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Per Share | Total | |||||||
Initial public offering price | $ | 20.00 | $ | 400,000,000 | ||||
Underwriting discounts and commissions | $ | 1.30 | $ | 26,000,000 | ||||
Proceeds, before expenses, to the selling shareholders | $ | 18.70 | $ | 374,000,000 |
Goldman, Sachs & Co. | Citigroup | Deutsche Bank Securities |
Jefferies & Company | William Blair & Company |
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• | Unique combination of leading market position and strong operational momentum. In the last year, we have achieved market-leading subscriber and revenue growth while steadily strengthening our operating margins. | |
• | Strong and distinctive own brand. Our established brand enjoys strong recognition in Israel. Since 2004, we have made the enhancement of our image among consumers a top priority and have invested substantial resources to position Cellcom as a local cellular company. | |
• | Transmission infrastructure and landline services. We have an advanced fiber-optic transmission infrastructure that consists of approximately 1,300 kilometers of inland fiber-optic cable, which, together with our complementary microwave-based infrastructure, connects the majority of our cell sites and provides for substantially all of our backhaul services. Our transmission infrastructure significantly reduces our operational reliance on Bezeq, the incumbent landline operator in Israel, while also saving us substantial infrastructure-leasing cash costs. | |
• | Strategic relationship with a leading group of local and international shareholders. Our ultimate parent company, IDB, is one of the largest business groups in Israel. We enjoy access, through our management services agreement, to the senior management of the IDB group, who are some of the most experienced managers in Israel. In 2006, our shareholder base was broadened as a result of IDB’s sale of minority stakes to a series of highly regarded international and local financial investors, including affiliates of Goldman Sachs, Bank Leumi, Migdal Group and the First International Bank of Israel. | |
• | Strong management team. Since IDB acquired control of us in September 2005, we have put in place a team of seasoned managers with significant experience and solid track records in previous managerial positions. |
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• | Strong cash flow generation. We have a proven track record of strong financial performance and profitability with cash operating margins that have been higher than those of our principal competitors. This performance has allowed us to distribute dividends to our shareholders. |
• | Maximize customer satisfaction, retention and growth. Our growth strategy is focused on retaining our subscribers and expanding the selection of services and products we offer to our subscribers in order to enhance customer satisfaction and increase average revenues per user, or ARPU. In addition to providing quality customer service, we also strive to retain our subscribers and attract new subscribers by offering them advanced handsets, handset upgrades, attractive calling plans and value-added services. In 2006, we introduced a “churn lab” that identifies subscribers at high risk of churn and seeks to preemptively approach them with tailored solutions to maintain their satisfaction with our services. | |
• | Grow and develop our Internet, content and data services. The usage of cellular content and data services in Israel is currently relatively low compared to western European countries and we believe that we have significant growth potential in this field. We intend to continue to invest in the deployment of our high speed UMTS/ HSDPA network, which covered 80% of the populated territory of Israel at the end of 2006. We also plan to expand our content and data services, products and capabilities through in-house expertise and strategic relationships with leading cellular content providers. | |
• | Grow roaming revenues. We have experienced steady growth in roaming revenues since 2003 and believe that roaming presents an important source of future revenue and profit growth for us. We currently have GSM roaming agreements with over 450 operators in 167 countries, of which 45 operators in 27 countries are also 3G operators, and we aim to increase our number of relationships. | |
• | Further develop and strengthen the Cellcom brand. External market surveys that we have commissioned indicate that brand recognition has become an increasingly important factor in subscriber selection of, and loyalty to, a cellular operator. Due to our extensive efforts in the past few years, we believe that we have established the Cellcom brand as one of the most recognized and respected consumer brands in Israel. We plan to continually enhance our brand through maintaining our high network quality, the provision of innovative products and services, quality customer service and investments in advertising and promotional campaigns. | |
• | Optimize our cost structure. We intend to continue our efforts to control costs so that we can improve profitability while also improving the quality of our services. We intend to continue to focus on identifying further opportunities to manage our costs without reducing the quality of our service. | |
• | Capitalize on our existing infrastructure to selectively provide landline telephony services. Our 1,300 kilometer inland fiber-optic network and our microwave infrastructure provide us with the ability to offer cost-efficient landline telecommunications solutions. We hold a license to operate a landline service in Israel and, since July 2006, we offer our landline telephony service to selected businesses. |
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The offering | 20,000,000 ordinary shares offered by the selling shareholders. | |
Ordinary shares to be outstanding after this offering | 97,500,000 ordinary shares | |
Over-allotment option | The selling shareholders have granted the underwriters a30-day option to purchase up to 3,000,000 ordinary shares to cover over- allotments. | |
Use of proceeds | We will not receive any proceeds from the offering. | |
Dividend policy | Our Board of Directors has adopted a dividend policy to distribute each year at least 75% of our annual net income, subject to applicable law, our license and our contractual obligations (which currently limit distribution of dividends) and provided that such distribution would not be detrimental to our cash needs or to any plans approved by our Board of Directors. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends. See “Dividend Policy.” We currently expect that the quarterly dividend we will declare for the first quarter of 2007, which may be funded out of a combination of net income, existing retained earnings and/or a portion of the approximately NIS 280 million of retained earnings described under “Operating and Financial Review and Prospects — Overview — New Israeli accounting standard affecting measurement of fixed assets,” will be NIS 1.4 per share. Any dividends must be declared by our Board of Directors, which will take into account the factors set out above. The amount of dividends per share we will pay for the first quarter does not necessarily reflect dividends that will be paid for future quarterly periods, which can change at any time in accordance with the policy described under “Dividend Policy.” | |
New York Stock Exchange symbol | “CEL” |
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Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | 2006 (In $) | |||||||||||||||||||
(In NIS millions, except per share data) | ||||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||
Revenues | 5,261 | 5,600 | 5,114 | 3,845 | 4,191 | 974 | ||||||||||||||||||
Cost of revenues | 3,075 | 3,302 | 3,133 | 2,264 | 2,470 | 574 | ||||||||||||||||||
Gross profit | 2,186 | 2,298 | 1,981 | 1,581 | 1,721 | 400 | ||||||||||||||||||
Selling and marketing expenses | 613 | 661 | 623 | 453 | 473 | 110 | ||||||||||||||||||
General and administrative expenses | 682 | 684 | 656 | 512 | 486 | 113 | ||||||||||||||||||
Operating income | 891 | 953 | 702 | 616 | 762 | 177 | ||||||||||||||||||
Financial income (expenses), net | (216 | ) | (45 | ) | 24 | 13 | (128 | ) | (30 | ) | ||||||||||||||
Other income (expenses), net | 1 | 1 | (11 | ) | (10 | ) | (1 | ) | 0 | |||||||||||||||
Income tax | 245 | 292 | 232 | 201 | 243 | 56 | ||||||||||||||||||
Net income | 431 | 617 | 483 | 418 | 390 | 91 | ||||||||||||||||||
Basic and diluted net income per share | 4.42 | 6.33 | 4.95 | 4.29 | 4.00 | 0.93 | ||||||||||||||||||
Weighted average ordinary shares outstanding | 97,500,000 | 97,500,000 | 97,500,000 | 97,500,000 | 97,500,000 | 97,500,000 | ||||||||||||||||||
Dividends declared per share(1) | — | — | 34.87 | — | 4.41 | 1.03 | ||||||||||||||||||
U.S. GAAP Income Statement Data(2): | ||||||||||||||||||||||||
Net income | 441 | 620 | 491 | 460 | 374 | 87 | ||||||||||||||||||
Basic and diluted earnings | 4.52 | 6.36 | 5.04 | 4.72 | 3.84 | 0.89 |
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Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | 2006 (In $) | |||||||||||||||||||
(In NIS millions, except per share data) | ||||||||||||||||||||||||
Other Data: | ||||||||||||||||||||||||
EBITDA(3) | 1,890 | 1,914 | 1,643 | 1,320 | 1,429 | 332 | ||||||||||||||||||
Subscribers (end of period)(4) | 2,300 | 2,450 | 2,603 | 2,554 | 2,828 | — | ||||||||||||||||||
Period churn rate(5) | 27.3 | % | 19.9 | % | 15.0 | % | 10.5 | % | 12.4 | % | — | |||||||||||||
ARPU (in NIS)(6) | 162 | 174 | 151 | 154 | 152 | 35 | ||||||||||||||||||
Average monthly usage per subscriber (in minutes of use, or MOU)(7) | 316 | 334 | 321 | 326 | 336 | — |
As of September 30, 2006 | ||||
(In NIS millions) | ||||
Balance Sheet Data: | ||||
Cash | 118 | |||
Working capital | 180 | |||
Total assets | 5,014 | |||
Shareholders’ equity | 184 | |||
U.S. GAAP Data(2): | ||||
Total assets | 9,085 | |||
Shareholders’ equity | 4,018 |
(1) | All dividends declared were paid in cash in the first nine months of 2006. |
(2) | Under U.S. GAAP, DIC’s acquisition of our shares in 2005 is treated as a purchase that requires a revaluation of our assets and liabilities, leading to increased amortization expense of intangible assets, offset by decreased depreciation expense of tangible assets under U.S. GAAP. In addition, we were required to push down certain DIC debt and the interest expense relating to such debt incurred to finance the acquisition until it was repaid in early 2006, leading to increased financial expense under U.S. GAAP. See note 28 to our consolidated financial statements. As a result of this accounting treatment, U.S. GAAP data presented for the year ended and as at December 31, 2005 and for the nine months ended and as at September 30, 2006 are not comparable with the data presented for the previous periods. |
(3) | EBITDA is a non-GAAP measure and is defined as income before financial income (expenses), net; other income (expenses), net; income tax; depreciation and amortization. We present EBITDA as a supplemental performance measure because we believe that it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structure (most particularly affecting our interest expense given our recently incurred significant debt), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses or, most recently, our provision for tax expenses) and the age of, and depreciation expenses associated with, fixed assets (affecting relative depreciation expense and, until December 31, 2003, the effects of adjusting for changes in the general purchasing power of the Israeli currency as discussed above). EBITDA should not be considered in isolation or as a substitute for operating income or other statement of operations or cash flow data prepared in accordance with GAAP as a measure of our profitability or liquidity. EBITDA does not take into account our debt service requirements and other commitments, including capital expenditures, and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. In addition, EBITDA, as presented in this prospectus, may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated. |
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Nine Months | ||||||||||||||||||||
Year Ended | Ended | |||||||||||||||||||
December 31, | September 30, | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(In NIS millions) | ||||||||||||||||||||
Net income | 431 | 617 | 483 | 418 | 390 | |||||||||||||||
Financial expense (income), net | 216 | 45 | (24 | ) | (13 | ) | 128 | |||||||||||||
Other expenses (income) | (1 | ) | (1 | ) | 11 | 10 | 1 | |||||||||||||
Income taxes | 245 | 292 | 232 | 201 | 243 | |||||||||||||||
Depreciation and amortization | 999 | 961 | 941 | 704 | 667 | |||||||||||||||
EBITDA | 1,890 | 1,914 | 1,643 | 1,320 | 1,429 | |||||||||||||||
(4) | Subscriber data refer to active subscribers. Until June 30, 2006, we had a three-month method of calculating our subscriber base, which means that we deduct subscribers from our subscriber base after three months of no revenue generation or activity on our network by or in relation to both the post-paid and pre-paid subscriber. We now believe that waiting six months to deduct subscribers is preferable since many subscribers that were inactive for three months become active again before the end of six months. As a result, commencing July 1, 2006, we adopted a six-month method of calculating our subscriber base, but have not restated our prior subscriber data presented in this table to reflect this change. The six-month method is, to the best of our knowledge, consistent with the methodology used by other cellular providers in Israel. This change in methodology resulted in an increase of our number of reported subscribers by approximately 80,000 compared to the prior methodology and affected our other key performance indicators accordingly. |
(5) | Churn rate is defined as the total number of voluntary and involuntary permanent deactivations in a given period expressed as a percentage of the number of subscribers at the beginning of the period. Involuntary permanent deactivations relate to subscribers who have failed to pay their arrears for the period of six consecutive months. Voluntary permanent deactivations relate to subscribers who terminated their use of our services. |
(6) | Average monthly revenue per subscriber (ARPU) is calculated by dividing revenues from cellular services for the period by the average number of subscribers during the period and by dividing the result by the number of months in the period. Revenues from inbound roaming services are included even though the number of subscribers in the equation does not include the users of those roaming services. Inbound roaming services are included because ARPU is meant to capture all service revenues generated by a cellular network, including roaming services. Revenues from sales of extended warranties are included because they represent recurring revenues generated by subscribers, but revenues from sales of handsets, repair services and transmission services are not. We, and industry analysts, treat ARPU as a key performance indicator of a cellular operator because it is the closest meaningful measure of the contribution to service revenues made by an average subscriber. |
Nine Months Ended | |||||||||||||||||||||||||
Year Ended December 31, | September 30, | ||||||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | 2006 (In $) | ||||||||||||||||||||
(In NIS millions, except number of subscribers and months) | |||||||||||||||||||||||||
Revenues | 5,261 | 5,600 | 5,114 | 3,845 | 4,191 | 974 | |||||||||||||||||||
less revenues from equipment sales | 498 | 646 | 565 | 406 | 477 | 111 | |||||||||||||||||||
less other revenues* | 22 | 21 | 38 | 26 | 43 | 10 | |||||||||||||||||||
adjustments to the Israeli CPI** | (62 | ) | — | — | — | — | — | ||||||||||||||||||
Revenues used in ARPU calculation (in NIS millions) | 4,803 | 4,933 | 4,511 | 3,413 | 3,671 | 853 | |||||||||||||||||||
Average number of subscribers | 2,477,316 | 2,368,919 | 2,489,453 | 2,467,596 | 2,675,807 | 2,675,807 | |||||||||||||||||||
Months during period | 12 | 12 | 12 | 9 | 9 | 9 | |||||||||||||||||||
ARPU (in NIS, per month) | 162 | 174 | 151 | 154 | 152 | 35 |
* | Other revenues includes revenues from repair services and transmission services. |
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** | Pursuant to Israeli GAAP, until December 31, 2003, we prepared our financial statements on the basis of historical cost adjusted for the changes in the general purchasing power of Israeli currency, the NIS, based upon changes in the Israeli CPI. We reverse these adjustments in presenting ARPU. |
(7) | Average monthly minutes of use per subscriber (MOU) is calculated by dividing the total billable minutes (of outgoing and incoming calls from other networks, excluding roaming usage) during the month, by the average number of subscribers during such month, and by dividing the sum of such results for all months in the reported period by the number of months in the period. If the methodology of calculating our subscriber base had not changed in July 2006, MOU for the nine months ended September 30, 2006 would have been 339 minutes, which represents an increase of 4.0% compared with the corresponding period in 2005. |
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We operate in a heavily regulated industry, which can harm our results of operations. |
• | reduce tariffs, including interconnect and roaming tariffs, limit our ability to vary charging units or otherwise intervene in the pricing policies for our products and services; | |
• | regulate the termination of predefined term agreements, including requiring us to disconnect subscribers once the initial term expires; | |
• | impose new safety or health-related requirements; | |
• | impose additional restrictions on the construction and operation of cell sites; | |
• | impose restrictions on the provision of content services; | |
• | limit or otherwise intervene with the services or products that we may sell; or | |
• | set higher service standards. |
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We may face claims of being in violation of the law and our license requiring the implementation of number portability and the terms of our license governing the method of charging for SMS messages. |
We may not be able to obtain permits to construct and operate cell sites. |
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We may be required to indemnify certain local planning and building committees in respect of claims against them. |
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Alleged health risks relating to non-ionizing radiation generated from cell sites and cellular telecommunications devices may harm our prospects. |
We face intense competition in all aspects of our business. |
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• | the implementation of number portability, as it would eliminate one of the deterrents to switching between cellular operators; | |
• | Pelephone’s offering of certain services jointly with its parent company, Bezeq, the incumbent landline operator; although Bezeq and Pelephone may not offer integrated or combined packages of cellular and landline telephone and other telecommunication services currently, the Ministry of Communications has stated that once Bezeq’s share of the Israeli landline telephone market falls below 85% (Bezeq does not publish its market share), it would be permitted to offer certain services jointly with its subsidiaries subject to regulatory limitations; | |
• | the entry into the Israeli cellular market by mobile virtual network operators, or MVNOs, could increase competition and thus may adversely affect our revenues; the government has authorized an examination of the desirability of introducing MVNO operation in Israel; the findings and recommendations are expected to be published in May 2007; and | |
• | a proposed amendment to the Israeli Restrictive Trade Practices Law, 1988 to grant the Commissioner of Restrictive Trade Practices broader authority to take action against oligopolies where there is insufficient competition, including the authority to issue orders to remove or to ease entry or transfer barriers, should the Commissioner conclude that this would increase competition; if the Commissioner were to decide that the Israeli cellular market was oligopolistic and insufficiently competitive, this could limit our freedom to manage our business, increase the competitive pressures that we face and adversely affect our results of operations. |
We could be subject to legal claims due to the inability of our information systems to fully support our calling plans. |
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We are exposed to, and currently are engaged in, a variety of legal proceedings, including class action lawsuits. |
We may be subject to increased regulation in respect of handset sales. |
We rely on interconnecting telecommunications providers and could be adversely affected if these providers fail to provide these services without disruption and on a consistent basis. |
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There are certain restrictions in our license relating to the ownership of our shares. |
• | our founding shareholder, DIC (or its transferee or transferees, if approved in advance by the Ministry of Communications as “founding shareholders”), must own at least 26% of each of our means of control; | |
• | Israeli citizens and residents among our founding shareholders (or their approved transferees) must own at least 20% of our outstanding share capital and each of our other means of control (DIC has agreed to comply with this requirement); | |
• | a majority of our directors must be Israeli citizens and residents; | |
• | at least 20% of our directors must be appointed by Israeli citizens and residents among our founding shareholders; and | |
• | we are required to have a committee of our Board of Directors that deals with matters relating to state security, which must be comprised of at least four directors (including an external director) having the requisite security clearance by Israel’s General Security Service. |
We may be adversely affected by the significant technological and other changes in the cellular communications industry. |
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If we cannot obtain or maintain favorable roaming arrangements our services may be less attractive or less profitable. |
Our substantial debt increases our exposure to market risks, may limit our ability to incur additional debt that may be necessary to fund our operations and could adversely affect our financial stability. |
• | increasing our vulnerability to adverse economic, industry or business conditions, including increases in prevailing interest rates, particularly because our debentures are linked to the Israeli CPI, and our credit facility bears interest at a variable rate; | |
• | limiting our flexibility in planning for, or reacting to, changes in our industry and the economy in general; | |
• | requiring us to dedicate a substantial portion of our cash flow from operations to service our debt, thus reducing the funds available for operations and future business development; and | |
• | limiting our ability to obtain additional financing to operate, develop and expand our business. |
Our freedom to operate our business is limited as a result of certain restrictive covenants contained in our credit facility and our indentures. |
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Our business results may be affected by currency fluctuations, by our currency hedging positions and by changes in the Israeli Consumer Price Index. |
We may not be able to fulfill our dividend policy in the future. |
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We rely on a limited number of suppliers for key equipment and services. |
We are a member of the IDB group of companies, one of Israel’s largest business groups. This may limit our ability to expand our business, to acquire other businesses or to borrow money from Israeli banks. |
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We conduct our operations in Israel and therefore our results may be adversely affected by political, economic and military instability in Israel. |
Our freedom and ability to conduct our operations may be limited during periods of national emergency. |
Provisions of Israeli law and our license may delay, prevent or impede an acquisition of us, which could prevent a change of control. |
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It may be difficult to enforce a U.S. judgment against our officers, our directors and us or to assert U.S. securities law claims in Israel. |
We are controlled by a single shareholder who can significantly influence matters requiring shareholders’ approval. |
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Our share price may be extremely volatile and you may not be able to resell your shares at or above the initial public offering price. |
A substantial number of our ordinary shares could be sold into the public market shortly after this offering, which could depress our share price. |
We will incur increased costs as a result of being a U.S. public company. |
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We have not yet evaluated our internal control over financial reporting in compliance with Section 404 of the Sarbanes-Oxley Act. |
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Month | High | Low | ||||||
(NIS) | (NIS) | |||||||
August 2006 | 4.408 | 4.357 | ||||||
September 2006 | 4.394 | 4.297 | ||||||
October 2006 | 4.302 | 4.238 | ||||||
November 2006 | 4.331 | 4.247 | ||||||
December 2006 | 4.234 | 4.176 | ||||||
January 2007 | 4.260 | 4.187 |
Year | Average | |||
(NIS) | ||||
2002 | 4.736 | |||
2003 | 4.512 | |||
2004 | 4.483 | |||
2005 | 4.503 | |||
2006 | 4.442 |
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• | we incur substantial non-cash depreciation and amortization expense that reduces our net income; and | |
• | we have not typically required significant working capital; our customers generally pay us within 45 days of the end of each monthly billing cycle in which the service was provided, while most of our service providers accept payment on a delayed basis. |
Nine Months | |||||||||||||||||
Ended | |||||||||||||||||
Year Ended December 31, | September 30, | ||||||||||||||||
2003 | 2004 | 2005 | 2006 | ||||||||||||||
(In NIS millions) | |||||||||||||||||
Net cash provided by operating activities | 1,393 | 1,471 | 1,272 | 1,067 | |||||||||||||
Net cash used in investing activities | (508 | ) | (852 | ) | (619 | ) | (511 | ) | |||||||||
Cash available for dividends(1) | 885 | 619 | 653 | 556 | |||||||||||||
Dividend distribution pursuant to current policy(2) | 323 | 463 | 362 | 293 |
(1) | We have not deducted cash used to make principal repayments of debt in determining cash available for dividends as we have been able to access the debt markets as needed in the past to refinance any existing debt coming due, and we anticipate that we will continue to be able to do so. |
(2) | Calculated as 75% of net income. Does not take into account contractual or other restrictions that may have been in effect at such times. |
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September 30, 2006 | ||||
(In NIS millions) | ||||
Total debt | 3,588 | |||
Shareholders’ equity: | ||||
Ordinary shares, NIS 0.01 par value per share, 300,000,000 shares authorized, 97,500,000 issued and outstanding | — | |||
Capital reserve | (20 | ) | ||
Retained earnings | 204 | |||
Total shareholders’ equity | 184 | |||
Total capitalization | 3,772 | |||
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NIS | $ | |||||||
Assumed initial public offering price | 86.04 | 20.00 | ||||||
Net tangible book value per share as of September 30, 2006 | (2.88 | ) | (0.67 | ) | ||||
Dilution per share to new investors | 83.16 | 20.67 |
Shares | Total Consideration | Average Price | ||||||||||||||||||
Purchased | Amount | per Share | ||||||||||||||||||
Number | NIS | $ | NIS | $ | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Existing shareholders who are affiliated persons(1) | 67,761,645 | 6,269 | (2) | 1,370 | 92.52 | 20.22 | ||||||||||||||
Purchasers in the offering | 20,000,000 | 1,721 | 400 | 86.04 | 20.00 |
(1) | Does not reflect dividends of NIS 39.3 ($9.13) per share paid in 2006. |
(2) | DIC paid the consideration in U.S. dollars. The consideration amount in NIS was calculated according to the exchange rate at the transaction date. |
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Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2006 | ||||||||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | (In $) | |||||||||||||||||||||||||
(In NIS millions, except per share data) | ||||||||||||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||||||||||
Revenues | 4,960 | 5,135 | 5,261 | 5,600 | 5,114 | 3,845 | 4,191 | 974 | ||||||||||||||||||||||||
Cost of revenues | 2,893 | 3,111 | 3,075 | 3,302 | 3,133 | 2,264 | 2,470 | 574 |
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Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2006 | ||||||||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | (In $) | |||||||||||||||||||||||||
(In NIS millions, except per share data) | ||||||||||||||||||||||||||||||||
Selling and marketing expenses | 574 | 651 | 613 | 661 | 623 | 453 | 473 | 110 | ||||||||||||||||||||||||
General and administrative expenses | 621 | 678 | 682 | 684 | 656 | 512 | 486 | 113 | ||||||||||||||||||||||||
Operating income | 872 | 695 | 891 | 953 | 702 | 616 | 762 | 177 | ||||||||||||||||||||||||
Financial income (expense), net | (15 | ) | (5 | ) | (216 | ) | (45 | ) | 24 | 13 | (128 | ) | (30 | ) | ||||||||||||||||||
Other income (expenses), net | 6 | (5 | ) | 1 | 1 | (11 | ) | (10 | ) | (1 | ) | (0 | ) | |||||||||||||||||||
Income tax | 288 | 266 | 245 | 292 | 232 | 201 | 243 | 56 | ||||||||||||||||||||||||
Net income | 575 | 419 | 431 | 617 | 483 | 418 | 390 | 91 | ||||||||||||||||||||||||
Basic and diluted net income per share | 5.90 | 4.30 | 4.42 | 6.33 | 4.95 | 4.29 | 4.00 | 0.93 | ||||||||||||||||||||||||
Weighted average ordinary shares outstanding | 97,500,000 | 97,500,000 | 97,500,000 | 97,500,000 | 97,500,000 | 97,500,000 | 97,500,000 | 97,500,000 | ||||||||||||||||||||||||
Dividends declared per share(1) | — | — | — | — | 34.87 | — | 4.41 | — | ||||||||||||||||||||||||
U.S. GAAP Data(2): | ||||||||||||||||||||||||||||||||
Net income | — | — | 441 | 620 | 491 | 460 | 374 | 87 | ||||||||||||||||||||||||
Basic and diluted earnings | — | — | 4.52 | 6.36 | 5.04 | 4.72 | 3.84 | 0.89 | ||||||||||||||||||||||||
Other Data: | ||||||||||||||||||||||||||||||||
EBITDA(3) | 1,704 | 1,652 | 1,890 | 1,914 | 1,643 | 1,320 | 1,429 | 332 | ||||||||||||||||||||||||
Capital expenditures | 1,727 | 1,073 | 658 | 739 | 747 | 360 | 313 | 73 | ||||||||||||||||||||||||
Net cash provided (used) by operating activities | 1,325 | 1,285 | 1,393 | 1,471 | 1,272 | 1,000 | 1,067 | 248 | ||||||||||||||||||||||||
Net cash provided (used) in investing activities | (1,280 | ) | (1,557 | ) | (508 | ) | (852 | ) | (619 | ) | (445 | ) | (511 | ) | (119 | ) | ||||||||||||||||
Net cash provided (used) by financing activities | (153 | ) | 436 | (603 | ) | (1,068 | ) | 1,114 | (536 | ) | (2,210 | ) | (514 | ) | ||||||||||||||||||
Subscribers(4) | 2,262 | 2,468 | 2,300 | 2,450 | 2,603 | 2,554 | 2,828 | |||||||||||||||||||||||||
Period churn rate(5) | 10.5 | % | 11.2 | % | 27.3 | % | 19.9 | % | 15.0 | % | 10.5 | % | 12.4 | % | ||||||||||||||||||
ARPU (in NIS)(6) | 177 | 166 | 162 | 174 | 151 | 154 | 152 | 35 |
December 31, | September 30, | |||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | 2006 | |||||||||||||||||||
(In NIS millions) | ||||||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||
Cash | 6 | 171 | 454 | 5 | 1,772 | 118 | ||||||||||||||||||
Working capital | (628 | ) | (67 | ) | (361 | ) | (138 | ) | 1,909 | 180 | ||||||||||||||
Total assets | 5,639 | 6,047 | 5,907 | 5,311 | 7,016 | 5,014 | ||||||||||||||||||
Shareholders’ equity | 1,694 | 2,114 | 2,545 | 3,161 | 3,649 | 184 | ||||||||||||||||||
U.S. GAAP Data(2): | ||||||||||||||||||||||||
Total assets | — | — | — | 5,610 | 11,100 | 9,085 | ||||||||||||||||||
Shareholders’ equity | — | — | — | 3,312 | 4,490 | 4,018 |
(1) | All dividends declared were paid in cash in the first nine months of 2006. |
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(2) | Under U.S. GAAP, DIC’s acquisition of our shares in 2005 is treated as a purchase that requires a revaluation of our assets and liabilities, leading to increased amortization expense of intangible assets, offset by decreased depreciation expense of tangible assets under U.S. GAAP. In addition, we were required to push down certain DIC debt and the interest expense relating to such debt incurred to finance the acquisition until it was repaid in early 2006, leading to increased financial expense under U.S. GAAP. See note 28 to our consolidated financial statements. As a result of this accounting treatment, U.S. GAAP data presented for the year ended and as at December 31, 2005 and for the nine months ended and as at September 30, 2006 are not comparable with the data presented for the previous periods. |
(3) | EBITDA is a non-GAAP measure and is defined as income before financial income (expenses), net; other income (expenses), net; income tax; depreciation and amortization. We present EBITDA as a supplemental performance measure because we believe that it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structure (most particularly affecting our interest expense given our recently incurred significant debt), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses or, most recently, our provision for tax expenses) the age of, and depreciation expenses associated with, fixed assets (affecting relative depreciation expense and, until December 31, 2003, the effects of adjusting for changes in the general purchasing power of the Israeli currency as discussed above). EBITDA should not be considered in isolation or as a substitute for operating income or other statement of operations or cash flow data prepared in accordance with GAAP as a measure of our profitability or liquidity. EBITDA does not take into account our debt service requirements and other commitments, including capital expenditures, and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. In addition, EBITDA, as presented in this prospectus, may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated. |
Nine Months | ||||||||||||||||||||||||||||
Ended | ||||||||||||||||||||||||||||
Year Ended December 31, | September 30, | |||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||||||||
(In NIS millions) | ||||||||||||||||||||||||||||
Net income | 575 | 419 | 431 | 617 | 483 | 418 | 390 | |||||||||||||||||||||
Financial expense (income), net | 15 | 5 | 216 | 45 | (24 | ) | (13 | ) | 128 | |||||||||||||||||||
Other expenses (income) | (6 | ) | 5 | (1 | ) | (1 | ) | 11 | 10 | 1 | ||||||||||||||||||
Income taxes | 288 | 266 | 245 | 292 | 232 | 201 | 243 | |||||||||||||||||||||
Depreciation and amortization | 832 | 957 | 999 | 961 | 941 | 704 | 667 | |||||||||||||||||||||
EBITDA | 1,704 | 1,652 | 1,890 | 1,914 | 1,643 | 1,320 | 1,429 | |||||||||||||||||||||
(4) | Subscriber data refer to active subscribers. Until June 30, 2006, we had a three-month method of calculating our subscriber base, which means that we deduct subscribers from our subscriber base after three months of no revenue generation or activity on our network by or in relation to both the post-paid and pre-paid subscriber. We now believe that waiting six months to deduct subscribers is preferable since many subscribers that were inactive for three months become active again before the end of six months. As a result, commencing July 1, 2006, we adopted a six-month method of calculating our subscriber base, but have not restated our prior subscriber data presented in this table to reflect this change. The six-month method is, to the best of our knowledge, consistent with the methodology used by other cellular providers in Israel. This change in methodology resulted in an increase of our number of reported subscribers by approximately 80,000 compared to the prior methodology and affected our other key performance indicators accordingly. |
We also revised our subscriber calculation methodology in 2003 and 2005 but in each case have not restated prior subscriber data to conform to the new presentation. We estimate that the change in methodology in 2003 led to a decrease in our reported subscriber numbers of approximately 300,000 and the change in methodology in 2005 led to an increase in our reported subscriber numbers of approximately 84,000. |
(5) | Churn rate is defined as the total number of voluntary and involuntary permanent deactivations in a given period expressed as a percentage of the number of subscribers at the beginning of the period. Involuntary permanent deactivations relate to subscribers who have failed to pay their arrears for the period of six consecutive months. Voluntary permanent deactivations relate to subscribers who terminated their use of our services. |
(6) | Average monthly revenue per subscriber (ARPU) is calculated by dividing revenues from cellular services for the period by the average number of subscribers during the period and by dividing the result by the number of months in the period. Revenues from inbound roaming services are included even though the number of subscribers in the equation does not include the users of those roaming services. Inbound roaming services are included because ARPU is meant to capture all service revenues generated by a cellular network, including roaming services. Revenues from sales of extended warranties are included because they represent recurring revenues generated by |
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subscribers, but revenues from sales of handsets, repair services and transmission services are not. We, and industry analysts, treat ARPU as a key performance indicator of a cellular operator because it is the closest meaningful measure of the contribution to service revenues made by an average subscriber. |
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||
Year Ended December 31, | |||||||||||||||||||||||||||||||||
2006 | |||||||||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | (In $) | ||||||||||||||||||||||||||
(In NIS millions, except number of subscribers and months) | |||||||||||||||||||||||||||||||||
Revenues | 4,960 | 5,135 | 5,261 | 5,600 | 5,114 | 3,845 | 4,191 | 974 | |||||||||||||||||||||||||
less revenues from equipment sales | 286 | 502 | 498 | 646 | 565 | 406 | 477 | 111 | |||||||||||||||||||||||||
less other revenues* | 11 | 10 | 22 | 21 | 38 | 26 | 43 | 10 | |||||||||||||||||||||||||
adjustments to the Israeli CPI** | 226 | (32 | ) | (62 | ) | — | — | — | — | — | |||||||||||||||||||||||
Revenues used in ARPU calculation (in NIS millions) | 4,437 | 4,655 | 4,803 | 4,933 | 4,511 | 3,413 | 3,671 | 853 | |||||||||||||||||||||||||
Average number of subscribers | 2,091,937 | 2,336,264 | 2,477,316 | 2,368,919 | 2,489,453 | 2,467,596 | 2,675,807 | 2,675,807 | |||||||||||||||||||||||||
Months during period | 12 | 12 | 12 | 12 | 12 | 9 | 9 | 9 | |||||||||||||||||||||||||
ARPU (in NIS, per month) | 177 | 166 | 162 | 174 | 151 | 154 | 152 | 35 |
* | Other revenues includes revenues from repair services and transmission services. |
** | Pursuant to Israeli GAAP, until December 31, 2003, we prepared our financial statements on the basis of historical cost adjusted for the changes in the general purchasing power of Israeli currency, the NIS, based upon changes in the Israeli CPI. We reverse these adjustments in presenting ARPU. |
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General |
35
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36
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37
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New Israeli accounting standard affecting measurement of fixed assets |
Year Ended | Nine Months Ended | |||||||||||||||||||
December 31, | September 30, | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
(In NIS millions) | ||||||||||||||||||||
Decrease in depreciation expense | 46 | 46 | 52 | 39 | 38 | |||||||||||||||
Decrease (increase) in deferred tax expense | (17 | ) | (4 | ) | (2 | ) | 2 | 7 | ||||||||||||
Decrease in capital gain | — | — | (2 | ) | (2 | ) | (3 | ) | ||||||||||||
Increase in net income | 29 | 42 | 48 | 39 | 28 | |||||||||||||||
Increase in basic and diluted earnings per ordinary shares | 0.30 | 0.43 | 0.49 | 0.40 | 0.29 |
Adoption of International Financial Reporting Standards |
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2006 Share Incentive Plan |
Revenues |
Cost of revenues |
Selling and marketing expenses |
39
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General and administrative expenses |
Financial income and expenses |
Other income and expenses |
Income Tax |
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Comparison of nine months ended September 30, 2005 and 2006 |
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2005 | 2006 | Change* | ||||||||||
Subscribers at end of period(1) (in thousands) | 2,554 | 2,828 | 10.7 | % | ||||||||
Period churn rate(1)(2) | 10.5 | % | 12.4 | % | 1.9 | pp | ||||||
Average monthly usage per subscriber (MOU) (in minutes)(1)(3) | 326 | 336 | 3.1 | % | ||||||||
Average monthly revenue per subscriber (ARPU)(1)(4) (in NIS) | 154 | 152 | (1.3 | )% | ||||||||
Operating income (in NIS millions) | 616 | 762 | 23.7 | % | ||||||||
Net income (in NIS millions) | 418 | 390 | (6.7 | )% | ||||||||
EBITDA(5) (in NIS millions) | 1,320 | 1,429 | 8.3 | % | ||||||||
Operating income margin(6) | 16.0 | % | 18.2 | % | 2.2 | pp | ||||||
EBITDA margin(7) | 34.3 | % | 34.1 | % | (0.2pp | ) |
* | pp denotes percentage points and this measure of change is calculated by subtracting the 2005 measure from the 2006 measure. |
(1) | Subscriber data refer to active subscribers. Until June 30, 2006, we had a three-month method of calculating our subscriber base, which means that we deduct subscribers from our subscriber base after three months of no revenue generation or activity on our network by or in relation to both the post-paid and pre-paid subscriber. We now believe that waiting six months to deduct subscribers is preferable since many subscribers that were inactive for three months become active again before the end of six months. As a result, commencing July 1, 2006, we adopted a six-month method of calculating our subscriber base, but have not restated our prior subscriber data presented in this table to reflect this change. The six-month method is, to the best of our knowledge, consistent with the methodology used by other cellular providers in Israel. This change in methodology resulted in an increase of our number of reported subscribers by approximately 80,000 compared to the prior methodology and affected our other key performance indicators accordingly. |
(2) | Churn rate is defined as the total number of voluntary and involuntary permanent deactivations in a given period expressed as a percentage of the number of subscribers at the beginning of the period. Involuntary permanent deactivations relate to subscribers who have failed to pay their arrears for the period of six consecutive months. Voluntary permanent deactivations relate to subscribers who terminated their use of our services. |
(3) | Average monthly minutes of use per subscriber (MOU) is calculated by dividing the total billable minutes (of outgoing and incoming calls from other networks, excluding roaming usage) during the month, by the average number of subscribers during such month, and by dividing the sum of such results for all months in the reported period by the number of months in the period. If the methodology of calculating our subscriber base had not changed in July 2006, the MOU for the nine months ended September 30, 2006 would have been 339 minutes, which represents an increase of 4.0% compared with the corresponding period in 2005. |
(4) | Average monthly revenue per subscriber (ARPU) is calculated by dividing revenues from cellular services for the period by the average number of subscribers during the period and by dividing the result by the number of months in the period. Revenues from inbound roaming services are included even though the number of subscribers in the equation does not include the users of those roaming services. Inbound roaming services are included because ARPU is meant to capture all service revenues generated by a cellular network, including roaming services. |
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Revenues from sales of extended warranties are included because they represent recurring revenues generated by subscribers, but revenues from sales of handsets, repair services and transmission services are not. We, and industry analysts, treat ARPU as a key performance indicator of a cellular operator because it is the closest meaningful measure of the contribution to service revenues made by an average subscriber. |
Nine Months Ended September 30, | |||||||||||||
2005 | 2006 | 2006 (In $) | |||||||||||
(In NIS millions, except number of | |||||||||||||
subscribers and months) | |||||||||||||
Revenues | 3,845 | 4,191 | 974 | ||||||||||
less revenues from equipment sales | 406 | 477 | 111 | ||||||||||
less other revenues* | 26 | 43 | 10 | ||||||||||
adjustments to the Israeli CPI** | — | — | — | ||||||||||
Revenues used in ARPU calculation (in NIS millions) | 3,413 | 3,671 | 853 | ||||||||||
Average number of subscribers | 2,467,596 | 2,675,807 | 2,675,807 | ||||||||||
Months during period | 9 | 9 | 9 | ||||||||||
ARPU (in NIS, per month) | 154 | 152 | 35 |
* | Other revenues include revenues from repair services and transmission services. |
** | Pursuant to Israeli GAAP, until December 31, 2003, we prepared our financial statements on the basis of historical cost adjusted for the changes in the general purchasing power of Israeli currency, the NIS, based upon changes in the Israeli CPI. We reverse these adjustments in presenting ARPU. |
If the methodology of calculating our subscriber base had not changed in July 2006, ARPU for the nine months ended September 30, 2006 would have been NIS 154, which is equal to ARPU for the corresponding period in 2005. |
(5) | EBITDA is a non-GAAP measure and is defined as income before financial income (expenses), net; other income (expenses), net; income tax; depreciation and amortization. We present EBITDA as a supplemental performance measure because we believe that it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structure (most particularly affecting our interest expense given our recently incurred significant debt), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses or, most recently, our provision for tax expenses) and the age of, and depreciation expenses associated with, fixed assets (affecting relative depreciation expense and, until December 31, 2003, the effects of adjusting for changes in the general purchasing power of the Israeli currency as discussed above). EBITDA should not be considered in isolation or as a substitute for operating income or other statement of operations or cash flow data prepared in accordance with Israeli GAAP as a measure of our profitability or liquidity. EBITDA does not take into account our debt service requirements and other commitments, including capital expenditures, and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. In addition, EBITDA, as presented in this prospectus, may not be comparable to similarly titled measures reported by other companies due to differences in the way these measures are calculated. |
Nine Months | ||||||||
Ended | ||||||||
September 30, | ||||||||
2005 | 2006 | |||||||
(In NIS | ||||||||
millions) | ||||||||
Net income | 418 | 390 | ||||||
Financial expenses (income), net | (13 | ) | 128 | |||||
Other expenses (income), net | 10 | 1 | ||||||
Income taxes | 201 | 243 | ||||||
Operating income | 616 | 762 | ||||||
Depreciation and amortization | 704 | 667 | ||||||
EBITDA | 1,320 | 1,429 | ||||||
(6) | Operating income margin is defined as operating income as a percentage of total revenues for each of the applicable periods. |
(7) | EBITDA margin is defined as EBITDA as a percentage of total revenues for each of the applicable periods. |
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Nine Months | ||||||||
Ended | ||||||||
September 30, | ||||||||
2005 | 2006 | |||||||
Revenues | 100.0 | % | 100.0 | % | ||||
Cost of revenues | 58.9 | % | 58.9 | % | ||||
Gross profit | 41.1 | % | 41.1 | % | ||||
Selling and marketing expenses | 11.8 | % | 11.3 | % | ||||
General and administrative expenses | 13.3 | % | 11.6 | % | ||||
Operating income | 16.0 | % | 18.2 | % | ||||
Financial income (expenses), net | 0.3 | % | (3.1 | )% | ||||
Other income (expenses), net | (0.2 | )% | (0.0 | )% | ||||
Income before taxes | 16.1 | % | 15.1 | % | ||||
Income tax | 5.2 | % | 5.8 | % | ||||
Net income | 10.9 | % | 9.3 | % | ||||
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2005 | 2006 | Change | ||||||||||
(In NIS millions) | ||||||||||||
Revenues | 3,845 | 4,191 | 9.0 | % |
Nine Months Ended September 30, | ||||||||||||||||
2005 | 2006 | |||||||||||||||
Revenues | % of Total Revenues | Revenues | % of Total Revenues | |||||||||||||
(NIS in millions) | (NIS in millions) | |||||||||||||||
Voice services: | ||||||||||||||||
Outgoing air time (including interconnect) | 1,931 | 50.2 | % | 1,958 | 46.7 | % | ||||||||||
Incoming air time | 815 | 21.2 | % | 846 | 20.1 | % | ||||||||||
Roaming | 222 | 5.8 | % | 292 | 7.0 | % | ||||||||||
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Nine Months Ended September 30, | ||||||||||||||||
2005 | 2006 | |||||||||||||||
Revenues | % of Total Revenues | Revenues | % of Total Revenues | |||||||||||||
(NIS in millions) | (NIS in millions) | |||||||||||||||
Total voice services | 2,968 | 77.2 | % | 3,096 | 73.9 | % | ||||||||||
Other services* | 471 | 12.2 | % | 618 | 14.7 | % | ||||||||||
Total services | 3,439 | 89.4 | % | 3,714 | 88.6 | % | ||||||||||
Handsets and accessories | 406 | 10.6 | % | 477 | 11.4 | % | ||||||||||
Total | 3,845 | 100.0 | % | 4,191 | 100.0 | % | ||||||||||
* | Consists of fixed monthly subscription fees, content services, text messages, data services, extended warranty fees, transmission and others. |
Nine Months Ended September 30, | ||||||||||||||||
2005 | 2006 | |||||||||||||||
Revenues | % of Total Revenues | Revenues | % of Total Revenues | |||||||||||||
(NIS in millions) | (NIS in millions) | |||||||||||||||
Individual | 2,112 | 54.9 | % | 2,280 | 54.4 | % | ||||||||||
Business | 1,609 | 41.9 | % | 1,693 | 40.4 | % | ||||||||||
Other* | 124 | 3.2 | % | 218 | 5.2 | % | ||||||||||
Total | 3,845 | 100.0 | % | 4,191 | 100.0 | % | ||||||||||
* | Consists of revenues from inbound roaming services and other services. |
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Nine Months Ended September 30, | ||||||||||||||||
2005 | 2006 | |||||||||||||||
Revenues | % of Total Revenues | Revenues | % of Total Revenues | |||||||||||||
(NIS in millions) | (NIS in millions) | |||||||||||||||
Pre-paid | 523 | 13.6 | % | 530 | 12.6 | % | ||||||||||
Post-paid | 3,198 | 83.2 | % | 3,443 | 82.2 | % | ||||||||||
Other* | 124 | 3.2 | % | 218 | 5.2 | % | ||||||||||
Total | 3,845 | 100.0 | % | 4,191 | 100.0 | % | ||||||||||
* | Consists of revenues from inbound roaming services and other services. |
Cost of revenues and gross profit |
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2005 | 2006 | Change | ||||||||||
(In NIS millions) | ||||||||||||
Cost of revenues — services | 1,816 | 1,878 | 3.4 | % | ||||||||
Cost of revenues — equipment | 448 | 592 | 32.1 | % | ||||||||
Total cost of revenues | 2,264 | 2,470 | 9.1 | % | ||||||||
Gross profit | 1,581 | 1,721 | 8.9 | % | ||||||||
Selling and marketing expenses and general and administrative expenses |
Nine Months Ended | |||||||||||||
September 30, | |||||||||||||
2005 | 2006 | Change | |||||||||||
(In NIS | |||||||||||||
millions) | |||||||||||||
Selling and marketing expenses | 453 | 473 | 4.4 | % | |||||||||
General and administrative expenses | 512 | 486 | (5.1 | )% | |||||||||
Total | 965 | 959 | (0.6 | )% | |||||||||
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Financial and other income (expenses), net |
Nine Months | ||||||||
Ended | ||||||||
September 30, | ||||||||
2005 | 2006 | |||||||
(In NIS | ||||||||
millions) | ||||||||
Financial income (expenses), net | 13 | (128 | ) | |||||
Other income (expenses), net | (10 | ) | (1 | ) |
Income tax |
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2005 | 2006 | Change | ||||||||||
(In NIS | ||||||||||||
millions) | ||||||||||||
Income tax | 201 | 243 | (20.9 | )% |
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Net income |
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2005 | 2006 | Change | ||||||||||
(In NIS | ||||||||||||
millions) | ||||||||||||
Net income | 418 | 390 | (6.7 | )% |
Comparison of 2003, 2004 and 2005 |
Year Ended December 31, | Change* | |||||||||||||||||||
2003 | 2004 | 2005 | 2004 vs. 2003 | 2005 vs. 2004 | ||||||||||||||||
Subscribers at end of period(1) (in thousands) | 2,300 | 2,450 | 2,603 | 6.5 | % | 6.2 | % | |||||||||||||
Period churn rate(1)(2) | 27.3 | % | 19.9 | % | 15.0 | % | (7.4pp | ) | (4.9pp | ) | ||||||||||
Average monthly usage per subscriber (MOU) (in minutes)(1)(3) | 316 | 334 | 321 | 5.7 | % | (3.9 | )% | |||||||||||||
Average monthly revenue per subscriber (ARPU)(1)(4) (in NIS) | 162 | 174 | 151 | 7.4 | % | (13.2 | )% | |||||||||||||
Operating income (in NIS millions) | 891 | 953 | 702 | 7.0 | % | (26.3 | )% | |||||||||||||
Net income (in NIS millions) | 431 | 617 | 483 | 43.2 | % | (21.7 | )% | |||||||||||||
EBITDA(5) (in NIS millions) | 1,890 | 1,914 | 1,643 | 1.3 | % | (14.1 | )% | |||||||||||||
Operating income margin(6) | 16.9 | % | 17.0 | % | 13.7 | % | 0.1pp | (3.3pp | ) | |||||||||||
EBITDA margin(7) | 35.9 | % | 34.2 | % | 32.1 | % | (1.7pp | ) | (2.1pp | ) |
* | pp denotes percentage points and this measure of change is calculated by subtracting the 2003 measure from the 2004 measure and the 2004 measure from the 2005 measure, respectively. |
(1) | Subscriber data refer to active subscribers. We revised our subscriber calculation methodology in 2003 and 2005 but in each case have not restated prior subscriber data to conform to the new presentation. We estimate that the change in methodology in 2003 led to a decrease in our reported subscriber numbers of approximately 300,000 and the change in methodology in 2005 led to an increase in our reported subscriber numbers of approximately 84,000. |
(2) | Churn rate is defined as the total number of voluntary and involuntary permanent deactivations in a given period expressed as a percentage of the number of subscribers at the beginning of such period. Involuntary permanent deactivations relate to subscribers who have failed to pay their arrears for the period of six consecutive months. Voluntary permanent deactivations relate to subscribers who terminated their use of our services. |
(3) | Average monthly minutes of use per subscriber (MOU) is calculated by dividing the total billable minutes (of outgoing and incoming calls from other networks, excluding roaming usage) during the month, by the average number of subscribers during such month, and by dividing the sum of such results for all months in the reported period by the number of months in the period. |
(4) | Average monthly revenue per subscriber (ARPU) is calculated by dividing revenues from cellular services for the period by the average number of subscribers during the period and by dividing the result by the number of months in the period. Revenues from inbound roaming services are included even though the number of subscribers in the |
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equation does not include the users of those roaming services. Inbound roaming services are included because ARPU is meant to capture all service revenues generated by a cellular network, including roaming services. Revenues from sales of extended warranties are included because they represent recurring revenues generated by subscribers, but revenues from sales of handsets, repair services and transmission services are not. We, and industry analysts, treat ARPU as a key performance indicator of a cellular operator because it is the closest meaningful measure of the contribution to service revenues made by an average subscriber. |
We have set out below the calculation of ARPU for each of the periods presented: |
Year Ended December 31, | |||||||||||||
2003 | 2004 | 2005 | |||||||||||
(In NIS millions, except number | |||||||||||||
of subscribers and months) | |||||||||||||
Revenues | 5,261 | 5,600 | 5,114 | ||||||||||
less revenues from equipment sales | 498 | 646 | 565 | ||||||||||
less other revenues* | 22 | 21 | 38 | ||||||||||
adjustments to the Israeli CPI** | (62 | ) | — | — | |||||||||
Revenues used in ARPU calculation (in NIS millions) | 4,803 | 4,933 | 4,511 | ||||||||||
Average number of subscribers | 2,477,316 | 2,368,919 | 2,489,453 | ||||||||||
Months during period | 12 | 12 | 12 | ||||||||||
ARPU (in NIS, per month) | 162 | 174 | 151 |
* | Other revenues include revenues from repair services and transmission services. |
** | Pursuant to Israeli GAAP, until December 31, 2003, we prepared our financial statements on the basis of historical cost adjusted for the changes in the general purchasing power of Israeli currency, the NIS, based upon changes in the Israeli CPI. We reverse these adjustments in presenting ARPU. |
(5) | EBITDA is a non-GAAP measure and is defined as income before financial income (expenses), net; other income (expenses), net; income tax; depreciation and amortization. We present EBITDA as a supplemental performance measure because we believe that it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structure (most particularly affecting our interest expense given our recently incurred significant debt), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses or, most recently, our provision for tax expenses) and the age of, and depreciation expenses associated with, fixed assets (affecting relative depreciation expense and, until December 31, 2003, the effects of adjusting for changes in the general purchasing power of the Israeli currency as discussed above) and the impact of purchase accounting (affecting depreciation and amortization expense). EBITDA should not be considered in isolation or as a substitute for operating income or other statement of operations or cash flow data prepared in accordance with Israeli GAAP as a measure of our profitability or liquidity. EBITDA does not take into account our debt service requirements and other commitments, including capital expenditures, and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. In addition, EBITDA, as presented in this prospectus, may not be comparable to similarly titled measures reported by other companies due to differences in the way these measures are calculated. |
Year Ended | ||||||||||||
December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
(In NIS millions) | ||||||||||||
Net income | 431 | 617 | 483 | |||||||||
Financial expenses (income), net | 216 | 45 | (24 | ) | ||||||||
Other expenses (income), net | (1 | ) | (1 | ) | 11 | |||||||
Income taxes | 245 | 292 | 232 | |||||||||
Operating income | 891 | 953 | 702 | |||||||||
Depreciation and amortization | 999 | 961 | 941 | |||||||||
EBITDA | 1,890 | 1,914 | 1,643 | |||||||||
(6) | Operating income margin is defined as operating income as a percentage of total revenues for each of the applicable periods. |
(7) | EBITDA margin is defined as EBITDA as a percentage of total revenues for each of the applicable periods. |
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Year Ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
Revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of revenues | 58.4 | % | 59.0 | % | 61.3 | % | ||||||
Gross profit | 41.6 | % | 41.0 | % | 38.7 | % | ||||||
Selling and marketing expenses | 11.7 | % | 11.8 | % | 12.2 | % | ||||||
General and administrative expenses | 13.0 | % | 12.2 | % | 12.8 | % | ||||||
Operating income | 16.9 | % | 17.0 | % | 13.7 | % | ||||||
Financial income (expenses), net | (4.1 | )% | (0.8 | )% | 0.5 | % | ||||||
Other income (expenses), net | 0.0 | % | 0.0 | % | (0.2 | )% | ||||||
Income before taxes | 12.8 | % | 16.2 | % | 14.0 | % | ||||||
Income tax | 4.6 | % | 5.2 | % | 4.6 | % | ||||||
Net income | 8.2 | % | 11.0 | % | 9.4 | % | ||||||
Revenues |
Year Ended December 31, | Change | |||||||||||||||||||
2003 | 2004 | 2005 | 2004 vs. 2003 | 2005 vs. 2004 | ||||||||||||||||
(In NIS millions) | ||||||||||||||||||||
Revenues | 5,261 | 5,600 | 5,114 | 6.4 | % | (8.7 | )% |
2003 | 2004 | 2005 | ||||||||||||||||||||||
% of Total | % of Total | % of Total | ||||||||||||||||||||||
Revenues | Revenues | Revenues | Revenues | Revenues | Revenues | |||||||||||||||||||
(NIS in | (NIS in | (NIS in | ||||||||||||||||||||||
millions) | millions) | millions) | ||||||||||||||||||||||
Voice services: | ||||||||||||||||||||||||
Outgoing air time (including interconnect) | 2,818 | 53.6 | % | 2,773 | 49.5 | % | 2,535 | 49.6 | % | |||||||||||||||
Incoming air time | 1,242 | 23.6 | % | 1,290 | 23.1 | % | 1,072 | 21.0 | % | |||||||||||||||
Roaming | 143 | 2.7 | % | 230 | 4.1 | % | 300 | 5.8 | % | |||||||||||||||
Total voice services | 4,203 | 79.9 | % | 4,293 | 76.7 | % | 3,907 | 76.4 | % | |||||||||||||||
Other services* | 560 | 10.6 | % | 661 | 11.8 | % | 642 | 12.6 | % | |||||||||||||||
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2003 | 2004 | 2005 | ||||||||||||||||||||||
% of Total | % of Total | % of Total | ||||||||||||||||||||||
Revenues | Revenues | Revenues | Revenues | Revenues | Revenues | |||||||||||||||||||
(NIS in | (NIS in | (NIS in | ||||||||||||||||||||||
millions) | millions) | millions) | ||||||||||||||||||||||
Total services | 4,763 | 90.5 | % | 4,954 | 88.5 | % | 4,549 | 89.0 | % | |||||||||||||||
Handsets and accessories | 498 | 9.5 | % | 646 | 11.5 | % | 565 | 11.0 | % | |||||||||||||||
Total | 5,261 | 100.0 | % | 5,600 | 100.0 | % | 5,114 | 100.0 | % | |||||||||||||||
* | Consists of fixed monthly subscription fees, content services, text messages, data services, extended warranty fees, transmission services and others. |
2003 | 2004 | 2005 | ||||||||||||||||||||||
% of Total | % of Total | % of Total | ||||||||||||||||||||||
Revenues | Revenues | Revenues | Revenues | Revenues | Revenues | |||||||||||||||||||
(NIS in | (NIS in | (NIS in | ||||||||||||||||||||||
millions) | millions) | millions) | ||||||||||||||||||||||
Individual | 2,998 | 57.0 | % | 3,140 | 56.1 | % | 2,805 | 54.8 | % | |||||||||||||||
Business | 2,192 | 41.7 | % | 2,322 | 41.5 | % | 2,137 | 41.8 | % | |||||||||||||||
Other* | 71 | 1.3 | % | 138 | 2.4 | % | 172 | 3.4 | % | |||||||||||||||
Total | 5,261 | 100.0 | % | 5,600 | 100.0 | % | 5,114 | 100.0 | % | |||||||||||||||
* | Consists of revenues from inbound roaming services and other services. |
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2003 | 2004 | 2005 | ||||||||||||||||||||||
% of Total | % of Total | % of total | ||||||||||||||||||||||
Revenues | Revenues | Revenues | Revenues | Revenues | revenues | |||||||||||||||||||
(NIS in | (NIS in | (NIS in | ||||||||||||||||||||||
millions) | millions) | millions) | ||||||||||||||||||||||
Pre-paid | 713 | 13.5 | % | 773 | 13.8 | % | 682 | 13.3 | % | |||||||||||||||
Post-paid | 4,477 | 85.1 | % | 4,689 | 83.7 | % | 4,260 | 83.3 | % | |||||||||||||||
Other* | 71 | 1.4 | % | 138 | 2.5 | % | 172 | 3.4 | % | |||||||||||||||
Total | 5,261 | 100.0 | % | 5,600 | 100.0 | % | 5,114 | 100.0 | % | |||||||||||||||
* | Consists of revenues from inbound roaming services and other services. |
Cost of revenues and gross profit |
Year Ended December 31, | Change | |||||||||||||||||||
2003 | 2004 | 2005 | 2004 vs. 2003 | 2005 vs. 2004 | ||||||||||||||||
(In NIS millions) | ||||||||||||||||||||
Cost of revenues-services | 2,365 | 2,489 | 2,450 | 5.2 | % | (1.6 | )% | |||||||||||||
Cost of revenues-equipment | 710 | 813 | 683 | 14.5 | % | (16.0 | )% | |||||||||||||
Total cost of revenues | 3,075 | 3,302 | 3,133 | 7.4 | % | (5.1 | )% | |||||||||||||
Gross profit | 2,186 | 2,298 | 1,981 | 5.1 | % | (13.8 | )% | |||||||||||||
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Selling and marketing expenses and general and administrative expenses |
Year Ended December 31, | Change | ||||||||||||||||||||
2003 | 2004 | 2005 | 2004 vs. 2003 | 2005 vs. 2004 | |||||||||||||||||
(In NIS millions) | |||||||||||||||||||||
Selling and marketing expenses | 613 | 661 | 623 | 7.8 | % | (5.7 | )% | ||||||||||||||
General and administrative expenses | 682 | 684 | 656 | 0.3 | % | (4.1 | )% | ||||||||||||||
Total | 1,295 | 1,345 | 1,279 | 3.9 | % | (4.9 | )% | ||||||||||||||
Financial and other income (expenses), net |
Year Ended | ||||||||||||
December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
(In NIS millions) | ||||||||||||
Financial income (expenses), net | (216 | ) | (45 | ) | 24 | |||||||
Other income (expenses), net | 1 | 1 | (11 | ) |
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Income tax |
Year Ended | ||||||||||||||||||||
December 31, | Change | |||||||||||||||||||
2003 | 2004 | 2005 | 2004 vs. 2003 | 2005 vs. 2004 | ||||||||||||||||
(In NIS millions) | ||||||||||||||||||||
Income tax | 245 | 292 | 232 | 19.2 | % | (20.5 | )% |
Net income |
Year Ended | ||||||||||||||||||||
December 31, | Change | |||||||||||||||||||
2003 | 2004 | 2005 | 2004 vs. 2003 | 2005 vs. 2004 | ||||||||||||||||
(In NIS millions) | ||||||||||||||||||||
Net income | 431 | 617 | 483 | 43.1 | % | (21.7 | )% |
• | Push-down accounting. Under U.S. GAAP, DIC’s acquisition of our shares is treated as a purchase that requires a revaluation of our assets and liabilities, leading to increased amortization expense of intangible assets, offset by decreased depreciation expense of tangible assets under U.S. GAAP. In addition, we were required to push down certain DIC debt and the interest expense relating to such debt incurred to finance the acquisition until it was repaid in early 2006, leading to increased financial expense under U.S. GAAP. Push-down accounting had a significant impact on our balance sheet under U.S. GAAP. | |
• | Depreciation of property, plant and equipment. Under U.S. GAAP, each individual significant component is depreciated over its useful life, rather than depreciating all assets on the basis of the estimated useful life of the dominant asset. This leads to decreased depreciation expense under U.S. GAAP. We will adopt a similar policy under Israeli GAAP beginning in 2007. |
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General |
Dividend payments |
Debt service |
Public debentures |
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Credit facility from bank syndicate |
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Other credit facilities |
Capital expenditures |
Cash flows from operating activities |
Cash flows from investing activities |
Cash flows from financing activities |
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Working capital |
Trade receivables |
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Total | 2006 | 2007-2009 | 2010-2011 | 2012 and Beyond | ||||||||||||||||
Long-term debt obligations (including interest)(1) | 4,299 | 78 | 1,408 | 1,413 | 1,400 | |||||||||||||||
Capital (finance) lease obligations | — | — | — | — | — | |||||||||||||||
Operating lease obligations | 1,768 | 67 | 630 | 291 | 780 | |||||||||||||||
Purchase obligations | 242 | 16 | 186 | 40 | — | |||||||||||||||
Other long-term liabilities reflected on our balance sheet under GAAP | — | — | — | — | — | |||||||||||||||
Total | 6,309 | 161 | 2,224 | 1,744 | 2,180 | |||||||||||||||
(1) | Interest on our credit facilities is calculated using LIBOR plus 1.05% and TELBOR plus 0.17% plus 1.175 to 1.25%, depending on the facility, using LIBOR and TELBOR in effect on November 30, 2006. Because the interest rate under the credit facility is variable, actual payments may differ. Interest does not include (a) payments that could be required under our interest-rate swap agreements, which payments will depend upon changes in interest rates and could vary significantly, or (b) any increase in interest that would be required based on increases in the Israeli CPI. |
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December 31, 2004 | December 31, 2005 | September 30, 2006 | ||||||||||||||||||||||
Par Value | Fair Value | Par Value | Fair Value | Par Value | Fair Value | |||||||||||||||||||
(In NIS millions) | ||||||||||||||||||||||||
Forward contracts on exchange rate (mainly US$ — NIS) | 754 | (12 | ) | 654 | 1 | 486 | (27 | ) | ||||||||||||||||
Forward contracts on Israeli CPI rate | — | — | — | — | 500 | (4 | ) | |||||||||||||||||
Options on the exchange rate (mainly US$ — NIS) | 1,639 | 12 | 925 | 4 | 796 | 1 | ||||||||||||||||||
Compounded foreign currency and interest swap | — | — | — | — | 887 | (62 | ) | |||||||||||||||||
2,393 | — | 1,579 | 5 | 2,669 | (92 | ) | ||||||||||||||||||
Sensitivity information |
• | an increase of 0.1% of the Israeli CPI would result in an increase of approximately NIS 2.0 million in our financial expenses; | |
• | a devaluation of the NIS against the U.S. dollar of 1.0% would increase our financial expenses by approximately NIS 9.0 million; and | |
• | an increase in NIS interest rates of 100 basis points would increase our annual interest expense by approximately NIS 6.2 million ($1.4 million). An increase in U.S. dollar interest rates of 100 basis points would increase our annual interest expense by approximately $2 million. |
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Revenue recognition |
Nature of critical estimate items |
Assumptions/approach used |
Effect if different assumptions used |
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Long-lived assets — depreciation |
Nature of critical estimate items |
Assumptions/approach used |
Effect if different assumptions used |
Impairment of long-lived assets |
Nature of critical estimate items |
Assumptions/approach used |
• | cash flows attributed to the asset group; | |
• | future cash flows for the asset group, including estimates of residual values, which incorporate our views of growth rates for the related business and anticipated future economic conditions; and | |
• | period of time over which the assets will be held and used. |
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Effect if different assumptions used |
Accounts receivable — bad debt and allowance for doubtful accounts |
Nature of critical estimate items |
Assumptions/approach used |
Effect if different assumptions used |
Liabilities arising from litigation |
Push-down accounting — for U.S. GAAP only |
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Income taxes |
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Israeli Accounting Standard No. 26, “Inventory” |
Israeli Accounting Standard No. 27, “Property, plant and equipment” |
Revaluation of assets |
Asset retirement obligations |
Components depreciation |
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Asset retirement obligations |
Components depreciation |
Israeli Accounting Standard No. 29, “Adoption of International Financial Reporting Standards (“IFRS”)” |
U.S. GAAP Accounting Standards |
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Population (millions) | 6.99 | |||
GDP ($ billions) | 123.7 | |||
GDP per capita($) | 17,900 | |||
Exports of goods & services ($ billions) | 56.8 | |||
CPI change | 2.4 | % | ||
Long-term local currency sovereign credit rating by S&P | A | + | ||
Unemployment rate (December 31, 2005) | 8.8 | % |
December 31, | ||||||||||||||||
September 30, | ||||||||||||||||
2003 | 2004 | 2005 | 2006 | |||||||||||||
Total subscribers (millions) | 6.6 | 7.2 | 7.8 | 8.2 | ||||||||||||
Cellular penetration(%) | 98 | 105 | 112 | 116 |
Source: | Reported by Cellcom, Partner and Pelephone. Cellcom estimates for MIRS as MIRS does not disclose operating information. |
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1986 | Bezeq and Motorola create a joint venture called “Pelephone”, which becomes Israel’s first cellular operator. Pelephone launches N-AMPS services | |
1994 | Cellcom awarded a license and launches TDMA services | |
1997 | Cellcom introduces first pre-paid plan to the market | |
1998 | Partner awarded a license and launches GSM services | |
1998 | Pelephone launches CDMA services | |
2001 | Ministry of Communications allocates additional 2G and 3G cellular frequencies for existing cellular operators and for the licensing of a new operator | |
2001 | MIRS becomes Israel’s fourth cellular operator with iDEN services | |
2002 | Cellcom launches GSM/GPRS services | |
2003 | Cellcom launches EDGE services | |
2004 | Partner launches UMTS services | |
Pelephone launches EVDO services | ||
2006 | Cellcom launches full scale UMTS/HSDPA services | |
Partner begins deploying HSDPA |
Key characteristics of the Israeli cellular services market |
High cellular telephone penetration. The estimated penetration rate in Israel as of September 30, 2006 was 116%. Penetration rate is calculated by dividing the total number of subscribers by the Israeli population. The Israeli population does not include foreign workers and Palestinian subscribers who are included in the number of subscribers. The number of subscribers may also include subscribers to more than one network including those in the process of switching networks. As a result, the effective penetration rate after adjustment for these factors is likely to be somewhat lower than 116%. | |
Favorable demographics. Population growth is generally high and the population is relatively younger than in other developed economies. | |
Favorable geography and high population density around a few urban centers. Israel covers a small area of territory of approximately 8,000 square miles (20,700 square kilometers). In addition, Israel is relatively flat and dry. Moreover, the population tends to be concentrated in a small number of geographical locations. These characteristics facilitate efficient network roll out. |
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High cellular voice usage. The average cellular voice usage per subscriber in Israel is more than 300 minutes per month, which is higher than the average cellular voice usage per subscriber in most developed economies. | |
Low average voice revenue per minute. Cellular operators in Israel have lower average voice revenues per minute than in most developed economies. This is a consequence, among other things, of the importance given to low prices in the first five years of our operation, in the awarding criteria during the original licensing process for a second cellular operator. | |
Different cellular technologies. We use TDMA, GSM/ GPRS/ EDGE and UMTS/ HSDPA networks. Partner uses GSM/ GPRS and UMTS/ HSDPA networks. Pelephone uses CDMA, CDMA1x and EVDO networks. MIRS uses an iDEN network. | |
High potential for value-added services. The contribution of non-voice revenues to total revenues in the Israeli cellular market is below the level of other developed markets such as the European Union. This characteristic is attributable in part to the low voice tariffs in Israel compared to the tariffs in other markets, which has the effect of keeping text messaging usage low. We believe that there is potential for narrowing this gap by increasing marketing efforts of new content services and the growth in our existing 3G subscriber base. Moreover, the percentage of post-paid subscribers is relatively high when compared to other developed economies, which we believe facilitates the acceptance of value-added services. | |
Calling party pays. In Israel, as in many western European countries, the party originating the call pays for the airtime. Cellular telephone network operators do not charge subscribers for calls received on their handsets, except while roaming abroad. | |
Low annual churn rates. The average annual churn rate in Israel was 12.6% in 2005, which is lower than the churn rates in other developed economies. |
2005 Data | ||||||||||||||||||||||||
Revenues as | ||||||||||||||||||||||||
Penetration | 2005 MOU | 2005 Yield per | 2005 ARPU | % of Total | 2005 Annual | |||||||||||||||||||
(%)(1) | (min/month) | Minute ($c) | ($) | Revenues (%) | Churn Rate (%) | |||||||||||||||||||
Israel | 112 | % | 304 | 10.6 | 35.3 | 9.7 | % | 12.6 | % | |||||||||||||||
United Kingdom | 113 | % | 144 | 20.5 | 41.0 | 21.6 | % | 32.5 | % | |||||||||||||||
France | 79 | % | 224 | 17.7 | 46.2 | 14.0 | % | 20.7 | % | |||||||||||||||
Germany | 96 | % | 83 | 23.0 | 29.4 | 18.6 | % | 19.6 | % | |||||||||||||||
United States | 69 | % | 739 | 6.0 | 51.3 | 6.8 | % | 28.4 | % | |||||||||||||||
Spain | 99 | % | 143 | 25.7 | 42.0 | 12.7 | % | 23.3 | % | |||||||||||||||
Italy | 120 | % | 130 | 23.7 | 36.3 | 14.9 | % | 17.1 | % | |||||||||||||||
South Korea(2) | 79 | % | 181 | 18.0 | 38.8 | 21.1 | % | 30.8 | % | |||||||||||||||
Taiwan(3) | 87 | % | 211 | 11.2 | 24.1 | 5.3 | % | 28.4 | % |
Source: | Pyramid Research (except for Israeli penetration which is based on data reported by Cellcom, Partner and Pelephone and Cellcom estimates for MIRS as MIRS does not disclose operating information). |
(1) | As of December 2005. |
(2) | Based on the 2005 Annual Reports of South Korean operators, LG Telecom, KT Freetel and SK Telecom, and Goldman Sachs Research. |
(3) | Based on the 2005 Annual Reports of Taiwanese operators, Chunghwa Telecom, Far Eastone and Taiwan Mobile, and Goldman Sachs Research. |
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Voice Services |
Broadband and Internet services |
International voice services |
Multichannel television |
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Nine Months | ||||||||||||||||||||||||||||
Ended | ||||||||||||||||||||||||||||
Year Ended December 31, | September 30, | |||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||||||||
Subscribers (end of period) (in thousands)(1) | 2,261 | 2,468 | 2,300 | 2,450 | 2,603 | 2,554 | 2,828 | |||||||||||||||||||||
Revenues (in NIS millions) | 4,960 | 5,135 | 5,261 | 5,600 | 5,114 | 3,845 | 4,191 |
(1) | Subscriber data refer to active subscribers. Until June 30, 2006, we had a three-month method of calculating our subscriber base, which means that we deduct subscribers from our subscriber base after three months of no revenue generation or activity on our network by or in relation to both the post-paid and pre-paid subscriber. We now believe that waiting six months to deduct subscribers is preferable since many subscribers that were inactive for three months become active again before the end of six months. As a result, commencing July 1, 2006, we adopted a six-month method of calculating our subscriber base, but have not restated our prior subscriber data presented in this table to reflect this change. Thesix-month method is, to the best of our knowledge, consistent with the methodology used by other cellular providers in Israel. This change in methodology resulted in an increase of our number of reported subscribers by approximately 80,000 compared to the prior methodology. |
We also revised our subscriber calculation methodology in 2003 and 2005 but in each case have not restated prior subscriber data to conform to the new presentation. We estimate that the change in methodology in 2003 led to a decrease in our reported subscriber numbers of approximately 300,000 and the change in methodology in 2005 led to an increase in our reported subscriber numbers of approximately 84,000. |
• | Unique combination of leading market position and strong operational momentum. In the last year, we have achieved market-leading subscriber and revenue growth while steadily strengthening our operating margins. Leveraging a series of brand, customer service and content initiatives and a rationalization of our management structure, our new senior management team has managed to solidify Cellcom’s leading market position as reflected in our subscriber base, revenues and EBITDA while controlling capital expenditures. | |
• | Strong and distinctive own brand. Our established brand enjoys strong recognition in Israel. Since 2004, we have made the enhancement of our image among consumers a top priority and have invested substantial resources to position Cellcom as a local cellular company with a warm personal touch. Our focus on music and music-related content services, particularly our “Cellcom Volume” initiative, is our leading marketing theme and one that associates us with the important growth opportunity presented by advanced cellular content and data services. | |
• | Transmission infrastructure and landline services. We have an advanced fiber-optic transmission infrastructure that consists of approximately 1,300 kilometers of inland fiber-optic cable, which, together with our complementary microwave-based infrastructure, connects the majority of our cell sites and provides for substantially all of our backhaul services. Our transmission infrastructure significantly reduces our operational reliance on Bezeq, the incumbent landline operator in Israel, while also saving us substantial infrastructure-leasing cash costs. As our transmission network has transmission and data |
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capacity in excess of our own backhaul needs, and covers the majority of Israel’s business parks, we offer transmission and data services to business customers and telecommunications providers. In addition, since July 2006, following the receipt of a landline transmission, data and telephony services license, we offer landline telephony services to selected businesses. | ||
• | Strategic relationship with a leading group of local and international shareholders. Our ultimate parent company, IDB, is one of the largest business groups in Israel. We enjoy access, through our management services agreement, to the senior management of the IDB group, who are some of the most experienced managers in Israel. These managers, including veterans of the Israeli telecommunications market, provide us with financial, managerial and strategic guidance. In 2006, our shareholder base was broadened as a result of IDB’s sale of minority stakes to a series of highly regarded international and local financial investors, including affiliates of Goldman Sachs, Bank Leumi, Migdal Group and the First International Bank of Israel. | |
• | Strong management team. Since IDB acquired control of us in September 2005, we have put in place a team of seasoned managers with significant experience and solid track records in previous managerial positions. Our Chairman, Mr. Ami Erel, is a veteran of the Israeli communications market and previously served as the chief executive officer of Bezeq. Our chief executive officer, Mr. Amos Shapira, has been chief executive officer of Kimberly-Clark’s Israeli subsidiary and of El Al Airlines, where he was credited with its successful restructuring and improvements in customer service. Our chief financial officer, Mr. Tal Raz, has extensive experience in the Israeli cellular market, as he was involved in the formation of one of our main competitors, Partner, and served as a member of its board of directors. Under the leadership of Messrs. Erel, Shapira and Raz, we have demonstrated significant improvements in our operating results and believe that we are well positioned to continue this trend and to execute our business strategy. | |
• | Strong cash flow generation. We have a proven track record of strong financial performance and profitability with cash operating margins that have been higher than those of our principal competitors. As a result, we have been able to invest in our business and deploy advanced network technology so that we can offer advanced services and applications, as well as distribute dividends to our shareholders. |
• | Maximize customer satisfaction, retention and growth. Our growth strategy is focused on retaining our subscribers and expanding the selection of services and products we offer to our subscribers in order to enhance customer satisfaction and increase average revenues per user, or ARPU. We strive to continually improve and enhance the flexibility of our customer service to shorten the time required to fulfill subscriber requests. From September 2005 to September 2006, despite a reduction in our overall workforce, we increased our customer-facing staff by 2%. In addition to providing quality customer service, we also strive to retain our subscribers and attract new subscribers by offering them advanced handsets, handset upgrades, attractive calling plans and value-added services. In 2006, we introduced a “churn lab” that identifies subscribers at high risk of churn and seeks to preemptively approach them with tailored solutions to maintain their satisfaction with our services. | |
• | Grow and develop our Internet, content and data services. The usage of cellular content and data services in Israel is currently relatively low compared to western European countries and we believe that we have significant growth potential in this field. We intend |
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to continue to invest in the deployment of our high speed UMTS/ HSDPA network, which covered 80% of the populated territory of Israel at the end of 2006, in order to permit higher-quality and higher-speed multimedia content transmission. We also plan to expand our content and data services, products and capabilities through in-house expertise and strategic relationships with leading cellular content providers. For example, in 2006 we introduced “Cellcom Heep,” a Web 2.0 portal that permits cellular and PC users to upload, review and rate user-generated content and in 2004 we introduced our “Cellcom Volume” initiative that featured, among other things, the introduction of our cellular music portal. | ||
• | Grow roaming revenues. We have experienced steady growth in roaming revenues since 2003 and believe that roaming presents an important source of future revenue and profit growth for us. We currently have GSM roaming agreements with over 450 operators in 167 countries, of which 45 operators in 27 countries are also 3G operators, and we aim to increase our number of relationships. In particular, we intend to pursue additional agreements with 3G operators, allowing our and their subscribers to benefit from advanced content and data services when traveling. | |
• | Further develop and strengthen the Cellcom brand. External market surveys that we have commissioned indicate that brand recognition has become an increasingly important factor in subscriber selection of, and loyalty to, a cellular operator. Due to our extensive efforts in the past few years, we believe that we have established the Cellcom brand as one of the most recognized and respected consumer brands in Israel. We plan to continually enhance our brand through maintaining our high network quality, the provision of innovative products and services, quality customer service and investments in advertising and promotional campaigns. We believe these enhancements are key to maintaining our competitive advantage, differentiating our services from those of our competitors and establishing and maintaining a successful relationship with our subscribers. | |
• | Optimize our cost structure. We intend to continue our efforts to control costs so that we can improve profitability while also improving the quality of our services. For example, from September 2005 to September 2006, we have reduced our non-customer facing positions by over 16%, including higher-cost temporary workers, while increasing our customer-facing positions. In addition, having already built our own fiber-optic and microwave infrastructure reduces our operating cash costs, as our network maintenance costs and microwave spectrum fees are lower than the lease costs to rent backhaul capacity from Bezeq. We intend to continue to focus on identifying further opportunities to manage our costs without reducing the quality of our service. | |
• | Capitalize on our existing infrastructure to selectively provide landline telephony services. Our 1,300 kilometer inland fiber-optic network and our microwave infrastructure provide us with the ability to offer cost-efficient landline telecommunications solutions. We hold a license to operate a landline service in Israel and, since July 2006, we offer our landline telephony service to selected businesses. |
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Basic cellular telephony services |
• | Our principal service is basic cellular telephony. In addition we offer many other services with enhancements and additional features to our basic cellular telephony service. These services include voice mail, cellular fax, call waiting, call forwarding, caller identification, conference calling, “Push-and-Talk” service (which allows subscribers to initiate a call with one or more other persons using a designated button in their handset without having to dial a number), “Talk 2” (two handsets sharing the same number, thus allowing our subscribers to own both a handset and a car phone), additional number service (enables our subscribers to add a second phone number to their handset) and collect call service (a unique service protected by our U.S. patent). | |
• | We also offer both an outbound roaming service to our subscribers when traveling outside of Israel and an inbound roaming to visitors to Israel who can “roam” into our network. Roaming allows cellular subscribers, while using their own cell phone number (and handset, in most cases) and being billed by their provider, to place and receive calls and text messages while in the coverage area of a network to which they do not subscribe. Where available, subscribers can also benefit from other cellular services such as advanced data and content services. As of September 30, 2006, we had commercial roaming relationships with over 450 operators in 167 countries based on the standard agreements of the GSM organization (an umbrella organization in which all the cellular operators operating with GSM technology are members). This enables our subscribers to enjoy our services in almost the entire world. Most of our GSM subscribers who use these roaming services abroad can use their own handset and others can borrow or rent, depending upon the period of time, a suitable handset from us. In addition, as of September 30, 2006, we had 3G roaming arrangements with 45 of these operators, enabling our 3G roamers to participate in video calls and use high-speed data, video and audio content services in 27 countries. Roaming is an increasingly important revenue stream to us due to the large inbound tourism industry in Israel and extensive overseas travel by Israelis. |
Value-added services |
• | In addition to basic cellular telephony services, we offer many value-added services. Value-added services are important to our business as they enable us to differentiate ourselves from our competitors, strengthen our brand and increase subscriber usage, ARPU and subscriber satisfaction. We offer those services that we believe are likely to be popular with subscribers and benefit our business. Some of the value-added services that we offer are available only to subscribers who have supporting handset models. The principal advanced value-added services that we currently offer, some of which are exclusive to us, are: |
Cellcom Volume. This music-related marketing initiative is focused not just on providing a rich downloadable content consisting of ringtones, video tones, true tones and songs in MP3 format through our popular cellular music portal, but also on promoting Israeli music and local musicians and supporting youth music centers. In addition, handsets supporting music content, as well as other merchandising, are marketed under |
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the “Cellcom Volume” service. Complementary services provided through Cellcom Volume include “Fun Dial,” which enables our subscribers to have callers listen to our subscribers’ favorite music instead of the regular ringing tone while waiting to be connected, and “Gift Song,” which enables subscribers to send songs to friends with a personally recorded introduction. | |
Cellcom Heep. This innovative portal enables our subscribers and other cellular and landline Internet users to upload, review and rate user-generated content by using Web 2.0 technology. | |
SMS and MMS services. These messaging services enable subscribers to send and receive text (SMS), photos, multimedia and animation (MMS) messages. Additional applications enable our subscribers to send SMS messages to a large number of handsets simultaneously. | |
Cellcom i-mode. This is a cellular Internet service developed by NTT DoCoMo, a Japanese operator and developer of sophisticated cellular multimedia technology, that enables our subscribers with designated handsets to obtain information and content from designated Internet sites in a friendly,easy-to-use manner. | |
Access to third party application providers. We provide our subscribers with access to certain services offered by third party application providers. These services include: a service that allows subscribers to receive notification of roadway speed detectors in their vicinity; a service (using a cellular modem) that provides a comprehensive system for the management of vehicle fleets and a service that enables subscribers to remotely manage and operate time clocks and various controllers for industrial, agricultural and commercial purposes. | |
Video calls. This service enables our 3G users, using 3G handsets in our 3G coverage area, to communicate with each other through video conferences. | |
Zone services. This service provides discounts on airtime for calls initiated from a specific location, such as a university campus. Our network identifies the location from which the call is initiated in order to apply the discounted rate on the call. | |
Location-based services. We offer a number of location-based services. “Where are you?” is a location-based service that allows one subscriber to locate another subscriber, subject to the latter’s prior approval, such as a parent and child. “Cellcom Navigator” is a service provided through a third party that enables our subscribers to receive real-time travel directions and visual data regarding their position using global positioning system, or GPS, technology. | |
Other information and content services. We also provide other information and content services, some provided directly by us and some by third party content providers. For example, we provide voice-based information services through interactive voice response platforms, or IVR, including interactive information services and radio and TV programs. We also provide text-based information services and interactive information services including news headlines, sports results, and traffic and weather reports. Some of these services are provided through our MMS or video-based technologies, and are offered to subscribers with supporting handsets. |
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Handsets |
Landline services |
General |
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Infrastructure |
Network design |
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Network performance |
Spectrum allocation |
Cell site construction and licensing |
Suppliers |
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Transmission Network |
Information technology |
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Sales |
Points of sale. We distribute our products and services through a broad network of physical points of sale providing us with nationwide coverage of our existing and potential subscriber base. | |
We operate directly, using our sales force and service personnel, approximately 40 physical points of sale and service, mostly located in shopping centers and other frequently visited locations to provide our subscribers with easy and convenient access to our products and services. We record approximately 175,000 subscriber applications per month in our direct points of sale and service. | |
We also distribute our products and services indirectly through a chain of dozens of dealers who operate in over 130 points of sale throughout Israel. Our dealers are compensated for each sale based on qualitative and quantitative measures. We closely monitor the quality of service provided to our subscribers by our dealers. In our efforts to penetrate certain sectors of our potential subscriber base, we select dealers with proven expertise in marketing to such sectors. | |
Telephonic sales. Telephonic sales efforts target existing and potential subscribers who are interested in buying or upgrading handsets and services. When approached by a customer, our sales representatives (both in-house and outsourced) offer such customer a variety of products and services. | |
Door-to-door sales. Thedoor-to-door sales team is comprised of approximately 350 dealers’ sales representatives. All the members of ourdoor-to-door sales team go through extensive training by us prior to commencing their work. We target thedoor-to-door subscribers based on market surveys that we regularly conduct. All information derived from our market surveys is uploaded into a database. Once a potential customer is identified, we |
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contact the potential customer and schedule a meeting with a member of ourdoor-to-door sales team. | |
Account managers. Our direct sales force for our business customers maintains regular, personal contact with our large accounts, focusing on sales, customer retention and tailor-made solutions for the specific needs of such customers, including advanced data services. |
Marketing |
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Call centers. In order to provide quick and efficient responses to the different needs of our various subscribers, our call-center services are divided into several sub-centers: finance; network; international roaming; and data transfer. The call center services are provided in four languages: Hebrew, Arabic, English and Russian. We regularly monitor the performance of our call centers. Based on our internal reviews, the average waiting time for subscribers who contact our call center is well under a minute. If calls go unanswered for longer than our guidelines require, a flashing light is automatically activated in our corporate headquarters, alerting management to the delay. We currently operate call centers in four locations throughout Israel, one of which is outsourced. On average, we respond to one million calls every month. During peak hours our call centers have the capability to respond to 700 customer calls simultaneously. | |
Walk-in centers. We currently operate approximately 40 service and sales centers, covering almost all the populated areas of Israel. These centers provide a walk-in contact channel and offer the entire spectrum of services that we provide to our subscribers and potential subscribers, including handsets and accessories, sales upgrades, maintenance and other services, such as finance, calling-plan changes and subscriptions to new services. These stores are mostly located in central locations, such as popular shopping malls. Our walk-in centers also provide our subscribers with onsite express repair services, performed by highly skilled technicians, a concept rarely seen in most western European countries. This enables a subscriber to deposit a handset with our repair lab and receive the repaired handset, on average, within one hour. If a repair service is expected to take longer, we provide the subscriber with a substitute handset. | |
Self-services. We provide our subscribers and potential subscribers with various self-service channels, such as interactive voice response, or IVR, web-based services and service using SMS. These channels provide general and specific information, including calling plans, account balance, billing-related information and roaming tariffs. They also provide subscribers information regarding trouble shooting and handset-operation, and enable subscribers to activate and deactivate services and to download content. | |
Churn Lab. In 2006, we introduced an innovative “churn lab,” aimed at reducing churn. The churn lab is part of our call center operations. Based on various factors and analytical tools, we identify and analyze high-quality subscribers whom we consider to be at a high risk of churn. Then, in order to retain them, we preemptively approach these subscribers with specially trained customer care representatives and offer them solutions previously successfully tested on a sample group of subscribers with similar characteristics, such as enhanced services at attractive prices and handset upgrades. | |
Our business sales force and back office personnel also provide customer care to our business customers. |
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All of our service channels are monitored and analyzed regularly in order to assure the quality of our services and to identify areas where we can improve. | |
Be’eri Printers provides our printing supplies and invoices as well as the distribution, packaging and delivery of invoices and other mail to the postal service distribution centers. We entered into an agreement with Be’eri Printers — Limited Partnership and with Be’eri Technologies (1977) Ltd., or together Be’eri, for printing services in August 2003. Under the terms of the agreement, we committed to purchase from Be’eri a minimum monthly quantity of production and distribution services which may be reduced if we modify our printed invoice delivery policy. The agreement is valid until 2008. |
Number of | ||||
Full-Time | ||||
Equivalent | ||||
Unit | Positions | |||
Management and headquarters | 31 | |||
Human resources and administration | 42 | |||
Marketing | 69 | |||
Business customers | 331 | |||
Sales and service | 1,904 | |||
Operations and supply chain | 411 | |||
Finance | 115 | |||
Technologies | 585 | |||
Total | 3,488 | |||
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Headquarters |
Real estate in Modi’in |
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Service centers, points of sale and cell sites |
Authorization agreement with land regulatory authorities |
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• | marketing and branding campaigns aimed at enhancing market leadership, perceived value, brand recognition and loyalty among our existing and potential subscriber base; | |
• | investing resources in improving customer service and retention, as well as supporting information technology systems; | |
• | introducing innovative value-added services and identifying popular niches among various subscriber groups; | |
• | investing in improving our network technology to ensure our ability to offer quality services and advanced services; | |
• | using innovative sales campaigns for attracting new subscribers by offering subsidies on handsets to new subscribers such as “1+1” (buy one, get one free) campaigns; and | |
• | offering attractive calling plans to subscribers, adapted to their needs and preferences. |
General |
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Purported class actions |
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Commercial and other disputes |
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• | The license may be modified, cancelled, conditioned or restricted by the Ministry of Communications in certain instances, including: if required to ensure the level of services we provide; if a breach of a material term of the license occurs; if DIC (or a transferee or transferees, if approved by the Ministry of Communications), in its capacity as our founding shareholder, holds, directly or indirectly, less than 26% of our means of control; if our founding shareholders who are Israeli citizens and residents (the Ministry of Communications has informed us that it is considering certain amendments to our license in relation to the Israeli holding requirement, such as to impose a minimum holding requirement on individual Israeli persons in connection with this requirement; based on conversations to date, we do not expect this change to have a material impact on us) hold, directly or indirectly, less than 20% of our means of control (DIC, as founding shareholder, has undertaken to comply with this condition); if at least 20% of our directors are not appointed by Israeli citizens and residents from among our founding shareholders or if less than a majority of our directors are Israeli citizens and residents; if any of our managers or directors is convicted of a crime of moral turpitude and continues to serve; if we commit an act or omission that adversely affects or limits competition in the cellular communications market; or if we and our 10% or greater shareholders fail to maintain combined shareholders’ equity of at least $200 million. For the purpose of the license, “means of control” is defined as voting rights, the right to appoint a director or general manager, the right to participate in distributions, or the right to participate in distributions upon liquidation; | |
• | It is prohibited to acquire (alone or together with relatives or with other parties who collaborate on a regular basis) or transfer our shares, directly or indirectly (including a |
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transfer by way of foreclosing on a pledge), in one transaction or a series of transactions, if such acquisition or transfer will result in a holding or transfer of 10% or more of any of our means of control, or to transfer any of our means of control if as a result of such transfer, control over our company will be transferred from one party to another, without the prior approval of the Ministry of Communications. For the purpose of the license, “control” is defined as the direct or indirect ability to direct our operations whether this ability arises from our articles of association, from written or oral agreement or from holding any means of control or otherwise, other than from holding the position of director or officer; | ||
• | It is prohibited for any of our office holders or anyone holding more than 5% of our means of control, to hold, directly or indirectly, more than 5% of the means of control in Bezeq or another cellular operator in Israel, or, for any of the foregoing to serve as an office holder of one of our competitors, subject to certain exceptions requiring the prior approval of the Ministry of Communications; | |
• | We, our office holders or interested parties may not be parties to any arrangement whatsoever with Bezeq or another cellular operator that is intended or is likely to restrict or harm competition in the field of cellular services, cellular handsets or other cellular services. For the purpose of the license, an “interested party” is defined as a 5% or greater holder of any means of control; | |
• | We are subject to the guidelines of Israel’s General Security Services, which may include requirements that certain office holders and holders of certain other positions be Israeli citizens and residents with security clearance. For example, our Board of Directors is required to appoint a committee to deal with matters concerning state security. Only directors who have the requisite security clearance by Israel’s General Security Services may be members of this committee. In addition, the Minister of Communications is entitled under our license to appoint a state employee with security clearance to act as an observer in all meetings of our Board of Directors and its committees; | |
• | During the entire period of operation under the license, we are required to have agreements with a manufacturer of cellular network equipment which must include, among other things, a know-how agreement and an agreement guaranteeing the supply of spare parts for our network equipment for a period of at least seven years; | |
• | We are required to interconnect our network to other public telecommunications networks in Israel, on equal terms and without discrimination, in order to enable subscribers of all operators to communicate with one another; | |
• | We may not give preference in providing infrastructure services to a license holder that is an affiliated company over other license holders, whether in payment for services, conditions or availability of services or in any other manner, other than in specific circumstances and subject to the approval of the Ministry of Communications; | |
• | The license sets forth the general types of payments that we may collect from our subscribers, the general mechanisms for setting tariffs, the reports that we must submit to the Ministry of Communications and the obligation to provide notice to the Ministry of Communications prior to changing tariffs. The Ministry of Communications is authorized to intervene in setting tariffs in certain instances; | |
• | The license requires us to maintain a minimum standard of customer service, including, among other things, establishing call centers and service centers, maintaining a certain service level of our network, collecting payments pursuant to a certain procedure and protecting the privacy of subscribers; |
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• | The license or any part thereof may not be transferred, pledged or encumbered without the prior approval of the Ministry of Communications. The license also sets forth restrictions on the sale, lease or pledge of any assets used for implementing the license; | |
• | We are required to obtain insurance coverage for our cellular activities. In addition, the license imposes statutory liability for any loss or damage caused to a third party as a result of establishing, sustaining, maintaining or operating our cellular network. We have further undertaken to indemnify the State of Israel for any monetary obligation imposed on the State of Israel in the event of such loss or damage. For the purpose of guaranteeing our obligations under the license, we have deposited a bank guarantee in the amount of $10 million with the Ministry of Communications, which may be forfeited in the event that we violate the terms of our license. |
Special general license for the provision of landline communication services |
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Data and transmission license |
Cellular services in Judea and Samaria |
• | The maximum interconnect tariff payable by a landline operator or a cellular operator for the completion of a call on another cellular network was decreased as of March 1, 2005 from NIS 0.45 to NIS 0.32 per minute; and as of March 2006, to NIS 0.29 per minute. This tariff will be reduced to NIS 0.26 per minute as of March 1, 2007, and it will be further reduced to NIS 0.22 per minute as of March 1, 2008. | |
• | The maximum interconnect tariff payable by an international call operator for the completion of a call on a cellular network is NIS 0.25 per minute. This tariff will be reduced to NIS 0.22 per minute as of March 1, 2008. | |
• | The maximum interconnect tariff payable by a cellular operator for sending an SMS message to another cellular network was decreased as of March 1, 2005 from NIS 0.285 to NIS 0.05 per message; and as of March 2006, to NIS 0.025 per message. |
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General |
• | building permits from the local planning and building committee or the local licensing authority (if no exemption is available); | |
• | approvals for construction and operation from the commissioner of environmental radiation of the Ministry of Environmental Protection; | |
• | permits from the Civil Aviation Authority (in most cases); | |
• | permits from the Israel Defense Forces (in certain cases); and | |
• | other specific permits necessary where applicable, such as for cell sites on water towers or agricultural land. |
National Zoning Plan 36 |
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Site licensing |
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Indemnification obligations |
Construction and operating permits from the commissioner of environmental radiation |
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Name | Age | Position | ||||
Ami Erel(2),(3) | 59 | Chairman of the Board | ||||
Nochi Dankner(3) | 52 | Director | ||||
Isaac Manor | 65 | Director | ||||
Shay Livnat(2),(3) | 48 | Director | ||||
Raanan Cohen(1),(2) | 39 | Director | ||||
Oren Lieder(1),(2) | 58 | Director | ||||
Avraham Bigger(1) | 60 | Director | ||||
Rafi Bisker(2) | 55 | Director | ||||
Shlomo Waxe(2),(4) | 60 | Director | ||||
Amos Shapira | 57 | President and Chief Executive Officer | ||||
Tal Raz | 44 | Chief Financial Officer | ||||
Eliezer (Lipa) Ogman | 53 | Chief Technology Officer | ||||
Isaiah Rozenberg | 46 | Vice President of Engineering and Network Operation | ||||
Itamar Bartov | 44 | Vice President of Executive and Regulatory Affairs | ||||
Refael Poran | 58 | Vice President of Business Customers | ||||
Meir Barav | 49 | Vice President of Sales and Services | ||||
Ronit Ben-Basat | 39 | Vice President of Human Resources | ||||
Amos Maor | 42 | Vice President of Operations and Supply Chain | ||||
Adi Cohen | 41 | Vice President of Marketing | ||||
Liat Menahemi-Stadler | 40 | General Legal Counsel | ||||
Gil Ben-Itzhak | 41 | Controller |
(1) | Member of our Audit Committee. |
(2) | Member of our Cost Analysis Committee. |
(3) | Member of our Option Committee. |
(4) | Elected as a member of our Audit Committee effective upon completion of the offering. |
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Qualifications of external directors |
• | an employment relationship; | |
• | a business or professional relationship maintained on a regular basis; | |
• | control; and | |
• | service as an office holder, excluding service as a director in a private company prior to its initial public offering if such director was appointed in order to serve as an external director following the offering. |
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Election of external directors |
• | at least one-third of the shares of non-controlling shareholders voted at the meeting vote in favor of the election of the external director; or | |
• | the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed 1% of the aggregate voting rights in the company. |
Israeli-Appointed Directors |
Audit committee |
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Cost analysis committee |
Option committee |
Security committee and observer |
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Fiduciary duties of office holders |
• | information on the appropriateness of a given action brought for his or her approval or performed by virtue of his or her position; and | |
• | all other important information pertaining to these actions. |
• | refrain from any conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs; | |
• | refrain from any activity that is competitive with the company; | |
• | refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and | |
• | disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder. |
Personal interests of an office holder |
• | other than in the ordinary course of business; | |
• | that is not on market terms; or | |
• | that is likely to have a material impact on the company’s profitability, assets or liabilities. |
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Personal interests of a controlling shareholder |
• | at least one-third of the shareholders who have no personal interest in the transaction and who vote on the matter must vote in favor of the transaction; or | |
• | the shareholders who have no personal interest in the transaction who vote against the transaction may not represent more than 1% of the voting rights in the company. |
• | an amendment to the articles of association; | |
• | an increase in the company’s authorized share capital; | |
• | a merger; and | |
• | approval of related party transactions that require shareholder approval. |
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• | the securities issued amount to 20% or more of the company’s outstanding voting rights before the issuance; | |
• | some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and | |
• | the transaction will increase the relative holdings of a shareholder that holds 5% or more of the company’s outstanding share capital or voting rights or that will cause any person to become, as a result of the issuance, a holder of more than 5% of the company’s outstanding share capital or voting rights. |
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2006 Share Incentive Plan |
Phantom compensation plan |
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Original 1997 shareholders agreement |
Goldman Sachs 2006 share purchase agreement and shareholders agreement |
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Migdal 2006 share purchase agreement |
Bank Leumi 2006 share purchase agreement and First International Bank 2006 share purchase agreement |
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• | each person, or group of affiliated persons, known to us to be the beneficial owner of 5% or more of our outstanding shares; | |
• | each selling shareholder; | |
• | each of our directors and executive officers; and | |
• | all of our directors and executive officers as a group. |
Shares Beneficially | Shares Beneficially | |||||||||||||||||||||||
Owned Before the | Shares Offered in the | Owned After the | ||||||||||||||||||||||
Offering | Offering | Offering | ||||||||||||||||||||||
Name of Beneficial Owner | Number | Percent | Number | Percent | Number | Percent | ||||||||||||||||||
5% Shareholders and Selling Shareholders | ||||||||||||||||||||||||
Discount Investment Corporation Ltd.(1) | 81,900,000 | 84.0 | % | 19,025,000 | 19.5 | % | 62,875,000 | 64.5 | % | |||||||||||||||
Goldman Sachs International | 4,875,000 | 5.0 | % | 975,000 | 1.0 | % | 3,900,000 | 4.0 | % | |||||||||||||||
Leumi & Co. Investment House Ltd. | 4,875,000 | 5.0 | % | — | — | 4,875,000 | 5.0 | % | ||||||||||||||||
Directors and Officers | ||||||||||||||||||||||||
Ami Erel(2) | — | — | — | — | — | — | ||||||||||||||||||
Nochi Dankner(3) | 81,900,000 | 84.0 | % | 19,025,000 | 19.5 | % | 62,875,000 | 64.5 | % | |||||||||||||||
Isaac Manor(4) | — | — | — | — | — | — | ||||||||||||||||||
Shay Livnat(5) | — | — | — | — | — | — | ||||||||||||||||||
Raanan Cohen(6) | — | — | — | — | — | — | ||||||||||||||||||
Oren Lieder(7) | — | — | — | — | — | — | ||||||||||||||||||
Avraham Bigger | — | — | — | — | — | — | ||||||||||||||||||
Rafi Bisker(8) | — | — | — | — | — | — | ||||||||||||||||||
Shlomo Waxe | — | — | — | — | — | — | ||||||||||||||||||
Amos Shapira | — | — | — | — | — | — | ||||||||||||||||||
Tal Raz | — | — | — | — | — | — | ||||||||||||||||||
Eliezer (Lipa) Ogman | — | — | — | — | — | — | ||||||||||||||||||
Isaiah Rozenberg | — | — | — | — | — | — | ||||||||||||||||||
Itamar Bartov | — | — | — | — | — | — | ||||||||||||||||||
Refael Poran | — | — | — | — | — | — | ||||||||||||||||||
Meir Barav | — | — | — | — | — | — | ||||||||||||||||||
Ronit Ben-Basat | — | — | — | — | — | — | ||||||||||||||||||
Amos Maor | — | — | — | — | — | — | ||||||||||||||||||
Adi Cohen | — | — | — | — | — | — | ||||||||||||||||||
Liat Menahemi-Stadler | — | — | — | — | — | — | ||||||||||||||||||
Gil Ben-Itzhak | — | — | — | — | — | — | ||||||||||||||||||
Directors and officers as a group (21 persons) | 81,900,000 | 84.0 | % | 19,025,000 | 19.5 | % | 62,875,000 | 64.5 | % |
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(1) | Includes 24,375,855 ordinary shares held by two wholly-owned subsidiaries of DIC (namely, PEC Israel Economic Corporation, a Maine corporation, and DIC Communication and Technology Ltd., an Israeli company) and 5,362,500 ordinary shares, representing 5.5% of our issued and outstanding shares, held by four shareholders whose voting rights are vested in DIC. DIC is a majority-owned subsidiary of IDB Development Corporation Ltd., or IDB Development, which in turn is a majority-owned subsidiary of IDB. IDB, IDB Development and DIC are public Israeli companies traded on the Tel Aviv Stock Exchange. |
• | Ganden Holdings Ltd., or Ganden, a private Israeli company controlled by Nochi Dankner (who is also the Chairman of IDB, IDB Development and DIC and one of our directors) and his sister Shelly Bergman, holds, directly and through a wholly-owned subsidiary, approximately 44.88% of the outstanding shares of IDB; | |
• | Shelly Bergman, through a wholly-owned company, holds approximately 7.23% of the outstanding shares of IDB; | |
• | Avraham Livnat Ltd., or Livnat, a private company controlled by Avraham Livnat (one of whose sons, Zvi Livnat, is a director and Executive Vice President of IDB, Deputy Chairman of IDB Development and a director of DIC, and another son, Shay Livnat, is one of our directors and a director of IDB Development) holds, directly and through a wholly-owned subsidiary, approximately 10.38% of the outstanding shares of IDB; and | |
• | Manor Holdings BA Ltd., or Manor, a private company controlled by Ruth Manor (whose husband, Isaac Manor, is one of our directors and he and their son Don Manor are directors of IDB, IDB Development and DIC) holds, directly and through a majority-owned subsidiary, approximately 10.37% of the outstanding shares of IDB. |
(2) | Mr. Erel, the President and Chief Executive Officer of DIC, disclaims beneficial ownership of the ordinary shares owned by DIC. |
(3) | Represents the 81,900,000 ordinary shares owned by DIC, of which Mr. Dankner is the Chairman. Mr. Dankner is also the Chairman and Chief Executive Officer of IDB and the Chairman of IDB Development. |
(4) | Mr. Manor, the Deputy Chairman of the board of directors of IDB and a member of the board of directors of IDB Development and DIC, disclaims beneficial ownership of the ordinary shares owned by DIC. |
(5) | Mr. Livnat, a member of the board of directors of IDB Development, disclaims beneficial ownership of the ordinary shares owned by DIC. |
(6) | Mr. Cohen, the Vice President of DIC, disclaims beneficial ownership of the ordinary shares owned by DIC. |
(7) | Mr. Lieder, the Senior Vice President and Chief Financial Officer of DIC, disclaims beneficial ownership of the ordinary shares owned by DIC. |
(8) | Mr. Bisker, a member of the board of directors of IDB, IDB Development and DIC, disclaims beneficial ownership of the ordinary shares owned by DIC. |
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121
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• | a citizen or resident of the United States; | |
• | a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or | |
• | an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source. |
Taxation of Distributions |
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Sale and Other Disposition of the Company’s Shares |
Passive Foreign Investment Company Rule |
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Information Reporting and Backup Withholding |
Taxation of Israeli Companies |
General Corporate Tax Structure |
Special Provisions Relating to Taxation under Inflationary Conditions |
• | When the value of a company’s equity, as calculated under the Inflationary Adjustments Law, exceeds the depreciated cost of its fixed assets (as defined in the Inflationary Adjustments Law), a deduction from taxable income is permitted equal to the product of |
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the excess multiplied by the applicable annual rate of inflation. The maximum deduction permitted in any single tax year is 70% of taxable income, with the unused portion permitted to be carried forward, linked to the increase in the Israeli CPI. | ||
• | If the depreciated cost of a company’s fixed assets exceeds its equity, the product of the excess multiplied by the applicable annual rate of inflation is added to taxable income. | |
• | Subject to certain limitations, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the Israeli CPI. |
Capital Gains Tax on Sales of Our Ordinary Shares |
Taxation of Israeli Residents |
Taxation of Non-Israeli Residents |
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Taxation of Dividends Paid on Our Ordinary Shares |
Taxation of Israeli Residents |
Taxation of Non-Israeli Residents |
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Number of Shares | Date | |
5,362,500(1) | On the date of this prospectus | |
72,137,500 | After 180 days from the date of this prospectus (subject, in some cases, to volume limitations) |
(1) | Holders of these shares are restricted from transferring their shares without the prior consent of DIC, which has undertaken toward the underwriters of this offering not to grant such consent during the lock-up period. |
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Number of | |||||
Ordinary | |||||
Underwriters | Shares | ||||
Goldman, Sachs & Co. | 8,274,000 | ||||
Citigroup Global Markets Inc. | 3,916,000 | ||||
Deutsche Bank Securities, Inc. | 3,916,000 | ||||
Merrill Lynch, Pierce, Fenner & Smith Incorporated | 1,800,000 | ||||
Jefferies & Company, Inc. | 1,258,000 | ||||
William Blair & Company, LLC | 836,000 | ||||
Total | 20,000,000 | ||||
No Exercise | Full Exercise | ||||||||
Per Share | $ | 1.30 | $ | 1.30 | |||||
Total | $ | 26,000,000 | $ | 29,900,000 | |||||
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United Kingdom |
(a) it has not made or will not make an offer of ordinary shares to the public in the United Kingdom within the meaning of section 102B of the Financial Services and Markets Act 2000 (as amended) (FSMA) except to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities or otherwise in circumstances which do not require the publication by us of a prospectus pursuant to the Prospectus Rules of the Financial Services Authority (FSA); | |
(b) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which section 21 of FSMA does not apply; and | |
(c) it has complied with, and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the ordinary shares in, from or otherwise involving the United Kingdom. |
European Economic Area |
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(a) to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities; | |
(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than€43,000,000 and (3) an annual net turnover of more than€50,000,000, as shown in its last annual or consolidated accounts; or | |
(c) in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive. |
Hong Kong |
Singapore |
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Israel |
Japan |
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Amount | |||||
to be Paid | |||||
Registration fee | $ | 44,551 | |||
NASD filing fee | 46,500 | ||||
NYSE listing fee | 250,000 | ||||
Transfer agent’s fees | 4,500 | ||||
Printing and engraving expenses | 140,000 | ||||
Legal fees and expenses | 745,000 | ||||
Accounting fees and expenses | 950,000 | ||||
Blue Sky fees and expenses | — | ||||
Miscellaneous | 600,000 | ||||
Total | $ | 2,780,551 | |||
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• | the judgment is enforceable in the state in which it was given; | |
• | adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence; | |
• | the judgment and the enforcement of the judgment are not contrary to the law, public policy, security or sovereignty of the State of Israel; | |
• | the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and | |
• | an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreign court. |
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F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-8 |
F-1
Table of Contents
F-2
Table of Contents
Convenience | Convenience | |||||||||||||||||||||||
Translation | Translation | |||||||||||||||||||||||
Into | Into | |||||||||||||||||||||||
U.S. Dollar | U.S. Dollar | |||||||||||||||||||||||
(Note 2C) | (Note 2C) | |||||||||||||||||||||||
December 31 | ||||||||||||||||||||||||
December 31 | September 30 | September 30 | ||||||||||||||||||||||
Note | 2004 | 2005 | 2005 | 2006 | 2006 | |||||||||||||||||||
NIS | NIS | US$ | NIS | US$ | ||||||||||||||||||||
(All amounts are in millions except for share and per share | ||||||||||||||||||||||||
data) | ||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Cash and cash equivalents | 3 | 5 | 1,772 | 412 | 118 | 27 | ||||||||||||||||||
Trade receivables, net | 4 | 1,190 | 1,237 | 288 | 1,259 | 293 | ||||||||||||||||||
Other receivables | 5 | 140 | 224 | 52 | 121 | 28 | ||||||||||||||||||
Inventory | 6 | 99 | 118 | 27 | 137 | 32 | ||||||||||||||||||
1,434 | 3,351 | 779 | 1,635 | 380 | ||||||||||||||||||||
Long-term receivables | 7 | 433 | 433 | 101 | 515 | 120 | ||||||||||||||||||
Property, plant and equipment, net | 8 | 2,948 | 2,739 | 637 | 2,399 | 558 | ||||||||||||||||||
Other assets, net | 9 | 496 | 493 | 114 | 465 | 108 | ||||||||||||||||||
Total assets | 5,311 | 7,016 | 1,631 | 5,014 | 1,166 | |||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Short-term bank credit | 10 | 552 | 320 | 75 | 333 | 77 | ||||||||||||||||||
Trade payables | 11 | 816 | 944 | 220 | 707 | 164 | ||||||||||||||||||
Other current liabilities | 12 | 204 | 178 | 41 | 415 | 97 | ||||||||||||||||||
1,572 | 1,442 | 336 | 1,455 | 338 | ||||||||||||||||||||
Long-term liabilities | ||||||||||||||||||||||||
Long-term loans from banks | 13 | 391 | 31 | 7 | 1,238 | 288 | ||||||||||||||||||
Debentures | 14 | — | 1,752 | 407 | 2,017 | 469 | ||||||||||||||||||
Deferred taxes | 25 | 155 | 140 | 33 | 118 | 28 | ||||||||||||||||||
Other long-term liabilities | 16 | 32 | 2 | — | 2 | — | ||||||||||||||||||
578 | 1,925 | 447 | 3,375 | 785 | ||||||||||||||||||||
Commitments and contingent liabilities | 17 | |||||||||||||||||||||||
Shareholders’ equity | 18 | |||||||||||||||||||||||
Share capital: | ||||||||||||||||||||||||
Ordinary shares of NIS 0.1 par value: | ||||||||||||||||||||||||
Authorized — 10,000,000 shares at December 31, 2004 and 2005, respectively, and at September 30, 2006; Issued and outstanding 114,000 shares at December 31, 2004 and 2005, respectively, and at September 30, 2006 | — | — | — | — | — | |||||||||||||||||||
Capital surplus | — | 5 | 1 | (20 | ) | (5 | ) | |||||||||||||||||
Retained earnings | 3,161 | 3,644 | 847 | 204 | 48 | |||||||||||||||||||
Total shareholders’ equity | 3,161 | 3,649 | 848 | 184 | 43 | |||||||||||||||||||
Total liabilities and shareholders’ equity | 5,311 | 7,016 | 1,631 | 5,014 | 1,166 | |||||||||||||||||||
F-3
Table of Contents
Convenience | ||||||||||||||||||||||||||||||||
Convenience | Translation | |||||||||||||||||||||||||||||||
Translation | Into | |||||||||||||||||||||||||||||||
Into | U.S. Dollar | |||||||||||||||||||||||||||||||
U.S. Dollar | (Note 2C) | |||||||||||||||||||||||||||||||
(Note 2C) | ||||||||||||||||||||||||||||||||
Nine Month Period Ended | ||||||||||||||||||||||||||||||||
Nine Month | ||||||||||||||||||||||||||||||||
Year Ended December 31 | Year Ended | Period Ended | ||||||||||||||||||||||||||||||
December 31 | September 30 | September 30 | September 30 | |||||||||||||||||||||||||||||
Note | 2003 | 2004 | 2005 | 2005 | 2005 | 2006 | 2006 | |||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||||||
NIS (Note 2B) | ||||||||||||||||||||||||||||||||
US$ | US$ | |||||||||||||||||||||||||||||||
NIS (Note 2B) | ||||||||||||||||||||||||||||||||
(All amounts are in millions except for share and per share data) | ||||||||||||||||||||||||||||||||
Revenues | 19 | 5,261 | 5,600 | 5,114 | 1,189 | 3,845 | 4,191 | 974 | ||||||||||||||||||||||||
Cost of revenues | 20 | 3,075 | 3,302 | 3,133 | 728 | 2,264 | 2,470 | 574 | ||||||||||||||||||||||||
Gross profit | 2,186 | 2,298 | 1,981 | 461 | 1,581 | 1,721 | 400 | |||||||||||||||||||||||||
Selling and marketing expenses | 21 | 613 | 661 | 623 | 145 | 453 | 473 | 110 | ||||||||||||||||||||||||
General and administrative expenses | 22 | 682 | 684 | 656 | 153 | 512 | 486 | 113 | ||||||||||||||||||||||||
Operating income | 891 | 953 | 702 | 163 | 616 | 762 | 177 | |||||||||||||||||||||||||
Financial income (expenses), net | 23 | (216 | ) | (45 | ) | 24 | 6 | 13 | (128 | ) | (30 | ) | ||||||||||||||||||||
Other income (expenses), net | 24 | 1 | 1 | (11 | ) | (3 | ) | (10 | ) | (1 | ) | — | ||||||||||||||||||||
Income before income tax | 676 | 909 | 715 | 166 | 619 | 633 | 147 | |||||||||||||||||||||||||
Income tax | 25 | 245 | 292 | 232 | 54 | 201 | 243 | 56 | ||||||||||||||||||||||||
Net income | 431 | 617 | 483 | 112 | 418 | 390 | 91 | |||||||||||||||||||||||||
Earnings per share | ||||||||||||||||||||||||||||||||
Basic and diluted earnings per share in NIS (see Note 2T) | 4.42 | 6.33 | 4.95 | 1.15 | 4.29 | 4.00 | 0.93 | |||||||||||||||||||||||||
Weighted-average number of shares used in the calculation of basic and diluted earnings per share (in thousands) | 97,500 | 97,500 | 97,500 | 97,500 | 97,500 | 97,500 | 97,500 | |||||||||||||||||||||||||
F-4
Table of Contents
Cash | ||||||||||||||||||||||||||||
Dividend | Convenience | |||||||||||||||||||||||||||
Share Capital | Declared | Translation | ||||||||||||||||||||||||||
Subsequent | Into | |||||||||||||||||||||||||||
Number of | Capital | to Balance | Retained | U.S. Dollar | ||||||||||||||||||||||||
Shares | Amount | Reserve | Sheet Date | Earnings | Total | (Note 2C) | ||||||||||||||||||||||
NIS 0.1 | US$ Millions | |||||||||||||||||||||||||||
par value | NIS Millions (Note 2B) | |||||||||||||||||||||||||||
Balance as of January 1, 2003 | 114,000 | — | — | — | 2,113 | 2,113 | 491 | |||||||||||||||||||||
Changes in the year ended December 31, 2003 | ||||||||||||||||||||||||||||
Net income | — | — | — | — | 431 | 431 | 100 | |||||||||||||||||||||
Balance as of December 31, 2003 | 114,000 | — | — | — | 2,544 | 2,544 | 591 | |||||||||||||||||||||
Changes in the year ended December 31, 2004 | ||||||||||||||||||||||||||||
Net income | — | — | — | — | 617 | 617 | 144 | |||||||||||||||||||||
Balance as of December 31, 2004 | 114,000 | — | — | — | 3,161 | 3,161 | 735 | |||||||||||||||||||||
Changes in the year ended December 31, 2005 | ||||||||||||||||||||||||||||
Movement in capital reserve in respect of hedging transactions, net | — | — | 5 | — | — | 5 | 1 | |||||||||||||||||||||
Cash dividend declared subsequent to balance sheet date | — | — | — | 3,400 | (3,400 | ) | — | — | ||||||||||||||||||||
Net income | — | — | — | — | 483 | 483 | 112 | |||||||||||||||||||||
Balance as of December 31, 2005 | 114,000 | — | 5 | 3,400 | 244 | 3,649 | 848 | |||||||||||||||||||||
For the nine month period ended September 30, 2006 | ||||||||||||||||||||||||||||
Movement in capital reserve in respect of hedging transactions, net | — | — | (25 | ) | — | — | (25 | ) | (6 | ) | ||||||||||||||||||
Dividend paid | — | — | — | (3,400 | ) | (430 | ) | (3,830 | ) | (890 | ) | |||||||||||||||||
Net income for the period | — | — | — | — | 390 | 390 | 91 | |||||||||||||||||||||
Balance as of September 30, 2006 | 114,000 | — | (20 | ) | — | 204 | 184 | 43 | ||||||||||||||||||||
For the nine month period ended September 30, 2005 (unaudited) | ||||||||||||||||||||||||||||
Balance as of January 1, 2005 | 114,000 | — | — | — | 3,161 | 3,161 | ||||||||||||||||||||||
Movement in capital reserve in respect of hedging transactions, net | — | — | 5 | — | — | 5 | ||||||||||||||||||||||
Cash dividend declared subsequent to balance sheet date | — | — | — | 1,700 | (1,700 | ) | — | |||||||||||||||||||||
Net income of the period | — | — | — | — | 418 | 418 | ||||||||||||||||||||||
Balance as of September 30, 2005 (unaudited) | 114,000 | — | 5 | 1,700 | 1,879 | 3,584 | ||||||||||||||||||||||
F-5
Table of Contents
Convenience | ||||||||||||||||||||||||||||
Convenience | Translation | |||||||||||||||||||||||||||
Translation | Into | |||||||||||||||||||||||||||
Into | U.S. Dollar | |||||||||||||||||||||||||||
U.S. Dollar | (Note 2C) | |||||||||||||||||||||||||||
(Note 2C) | ||||||||||||||||||||||||||||
Nine Month Period Ended | ||||||||||||||||||||||||||||
Nine-Month | ||||||||||||||||||||||||||||
Year Ended December 31 | Year Ended | Period Ended | ||||||||||||||||||||||||||
December 31 | September 30 | September 30 | September 30 | |||||||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2005 | 2006 | 2006 | ||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
US$ | US$ | |||||||||||||||||||||||||||
NIS (Note 2B) | NIS (Note 2B) | |||||||||||||||||||||||||||
(All amounts are in millions) | ||||||||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||||
Net income | 431 | 617 | 483 | 112 | 418 | 390 | 91 | |||||||||||||||||||||
Addition required to present cash flows from operating activities(a) | 962 | 854 | 789 | 184 | 582 | 677 | 157 | |||||||||||||||||||||
Net cash provided by operating activities | 1,393 | 1,471 | 1,272 | 296 | 1,000 | 1,067 | 248 | |||||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||
Addition to property, plant and equipment | (676 | ) | (725 | ) | (576 | ) | (134 | ) | (420 | ) | (501 | ) | (117 | ) | ||||||||||||||
Proceeds from sales of property, plant and equipment | 23 | 7 | 12 | 3 | 8 | 12 | 3 | |||||||||||||||||||||
Long-term deposit | 189 | — | — | — | — | — | — | |||||||||||||||||||||
Investment in other assets | (44 | ) | (134 | ) | (55 | ) | (13 | ) | (33 | ) | (22 | ) | (5 | ) | ||||||||||||||
Net cash used in investing activities | (508 | ) | (852 | ) | (619 | ) | (144 | ) | (445 | ) | (511 | ) | (119 | ) | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||
Repayments under short-term bank credit facility | (25,616 | ) | (9,269 | ) | (4,953 | ) | (1,151 | ) | (4,817 | ) | (903 | ) | (210 | ) | ||||||||||||||
Borrowings under short-term bank credit facility | 25,168 | 9,328 | 4,894 | 1,138 | 4,758 | 1,166 | 271 | |||||||||||||||||||||
Borrowings of long-term loans from banks | — | — | — | — | — | 2,155 | 501 | |||||||||||||||||||||
Payment of long-term loans from banks | (155 | ) | (1,127 | ) | (533 | ) | (124 | ) | (477 | ) | (1,088 | ) | (253 | ) | ||||||||||||||
Proceeds from issuance of debentures, net of issuance costs | — | — | 1,706 | 396 | — | 290 | 67 | |||||||||||||||||||||
Paid dividend | — | — | — | — | — | (3,830 | ) | (890 | ) | |||||||||||||||||||
Net cash provided by (used in) financing activities | (603 | ) | (1,068 | ) | 1,114 | 259 | (536 | ) | (2,210 | ) | (514 | ) | ||||||||||||||||
Increase (decrease) in cash and cash equivalents | 282 | (449 | ) | 1,767 | 411 | 19 | (1,654 | ) | (385 | ) | ||||||||||||||||||
Balance of cash and cash equivalents at beginning of the period | 171 | 454 | 5 | 1 | 5 | 1,772 | 412 | |||||||||||||||||||||
Balance of cash and cash equivalents at end of the period | 453 | 5 | 1,772 | �� | 412 | 24 | 118 | 27 | ||||||||||||||||||||
The accompanying notes are an integral part of the financial statements. |
F-6
Table of Contents
Convenience | ||||||||||||||||||||||||||||
Convenience | Translation | |||||||||||||||||||||||||||
Translation | Into | |||||||||||||||||||||||||||
Into | U.S. Dollar | |||||||||||||||||||||||||||
U.S. Dollar | (Note 2C) | |||||||||||||||||||||||||||
(Note 2C) | ||||||||||||||||||||||||||||
Nine Month Period Ended | ||||||||||||||||||||||||||||
Nine-Month | ||||||||||||||||||||||||||||
Year Ended December 31 | Year Ended | Period Ended | ||||||||||||||||||||||||||
December 31 | September 30 | September 30 | September 30 | |||||||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2005 | 2006 | 2006 | ||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
US$ | US$ | |||||||||||||||||||||||||||
NIS (Note 2B) | NIS (Note 2B) | |||||||||||||||||||||||||||
(All amounts are in millions) | ||||||||||||||||||||||||||||
(a) Adjustments required to present cash flows from operating activities | ||||||||||||||||||||||||||||
Income and expenses not involving cash flows | ||||||||||||||||||||||||||||
Depreciation and amortization | 999 | 961 | 941 | 219 | 704 | 667 | 155 | |||||||||||||||||||||
Deferred taxes | 54 | (9 | ) | (6 | ) | (1 | ) | (11 | ) | (21 | ) | (5 | ) | |||||||||||||||
Exchange and linkage differences on long-term liabilities | 16 | 6 | — | — | — | (68 | ) | (16 | ) | |||||||||||||||||||
Capital losses (gains) | (7 | ) | (1 | ) | 2 | — | 2 | 1 | — | |||||||||||||||||||
Change in liability for employee severance pay | 6 | (7 | ) | — | — | (1 | ) | — | — | |||||||||||||||||||
Provision for decline in value of land — held for sale | 6 | — | 4 | 1 | 4 | — | — | |||||||||||||||||||||
1,074 | 950 | 941 | 219 | 698 | 579 | 134 | ||||||||||||||||||||||
Changes in assets and liabilities | ||||||||||||||||||||||||||||
Increase in trade receivables (including long-term amounts) | (141 | ) | (234 | ) | (37 | ) | (9 | ) | (12 | ) | (80 | ) | (19 | ) | ||||||||||||||
Decrease (increase) in other receivables (including long-term amounts) | (15 | ) | 133 | (60 | ) | (14 | ) | (40 | ) | 26 | 6 | |||||||||||||||||
Decrease (increase) in inventories | 69 | 15 | (19 | ) | (4 | ) | (47 | ) | (19 | ) | (4 | ) | ||||||||||||||||
Increase (decrease) in trade payables (including long-term amounts) | (94 | ) | 74 | (15 | ) | (3 | ) | (19 | ) | (26 | ) | (6 | ) | |||||||||||||||
Increase (decrease) in other payables and credits (including long-term amounts) | 69 | (84 | ) | (21 | ) | (5 | ) | 2 | 197 | 46 | ||||||||||||||||||
(112 | ) | (96 | ) | (152 | ) | (35 | ) | (116 | ) | 98 | 23 | |||||||||||||||||
962 | 854 | 789 | 184 | 582 | 677 | 157 | ||||||||||||||||||||||
(b) Non-cash activities | ||||||||||||||||||||||||||||
Acquisition of property, plant and equipment and other assets on credit | 259 | 165 | 314 | 73 | 105 | 94 | 22 | |||||||||||||||||||||
Receivables in respect of issuance of debentures | — | — | 46 | 11 | — | — | — | |||||||||||||||||||||
Supplemental information: | ||||||||||||||||||||||||||||
Income taxes paid | 211 | 277 | 275 | 64 | 205 | 206 | 48 | |||||||||||||||||||||
Interest paid | 177 | 109 | 51 | 12 | 44 | 95 | 22 | |||||||||||||||||||||
F-7
Table of Contents
A. | Basis of presentation |
B. | Reporting principles |
F-8
Table of Contents
December 31, | December 31, | December 31, | September 30, | September 30, | ||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
CPI (in points) | 178.6 | 180.7 | 185.1 | 184.1 | 186.5 | |||||||||||||||
Exchange rate of U.S.$ in NIS | 4.379 | 4.308 | 4.603 | 4.598 | 4.302 |
January 1 to | January 1 to | |||||||||||||||||||
September 30 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
CPI | (1.9 | )% | 1.2 | % | 2.4 | % | 1.9 | % | 0.7 | % | ||||||||||
Exchange rate of U.S.$ in NIS | (7.6 | )% | (1.6 | )% | 6.9 | % | 6.7 | % | (6.5 | )% |
C. | Convenience translation into U.S. dollars (“dollars” or “$”) |
D. | Use of estimates |
F-9
Table of Contents
E. | Principles of consolidation |
F. | Cash and cash equivalents |
G. | Allowance for doubtful accounts |
H. | Inventory |
I. | Property, plant and equipment |
F-10
Table of Contents
% | ||||||
Network and transmission equipment | 15 | |||||
Control and testing equipment | 15-25 | (Mainly 25%) | ||||
Vehicles | 15 | |||||
Computers and software | 15-33 | (Mainly 25%) | ||||
Furniture and office equipment | 6-15 | (Mainly 7%) |
J. | Impairment of assets |
K. | Other assets, net |
F-11
Table of Contents
L. | Revenue recognition |
F-12
Table of Contents
M. | Discounts from suppliers |
N. | Advertising expenses |
O. | Capitalization of financing costs |
P. | Deferred taxes |
F-13
Table of Contents
Q. | Freestanding derivative financial instruments |
R. | Financial instruments and concentration of credit risk |
F-14
Table of Contents
S. | Dividend declared subsequent to the balance sheet date |
T. | Earnings per share |
U. | Effects of new Israeli Accounting Standards not yet adopted |
F-15
Table of Contents
Revaluation of assets |
Asset retirement obligations |
Component depreciation |
Asset retirement obligations |
Component depreciation |
F-16
Table of Contents
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Decrease in depreciation expense | 46 | 46 | 52 | 39 | 38 | |||||||||||||||
Decrease in capital gain | — | — | (2 | ) | (2 | ) | (3 | ) | ||||||||||||
Decrease (increase) in deferred tax expense | (17 | ) | (4 | ) | (2 | ) | 2 | (7 | ) | |||||||||||
Increase in net income | 29 | 42 | 48 | 39 | 28 | |||||||||||||||
Increase in basic and diluted earnings per ordinary shares | 0.30 | 0.43 | 0.49 | 0.40 | 0.29 | |||||||||||||||
Composition |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
Israeli currency — NIS | 1 | 1,767 | 109 | |||||||||
Foreign currency | 4 | 5 | 9 | |||||||||
5 | 1,772 | 118 | ||||||||||
Composition |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
Open accounts and unbilled revenue | 747 | 723 | 716 | |||||||||
Checks and credit cards receivables | 153 | 149 | 171 | |||||||||
900 | 872 | 887 | ||||||||||
Current maturity of long-term receivables | 461 | 519 | 556 | |||||||||
1,361 | 1,391 | 1,443 | ||||||||||
Less — allowance for doubtful accounts | 171 | 154 | 184 | |||||||||
1,190 | 1,237 | 1,259 | ||||||||||
F-17
Table of Contents
Composition |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
Government institutions | 1 | 40 | — | |||||||||
Derivative financial instruments | 12 | 7 | 1 | |||||||||
Prepaid expenses | 54 | 70 | 54 | |||||||||
Deferred taxes | 64 | 53 | 64 | |||||||||
Receivables in respect of debentures | — | 46 | — | |||||||||
Other | 9 | 8 | 2 | |||||||||
140 | 224 | 121 | ||||||||||
A. | Composition |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
Handsets | 87 | 97 | 105 | |||||||||
Accessories | 5 | 8 | 10 | |||||||||
Spare parts | 7 | 13 | 22 | |||||||||
99 | 118 | 137 | ||||||||||
Composition |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
Open accounts(a) | 901 | 816 | 890 | |||||||||
Credit cards receivables(a) | 46 | 155 | 176 | |||||||||
Other | 24 | 33 | 57 | |||||||||
Total | 971 | 1,004 | 1,123 | |||||||||
Less deferred interest income(b) | 75 | 48 | 48 | |||||||||
896 | 956 | 1,075 | ||||||||||
Less — Allowance for doubtful accounts | 2 | 4 | 4 | |||||||||
894 | 952 | 1,071 | ||||||||||
Less current maturities | 461 | 519 | 556 | |||||||||
433 | 433 | 515 | ||||||||||
F-18
Table of Contents
December 31 | September 30 | |||||||
2005 | 2006 | |||||||
NIS millions | NIS millions | |||||||
Second year | 279 | 350 | ||||||
Third year | 120 | 130 | ||||||
Fourth year and thereafter | 34 | 35 | ||||||
433 | 515 | |||||||
(a) | The long-term trade receivables arise from the sale of handsets on a contractual installment basis (primarily 36 monthly payments). |
(b) | The deferred interest income constitutes the difference between the amount of the long-term receivables and their discounted value based on the relevant imputed interest rate at the date of the transaction. The annual interest rate used by the Company in 2006 is 5% (2005 — 3.5%-7%, 2004 — 9%). |
A. | Composition: |
Network | Computers, | |||||||||||||||||||||||||||
and | Control and | Furniture | ||||||||||||||||||||||||||
Transmission | Testing | and Office | Leasehold | |||||||||||||||||||||||||
Land* | Equipment | Equipment | Vehicles | Equipment | Improvements | Total | ||||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||||||||
For the year ended December 31, 2005 | ||||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||
Balance at January 1, 2005 | 33 | 6,830 | 239 | 92 | 1,507 | 160 | 8,861 | |||||||||||||||||||||
Additions | — | 456 | 22 | 7 | 212 | 25 | 722 | |||||||||||||||||||||
Dispositions | — | (52 | ) | — | (30 | ) | (7 | ) | (1 | ) | (90 | ) | ||||||||||||||||
Balance at December 31, 2005 | 33 | 7,234 | 261 | 69 | 1,712 | 184 | 9,493 | |||||||||||||||||||||
Accumulated depreciation | ||||||||||||||||||||||||||||
Balance at January 1, 2005 | — | 4,691 | 154 | 51 | 916 | 95 | 5,907 | |||||||||||||||||||||
Depreciation for the year | — | 635 | 32 | 12 | 219 | 14 | 912 | |||||||||||||||||||||
Dispositions | — | (46 | ) | — | (23 | ) | (6 | ) | — | (75 | ) | |||||||||||||||||
Balance at December 31, 2005 | — | 5,280 | 186 | 40 | 1,129 | 109 | 6,744 | |||||||||||||||||||||
Provision for decline in value in land held for sale | ||||||||||||||||||||||||||||
Balance at January 1, 2005 | (6 | ) | — | — | — | — | — | (6 | ) | |||||||||||||||||||
Additions | (4 | ) | — | — | — | — | — | (4 | ) | |||||||||||||||||||
Balance at December 31, 2005 | (10 | ) | — | — | — | — | — | (10 | ) | |||||||||||||||||||
Net depreciated cost as at December 31, 2005 | 23 | 1,954 | 75 | 29 | 583 | 75 | 2,739 | |||||||||||||||||||||
Net depreciated cost as at December 31, 2004 | 27 | 2,139 | 85 | 41 | 591 | 65 | 2,948 | |||||||||||||||||||||
F-19
Table of Contents
Network | Computers, | |||||||||||||||||||||||||||
and | Control and | Furniture | ||||||||||||||||||||||||||
Transmission | Testing | and Office | Leasehold | |||||||||||||||||||||||||
Land* | Equipment | Equipment | Vehicles | Equipment | Improvements | Total | ||||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||||||||
For the nine month period ended September 30, 2006: | ||||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||
Balance at January 1, 2006 | 33 | 7,234 | 261 | 69 | 1,712 | 184 | 9,493 | |||||||||||||||||||||
Additions | — | 204 | — | — | 99 | 10 | 313 | |||||||||||||||||||||
Dispositions | — | (47 | ) | — | (31 | ) | (11 | ) | — | (89 | ) | |||||||||||||||||
Balance at September 30, 2006 | 33 | 7,391 | 261 | 38 | 1,800 | 194 | 9,717 | |||||||||||||||||||||
Accumulated depreciation | ||||||||||||||||||||||||||||
Balance at January 1, 2006 | — | 5,280 | 186 | 40 | 1,129 | 109 | 6,744 | |||||||||||||||||||||
Depreciation for the period | — | 437 | 19 | 6 | 168 | 12 | 642 | |||||||||||||||||||||
Dispositions | — | (44 | ) | — | (23 | ) | (11 | ) | — | (78 | ) | |||||||||||||||||
Balance at September 30, 2006 | — | 5,673 | 205 | 23 | 1,286 | 121 | 7,308 | |||||||||||||||||||||
Provision for decline in value in land held for sale | ||||||||||||||||||||||||||||
Balance at January 1, 2006 | (10 | ) | — | — | — | — | — | (10 | ) | |||||||||||||||||||
Additions | — | — | — | — | — | — | — | |||||||||||||||||||||
Balance at September 30, 2006 | (10 | ) | — | — | — | — | — | (10 | ) | |||||||||||||||||||
Net depreciated cost as at September 30, 2006 | 23 | 1,718 | 56 | 15 | 514 | 73 | 2,399 | |||||||||||||||||||||
* | Represents land that was leased from the Israel Lands Administration. |
B. Additional information |
F-20
Table of Contents
Composition |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
Deferred expenses | — | 4 | — | |||||||||
License | 536 | 558 | 559 | |||||||||
Less — accumulated amortization | (40 | ) | (69 | ) | (94 | ) | ||||||
496 | 493 | 465 | ||||||||||
December 31 | September 30 | |||||||
2005 | 2006 | |||||||
NIS millions | NIS millions | |||||||
2006 | 31 | 8 | ||||||
2007 | 31 | 31 | ||||||
2008 | 31 | 31 | ||||||
2009 | 31 | 31 | ||||||
2010 | 31 | 31 | ||||||
2011 | 31 | 31 |
Composition |
December 31 | ||||||||||||||||
September 30 | September 30 | |||||||||||||||
2006 | 2004 | 2005 | 2006 | |||||||||||||
Interest rate % | NIS millions | NIS millions | NIS millions | |||||||||||||
Short-term loans from banks | 6.4 - 7.1 | 59 | — | 263 | ||||||||||||
Current maturities of long-term loans from banks | 6.9 - 7.3 | 493 | 320 | 75 | ||||||||||||
Total | 552 | 320 | 338 | |||||||||||||
Less debt issuance cost | — | — | (5 | ) | ||||||||||||
552 | 320 | 333 | ||||||||||||||
F-21
Table of Contents
Composition |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
Open accounts: | ||||||||||||
In Israeli currency | 122 | 169 | 126 | |||||||||
In foreign currency (mainly in U.S. dollars) | 139 | 289 | 90 | |||||||||
Accrued expenses (mainly in NIS) | 514 | 457 | 491 | |||||||||
775 | 915 | 707 | ||||||||||
Current maturity of long-term trade payables | 41 | 29 | — | |||||||||
816 | 944 | 707 | ||||||||||
Composition |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
Employees and related liabilities | 100 | 71 | 94 | |||||||||
Government institutions | 20 | 16 | 100 | |||||||||
Accrued expenses | 38 | 41 | 95 | |||||||||
Deferred revenue | 26 | 39 | 29 | |||||||||
Derivative financial instruments | 13 | 3 | 93 | |||||||||
Advances from customers | 7 | 8 | 4 | |||||||||
204 | 178 | 415 | ||||||||||
A. | Composition |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
In NIS — linked to the Israeli CPI | 107 | — | — | |||||||||
In NIS — unlinked | 777 | 351 | 1,325 | |||||||||
884 | 351 | 1,325 | ||||||||||
Less debt issuance cost | — | — | (12 | ) | ||||||||
Total | 884 | 351 | 1,313 | |||||||||
Less current maturities | (493 | ) | (320 | ) | (75 | ) | ||||||
391 | 31 | 1,238 | ||||||||||
F-22
Table of Contents
B. | Maturity dates: |
December 31 | September 30 | |||||||
2005 | 2006 | |||||||
NIS millions | NIS millions | |||||||
2006 | 320 | 56 | ||||||
2007 | 25 | 25 | ||||||
2008 | 6 | 254 | ||||||
2009 | — | 247 | ||||||
2010 | — | 743 | ||||||
351 | 1,325 | |||||||
C. | Credit facility agreement |
F-23
Table of Contents
D. | Credit facility |
F-24
Table of Contents
A. | Composition |
December 31 | September 30 | |||||||||||
Interest Rate % | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | |||||||||||
Debentures (Series A) — linked to the CPI | 5.0 | % | 1,037 | 1,080 | ||||||||
Debentures (Series B) — linked to the CPI | 5.3 | % | 715 | 939 | ||||||||
Unamortized premium on debentures | — | 3 | ||||||||||
1,752 | 2,022 | |||||||||||
Less — Deferred issuance expenses | — | (5 | ) | |||||||||
1,752 | 2,017 | |||||||||||
B. | Maturity dates |
December 31 | September 30 | |||||||
2005 | 2006 | |||||||
NIS millions | NIS millions | |||||||
2006 | — | — | ||||||
2007 | — | — | ||||||
2008 | 115 | 120 | ||||||
2009 | 230 | 240 | ||||||
2010 | 230 | 240 | ||||||
More than 5 years | 1,177 | 1,422 | ||||||
1,752 | 2,022 | |||||||
C. | Issuance of debentures |
F-25
Table of Contents
Composition: |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
In respect of acquisition of spectrum licenses | 69 | 29 | — | |||||||||
Other | 4 | 2 | 2 | |||||||||
73 | 31 | 2 | ||||||||||
Less current maturities | (41 | ) | (29 | ) | — | |||||||
32 | 2 | 2 | ||||||||||
A. | Contingent liabilities |
F-26
Table of Contents
F-27
Table of Contents
F-28
Table of Contents
F-29
Table of Contents
F-30
Table of Contents
B. | Effects of new legislation and standards |
(a) The Company estimates, based on the opinion of the Company legal advisors, that there are currently no legal grounds for approval of any indemnification with respect to sites established based on a permit issued under the NZP, prior to the entry of the aforementioned amendment. Presently, attempts, which have yet to be filed or decided, are being made to assert such grounds for legal claims. | |
(b) As part of the Company considerations for establishment of new cell sites, the Company will also examine the potential for a claim under Section 197. To the best of management’s knowledge, at this point no court decision has been made indicating a decline in the value of property due to the construction of a cell site. | |
(c) The need to dismantle and remove existing sites, and the difficulties in establishing alternative sites, could have an adverse effect on the Company’s results of operations. | |
(d) The Company is unable to estimate the future impact of the indemnification requirement, as detailed in sections a and b. Despite this, if the Company shall be required to make substantial payments under the indemnity letters, it may have an adverse effect on the Company’s financial results and trigger a default under the credit facility agreement (see Note 13C above). |
F-31
Table of Contents
a. A gradual decline in the rate of interconnection tariffs received from other cellular networks or from landline network operators, as follows: as of March 1, 2005, the rate of NIS 0.45 per minute will decrease to a maximum rate of NIS 0.32 per minute; as of March 1, 2006, to a maximum rate of NIS 0.29 per minute; as of March 1, 2007, to a maximum rate of NIS 0.26 per minute, and as of March 1, 2008, to a maximum rate of NIS 0.22 per minute. | |
b. A decrease in the rate of interconnection tariffs received from international network operators, from the current rate of NIS 0.25 per minute, to a maximum rate of NIS 0.22 per minute, as of March 1, 2008. | |
c. A decrease, as of March 1, 2005, in the rate of SMS interconnection tariffs received from other cellular operators from the rate of NIS 0.285 per message, to a maximum rate of NIS 0.05 per message, and an additional decrease to a maximum rate of NIS 0.025 per message as of March 1, 2006. | |
d. The aforementioned tariffs in items a through c do not include Value Added Tax and linkage to the CPI, and they will be annually updated, based on the annual change in the CPI, as of March 1, 2005, in accordance with the provisions of the aforementioned regulations. |
F-32
Table of Contents
C. | Commitments |
a. Not to pledge any of the assets used to execute the license without the advance consent of the Ministry of Communications. | |
b. To pay the State of Israel royalties equal to 3% of the Company’s revenues generated from telecommunications services, less payments transferred to other license holders for interconnect fees or roaming services, sale of handsets and losses from bad debt. The rate of these royalties has decreased in recent years, from 4.5% in 2002, to 4% in 2003, and to 3.5% in 2004 and 2005. In August 2006, the royalty rate was reduced to 3%, retroactively from January 1, 2006 and it will continue to be reduced by 0.5% per year, until reaching a rate of 1%. | |
c. The Company’s shareholders’ joint equity, combined with the Company’s equity, shall not amount to less than $200 million. Regarding this stipulation, a shareholder holding less than 10% of the rights to the Company’s equity is not taken into account. |
F-33
Table of Contents
a. Office buildings and warehouses — there are lease agreements for periods of up to 23 years and four months. | |
b. Switching stations — there are lease agreements for switching station locations for periods of up to 10 years. | |
c. Cell sites — there are lease agreements for cell sites for periods of up to 28 years and four months. | |
d. Service centers, retail stores and stands — there are lease agreements for service and installation centers, stores and stands for periods of up to 15 years and six months. | |
e. Transmission services for cell sites and switches. |
F-34
Table of Contents
f. Motor vehicles lease for a period of 3 years. |
December 31 | September 30 | |||||||
2005 | 2006 | |||||||
NIS millions | NIS millions | |||||||
2006 | 213 | 67 | ||||||
2007 | 202 | 254 | ||||||
2008 | 174 | 199 | ||||||
2009 | 123 | 176 | ||||||
2010 | 115 | 158 | ||||||
2011 and thereafter | 634 | 914 | ||||||
1,461 | 1,768 | |||||||
D. | Liens and guarantees |
a. To the Government of Israel (to guarantee performance of the License) — U.S. $10 million. | |
b. To the Government of Israel (to guarantee performance of the License for Cellcom Fixed Line Communication L. P.) — NIS 10 million. | |
c. To suppliers and government institutions — NIS 14.7 million. |
At September 30, 2006 | ||||||||
and at December 31 2005 | ||||||||
and 2004 | ||||||||
Issued and | ||||||||
Authorized | Paid-up | |||||||
NIS | NIS | |||||||
Ordinary shares of NIS 0.1 par value each | 1,000,000 | 11,400 | ||||||
F-35
Table of Contents
1) To reorganize the share capital so that each ordinary share of NIS 0.1 par value would be split into 10 ordinary shares of NIS 0.01 par value. | |
2) To increase the authorized share capital from 100,000,000 ordinary shares of NIS 0.01 par value to 300,000,000 ordinary shares of NIS 0.01 par value. | |
3) To allot 96,360,000 fully paid share dividend of NIS 0.01 par value to all shareholders, pro rata. |
C. | Share Based Incentive Plan |
All per share data and ordinary share data below have been retroactively adjusted to reflect the increase in the authorized share capital, stock split and allotment of bonus shares, effected by the Company, subsequent to the balance sheet date, on October 12, 2006. | |
In September 2006, the Company’s Board of Directors approved a share based incentive plan for employees, directors, consultants and sub-contractors and to those of the Company’s affiliates and the shareholders’ affiliates. The plan has an initial pool of 2,500,000 shares over which options and restricted stock units may be granted. | |
In October and November 2006, subsequent to the balance sheet date, the Company granted options to purchase an aggregate of 2,414,143 ordinary shares at an exercise price of $12.60 per share. Among those grants were options to purchase up to 450,000 ordinary shares granted to the Chairman of the Company’s Board of Directors and an additional 450,000 options to the Company’s Chief Executive Officer. The remainder of the option grants was made to other Company employees. The options are exercisable only upon a successful public offering of the Company’s ordinary shares. | |
In general, the options will vest in four equal installments on each of the first, second, third and fourth anniversary of the date of grant. As a result, the total value of the options granted in October and November 2006 will be expensed over the vesting period commencing on the date of completion of a public offering of the Company’s ordinary shares. However, the vesting of options and restricted stock units will be accelerated upon the occurrence of certain events, including a merger, a consolidation, a sale of all or substantially all of the Company’s consolidated assets, or a sale of the Company’s ordinary shares held by DIC and its affiliates to a third party resulting in IDB holding less than 50.01% of the Company’s then outstanding share capital. | |
The total compensation expense related to the options granted during October-November 2006 is approximately NIS 53 million, which will be recognized over the vesting period commencing on the date of completion of a public offering of the Company’s ordinary shares (unaudited). |
F-36
Table of Contents
The fair value of each option granted was estimated on the date of the grant using the Black-Scholes model, assuming a dividend yield of zero percent, due to a dividend adjustment mechanism, and using the following assumptions: |
• | weighted average expected life of the options of 4.25 years; | |
• | risk-free, annual interest rate of 5.01%, which represents the risk- free interest rate of zero-coupon U.S. Government Bonds; and | |
• | expected average volatility of 26.69%, which represents a weighted average standard deviation rate for the stock prices of similar publicly traded companies. |
D. | Dividend policy |
Composition |
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Revenues from handsets, net | 498 | 646 | 565 | 406 | 477 | |||||||||||||||
Revenues from services | 4,763 | 4,954 | 4,549 | 3,439 | 3,714 | |||||||||||||||
5,261 | 5,600 | 5,114 | 3,845 | 4,191 | ||||||||||||||||
F-37
Table of Contents
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Additional information | ||||||||||||||||||||
Revenues from handsets on an installments basis | 377 | 539 | 527 | 351 | 428 | |||||||||||||||
Composition |
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
According to source of income: | ||||||||||||||||||||
Cost of revenues from handsets | 710 | 813 | 683 | 448 | 592 | |||||||||||||||
Cost of revenues from services | 2,365 | 2,489 | 2,450 | 1,816 | 1,878 | |||||||||||||||
3,075 | 3,302 | 3,133 | 2,264 | 2,470 | ||||||||||||||||
According to its components: | ||||||||||||||||||||
Purchase of handsets | 640 | 798 | 649 | 476 | 611 | |||||||||||||||
Changes in inventory | 44 | 1 | (18 | ) | (47 | ) | (28 | ) | ||||||||||||
Write-down of inventory | 26 | 14 | 52 | 19 | 9 | |||||||||||||||
710 | 813 | 683 | 448 | 592 | ||||||||||||||||
Rent and related expenses | 230 | 268 | 286 | 195 | 219 | |||||||||||||||
Salaries and related expenses | 175 | 164 | 142 | 107 | 113 | |||||||||||||||
Fees to other operators and others | 882 | 928 | 825 | 595 | 673 | |||||||||||||||
Depreciation and amortization | 742 | 688 | 681 | 501 | 480 | |||||||||||||||
Royalties (see Note 17C1) | 137 | 120 | 112 | 86 | 79 | |||||||||||||||
Other | 199 | 321 | 404 | 332 | 314 | |||||||||||||||
2,365 | 2,489 | 2,450 | 1,816 | 1,878 | ||||||||||||||||
3,075 | 3,302 | 3,133 | 2,264 | 2,470 | ||||||||||||||||
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Table of Contents
Composition |
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Salaries and related expenses | 252 | 232 | 236 | 175 | 192 | |||||||||||||||
Commissions | 109 | 140 | 122 | 84 | 110 | |||||||||||||||
Advertising and public relations | 116 | 138 | 118 | 91 | 65 | |||||||||||||||
Depreciation | 13 | 12 | 9 | 7 | 5 | |||||||||||||||
Other | 123 | 139 | 138 | 96 | 101 | |||||||||||||||
613 | 661 | 623 | 453 | 473 | ||||||||||||||||
Composition |
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Salaries and related expenses | 176 | 160 | 148 | 114 | 106 | |||||||||||||||
Depreciation and amortization | 245 | 262 | 251 | 197 | 182 | |||||||||||||||
Rent and maintenance | 76 | 79 | 75 | 55 | 54 | |||||||||||||||
Professional services | 76 | 77 | 81 | 61 | 55 | |||||||||||||||
Allowance for doubtful accounts | 64 | 37 | 19 | 27 | 32 | |||||||||||||||
Other | 45 | 69 | 82 | 58 | 57 | |||||||||||||||
682 | 684 | 656 | 512 | 486 | ||||||||||||||||
December 31 | September 30 | |||||||||||||||
2003 | 2004 | 2005 | 2006 | |||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | |||||||||||||
Balance at beginning of the period | 176 | 151 | 173 | 158 | ||||||||||||
Write-offs | (89 | ) | (15 | ) | (34 | ) | (2 | ) | ||||||||
Additional allowance | 64 | 37 | 19 | 32 | ||||||||||||
Balance at end of the period | 151 | 173 | 158 | 188 | ||||||||||||
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Table of Contents
Composition |
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Expenses for long-term liabilities: | ||||||||||||||||||||
Debentures | — | — | (2 | ) | — | (98 | ) | |||||||||||||
Long-term loans | (160 | ) | (94 | ) | (43 | ) | (36 | ) | (53 | ) | ||||||||||
�� | ||||||||||||||||||||
(160 | ) | (94 | ) | (45 | ) | (36 | ) | (151 | ) | |||||||||||
Short-term loans | (42 | ) | (5 | ) | (2 | ) | (2 | ) | (19 | ) | ||||||||||
Transactions in derivative financial instruments | (85 | ) | (28 | ) | 11 | 10 | (16 | ) | ||||||||||||
Transactions involving installment sales imputed interest on market installment sales | 50 | 70 | 62 | 48 | 38 | |||||||||||||||
Other items | 21 | 12 | (2 | ) | (7 | ) | 20 | |||||||||||||
(216 | ) | (45 | ) | 24 | 13 | (128 | ) | |||||||||||||
Additional information: | ||||||||||||||||||||
Includes expenses for foreign exchange differences | (23 | ) | (2 | ) | (3 | ) | (5 | ) | (5 | ) | ||||||||||
Composition |
Nine Month Period Ended | |||||||||||||||||||||
Year Ended December 31 | September 30 | ||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | |||||||||||||||||
(Unaudited) | |||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | |||||||||||||||||
Capital gain (loss) from sale of property, plant and equipment | 7 | 1 | (2 | ) | (1 | ) | (1 | ) | |||||||||||||
Other income (expenses), net* | (6 | ) | — | (9 | ) | (9 | ) | — | |||||||||||||
1 | 1 | (11 | ) | (10 | ) | (1 | ) | ||||||||||||||
* Includes provision for decline in value of land — | |||||||||||||||||||||
— held for sale | (6 | ) | — | (4 | ) | (4 | ) | — | |||||||||||||
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Table of Contents
D. | Reconciliation of income tax expense: |
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Income before income taxes as per the income statement | 676 | 909 | 715 | 619 | 633 | |||||||||||||||
Tax rate | 36 | % | 35 | % | 34 | % | 34 | % | 31 | % | ||||||||||
Tax calculated according to the main tax rate | 243 | 318 | 243 | 210 | 196 | |||||||||||||||
Increase (decrease) in tax resulting from: | ||||||||||||||||||||
Non-deductible interest expenses (see Note 25F) | — | — | — | — | 39 | |||||||||||||||
Other non-deductible expenses and non taxable income, net | 8 | 4 | 4 | 4 | 4 |
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Table of Contents
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Taxes in respect of prior years | — | 2 | — | — | 3 | |||||||||||||||
Change in deferred tax balances due to reduction in tax rate | — | (22 | ) | (16 | ) | (16 | ) | — | ||||||||||||
Other, net | (6 | ) | (10 | ) | 1 | 3 | 1 | |||||||||||||
245 | 292 | 232 | 201 | 243 | ||||||||||||||||
E. | Deferred taxes |
December 31 | September 30 | |||||||||||||||
2003 | 2004 | 2005 | 2006 | |||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | |||||||||||||
Provisions for employee benefits, net | 8 | 4 | 1 | 1 | ||||||||||||
Allowance for doubtful debts | 54 | 59 | 49 | 54 | ||||||||||||
Hedging transactions | — | — | (2 | ) | 8 | |||||||||||
Property, plant and equipment and other assets | (162 | ) | (154 | ) | (135 | ) | (117 | ) | ||||||||
(100 | ) | (91 | ) | (87 | ) | (54 | ) | |||||||||
December 31 | September 30 | |||||||||||||||
2003 | 2004 | 2005 | 2006 | |||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | |||||||||||||
Other receivables (short-term) | 60 | 64 | 53 | 64 | ||||||||||||
Deferred taxes (long-term) | (160 | ) | (155 | ) | (140 | ) | (118 | ) | ||||||||
(100 | ) | (91 | ) | (87 | ) | (54 | ) | |||||||||
F. | Income tax in the income statement |
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Current taxes | 191 | 299 | 238 | 215 | 263 | |||||||||||||||
Prior year taxes | — | 2 | — | — | 3 | |||||||||||||||
Deferred taxes | 54 | (9 | ) | (6 | ) | (14 | ) | (23 | ) | |||||||||||
245 | 292 | 232 | 201 | 243 | ||||||||||||||||
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Table of Contents
G. | Taxes recorded to shareholders’ equity |
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Deferred taxes in respect of hedging transactions | — | — | 2 | 2 | (10 | ) | ||||||||||||||
H. | Losses for tax purposes |
A. | Linkage terms of financial instrument |
December 31, 2005 | September 30, 2006 | |||||||||||||||||||||||
In or | In or | |||||||||||||||||||||||
Linked to | Linked to | |||||||||||||||||||||||
Foreign | Foreign | |||||||||||||||||||||||
Currencies | Currencies | Linked to | ||||||||||||||||||||||
(Mainly | Linked to the | (Mainly | the Israeli | |||||||||||||||||||||
Dollars) | Israeli CPI | Unlinked | Dollars) | CPI | Unlinked | |||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | |||||||||||||||||||
Assets | 5 | 15 | 3,577 | 9 | 18 | 1,910 | ||||||||||||||||||
Liabilities | 317 | 1,752 | 1,158 | 980 | 2,074 | 1,663 | ||||||||||||||||||
B. | Derivative Financial Instruments |
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Table of Contents
December 31, 2004 | December 31, 2005 | September 30, 2006 | ||||||||||||||||||||||
Par Value | Fair Value | Par Value | Fair Value | Par Value | Fair Value | |||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | |||||||||||||||||||
Forward contracts on exchange rate (mainly dollar — NIS) | 754 | (12 | ) | 654 | 1 | 486 | (27 | ) | ||||||||||||||||
Forward contracts on Israeli CPI | — | — | — | — | 500 | (4 | ) | |||||||||||||||||
Options on the exchange rate (mainly dollar — NIS) | 1,639 | 12 | 925 | 4 | 796 | 1 | ||||||||||||||||||
Compounded foreign currency and interest swap | — | — | — | — | 887 | (62 | ) | |||||||||||||||||
2,393 | — | 1,579 | 5 | 2,669 | (92 | ) | ||||||||||||||||||
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
Beginning accumulated derivative in capital reserve | — | — | 5 | |||||||||
Net (gain) loss reclassified to earnings | — | (3 | ) | (1 | ) | |||||||
Net change in the revaluation of hedging transactions | — | 8 | (24 | ) | ||||||||
Ending accumulated derivative in capital reserve | — | 5 | (20 | ) | ||||||||
F-44
Table of Contents
C. | Fair value of financial instruments |
December 31, 2005 | September 30, 2006 | |||||||||||||||
Book Value | Fair Value | Book Value | Fair Value | |||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | |||||||||||||
Long-term receivables | 921 | 922 | 1,017 | 1,017 | ||||||||||||
Long-term loans, debentures and other liabilities | 2,103 | 2,105 | 3,588 | 3,706 | ||||||||||||
A. | Balance sheet |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
Current assets | 5 | 1 | — | |||||||||
Long-term liability — debentures | — | 136 | 119 | |||||||||
B. | Transactions with related and interested parties are executed in the ordinary course of business at regular commercial terms: |
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Expenses: | ||||||||||||||||||||
Salaries and related expenses to related parties (two salaried employees in 2005) | 3 | 4 | 17 | 13 | 2 | |||||||||||||||
Professional services and other | 1 | 5 | 2 | 1 | 2 |
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Table of Contents
C. | An agreement with DIC |
Note 28 — | Material Differences between Israeli and US GAAP and their Effect on the Financial Statements |
A. | The effect of the differences between Israeli and US GAAP on the financial statements |
1. | Reconciliation of: |
Nine Month Period Ended | |||||||||||||||||||||
Year Ended December 31 | September 30 | ||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | |||||||||||||||||
(Unaudited) | |||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | |||||||||||||||||
Net income as reported, according to Israeli GAAP | 431 | 617 | 483 | 418 | 390 | ||||||||||||||||
Temporary differences resulting from recognition of revenue arising from application of EITF 00-21 — Note 28C(5) | — | (37 | ) | 14 | 13 | 4 | |||||||||||||||
Depreciation of property, plant and equipment — Note 28C(3) | 46 | 46 | 50 | 37 | 34 | ||||||||||||||||
Embedded Derivatives — Note 28C(4) | (28 | ) | (13 | ) | 9 | 9 | (2 | ) | |||||||||||||
AROs — Note 28C(6) | (3 | ) | (3 | ) | (2 | ) | (1 | ) | (2 | ) | |||||||||||
Push down accounting adjustments: | |||||||||||||||||||||
Elimination of deferred revenue | — | — | (10 | ) | — | — | |||||||||||||||
Depreciation expenses of property, plant and equipment | — | — | 25 | 3 | 80 | ||||||||||||||||
Amortization expenses of intangible assets | — | — | (50 | ) | (5 | ) | (125 | ) | |||||||||||||
Interest expenses on push down debt | — | — | (43 | ) | (4 | ) | (17 | ) |
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Table of Contents
Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Income tax effect of US GAAP adjustments | (5 | ) | 10 | 15 | (10 | ) | 12 | |||||||||||||
Net income according to US GAAP | 441 | 620 | 491 | 460 | 374 | |||||||||||||||
December 31 | December 31 | September 30 | |||||||||||
2004 | 2005 | 2006 | |||||||||||
NIS millions | NIS millions | NIS millions | |||||||||||
Shareholders’ equity as reported, according to Israeli GAAP | 3,161 | 3,649 | 184 | ||||||||||
Temporary differences resulting from recognition of revenue arising from application of EITF 00-21 — Note 28C(5) | (37 | ) | (6 | ) | (2 | ) | |||||||
Depreciation of property, plant and equipment — Note 28C(3) | 296 | 346 | 380 | ||||||||||
Embedded Derivatives — Note 28C(4) | (30 | ) | (21 | ) | (23 | ) | |||||||
AROs — Note 28C(6) | (6 | ) | (10 | ) | (9 | ) | |||||||
Push down accounting adjustments — Note 28C(2): | |||||||||||||
Push down of the acquisition | — | 3,652 | 3,652 | ||||||||||
Push down of DIC’s debt | — | (2,970 | ) | — | |||||||||
Elimination of deferred revenue | — | (22 | ) | (22 | ) | ||||||||
Cumulative depreciation of property, plant and equipment | — | 25 | 105 | ||||||||||
Cumulative amortization expenses of intangible assets | — | (50 | ) | (175 | ) | ||||||||
Accrued interest expenses, net of deemed dividend in respect of DIC’s push down debt | — | (43 | ) | — | |||||||||
Income tax effect of US GAAP adjustments | (72 | ) | (60 | ) | (72 | ) | |||||||
Shareholders’ equity according to US GAAP | 3,312 | 4,490 | 4,018 | ||||||||||
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Table of Contents
Note 28 — | Material Differences between Israeli and US GAAP and their Effect on the Financial Statements |
B. | Condensed financial statements according to US GAAP |
December 31 | December 31 | September 30 | |||||||||||
2004 | 2005 | 2006 | |||||||||||
(All amounts are in NIS millions) | |||||||||||||
Current assets | |||||||||||||
Cash and cash equivalents | 5 | 1,772 | 118 | ||||||||||
Trade receivables, net | 1,190 | 1,237 | 1,259 | ||||||||||
Other receivables | 140 | 225 | 121 | ||||||||||
Inventory | 99 | 118 | 137 | ||||||||||
1,434 | 3,352 | 1,635 | |||||||||||
Long-term receivables | 460 | 456 | 537 | ||||||||||
Property, plant and equipment, net | 3,220 | 2,384 | 2,159 | ||||||||||
Other assets, net | 496 | 1,625 | 1,471 | ||||||||||
Goodwill | — | 3,283 | 3,283 | ||||||||||
Total assets | 5,610 | 11,100 | 9,085 | ||||||||||
Current liabilities | |||||||||||||
Short-term bank credit (see Note 28C(2)) | 552 | 3,333 | 333 | ||||||||||
Trade payables | 816 | 944 | 707 | ||||||||||
Other current liabilities | 271 | 205 | 440 | ||||||||||
1,639 | 4,482 | 1,480 | |||||||||||
Long-term liabilities | |||||||||||||
Long-term loans from banks | 391 | 31 | 1,238 | ||||||||||
Debentures | — | 1,752 | 2,017 | ||||||||||
Deferred taxes | 227 | 333 | 318 | ||||||||||
Other long-term liabilities | 41 | 12 | 14 | ||||||||||
659 | 2,128 | 3,587 | |||||||||||
Shareholders’ equity | 3,312 | 4,490 | 4,018 | ||||||||||
Total liabilities and shareholders’ equity | 5,610 | 11,100 | 9,085 | ||||||||||
F-48
Table of Contents
Year Ended | January 1 | September 22 | Nine Month Period | |||||||||||||||||||||||
December 31 | Through | through | Ended September 30 | |||||||||||||||||||||||
September 21 | December 31 | |||||||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2005 | 2006 | |||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||
All amounts are in NIS millions except for share and per share data | ||||||||||||||||||||||||||
Revenues | 5,261 | 5,563 | 3,713 | 1,405 | 3,858 | 4,195 | ||||||||||||||||||||
Cost of revenues | 3,034 | 3,263 | 2,141 | 972 | 2,232 | 2,480 | ||||||||||||||||||||
Gross profit | 2,227 | 2,300 | 1,572 | 433 | 1,626 | 1,715 | ||||||||||||||||||||
Selling and marketing expenses | 613 | 661 | 434 | 189 | 453 | 473 | ||||||||||||||||||||
General and administrative expenses | 681 | 683 | 502 | 167 | 524 | 491 | ||||||||||||||||||||
Operating income | 933 | 956 | 636 | 77 | 649 | 751 | ||||||||||||||||||||
Financial income (expenses), net | (240 | ) | (55 | ) | 21 | (27 | ) | 22 | (145 | ) | ||||||||||||||||
Income before income tax and cumulative effect of change in accounting principle | 693 | 901 | 657 | 50 | 671 | 606 | ||||||||||||||||||||
Income tax | 250 | 281 | 205 | 11 | 211 | 232 | ||||||||||||||||||||
Income before cumulative effect of change in accounting principle | 443 | 620 | 452 | 39 | 460 | 374 | ||||||||||||||||||||
Cumulative effect of a change in accounting principle (Note 28C(6)) | (2 | ) | — | — | — | — | — | |||||||||||||||||||
Net income | 441 | 620 | 452 | 39 | 460 | 374 | ||||||||||||||||||||
Earnings per share | ||||||||||||||||||||||||||
Basic and diluted earnings per share in NIS | 4.52 | 6.36 | 4.64 | 0.40 | 4.72 | 3.84 | ||||||||||||||||||||
Weighted-average number of shares used in calculation of basic and diluted earnings per share (in thousands) | 97,500 | 97,500 | 97,500 | 97,500 | 97,500 | 97,500 | ||||||||||||||||||||
* | The period from September 22, 2005 through September 30, 2005 is presented under the new basis of accounting within the nine month period ended September 30, 2005. |
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Table of Contents
Share Capital | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Number of | Paid-in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
NIS 0.01 | ||||||||||||||||||||
Pare Value | ||||||||||||||||||||
All amounts are in NIS millions except for share and per share | ||||||||||||||||||||
data | ||||||||||||||||||||
Balance as of January 1, 2003 | 97,500,000 | — | — | 2,251 | 2,251 | |||||||||||||||
Changes in the year ended December 31, 2003 | ||||||||||||||||||||
Net income | — | — | — | 441 | 441 | |||||||||||||||
Balance as of December 31, 2003 | 97,500,000 | — | — | 2,692 | 2,692 | |||||||||||||||
Changes in the year ended December 31, 2004 | ||||||||||||||||||||
Net income | — | — | — | 620 | 620 | |||||||||||||||
Balance as of December 31, 2004 | 97,500,000 | — | — | 3,312 | 3,312 | |||||||||||||||
Changes in the year ended December 31, 2005 | ||||||||||||||||||||
Movement in capital reserve in respect of hedging transactions, net, for the period from January 1, 2005 through September 21, 2005 | — | — | 5 | — | 5 | |||||||||||||||
Net income for the period from January 1, 2005 through September 21, 2005 | — | — | 452 | 452 | ||||||||||||||||
Elimination of historical equity on acquisition at September 21, 2005 | — | 3,764 | (3,764 | ) | — | |||||||||||||||
Push-down of the acquisition — Note 28C(2b5) | — | 3,652 | — | 3,652 | ||||||||||||||||
Push-down of DIC’s debt — Note 28C(2b6) | — | (2,970 | ) | — | (2,970 | ) | ||||||||||||||
Net income for the period from September 22, 2005 through December 31, 2005 | — | — | 39 | 39 | ||||||||||||||||
Balance as of December 31, 2005 | 97,500,000 | — | 4,451 | 39 | 4,490 | |||||||||||||||
For the nine month period ended September 30, 2006 | ||||||||||||||||||||
Movement in capital reserve in respect of hedging transactions, net | — | — | (25 | ) | — | (25 | ) | |||||||||||||
Dividend paid | — | — | (3,570 | ) | (260 | ) | (3,830 | ) | ||||||||||||
Allotment to dividend share subsequent to balance sheet date | — | 1 | — | (1 | ) | — |
F-50
Table of Contents
Share Capital | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Number of | Paid-in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
NIS 0.01 | ||||||||||||||||||||
Pare Value | ||||||||||||||||||||
All amounts are in NIS millions except for share and per share | ||||||||||||||||||||
data | ||||||||||||||||||||
Repayment of DIC’s push-down debt and interest, net of deemed dividend | — | — | 3,009 | — | 3,009 | |||||||||||||||
Net income | — | — | — | 374 | 374 | |||||||||||||||
Balance as of September 30, 2006 | 97,500,000 | 1 | 3,865 | 152 | 4,018 | |||||||||||||||
4. | Comprehensive income (loss) |
January 1 | September 22 | Nine Month Period Ended | ||||||||||||||||||||||||
Year Ended December 31, | through | through | September 30 | |||||||||||||||||||||||
September 21, | December 31, | |||||||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2005 | 2006 | |||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | |||||||||||||||||||||
Net income according to US GAAP | 441 | 620 | 452 | 39 | 460 | 374 | ||||||||||||||||||||
Net gain (loss) reclassified to earnings | — | — | (1 | ) | (2 | ) | (1 | ) | (1 | ) | ||||||||||||||||
Adjustments in respect of derivatives, net | — | — | 6 | 2 | 6 | (24 | ) | |||||||||||||||||||
Total comprehensive income | 441 | 620 | 457 | 39 | 465 | 349 | ||||||||||||||||||||
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Table of Contents
5. | Condensed Consolidated Statement of Cash Flows: |
Year Ended | January 1 | September 22 | Nine Month Period | |||||||||||||||||||||||
December 31 | through | through | Ended September 30 | |||||||||||||||||||||||
September 21, | December 31, | |||||||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2005 | 2006 | |||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||
All amounts are in NIS millions | ||||||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||
Net income | 441 | 620 | 452 | 39 | 460 | 374 | ||||||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||||
Depreciation and amortization | 956 | 920 | 645 | 269 | 668 | 677 | ||||||||||||||||||||
Deferred income taxes | 59 | (20 | ) | (3 | ) | (17 | ) | (1 | ) | (32 | ) | |||||||||||||||
Exchange and linkage differences (erosion of) long- term liabilities | 17 | 6 | — | 2 | — | (68 | ) | |||||||||||||||||||
Interest on push-down debt (see Note 28C(2c3)) | — | — | — | 43 | 4 | 17 | ||||||||||||||||||||
Capital losses (gains) | (7 | ) | (2 | ) | 3 | (1 | ) | 4 | 4 | |||||||||||||||||
Change in liability for employee severance pay | 6 | (7 | ) | — | — | (1 | ) | — | ||||||||||||||||||
Provision for decline in value of land — held for sale | 6 | — | 4 | — | 4 | — | ||||||||||||||||||||
1,037 | 897 | 649 | 296 | 678 | 598 | |||||||||||||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions: | ||||||||||||||||||||||||||
Decrease (increase) in trade receivables (including long-term amounts) | (141 | ) | (234 | ) | 65 | (102 | ) | (12 | ) | (80 | ) | |||||||||||||||
Decrease (increase) in other receivables (including long-term amounts) | (3 | ) | 134 | (41 | ) | (19 | ) | (40 | ) | 26 | ||||||||||||||||
Decrease (increase) in inventories | 69 | 15 | (43 | ) | 24 | (47 | ) | (19 | ) | |||||||||||||||||
Increase (decrease) in trade payables (including long-term amounts) | (94 | ) | 74 | (69 | ) | 54 | (19 | ) | (26 | ) |
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Year Ended | January 1 | September 22 | Nine Month Period | |||||||||||||||||||||||
December 31 | through | through | Ended September 30 | |||||||||||||||||||||||
September 21, | December 31, | |||||||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2005 | 2006 | |||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||
All amounts are in NIS millions | ||||||||||||||||||||||||||
Increase (decrease) in other payables and credits (including long-term amounts) | 84 | (34 | ) | 6 | (39 | ) | (20 | ) | 194 | |||||||||||||||||
(85 | ) | (45 | ) | (82 | ) | (82 | ) | (138 | ) | 95 | ||||||||||||||||
Net cash provided by operating activities | 1,393 | 1,472 | 1,019 | 253 | 1,000 | 1,067 | ||||||||||||||||||||
Net cash used in investing activities | (508 | ) | (852 | ) | (444 | ) | (175 | ) | (445 | ) | (511 | ) | ||||||||||||||
Net cash provided by (used in) financing activities | (603 | ) | (1,068 | ) | (536 | ) | 1,650 | (536 | ) | (2,210 | ) | |||||||||||||||
Increase (decrease) in cash and cash equivalents | 282 | (448 | ) | 39 | 1,728 | 19 | (1,654 | ) | ||||||||||||||||||
Balance of cash and cash equivalents at beginning of the period | 171 | 453 | 5 | 44 | 5 | 1,772 | ||||||||||||||||||||
Balance of cash and cash equivalents at end of the period | 453 | 5 | 44 | 1,772 | 24 | 118 | ||||||||||||||||||||
C. | Differences between Israeli GAAP and US GAAP |
1. Effect of inflation |
In accordance with Israeli GAAP: |
In accordance with US GAAP: |
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2. | Push-down accounting |
In accordance with Israeli GAAP: |
In accordance with US GAAP: |
a. New basis of accounting: |
September 21 | ||||
2005 | ||||
NIS millions | ||||
Current assets | 1,051 | |||
Property, plant and equipment | 1,338 | |||
Other assets | 301 | |||
Liabilities | (1,098 | ) | ||
Definite life intangible assets acquired licenses | 346 | |||
Definite life intangible assets acquired customer base | 714 | |||
Indefinite life brand name | 468 |
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September 21 | ||||
2005 | ||||
NIS millions | ||||
Goodwill | 3,283 | |||
Deferred taxes | (134 | ) | ||
Total cash consideration paid for equity interests, including direct acquisition cost | 6,269 | |||
b. Primary changes to the balance sheet |
(1) The reduction of the carrying value of property, plant and equipment, which have been recorded using the estimated replacement cost fair market value; | |
(2) The recording of a value for brand name; | |
(3) The recording of a value for customer base; | |
(4) Adjustment to deferred tax assets resulting from the above changes; | |
(5) The recording of a value for goodwill; | |
(6) The recording NIS 2,970 millions of push-down debt; | |
(7) The elimination of deferred revenue; | |
(8) An increase to the shareholders equity in respect of these adjustments. |
c. Primary changes to the income statement |
(1) A decrease in costs of revenue due to lower level of depreciation from the reduced depreciable base of property, plant and equipment; | |
(2) An increase in costs of revenue due to amortization of the acquired customer base; | |
(3) An increase in interest expenses resulting from the push-down debt; | |
(4) A decrease in the deferred tax expenses resulting from the above adjustments. |
d. Brand names and goodwill |
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e. Customer base |
3. | Property, plant and equipment |
In accordance with Israeli GAAP: |
In accordance with US GAAP: |
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4. | Embedded Derivatives |
In accordance with Israeli GAAP: |
In accordance with US GAAP: |
5. | Revenue recognition — free air time sold together with a handset |
In accordance with Israeli GAAP: |
In accordance with US GAAP: |
6. | Asset Retirement Obligations |
In accordance with Israeli GAAP: |
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In accordance with US GAAP: |
7. | Deferred issuance expenses in respect of debentures |
In accordance with Israeli GAAP: |
In accordance with US GAAP: |
D. | US GAAP (Supplementary Information) |
1. Deferred taxes |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
Deferred tax assets: | ||||||||||||
Provision for employee benefits, net | 4 | 1 | 1 | |||||||||
Allowance for doubtful debts | 59 | 49 | 54 | |||||||||
Hedging transactions | — | (2 | ) | 8 | ||||||||
Tax losses | 3 | 3 | 3 | |||||||||
Gross total deferred tax assets | 66 | 51 | 66 | |||||||||
Valuation allowance — in respect of carryforward tax losses | (3 | ) | (3 | ) | (3 | ) | ||||||
Net deferred tax assets | 63 | 48 | 63 | |||||||||
Deferred tax liabilities: | ||||||||||||
Property, plant and equipment and other assets, net | (249 | ) | (232 | ) | (221 | ) |
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December 31 | |||||||||||||
September 30 | |||||||||||||
2004 | 2005 | 2006 | |||||||||||
NIS millions | NIS millions | NIS millions | |||||||||||
Push down adjustments: | |||||||||||||
Property, plant and equipment and other assets | — | 184 | 158 | ||||||||||
Intangible asset | — | (302 | ) | (263 | ) | ||||||||
Push down interest expense | — | 14 | — | ||||||||||
Other | 23 | 8 | 9 | ||||||||||
Net deferred tax liabilities | (226 | ) | (328 | ) | (317 | ) | |||||||
Deferred taxes are included in the balance sheet as follows: | |||||||||||||
Other receivables | 64 | 53 | 64 | ||||||||||
Long-term liabilities | (227 | ) | (333 | ) | (318 | ) | |||||||
(163 | ) | (280 | ) | (254 | ) | ||||||||
Reconciliation of income tax expense: |
Nine Month Period Ended | |||||||||||||||||||||
Year Ended December 31 | September 30 | ||||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | |||||||||||||||||
(Unaudited)- | |||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | |||||||||||||||||
Income before income taxes as per the income statement | 693 | 901 | 707 | 671 | 606 | ||||||||||||||||
Tax rate | 36 | % | 35 | % | 34 | % | 34 | % | 31 | % | |||||||||||
Tax calculated according to the main tax rate | 249 | 315 | 240 | 228 | 188 | ||||||||||||||||
Increase (decrease) in tax resulting from: | |||||||||||||||||||||
Non-deductible interest expenses | — | — | — | — | 39 | ||||||||||||||||
Other Non-deductible expenses and non taxable income, net | 8 | 4 | 4 | 4 | 4 | ||||||||||||||||
Taxes in respect of prior years | — | 2 | — | — | 3 |
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Nine Month Period Ended | ||||||||||||||||||||
Year Ended December 31 | September 30 | |||||||||||||||||||
2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
(Unaudited)- | ||||||||||||||||||||
NIS millions | NIS millions | NIS millions | NIS millions | NIS millions | ||||||||||||||||
Change in deferred tax balances due to reduction in tax rate | — | (32 | ) | (27 | ) | (27 | ) | — | ||||||||||||
Other, net | (7 | ) | (8 | ) | (1 | ) | 6 | (2 | ) | |||||||||||
250 | 281 | 216 | 211 | 232 | ||||||||||||||||
2. | Assets retirement obligations: |
December 31 | ||||||||||||
September 30 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
NIS millions | NIS millions | NIS millions | ||||||||||
Balance at the beginning of the period | 6 | 9 | 10 | |||||||||
Liability settled during the period | (1 | ) | (2 | ) | (1 | ) | ||||||
Accretion expenses | 1 | 1 | 1 | |||||||||
New liability | 3 | 2 | 2 | |||||||||
Balance at the end of the period | 9 | 10 | 12 | |||||||||
3. | Segment information |
4. | New accounting standards |
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