDAQ Global Select Market under the symbol “PTNR”. The ADSs are evidenced by American Depositary Receipts (“ADRs”). Citibank serves as our depositary for ADSs.
The tables below set forth, for the periods indicated, the reported high and low closing quotations, not adjusted for dividends, based on information supplied by the National Association of Securities Dealers, Inc., and information supplied by the Tel Aviv Stock Exchange.
| | NASDAQ | | | Tel Aviv Stock Exchange | |
| | ($ per ADS) | | | (NIS per ordinary share) | |
| | High | | | Low | | | High | | | Low | |
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2013 | | | 9.75 | | | | 5.46 | | | | 35.00 | | | | 20.30 | |
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2014 | | | 9.57 | | | | 5.05 | | | | 33.10 | | | | 20.14 | |
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2015 | | | 5.00 | | | | 2.18 | | | | 19.65 | | | | 8.50 | |
2016 | | | | | | | | | | | | | | | | |
First Quarter | | | 4.84 | | | | 4.07 | | | | 19.16 | | | | 16.20 | |
Second Quarter | | | 5.48 | | | | 4.03 | | | | 20.80 | | | | | |
Third Quarter | | | 5.02 | | | | 4.44 | | | | 19.66 | | | | 17.14 | |
Fourth Quarter | | | 5.08 | | | | 4.33 | | | | 19.50 | | | | 16.94 | |
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2017 | | | | | | | | | | | | | | | | |
First Quarter | | | 6.28 | | | | 5.09 | | | | 23.67 | | | | 18.44 | |
Second Quarter | | | 5.74 | | | | 4.72 | | | | 20.35 | | | | 17.48 | |
Third Quarter | | | 5.49 | | | | 4.71 | | | | 19.57 | | | | 17.10 | |
Fourth Quarter | | | 6.24 | | | | 5.02 | | | | 22.15 | | | | 17.96 | |
| | | | | | | | | | | | | | | | |
September 2017 | | | 5.49 | | | | 4.87 | | | | 19.57 | | | | 17.90 | |
October 2017 | | | 5.37 | | | | 5.03 | | | | 19.26 | | | | 18.15 | |
November 2017 | | | 5.89 | | | | 5.02 | | | | 21.17 | | | | 17.96 | |
December 2017 | | | 6.24 | | | | 5.60 | | | | 22.15 | | | | 20.68 | |
January 2018 | | | 6.60 | | | | 5.60 | | | | 22.67 | | | | 19.35 | |
February 2018 | | | 5.67 | | | | 5.10 | | | | 19.48 | | | | 17.87 | |
March 2018 (through March 27) | | | 5.24 | | | | 4.60 | | | | 18.05 | | | | 16.40 | |
9B. Plan of Distribution
Not applicable.
9C. Markets
Our ADSs are quoted on the NASDAQ Global Select Market under the symbol “PTNR”. Our ordinary shares are traded on the Tel Aviv Stock Exchange under the symbol “PTNR”.
9D. Selling Shareholders
Not applicable.
9E. Dilution
Not applicable.
9F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
10A. Share Capital
Not applicable.
10B. Memorandum and Articles of Association
10B.1 PURPOSES AND OBJECTS OF THE COMPANY
We are a public company registered under the Israeli Companies Law as Partner Communications Company Ltd., registration number 52-004431-4.
Pursuant to our Articles of Association, we were formed for the purpose of participating in the auction for the granting of a license to operate cellular radio telephone services in Israel, to provide such services, and without derogating from the above, we are also empowered to hold any right, obligation or legal action and to operate in any business or matter approved by the Company.
Pursuant to section three of our Articles of Association, our purpose is to operate in accordance with business considerations to generate profits; provided, however, that the Board of Directors is entitled to donate reasonable amounts to worthy causes, even if such donation is not within the frame of these business considerations.
Pursuant to section four of our Articles of Association, our objective is to engage in any legal business.
10B.2 THE POWERS OF THE DIRECTORS
The power of our directors to vote on a proposal, arrangement or contract in which the director is personally interested is limited by the relevant provisions of the Israeli Companies Law and our Articles of Association. In addition, the power of our directors to vote compensation to themselves or any members of their body, requires the approval of the compensation committee, the Board of Directors and the general meeting of shareholders. Generally, the Annual Meeting of the Shareholders must be convened to elect directors and a shareholders meeting could terminate the term of office of directors. In addition, our Articles of Association provide that, in certain circumstances relating to our compliance with the license, our Board of Directors may remove any director from the Board of Directors by a resolution passed by 75% or more of the directors present and voting at the relevant meeting. See also “Item 6C Board Practices”.
10B.3 RIGHTS ATTACHED TO SHARES
Our registered share capital consists of a single class of 235 million ordinary shares, par value NIS 0.01 per share, of which 171,095,739190,568,757 ordinary shares were issued and 171,095,739183,835,708 shares (does not include treasury shares) and 182,826,973 shares (does not include treasury shares and unearned shares held by trustee on behalf of employees under share-based payment plan) were issued and outstanding as of March 1, 2018.2021. All issued and outstanding ordinary shares are validly issued and registered. The rights attached to our ordinary shares are described below.
Dividend Rights
Holders of ordinary shares are entitled to the full amount of any cash or share dividend subsequently declared. The Board of Directors may propose and approve distribution of a dividend with respect to any fiscal year or quarter only out of profits, subject to the provisions of the Israeli Companies Law. See “Item 10E Taxation.”
Shares which are treated as dormant under section 44.6 of our Articles of Association (under circumstances relating to compliance with our license) retain the rights to receive dividends or other distributions to shareholders, and to participate in rights offerings, but no other rights. See “Item 4B.12f Our Mobile Telephone License”.
One year after a dividend has been declared and is still unclaimed, the Board of Directors is entitled to invest or utilize the unclaimed amount of the dividend in any manner to the benefit of the Company until it is claimed. We are not obligated to pay interest or linkage on an unclaimed dividend.
Voting Rights
Holders of issued and outstanding ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders either in person or by proxy. 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. The quorum required for a general meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent, in the aggregate, at least one third of the voting rights of the issued share capital. In the event that a quorum is not present within thirty minutes of the scheduled time, the shareholders’ meeting will be adjourned to the same day of the following week, or the next business day thereafter, at the same time and place, or such time and place as the Board of Directors may determine. If at such reconvened meeting a quorum is not present after the lapsing of 30 minutes from the time appointed for holding the meeting, one or more shareholders present in person or by proxy holding or representing in the aggregate at least 10% of the voting rights in the Company will generally constitute a quorum. Any shareholder seeking to vote at a general meeting of our shareholders must first notify us if any of the shareholder’s holdings in the Company requires the consent of the Ministry of Communications. The instructions of a shareholder will not be valid unless accompanied by a declaration by the shareholder as to whether or not the shareholder’s holdings in the Company or the shareholder’s vote requires the consent of the Ministry of Communications due to a breach by the shareholder of the restrictions on transfer or acquisition of means of control, or provisions regarding cross-ownership with other mobile telephone operators or shareholdings or agreements which may reduce or harm competition. If the shareholder does not provide such certification declaration, his instructions will be invalid and his vote not counted.
An ordinary resolution, such as a resolution for the election of directors (excluding external directors), or the appointment of auditors, requires approval by the holders of a majority of the voting rights represented at the meeting, in person or by proxy, and voting thereon. Under our Articles of Association, resolutions such as a resolution amending our Articles of Association or approving any change in the share capital, liquidation, changes in the objectives of the company, or the name of the company, 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 or by proxy, and voting thereon.
Under our Articles of Association our directors are generally elected by an ordinary majority of the shareholders at each duly convened annual meeting, and serve until the next annual meeting, and our external directors are elected in accordance with applicable law and/or relevant stock exchange rules applicable to us; or until their respective successors are elected and qualified, whichever occurs first, or in the case of Israeli directors who are appointed by the founding Israeli shareholders, generally upon a written notice signed by at least two of the founding Israeli shareholders who are the record holders of (i) at least 50% of minimum Israeli holding shares or (ii), who hold in the aggregate the highest number of minimum Israeli holding shares among the Israeli founding shareholders. Any Israeli founding shareholders who have specified connections to a competing mobile radio telephone operator (as defined in the license) of the Company are prohibited from participation in any such appointment. The notice is addressed to the Company’s company secretary indicating his appointment, until their respective successors are elected upon such notice. In each annual meeting the directors that were elected at the previous annual meeting are deemed to have resigned from their office, excluding the external directors, who according to the Israeli Companies Law, are elected for a period of three years and the Israeli director whose appointment is terminated generally by a written notice by himself or by the founding Israeli shareholders. A resigning director may be reelected. Each ordinary share represents one vote. No director may be elected or removed on the basis of a vote by dormant shares. The ordinary shares do not have cumulative voting rights in the election of directors.
Under our Articles of Association our shareholders discuss our annual consolidated financial statements, at the annual general meeting of shareholders.
Directors may be appointed also in certain circumstances by an extraordinary general meeting and by the Board of Directors upon approval of a simple majority of the directors. Such director, excluding the external directors, shall serve for a term ending at the next annual general meeting.
Rights in the Company’s Profits
Our shareholders have the rights to share in our profits distributed as a dividend and any other permitted distribution. See “Item 10B.3 Rights Attached to Shares-–Dividend Rights.”
Rights in the Event of Liquidation
All of our ordinary shares confer equal rights among them with respect to amounts distributed to shareholders in case of liquidation.
Rights in the Event of Reorganization
Upon the sale of the property of the Company, the Board of Directors or the liquidators (in case of a liquidation) may receive and, if the Company’s profits so permit, distribute among the shareholders fully or partially paid up shares, bonds or securities of another company or any other property of the Company without selling them or depositing them with trustees on behalf of the shareholders, provided, however, that they have received the prior authorization adopted by a special majority of the shareholders of the Company (representing at least 75% of the votes of shareholders participating and voting in the relevant general meeting). Such special majority may also decide on the valuation of such securities or property, unless the Company is in or beginning a liquidation process.
Limitations on Ownership and Control
Ownership and control of our ordinary shares are limited by the terms of our licenses and our Articles of Association. See “Item 4B.12f Our Mobile Telephone License-License Conditions” and “Revoking, limiting or altering our license.”
In order to comply with the conditions and restrictions imposed on us by the Ministry of Communications or under our licenses in relation to ownership or control over us, under certain events specified in our Articles of Association, the Board of Directors may determine that certain ordinary shares are dormant shares. According to our Articles of Association, dormant shares bear no rights as long as they are dormant shares, except for the right to receive dividends and other distributions to shareholders. Consequently, we have received an exemption from the requirement set out in NASDAQ’s Marketplace Rule 4351 that voting rights of existing shareholders of publicly traded common stock registered under Section 12 of the US Securities Exchange Act cannot be disparately reduced or restricted through any corporate action or issuance. In addition, the Board of Directors shall not register a person as a holder of a share before receipt of their declaration that they are not a “relevant person” as defined in our Articles of Association.
Our Compensation Policy allows us to allocate in addition to shares, restricted shares. For rights attached to restricted shares see “Item 6E.2 EQUITY INCENTIVE PLAN”.
10B.4 CHANGING RIGHTS ATTACHED TO SHARES
According to our Articles of Association, in order to change the rights attached to any class of shares, the general meeting of the shareholders must adopt a resolution to change such rights by a special majority, representing at least 75% of the votes of shareholders participating and voting in the general meeting, and in case of changing the rights attached to certain class of shares, the approval by special majority of each class meeting, is required.
10B.5 ANNUAL AND EXTRAORDINARY GENERAL MEETINGS
The Board of Directors must convene an annual general meeting of shareholders at least once every calendar year, within fifteen months of the last annual general meeting. In accordance with our Articles of Association, notice of a general meeting must be sent to each registered shareholder no later than five days after the record date set by the Board of Directors for that meeting, unless a different notice time is required under applicable law. An extraordinary meeting may be convened by the Board of Directors, as it decides or upon a demand of any two directors or 25% of the directors, whichever is lower, or of one or more shareholders holding in the aggregate at least 5% of our issued capital and at least 1% of the voting rights of the Company; or (ii) at least 5% of the voting right of the Company, can seek to convene a shareholders meeting or as otherwise permitted by the Israeli Companies Law. See “Item 10B.3 RIGHTS ATTACHED TO SHARES–Voting Rights.”
One or more shareholders holding (alone or in the aggregate), 1% or more of the share capital of the Company may request that the Board of Directors include an issue on the agenda of a general meeting of shareholders (including the nomination of a candidate to the board of directors), provided that such issue is suitable to be discussed in the general meeting of shareholders. Pursuant to an amendment to regulations promulgated under the Israeli Companies Law, effective from July 2014, said shareholder request should be submitted to the company within three or seven days (depending on the type of resolution dealt with in the convened meeting) following publication of the Company’s notice with respect to its general meeting of shareholders, or, if the Company publishes a preliminary notice stating its intention to convene such meeting and the agenda thereof, within fourteen days of such preliminary notice. Any such proposal must further comply with the information requirements and time frames under Israeli law.
10B.6 LIMITATIONS ON THE RIGHTS TO OWN OUR SECURITIES
For limitations on the rights to own our securities see “Item 4B.12f Our Mobile Telephone License– License Conditions,” “ – Our Permit Regarding Cross Ownership” and “Item 10B.3 Rights Attached to Shares – Limitations on Ownership and Control.”
10B.7 LIMITATIONS ON CHANGE IN CONTROL AND DISCLOSURE DUTIES
For limitations on change in control see “Item 4B.12f Our Mobile Telephone License– License Conditions” and “– Our Permit Regarding Cross Ownership”.
10B.8 CHANGES IN OUR SHARE CAPITAL
Changes in our share capital are subject to the approval of the shareholders at a general meeting of shareholders by a special majority of 75% of the votes of shareholders participating and voting in the general meeting of shareholders.
10B.9 OUR LICENSE PREVAILS IN CASE OF AN INCONSISTENCY
If any article of our Articles of Association is found to be inconsistent with the terms of our mobile telephone license granted by the Ministry of Communications (see “Item 4B.12f Our Mobile Telephone License”) or of any other telecommunications license we hold, the provisions of such Article shall be deemed null and void.
10C. Material Contracts
Network sharing agreement. In April 2015, the Ministry of Communications approved the 15- year Network Sharing Agreement that we entered into with HOT Mobile. Pursuant to the Network Sharing Agreement, the parties created a 50-50 limited partnership, the purpose of which is to operate and develop a cellular network to be shared by both parties, starting with a pooling of both parties’ radio access network infrastructures to create a single shared radio access network. The limited partnership began operations in August 2015. See “Item 4B.8 OUR NETWORK”.
Right of Use Agreement with HOT Mobile. Partner and HOT Mobile entered into a Right of Use agreement, which took effect on November 8, 2013, and was valid until April 1, 2016. Under the Right of Use agreement, Partner provided services to HOT Mobile in the form of a right of use of Partner’s radio cellular network. According to the Right of Use agreement, HOT Mobile paid Partner fixed base payments with additional variable payments based, among other things, on traffic volume exceeding a defined threshold. See “Item 4B.8 OUR NETWORK”.
i-Phone Agreement. Following the expiration of a previous agreement, in June 2016, we entered into a non-exclusive agreement with Apple Distribution International, effective April 1, 2021, for the purchase and resale of iPhone handsets in Israel. Pursuant to the agreement, we agreed to purchase a minimum quantity of iPhone handsets per year, for a period of three years. These purchases will represent a significant portion of our expected handset purchases and sales over that period.
Registration Rights Agreement. We have entered into registration rights agreements with S.B. Israel Telecom, our principal shareholder, in which we granted our principal shareholders the right to require us to register ordinary shares held by them under the US Securities Act. See “Item 7B.2 REGISTRATION RIGHTS”.
Network upgrade and deployment of fourth generation network. OnIn October 25, 2010, we entered into an agreement with Ericsson for the upgrade of our existing networks and the deployment of our fourth generation network in Israel for an initial term that ended at the end of 2014. We extended with certain modifications, the initialmaintenance period by an additional period of one year for the provision of support and maintenance servicesperiods until the end of 2015 and again until the end of 2016 and we have ordered maintenance services for the years 2017 and 2018.2019. See "Item 4B.8g Suppliers" and “Item 5A.1g Agreement for the Upgrade of Our Existing Networks and the Deployment of Fourth Generation Network in Israel””.
TI Sparkle Israel (formerlyMed Nautilus) Agreement. We have an agreement with TI Sparkle for the provision of international capacity services through submarine infrastructure, which connects countries bordering the Mediterranean Sea to all major Western European countries and from there to the rest of the world until 2023 with an option to extend the agreement until 2030.
Upgrade of LTE network. In January 2019, we entered into an agreement with Mavenir Systems Limited for the upgrade and improvement of the performance of our LTE network moving into virtualized architecture of the network, alongside new functionalities and capabilities, and preparation for 5G. See "Item 4B.8g Suppliers".
10D. Exchange Controls
There are no Israeli government laws, decrees or regulations that restrict or that affect our export or import of capital or the remittance of dividends, interest or other payments to non-resident holders of our securities, including the availability of cash and cash equivalents for use by us and our wholly-owned subsidiaries, except or otherwise as set forth under “Item"Item 10E Taxation.”Taxation".
Under Israeli law (and our Memorandum and Articles of Association), persons who are neither residents nor nationals of Israel may freely hold, vote and transfer ordinary shares in the same manner as Israeli residents or nationals.
10E. Taxation
Israeli Tax Considerations
The following discussion is not intended, and should not be construed, as legal or professional tax advice and should not be relied on any specific case since it does not exhaust all possible tax considerations.
The following is a summary of the current tax laws of the State of Israel as they relate to us and to our shareholders (in relation to their investments in the Company) and also includes a discussion of the material Israeli tax consequences for persons purchasing our ordinary shares or ADSs, both referred to below as the “Shares”. To the extent that the discussion is based on legislation yet to be subject to judicial or administrative interpretation, there can be no assurance that the views expressed herein will accord with any such interpretation in the future. This discussion is not intended and should not be construed as legal or professional tax advice and does not cover all possible tax considerations.
Potential investors are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of our Shares, including, in particular, the effect of any foreign, state or local taxes.
Israeli Tax Reforms
The “Tax Burden Distribution Law” legislation amendments (2011) that were published in December 2011, which became effective on January 1, 2012, abolished the reduction of income tax rates for corporations and individuals and increased, amongst other things, the corporate tax rate and the tax rates on individual’s dividend income. On July 27, 2013 following the Tax Burden Distribution Law, the Israeli Parliament approved The Law For the Change in National Priorities (Legislation Amendment to Achieving Budget Goals for years 2013 and 2014), 2013 (the “2013 Amendment”). On January 4, 2016, the Israeli Parliament approved an amendment for the Israeli tax Ordinance (Number 216), according to which corporate tax rate will be updated for 2016 (the “2016 Amendment”). On December 29, 2016, the Israeli Parliament passed the Israeli Economic Recuperation Law (legislated amendments to achieve implementation of the Economic Policy for the budget years 2017-2018), which, amongst other things, reduced the regular corporate tax rate, and changed the requirement regarding surplus tax.
General Corporate Tax Structure
Israeli companies are generally subject to corporate tax on their taxable income (including capital gains). In general, the regular corporate tax rate in Israel for 2014 and 2015 was 26.5%, for 2016 was 25% and, for 2017 was 24%. The regular corporate tax rate and 23% for 2018 and thereafter will be reduced further to 23%.thereafter.
Tax on Capital Gains of Shareholders
General.
General. Israeli law generally imposes a capital gains tax on the sale of capital assets by residents of Israel as defined for Israeli tax purposes, and on the sale of capital assets located in Israel or the sale of direct or indirect rights to assets located in Israel, including on the sale of our Shares by some of our shareholders (see discussion below). The Israeli Income Tax Ordinance distinguishes between “Real Capital Gain” and “Inflationary Surplus”. Real Capital Gain is the excess of the total capital gain over Inflationary Surplus computed on the basis of the increase in the CPI between the date of purchase and the date of sale. In 2017,2020, the real capital gain accrued on the sale of our Shares was generally taxed at a rate of 24%23% for corporations (26.5% for 2014 and 2015, 25%(25% for 2016, 24% for 2017 and 23% for 2018 and thereafter) and a rate of up to 25% for individuals. Additionally, if such individual shareholder is considered a “Significant Shareholder” at any time during the 12-month period preceding such sale (i.e., if such individual shareholder holds directly or indirectly, along with others, at least 10% of any means of control in the company, including, among other things, the right to receive profits of the company, voting rights, the right to receive the company’s liquidation proceeds and the right to appoint a director), the tax rate will be up to 30%.
Generally, a semi-annual detailed return, including a computation of the tax due should be submitted to the Israeli Tax Authorities and a tax advance amounting to the tax liability arising from the capital gain is payable. At the sale of traded securities, the aforementioned detailed return may not be submitted and the tax advance should not be paid, if all tax due was withheld at source according to applicable provisions of the Israeli Tax Ordinance and regulations promulgated thereunder.
Capital gains are also reportable on annual income tax returns.
The following is a summary of the most significant Israeli capital gains tax implications arising with respect to the sale of our Shares by shareholders who are not engaged in the business of trading in securities.
As of January 1, 2012, a shareholder will generally be subject to tax at up to 25% rate on realized real capital gain (if the shareholder is a Significant Shareholder, as defined above, the tax rate will be up to 30%). To the extent that the shareholder claims a deduction of financing expenses, the gain will be subject to tax at a rate of 30% (until otherwise stipulated in bylaws that may be published in the future).
Please note that an individual Israeli tax resident may be required to pay up to 47% (from 2017 and thereafter) on his yearly taxable income, subject to certain exceptions. In addition, as of January 1, 2013, an individual Israeli tax resident is required to pay an additional tax at the rate of 2% on his yearly taxable combined income from any source exceeding NIS 810,720 for 2015 and803,520 with respect to 2016. From 2017 theThe additional tax rate is 3% from an amount exceeding NIS 639,996.640,000 in 2017, NIS 641,880 in 2018, NIS 649,560 in 2019 and NIS 651,600 in 2020.
Shareholders who are corporations will be generally subject to tax at the corporate tax rate on the realized capital gain as described in “General Corporate Tax Structure” in Item 10E above.
Different taxation rules may apply to shareholders who purchased the Shares prior to January 1, 2009, or prior to the listing on the Tel Aviv Stock Exchange or the Nasdaq Global Market. Such Shareholders should consult with their own tax advisors for the tax consequences upon sale.
In general, a partnership will be a transparent entity for Israeli tax purposes and its partners will be subject to tax with respect to their share in accordance with each of their applicable tax status and rates.
In general, under the Israel Tax Ordinance, public institutions are exempt from tax.
As mentioned above, Israeli law generally imposes a capital gains tax on sales of capital assets, including securities and any other direct or indirect rights to capital assets located in Israel. This tax is also applicable to non-Israeli residents of Israel as follows:
Under Israeli law, the capital gain from the sale of shares by non-Israeli residents is tax exempt in Israel as long as our Shares are listed on the NASDAQ Global Select Market or any other stock exchange recognized by the Israeli Ministry of Finance (this condition shall not apply to shares purchased on or after January 1, 2009) and provided that certain other conditions are met, the most relevant of which are: (A) the capital gain is not attributed to the foreign resident’s permanent establishment in Israel, (B) the shares were acquired by the foreign resident after the company’s shares had been listed for trading on the foreign exchange, and (C) if the seller is a corporation, less than 25% of its means of control are held by Israeli residents. It should be noted that with respect to shares which are listed on the Israeli stock exchange market, a tax exemption may apply under certain different conditions.
In addition, the sale of shares may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty (for example, please refer to the discussion below with respect to the Convention Between the Government of the United States of America and the Government of the State of Israel with Respect to Taxes on Income).
Different taxation rules may apply to shareholders who purchased their shares prior to the listing on the Tel Aviv Stock Exchange. Such shareholders should consult with their tax advisors for the precise treatment upon sale.
Individual and corporate dealers in securities in Israel are taxed at tax rates applicable to business income.
The purchaser, the Israeli stockbrokers and any financial institution through which the sold securities are held, are obliged, subject to certain exemptions, to withhold tax on the amount of consideration paid with respect to such sale (or on the capital gain realized on the sale, if known) at the Israeli corporate tax rate as described in “General Corporate Tax Structure” in Item 10E above.
Where the seller is an individual, the applicable withholding tax rate would be 25%, or 30% where the seller is a significant shareholder.
The following Israeli tax consequences shall apply in the event of actual payment of any dividends on the Shares.
As of January 1, 2012, dividends, other than bonus shares (stock dividends), paid to Israeli resident individuals who purchased our Shares will generally be subject to income tax at a rate of 25% for individuals, or 30% if the dividend recipient is a Significant Shareholder (as defined above) at any time during the 12-month period preceding such distribution. Dividends paid to Israeli resident companies will not be included in their tax liability computation.
Non-residents of Israel (both individuals and corporations) are subject to income tax on income accrued or derived from sources in Israel, including dividends from Israeli corporations. The distribution of dividend income, other than bonus shares (stock dividends), to non-residents of Israel will generally be subject to income tax at a rate of 25% (or 30% for a shareholder that is considered a Significant Shareholder (as defined above) at any time during the 12-month period preceding such distribution), unless a lower rate is stipulated by a double tax treaty between the State of Israel and the shareholder’s country of residence. In addition, an additional tax at a rate of 3% may be imposed upon individual shareholders whose annual income from all sources that are taxable in Israel exceed a certain amount.
In the event of actual payment of any dividends on our Shares the following withholding rates will be applied: (i) Israeli resident corporations – 0%, (ii) Israeli resident individuals – 25% (iii) non-Israeli residents – 25%, subject to a reduced tax rate under an applicable double tax treaty; (iv) Israeli resident individual who is a Significant Shareholder – 30%; and (v) non -Israeli resident who is a Significant Shareholder – 30%, subject to a reduced tax rate under an applicable double tax treaty. Nevertheless, if the Shares are held through a Nominee Company, as defined in the Israel Securities Act, the withholding tax rate for shareholders under (iv) and (v) above shall be 25% (subject to a reduced tax rate under an applicable double tax treaty for non-Israeli residents).
A non-resident of Israel that has received a dividend income derived from an Israeli corporation, from which tax was withheld at the source, is generally exempt from the duty to file tax returns in Israel in respect of such income, provided that such income was not connected to or derived from a trade or business conducted in Israel by such person.a person and provided the person has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.
Non-residents of Israel who acquire any of the Shares of the Company will be able to repatriate dividends, liquidation distributions and the proceeds from the sale of such shares in non-Israeli currencies at the rate of exchange prevailing at the time of repatriation provided that any applicable Israel income tax has been paid, or withheld, on such amounts. US holders should refer to the “United States Federal Income Considerations” section below with respect to the US federal income tax treatment of foreign currency gain or loss.
The foregoing discussion is intended only as a summary and does not purport to be a complete analysis or listing of all potential Israeli tax effects of holding of our shares. We recommend that shareholders consult their tax advisors concerning the Israeli and non-Israeli tax consequences to them of holding our shares.
Residents of the United States generally will be subject to withholding tax in Israel on dividends paid, if any, on Shares (including ADSs). Generally, under the Convention Between the Government of the United States of America and the Government of the State of Israel with Respect to Taxes on Income (the “US Treaty”), the maximum rate of withholding tax on dividends paid to a holder of Shares (including ADSs) who is a resident of the United States (as defined in the US Treaty) will be 25%. Under the US Treaty, the withholding tax rate on dividends will be reduced to 12.5% if (i) the shareholder is a U.S. resident corporation which holds during the portion of the taxable year which precedes the date of payment of the dividend, and during the whole of its prior taxable year, at least 10% of the outstanding shares of the voting stock of the Israeli resident paying corporation and (ii) not more than 25% of the gross income of the Israeli resident paying corporation for such prior taxable year consists of certain types of interest or dividends.
The US Treaty exempts from taxation in Israel any capital gains realized on the sale, exchange or other disposition of Shares (including ADSs) provided that the following cumulative conditions are met: (a) the seller is a resident of the United States for purposes of the US Treaty; (b) the seller owns, directly or indirectly, less than 10% of our voting stock at all times during the 12-month period preceding such sale, exchange or other disposition; (c) the seller, being an individual, is present in Israel for a period or periods of less than 183 days during the taxable year; and (d) the capital gain from the sale was not generated through a permanent establishment of the seller in Israel.
Subject to the exemptions from capital gains prescribed in the Israeli Income Tax Ordinance (as described above), purchasers of Shares (including ADSs) who are residents of the United States and who hold 10% or more of the outstanding Shares at any time during such 12-month period will be subject to Israeli capital gains tax. However, under the US Treaty, residents of the United States (as defined in the US Treaty) generally would be permitted to claim a credit for this tax against US federal income tax imposed on the sale, exchange or other disposition, subject to the limitations in US laws applicable to the utilization of foreign tax credits generally.
The application of the US Treaty provisions to dividends and capital gains described above is conditioned upon the fact that such income is not effectively connected with a permanent establishment (as defined in the US Treaty) maintained by the non-Israeli resident in Israel.
The following discussion is a summary of certain material US federal income tax considerations applicable to a US holder (as defined below) regarding the acquisition, ownership and disposition of Shares or ADSs. This summary is based on provisions of the Internal Revenue Code of 1986, as amended (the “Code”), existing and proposed US Treasury regulations, administrative pronouncements, rulings and judicial decisions as of the date of this annual report.Annual Report. All of these authorities are subject to change, possibly with retroactive effect, and to change or changes in interpretation. In addition, this summary does not discuss all aspects of US federal income taxation that may be applicable to investors in light of their particular circumstances or to investors who are subject to special treatment under US federal income tax law, including US expatriates,certain former citizens or residents of the United States, insurance companies, banks, regulated investment companies, securities broker-dealers, financial institutions, tax-exempt organizations, persons holding Shares or ADSs as part of a straddle, hedging or conversion transaction, persons subject to the foreign tax credit splitting events rules, persons subject to the alternative minimum tax, persons who acquired their Shares or ADSs pursuant to the exercise of employee stock options or otherwise as compensation, US holders having a functional currency other than the US dollar, persons owning (directly, indirectly or by attribution) 10% or more of our outstanding share capital or voting stock and persons not holding the Shares or ADSs as capital assets. This discussion also does not address the consequences of the Medicare tax on net investment income or any aspect of state, local or non-US tax law or any other aspect of US federal taxation other than income taxation. There can be no assurances that the U.S. Internal Revenue Service (the “IRS”) will not take a different position concerning the tax consequences of the acquisition, ownership and disposition of our shares or that such a position would not be sustained. This summary is not intended to be, and should not be considered to be, legal or tax advice.
As used herein, the term “US holder” means a beneficial owner of an ordinary share or an ADS who is eligible for benefits as a US resident under the limitation on benefits article of the US Treaty (as defined above in “–Taxation of Residents of the United States under the US Treaty”), and is:
For US federal income tax purposes, US holders of ADRs will be treated as owners of the ADSs evidenced by the ADRs and the Shares represented by the ADSs. Furthermore, deposits or withdrawals by a US holder of Shares for ADSs, or of ADSs for Shares, will not be subject to US federal income tax. The statement of US federal income tax law set forth below assumes that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.US holders should review the summary above under “Israeli Tax Considerations” and “Taxation of Residents of the United States under the US Treaty” for a discussion of the Israeli taxes which may be applicable to them.
Holders of Shares or ADSs should consult their own tax advisors concerning the specific Israeli, US federal, state and local tax consequences of the ownership and disposition of the Shares or ADSs in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction. In particular, US holders are urged to consult their own tax advisors concerning whether they will be eligible for benefits under the US Treaty.
A US holder generally will be required to include in gross income as ordinary dividend income the amount of any distributions paid on the Shares and ADSs, including the amount of any Israeli taxes withheld in respect of such dividend. Dividends paid by us will not qualify for the dividends-received deduction applicable in certain cases to US corporations.
The amount of any distribution paid in NIS, including the amount of any Israeli withholding tax thereon, will be included in the gross income of a US holder of Shares in an amount equal to the US dollar value of the NIS calculated by reference to the spot rate of exchange in effect on the date the distribution is received by the US holder or, in the case of ADSs, by the Depositary. If a US holder converts dividends paid in NIS into US dollars on the day such dividends are received, the US holder generally should not be required to recognize foreign currency gain or loss with respect to such conversion. If the NIS received in the distribution are not converted into US dollars on the date of receipt, any foreign currency gain or loss recognized upon a subsequent conversion or other disposition of the NIS will be treated as US source ordinary income or loss. Special rules govern and special elections are available to accrual method taxpayers to determine the US dollar amount includible in income in the case of taxes withheld in a foreign currency. Accrual basis taxpayers are urged to consult their own tax advisors regarding the requirements and the elections applicable in this regard. Dividends paid with respect to Shares may be subject to rules applicable where US persons own or are treated as owning 50% or more (by vote or value) of a foreign corporation, and such rules could adversely affect the US shareholders’ ability to use US foreign tax credits.
Any dividends paid by us to a US holder on the Shares or ADSs will be treated as foreign source income and generally will be categorized as “passive income” for US foreign tax credit purposes. Subject to the limitations in the Code, as modified by the US Treaty, a US holder may elect to claim a foreign tax credit against its US federal income tax liability for Israeli income tax withheld from dividends received in respect of Shares or ADSs. US holders who do not elect to claim the foreign tax credit may instead claim a deduction for Israeli income tax withheld, but only for a year in which the US holder elects to do so with respect to all foreign income taxes. A deduction does not reduce US tax on a dollar-for-dollar basis like a tax credit. The deduction, however, is not subject to the limitations applicable to foreign tax credits. The rules relating to the determination of the foreign tax credit are complex. Accordingly, if you are a US holder of Shares or ADSs, you should consult your own tax advisor to determine whether and to what extent you would be entitled to the credit.
Certain US holders (including individuals) are eligible for reduced rates of US federal income tax in respect of “qualified dividend income”. For this purpose, qualified dividend income generally includes dividends paid by a non-US corporation if, among other things, the US holders meet certain minimum holding period requirements and the non-US corporation satisfies certain requirements, including that either (i) the shares (or ADSs) with respect to which the dividend has been paid are readily tradable on an established securities market in the United States, or (ii) the non-US corporation is eligible for the benefits of a comprehensive US income tax treaty (such as the US Treaty) which provides for the exchange of information. We currently believe that dividends paid with respect to our Shares and ADSs should constitute qualified dividend income for US federal income tax purposes. We anticipate that our dividends will be reported as qualified dividends on Forms 1099-DIV delivered to US holders. In computing foreign tax credit limitations, non-corporate US Holders may take into account only a portion of a qualified dividend to reflect the reduced US tax rate applicable to such dividend. Individual US holders of Shares or ADSs are urged to consult their own tax advisors regarding the availability of the reduced dividend tax rate in light of their own particular situation and regarding the computations of their foreign tax credit limitation with respect to any qualified dividend income paid by us, as applicable.
Upon the sale, exchange or other taxable disposition of Shares or ADSs, a US holder generally will recognize capital gain or loss equal to the difference between the US dollar value of the amount realized on the sale, exchange or other taxable disposition and the US holder’s adjusted tax basis, determined in US dollars, in the Shares or ADSs. Any gain or loss recognized upon the sale, exchange or other taxable disposition of the Shares or ADSs will be treated as long-term capital gain or loss if, at the time of the sale, exchange or other taxable disposition, the holding period of the Shares or ADSs exceeds one year. In the case of individual US holders, capital gains generally are subject to US federal income tax at preferential rates if specified minimum holding periods are met. The deductibility of capital losses by a US holder is subject to significant limitations. US holders should consult their own tax advisors in this regard.
In general, gain or loss recognized by a US holder on the sale, exchange or other taxable disposition of Shares or ADSs will be US source income or loss for US foreign tax credit purposes. Pursuant to the US Treaty, however, gain from the sale or other taxable disposition of Shares or ADSs by a holder who is a US resident, for US Treaty purposes, and who sells the Shares or ADSs within Israel may be treated as foreign source income for US foreign tax credit purposes.
US holders who hold Shares or ADSs through an Israeli stockbroker or other Israeli intermediary may be subject to an Israeli withholding tax on any capital gains recognized if the US holder does not obtain approval of an exemption from the Israeli Tax Authorities. See “Israeli Tax Considerations” above. US holders are advised that any Israeli tax paid under circumstances in which an exemption from such tax was available will not give rise to a deduction or credit for foreign taxes paid for US federal income tax purposes. US holders are advised to consult their Israeli stockbroker or intermediary regarding the procedures for obtaining an exemption.
If a US holder receives NIS upon the sale of Shares, that US holder may recognize ordinary income or loss as a result of currency fluctuations between the date of the sale of the Shares and the date the sales proceeds are converted into US dollars.
A non-US corporation will be classified as a Passive Foreign Investment Company (a “PFIC”) for any taxable year if (i) at least 75% of its gross income consists of passive income (such as dividends, interest, rents, royalties (other than rents or royalties derived in the active conduct of a trade or business and received from an unrelated person) and gains on the disposition of certain minority interestsinterests) or (ii) at least 50% of the average value of its assets consist of assets that produce or are held for the production of, passive income. We currently believe that we were not a PFIC for the year ended December 31, 2017.2020. However, this conclusion is a factual determination that must be made at the close of each year and is based on, among other things, a valuation of our Shares, ADSs and assets, which will likely change from time to time. If we were characterized as a PFIC for any taxable year, a US holder would suffer adverse tax consequences. These consequences may include having the gains that are realized on the disposition of Shares or ADSs treated as ordinary income rather than capital gains and being subject to punitive interest charges with respect to certain dividends and gains and on the sale or other disposition of the Shares or ADSs. Furthermore, dividends paid by a PFIC are not eligible to be treated as “qualified dividend income” (as discussed above). In addition, if a US holder holds Shares or ADSs in any year in which we are treated as a PFIC, such US holder will be subject to additional tax form filing and reporting requirements.
Application of the PFIC rules is complex. A US holder of a PFIC may be required to file an IRS Form 8621. The failure to file this form when required could result in substantial penalties. US holders should consult their own tax advisors regarding the potential application of the PFIC rules to the ownership of our Shares or ADSs.
Dividend payments with respect to Shares or ADSs and proceeds from the sale, exchange or other disposition of Shares or ADSs may be subject to information reporting to the Internal Revenue Service (the “IRS”) and possible US backup withholding at a current rate of 24%. Backup withholding will not apply, however, to a holder who furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification or who is otherwise exempt from backup withholding. US persons who are required to establish their exempt status generally must provide IRS Form W-9 (Request for Taxpayer Identification Number and Certification). Non-US holders generally will not be subject to US information reporting or backup withholding. However, such holders may be required to provide certification of non-US status (generally on IRS Form W-8BEN or IRS W-8BEN-E) in connection with payments received in the United States or through certain US-related financial intermediaries.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a holder’s US federal income tax liability, and a holder may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely fashion.
In addition, certain US holders who are individuals that hold certain foreign financial assets as defined in the Code (which may include Shares or ADSs) are required to report information relating to such assets, subject to certain exceptions.
Not applicable.
Not applicable.
Reports and other information of Partner filed electronically with the US Securities and Exchange Commission may be found at www.sec.gov. They can also be inspected without charge and copied at prescribed rates at the public reference facilities maintained by the SEC in Room 1024, 450 Fifth Avenue, N.W., Washington, D.C. 20549.
Not applicable.
We are exposed to market risk, including movements in foreign currency exchange and inflation-indexed interest rates. We do not enter into any derivative transactions to hedge underlying exposure to foreign currencies. As a matter of policy, we do not enter into transactions of a speculative or trading nature. Interest rate and foreign exchange exposures are monitored by tracking actual and projected commitments and through the use of sensitivity analysis.
Substantially all of our revenues and a majority of our operating expenses are denominated in NIS. However, in 2017,2020, approximately one fifthquarter of our operating expenses (excluding depreciation), including a substantial majority of our device and equipment purchases related to end sales to customers, were linked or denominated to non-NIS currencies, mainly the US dollar. These expenses related mainly to the acquisition of handsets and other equipment where the price paid by us is based on various foreign currencies, mainly the US dollar. We do not enter into derivative transactions and thus we are exposed to the aforementioned foreign currency fluctuations. We do not hold or issue derivative financial instruments for trading purposes. In addition, a substantial amountpart of our capital expenditures are incurred in, or linked to, non-NIS currencies, mainly the US dollar. See note 6 to the consolidated financial statements for description of the market risks.
Citibank serves as the depositary (the “Depositary”) for our American Depositary Receipt (“ADR”) program. Pursuant to the deposit agreement between the Company, the Depositary and owners and holders of ADRs (the “Deposit Agreement”), ADR holders may be required to pay various fees to the Depositary. In particular, the Depositary, under the terms of the Deposit Agreement, may charge the following fees: (i) Issuance Fee: to any person depositing shares or to whom ADSs are issued upon the deposit of shares, a fee not in excess of $5.00 per 100 ADSs (or fraction thereof) (excluding issuances as a result of distributions described in paragraph (iv) below); (ii) Cancellation Fee: to any person surrendering ADSs for cancellation and withdrawal of deposited securities or to any person to whom deposited securities are delivered, a fee not in excess of $5.00 per 100 ADSs (or fraction thereof) surrendered;(iii) Cash Distribution Fee: to any holder of ADS(s), a fee not in excess of $5.00 per 100 ADSs (or fraction thereof) held for the distribution of cash dividends or other cash distributions (i.e., sale of rights and other entitlements); (iv) Stock Distribution/Rights Exercise Fee: to any holder of ADS(s), a fee not in excess of $5.00 per 100 ADSs (or fraction thereof) held for (a)stock dividends or other free stock distributions or (b)exercise of rights to purchase additional ADSs; (v) Other Distribution Fee: to any holder of ADS(s), a fee not in excess of $5.00 per 100 ADSs (or fraction thereof) held for the distribution of securities other than ADSs or rights to purchase additional ADSs (i.e., spin-off shares); and (vi) Depositary Services Fee: to any holder of ADS(s), a fee not in excess of $5.00 per 100 ADSs (or fraction thereof) held on the applicable record date(s) established by the Depositary. The parties agreed to allow Citibank to charge an additional $1.00 per 100 ADSs (a fee not in excess of $6.00 in aggregate) in the event that the Company does not pay cash or stock dividends.
Owners, beneficial owners, persons depositing shares and persons surrendering ADSs for cancellation and for the purpose of withdrawing deposited securities shall be responsible for the following charges: (a) taxes (including applicable interest and penalties) and other governmental charges; (b) such registration fees as may from time to time be in effect for the registration of shares or other deposited securities on the share register and applicable to transfers of shares or other deposited securities to or from the name of the custodian, the Depositary or any nominees upon the making of deposits and withdrawals, respectively; (c) such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person depositing or withdrawing shares or owners and beneficial owners of ADSs; (d) the expenses and charges incurred by the Depositary in the conversion of foreign currency; (e) such fees and expenses as are incurred by the Depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to Shares, deposited securities, ADSs and receipts; and (f) the fees and expenses incurred by the Depositary, the Custodian, or any nominee in connection with the delivery or servicing of deposited securities.
None.
None.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Nevertheless, our disclosure controls and procedures are designed to provide reasonable assurance of achieving the desired control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures in place as of December 31, 2017,2020, were effective.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017,2020, based on the framework for Internal Control-Integrated Framework (2013) set forth by The Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.2020.
Kesselman & Kesselman, our independent registered public accounting firm in Israel and a member of PricewaterhouseCoopers International Limited (“PwC”), have served as our independent public accountants for each of the fiscal years in the three-year period ended December 31, 2017,2020, for which audited financial statements appear in this annual reportAnnual Report on Form 20-F.
The following table presents the aggregate fees for professional services rendered by PwC to Partnerthe Company in 20162019 and 2017.2020.
Our audit committee’s specific responsibilities in carrying out its oversight of the quality and integrity of the accounting, auditing and reporting practices of the Company include the approval of audit and non-audit services to be provided by the external auditor. The audit committee approves in advance the particular services or categories of services to be provided to the Company during the following yearly period and also sets forth a specific budget for such audit and non-audit services. Additional non-audit services may be pre-approved by the audit committee.
Not applicable.
Not applicable.
See “Item 6C.5 NASDAQ Corporate Governance Rules and Our Practices”, and also “Item 10B Memorandum and Articles of Association”.
The company has responded to “Item 18. Financial Statements” in lieu of responding to this item.
Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed certain agreements as exhibits to this annual reportAnnual Report on Form 20-F. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in our public disclosure, (iii) may reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe our actual state of affairs at the date hereof and should not be relied upon.
Confidential material has been redacted and has been separately filed with the Securities and Exchange