hot - telecommunication systems ltd. consolidated financial

Transcription

HOT - TELECOMMUNICATION SYSTEMS LTD.
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011
NIS IN MILLIONS
INDEX
Page
2
Auditors' Report
Consolidated Balance Sheets
3-4
Consolidated Statements of Comprehensive Income
5
Consolidated Statements of Changes in Equity
6
Consolidated Statements of Cash Flow
Notes to the Consolidated Financial Statements
Appendix to the Consolidated Financial Statements - List of Principal
Investee Companies
------------
7-8
9-131
132
Kost Forer Gabbay
Kasierer
3 Aminadav St.,
Tel Aviv 67067
&
Telephone no. 03-6232525
Fax: 03-5622555
www.ey.com
AUDITORS' REPORT
To the Shareholders of
HOT - TELECOMMUNICATION SYSTEMS LTD
We have audited the accompanying consolidated balance sheets of HOT - Telecommunication Systems Ltd.
(hereinafter - “the Company”) as of December 31, 2011 and 2010 and the related consolidated statements of
comprehensive income, changes in equity and cash flows for each of the years ended December 31, 2011, 2010 and
2009. These financial statements are the responsibility of the Company’s Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on our audits.
The Company's financial statements as of December 31, 2009 and for the year ended on that date were audited
jointly by us and the firm of Somech Hayekin.
We conducted our audit in accordance with generally accepted auditing standards in Israel, including those
prescribed by the Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of the Company and its subsidiaries as of December 31, 2011 and 2010, and the results of their operations
changes in their equity and cash flows for each of the years ended December 31, 2011, 2010 and 2009, in
conformity with International Financial Reporting Standards (IFRS) and with the provision of the Israeli Securities
Regulations (Annual Financial Statements) - 2010.
Without qualifying our above opinion, we hereby draw attention to Notes 1 and 26 to the consolidated financial
statements regarding claims filed against the Group and restrictions placed by legislation and supervisory
arrangements, including the Second Channel Law on the subject of Digital Broadcasting Stations (as stated in Note
1A(4)b(1)), which could have a material adverse effect on the Group's business and on its operating results.
Tel-Aviv
March 20, 2012
KOST FORER GABBAY & KASIRER
Certified Public Accountants
FREE TRANSLATION FROM ORIGINAL DOCUMENT IN HEBREW- FOR INFORMATION ONLY
CONSOLIDATED BALANCE SHEETS
Note
December 31
2011
2010
NIS in millions
Current Assets
Cash and cash equivalents
Designated cash
Trade receivables
Other receivables
Inventory
5A
5B
1
7
8
Total current assets
61
973
73
22
6
626
681
22
-
238
996
81
13
22
92
96719
897
66212
76
17
31
8
96219
192
66117
93
16611
16118
16119
16983
Non-Current Assets
Long-term trade receivables
Movie and program broadcasting rights
Investment in financial asset available for sale
Other long-term receivables
Fixed assets, net
Intangible assets, net
Goodwill
Deferred taxes
3
61
66
69
62
61
61
21
Total non-current assets
The accompanying notes form an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
Note
December 31
2011
2010
NIS in millions
Current Liabilities
61
26
67
68
63
Credit from financial institutions
Current maturities of debentures
Trade payables
Other payables
Provision for legal claims
Total current liabilities
971
16
816
926
618
)* 223
112
)* 226
279
66721
66967
121
66293
111
22
29
912
)* 26212
)* 671
97
68
18
26381
26116
31
66112
96
26
623
31
66172
3
17
)262(
66396
66126
16119
16983
Non-Current Liabilities
Loans from financial institutions
Debentures
Other long-term liabilities
Advanced received for terminal equipment installation
Employee benefit liability, net
Deferred taxes
21
26
22
29
21
Total non-current liabilities
27
Equity
Share capital
Share premium
Reserve on share-based payments
Capital reserve from available for sale financial asset
Retained earnings (accumulated loss)
*)
Reclassified - see Note 2X.
March 20, 2012
Date of the approval of the
Financial Statements
Stella Handler
Chairperson of the
Board of Directors
Hertzel Ozer
CEO
Jean-Luc Berrebi
Deputy CEO and CFO
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Note
Year ended
December 31
2011
2010
2009
NIS in millions
(except for per share data)
28A
96972
96212
96623
28B
718
66126
111
66133
727
66728
Total cost of producing revenues
26923
26912
26271
Gross profit
66121
831
112
)692(
)623(
)621(
)691(
)222(
619
)662(
)212(
)612(
)661(
)689(
98
121
236
272
96
)291(
61
)216(
7
)212(
226
611
73
611
)1(
)1(
926
611
81
Changes in the fair value of an available for sale
financial asset less tax effects
)91(
)2(
62
Total other comprehensive income (loss)
)91(
)2(
62
Total comprehensive income
911
612
33
Basic net earnings
2426
6493
6462
Diluted net earnings
2498
6493
6462
Revenues
Cost of producing revenues
Depreciation and amortization
Other operating expenses
General and administrative expenses
Sales and marketing expenses:
Amortization of intangible assets
Other sales and marketing expenses
Other income (expenses), net
28C
28C
28E
Operating income
Financing income
Financing expenses
28D
28D
Income before taxes on income
Taxes on income (tax benefit)
25
Net income
Other comprehensive earnings (loss) (after tax effects):
Net earnings per share attributable to shareholders in
the Company (in NIS):
29
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Share
capital
Share
premium
Reserve on
share-based
Retained
payment
earnings
transactions
(losses)
NIS in millions
Audited
Capital
Reserve on an
available for
sale financial
asset
Total
Equity
31
66116
62
)219(
27
66962
Net income
Total other comprehensive income
-
-
-
81
-
62
81
62
Total comprehensive income
Change in the terms of a sharebased payment to a liability
Exercise of options into shares
Cost of share-based payment
-
-
-
81
62
33
-
8
6
-
)3(
)6(
6
-
-
31
66171
9
)968(
16
66266
-
-
-
611
-
)2(
611
)2(
-
2
-
)6(
7
611
-
)2(
-
612
6
7
31
66172
3
)262(
17
66126
-
-
-
926
-
)91(
926
)91(
6
)* -
82
22
926
-
)91(
-
911
89
22
31
66112
96
623
26
66396
Balance as of January 1, 2009
)*
Balance as of December 31, 2009
Net income
Total other comprehensive loss
Total comprehensive income (loss)
Net income
Total other comprehensive loss
Total comprehensive income (loss)
Issuance of shares
Balance as of December 31 2011
*)
)*
-
Represents an amount lower than NIS 1 million.
)*
)6(
6
CONSOLIDATED STATEMENTS OF CASH FLOW
Year ended
December 31
2010
NIS in millions
2011
2009
Cash flow from operating activities
Net income
926
611
81
116
689
611
1
61
63
22
661
191
619
)6(
)1(
)1(
23
7
32
761
628
)1(
)2(
1
6
621
66661
838
381
)1(
)96(
)2(
)21(
6
)1(
29
2
)611(
2
)62(
)8(
)8(
)98(
11
61
633
)1(
)69(
21
62
)98(
)21(
21
)62(
1
)9(
6
)626(
639
)91(
)611(
2
1
)621(
6
21
)621(
9
)2(
3
)31(
)32(
)691(
66221
66619
366
Adjustments required to present cash flows from current activities:
Adjustments to items in statement of income:
Depreciation of fixed assets, including the updating of the
impairment provision
Amortization of intangible assets
Gain on the disposal of fixed assets
Taxes on income
Change in employee benefit liabilities, net
Linkage differentials on debentures
Revaluation of other long-term liabilities
Financing and other expenses, net
Changes in asset and liability items:
Increase in trade receivables
Decrease (increase) in other receivables and long-term receivables
Decrease (increase) in movie and program broadcasting rights
Increase in subscription acquisition costs
Decrease in inventory
Increase in non-current trade receivables
Increase (decrease) in trade payables
Increase in other payables
Increase (decrease) in provision for legal claims
Increase (decrease) in other long-term liabilities
Increase (decrease) in advances received for installation fees and
deposits for terminal equipment, net
Cash paid and received during the course of the year for:
Interest paid
Interest received
Taxes paid
Dividends received
Net cash generated from operating activities
CONSOLIDATED STATEMENTS OF CASH FLOW
2011
Year ended
December 31
2010
NIS in millions
2009
Cash flows from investment activities
Purchase of initially consolidated, consolidated company (A)
Acquisition of fixed assets and intangible assets
Consideration from the disposal of an asset held for sale (real
estate)
Consideration from the disposal of fixed assets
Repayment (investment) in designated cash, net
)281(
)193(
)128(
)189(
626
1
6
23
)12(
Net cash used in investing activities
)838(
)132(
)791(
)212(
729
)26998(
96
)13(
66281
89
)962(
111
)732(
26
)23(
-
)622(
)1(
2
)11(
-
)927(
)162(
)677(
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
61
6
)6(
2
)6(
9
Cash and cash equivalents at the end of the year
61
1
2
172
144
Cash flows from financing activities
Short-term credit from banking institutions, net
Receipt of long-term loans from banking institutions
Repayment of long term loans from banking institutions
Increase in other long-term liabilities
Repayment of other long-term liabilities
Issuance of debentures
Issuance of share capital
Net cash generated by financing activities
(A) Purchase of initially consolidated, consolidated company
Working capital (Except for cash and cash equivalents)
Non-current liabilities, including in respect of contingent
consideration
Fixed assets
Intangible assets
Goodwill
Other long-term fixed assets
Deferred tax liabilities, net
316
403
(640)
(389)
(207)
(83)
120
(480 )
(B) Significant Non-cash Transaction
Acquisition of fixed assets on credit
241
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: - GENERAL
A.
General description of the Group
1.
2.
HOT Telecommunication Systems Ltd. (hereinafter – the Company) operates,
independently and through wholly-owned subsidiaries and consolidated partnerships, in
four main areas:
a)
Providing multi-channel television broadcasting services to subscribers.
b)
Providing in country landline telecommunication services.
c)
Providing Cellular telecommunication services- beginning from November 28,
2011, the date of first consolidation of Mirs communication Ltd (hereinafter –
Mirs). See Note 3 on the subject of the completion of the acquisition of Mirs entire
share capital by the Company on this issue.
d)
Providing ISP services- as of December 31, 2011 an immaterial service.
The legal merger
On May 8, 2006 the merger agreement between the cable companies, within the
framework of which the Company gave an undertaking to purchase the operations of the
other cable companies in the broadcasting and the telecommunications fields, in
consideration for the allocation of shares in the Company to the selling parties or to the
holders of the rights therein and the endorsement of the debts of the selling parties to the
Company, was signed.
On December 31, 2006 the merger transaction was completed and as a result, directly and
indirectly, all of the operations of the other cable companies in the broadcasting and the
telecommunications fields were transferred to the Company, including all of the
commitments, the assets and the liabilities (whether by means of the purchase of rights
and whether by means of the acquisition of operations). In continuation thereof, all of the
operations in the telecommunications field have been condenser in HOT Telecom.
3.
Application for the approval of a structural change
As part of a re-organization process, the Company is examining the possibility of
merging all of its operations in the broadcasting field, part of which are conducted within
the framework of the Company and some of which are conducted within the framework
of consolidated companies, into a new company that was set up for that purpose, HOT Yeudit Ltd. (hereinafter - HOT Yeudit), which will hold, inter alia, HOT Telecom, in
which the operations in the in country landline telecommunications field are conducted,
by way of the elimination of some of the consolidated companies. The main practical
effect of the re-organization process that is described above is the simplification of the
structure whilst creating a convenient and efficient structure for the routine operations.
The re-organization process, as described above, is conditional, inter alia, on the
completion of all of the activities that are required for the completion of the merger,
including the receipt of a pre-ruling from the tax authorities for the execution of the reorganization with a tax exemption, in accordance with the provisions of Chapter E'2 of
the Income Tax Ordinance, the ratification of the process by the Company's Board of
Directors and the receipt of additional approvals from the relevant regulatory bodies.
In December 2011, the Company presented an application for the execution of a
structural change with effect on December 31, 2011 to the Tax Authority in Israel,
according to which the Merger will be executed of all of the broadcasting operations that
are conducted in the Group within the framework of its concentration into Hot Yeudit. As
of the date of the approval of the financial statements, all of the approvals that are
required for the execution of the structural change have not yet been received.
NOTE 1: - GENERAL (Cont.)
4.
Multi channel television broadcasts
In this field, the Company, operating by itself and through subsidiary companies that are
wholly owned by it, directly and indirectly, supplies multi channel cable television
broadcasts for subscribers with a countrywide dispersal. The services in this field are
delivered through a national network of cables and under a general, non-exclusive cablebroadcasting license, which applies to all regions of the country, under a general, nonexclusive cable broadcasting license, which applies to Judaea and Samaria and under a
special license to operate a broadcasting center, which is owned by HOT Telecom.
The multi-channel television services include a variety of content, including series,
movies, sports broadcasts, children's programs, enrichment, entertainment and leisure,
music, culture, science, foreign languages and international news, using digital and
analogical broadcasting (in this connection, it should be noted that in July 2009 the Cable
And Satellite Broadcasting Council (hereinafter- the Council) gave its approval for the
Company to start the process of reducing the analogical broadcasts until they are
completely discontinued).
The transmission of the multi-channel television services via the digital infrastructure
enables the Company to offer dozens of channels as well as special services, such as
inter-active services. Furthermore, the cables network in its updated format enables to the
company to provide view on demand services (HOT VOD) as well as technology content
and channels using HD technology- innovative technology that enables a broadcast
viewing experience with better picture resolution and sound (The sharpness of the color
and sound). In addition, the Group offers Personal Video Recorder (PVR) services to its
digital subscribers through a converter that is marketed under the "Hot Magic"
commercial name, which in addition to the recording of the regular broadcasts, enables
the recording of broadcasts in accordance with the subscriber's decision, the editing of the
broadcasts and control over the timing of the broadcasts. In addition, during the course of
the year 2011 the Company launched, in a combined format, the PVR services as well as
the high definition quality viewing services (the HD-PVR converter).
Within the framework of the broadcasting operations, as aforesaid, the Company holds,
directly and indirectly, 100% of HOT Vision Ltd. (hereinafter- HOT Vision), which is
engaged in the preparation of content for screening and broadcasting by the cable
companies, and in additions it purchases content and produce original productions for the
Company and the consolidated companies. The said activity is conducted by the
Company through HOT Vision.
a)
Licenses in the broadcasting field
(1)
A general cable broadcasting license, which applies to all regions of the
country (hereinafter - the broadcasting license). The broadcasting license
that has been granted to the company is for a period of 15 years, starting on
April 30, 2002 and it can be extended with the approval of the Council for
additional periods of ten years each.
(2)
A license for the provision of cable television broadcasts (hereinafter – the
license), which was granted by the Head of the Civil Administration to the
Company in June 2006, in a number of settlements in Judaea and Samaria.
The license is in force until April 30, 2017 and it can be extended for
additional periods of ten years each, each time, subject to the conditions that
were stipulated in the license. The Company supplies cable television
broadcasting services in the said settlements under the license, in a similar
format to that supplied under the Company's general cable television
broadcasting license.
b)
Legislation and supervision
As aforesaid, the Group's operations in the broadcasting field are subject to a wide
range of legislation that arranges the activity in the telecommunications market in
Israel, including the Telecommunications Law and the rules thereunder as well as
the provisions of the broadcasting license.
The Group's operations in the broadcasting fields are also subject to specific
legislation applicable to television broadcasting such as the Classification, Marking
and Prohibition of Harmful Broadcasts Law, 2001 (under which commitment have
been placed upon the Company on the subject to the classification of the marking
of certain television broadcasts) and the Television Broadcasting (Subtitles and
Sign Language Translation) Law, 2005 (under which commitments have been
placed upon the Company on the subject of television broadcasts that relate to the
provision of subtitles and sign language translation for certain television programs
that are broadcasted by it).
The Group's broadcasting activity is also subject to supervision by the Ministry of
Communications and the Council for Cable and Satellite Television Broadcasting
(hereinafter - the Council), inter alia, in connection with the pricing of analog
services, broadcasting content, agreements with subscribers, the introduction of
new broadcasting channels and the termination of broadcasting channels. The
Company has been declared to be a monopoly in the multi-channel television for
subscribers broadcasting field and accordingly, the Anti-trust Director (hereinafterthe Director) is entitled to issue directives to it in accordance with the Anti-trust
Law.
(1)
The setting up of live digital broadcasting stations- The Digital Terrestrial
Transmission (DTT) (and the expansion of their activity)
In the light of the amendment to the Second Authority for Television and
Radio Law, the Second Authority was obligated to plan, set up and operate,
by itself or through others, digital terrestrial television channels for free
public reception and distribution of television broadcasts (The DDT
broadcasts). In August 2009, the Second Authority launched these
broadcasts nationwide, allowing the free public distribution of the television
channels of the Israel Broadcasting Authority ("IBA") (Channels 1 and 33),
the commercial television channels (Channels 2 and 10) and the Israeli
Knesset Channel (Channel 99). The establishment of the digital broadcasting
stations, as aforesaid, allows customers to watch each of the above five
channels for a non-recurring fee for the purchase of broadcast reception
equipment and for no additional fees whatsoever.
In January 2012 the Finance Committee of the "Knesset" (Israeli parliament)
approved the Draft Distribution of Broadcasts Via Digital Stations Bill –
2011 (hereinafter- the Draft Law) for its second and third readings. In
accordance with the Draft Law, inter alia, the DTT system will be expanded
within two years from the earlier of the date of the publication of the Law or
December 31, 2013, such that there will be added to it, inter alia, a radio
channel, which is to includes the regional and national radio channel, the
educational television channel if it should so request, a designated channel if
this has been requested by it, an additional IBA channel that has been
dubbed using HD technology – if this has been asked for by it (where as of
today there are two designated channels – a designated Russian language
channel and a designated Israeli and Mediterranean music channel, to which
a designated Arabic language channel will be added). However, the
broadcast of a designated channel over the five channels, is subject to the
existence of available capacity for this purpose.
The attachment of any of the said channels will be done at its request and in
consideration for the payment of a distribution fee.
The distribution fees will be set by the Minister of Communications and the
Minister of Finance and will be calculated in accordance with the payments
and the costs that are involved in the operation and maintenance of the DTT
system and any other operational payment, which is involved in the
distribution of the broadcast, except for set-up costs.
The Draft Law includes, inter alia, a prohibition on the collection of any
payment whatsoever from the public for the receipt of the broadcasts that are
distributed using the digital broadcasting stations in accordance with the
Draft Law.
It is also proposed that the Minister of Communications, after consultation
with the Minister of Finance, the Second Channel Authority and the Council
will be entitled to give instructions for the attachment of additional channels
that have asked to join the DTT system and its operations, and this in
consideration for the payment of distribution fees, as aforesaid.
In addition, in accordance with the draft law, as from January 1, 2014, the
DTT system will be transferred from the Second Authority to a public body,
a statutory entity or a government company, which are not broadcasters and
which are not supervisors of television or radio programs, which will be
appointed by the Minster of Communications and the Minister of Finance
with the Government's approval.
The draft law, which includes the expansion of the DTT system will be
presented for its second and third readings in the Knesset with the
attachment of qualifications from the Ministry of Finance.
In the Company's assessment, the DTT broadcasting and in particular the
addition of additional channels to the existing broadcasting system may
cause changes in the viewing habits of multi-channel television subscribers,
resulting in a significant reduction in the Company’s revenues and as a result
of this, having a significant adverse impact on the Company's business and
future business results. In the Company's management's assessment, as of the
date of the financial statements, there has been no material deterioration in
the Company's business or in its current operating results as a result of the
DTT broadcasts in their current format.
(2)
The commercial television channels - The transition from the concessions
method to a licenses method
Within the framework of the Amendment to the Second Authority for
Television and Radio (Amendment No. 33) (Transition from Franchises to
Licenses in Television Broadcasting) Law, 2010, whose legislative
proceedings were completed in February 2011 (hereinafter - the
Amendment), it is proposed that the scope of the content that is broadcast on
the commercial television channels be increased by way of a change in the
system that arranges the commercial television broadcasts by means of
transition from the current system of (exclusive) concessions to a system of
licenses that would be granted to entities that meet the threshold conditions
that are set in the Amendment and which will be in force for a longer period
by comparison with the current concessions.
In accordance with the Amendment, 2013 is the designated year for the
transition from a system of concessions to a system of licenses and every
commercial license holder will be entitled to be included within the
framework of the DTT broadcasts. Furthermore, the Amendment stipulates
that changes will take place in the channel numbers of the existing channels
as may be determined by the authorized bodies (the Council, The Second
Television and Radio Authority and the Minister of Communications).
In the Company’s assessment, the transition from a system of concessions to
a system of licenses could cause changes in the viewing habits of the multichannel television subscribers, to a significant decline in the Company's
revenues and as a result of this, there could be a significant negative impact
of the Company’s business and on its future business results.
(3)
VOD services and broadcasting via the internet network
The Video on Demand (VOD) service is an interactive service for the
broadcasting of content to the television converter, with which the customer
can view a range of content such as movies, series, shows, educational
content, content for children and teenagers and adult content, by ordering it
personally, as they choose.
In August 2007, the Telecommunications Law was amended so as to enable
additional suppliers of content to provide content supply services on
demand, on a broadband access network using IP technology. Furthermore,
the Council was empowered to grant licenses for on demand broadcasts,
which are transmitted via broadband infrastructure, and which are provided
at the assured quality and quality of service that is generally acceptable for
broadcasts using the digital method. It was further determined that in a case
in which an application for the receipt of a license for on demand
broadcasting has been presented to the Council, the Council is entitled to
decide that for the purposes of the broadcasting it is necessary to receive a
general cable television broadcasting license, taking note, inter alia, of the
characteristics of the broadcasts, their nature and the volume. As of the date
of the financial statements, no special licenses for on demand broadcasting
have been given under the said Amendment.
The company is taking action in order to improve and to promote its VOD
services by means of broadcasting additional sorts of content in a manner
that will enable every user to view their preferred content. It should be noted
in this connection that during the course of the year 2010, Yes began to
supply VOD services to its subscribers by means of converters on the
internet network, and as from that time the Company is no longer the sole
supplier of this service.
Furthermore, additional players in the field of activity, for example, those
that hold a commercial television concession, also offer similar services,
which constitute competition in this field of activity.
With the development of the swift internet networks, the use of technology
that enables broadcasting and the transmission of video content using
broadband internet infrastructures may well expand. This trend could also
affect the broadcasting field by way of a change in the viewing habits of the
final users.
(4)
The amendment of the Telecommunications Law on the subject of the
supply of a basic basket of broadcasts in consideration for access fees
(hereinafter- the narrow package)
Over the course of recent years, a proposal for the Amendment of the
Communications Law has been on the Knesset's agenda, within the
framework of which it is proposed, inter alia, that a holder of a general cable
broadcasting license will be entitled to demand payment from its subscribers
for connecting their homes to its broadcasting center; the payment is to be
based on the cost of the connection to the center with the addition of a
reasonable margin (hereinafter – the access fee). Furthermore, the
broadcasting license holder is required to enable the subscriber who pays
access fees to purchase a broadcasting channel in accordance with the
subscriber's demand or any other broadcast that is offered to subscribers for
purchase, separately, without conditioning the purchase of one channel on
the purchase of the other.
In accordance with the proposed Amendment, the owner of a general cable
broadcasting license is to provide all of its subscribers the Knesset Channel,
the IBA's channels (Channels 1 and 33), Channel 2 and Channel 10 without
collecting any fee apart from the access fee. In the event that the certain
channels are provided by an owner of a special cable-broadcasting license or
by an independent channel producer through the owner of a general cablebroadcasting license, the latter will not be entitled to collect any fee for the
channels besides the access fee collected from the final customers.
In accordance with the draft Amendment, the owner of a cable-broadcasting
license will be entitled to include commercials in its broadcasts in
consideration for a payment that it sets, subject to the rules that will be set in
the law. In May 2010, the Government withdrew this draft Amendment.
In the Company's assessment in so far as it may be required in the future to
provide a basic broadcasting package under a similar format to the aforesaid,
its business results may be adversely affected.
(5)
The impact on content and the specifications of the broadcasts
(a)
The Company's main activity in broadcasting field consists of
broadcasting the various channels under its multi-channel television
services. The Company is subject to regulatory restrictions in
connection with the ownership and production of channels, among
other things, as prescribed in the Communications Law and in the
Telecommunication and Broadcasting Rules (Owner of Broadcasting
License), 1987 (hereinafter - "the telecommunication rules").
According to the provisions of the Communications Law, as of the
date of the approval of the financial statements, the Company is
subject to restrictions regarding the number of channels that it may
produce by itself or in conjunction with another owner of a
broadcasting license, such that this number does not exceed two fifths
of the number of independent channels (as defined in the
Communications Law) which are broadcast by the Group. Similarly,
in the telecommunication rules and in accordance with the decision of
the Council approving the merger, additional restrictions were
imposed in this respect. In addition, the telecommunication rules
determine that the number of channels, which are produced by the
Company, shall not exceed at any time 20% of the number of its own
channels broadcast by it. In addition, the Company is allowed to hold
means of control in additional channels whose number may not
exceed 4% of the number of its own channels, provided that the
Company is not a controlling interest in those channels. Furthermore,
in accordance with the decision of the Director approving the merger,
the Group may hold means of control in Channel HOT 3 and HOT
Movies (formerly: Channel 3 and Channel 4) as well as in only four
other channels (unless the Director gives approval otherwise) and
additional restrictions have also been placed on connections with
channels.
(b)
In accordance with the provisions of the Telecommunications Law,
the telecommunications rules and the Council decisions, the Company
is required, inter alia, to invest in local productions at a rate of 8% of
its annual revenues from subscription fees. In the course of the years
2009, 2010 and 2011 the Company complied with the investment rate
that is required, as aforesaid. In this connection, it should be noted that
the Telecommunications Law empowers the Council to set the rate of
investment that is required, and solely that it not exceed 12% and it
shall not be less than 8% of the annual revenues from subscription
fees.
In this connection, in October 2011 the Council announced to the
Company that as from the year 2012 it would see its income from
subscription fees, which constitute the basis for the calculation of the
duty to produce original content, as including all of the payments that
are paid by its subscribers for the purpose of receiving their broadcasts
and receiving their services, including income from terminal
equipment and its instillation, and this was despite the fact that in
accordance with the policy that the Council has implemented up to
now on the matter of the inclusion of the income from terminal
equipment for the purpose of calculating the duty to produce original
productions, was made conditional upon a mechanism that was based
on the profitability of this component of income, and in previous years
income from terminal equipment and its instillation has not been
included in the basis for the calculation of the original production
requirement. In response to the Company's claims, which were
delivered to the Council on January 12, 2012, the Council determined
that the Company would be entitled to complete the amount of the
additional investment for the year 2012 over a period of three years of
investment, in equal amounts for each of the years 2012 to 2014. In
the Company's assessment, it is expected that there will be a
significant increase in the amount of the annual investment in original
productions that the Company will be required to make as from the
year 2012.
(c)
The Council is entitled to grant a special cable-broadcasting license,
and the holders of the broadcasting license are required to transmit the
broadcasts of the special license holders, as aforesaid, and solely that
the capacity that is available to the holders of the general broadcasting
licenses is not to be less than five sixths. Furthermore, in accordance
with the Telecommunications Law, the Council is entitled to grant
special licenses for designated channels with the intention of bringing
about an increase in the number of parties who are involved in
broadcasting to the public. In accordance with the conditions set by
the Council for the merger of the cable companies and in accordance
with the terms set by the Director for the merger of the cable
companies, the Company is to reserve a minimal capacity for holders
of special licenses. In accordance with a decision by the Minister of
Communications on the subject of the setting of the transmission fees,
dated August 23, 2007, the Company is entitled to collect transmission
fees for the transmission of the broadcasts of a holder of a special
license in accordance with the mechanism set in the decision. In
accordance with Amendment 44 to the Telecommunications Law as
from July 2010, the designated channels will be exempted from the
payment of transmission fees for the transmission of their broadcasts
(it should be clarified that there is nothing in the said Amendment that
detracts from the other contractual authorities between the Company
and the owners of the designated channels).
(d)
The amendment of the Council's policy on the subject of the
conditions for the granting of special licenses
On September 10, 2009, the Council made a decision to amend its
existing policy on the subject of the conditions for the grant of special
licenses, the main points of which are: (a) the cancellation of the
prohibition in the policy to grant special licenses for movie channels.
In this connection, it was determined that the Council would, within
six months from the date of its decision, examine whether to cancel
the prohibition in the policy regarding the grant of special licenses to
series channels; (b) the examination of the cancellation of the
restriction in the policy in respect of the number of licenses to be
granted to one body, which was to be done within six months from the
time of the said decision; (c) the imposition of certain restrictions on
original productions in certain cases where more than one license is
requested.
As of the date of the financial statements, no special broadcast
licenses have been issued yet in accordance with the said Amendment.
(6)
The Council's decision on the subject of the manner of the collection of
payment from the Company’s customers
On September 22, 2011 the Council passed a decision in accordance with
which the Company's broadcasting licenses will be amended such that the
Company may collect payment from its suppliers for the Company's services
solely and exclusively in respect of the month that has passed and not in
respect of the current month. In accordance with the letter from the
Chairman of the Council dated October 26, 2011, the Amendment will enter
force and will apply to new subscribers as well as to customers whose period
of commitment has ended and who have chosen to renew the subscription
agreement from the time of the decision, on December 1, 2011. In addition,
in accordance with what is stated in the decision, at the end of a period of 12
months from the time of the decision, the Amendment will apply to all of the
Company's subscribers.
In the Company's assessment, the Council's decision is likely to cause a
worsening of the Company's business results and primarily a non-recurring
worsening of the Company's cash flows.
(7)
The amendment of the Telecommunications Law (Amendment No. 50) 2011
On July 27, 2011, the "Knesset" passed an Amendment to the
Telecommunications Law (Amendment No. 50) - 2011 at the second and
third reading (in this section – the amendment to the law). The main points
of Amendment to the Law are as follows:
(a)
A license holder will not be entitled to collect any payments
whatsoever from a subscriber, who has entered into a commitment
with it after the entry of the Amendment to the Law into force, who
cancels the commitment agreement with it, and it will not be entitled
to prevent them from receiving a benefit that they would receive were
it not for the cancellation; despite the aforesaid, the license holder will
be entitled to collect the balance of the payments for the terminal
equipment that was purchased by the subscriber and the debts that the
subscriber has accumulated.
(b)
A license holder who has agreed with a subscriber that has purchased
terminal equipment from it that the subscriber will pay for the
equipment in installment payments, will not be entitled to make the
balance of the subscriber's payments for the terminal equipment
payable immediately, in the event that the subscriber cancels the
commitment agreement.
(c)
In relation to existing subscribers, who entered into a commitment
with the license holder before the entry of the Amendment to the Law
into force, the payment that the license holder is entitled to collect
from a subscriber, who cancels the commitment agreement with them
during the course of the period of the commitment, may not exceed
8% of the subscriber's average monthly bill for services from the
license holder, which the consumer had during the course of the
period of the agreement until it was cancelled, multiplied by the
number of months remaining until the end of the period of the
commitment (hereinafter- the ceiling amount). The ceiling amount
does not include a payment for the purchase of terminal equipment.
Furthermore, the ceiling amount is not to include a payment that has
been made by the subscriber for rental or borrowing services in
respect of terminal equipment from the license holder. This provision
will apply at the end of a period of three months from the time of the
entry of the Amendment to the Law into force and thereafter.
(d)
The Amendment will not apply to a subscriber, whose average
monthly bill for services from the license holder up to the time of the
cancellation exceeds NIS 5,000.
In accordance with the Amendment to the Law, the Minister of
Communications is entitled: (1) to defer the date on which a certain type of
license starts for a period that shall not exceed six months, if he is satisfied
that there exists fear of material damage to the regular course of business of
the holders of the licenses of that sort; (2) determine, with the approval of
the Finance Committee of the Knesset, that the amount determined in the
definition of "a subscriber" within the framework of the Amendment to the
Law, shall be different in respect of a certain type of licenses. A
determination, as aforesaid, shall be for a period not exceeding one year.
The Minister is entitled to return and extend the said period for additional
periods, which may not exceed one year each time.
The Company begun to implement the provisions of the Amendment to the
Law in respect of new subscribers in August 2011 and as from the beginning
of November 2011, in respect of existing subscribers. In the Company's
assessment, a significant negative impact on the Group's business and on its
future business results may arise as a result of the Amendment to the Law.
(8)
The entry of new competitors into the broadcasting field, via the internet and
cellular services
During 2009, an invitation was published by the Council and the Ministry of
Communications to present positions on the question of the arrangement of
broadcasting on new platforms and technologies, with the objective of
examining whether there is a need for regulatory arrangement of video
content being transmitted via the internet network. During the course of
September 2009, a hearing was held on the subject, within the framework of
which positions were heard from various parties, with the Company among
them. It should further be noted that the Company made an approach to the
Minister of Communications and the Council and it presented its position,
according to which the internet broadcasting activity of telecommunications
companies that compete with the Company is "cable broadcasts" as defined
in the Law and that accordingly any entity that transmits these broadcasts
should comply with all of the requirements in the Law and in the
Regulations, including the duty of structural separation, as those apply to the
Company.
On October 11, 2011 the recommendation of a joint team of the Council and
the Ministry of Communications on the subject of the distribution of content
to the public at large via electronic telecommunications networks
(hereinafter- the contract services) was published. The central
recommendation is to arrange the contract services on electronic networks,
such as the internet, in so far as they meet certain tests, which were detailed
within the framework of the recommendations.
An additional possible platform for the transmission of content is the cellular
infrastructure.
As of the date of these financial statements, the Minister of Communications
has not yet made a decision in respect of the said recommendations.
In the Company's assessment, the entry of new competitors into the
broadcasting via the internet field, as aforesaid, and especially if those
competitors are not made subject to the regulations to which the Company is
subject, will have a significant impact on the character of the competition in
the field, which is expected to increase. In the Company's assessment, the
aforesaid may have an extremely negative impact on its business in the
broadcasting field.
(9)
Government committees for examining the broadcasting field
In March 2008, the Grunau Committee (a public committee appointed to
formulate detailed recommendations regarding policy and rules of
competition in the Israeli communications market) published its conclusions,
including recommendations relating to the multi-channel broadcasting
sector. Inter alia, the Committee recommended: the offering of "a narrow
basic package of channels" comprising five to ten channels; the removal of
the restrictions that apply to competitors in respect of content; the need for
the reexamination of the price that a special license holder is to pay to the
holder of a general license for transmission of their broadcasts. On August
13, 2008, the Minister of Communications published a press release on the
subject of the adoption of the recommendations of the Grunau Committee
and on the subject of the organization of the multi-channel television market,
the Minister of Communications decided to carry out a comprehensive
examination of all levels of the broadcasting field and to appoint a
committee for this purpose, to formulate recommendations with regards to
the policy and rules of competition in the multi-channel television and the
commercial television fields. Such a committee, as noted, was not appointed,
in the light of the appointment of an inter-ministerial committee (hereinafter
- the Mordechai Committee) to examine the implications of a change in the
method by which the commercial television broadcasting field is organized.
Beside the recommendations of the Mordechai Committee in 2009, in
connection with the commercial television broadcasting field (including,
inter alia, the transition from the concessions method to licensing and the
expansion of the range of channels in the DTT broadcasts),
recommendations were also made in the multi-channel television
broadcasting field, inter alia, as follows: (1) the duty to offer a narrow
package of channels in consideration for the payment of an access fee; (2)
the deferral of the time for the broadcast of advertizing by a license holder to
January 2012; (3) the distribution of special channel broadcasts without
collecting payment over and above the access fee and as part of the narrow
basic channel of channels.
In February 2010 the Ministry of Communications announced that the
Minister of Finance and the Minister of Communications has appointed a
committee that was to be headed by the Director General of the Ministry of
Industry and Trade, Mr. Amir Hayek (hereinafter - the Hayek Committee),
which would examine two main subjects and make recommendations on
their behalf: (a) a new arrangement for charge rates for the Bezeq company,
with the arrangement being adapted for the changing environment in the
telecommunications sector and the policy of competition; and (b) the
determination of charge rate for various sections, which relate to the supply
of services in the wholesale market in the landline segment by the owners of
the universal infrastructure and the setting of charge rates for the completion
of conversations on the fixed-line networks. On March 3, 2011, the Hayek
Committee published recommendation on the structural issues, which were
presented for comments by the public. For details in respect of the final
recommendations of the Hayek Committee, see section 5b(6) below.
5.
The in country landline telecommunications field
HOT Telecom, a partnership that is wholly owned, directly and indirectly, by the
Company, is engaged in the provision of in country landline telecommunications services
on the cables infrastructure. The services in this field are provided under a general license
for the provision of in country landline telecommunications services (hereinafter – a
national operator license). The national operator license that was granted to HOT
Telecom permits, inter alia, the provision of access service to fast internet providers
(transmission) on the cables infrastructure, the provision of in country landline telephony
services, data communications services and digital and optical transmission in a range of
speeds and band widths, as well as internet protocol virtual private line data transmission
services (IPVPN). In addition, as of the time of the report, the Group's
telecommunications network allows the provision of transmission services on optical
fibers using Synchronous Digital Hierarchy (SDH) or Internet Protocol (IP) technology.
a)
Licenses in the in country landline telecommunications field
(1)
HOT Telecom operates in accordance with a national operator license, which
was granted to it by the Ministry of Communications in November 2003
(hereinafter- the national operator license).
The said national operator license was given for a period of twenty years and
it can be extended with the approval of the Minister of Communications, for
additional periods of ten years each.
(2)
In June 2006 the Head of the Civil Administration granted HOT Telecom a
license for the provision of telecommunications services in a number of
settlements in Judaea and Samaria.
The license that was granted is in place until November 30, 2023 and it can
be extended for an additional period of 10 years each time, subject to the
conditions that were stipulated in the license. HOT Telecom provides
telecommunication services under the license, in a similar format to that
which it provides under the national operator license, in a number of
settlements in Judaea and Samaria.
(3)
b)
In September 2007 HOT Telecom was awarded a special license by the
Ministry of Communications, for the operation of broadcasting centers,
which replaced the previous licenses that the Company and the other cable
companies held prior to the merger transaction. The special license will
remain in force so long as the broadcasting license, which has been granted
to the Company is in force, but no later than August 31, 2012, unless it has
been extended with the approval of the Director.
HOT Telecom's operations in the communications field are subject to the
supervision of the Minister of Communications and the Ministry of
Communications, who are empowered to arrange and to permit the provision of
services in the telecommunications field. The policy of the Minister of
Communications and the Ministry of Communications has a significant impact on
HOT Telecom's operation in this field.
In addition, HOT Telecom's operations in the telecommunications field are subject
to the national operator license, which stipulates conditions and restrictions on a
wide range of aspects.
(1)
Restrictions on the operations of the Bezeq company, which constitutes a
monopoly in the field
In May 2010, with the decline in Bezeq's market share in the landline
telephony field to less than 85%, the Ministry of Communications
announced the amendment of the license of the Bezeq company and of its
subsidiary companies, in respect of the possibility of marketing joint baskets
of services. In July 2010 the Ministry of Communications announced that in
continuation of the amendment of the licenses, as aforesaid, Bezeq would
start to offer a basket of services in co-operation with the subsidiary
companies in its group. As of the time of these financial statements, to the
best of the Company's knowledge, Bezeq markets two telecommunications
baskets, which include: (1) internet infrastructure services (ADSL) as well as
the ISP services of its subsidiary company- Bezeq International; and (2)
internet infrastructure services (ADSL), the ISP services of its subsidiary
company- Bezeq International and fixed-line telephony services. On
February 3, 2011 the Ministry of Communications published a hearing for
Bezeq and its subsidiary companies, in accordance with which the Ministry
intended to amend their licenses in the wake of the decline of Bezeq's
market share below 85%, in the business sector as well, in a manner that
would enable Bezeq and its subsidiary companies to market joint baskets of
services to business customers as well. HOT Telecom has presented its
position in connection with the hearing.
In the Company’s assessment, the amendment to the licenses of Bezeq and
its subsidiary companies and the marketing of joint baskets of services could
lead to a significant decrease in the Group's revenues, having a negative
impact on the Group's business results. As of the time of these financial
statements, the said impact is not yet apparent.
(2)
The obligation to provide service
HOT Telecom is committed to provide service to anyone who requests it in
the entire region covered by the license. The requirement to provide the
service in certain cases causes a situation in which HOT Telecom is
committed to provide service where this is not economically feasible and the
Company has made approaches to the Ministry of Communications
requesting an exemption from the requirement to provide service to various
people who have requested it. In accordance with the provisions of national
operator license, it is stipulated that the Minister of Communications is to
appoint an exceptions committee, which is to deal with applications for an
exemption from the holder of a license. On January 23, 2012 the
Telecommunications Regulations (Telecommunications and Services)
(Consultative Committee) (Temporary Directive)- 2011 was published
(hereinafter in this section – the Regulations).
The regulation contain provisions in respect of the appointment of a
consultative council (in this section – the Council), whose role is to consider
applications that have been presented by holders of a national license, with
the objective of restricting the requirement to provide service that applies to
them under Regulation 18(C)(3) of the Telecommunications Regulations
(Telecommunications and Broadcasts) (procedures and conditions for the
receipt of a general license for the provision of in country landline
telecommunications services) – 2000, or under the provisions of the national
operator license that was granted to them, which commits them to providing
service to anyone who requests it.
In addition, the Committee is to consider applications that have been
presented by a company that holds a license with the objective of restricting
the requirement to provide the service, which applies to it under Regulations
26 and 27 of the Telecommunications Regulations (Instillation, operation
and maintenance) - 1985, or under the provisions of the general license that
has been granted to it, which require the company to provide its services to
anyone who asks for them. The Regulations contain provisions relating to
the composition of the Committee, the arrangements for its work, the
considerations that it is to take into account when it comes to consider an
application and in respect of its recommendations.
In continuation to the publication of the Regulations, on November 17, 2011
the Minister of Communications appointed a consultative committee, which
has five members, in accordance with Regulation 2 of the Regulations. HOT
Telecom has presented applications to the Committee, in respect of the
demands to receive service, which had been presented to it immediately
before the entry into force of the Regulations.
It should be noted that in accordance with the provisions of the national
operator license, the non-compliance with the requirement to connect, as
aforesaid, could, inter alia, lead to the cancellation of the license or be
grounds for the non-extension of the period of the license, as well as creating
an exposure to lawsuits from citizens who have not been connected to the
cables infrastructure. It should be noted in this connection that in past an
application for recognition as a class action was filed against the Company
in respect of the non-connection of settlements to the cables network, which
were turned down and the applicant has filed an appeal against the turning
down of the action. Furthermore, on January 3, 2011, the Company received
an application for the approval of a further class action on the allegations
that the Company has breached the provisions of the national operator
license in that it has avoided connection settlements on the periphery to its
infrastructure.
(3)
The provision of broadband telephony services (VOB)
In January 2007, the Ministry of Communications published its policy for
the regulation and licensing of the provision of telephony services via the
broadband internet infrastructure - Voice over Broadband (VOB). Within the
framework of the policy decision, it was stipulated that the provision of in
country landline VOB services was to be organized within the framework of
a designated in country operator license that would be given in accordance
with the provisions of the Telecommunications Regulations
(Telecommunications and Broadcasting) (Proceedings and conditions for
receipt of a designated general license), 2004. In accordance with the said
license, the provision of telephony services using VoIP technology would be
permitted using the broadband access service of a national operator that
holds a general national operator's license (as of the date of the approval of
the financial statements, HOT Telecom or Bezeq).
This policy enables a sort of virtual "unbundling", with the supply of the
service making use of sections of the access network, but without making
payment to the owner of the network for its use and whilst competing with it
in the provision of telephone services, except for a reciprocal connection fee.
It was further decided that the payment arrangement in respect of the
reciprocal connection fee was to be examined by the Ministry of
Communications no later than by February 1, 2009. Despite the fact that this
date has passed, the arrangement remains in place, which means that the
reciprocal connection fee in respect of a conversation that ends on a VOB
operator network is charged at an identical rate as the reciprocal connection
fee to the general national operator network. . As of the date of the financial
statements, a number of companies are providing VOB services in
accordance with the Ministry of Communications' policy on this matter,
under designated domestic operator licenses that have been issued to them.
(4)
The use of the Israel Electricity Corporation's infrastructure for the provision
of telecommunications services
In January 2010, the Ministry of Communications announced that in light of
its desire to exploit the existing infrastructure of the Israel Electricity
Corporation Ltd. (IEC) with the objective of increasing the level of
competition in the telephony and broadband internet field, it intends to grant
a communications company, which would be set up for this purpose (in
which the IEC would hold no more than 49% of the means of control and
which it would not control) a license to provide various communications
services including, inter alia, transmission services and broadband internet
services to subscribers. In June 2010, the Ministry of Communications
announced that the IEC had presented the Ministry with the results of a
technological trial for the provision of high-speed internet services on its
existing infrastructure, which was conducted in Kiryat Shmona. In July
2010, the government reached a decision in accordance with which, inter
alia, the Electricity Sector Law and the Communications Law would be
amended so that a communications company, as aforesaid, which is related
to the IEC would be permitted to operate in the communications market,
subject to certain conditions. As at the date of these financial statements, the
Law has not yet been amended as aforesaid. The company has expressed its
opposition to the granting of a license for the provision of communications
services on the IEC's infrastructure to the Ministry of Communications.
In accordance with the announcement by the Ministry of Communications
on March 6, 2011, the Government has approved the establishment of a new
telecommunications
infrastructure
company
(hereinafter
- the
telecommunications company) in which 51% of the shares will be held by a
private external investor (hereinafter - the partner) and 49% of the shares
will be held by the IEC.
On July 10, 2011 the Ministry of Communications announced its intention to
publish a tender for the selection of an external company (hereinafter – the
investor), which will cooperate with a subsidiary company of the IEC
(hereinafter - the telecommunications company), which will receive a license
for the provision of various telecommunications services with the objective
of exploiting the IEC's existing infrastructure, in order to increase the level
of competition in the telephony and broadband internet field.
On October 9, 2011 the Ministry of Communications, the Treasury and the
Ministry of National Infrastructures announced the setting up of a joint
committee of the government and the IEC, whose objective is to select the
investor in the telecommunications company, in a process that is supposed to
last about six months. It should be noted that on October 25, 2011 an
amendment to the Telecommunications Regulations (Telecommunications
and Broadcasting) (Processes and conditions for the receipt of a general
license for the provisions of in country landline telecommunications
services) - 2011, which sets conditions for the granting of a national
infrastructure operator license.
(5)
See section 4b(7) above on the subject of the amendment of the
Telecommunications Law (Amendment No. 50) – 2011.
(6)
Government committees for examining the telecommunications field
In continuation of the recommendations of the Grunau Committee, in
February 2010 the Ministry of Communications announced that the Minister
of Finance and the Minister of Communications had appointed a committee
headed by the former Director General of the Ministry of Industry, Trade
and Employment, Mr. Amir Hayek (hereinafter - the Hayek Committee),
which will examine and make recommendations on their behalf in respect of
two key issues: (a) a new charge rate arrangement for Bezeq, which has been
adapted to the variable charge rates in the telecommunications sector and the
policy of the level of competition; and (b) the setting of charge rates for
various sections, which relate to the provision of services in the wholesale
market in the landline segment by the owners of the universal infrastructure,
and the setting of charge rates for the completion of a conversation on the
landline networks.
It should be noted in this connection that it was stipulated in the Committee's
letter of appointment that it will be entitled, but not bound, to make a
recommendation on any issue that is required in order to formulate its
recommendations that were the subject of the letter of appointment, subject
to the holding of a public hearing.
On March 3, 2011 the Hayek Committee published its recommendations on
the structural issues that were presented for the receipt of comments from the
public. The Committee clarified that the structural recommendations
constitutes as aforesaid a condition for the implementation of the detailed
arrangements that would be formulated by it later on.
The Committee's recommendations relate, inter alia, to the following
subjects: (a) the cancellation of the requirement of structural separation in
the landline field and in other fields in the telecommunications sector, except
for the multi-channel television field, which will be cancelled after the
operation of the television market on the internet becomes possible; (b) the
supervision of the retail price of the Bezeq company will be under a method
for determining the maximum price and not under a method by which a fixed
price is set in accordance with section 15(A) of the Telecommunications
Law, which is to be done without delay and independently of any other
subject in accordance with the letter of recommendations; (c) holders of
general national operator licenses are to provide service and are to enable
use of all of the infrastructure that is required in order to enable the
operations of the other license holders who supply services to terminal
customers, which includes,
inter alia, that broadband internet access
service is to be provided immediately in a manner that will enable operation
and control by a service provider, who does not own the infrastructure, who
can manage the service; (d) the holders of national operator licenses are to
routinely make public to the other license holders in the telecommunications
field the deployment of the existing infrastructure in accordance with
demands from the body that organizes the subject; (e) holders of national
operator licenses are to reach agreements with the other license holders for
the use of the types of infrastructure that are detailed above, which are to be
passed on to the organizing body and which are to be published for review
by the public; (f) in parallel, the Committee will formulate detailed
arrangements for the various sections that relate to the assurance of the
possibility of supplying the types of wholesale services that are detailed in
the document. These arrangements, or any other specific involvement by the
regulator, will be put into operation, if the regulator learns that the wholesale
market has not developed as required within six months of the publication of
the Committee's final recommendations, and within three months in respect
of broadband access services; (g) the Committee attaches considerable
importance to the promotion of the communications company's operations
using the IEC's infrastructure, in accordance with the Government's decision,
and believes that the authority that will be established in this context should
be subject to the same regulations with respect to the provision of wholesale
services as apply to the other general national operator license holders, with
the necessary regulatory adaptations.
On the subject of the cancellation of the structural separation requirement,
the Committee recommended that this is to apply immediately once the
following conditions are met: (a) on the adoption of the Committee's
recommendations, as detailed above; (b) at the earlier of six months from the
date of the signing of the agreements with the other license holders for the
provision of wholesale services, or from the date on which the provision of
the services commences; (c) the holders of general national operator licenses
are to provide autonomous bank guarantees of hundreds of millions of NIS
as collateral for the maintenance of a wholesale market; (d) non-compliance
with any of the above conditions will result, inter alia, in a regime of strict
supervision over the holders of general licenses, the forfeiture of the bank
guarantees, the imposition of personal accountability on the directors of the
companies that own the general national operator licenses and the
consideration of the imposition of structural separation between the general
national operator license holder's infrastructure and the services that are
provided to the final users.
On October 4, 2011 the Hayek Committee presented a report on the
examination of the Bezeq company’s charge rates and their updating and the
setting of the charge rates for wholesale services in the landline
telecommunications field. The Committee's report contains, inter alia,
recommendations on the following subjects:
(a)
The development of a wholesale market
Within the framework of the Committee's recommendations in
connection with the development of a wholesale market, the
Committee included the following recommendations: (a) requiring the
holders of general national operator licenses to provide services that
will enable the use of their infrastructures in order to enable the
operations of other telecommunications license holders, in the
provision of services to final customers; (b) broadband access services
are to be provided immediately, in a manner that will enable operation
and control by a service provider who does not own the infrastructure,
who can manage the service; (c) holders of general national operator
licenses are to reach agreement with other license holders in respect of
the abovementioned services and usage, including a specification of
the services, the manner in which they are to be ordered, their price
and the level of the service (SLA). The organizing body will be
entitled to compel changes in the agreements, if they do not comply
with the principles that are stated in the recommendations; (d) holders
of general national operator licenses are to deposit autonomous bank
guarantees in an overall amount of NIS 200 million as collateral for
the maintenance of a wholesale market.
(b)
The arrangement of the prices for wholesale services
Until the charge rates are set by the arranging body, the price of each
wholesale service is to be uniform, independently of the
characteristics of the consumer. The services are to be costed by the
arranging body in accordance with the cost principle. The charge rates
are to be set as a maximum price that the holders of a general national
operator license will be entitled to sell the services to other license
holders, and these are to be re-examined once every three years.
Until the setting of the prices, as aforesaid, the services that are sold
by holders of general national operator licenses on a wholesale basis,
are to be sold to the other license holders at a price that is not to
exceed 75% of the retail price that is offered by the holder of the
general national operator license, with the largest market share in the
field of internet infrastructure for private customers, on the basis of
the average price from July to September 2011. This arrangement will
apply for a period of six months from the date of the approval of the
recommendations by the Minster of Communications, and the
Minister can only extend this period for six months.
(c)
The requirement for structural separation
The cancellation of the requirement for structural separation in the
landline field and in other fields in the telecommunications sector,
except for the multi-channel television field, which will be cancelled
after the broadcasting of television on the internet infrastructure is
made possible.
To give immediate approval for all of the telecommunications
companies and groups to provide all of the telecommunications
services (which they do not currently provide) without structural
separation restrictions. The structural separation requirement should
be replaced by an accounting separation requirement. In addition, a
prohibition is to be place on the transfer of information between the
retail sector and the wholesale sector in each of the companies.
The existing requirement for structural separation is to be cancelled at
the earlier of the day on which six months have passed from the day
on which the aforesaid agreements were signed, or the day on which
the general national operator license operators begin to provide the
wholesale services as determined in the said agreements.
If no wholesale market will operate in 24 months after the date of the
publication of the Committee's recommendations, the organizing body
is to take execute a structural separation between the infrastructures of
the general license holders and the services that are provided to the
final customers.
The Committee see the importance in promotion of the operations of
the telecommunications company that is expected to operate on the
IEC's infrastructure (as stated in section (4) above), and it is of the
opinion that similar regulatory principles should be applied to it in
respect of the provision of wholesale services as those that will apply
to the holders of the other general national operator licenses.
The Committee's recommendations, their adoption and their actual
implementation are subject to the approval of the Minister of
Communications and the Minister of Finance.
As of the date of the financial statements, the Ministry of
Communications has not yet adopted the recommendations of the
Hayek Committee.
(7)
Structural separation
Provisions are stipulated in the national operator license in respect of the
existence of an structural separation between the Company as the holder of a
broadcasting license, and Hot Telecom as the holder of a national operator
license and its general partner, in a similar manner to the provisions set in
the broadcasting license, inter alia, in accordance with what is detailed as
follows: (1) At least half of the members of the Company's Board of
Directors are not to hold office in the Board of Directors of the general
partner of HOT Telecom, and at least one of the members of the Company’s
Board of Directors must not be an related party in the Company or an office
holder in an related party in the Company; (2) There is to be structural
separation between the management of the Company and the management of
HOT Telecom and the general partner of HOT Telecom, including on all
matters relating to the business system, the financial set up and the
marketing system; and in addition there is a requirement to separate the
assets, and there is to be a mutual prohibition on the employment of
employees.
Despite the requirement for separation, as aforesaid, HOT Telecom is
permitted to sell a basket of services that includes the services of HOT
Telecom and broadcasting services that are provided by the Company, and to
perform the collection activities that are involved in that, and solely that
HOT Telecom only transfers commercial information to the Company that it
need in order to market a basket of services and to make collections as
aforesaid.
In accordance with the amendment to the national operator license in August
2009, qualification and reliefs were determined in respect of the requirement
for structural separation as set from the outset in the national operator
license. It was also determined in the amendment, inter alia, that HOT
Telecom is entitled to make use of the Company's management, operational
and information systems maintenance, billing and collection services, in
consideration for a reasonable payment and within the restrictions that have
been placed on access to information, in accordance with the conditions that
have been set in the amendment. In addition, it was stipulated that HOT
Telecom and the Company will be entitled to make use of the assets in
which the other entity has property rights in consideration for a reasonable
payment. HOT Telecom is further permitted to make use of manpower
services that are provided by the Company in consideration for a reasonable
payment, and to pass financial information to the Company's Chief Financial
Officer in respect of HOT Telecom, and solely that the information is
required for the purpose of monitoring the provisions of the financing
agreement that was signed between the Company and the banks in December
2006 (and which was most recently amended in November 2011).
6.
The cellular telecommunications field
Mirs, the purchase of whose entire share capital was completed by the Company in
November 2011 (see Note 3), operates in the cellular telecommunications field.
Mirs provides cellular telecommunications services to its customers using designated
technology (iDEN), which include: Walky-talky services (Push to Talk), telephone
conversations, data transfer, content services, added value services, text message sending,
cellular oversees roaming services, as well as the sale and maintenance of terminal
equipment. The iDEN technology is cellular technology that permits a combination of
personal and group walky-talky conversations with telephone conversations, data transfer
and message transfer (SMS).
In addition, Mirs provides its customers with selling and maintenance services for
terminal equipment, which also includes the sale of ancillary equipment for mobile
telephones such as hands free sets, pouches and so on.
a)
Licenses in the cellular telecommunications field
(1)
Mirs received a special license from the Ministry of Communications for a
multi-wave, multi-frequency access business, using iDEN technology, which
was developed by the Motorola Solutions company (formerly Motorola
Inc.), which is the technology that is used by Mirs as of the date of these
financial statements (hereinafter - the special license). On February 5, 2001,
the Ministry of Communications converted the special license into a general
license for the provision of radio, mobile telephone services in Israel and on
February 11, 2003 that license was extended by 15 years until 2016.
(2)
In April 2011 Mirs won a tender that was published by the Ministry of
Communications for the allocation of frequencies, which enable the setting
up of a generation 3.3 network (UMTS). Within the framework of the tender,
Mirs gave an undertaking to supply national coverage (at an extent of 90%)
by means of the new infrastructure within seven years of the receipt of the
new radio, mobile telephone license, part of which was to be provided by
means of Mirs existing sites, which would be converted to the new
broadcasting frequencies, and some of which by means of new sites to be set
up by Mirs. Till the completion of the coverage as required in the radio
cellular telephone license of Mirs, Mirs can expand the coverage by means
of the use of in country roaming services.
The version of the license that was received in 2001 was amended in
September 2011 in order to adapt it to the terms of the frequencies tender
that was won by Mirs (hereinafter – the expansion of the license). Within the
framework of the expansion of the license, it was stipulated that the license
would be in force for a period of twenty years, as from September 26, 2011.
However, it is stipulated in the license that on the matter of the use of
frequencies, Mirs will be entitled to make use of the frequencies that have
been allocated to it in the course of 2001 until February 4, 2016.
Within the framework of the tender, Mirs gave an undertaking to provide
countrywide cover by means of the new network during the course of the
seven years that follow the receipt of the license at an extent of 20% inside
two years, an extent of 40% within four years, an extent of 55% within five
years, an extent of 75% within six years and an extent of 90% within seven
years.
In accordance with the results of the frequency tender, the license fees were
set at an amount of NIS 705 million (hereinafter – the license fees). Mirs
paid an amount of NIS 10 million on the receipt of the license and it is to pay
an additional amount of NIS 695 million after a period of five years
commencing on September 26, 2011 (hereinafter – the time of the expansion
of the license), in the wake of its win in the frequencies tender (hereinafter –
the balance). Mirs has made a bank guarantee in an amount of NIS 695
million available in respect of the balance. However, the license contains a
mechanism for the reduction of the balance, as follows: the entitlement to the
reduction of the license fee will be examined in accordance with the market
share that Mirs accumulated in the private sector at two times that have been
set for the examination – two years from the time of the expansion of the
license and at the end of a period of five years from the time of the
expansion of the license (hereinafter – the market share).
The market share will be calculated as the regular average of (a) the ratio
between the number of Mirs private subscribers and the overall number of
subscribers in the private sector; (b) the ratio between the number of
outgoing minutes that are initiated by Mirs private subscribers and the
overall number of outgoing minutes (including minutes within networks) in
the market that are initiated by the generality of subscribers in the private
sector; (c) the ratio between the volume of revenues from Mirs private
subscribers and the volume of revenues from subscribers in the private sector
as a whole. In accordance with the key for the reduction, the balance of the
license fee will be reduced by a seventh for each 1% of market share that has
been accumulated by Mirs.
At the end of a period of five years and three months from the date of the
granting of the license, Mirs will pay the lower of the balance, which has
reduced in accordance with the market share that it has accumulated up to
the time of the second check, or the balance, which has reduced in
accordance with the market share that it had accumulated up to the time of
the first check.
As of the time of the signing of these financial statements, Mirs is engaged
in the setting up of the new network and is making preparations for the start
of its commercial operations. In accordance with its assessment and its
forecasts, inter alia on the basis of the assumption that regulation will exist
that will enable the construction of instillations or that will give an
exemption from the need to construct instillations. The new network is
expected to begin to operate during the course of the year 2012. Costs in
connection with the new network, which have been incurred after the time of
its win and which can be attributed directly to bringing the network to its
current state in a manner that it can operate in the manner in which
management intended, have been recorded as part of the cost of the property,
plant and equipment that are attributed to the network.
b)
Mirs' operations in the field of activity are subject to the supervision of the
Ministry of Communications, which is empowered to organize and to permit the
provision of the services in the telecommunications field.
(1)
Mobile Virtual Network Operators (MVNO)
On January 19, 2012 the Ministry of Communications published regulations,
which enable telecommunications companies to present an application for
the granting of a virtual operator license in accordance with the conditions
that are set in the regulations. To the best of Mirs' knowledge, as of the date
of the financial statements, a number of companies have presented
applications to receive a virtual operator license, of which eight companies
have received the said license. On November 17, 2010 the Ministry of
Communications announced that the Director General of the Ministry has
made an approach to the cellular companies and the companies that hold an
MNVO license, asking to receive details on the question of whether
negotiations were being held on the terms of the commitment between the
cellular companies and the virtual operators in accordance with the
provisions of the Telecommunications Law, and the stage at which the
negotiations were situation, in so far as they had started.
On December 23, 2010 the Bezeq company announced that its subsidiary
company, Pelephone Communications Ltd. (hereinafter - Pelephone) had
entered into a commitment under an agreement in accordance with which
Pelephone would allow a virtual network operator to use sections of its
network for the purpose of providing cellular services to the public. To the
best of Mirs' knowledge, during the course of the year 2011 the virtual
network operator began to operate in the field of mobile telephony services.
The entry of MVNO operators into the cellular telecommunications field as
well as the issuing of licenses to virtual operators who will operate under the
VOIP method will increase the competition in the field and could impact on
Mirs' profitability rates.
(2)
The Telecommunications Law
The Telecommunications Law and the Regulations that have been
promulgated thereunder are the main legislation that organizes the field of
telephony services in Israel. The Telecommunications Law prohibits any
person from providing Bezeq services without have received an appropriate
permit or license from the Minister of Communications. In addition, the Law
empowers the Minister of Communications to impose significant monetary
sanctions on license holders who breach its provisions and/or who have
caused significant damage to the public or to its competitors.
On December 14, 2011, a draft of the Telecommunications Law (Bezeq and
broadcasting) (Amendment No. 52) (The prohibition of payment and the loss
of a benefit as the result of the cancellation of an agreement for the provision
of radio, mobile telephone services)- 2011 (hereinafter- the draft law) was
published in the official gazette.
Within the framework of the draft law, it is proposed that the collection of
payments and the prevention of benefits from a subscriber of a radio, mobile
telephone license holder, who seeks to cancel the commitment agreement
with the holder of the license be absolutely forbidden, except for the
collection of the balance of the payments for the terminal equipment that the
subscriber purchased from the license holder, in accordance with the
provisions of section 51B of the Telecommunications Law. The proposed
amendment will apply to subscribers who entered into a commitment under
an agreement with a holder of a radio, mobile telephone license as from
November 1, 2011 (except in relation to customers who have 100 or more
subscriptions) .Furthermore, in accordance with this proposal, as from
January 1, 2013 it will not be possible to make a connection between a
transaction for the purchase of terminal equipment and a transaction for the
provision of services.
In this connection, on March 5, 2011 the Finance Committee of the Knesset
(hereinafter- the Committee), approved a draft law within the framework of
its preparation in advance of the second and third readings. The law is
expected to reach the Knesset Plenum for second and third readings and to
be published in the official gazette in April 2012.
In Mirs' assessment, the said change is likely to further reduce the barriers to
transferring between the competitors in the cellular market and this to ease
the acquisition of market share by new competitors, including Mirs.
However, as of the time of these financial statements, Mirs is unable to
quantify the degree to which this will impact on its business, inter alia, since
the transition provisions on the matter of the amendment of the Law, in the
event that it is passed, have not yet been clarified.
(3)
The Non-ionized Radiation Law
During the course of January 2006 the Non-ionized Radiation Law (in this
section - the Law) was passed, within the framework of which the Planning
and Construction Law - 1965 (hereinafter - the Planning and Construction
Law) was also amended. The main provisions of the Law entered force at the
beginning of 2008. The amendment determines, inter alia, that as a condition
for the issuance of a license for the construction of a broadcasting facility, a
letter of indemnification against claims for compensation under section 197
of the Planning and Construction Law, in respect of impairment in the value
of land is to be demanded by the planning institution, which gives the
permit (hereinafter - the letter of indemnification), in accordance with the
directives issued by the National Council. These directives will remain in
force until a change is made in National Outline Plan 36. At the beginning of
January 2006 official directives from the National Planning and Construction
Council, in which a duty of indemnification at a rate of 100% was set, were
published. The deliverer of a letter of indemnification will be given the
possibility of conducting the legal proceedings opposite a claim that is
presented, as aforesaid.
Following the legislation of the Law, Mirs has delivered 215 letters of
indemnification as a condition for the receipt of building permits at various
sites across the country.
Up to the date of the financial statements, no claims have been filed against
Mirs under the letters of indemnification and in accordance with an
announcement by the Attorney General, no claims will be recognized under
the letters of indemnification, which are presented after one year has passed
since the time of the receipt of the building permit.
It should be noted that up to the present time a partial version of the
regulations has been approved and the chapter in the regulations, which
relates to the maximum radiation levels has not yet been promulgated. The
version of the said chapter, which is acceptable to the Minster of
Communications has been presented by the Ministry of the Environment, for
approval by the Interior and Environment Committee of the Knesset but it
has not won approval, since the Committee has demanded a stiffening of the
criteria for the granting of the permits from the Supervisor of Environmental
Radiation. If the Committees demands are met, in Mirs assessment this will
significantly impair its ability to provide cellular services in the State of
Israel.
(4)
Structural separation
In accordance with the terms of the license, Mirs is to maintain structural
separation between itself and the Company and HOT Telecom, as detailed
below: (a) full separation between Mirs' management and the managements
of the Company and of HOT Telecom, including in all matters relating to the
business system, the financial system and the marketing system; (b) full
separation between Mirs' assets and the assets of the Company and of HOT
Telecom; (c) Mirs is not to employ the Company's employees, nor is it to
employ HOT Telecom's employees, and it is not to cause in any way,
whether by act or by omission, for the Company or HOT Telecom to
employee its employees; (d) conditions exist in relation to the maintenance
of the confidentiality of commercial information, its receipt and its transfer
to the Company and to HOT Telecom.
7.
The internet supply services- ISP services field
In 2008 the Group made an approach to the Ministry of Communications requesting a
license for ISP services. On December 5, 2010 it was decided to grant a license for the
provision of ISP services to a subsidiary company of the Company (hereinafter –the
decision), subject to arrangements that were stipulated in the decision, including the
amendment of certain provisions in HOT Telecom's national operator license and the
Company's broadcasting license (hereinafter- the amendments to the national operator
license and the broadcasting license).
In continuation of the decision, on December 14, 2010 the Ministry of Communications
granted a special license to HOT Investments and Finance Ltd., which changed its name
to Hot Net Internet Services Ltd. (hereinafter – HOT Net), a subsidiary company of the
Company (hereinafter- the internet provider) to carry out Bezeq activities and to provide
Bezeq services- internet access services (hereinafter – the ISP license). On February 15,
2012, HOT Net began to supply ISP services to private subscribers. As of the date of
these financial statements, this activity of the Group is not on a significant scale, and
therefore it is not reported as a reportable segment.
The details of the ISP license are presented below:
a)
Services under the license
The license affords the internet supplier authorization to provide various Bezeq
services, including: internet access services, e-mail services, the setting up and
maintenance of a data transfer network, electronic data interchange (EDI),
processing activities, management and routing of messages and system
management services (including the monitoring and handling of malfunctions,
information security, information systems and information compression, the
security of access to the computer of the recipient of the service).
b)
The period of the license
The ISP license has been given for a period starting at the time of the granting of
the license and ending on December 31, 2015. Towards the end of the period of the
license the internet provider will be entitled to present an application for the
renewal of the license for an additional period.
The ISP license contains provisions on the subject of a prohibition on the transfer
of the license as well as any right or duty thereunder, except with the approval of
the Minister of Communications, as well as restrictions on a charge on the means
of control in the license holder or in a related party therein, as well as restrictions
on a charge on the license assets. Despite the aforesaid, the internet supplier is
entitled to charge any of the license assets in favor of a banking entity that lawfully
operates in Israel, for the purpose of receiving bank credit and solely that the
charge agreement is to include a terms that the exercise of the rights is not to harm
the provision of the services in accordance with the license.
c)
The requirement for structural separation
The provisions of the ISP license require HOT Net to maintain structural separation
between HOT Net, the Company and HOT Telecomm which includes a
requirement to separate the managements of the entities, including on all matters
relating to the business system, the financial system and the marketing system, the
separation of assets of the Company and a prohibition on employing the employees
of another entity. Furthermore, HOT Net is to have a separate CEO appointed. The
amendments to the national operator license and the broadcasting license add a
prohibition on the Company and on HOT Telecom from transferring commercial
information that they possess to HOT Net, including information on subscribers
and marketing plans, unless this is required for the purpose of supplying a joint
basket of services as described in section (e) below.
d)
The duty to provide service without discrimination
The internet supplier will be required to provide its services to any random
subscriber or recipient of service or holder of an ISP license, including subscribers
of other holders of a national operator license or a radio, mobile telephone license,
and this is to be done without discrimination and under egalitarian terms.
e)
The marketing of a joint basket of services
In accordance with the provisions of the ISP license and the amendments to the
national operator and the broadcasting licenses, each of the following entities: HOT
Net, the Company and Hot Telecom will be entitled to market a basket of services,
which includes, inter alia, the Company's broadcasting services, Bezeq services
that are provided by HOT Telecom, in whole or in part, together with HOT Net's
ISP services, and to carry out the collection activities that are involved therewith,
subject to compliance with certain conditions that were set in the license.
8.
On February 14, 2012, the Company received a letter from the Ministry of
Communications, in connection with a demand for data in respect of the packages of
services that the Group intends to market to the public. In this connection, because of the
fact that the packages that are offered to the public by the Group offer significant discount
rates, the Company was requested to present data and details to the Ministry of
Communications in respect of the terms of the packages being offered by it. As of the
date of these financial statements, the Company has provided the Ministry of
Communications with the data that was requested.
On February 22, 2012, the Company received a letter from the Ministry of
Communications, according to which the Company, HOT Telecom and HOT Net had
purportedly breached provisions in their licenses, which stipulated a requirement for
structural separation, because of the joint marketing of HOT Net's services with other
services provided by the Group (hereinafter - the approach). In response to the approach,
the Companies in the Group informed the Ministry of Communications, that from their
perspective the marketing activities were undertaken in conformity with their licenses. In
continuation the companies announced that the marketing format in the company had
been adapted so as to accord with the approach taken by the Ministry of Communications.
On March 20, 2012 the Company received a letter from the Ministry of Communications,
according to which it had noted the Company’s announcement, and making it clear that if
the Company was interested in marketing a basket of joint services, within the framework
of which HOT Net's services would be marketed, it was to present an application for the
approval of the director and that the application would be considered properly.
9.
International operator license
On March 18, 2008 the Group made an approach to the Ministry of Communications with
a request to receive an international operator license in order to provide international
calling services (hereinafter – the international operator license). The Group requested
that such a license should also include international VOB services, in accordance with the
policy of the Ministry of Communications as issued in January 2007. On February 2,
2012 Mirs International Telecommunications Ltd., a wholly owned subsidiary of Mirs'
made an approach to the Ministry of Communications requesting to receive a general
license for the provision of international telecommunications services. At this stage it is
not possible to assess if and when an international operator license will be granted and
what the volume of activity will be in this field, if the Group operates in it or what its
implications will be for the Group's operations.
10.
The Company's working capital deficit
As of the balance sheet date the Group has a working capital deficit of NIS 1,248 million
(as of December 31, 2010- NIS 986 million). Approximately NIS 364 million of the said
deficit derives from loans that have been received from banking institutions, in
accordance with the credit agreement, as detailed in Note 20.
In the Company’s management's assessment, as of the time of the approval of the
financial statements, it has sufficient sources of funds to repay the deficit in its working
capital and to continue its operations.
B.
Definitions
In these financial statements:
The Company
- HOT Telecommunications Ltd.
The company in its
previous format
- The Company before the completion of the legal merger
The cable companies
in
their
previous
format
- The HOT Gold Group and the Tevel Group
The
companies
- The Company in its previous format and the cable companies in
their previous format
merging
Consolidated
companies
partnerships
and
- Companies or partnerships over which the Company has control (as
defined in IAS 27 (2008)) and whose financial statements are
consolidated with the Company's financial statements.
Investee companies
- Consolidated companies and partnerships and associate companies.
The Tevel Group
- Tevel International Transmissions Ltd., Gvanim Cable Television
Ltd. and Gvanim-Krayot Cable Television Ltd.
The HOT Gold Group
- The HOT Gold & Co. Partnership (hereinafter – HOT-Gold), Drom
Hasharon Telecommunications Ltd., Isracable Ltd., HOT T.L.M.
Subscriber Television Ltd., HOT Idan Cables Systems Israel
(Holdings 1987) Ltd., HOT- Idan Cable Systems Israel Ltd. and
HOT Edom Ltd.
Other company
- A company that is not an investee company and the investment in
which is measured on the basis of its fair value
The parent company
- Cool Holdings Ltd. (Cool Holdings S.a.r.l.)
The Group
- The Company and its consolidated companies and partnerships
Interested parties and
controlling
shareholders
- As defined in the Securities Regulations (Annual financial
statements) - 2010.
Related parties
- As defined in IAS 24.
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES
A.
Basis of presentation of the financial statements
1.
Measurement basis
The Company's financial statements have been prepared on the cost basis, except for the
liability for cash settled share based payment transaction, derivatives and financial
instruments at fair value through profit or loss, available for sale financial assets, deferred
tax assets and deferred tax liabilities, employee benefits assets and liabilities and
provisions.
The Company has elected to present profits or loss items using the nature of activities
method.
2.
Basis preparation of the financial statements
These financial statements have been prepared in accordance with International Financial
Reporting Standards (hereinafter – IFRS Standards). These standards include:
1.
International Financial Reporting Standards (IFRS).
2.
International Accounting Standards (IAS).
3.
Interpretations issued by the IFRIC and by the SIC.
Furthermore, the financial statements have been prepared in accordance with the
provisions of the Israeli Securities Regulations (Annual financial statements) - 2010.
3.
Consistent accounting policies
The accounting policies that are detailed below have been implemented in the financial
statements in a consistent manner in all of the periods that are presented, except as stated
in section 4 below.
4.
Changes in the accounting policies in view of the adoption of new standards
IFRS 7- Financial instruments: Disclosure
The amendment to IFRS 7 ("the Amendment") clarifies the Standard's disclosure
requirements. In this context, emphasis is placed on the interaction between the
quantitative disclosures and the qualitative disclosures and the nature and extent of risks
arising from financial instruments. The Amendment also reduces the disclosure
requirements for collateral held by the Company and revises the disclosure requirements
for credit risk. The Amendment has been implemented retrospectively commencing from
the financial statements for periods beginning on January 1, 2011.
The retrospective application of the Amendment did not have an impact on the
Company's financial statements.
B.
Significant accounting judgments, estimates and assumptions used in the preparation of the
financial statements
1.
Judgments
In the process of applying the significant accounting policies, the Group has exercised its
judgment and has taken considerations into account in respect of the matters which have
the most significant impact on the amounts that have been recognized in the financial
statements.
Classification of leases
In order to determine whether to classify a lease as a finance lease or an operating lease,
the Company evaluates whether the lease transfers substantially all the risks and benefits
incidental to ownership of the leased asset. In this respect, the Company evaluates such
criteria as the existence of a "bargain" purchase option, the lease term in relation to the
economic life of the asset and the present value of the minimum lease payments in
relation to the fair value of the asset.
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Recognizing revenue on a gross or net basis
In cases in which the Group operates as an agent or as a broker without bearing any of the
risks and the reward derived from the transaction, revenue is presented on a net basis. In
contrast, if the Group acts as the principal and bears the risks and rewards derived from
the transaction, revenue is presented on a gross basis.
Determination the fair value of share based payment transactions
The fair value of share based payment transactions is determined using option-pricing
model. The assumptions used in the model include the share price, the exercise price,
expected volatility, the expected lifetime, expected dividends and the risk free interest
rate.
2.
Estimates and assumptions
The preparation of the financial statements requires management to make estimates and
assumptions that have an effect on the application of the accounting policies and on the
reported amounts of assets, liabilities, revenues and expenses. These estimates and
underlying assumptions are reviewed regularly. Changes in accounting estimates are
reported in the period of the change in estimate.
The key assumptions made in the financial statements concerning uncertainties at the end
of the reporting period and the critical estimates computed by the Group that may result
in a material adjustment to the carrying amounts of assets and liabilities within the next
financial year are discussed below.
Legal claims
In estimating the likelihood of outcome of legal claims filed against the Company and its
investees, the companies rely on the opinion of their legal counsel. These estimates are
based on the legal counsel's best professional judgment, taking into account the stage of
proceedings and historical legal precedents in respect of the different issues. Since the
outcome of the claims will be determined in courts, the results could differ from these
estimates.
Impairment of goodwill
The Group reviews goodwill for impairment at least once a year. This requires
management to make an estimate of the projected future cash flows from the continuing
use of the cash-generating unit (or a group of cash-generating units) to which the
goodwill is allocated and also to choose a suitable discount rate for those cash flows.
Further details are given in O.
Deferred tax assets
Deferred tax assets are recognized for unused carryforward tax losses and deductible
temporary differences to the extent that it is probable that taxable profit will be available
against which the losses can be utilized. Significant management judgment is required to
determine the amount of deferred tax assets that can be recognized, based upon the likely
timing and level of future taxable profits together with future tax planning strategies.
Further details are given in P.
Post employment benefits
The liability in respect of post employment defined benefit plans is determined using
actuarial valuations. The actuarial valuation involves making assumptions about, among
others, discount rates, expected rates of return on assets, future salary increases and
mortality rates. Due to the long-term nature of these plans, such estimates are subject to
uncertainty. Further details are given in R.
C.
Consolidated financial statements
Effective from January 1, 2010, the date of adoption of IFRS 3 (Revised), and of IAS 27 (2008),
the Group applies the accounting policies required by these standards for business combinations
and transactions with non-controlling interests.
The consolidated financial statements comprise the financial statements of companies that are
controlled by the Company (subsidiaries). Control exists when the Company has the power,
directly or indirectly, to govern the financial and operating policies of an entity. The effect of
potential voting rights that are exercisable at the end of the reporting period is considered when
assessing whether an entity has control. The consolidation of the financial statements
commences on the date on which control is obtained and ends when such control ceases.
Significant intragroup balances and transactions and gains or losses resulting from intragroup
transactions are eliminated in full in the consolidated financial statements.The financial
statements of the Company and of the subsidiaries are prepared as of the same dates and
periods. The consolidated financial statements are prepared using uniform accounting policies
by all companies in the Group.
D.
Functional currency and foreign currency
1.
Functional currency and the presentation currency
The presentation currency of the financial statements is the NIS.
The functional currency which is the currency that best reflects the economic environment
in which the Company operates and conducts its transactions, is separately determined for
each Group entity, and is used to measure its financial position and operating results. The
functional currency of the Company is the NIS.
2.
Transactions, assets and liabilities in foreign currency
Transactions denominated in foreign currency (other than the Company's functional
currency) are recorded on initial recognition at the exchange rate at the date of the
transaction. After initial recognition, monetary assets and liabilities denominated in foreign
currency are translated at the end of each reporting period into the functional currency at
the exchange rate at that date. Exchange differences are recognized in profit or loss. Nonmonetary assets and liabilities measured at cost in a foreign currency are translated at the
exchange rate at the date of the transaction.
3.
Index-linked monetary items
Monetary assets and liabilities linked to the changes in the Israeli Consumer Price Index
("Israeli CPI") are adjusted at the relevant index at the end of each reporting period
according to the terms of the agreement. Linkage differences arising from the adjustment,
as above, are recognized in profit or loss.
The following are details in respect of the exchange rates of various currencies that are
relevant to the Group and the Consumer Prices Index:
2166
December 31
2166
2113
The Index (in points) (*)
216.3
211.7
206.2
Exchange rates (In NIS):
US Dollar
Euro
3.82
4.94
3.55
4.74
3.78
5.44
(*) The basis for the Index is the average index for 1993 = 100.
For the year ended December 31
2166
2010
2113
%
%
%
Rate of change in the year then ended:
Consumer Prices Index
US Dollar
Euro
E.
2.17
7.61
4.22
2.67
(6.08)
(12.87)
3.93
(0.53)
2.64
Cash equivalents
Cash equivalents are considered as highly liquid investments, including unrestricted short-term
bank deposits with an original maturity of three months or less from the date of acquisition or
with a maturity of more than three months, but which are redeemable on demand without
penalty and which form part of the Group's cash management.
F.
Designated cash
Designated cash is considered to be cash that is designated for the repayment of the Company's
liabilities to financial institutions in accordance with the Company's credit agreement.
G.
Allowance for doubtful accounts
The allowance for doubtful accounts is determined in respect of specific debts where the
Company's management believes that their collection is doubtful. Moreover, the Company has
recognized a provision for groups of customers who are evaluated collectively in respect of
impairment based on their credit risk characteristics. The debts of customers where an
impairment of value has occurred, derecognized at the time that it is determined that those debts
cannot be collected.
H.
Inventories
Inventories are measured at the lower of cost and net realizable value. The cost of inventories
comprises costs of purchase and costs incurred in bringing the inventories to their present
location and condition. Net realizable value is the estimated selling price in the ordinary course
of business less the estimated costs of completion and the estimated selling costs.
Cost of inventories is determined using the weighted average cost method.
The Company periodically evaluates the condition and age of inventories and makes provisions
for slow moving inventories accordingly.
I.
The operating cycle
The Group's regular operating cycle is one year, as a result of this the current assets and the
current liabilities include items that are intended and expected to be realized within the
Company's regular operating cycle.
J.
Financial instruments
1.
Financial assets
Financial assets within the scope of IAS 39 are initially recognized at fair value plus
directly attributable transaction costs, except for financial assets measured at fair value
through profit or loss in respect of which transaction costs are recorded in profit or loss.
After initial recognition, the accounting treatment for investments in financial assets is
based on their classification into one of the following three categories:
 Financial assets at fair value through profit or loss.
 Loans and receivables.
 Available for sale financial assets.
a)
Financial assets at fair value through profit or loss
The Group has financial assets at fair value through profit or loss, which
include financial assets that are held for trading.
Financial assets that are classified as held for trading are a derivative that is not
designated as a hedging instrument.
Gains or losses on investments that are held for trading are recognized in profit
or loss when incurred.
Embedded derivatives are separated from the host contract and accounted for
separately if: (a) the economic characteristics and risks of the embedded
derivatives are not closely related to those of the host contract; (b) a separate
instrument with the same terms as the embedded derivative would meet the
definition of a derivative; and (c) the combined instrument is not measured at
fair value through profit or loss. And (d) the currency in which the contract is
denoted (foreign currency) is not the functional currency of the counter-party,
which operates in Israel.
Derivatives, including separated embedded derivatives, are classified as held
for trading. In the event of a financial instrument that contains one or more
embedded derivatives, the entire combined instrument may be designated as a
financial asset at fair value through profit or loss only upon initial recognition.
The Group assesses whether embedded derivatives are required to be separated
from host contracts when the Group first becomes party to the contract.
Reassessment only occurs if there is a change in the terms of the contract that
significantly modifies the cash flows that would otherwise be required.
All of the derivatives are not designated for effective accounting hedging
usage.
b)
Loans and receivables
The group has loans and receivables, which are (non-derivative) financial assets
with fixed or determinable payments, that are not quoted on an active market.
After initial measurement, the loans are measured in accordance with their
terms at amortized cost using the effective interest method, while taking into
account directly attributable transactions costs , if any. Short-term receivables
(such as trade and other receivables) are measured based on their terms, and
generally at its face value. Gains and losses are recognized in profit or loss
when the loans and the receivables are derecognized, or when a loss from
impairment in value is recognized in respect of them, as well as through the
systematic amortization.
c)
Available for sale financial assets
The Group has available for sale financial assets that are (non-derivative)
financial assets that have been designated as available for sale. After the initial
recognition, available for sale financial assets are measured at fair value. Gains
or losses as the result of the adjustments of fair value are recognized directly in
equity as other comprehensive income (losses) under a capital reserve in
respect of available for sale financial assets. At the time of the disposal of the
investment or if an impairment in value is recognized in respect of it, the other
comprehensive income (loss) is recognized in profit or loss.
2.
Financial liabilities
a)
Financial liabilities at amortized cost
Loans and borrowings are initially recognized at fair value less directly
attributable transaction costs (such as loan raising costs). After initial
recognition, loans, including debentures, are measured based on their terms at
amortized cost using the effective interest method taking into account directly
attributable transaction costs. Short-term borrowings (such as trade and other
payables) are measured based on their terms, normally at face value. Gains and
losses are recognized in profit or loss when the financial liability is
derecognized as well as through the systematic amortization process. See
section S below in respect of the recognition of income from interest.
b.
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial
liabilities classified as held for trading at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are acquired for the
purpose of sale in the near term. Gains or losses on liabilities held for trading
are recognized in profit or loss.
Derivatives, including separated embedded derivatives, are classified as held
for trading. In the event of a financial instrument that contains one or more
embedded derivatives, the entire combined instrument may be designated as a
financial liability at fair value through profit or loss only upon initial
recognition.
The Group assesses whether embedded derivatives are required to be separated
from host contracts when the Group first becomes party to the contract.
Reassessment only occurs if there is a change in the terms of the contract that
significantly modifies the cash flows that would otherwise be required.
3.
Fair value
The fair value of financial instruments that are traded in an actively traded in organized
financial market is determined by reference to quoted market prices at the end of the
reporting period. For financial instruments for which there is no active market, fair value
is determined by the use of valuation techniques. Such techniques include using arm's
length market transactions, reference to the current market value of another instrument,
which is substantially the same, discounted cash flow analysis or other valuation models.
4.
Offsetting financial instruments
Financial assets and financial liabilities are offset and their net amount is presented in the
balance sheet, if a legally enforceable right to set-off the amounts that have been
recognized and there is an intention either to settle the asset and the liability on a net basis
or to realize the asset and to settle the liability in parallel.
5.
Derecognition of financial instruments
a)
Financial assets
A financial asset is derecognized when the contractual rights to receive cash flows
from the financial asset have expired or when the Company has transferred the
contractual rights to receive cash flows from the financial asset or when it has
taken upon itself a commitment to pay the cash flows that have been received in
full to a third party, without any significant delay, and in addition, it has
substantially transferred all of the risks and the benefits that are connected to the
asset or it has not transferred nor retained substantially all of the risks and the
benefits that are connected to the asset, but has transferred control over the asset.
b)
A financial liability is derecognized when it is extinguished, that is when the
obligation is discharged or cancelled or has expired. A financial liability is
extinguished where the debtor (the Group):

Discharges the liability by a cash payment, by means of other financial
assets, by means of goods or services, or

Is legally released from the liability.
When an existing financial liability is exchanged with another liability from the
same lender on substantially different terms, or the terms of an existing liability are
substantially modified, such an exchange or modification is accounted for as an
extinguishment of the original liability and the recognition of a new liability. The
difference between the carrying amount of the above liabilities is recognized in
profit or loss. If the exchange or modification is not substantial, it is accounted for
as a change in the terms of the original liability and no gain or loss is recognized on
the exchange. When evaluating whether the change in the terms of an existing
liability is substantial, the Company takes into account both quantitative and
qualitative considerations.
6.
Impairment in the value of financial assets
The Group assesses at the end of each reporting period whether there is any objective
evidence of impairment of a financial asset or group of financial assets as follows:
a) Financial assets carried at amortized cost
There is objective evidence of impairment of loans and carried at amortized cost as a
result of one or more events that has occurred after the initial recognition of the asset
and that loss event has an impact on the estimated future cash flows. Evidence of
impairment may include indications that the debtor is experiencing financial
difficulties, including liquidity difficulty and default in interest or principal payments.
The amount of the loss recorded in profit or loss is measured as the difference
between the asset's carrying amount and the present value of estimated future cash
flows (excluding future credit losses that have not yet been incurred) discounted at
the financial asset's original effective interest rate (the effective interest rate
computed at initial recognition). The carrying amount of the asset is reduced through
the use of an allowance account (see allowance for doubtful accounts above). In a
subsequent period, the amount of the impairment loss is reversed if the recovery of
the asset can be related objectively to an event occurring after the impairment was
recognized. The amount of the reversal, up to the amount of any previous
impairment, is recorded in profit or loss.
b) Available for sale financial assets
In respect of available for sale financial assets, which are equity instruments,
objective evidence includes a significant or continuing impairment in the fair value of
the asset to beneath its costs as well as the examination of changes in the
technological, economic, legal or market environment in which the company that has
issued the instrument operates.
The examination of a significant or prolonged impairment is dependent on the
circumstances at each balance sheet date, where within the framework of the
examination, historical fluctuations in the fair value as well as the decline in the fair
value are taken into account. Where there is evidence of impairment, the cumulative
loss - measured as the difference between the acquisition cost (less any previous
impairment losses) and the fair value - is reclassified from other comprehensive
income and recognized as an impairment loss in profit or loss. In following periods,
any reversal of the impairment loss is not recognized in profit or loss but recognized
in other comprehensive income.
K.
Leasing
The testing for classification as finance leasing or operating leasing is based on the substance of
the agreements and is made at the inception of the lease in accordance with the following
principles set in IAS 17.
The group as a Lessee
1.
Financing leasing
Finance leases transfer to the Group substantially all the risks and benefits incidental to
ownership of the leased asset. At the commencement of the lease term, the leased assets
are measured at the fair value of the leased asset or, if lower, at the present value of the
minimum lease payments. The liability for lease payments is presented at its present
value and the lease payments are apportioned between finance charges and a reduction of
the lease liability using the effective interest method.
After initial recognition, the leased asset is accounted for according to the accounting
policy applicable for this type of asset .
2.
Operating leasing
Lease agreements are classified as an operating lease if they do not transfer substantially
all the risks and benefits incidental to ownership of the leased asset. Lease payments are
recognized as an expense in profit or loss on a straight-line basis over the lease term.
L.
Business combinations and goodwill
Effective from January 1, 2010, following the expansion of the definition of a "business"
pursuant to IFRS 3 (Revised), the Company also accounts for activities and assets as a business
even when they are not conducted as such as long as the seller is capable of operating them as a
business.
Business combinations are treated using the acquisition method of accounting. Under this
method, the identifiable assets and the liabilities of the acquired company are identified in
accordance with their fair value at the acquisition date. The cost of the acquisition is the
cumulative fair value at the time of the acquisition of the assets that have been given, the
liabilities that have been taken up and the equity interests that have been issued by the acquirer.
For business combinations that occurred on or after January 1, 2010, direct acquisition costs
relating to the business combination are recognized as an expense in profit or loss and are not
part of the acquisition cost.
As for business combinations that occurred through December 31, 2009, these costs are
recognized as part of the acquisition cost.
On the acquisition date, the assets acquired and liabilities assumed are classified and designated
in accordance with the contractual terms, economic circumstances and other pertinent
conditions that exist at the acquisition date, except for lease contracts that have not been
modified on the acquisition date and whose classification as a finance or operating lease is
therefore not reconsidered.
Goodwill is initially measured at cost which represents the excess of the acquisition
consideration and the amount of non-controlling interests over the net identifiable assets
acquired and liabilities assumed as measured on the acquisition date.
After initial recognition, goodwill is measured at cost less, if relevant, any accumulated
impairment losses. Goodwill is not systematically amortized. As for testing the impairment of
goodwill, see O.
For business combinations that occurred on or after January 1, 2010, contingent consideration is
recognized at fair value on the acquisition date. If the contingent consideration is classified as a
financial liability in accordance with IAS 39, subsequent changes in the fair value of the
contingent consideration are recognized in profit or loss.
Effective from January 1, 2010, an adjustment to the deferred tax asset balance in respect of
acquired temporary differences which did not meet the recognition criteria at acquisition date is
recorded in profit or loss and not as an adjustment to goodwill.
M.
Property, plant and equipment
Property, plant and equipment items are measured at cost with the addition of direct purchase
costs and less accumulated depreciation, accumulated impairment losses and any related
investment grants and they do not include routine maintenance expenses. The cost includes
spare parts and ancillary equipment that can only be used in connection with the plant and
equipment.
The cost of a number of Property, plant and equipment items has been determined in accordance
with their fair value as of January 1, 2007, the time of the transition to IFRS (deemed cost).
Depreciation is calculated using the straight-line method over the useful lives of the assets, as
follows:
Buildings
Cable network
Call center (primarily electronic equipment)
Infrastructure for the telecommunications network
Converters and modems
Computers and ancillary equipment
Office furniture and equipment
Leasehold improvements
%
2–4
5 – 25
11 – 20
6 – 15
15
15 – 33
6 – 15
10
Primarily 2%
Leasehold improvements are depreciated in accordance with the straight line method over the
shorter of the period of the rental (including the option period for an extension by the Group,
which it intends to exercise) or the expected life of the improvement.
Elements of a property, plant and equipment item, having a cost that is significant by
comparison with the overall cost of the item, are depreciated separately, using the elements
method. The depreciation is calculated in accordance with the straight line method at annual
rates that are considered to be sufficient to depreciate the assets over the useful life of the part.
The useful life, depreciation method and residual value of an asset are reviewed at least each
year-end and any changes are accounted for prospectively as a change in accounting estimate.
As for testing the impairment of property, plant and equipment, see P below.
The depreciation of assets is discontinued at the earlier of the date at which the asset is
classified as held for sale and the date at which the asset is derecognized. An asset is
derecognized on disposal or when no further economic benefit is expected to derive from the
use of the asset. The gain or loss on the derecognition of the asset (calculated as the difference
between the net disposal proceeds and the carrying amount of the asset in the financial
statements) is included in profit or loss in the period in which the asset is derecognition.
N.
Intangible assets
Intangible assets that are acquired separately are measured at cost on initial recognition, with the
addition of direct acquisition costs. Intangible assets that are acquired in a business combination
are measured at fair value at the date of the acquisition. Following initial recognition, intangible
assets are carried at cost less accumulated amortization and less any accumulated impairment
losses.
In management's opinion, the intangible assets have defined useful lives. The assets are
amortized over their useful lives using the straight line method and assessed for impairment
signs exist that indicates impairment in value. The amortization period and the amortization
method for an intangible asset with a finite useful life are reviewed at least once a year. Changes
in the expected useful life or the expected pattern of consumption of future economic benefits
that are expected to derive from the asset are treated as a change in an accounting estimate by
way of from here onwards. The amortization expenses in respect of intangible assets with finite
useful lives are recognized in profit or loss.
The useful lives of the intangible assets are as follows:
Years
Software
Customer relationships
Customer relationships with a defined contractual period
Brand name
Subscription purchase costs
Rights to screen movies and programs
Mirs' License
3
7–9
3
5 – 12
1.5 – 3
(*)
5
(*) Rights to screen films and programs
The costs includes the amounts of the commitments with suppliers of the rights to screen
films and programs on the television, with the addition of the direct costs expensed for the
purpose of adapting the films and the programs for screening in Israel. Content usage rights
are recorded under this item. The rights are amortized on the basis of the actual screenings,
whilst giving a relatively higher weighting to the initial screening.
On an original production, 65% of the asset is amortized on the first screening (which
includes the screenings that take place in the following 72 hours), and the balance is
amortized over the balance of the screenings in accordance with the agreement. The rights
to screen films and programs from overseas suppliers are amortized by 65% on the initial
screening and by 35% on a straight line over the balance of the screenings under the
agreement.
Goodwill
Goodwill represents the surplus of the acquisition cost over the estimated fair value of the
tangible and intangible assets, after deducting the fair value of the liabilities that have been
acquired by the Company.
Customer relationships
Customer relationships - this intangible asset was evaluated on the basis of the fair value of the
existing customers in accordance with the contacts with them, in accordance with the excess
earnings method for multiple periods.
The amortization period for customer relationships that have been valued within the framework
of the legal merger between the cable companies is 9 years and in accordance with the economic
conditions that are expected in each period.
The amortization period for customer relationships that were valued within the framework of
the acquisition of Mirs is 7 years and in accordance with the economic conditions that are
expected in each period.
Customer relationships with a defined contractual term
This intangible asset was estimated under the purchase of Mirs shares based on the cash flows
expected from existing orders or signed agreements of existing customers according to the
surplus earning method for multiple periods. The amortization period for this asset is 3 years
according to the capitalized estimated number of years, based on the existing agreements data.
Brand name
The "HOT" brand and "Mirs" brand - this intangible asset was evaluated within the framework
of the businesses combinations in accordance with the "exempt from royalties" method, which
constituted the implementation of the income approach in the evaluation of the value of the
assets. The amortization period for the brand name is 12 years under the straight line method for
HOT and 5 years for Mirs.
Subscriber purchase costs
The HOT Group has an intangible asset that was created in respect of the costs associated with
the purchase of subscribers. The additional direct sales commissions that are paid in respect of
sales to subscribers that have signed on a commitment to remain customers of the Group are
recognized as an intangible asset up to the maximum fine that is exist according to the
obligation. The expenses relating to the amortization of the purchase of the subscribers are
recorded in the statement of comprehensive income over the length of the period of the
subscribers' average contractual commitment.
During the reporting period, as a result of the amendment of the Telecommunications Law, as
noted in Note 1A(4)(b)(7) and the change in the level of the maximum fine in respect of a
breach of the customers' commitment, the amortization of the asset was accelerated so as to
reflect the maximum fine that exists in respect of the Group's customers' commitment.
Software
The Group's assets include computer systems that contain both software and hardware. Software
that constitutes an integral part of the hardware, which cannot operate without the software that
is installed therein, are classified as property, plant and equipment. By contrast, licenses from
stand-alone software which add additional functionalities for the hardware are classified as
intangible assets.
Mirs' license
Mirs have a general license to provide cellular phone services in a cellular network. In February
2003, the license period was updated and extended for 15 years. The license is amortized using
the straight line method over its useful lives under the license period set forth in the agreement.
O.
Impairment in the value of non-financial assets
The group assesses the need for the examination of the impairment in the carrying amount of
non-financial assets (property, plant and equipment and intangible assets except goodwill) when
there are signs, as the result of events or changes in the circumstances that indicate that the
carrying amount in the financial statements is not recoverable. In cases where the carrying
amount in the financial statements of the non-financial assets exceed their recoverable amount,
the assets are written down to their recoverable value. The recoverable amount is the higher of
the fair value less costs of sale and the value in use. In assessing value in use, the estimated
future cash flows are discounted to using a pre-tax discount rate that reflected the risks that are
specific to each asset. For assets that do not generate independent cash flows, the recoverable
amount for the cash generating unit to which the asset belongs is determined. Impairment losses
are recognized in profit or loss.
An impairment loss of an asset, other than goodwill, is reversed only if there have been changes
in the estimates used to determine the asset's recoverable amount since the last impairment loss
was recognized. Reversal of an impairment loss, as above, shall not be increased above the
lower of the carrying amount that would have been determined (net of depreciation or
amortization) had no impairment loss been recognized for the asset in prior years and its
recoverable amount. The reversal of impairment loss of an asset presented at cost is recognized
in profit or loss.
The following criteria are used in the assessing impairment of the following specific assets:
Goodwill in respect of subsidiaries
For the purpose of impairment testing, goodwill acquired in a business combination is allocated,
at the acquisition date, to each of the Group's cash-generating units that is expected to benefit
from the synergies of the combination.
The Company reviews goodwill for impairment once a year as of December 31 or more
frequently if events or changes in circumstances indicate that there is impairment.
Goodwill is tested for impairment by assessing the recoverable amount of the cash-generating
unit (or group of cash-generating units) to which the goodwill has been allocated. An
impairment loss is recognized if the recoverable amount of the cash-generating unit (or group of
cash-generating units) to which goodwill has been allocated is less than the carrying amount of
the cash-generating unit (or group of cash-generating units). Any impairment loss is allocated
first to goodwill. Impairment losses recognized for goodwill cannot be reversed in subsequent
periods.
Effective from January 1, 2010, each unit or group of units to which the goodwill is allocated
shall not be larger than an operating segment determined in accordance with IFRS 8, "Operating
Segments", prior to aggregation for reporting purposes.
P.
Taxes on income
Taxes on income in the profit or loss include current taxes and deferred taxes. The tax expenses
or income in respect of current taxes or deferred taxes are recognized in profit or loss unless
they relate to items that are recorded directly in other comprehensive income or in equity, in
these cases the tax effect is reflected under the relevant item.
1.
Current taxes
The current tax liability is measured using the tax rates and tax laws that have been
enacted or substantively enacted by the end of reporting period as well as adjustments
required in connection with the tax liability in respect of previous years.
2.
Deferred taxes
Deferred taxes are computed in respect of temporary differences between the carrying
amounts in the financial statements and the amounts attributed for tax purposes.
Deferred taxes are measured at the tax rates that are expected to apply to the period when
the taxes are reversed in profit or loss, other comprehensive income or equity, based on
tax laws that have been enacted or substantively enacted by the end of the reporting
period. Deferred taxes in profit or loss represent the changes in the carrying amount of
deferred tax balances during the reporting period, excluding changes attributable to items
recognized in other comprehensive income or in equity.
Deferred tax assets are reviewed at the end of each reporting period and reduced to the
extent that it is not probable that they will be utilized. Also, temporary differences (such
as carry forward losses) for which deferred tax assets have not been recognized are
reassessed and deferred tax assets are recognized to the extent that their recoverability has
become probable. Any resulting reduction or reversal is recognized in the line item,
"taxes on income".
Taxes that would apply in the event of the disposal of investments in investees have not
been taken into account in computing deferred taxes, as long as the disposal of the
investments in investees is not probable in the foreseeable future. Also, deferred taxes
that would apply in the event of distribution of earnings by investees as dividends have
been taken into account in computing deferred taxes, since the distribution of dividends
does not involve an additional tax liability or since it is the Company's policy not to
initiate distribution of dividends that triggers an additional tax liability.
All deferred tax assets and deferred tax liabilities are presented in the balance sheet as
non-current assets and non-current liabilities, respectively. Deferred taxes are offset in the
balance sheet if there is a legally enforceable right to offset a current tax asset against a
current tax liability and the deferred taxes relate to the same taxpayer and the same
taxation authority.
Q.
Share based payment transactions
The Company's employees are entitled to remuneration in the form of equity-settled share-based
payment transactions and certain employees are entitled to remuneration in the form of cashsettled share-based payment transactions that are measured based on the increase in the
Company's share price.
Equity settled transactions
The cost of equity settled transactions with employees is measured in accordance with the fair
value that have been granted at the time of the grant and in respect of options that existed at the
time of the business combination that took place on March 16, 2011, in accordance with their
value at that time. The fair value is determined using a generally acceptable pricing model, see
note 27.
The cost of equity settled transactions is recognized in the profit or loss together with the
parallel increase in equity over the length of the period in which the service terms are met and
ending at the time at which the relevant employees are entitled to the award (hereinafter - the
vesting period). The cumulative expenses that have been recognized in respect of equity settled
transactions at the end of each reporting date until the vesting date reflects the extent to which
the vesting period has expired and the Group's best estimate in respect of the number of equity
instruments that will ultimately vest. The expense or the income profit or loss reflects the
change between the cumulative expense that has been recognized as at the end of the reporting
period and the cumulative expense that has been recognized at the end of the previous reporting
period.
No expense is recognized in respect of awards that do not ultimately vest.
If the Company modifies the conditions on which equity-instruments were granted, an
additional expense is recognized for any modification that increases the total fair value of the
share-based payment arrangement or is otherwise beneficial to the employee at the modification
date.
If a grant of an equity instrument is cancelled, it is accounted for as if it had vested on the
cancellation date, and any expense not yet recognized for the grant is recognized immediately.
However, if a new grant replaces the cancelled grant and is identified as a replacement grant on
the grant date, the cancelled and new grants are accounted for as a modification of the original
grant, as described in the previous paragraph.
Cash-settled transactions
The cost of cash-settled transactions is measured at fair value on the grant date using a standard
option pricing model. The fair value is recognized as an expense over the vesting period and a
corresponding liability is recognized. The liability is re-measured at each reporting date until
settled at fair value with any changes in fair value recognized in profit or loss.
R.
Employee benefit liabilities
There are number of sorts of employee benefits in the Group:
1.
Short-term employee benefits
Short-term benefits for employees include salaries, paid annual leave, paid sick leave,
recuperation pay and social security contributions and are recognized as an expense when
the services are provided. A liability in respect of a cash bonus or a profits sharing
scheme is recognized where the Group has a legal or constructive obligation to pay the
said amount in respect of service that has been provided by the employee in the past and
where the amount can be reliably estimated.
2.
Post-employment benefits
The plans are generally financed by contribution to insurance companies and they are
classified as defined contribution plans and also as defined benefit plans.
The Group operates a defined benefits plan in respect of severance pay in accordance
with the Severance Pay Law. According to the Law, employees are entitled to receive
severance pay if they are dismissed or on their retirement. The liability in respect of the
termination of employee-employer relations is Measured in accordance with the actuarial
value of a forecast unit credit method. The actuarial calculation takes into account
increases in salaries in the future and the rate at which employees leave the Company and
this on the basis of an estimate of the timing of the payment. The amounts are presented
on the basis of the discounting of the expected future cash flows using a discount rate
determined by reference to yield on government bonds, with a term that matches the
estimated term of the benefit obligation.
The Company deposits monies in respect of its liabilities to pay severance pay to some of
its employees, in a routine manner, in pension funds and with insurance companies
(hereinafter - the plan assets). The plan assets are assets that are held by the employee
benefits plan for the long-term or in qualifying insurance policies. The plan assets are not
available for use by the Group's creditors, and they cannot be returned directly to the
Group.
The liability in respect of employee benefits that is presented in the balance sheet
represents the present value of the defined benefits obligation less the fair value of the
plan assets, less the past service costs. Actuarial gains or losses are reflected profit or loss
in the period in which they arise, as part of the salary costs.
As from the year 2011, the Group has defined contribution plans pursuant to Section 14
to the Severance Pay Law under which the Group pays fixed contributions and will have
no legal or constructive obligation to pay further contributions if the fund does not hold
sufficient amounts to pay all employee benefits relating to employee service in the current
and prior periods. Contributions to the defined contribution plan in respect of severance
or retirement pay are recognized as an expense when contributed simultaneously with
receiving the employee's services and no additional provision is required in the financial
statements.
3.
Other long-term employee benefits
The Group's net obligation in respect of other long-term employee benefits is in respect of
the future benefit amount due to employees for services rendered in current and prior
periods. This amount of benefits is discounted to its present value and the fair value of the
assets relating to this obligation is deducted from said amount. The discount rate is
determined by reference to the yields on Government bonds whose currency and term are
consistent with the currency and term of the Group's obligation. The obligation is
calculated using the projected unit credit method.
Actuarial gains and losses are recognized in profit or loss in the period in which they
occur.
4.
Termination benefits
Severance pay for employees is reflected as an expense when the Group has committed,
with no real possibility of withdrawal, to terminate employees before they reach the
customary retirement age in accordance with a detailed formal plan. The benefits that are
given to the employees who take voluntary retirement are reflected where the Group has
offered the employees a plan that encourages voluntary retirement, it is expected that the
offer will be accepted and the number of persons accepting the offer can be reliably
estimated.
S.
Revenues recognition
Revenues are recognized in profit or loss when the revenues can be measured reliably, it is
probable that the economic benefits associated with the transaction will flow to the Company
and the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Revenues are measured at the fair value of the consideration received less any trade discounts,
volume rebates and returns.
Revenues from credit sales transactions that include a financing element are recorded at present
value such that the difference between the fair value of the consideration had credit not been
provided and the nominal amount of the consideration is recognized in profit or loss as finance
income using the effective interest method.
The following are the specific criteria in respect of the recognition of income in respect of the
following types of income:
Revenue from the provision of services
Income from the provision of cables, internet, telephony and mobile radio telephone network in
a cellular network are recognized in accordance with the stage of completion of the transaction
as of the reporting date. In accordance with this method, the income is recognized in the
reporting period in which the services are provided. Prepaid revenues are recognized from
selling calling cards according to the actual use of the customers or upon their expiration,
whichever is earlier.
Revenues from the sale of goods
Revenues from the sale of goods are including sale of mobile devices and related equipment.
Revenues from the sale recognized when all the significant risks and rewards of ownership of
the goods have passed to the buyer and the seller no longer retains continuing managerial
involvement. The delivery date is usually the date on which ownership passes.
The charge for the end equipment is done separately from the monthly charge for services and
according to a stated amount included in a separate invoice reflecting the fair value of the end
equipment that is not subsidized by the group. In view of the above, the group recognized
revenues from selling instruments upon transfer of title on such instruments to its customers.
Revenue is recognized on the first day according to its fair value for that day and the difference
between the fair value and the stated amount of the consideration is recognized as financial
income during the payment period.
Revenues from credit arrangements
Revenues from long term credit arrangements (such as sale of instruments in payments) are
recorded based on the present value of future cash flows (against long term trade receivables)
and are capitalized according to interest rates. The difference between the original amount of the
credit and the present value, as above, is spread over the credit period and recorded as interest
income over the credit period.
Interest income
Interest income in respect of financial assets is recognized on the accruals basis using the
effective interest method.
The reporting of income on the gross basis or on the net basis
In cases in which the Group operates as an agent or as a broker, without bearing the risks and
the rewards that are derived from the transaction, its revenues are presented on a net basis. As of
the balance sheet date, the Company has revenues that are presented on the net basis in respect
of the connection fees of international telecommunications operators. By contrast, in cases in
which the Group operates as the main supplier and bears the risks and the rewards that are
derived from the transaction, its revenues are presented on a gross basis.
Income in respect of fees for installation in customer's homes
In accordance with the provisions of IAS 18, since the transaction in respect of the connection
of a customer to the Group's services is connected to a services arrangement, in such manner
that the services arrangement will only have a commercial effect in relation to both of the
transactions together (the connection and the services), the income from installation/connection
fees is recognized over the length of the expected period of the commitment between the
customer and the Company, in accordance with the services arrangement, as aforesaid.
Customer discounts
Current customer discounts are recognized in the financial statements when granted and are
deducted from sales.
Arrangements with multiple elements
Revenues from sale agreements that do not contain a general right of return and that are
composed of multiple elements such as equipment, services and technical support are allocated
to the various accounting units and recognized for each accounting unit separately. An element
constitutes a separate accounting unit if and only if it has a separate value to the customer.
Furthermore, this only applies if there is objective and reliable evidence as to the fair value of
each element in the agreement or as to the fair value of undelivered elements. Elements that
have not been separated into accounting units because they do not comply with the above
criteria are grouped as a single accounting unit. Revenue from the various accounting units is
recognized when the criteria for revenue recognition regarding the elements of that accounting
unit have been met according to their type and only to the extent of the consideration that is not
contingent upon completion or performance of the remaining elements in the contract.
Revenue from Dividend
Dividend income from investments that are treated as an available for sale financial asset are
recognized at the determining date for entitlement to the dividend.
Finance income and expenses
Finance income comprises interest income on amounts invested, changes in fair value of
financial assets at fair value through profit or loss and exchange rate gains. Interest income is
recognized as it accrues using the effective interest method.
Finance expenses comprise interest expense on borrowings, changes in the time value of
provisions, changes in the fair value of financial assets at fair value through profit or loss.
Borrowing costs are recognized in profit or loss using the effective interest method.
Gains and losses on exchange rate differences are reported on a net basis.
T.
Earnings per share
Earnings per share are calculated by dividing the net income attributable to equity holders of the
Company by the weighted number of Ordinary shares outstanding during the period. Basic
earnings per share only include shares that were actually outstanding during the period.
Potential Ordinary shares (such employee options) are only included in the computation of
diluted earnings per share when their conversion decreases earnings per share or increases loss
per share from continuing operations. Further, potential Ordinary shares that are converted
during the period are included in diluted earnings per share only until the conversion date and
from that date in basic earnings per share. The Company's share of earnings of investees is
included based on the earnings per share of the investees multiplied by the number of shares
held by the Company.
U.
Operating segments
An operating segment is a component of the Group that meets the following three conditions:
1.
2.
3.
V.
Is engaged in business activities from which it may earn revenues and incur expenses,
including revenues and expenses relating to intra - group transactions;
Whose operating results are regularly reviewed by the Group's chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its
performance; and
For which separate financial information is available.
Provisions
A provision in accordance with IAS 37 is recognized when the Group has an obligation in the
present (legal or constructive) as the result of a past event, it is probable that an outflow of
resources embodying economic benefits will be required in order to settle the obligation and
reliable estimate can be made of the amount of the obligation.
The following are the types of provisions that are recorded in the financial statements:
Legal claims
A provision in respect of claims is recognized where the Group has a present legal or
constructive obligation as the result of past event, where it is more likely than not that the
outflow of resources embodying economic benefits will be required by the group to settle the
obligation and a reliable estimate can be made of the amount of the obligation. Where the effect
of time is significant, the provision is measured in accordance with the present value.
Provision for warranty
The Group recognizes a provision for warranty for the sale of its products. The warranty is
limited to malfunctions as defined by the Group and does not include warranty for damages
incurred by the customer.
W.
Advertizing expenses
Expenses in respect of advertising activities, sales promotion and marketing such as production
of catalogs and promotional pamphlets. are recognized as an expense at the time at which the
Group has access to the advertising products or where the service in respect of those activities is
provided to the Group.
X.
Reclassification
The Company has reclassified the balances of the liability in respect of finance leasing as of
December 31, 2010 in an amount of NIS 26 million, from loans from financial institutions
account to other long-term liabilities account.
In parallel, the Company has reclassified the balance of the current maturities as of December
31, 2010 in an amount of NIS 8 million in respect of finance leasing from current maturities of
long-term loans account, which appears under credit from financial institutions and others to
current maturities of long-term liabilities account, which appears under other payables.
Y.
Presentation of statement of comprehensive income
The Company has elected to present a single statement of comprehensive income, which
contains items relating the statement of income as well as items relating to other comprehensive
income.
Z.
Disclosure of new IFRSs in the period prior to their adoption
IAS 19 (Revised)- Employee benefits
In June 2011 the IASB published IAS 19 (Revised) (hereinafter - the standard). The principal
amendments included in the standard are:
- Actuarial gains and losses will only be recognized in other comprehensive income and not
recorded in profit or loss.
- The return on the plan assets is recognized in profit or loss based on the discount rate used to
measure the employee benefit liabilities, regardless of the actual composition of the
investment portfolio.
- The distinction between short-term employee benefits and long-term employee benefits will
be based on the expected settlement date and not on the date on which the employee first
becomes entitled to the benefits.
- Past service cost arising from changes in the plan will be recognized immediately.
The Standard is to be applied retrospectively in financial statements for annual periods
commencing on January 1, 2013, or thereafter. Earlier application is permitted.
The Company is evaluating the possible impact of the adoption of the Standard but is
presently unable to assess the effects, if any, on its financial statements.
IAS 32- Financial instruments: Presentation and IFRS 7- Financial instruments: Disclosure
In December 2011, the IASB issued amendments to IAS 32 ("the amendments to IAS 32")
regarding the offsetting of financial assets and liabilities. The amendments to IAS 32 clarify,
among others, the meaning of "currently has a legally enforceable right of set-off" ("the right of
set-off"). Among others, the amendments to IAS 32 prescribe that the right of set-off must be
legally enforceable not only during the ordinary course of business of the parties to the contract
but also in the event of bankruptcy or insolvency of one of the parties. The amendments to IAS
32 also state that in order for the right of set-off to be currently available, it must not be
contingent on a future event, there may not be periods during which the right is not available, or
there may not be any events that will cause the right to expire.
Simultaneously in December 2011, the IASB issued amendments to IFRS 7 ("the amendments
to IFRS 7") regarding the offsetting of financial assets and liabilities. According to the
amendments to IFRS 7, the Company is required, among others, to provide disclosure of rights
of set-off and related arrangements (such as collateral agreements), the composition of amounts
that are set off, and amounts subject to enforceable master netting arrangements that do not
meet the offsetting criteria of IAS 32.
The amendments to IAS 32 are to be applied retrospectively commencing from the financial
statements for periods beginning on January 1, 2014, or thereafter. Earlier application is
permitted, but disclosure of early adoption is required as well as the disclosures required by the
amendments to IFRS 7 as described above. The amendments to IFRS 7 are to be applied
retrospectively commencing from the financial statements for periods beginning on January 1,
2013, or thereafter.
The Company estimates that the amendments to IAS 32 are not expected to have a material
impact on its financial statements. The required disclosures pursuant to the amendments to IFRS
7 will be included in the Company's financial statements.
IFRS 7- Financial instruments: Disclosure
The amendment to IFRS 7 ("the Amendment") provides new and expansive disclosure
requirements regarding the derecognition of financial assets and regarding unusual transfer
activity close to the end of a reporting period. The objective of the Amendment is to assist users
of financial statements to assess the risks to which the Company may remain exposed from
transfers of financial assets and the effect of these risks on the Company's financial position.
The Amendment is designed to enhance the reporting transparency of transactions involving
asset transfers, specifically securitization of financial assets. The Amendment is to be applied
prospectively commencing from the financial statements for periods beginning on January 1,
2012. Earlier application is permitted.
The appropriate disclosures will be included in the Company's financial statements.
IFRS 9- Financial instruments
1.
In November 2009, the IASB issued IFRS 9, "Financial Instruments", the first part of
Phase 1 of a project to replace IAS 39, "Financial Instruments: Recognition and
Measurement". IFRS 9 ("the Standard") focuses mainly on the classification and
measurement of financial assets and it applies to all financial assets within the scope of
IAS 39.
According to the Standard, all financial assets (including hybrid contracts with financial
asset hosts) should be measured at fair value upon initial recognition. In subsequent
periods, debt instruments should be measured at amortized cost only if both of the
following conditions are met:
The asset is held within a business model whose objective is to hold assets in order
to collect the contractual cash flows.
-
The contractual terms of the financial asset give rise on specified dates to cash
flows that are solely payments of principal and interest on the principal amount
outstanding.
Notwithstanding the aforesaid, upon initial recognition, the Company may designate a
debt instrument that meets both of the abovementioned conditions as measured at fair
value through profit or loss if this designation eliminates or significantly reduces a
measurement or recognition inconsistency ("accounting mismatch") that would have
otherwise arisen.
Subsequent measurement of all other debt instruments and financial assets should be at
fair value.
Financial assets that are equity instruments should be measured in subsequent periods at
fair value and the changes recognized in profit or loss or in other comprehensive income,
in accordance with the election by the Company on an instrument-by-instrument basis
(amounts recognized in other comprehensive income cannot be subsequently transferred
to profit or loss). Nevertheless, if equity instruments are held for trading, they should be
measured at fair value through profit or loss. This election is final and irrevocable. When
an entity changes its business model for managing financial assets it shall reclassify all
affected financial assets. In all other circumstances, reclassification of financial
instruments is not permitted.
The Standard is effective commencing from January 1, 2015. Earlier application is
permitted. Upon initial application, the Standard should be applied retrospectively by
providing the required disclosure or restating comparative figures, except as specified in
the Standard.
2.
In October 2010, the IASB issued certain amendments to the Standard regarding
derecognition and financial liabilities. According to those amendments, the provisions of
IAS 39 will continue to apply to derecognition and to financial liabilities for which the
fair value option has not been elected (designated as measured at fair value through profit
or loss); that is, the classification and measurement provisions of IAS 39 will continue to
apply to financial liabilities held for trading and financial liabilities measured at
amortized cost.
The changes arising from these amendments affect the measurement of a liability for
which the fair value option has been chosen. Pursuant to the amendments, the amount of
the adjustment to the liability's fair value that is attributable to changes in credit risk
should be presented in other comprehensive income. All other fair value adjustments
should be presented in profit or loss. If presenting the fair value adjustment of the liability
arising from changes in credit risk in other comprehensive income creates an accounting
mismatch in profit or loss, then that adjustment should also be presented in profit or loss
rather than in other comprehensive income.
Furthermore, according to the amendments, derivative liabilities in respect of certain
unquoted equity instruments can no longer be measured at cost but rather only at fair
value.
The amendments are effective commencing from January 1, 2015. Earlier application is
permitted provided that the Company also adopts the provisions of the Standard regarding
the classification and measurement of financial assets (the first part of Phase 1). Upon
initial application, the amendments are to be applied retrospectively by providing the
required disclosure or restating comparative figures, except as specified in the
amendments.
The Company is evaluating the possible impact of the Standard but is presently unable to
assess its effect, if any, on the financial statements.
IFRS 10, IFRS 11, IFRS 12, IFRS 13 - Consolidated financial statements, Joint arrangements,
Disclosure of interest in other entities, Fair value measurement.
In May 2011, the IASB issued four new Standards: IFRS 10, "Consolidated Financial
Statements", IFRS 11, "Joint Arrangements", IFRS 12, "Disclosure of Interests in Other
Entities" ("the new Standards") and IFRS 13, "Fair Value Measurement", and amended two
existing Standards, IAS 27R (Revised 2011), "Separate Financial Statements", and IAS 28R
(Revised 2011), "Investments in Associates and Joint Ventures".
The new Standards are to be applied retrospectively in financial statements for annual periods
commencing on January 1, 2013 or thereafter. Earlier application is permitted. However, if the
Company chooses earlier application, it must adopt all the new Standards as a package
(excluding the disclosure requirements of IFRS 12 which may be adopted separately). The
Standards prescribe transition provisions with certain modifications upon initial adoption.
The main provisions of the Standards and their expected effects on the Company are as follows:
IFRS 10- Consolidated financial statements
IFRS 10 supersedes IAS 27 regarding the accounting treatment of consolidated financial
statements and includes the accounting treatment for the consolidation of structured entities
previously accounted for under SIC 12, "Consolidation - Special Purpose Entities".
IFRS 10 does not prescribe changes to the consolidation procedures but rather modifies the
definition of control for the purpose of consolidation and introduces a single consolidation
model. According to IFRS 10, in order for an investor to control an investee, the investor must
have power over the investee and exposure, or rights, to variable returns from the investee.
Power is defined as the ability to influence and direct the investee's activities that significantly
affect the investor's return.
According to IFRS 10, when assessing the existence of control, potential voting rights should be
considered only if they are substantive, as opposed to the provisions of IAS 27 prior to its
amendment which required consideration of potential voting rights only if they could be
exercised immediately while disregarding management's intentions and financial ability to
exercise such rights.
IFRS 10 also prescribes that an investor may have control even if it holds less than a majority of
the investee's voting rights (de facto control), as opposed to the provisions of the existing IAS
27 which permits a choice between two consolidation models - the de facto control model and
the legal control model.
IFRS 10 is to be applied retrospectively in financial statements for annual periods commencing
on January 1, 2013, or thereafter.
The Company believes that the adoption of IFRS 10 is not expected to have a material effect on
the financial statements.
IAS 27R- Separate financial statements
IAS 27R supersedes IAS 27 and only addresses separate financial statements. The existing
guidance for separate financial statements has remained unchanged in IAS 27R.
IFRS 12- Disclosure of interests in other entities
IFRS 12 prescribes disclosure requirements for the Company's investees, including subsidiaries,
joint arrangements, associates and structured entities. IFRS 12 expands the disclosure
requirements to include the judgments and assumptions used by management in determining the
existence of control, joint control or significant influence over investees, and in determining the
type of joint arrangement. IFRS 12 also provides disclosure requirements for material investees.
The required disclosures will be included in the Company's financial statements upon initial
adoption of IFRS 12.
IFRS 13- Fair Value Measurement
IFRS 13 establishes guidance for the measurement of fair value, to the extent that such
measurement is required according to IFRS. IFRS 13 defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. IFRS 13 also specifies the characteristics of market
participants and determines that fair value is based on the assumptions that would have been
used by market participants. According to IFRS 13, fair value measurement is based on the
assumption that the transaction will take place in the asset's or the liability's principal market, or
in the absence of a principal market, in the most advantageous market.
IFRS 13 requires an entity to maximize the use of relevant observable inputs and minimize the
use of unobservable inputs. IFRS 13 also includes a fair value hierarchy based on the inputs
used to determine fair value as follows:
Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - inputs other than quoted market prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly.
Level 3 - unobservable inputs (valuation techniques that do not make use of observable inputs).
IFRS 13 also prescribes certain specific disclosure requirements.
The new disclosures, and the measurement of assets and liabilities pursuant to IFRS 13, are to
be applied prospectively for periods commencing after the Standard's effective date, in financial
statements for annual periods commencing on January 1, 2013 or thereafter. Earlier application
is permitted. The new disclosures will not be required for comparative data.
The appropriate disclosures will be included in the Company's financial statements upon initial
adoption of IFRS 13.
The Company is evaluating the possible impact of the adoption of IFRS 13 but is presently
unable to assess the effects, if any, on its financial statements.
NOTE 3: - INVESTMENT IN MIRS
A.
Business combination in the reporting period
On November 28, 2011 the acquisition of the entire rights of Altice Securities S.A.r.l
(hereinafter- "Altice"), a company that is controlled by Altice VII S.A.r.l., which is the sole
shareholder in the controlling interest in the Company and of a third party that is not related to
the Company (hereinafter- "Migad") in Mirs was completed by the Company, which includes:
(1) 33,162,309 regular shares of par value NIS 1.00 each in Mirs, constituting 100% of Mirs'
issued and paid up share capital; (2) shareholders' loans in an amount of NIS 69 million, which
has been made available to Mirs by Altice and Migad; as well as (3) a capital note in an amount
of NIS 200 million, which had been issued to Mirs by Altice and Migad. The overall
consideration for the business combination amounted to up to NIS 1.2 billion.
As from the date of the completion of the transaction, the Company has been consolidating Mirs
financial statements.
The Company has recognized the fair value of the assets that were acquired and the liabilities
that were taken on within the framework of the business combination in accordance with an
evaluation by management with the assistance of an independent valuation firm. As of the time
of the approval of the financial statements, a final evaluation has been received.
Consideration
The total consideration for the acquisition of Mirs has been calculated in accordance with the
value of the Mirs which evaluated to approximately NIS 1.2 billion, which is based upon the
cash payment and the contingent consideration on behalf of future performance, as detailed
below:
1.
An amount of NIS 750 million in deduction of the amount of the net debt as defined in the
purchase agreement (as of June 30, 2011- an amount of NIS 264 million, which was paid
on the date of closing).
2.
Additional consideration, in an amount of NIS 450 million, which is subject to future
performance, and will be paid in payments, as detailed below:
a)
Contingent future payment upon achievement of the Company's and Mirs' EBITDA
targets - an amount of up to NIS 225 million is to be paid in four equal payments of
NIS 56.25 million each, which are conditional upon the achievement of accounting
EBITDA targets in accordance with the consolidated financial statements of the
Company (including Mirs) for the years 2013 to 2016 inclusive, as defined in the
agreement.
b)
Contingent future payment upon the achievement of Mirs' market share – an amount
of up to NIS 225 million is to be paid in end of the increasing of Mirs' "market share",
as defined in Mirs' license, up to the year 2016 at a rate of 7% of the overall Israeli
market, and this over and above its existing market share.
In accordance to the purchase agreement a mechanism for future payments was determined in
relation with EBITDA and/or market share targets are met at earlier stages and/or in the amount
of the EBITDA that is achieved in the years prior to 2016 in accordance with the EBITDA
target for the year 2016. Furthermore, a mechanism was determined for a case in which Mirs
may be charged with payments to the State in respect of the non-compliance with the market
share targets in accordance with the license that was granted, those payments are to be deducted
from the future payment that is to be made to the sellers in accordance with section 2(b).
As of the date of the purchase, the fair value of the contingent consideration was estimated at
NIS 340 million.
NOTE 3: - INVESTMENT IN MIRS (Cont.)
Financing the acquisition
The Company financed the acquisition by means of the Company's existing credit facilities,
which had been extended by Bank Hapoalim Ltd. and Bank Leumi Ltd., less the cash balance
that was available to it at that time (hereinafter- "The financing banks").
On November 28, 2011 the Company signed on an amendment to the Company's existing credit
agreement, which inter alia included the agreement of the financing banks for the execution of
the acquisition and the financing for the payment of its consideration, from the Company's
credit facilities with the financing banks (see also Note 20C(9) on this matter).
Allocation of the acquisition price
The acquisition cost is determined by management with the assistance of an independent
valuation firm, as of the time of the transaction.
The acquisition cost has been allocated to Mirs' tangible and intangible assets as well as to the
liabilities that were taken up in accordance with their assessed fair value. The excess of the
acquisition cost over the fair value of the identified tangible assets and intangible assets and less
the fair value of the liabilities taken up has been recorded as goodwill.
The overall purchase price amounted to NIS 826 million.
As aforesaid, based on management evaluation, the acquisition cost was allocated to Mirs' assets
and liabilities, as follows:
a)
The "Mirs" brand name (which was evaluated at NIS 8 million) was evaluated in
accordance with the "exemption from royalties" approach, a method that constitutes the
implementation of the income approach in the evaluation of the value of assets.
b)
Customer relationships (which were evaluated at NIS 168 million) were evaluated on the
basis of the fair value of the existing customers and in accordance with the relationship
with them in accordance with the excess earnings method for multiple periods.
c)
Customer relationships with defined periods (which were evaluated at NIS 86 million)
were evaluated on the basis of the cash flows that are expected to be received during the
period of the signed contracts.
d)
Goodwill represents the surplus of the cost of the acquisition over the estimated fair value
of the tangible and intangible assets after the deducting of the fair value of the liabilities
that were acquired by the Company.
e)
The fair value of the fixed assets (approximately NIS 640 million, including an excess cost
of NIS 237 million) was determined in accordance with the actual current cost that would
have derived where the cable network and other equipment had to be repurchased, and
taking into account amortization representing technological and economic depreciation.
f)
The liability in respect of the marketing contract as a result of its adjustment to fair value
(which was estimated at approximately NIS 26 million) has been evaluated using the
excess earning method, on the basis of the amounts that are expected to be paid in the
course of the period of the marketing contract and the amounts that are expected to be paid
under the parallel services contract at market prices.
g)
Deferred taxes have been attributed in respect of the said surplus costs (except for
goodwill).
Details of the acquisition consideration by allocation to assets and liabilities
Current assets
Fixed assets
Customer relationships, including with a defined contractual period
The Mirs brand
Other intangible assets
Other non-current assets
November 30,
2011
100%
Fair value
NIS in millions
238
640
254
8
127
83
1,350
Current liabilities
Other non-current liabilities
Deferred taxes
550
61
120
731
Identified assets, net
Goodwill deriving from the acquisition
619
207
Total acquisition cost
826
The cost of the acquisition
NIS in millions
Cash paid, including the repayment of a loan to the previous shareholder
Payables in respect of the acquisition (presented under other long-term
liabilities)
486
Total acquisition cost
826
340
Cash absorbed by the acquisition
Cash and cash equivalents in the acquired company at the time of the
acquisition
Cash paid
Net cash
6
486
(480)
The total cost of the business combination amounted to NIS 826 million and included a cash
payment of NIS 486 million, including in respect of the repayment of a loan due from Mirs to
the seller.
Direct acquisition costs, which have been attributed to the transaction, in an amount of
approximately NIS 7 million have been reflected as an expenses and recorded under other
expenses (income), net.
Beginning from the date of the acquisition, Mirs has increased the consolidated revenue by NIS
66 million and reduced the consolidated net income by NIS 42 million (in respect of the period
in which it has been consolidated into the Company's financial statements). Under the
assumption that Mirs would have been initially consolidated as from January 1, 2011, Mirs
would have increased the consolidated revenue by NIS 829 million and reduced the
consolidated net income by NIS 56 million.
The goodwill arising on the acquisition has been attributed to the forecast benefits deriving from
the synergies in the integration of the activities of the Company and of the acquire deriving
company.
NOTE 4: - THE LEGAL MERGER
A.
As stated in Note 1A(2), the legal merger between the merging companies was actually
completed on December 31, 2006, following the signing of the financing agreement with the
banks on December 12, 2006.
B.
The consideration for the acquisition
The original overall consideration for the acquisition in respect of the acquisition of the merging
companies, which was based on an evaluation from an independent external expert and in
reliance on the price per cable television subscriber of NIS 6,277.50, amounted to an overall
sum of approximately NIS 4.4 billion, with the Company taking a financial debt in an overall
amount of approximately NIS 3.2 billion upon itself, in parallel to the allocation of capital that it
executed.
NOTE 5: - CASH AND CASH EQUIVALENTS AND DESIGNATED CASH
A.
December 31
2011
2010
NIS in millions
Cash for immediate withdrawal
B.
16
1
Designated cash
December 31
2011
2010
NIS in millions
Designated cash
-
121
The restricted cash has been deposited in financial institutions and as of the balance sheet date it
bears interest based on the interest rate on daily bank deposits.
NOTE 6: - TRADE RECEIVABLES
A.
Composition:
December 31
2011
2010
NIS in millions
Open debts
Trade receivable
Credit cards
Checks collectable
Current maturities of long term receivables (see Note 9).
352
36
84
4
(3)
166
14
54
1
-
Less- provision for doubtful accounts
473
94
235
50
Trade receivables, net
379
185
1
1
Including – principal shareholders
B.
Additional details:
1.
2.
3.
C.
See Note 22 in respect of the linkage terms of the trade receivables.
The debts of Mirs' customers, which are in arrears, are interest bearing.
Impairment in the value of customers' debts is treated by means of the recording of an
allowance for doubtful accounts.
The following is the movement in the allowance for doubtful debt:
Total
NIS in millions
D.
charge for the year
38
12
Amount added for initially consolidated company
Charge for the year
Recognition of bad debts
50
38
10
(4)
94
The following is an analysis of the trade receivables (open accounts and income receivable) in
respect of which full impairment in value (allowance for doubtful debts) has not been
recognized, net trade receivables in accordance with the period of arrears in collection in
relation to the balance sheet date:
Trade receivables
settlement date
has not yet been
reached
30 – 90
90 days and
days
more
NIS in millions
Total
December 31, 2011
226
20
48
294
December 31, 2010
92
14
24
130
NOTE 7: - OTHER RECEIVABLES
A.
Composition:
December 31
2011
2010
NIS in millions
Government authorities
Prepaid expenses
Derivative instruments
Income receivable
Advances to suppliers
Others
B.
18
18
21
8
9
5
1
10
1
5
7
79
24
See Note 22 in respect of the linkage terms of the other receivables.
NOTE 8: – INVENTORY
Composition:
December 31, 2011
NIS in millions
Mobile telephones
Accessories
Spare parts
26
4
3
Less- Provision for inventories impairment
33
(9)
24
NOTE 9: - LONG-TERM TRADE RECEIVABLES
The balance represents the debts in respect of selling mobile phones with deferred consideration. The
balance is presented at its present value discounted using interest rate of 5% for a period of 36 months
net of current maturities which is presented under trade receivables (as of December 31, 2011 - NIS 42
million).
NOTE 10: - MOVIE AND PROGRAM BROADCASTING RIGHTS
December 31
2011
2010
NIS in millions
Balance at the January 1, 2011
Purchases
Disposals
Depreciations
67
95
(1)
(92)
59
108
(100)
Balance at December 31, 2011
69
67
NOTE 11: - INVESTMENTS IN FINANCIAL ASSET AVAILABLE FOR SALE
A.
The value of the investment
December 31
2011
2010
NIS in millions
Ordinary shares - quoted
B.
42
90
Additional details:
1.
As of December 31, 2011, the Company, through HOT Net Internet Services Ltd.
(formerly: HOT Investments and Financing Ltd.) (hereinafter – HOT Net), holds
1,454,663 regular shares in the company Partner Communications Ltd. (hereinafter –
Partner), constituting approximately 0.9% of Partner's share capital, which is engaged in
the provision of cellular communications services, and whose shares are traded on stock
exchanges in the United States, London and Israel.
Partner's shares are subject to the Israeli restrictions, in accordance with the mobile radiotelephone license that was granted to Partner, in accordance with which the shares can
only be sold to an Israeli buyer, as defined in the said license.
During the reporting period, Hot Net received a dividend of NIS 6 million from Partner,
which is recorded under other income (in 2010 and 2009 Hot Investments received
dividends of NIS 25 million and NIS 9 million, respectively, from Partner).
2.
The Company presents its investment in Partner as an investment in financial asset
available for sale that is measured at fair value (less a discount, which in the opinion of
the Company’s management reflects the value of the Israel restriction, as aforesaid in
section 1 above). Changes in the fair value, net of tax, are reflected under other
comprehensive income, in a reserve for available for sale financial assets.
NOTE 12: - INVESTMENTS IN CONSOLIDATED INVESTEE COMPANIES (HELD DIRECTLY BY
THE COMPANY)
A.
Composition:
December 31
2011
2010
NIS in millions
Details of the investments (directly held by the Company)
Shares
Loans
Goodwill recorded as part of the investments
1,142
3,105
156
2,677
4,247
2,833
464
257
THE COMPANY) (Cont.)
B.
General information:
2011
HOT Cable Telecommunication
Systems Haifa-Hadera Ltd. *)
HOT- Net Internet Services Ltd.
HOT Properties Ltd.
HOT Vision Ltd.
Non-Stop Ventures Ltd.
HOT Telecom Limited Partnership
Drom Hasharon Telecom (1990) Ltd. *)
IsraCable Ltd.
HOT T.L.M. Subscriber Television Ltd.
HOT Edom Ltd.
HOT – Eidan Cable Systems (Holdings)
1987 Ltd. *)
HOT Eidan Cable Systems in Israel Ltd.
HOT Gold & Co.
HOT Net Limited Partnership
MIRS Communications Ltd
Amounts made
available to the
Total amount
consolidated company
invested
by the Company
consolidated
Loans
Guarantees
company
NIS in millions
Country of
incorporation
The
Company's
rights in
equity and in
voting rights
%
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
117
14
1
60
3
2,304
1
106
8
299
-
8
31
1
62
2,740
1
95
12
Israel
Israel
Israel
Israel
100%
100%
100%
100%
Israel
100%
92
(28)
427
-
154
1,143
3,105
299
4,247
*) Companies held 100% directly
2010
HOT Cable Telecommunication
Systems Haifa-Hadera Ltd. *)
HOT- Net Internet Services Ltd.
HOT Properties Ltd.
HOT Vision Ltd.
Drom Hasharon Telecom (1990) Ltd. *)
Isracable Ltd.
HOT Edom Ltd.
HOT – Idan Cable Systems (Holdings)
1987 Ltd. *)
HOT Idan Cable Systems in Israel Ltd.
HOT Gold & Co.
Amounts made
available to the
Total amount
consolidated company
invested
by the Company
consolidated
Loans
Guarantees
company
NIS in millions
Country of
incorporation
The
Company's
rights in
equity and in
voting rights
%
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
128
(3)
1
50
3
2,295
1
116
8
268
-
13
54
1
52
2,436
1
102
12
Israel
Israel
Israel
100%
100%
100%
Israel
100%
104
(26)
-
-
162
-
2,677
268
2,833
*) Companies held 100% directly
THE COMPANY) (Cont.)
C.
The amounts of dividends from consolidated companies that the Company has received or which it is
entitled to receive:
2011
2010
2009
NIS in millions
HOT-Net Internet Services Ltd.
2
28
57
NOTE 13: - OTHER LONG-TERM RECEIVABLE
Composition:
December 31
2011
2010
NIS in millions
Prepaid expenses in respect of costs relating to the re-organization
of debt (1)
Deferred marketing expenses
Employee benefits (2) assets
(1)
See Note 20C.
(2)
Composition of assets in respect of employee benefits:
21
9
5
8
-
34
8
December 31, 2011
NIS in millions
Liabilities in respect of defined benefits plan
Fair value of the plan assets
Less liability in respect of early retirement grants (*)
(14)
27
13
(8)
Total net assets
(*) In December 2009 Mirs offered an early retirement plan to some 40 employees, who
had worked for it for more than 10 years and who were more than 50 years old, in
accordance with which in the event that the employment of an employee us brought
to an end by Mirs or by voluntary retirement within the defined period of time, the
employee will be entitled to an increased early retirement grant. The plan is in force
for a period of up to two years from the date of the aforesaid merger. The overall
cost of this retirement plan is estimated at NIS 9 million.
5
NOTE 14: -FIXED ASSETS
A.
Composition and Movement
For 2011:
Communic
Land
ations
(Including network
Construc- InfrastCables
tion Plans) ructure
network
Cost
Additions for initially
consolidated companies
Additions during the year
Disposals during the year
42
-
-
582
32
-
42
Accumulated depreciation
Call-center
Computers Office
(primarily Converters
and
furniture Leasehold
electronic
and
ancillary
and
Improve- Motor
equipment) Modems equipment equipment ments vehicles Total
NIS in millions
4,322
-
981
1,855
159
57
89
3
7,508
198
-
91
-
178
(10)
11
18
-
5
1
-
42
4
-
-
640
522
(10)
614
4,520
1,072
2,023
188
63
135
3
8,660
20
1
-
4
-
2,275
320
-
636
127
-
1,087
182
(9)
136
17
-
47
2
-
43
7
-
1
1
-
4,245
661
(9)
21
4
2,595
763
1,260
153
49
50
2
4,897
Depreciated cost as of
December 31, 2011
21
610
1,925
309
763
35
14
85
1
3,763
For 2010:
Land
(Including
Construc- Cables
tion Plans) network
Call-center
Computers Office
(primarily Converters
and
furniture Leasehold
electronic
and
ancillary
and
Improve- Motor
equipment) Modems equipment equipment ments vehicles
NIS in millions
Total
Cost
Balance as of January 1, 2010 *)
42
-
4,139
183
-
890
91
-
1,531
346
(22)
145
14
-
56
1
-
86
3
-
3
-
6,892
638
(22)
42
4,322
981
1,855
159
57
89
3
7,508
Accumulated depreciation
Balance as of January 1, 2010 *)
19
1
-
1,974
301
-
511
125
-
941
168
(22)
115
21
-
44
3
-
34
9
-
1
-
3,638
629
(22)
20
2,275
636
1,087
136
47
43
1
4,245
Depreciated cost As of
December 31, 2010
22
2,047
345
768
23
10
46
2
3,263
*)
Reclassified.
B.
The land assets are assets which are owned by the Company, presented at un-capitalized amounts.
C.
HOT Telecom has assets that have been fully depreciated and which are still operative. HOT Telecom is unable to estimate the
original cost of the said assets because of the outline of the legal merger (see Note 4). In the year 2011 Hot Telecom eliminated fully
depreciated property, plant and equipment which are not being used by the Company in an amount of NIS 26 million.
D.
See Note 24B(2) in respect of liabilities in respect of property, plant and equipment.
E.
See also Note 2X.
F.
See Note 26C in respect of liens.
G.
See Note 26B(6) in respect of commitments for the purchase of fixed assets.
NOTE 15: - GOODWILL AND INTANGIBLE ASSETS
2011:
Customer
relation
with a
defined
contract
period
Subscript
-ion
purchase
costs
Software
Customer
relationships
212
594
-
55
1,057
146
-
12
2,076
32
71
168
-
86
-
8
-
207
-
49
26
46
1
(1)
596
97
315
762
86
63
1,264
221
47
11
2,769
147
196
-
20
-
114
-
8
485
45
85
2
5
-
46
-
-
183
192
281
2
25
-
160
-
8
668
Amortized cost as of December
31, 2011
123
481
84
38
1,264
61
47
3
2,101
Cost
Additions during respect of a
initially consolidated company
Accumulated amortization
Amortization recognized during
the year
Brand
name
Goodwill
NIS in millions
Mirs
licenses
Other
2010:
Subscript
-ion
Brand
purchase
name Goodwill
costs
NIS in millions
Software
Customer
relationships
Cost
175
37
594
-
55
-
1,057
-
108
38
-
12
-
2,001
75
212
594
55
1,057
146
-
12
2,076
105
119
15
-
85
-
8
332
42
77
5
-
29
-
-
153
147
196
20
-
114
-
8
485
65
398
35
1,057
32
-
4
1,591
Accumulated amortization
Amortization recognized during
the year
Amortized cost as of December
31, 2010
license
Other
Total
Total
NOTE 15: - GOODWILL AND INTANGIBLE ASSETS (Cont.)
Amortization Expenses
Amortization of intangible assets are classified in profit or loss in the following manner:
2011
2010
2009
NIS in millions
Under cost of generating revenues
Under and marketing expenses
Under other income (expenses), net
53
130
-
41
112
-
36
110
2
183
153
148
Impairment in the value of goodwill and intangible assets with a definite useful life
For the purposes of the testing for impairment of goodwill and intangible assets with a definite useful
life, the goodwill, brand name and customer relationships have been allocated to the business
segments that represent three cash-generating units, as follows:

In Country fixed-line telecommunications

Cable television

Cellular communications
The following are the carrying amount in the financial statements of the said intangible assets, which
have been allocated to each of the cash-generating units:
Cellular
communication
Cable television
segment
As of December 31
2011
2010
2011
NIS in millions
In Country fixed-line
communication
2011
2010
Total
2011
2010
474
474`
583
583
207
1,264
1,057
Brand name
14
16
16
19
8
38
35
Customer relation
57
71
258
327
166
481
398
-
-
-
-
84
84
-
Goodwill
Customer relation with a
defined contract period
Cellular Communications
Intangible assets that were evaluated within the context of the allocation of the cost of the acquisition
of Mirs, see Note 3.
In Country fixed-line telecommunications and cable television
The Group has tested the recoverable amount of the In Country landline communications segment and
the cable television segment in accordance with the instructions contained in section 99 of
International Accounting Standard 36, based upon the recoverable amounts as of December 31, 2010,
as determined by the management with the assistance of an externa appraiser, and this was because:
(1) The assets and the liabilities that comprise the cash-generating units had not changed significantly
since the last time at which the recoverable amount was calculated – December 31, 2010;
(2) The last calculation of the recoverable amounts as of December 31, 2010 exceeded the carrying
amount by a substantial margin;
(3) Based on an analysis of the events that have occurred and the circumstances that have changed
since the last calculation of the recoverable amounts as of December 31, 2010, the Company’s
management's position, is that the likelihood that the recoverable amounts for each segment are
lower than their carrying amount is remote.
The following are the principal assumptions that were used in the measurement of the recoverable
amounts as of December 31, 2010:
In Country fixed-line telecommunications
The recoverable amount of the In Country fixed-line telecommunications segment was determined on
the basis of the value in use, which was calculated in accordance with an estimate of the future cash
flows, which are expected for the segment, which were determined in accordance with the budget for
the next five years, as of December 31, 2010. The pre-tax discount rate in accordance with which the
cash flows were discounted was 10.9%. The cash flows for the period exceeding five years from that
date were estimated used a fixed growth rate of 1.5%.
Cable television
The recoverable amount of the cable television segment was determined on the basis of the value in
use, which was calculated in accordance with an estimate of the future cash flows, which are expected
for the segment, which were determined in accordance with the plans for the next five years, as of
December 31, 2010. The pre-tax discount rate in accordance with which the cash flows were
discounted was 10.9%. The cash flows for the period exceeding five years from that date were
estimated used a fixed growth rate of 1.5%.
The key assumptions that were used in the calculation of the value in use in respect of the In Country
fixed-line telecommunications and cable television fields
The calculation of the value in use, both for the In Country fixed-line telecommunications unit and the
cable television unit, is subject to changes in the following assumptions:

Revenues.

Operating expenses.

Selling and marketing expenses.

Administrative and general expenses.

Investments.

The weighted cost of capital.

Long-term growth.
Revenues - The level of revenues is derived from changes in the number of subscribers and changes in
the average revenues per subscriber over the length of the period of the forecast.
Operating expenses - The operating expenses (excluding depreciation expenses) are primarily fixed
and semi-fixed, with the most pronounced expenses being content expenses, salary expenses and
network maintenance expenses.
Selling and marketing expenses - Selling and marketing expenses primarily include salary expenses
and advertizing and marketing expenses, which have been estimated to be in the range of from 7% of
the revenues in the cable television segment to 4% of revenues in the In Country fixed-line
telecommunications segment for the purposes of the forecast.
Administrative and general expenses - Administrative and general expenses are primarily fixed.
The weighted cost of capital The real post-tax discount rate that has been taken into account is 9.1%, which reflects a pre-tax
discount rate of 10.9%. The discount rate reflects capital of approximately 13%, an interest rate of
approximately 4% on debt and a gearing rate of approximately 40% of the total assets.
Long-term growth - Aveage long term growth is 1.5% per year
NOTE 16: - SHORT-TERM CREDIT FROM FINANCIAL INSTITUTIONS
A.
Composition:
Interest rate
%
Short-term credit from financial institutions
Current maturities of long-term loans from
financial institutions (see Note 20)
*)
December 31
2011
2010
NIS in millions
2461-1421
295
191
1411-1463
80
(* 58
375
249
Reclassified, see Note 2X.
B.
See Note 20C on the subject of a credit agreement with financial institutions and the financial
covenants to which the Company is subject.
C.
See Note 26C on the subject of collateral.
D.
See Note 22 on the subject of the linkage terms of the credit from financial institutions.
NOTE 17: - TRADE PAYABLES
A.
Composition:
December 31
2011
2010
NIS in millions
Open debts
Accrued expenses in respect of suppliers
Checks payable
Including interested parties
630
171
-
382
170
2
801
554
21
25
B.
Debts to suppliers are non-interest bearing. The average number of days of credit from suppliers
is 92 days (as of December 31, 2010 – 85 days).
C.
See Note 22 on the subject of the linkage terms of the trade payables.
NOTE 18: -OTHER PAYABLES
December 31
2011
2010
NIS in millions
Liabilities to employees and other liabilities in respect of salaries and
wages (1)
Current maturities of other long-term liabilities (see Note 24)
Current maturities of revenues from instillations
Current maturities of a burdensome contract
Interest payable
Royalties to the Israeli government
Income in advance from customers
Expenses payable
Others
*)
Reclassified, see Note 2X.
(1)
Including the provision for vacation and recuperation pay.
122
68
15
11
31
25
25
20
24
71
(*73
15
22
17
18
5
20
341
241
See Note 22 on the subject of the linkage terms of other payables.
NOTE 19: PROVISION FOR LEGAL CLAIMS
December 31
2011
2010
NIS in millions
Balance as of January 1
Amounts added in respect of an initially consolidated company
Amounts provided
Amounts paid
Amounts cancelled
Balance as of December 31
273
1
17
(4)
(119)
74
203
(4)
-
168
273
NOTE 20: - LOANS FROM FINANCIAL INSTITUTIONS
A‎‎.
Composition
December 31, 2011
Principal
amount
NIS in millions
Loans from financial institutions
(unlinked)
Less balance of credit discount expenses
712
(7)
Denoted
interest
rate
%
Effective
interest rate
%
5.65 6.34
5.94
705
December 31, 2010
Loans from financial
(unlinked)
Balance
NIS in millions
Balance less
current
maturities
NIS in millions
712
(7)
630
(5)
705
625
2,320
2,262
institutions
2,320
2.99-6.3
4.63
NOTE 20: - LOANS FROM FINANCIAL INSTITUTIONS (Cont.)
B.
Repayment periods after the reporting date:
December 31
2011
2010
NIS in millions
In the first year
In the second year
In the third year
In the fourth year
In the fifth year and thereafter
Less balance of credit discount expenses
*)
C.
82
70
74
78
408
(7)
58
1,544
683
27
8
-
705
2,320
As of December 31 2010, the balance included loans, in respect of which the Company, in accordance with
the previous credit agreement, had the right available to it to renew them and to extend their period,
amounting to NIS 2,037 million, subject to the terms set in the previous credit agreement.
On March 17, 2011 the Company, together with HOT Net Internet Services Ltd. and the HOT
Telecom Partnership (hereinafter - the borrowers), signed on an agreement with Bank Hapoalim
Ltd. and with Bank Leumi Le'Israel Ltd. (hereinafter – the banks) in connection with the
refinancing of the previous bank credit, which had been made available to the Company by a
number of financial institutions, including the banks (hereinafter – the new credit agreement). It
is stipulated in the new credit agreement that the Company is to operate opposite the banking
institutions within the framework of a syndicate, of which Bank Hapoalim Ltd. is the organizer.
On November 28, 2011 the Company signed on an amendment to the credit agreement, inter
alia, as part of the Mirs purchase transaction, which includes, inter alia, the agreement of the
financing banks for the execution of the purchase transaction (as required under the terms of the
credit agreement) and the financing for the payment of its consideration out of the Company’s
credit facility from the financing banks. The following are the main details of the credit facility,
including the main details of the amendment:
1.
The credit facility
A credit facility of up to NIS 3.4 billion, made up of three credit facilities, as follows:
a)
Credit facility A' - in total amount of up to NIS 2.04 billion. This credit facility is
available for a period of two years from the time of the signing of the new credit
agreement. This credit is to be settled in accordance with a fixed payment type
repayment schedule, over the course of the period from the drawing down of the
loan and until the final settlement date (The final settlement date, meaning the
earlier of : (a) the time at which seven years have passed from the time at which the
initial draw down was made from any of the credit facilities; or (b) the time at
which seven years and three months have passed from the time of the signing of
the credit agreement, in other words March 31, 2018).
As of December 31, 2011 the Company has taken up an amount of NIS 497 million
of this credit facility.
b)
Credit Facility B' - in total amount of up to NIS 876 million. This credit facility is
available for a period of two years from the time of the signing of the new credit
agreement. The principal amount of the loans taken up from this facility are to be
repaid at the time of the final settlement.
As of December 31, 2011 the Company has taken up loans in an amount of NIS
214 million from this credit facility.
c)
Credit facility C' - in total amount of up to NIS 0.5 billion, which can be used for
bank guarantees, futures transactions, short-term loans, the factoring of payments
to suppliers, credit card facilities, all of which is to be done in accordance with the
new credit agreement. This credit facility is available up to the final settlement
date.
As of December 31, 2011 the Company has taken up loans in an amount of NIS
295 million from this credit facility.
2.
Settlement terms for the principal and interest
The amounts of the principal in respect of each loan that is made available out of facility
A' is to be repaid in quarterly payments in accordance with a "fixed payment type"
repayment schedule. The amounts of the principal in respect of loans taken up from credit
facility B' are to be repaid in full at the final settlement date. The amounts that may be
paid by a financer under bank guarantees that it has issued and /or a commitment in
respect of a future transaction and/or a short-term loan out of credit facility C' are to be
repaid to that same financer in accordance with the terms set with that financer in respect
of those credits.
Any credit that will be made available under credit facility A' and credit facility B' shall
bear interest from the time that it is made available and until the time that it is repaid, at
the aforesaid annual interest rate, with the addition of a margin and with the addition of a
cost in so far as one shall apply under the provisions of the law. Any credit taken up out
of credit facility C' shall bear interest from the time that the credit is made available until
the time that it is repaid.
3.
The interest
The interest in respect of the bank credit in credit facilities A' and B' is to be based on the
average of the bases for the determination of interest rates in banks (hereinafter – the
banks' credit recruitment cost) with the addition of a margin in accordance with the new
credit agreement. The interest in respect of the bank credit in credit facility C' is to be
based upon the bank's cost of recruiting and that of the other financing banks, with the
addition of a margin that shall not exceed the margin in accordance with the new credit
agreement.
4.
The financial covenants
A number of financial covenants were set in the credit agreement, which the Company is
to comply with, on a quarterly basis, including: a debt cover ratio (with and without cash
balances), a debt to cash flows ratio, a ratio between the total amount of the financial
liabilities less cash balances and the EBITDA and a minimal capital level.
As of December 31, 2011 the Company is in compliance with the required financial
covenants.
5.
Immediate repayment
A series of cases, events and circumstances were set in the credit agreement, in which the
banks are entitled to make all of the credit repayable immediately. Among the other
cases, the following may be noted: not paying on time; a breach of the agreement; noncompliance with financial ratios; insolvency; liquidation; attachments and so on, the
cancellation or expiry of a significant license; a breach of other financial commitments
vis-à-vis other parties (other than the banks); a transfer or acquisition of control in the
Company in contravention of the provisions of the new credit agreement; a change in the
field of activity of any of the borrowers; the exercise of a bank guarantee that has been
made available under any of the Group's licenses; if any of the Company's securities that
are registered for trade on a stock exchange being removed or suspended from trading
(for more than five consecutive trading days); an event or series of events that could, in
the opinion of the financial institutions, cause a significant impact in the borrower's
ability to fulfill every material aspect of the provisions of the new credit agreement or a
significant impact in the borrower's financial position.
6.
Collateral
For the purpose of collateralizing the bank credit in accordance with the new credit
agreement, first ranking, fixed charges and endorsements by way of a charge in an
unlimited amount have been placed, as detailed below:
a)
First ranking fixed charges on the rights of the Group companies.
b)
Endorsements by way of a charge on the Groups subscription agreements with its
subscribers and the supplier numbers of the Group companies with credit
companies.
c)
Fixed charges on the Group companies' equipment.
d)
Fixed charges on the Group companies' land assets.
e)
Fixed charges on the Group companies' bank accounts.
f)
First ranking floating charges on all of the Group companies' assets and rights.
In addition to the aforesaid, the borrowers have made guarantees available in relation to
the other two borrowers within the framework of which they have guaranteed the fill
amounts of the liabilities that are guarantees in accordance with the new credit facility.
7.
Distribution
The Company will be entitled to distribute a dividend to its shareholders, including by
way of a capital reduction, subject to the receipt of all of the approvals that are required
under the law, and this so long as the Company's shareholders' equity shall not fall below
an overall amount of NIS 600 million, a minimal debt cover ratio of 1.25, a debt to cash
flow ratio of 5.5 in the year 2011 (and at a reducing rate until 2014) and a minimal annual
EBITDA of NIS 1.3 billion (see also Note 27I on the subject of the declaration and
distribution of a dividend after the balance sheet date).
8.
Restrictions that apply to the Group in respect of the receipt of credit
The making available of the bank credit to borrowers is subject to a number of conditions,
inter alia, the repayment of the bank credit in accordance with the previous credit
agreement to the consortium of banks that are connected to the agreement, the removal of
the charges on the Group's assets in accordance with the previous credit agreement and
the creation of new charges in accordance with the aforesaid. As of the time of the
approval of the financial statements the said conditions are being complied with, except
for the non-completion of the recording of the charges, as required in the agreement,
since they are still in the process of being recorded.
9.
The amendment of the credit agreement as the result of the acquisition of Mirs
As aforesaid, as a result of the acquisition of Mirs by the Company, the Company entered
into a commitment with the financing banks on November 28, 2011 under an amendment.
Within the framework of the amendment, the Company has undertaken, inter alia, as
follows:
a)
The Company has undertaken to register a first ranking fixed charge and an
endorsement by way of a charge in an unlimited amount on all of Mirs' share
capital that it owns after the completion of the transaction for the acquisition of
Mirs and all of the rights that are attached and/or that derive therefrom, inter alia,
on the Company’s rights to the repayment of shareholders' loans and rights to the
repayment of amounts under capital notes and so on.
b)
The minimum EBITDA requirements (within the definition of that term in the
amendment to the credit agreement) for the purpose of the distribution of a current
dividend by the Company and for the payment of management fees have been
increased from NIS 1.2 billion a year to NIS 1.3 billion a year, as aforesaid.
c)
The Company has undertaken to bear a rate of not less than 30 (thirty) percent of
the financing of Mirs' investments (within the definition of that term in the
amendment to the credit agreement). In addition, the Company has undertaken that
as from January 1, 2014 it will bear the following at a rate of not less than 30%: (a)
the financing of Mirs' investments; with the addition of (b) the amount of the
balance of the bank guarantee that was made available to Mirs as collateral for the
commitments that had been given within the framework of the frequencies tender
process, as that may be at that time (hereinafter – the frequencies guarantee, see
also Note 26C(6)(d) on this matter.
d)
Despite the aforesaid, the Company shall not bear the cumulative financing of its
investments in Mirs, in an amount that exceeds NIS 0.5, 0.8, 1 and 1.1 billion in the
years 2012, 2013, 2014 and 2015 and thereafter, respectively (where for this
purpose, inter alia, the amounts that the Company is to pay for the purposes of the
frequencies guaranty, are not to be taken into account).
As part of the repayment of the previous bank credit and the signing on the new credit
agreement, the Company bore early repayment type and re-organization type
commissions in the reporting period as well as consultancy costs in an amount of NIS 57
million, of which NIS 23 million have been reflected under financing expenses in the
statement of income and an amount of NIS 34 million has been recorded as a discount
from the credit, which has been exploited and partially as a prepaid expenses in respect of
the unexploited credit facility.
D.
The Mirs credit agreement
As part of the transaction for Mirs acquisition by the Company and in order to receive the bank's
approval for the execution of the transaction for the acquisition of Mirs, the conditional
approval of Mirs' financing bank for the completions of the acquisition was received on
November 28, 2011. The bank's approval is subject to compliance with a number of crucial
conditions, including the entry into force of the letter of undertaking that was signed by Mirs,
which will arrange the commitments vis-à-vis the financing bank, including in connection with
the frequencies guarantee (hereinafter -the letter of undertaking). The main points in the letter
of undertaking are as follows:
1.
Upon the entry of the letter of undertaking into force, Mirs repaid all of the credit that had
been made available to it by Bank Hapoalim within the framework of the credit
agreement, and all of Mirs shares, which had been charged under the said credit
agreement were released and those shares have been charged in favor of the Company's
financing banks in accordance with the new credit agreement, which is described above.
2.
Mirs has undertaken to the subordination of the shareholders' loans and the capital notes
that were sold to the Company within the framework of the transaction for the acquisition
of Mirs in relation to the debts to the financing bank and it has also undertaken not to
repay the existing and/or future shareholders' loans at any time whatsoever and in any
manner (whether in money or in money's worth and including by way of set-off) to any of
Mirs' shareholders or to any body that is related to the shareholders, as aforesaid, or to an
interested party in the shareholders or to any related body or relative of any of these (all
of whom will jointly be called: "a related party"), so long as Mirs has not repaid its debts
to the bank. However, it is clarified that the aforesaid shall not apply in respect of
commercial debts, which arise in the ordinary course of Mirs' business.
3.
There is a prohibition on Mirs making a loan to a related party and/or to any third party
whatsoever.
4.
There is a prohibition on the execution, on a decision to execute, a declaration or an
undertaking to make any distribution whatsoever of any receipt whatsoever to a related
party, except for management fees in an annual amount that does not exceed an amount
of NIS 10 million and additional exceptions, which were set in the letter of undertaking.
5.
Financial covenants have been set for Mirs, which include:
a)
The making available of a fixed charge on a Shekel deposit, in favor of the banks,
in accordance with a formula that was detailed in the letter of undertaking, in the
event of the non-compliance with the radio-telephone market share rate as defined
in the agreement.
b)
A minimal ratio between the amounts of the increase in the shareholders' equity
and Mirs cumulative free cash flows, as defined in the agreement, as from the time
of the completion of the acquisition transaction by the Company and thereafter.
As of December 31, 2011 Mirs is in compliance with the financial covenants that
have been set for it.
c)
A prohibition on a change in control or a change in Mirs structure, or a change in
Mirs' ownership, directly and/or indirectly, which does not constitute a change in
control however it leads to the financing bank exceeding the restrictions that are
placed upon it under the directives and the procedures issued by the Bank of Israel
and the Supervisor of Banks in any issue relating to "a single borrower", "a group
of borrowers" or any other restriction that is placed upon the bank and those
directives and procedures.
E.
See Note 26C in respect of collateral.
F.
See Note 22 on the subject of the linkage and interest terms of the loans from financial
institutions.
NOTE 21: - DEBENTURES
A‎‎.
Composition
December 31,
2011
NIS in millions
Debentures
Less- balance of deferred issuance expenses
1,514
(14)
1,500
B.
Repayment periods after the reporting date
December 31,
2011
NIS in millions
In the first year – current maturities
In the second year
In the third year
In the fourth year
In the fifth year and thereafter
Less- balance of deferred issuance expenses
63
126
126
126
1,073
(14)
1,500
NOTE 21: - DEBENTURES (Cont.)
C.
On February 27, 2011 the Company’s Board of Directors approved a decision on the subject of
the presentation of an application to the Securities Authority and the Tel-Aviv Stock Exchange
for a permit for the publication of a shelf prospectus, on the basis of the Company’s financial
statements as of September 30, 2010, in accordance with which the Company will be entitled to
issue shares, options for shares, debentures and convertible debentures as well as options for
debentures, in such extend and under such conditions as may be determined in accordance with
the shelf offer reports, if and in so far as they may be published by the Company in the future.
D.
On March 29, 2011 the Company announced that it had received all of the permits, approvals
and licenses that are required in accordance with the law for the offering of the securities that
are being offered in accordance with the shelf offer report, for the issuance and publication of
the shelf offer report and in accordance with its offering of debentures to the public.
On March 30, 2011 a tender was held for the purchase of the Company's Series A and Series B
debentures. The immediate gross consideration that was received by the Company within the
framework of the said issue amounted to NIS 1.5 billion.
E.
The Series A' debentures – NIS 825 million par value are linked to the Consumer Prices Index
for the month of February, 2011, and bear interest at a rate of 3.9% a year. The debentures are
repayable in 13 semi-annual payments commencing on September 30, 2012 and up to
September 30, 2018. The debentures are not collateralized by any charge whatsoever.
The gross consideration that was received by the Company in respect of the said debentures
amounted to NIS 825 million.
F.
The Series B' debentures - NIS 675 million par value bear interest at a fixed rate of 6.9% a
year. The debentures are repayable in 13 semi-annual payments commencing on September 30,
2012 and up to September 30, 2018. The debentures are not collateralized by any charge
whatsoever.
The gross consideration that was received by the Company in respect of the said debentures
amounted to NIS 675 million.
G.
On March 29, 2011 and on September 12, 2011, the Company received a rating of A1 with a
stable horizon for the Series A and Series B debentures, in an amount of up to NIS 1,500
million par value from the Midroog Ltd. rating company.
The issuance expenses in respect of the said debentures amounted to NIS 15 million (as of
December 31, 2011 the issuance expenses amounted to NIS 14 million).
H.
Financial covenants were set within the framework of the issue of the debentures, the breach of
which, under certain conditions, could lead to the immediate repayment of the debentures, as
follows:
1.
A debt to EBITDA ratio, which is not to exceed 6 for a period that exceeds two
consecutive quarters.
2.
A distribution of a dividend at a time at which the Company is exceeding a debt to
EBITDA ratio of 5.5
As of December 31, 2011 the Company was in compliance with all of the required financial
covenants.
NOTE 22: - FINANCIAL INSTRUMENTS
A.
The classification of the financial assets and the financial liabilities
The following is the classification of the financial assets and the financial liabilities in the
balance sheet by groups of financial instruments in accordance with IAS 39:
December 31
2011
2010
NIS in millions
Financial assets
Financial assets at fair value through profit or loss:
Financial assets classified as held for trading
Loans and receivables
Available for sale financial asset
Financial liabilities measured at amortized cost
Financial liabilities at fair value through profit or loss:
Financial liabilities designated at the time of initial recognition
Financial liabilities classified as held for trading
B.
25
-
494
197
42
90
3,790
3,425
360
3
18
Financial risk factors
The Group's activities expose it to various financial risks, such as market risks (foreign
exchange risk, interest rate risk and price risk), credit risk and liquidity risk. The Group's overall
risk management program focuses on activities that reduce to a minimum the possible negative
impact on the Group's financial performance. The Group utilized derivative financial
instruments in order to hedge certain exposures to risks.
The risk management is performed by the Company’s Chief Financial Officer, in accordance
with policies that have been approved by the Board of Directors. The Company’s Chief
Financial Officer evaluates and hedges financial risks in cooperation with the Group’s operating
units. The Board of Directors provides principles for the overall management of the risks.
1.
Market Risks
a)
Foreign Exchange Risk
The Group operates with various suppliers across the globe and it is exposed to
foreign exchange risk, which derived from the exposure to various currencies,
primarily the US Dollar. Exchange rate risk derives from the Company’s futures
transactions and from liabilities that have been recognized and which are denoted
in foreign currency, which is not the functional currency.
The Company's management acts to hedge some of the forecast US Dollar
transactions (other than for the purposes of accounting hedging), based on
budgetary data, subject to the terms of the credit agreement with the financial
institutions.
NOTE 22: - FINANCIAL INSTRUMENTS (Cont.)
b)
Consumer Prices Index Risk
The Group has loans from banking institutions, debentures that have been issued
and other long-term liabilities that are linked to Consumer Prices Index in Israel.
Furthermore, the Group has deposits and loans that have been extended, which are
linked to changes in that index. The net amount of the financial instruments that are
linked to the Consumer Prices Index and in respect of which the group has an
exposure to changes in the Consumer Prices Index is financial liabilities of
NIS 1,235 million as of December 31, 2011.
c)
Interest rate risk
The Group is exposed to risk in respect of changes in the interest rates in the
market that derives from long-term loans that have been received and which bear
interest at a variable rate. The mix of the loans at variable rates and/or at fixed rates
is partially determined within the framework of the credit agreement with the
financial institutions.
The following are details in respect of the type of interest on the Group's interest
bearing financial instruments:
December 31
2011
2010
NIS in millions
d)
Fixed rate interest instruments
1,765
1,555
Variable interest rate bearing instruments
1,008
1,192
Price risk
The Group has investments in financial instruments, which are marketable on the
Stock Exchange, which have been classified as an available for sale financial asset,
in respect of which the Group is exposed to risk in respect of fluctuations in the
price of the security, which is determined on the basis quoted of market prices. The
balance of these investments as recorded in the financial statements as of
December 31, 2011 is NIS 42 million (December 31, 2010 - NIS 90 million).
2.
Liquidity risk
The Group's objective is to maintain the existing ratio between the receipt of continuing
financing and the existing flexibility by means of the use of overdrafts and loans from
financial institutions. Within the framework of the Company's new credit agreement and
the terms of the debentures that the Company has raised (as aforesaid in Note 20 and 21),
the Company and Mirs have financial covenants that they have to comply with on a
quarterly basis and their breach, as defined in the agreements, may lead to a demand for
the immediate repayment of the credit that has been available by the financial institutions
and/or with the framework of the debentures.
3.
Credit risk
The Group has no significant concentrations of credit risk. Credit risk might arise from
exposures in respect of commitments under a number of financial instruments with one
body or as a result of a commitment with a number of groups or debtors having similar
economic characteristics, whose ability to meet their commitments is expected to be
affected similarly by changes in the economic or other conditions. Characteristics that
might cause a concentration of risk include the significance of the activities in which the
debtors are engaged, such as the branch in which they operate, the geographical region in
which they operate and the level of their financial stability.
The Group provides services under credit terms of 16 days, 24 days and 96 days on
average to its customers in the broadcasting, In Country fixed-line telecommunications
and cellular telecommunications fields, respectively. The managements of the Group
companies routinely evaluate the credit that has been extended to its customers, whilst
checking their financial condition, however it does not demand collateral to secure those
receivables. The Company records an allowance for doubtful accounts, based on the
factors that affect the credit risk pertaining to specific customers, past experience and
other information.
The Group's income derives from customers in Israel. The Group routinely monitors
customers' receivables and an allowance for doubtful accounts is recorded in the financial
statements, which in the Group's opinion, provides a fair reflection of the loss that is
inherent in debts whose collection lies in doubt.
The Group does not have any significant concentrations of credit risk, because of the
Group's policy, which ensures that the sales are mostly executed against standing orders
or by means of credit cards.
C.
Liquidity Risk Concentration
The following table presents the maturity profile of the Group’s financial liabilities, in accordance with the contractual terms, in non-discounted sums, including payments in respect of
interest:
As of December 31, 2011
Up to 3
Months
Credit from banking institutions
Other payables
Trade payables
Long-term loans from banking institutions (including current maturities)
Debentures (including current maturities)
Other long-term liabilities (including current maturities) *)
From 3
Months
Up to One
Year
From One
to
From Two From 3 to From 4 to
Two Years to 3 Years 4 Years
5 Years
NIS in millions
Over 5
Years
Total
231
632
816
11
21
29
81
622
11
611
633
292
611
632
612
611
681
667
611
678
77
921
66122
21
231
632
816
311
66321
717
66216
218
197
211
218
916
66261
26891
Up to 3
Months
Credit from financial institutions
Trade payables
Other payables
Long-term loans from financial institutions (including current maturities)
Other long-term liabilities (including current maturities)
*)
681
112
622
27
61
From 3
Months
Up to One
Year
1
9
621
22
From 1 to From 2 From 3 to From 4 to
2 Years to 3 Years 4 Years
5 Years
NIS in millions
66111
18
131
13
23
11
3
3
Over 5
Years
62
Total
632
112
627
26111
218
317
633
66118
712
83
68
62
96197
Payments of NIS 145 million, NIS 77 million, NIS 97 million and NIS 66 million in 2013, 2014, 2015 and 2016, respectively, have been assumed in respect of contingent
consideration, based on the most common scenarios that are inherent in the value of the estimated contingent consideration in respect of the acquisition of shares in Mirs (see also
Note 3).
D.
The fair value of financial instruments that are presented in the financial statements other
than in accordance with their fair values
Carrying amount
Fair Value
December 31
December 31
2011
2010
2011
2010
NIS in millions
Financial Liabilities
Long-term loans from banking
institutions at variable interest
rates (including current
maturities) *)
Long-term loans from banking
institutions at fixed interest rates
(including current maturities) **)
Debentures bearing fixed interest
rates (including current maturities)
Liabilities to the government and
other long-term liabilities at fixed
interest rates (including current
maturities)
Total
*)
769
66679
721
66671
-
66613
-
66631
66121
-
66127
-
221
262
227
292
26278
26111
26232
26137
The balance of long-term loans at variable interest rates includes the amount of
interest that has accumulated and has not yet been paid as of the balance sheet date
and has been recorded under other payables. The fair value of the long-term loans at
variable interest rates is based on a calculation of the present value of the cash flows
after updating the amount for which a variable interest rate has been set.
**) The balance of long-term loans at fixed interest rates includes the amount of interest
that has accumulated and has not yet been paid as of December 31, 2011 and has
been recorded under other payables. The fair value of the long-term loans at fixed
interest rates is based on a calculation of the present value of the cash flows at the
generally accepted interest rate for a similar loan.
The fair value is estimated based on recent market transactions between unrelated parties.
The carrying amount of cash and cash equivalents, designated cash, trade receivables,
other receivables, credit from financial institutions, trade payables, and other payables in
the financial statements accords with or approximates their fair value.
E.
The classification of financial instruments in accordance with hierarchical levels for fair
values:
The financial instruments that are presented in the balance sheet in accordance with their fair
value are classified in accordance with groups that have similar characteristics, into
hierarchical levels for fair values, as aforesaid, which are determined in accordance with the
source of the input that was used for determining the fair value:
Level 1 -
Quoted prices (without adjustments) in an active market for identical assets
and liabilities. As of December 31, 2011 the Company has no financial assets
or liabilities that meet the definition of Level 1.
Level 2 -
Inputs other than quoted prices that are included in level 1, which can be
observed directly or indirectly.
Level 3 -
Inputs that are not based on observable market data (an evaluation technique
that does not use observable market data).
Financial instruments measured at fair value
Level 2
Level 3
NIS in millions
Available for sale financial asset:
Shares
Financial assets at fair value through profit or loss:
Forward contracts in foreign currency that are not defined as
accounting hedges
Embedded derivatives
Interest rate swap contract
Liability to the Ministry of Communications (see Note 24)
Payables for the acquisition (see Note 3)
-
42
25
-
2
1
-
19
341
22
(318)
-
90
14
4
-
18
90
Available for sale financial asset:
Shares
Forward contracts in foreign currency that are not defined as
accounting hedges
Interest rate swap contract
During the course of the year 2011 there were no transfers in respect of measurement at fair value of
any financial instrument whatsoever between level 1 and level 2, and in addition there were no
transfers into or out of level 3 in respect of measurement at fair value of any financial instrument
whatsoever.
Movements in financial assets that are classified under level 3
Available for sale
financial assets
NIS in millions
Total income recognized under other comprehensive income (exclusive
of the impact of taxation)
96
Addition for newly respect of an initially consolidated company
Total loss recognized in profit or loss (exclusive of the impact of
taxation)
Total loss recognized under other comprehensive income (loss)
(exclusive of the impact of taxation)
90
(359)
(318 )
(6)
(1)
(48 )
F.
Embedded derivatives
The Group has a commitment under a number of content purchasing agreements and rental
agreements that are denoted in a currency (primarily the Dollar), other than the functional
currency of any of the parties to the agreements.
G. Sensitivity tests in respect of changes in market factors:
1.
Sensitivity tests for changes in interest rates:
Gain (loss) from the change
Increase of
Decrease of
0.5% in the
0.5% in the
interest rate
interest rate
NIS in millions
2011
2
(2)
Increase of
Decrease of
1.5% in the
0.5% in the
interest rate
interest rate
NIS in millions
2010
2.
(16)
5
Sensitivity tests for changes in the exchange rate of the Dollar:
Increase of
Decrease of
10% in the
10% in the
exchange rate exchange rate
NIS in millions
3.
2011
22
(22)
2010
19
(19)
Sensitivity tests for changes in the Consumer Prices Index:
Increase of
Decrease of
2.5% in the
2.5% in the
index
index
NIS in millions
2011
(29)
29
4.
Sensitivity tests for changes in the price of available for sale securities on the Stock
Exchange:
Change in equity before tax
Increase of
Decrease of
20% in the
20% in the
security price security price
NIS in millions
2011
9
(9)
Change in equity before tax
Increase of
Decrease of
10% in the
10% in the
security price security price
NIS in millions
2010
9
(9)
Sensitivity test and the principal working assumptions
The sensitivity analysis in respect of financial instruments was performed under the
assumption that the amount outstanding as of the balance sheet date was outstanding
throughout the entire reporting year.
The changes that have been selected as the relevant risk variables have been determined
in accordance with management's assessment in respect of the changes in those risk
variables that are reasonably possible.
The Company has performed sensitivity testing for the main market risk factors that could
affect the reported operating results or the financial position. The sensitivity tests present
the gain or loss and/or the change in equity (pre-tax) for each financial instrument in
respect of the relevant risk variable that has been selected for it as of each reporting date.
The testing of the risk factors was executed on the basis of the materiality of the
exposure of the operating results or the financial position in respect of each risk factor,
taking into account the functional currency and on the assumption that all the other
variables remained fixed.
The Group has no exposure in respect of interest risk in respect of long-term loans at
fixed interest rates.
In respect of long-term loans at variable interest rates, the sensitivity test for interest risk
was only performed in respect of the variable interest component.
In 2011 an annual interest rate of 0% - 1.3% was used in respect of forwards transactions
opposite the Dollar (2010 – 0% - 1.3%). An annual Shekel interest rate of 2% - 2.5% was
used for all forward transactions (2010 – 1.5% - 2.5%).
H.
Linkage terms of the monetary balance
December 31, 2011
In
foreign
currency
or linked
thereto
Linked to
the
Consumer
Prices
Index
Unlinked
December 31, 2010
In
foreign
currency
or linked
Total
thereto
NIS in million
Linked to
the
Consumer
Prices
Index
Unlinked
Total
Assets
Designated cash
Trade receivables
Other receivables
Long-term trade receivables
Long-term loans to affiliated companies
21
-
63
9
61
973
8
81
-
61
973
12
81
9
-
6
9
6
626
681
8
-
6
626
681
3
9
21
22
288
191
-
2
961
963
623
13
62
896
262
231
127
261
711
113
612
231
731
222
711
66111
191
669
62
92
2
27
636
226
692
26921
617
636
112
611
26921
228
218
66217
26188
26619
616
96
96216
96229
Liabilities
Short-term credit from banking institutions
Trade payables
Other payables
Loans from banking institutions *)
Debentures
Other long-term liabilities *)
*) Includes current maturities.
HOT - Telecommunication Systems Ltd.
Appendix to the Consolidated Financial Statements
NOTE 23: - ASSETS AND LIABILITIES IN RESPECT OF EMPLOYEE BENEFITS
Defined Benefit Plans
The portion of the severance pay payments that is not covered by deposits as aforesaid, is treated by
the Group as a defined benefit plan in accordance with which a liability is recorded in respect of
employee benefits, and the Group deposits amounts in central severance pay funds and in appropriate
insurance policies in respect of it.
The Group has defined deposit plans, in accordance with section 14 of the Severance Pay Law, in
accordance with which the Group makes regular payments without it having a legal or implicit
commitment to pay additional payments even if sufficient funds have not accumulated in the funds to
pay all of the benefits to an employee that relate to the employee's employment in the current period
and in previous periods.
Deposits in a defined deposit plan in respect of severance pay or in respect of emoluments are
recognized as expense at the time of the deposit in the plan, in parallel to the receipt of the labor
services from the employee and no additional provision is required in the financial statements.
1. Expenses reflected in the statement of comprehensive income
2011
2010
2009
NIS in millions
Current service cost
Interest expenses in respect of the benefit
liabilities
Expected yield in the plan assets
Net actuarial loss (gain), which has been
recognized in the year
Total expenses in respect of employee
benefits
Actual yield on the plan assets
The expenses have been presented in the
statement of income as follows:
Selling and marketing expenses
Administrative and general expenses
Financing expenses
2.
19
19
18
5
(4)
5
(4)
4
(2)
12
(1)
(1)
32
19
19
4
4
13
22
5
4
1
14
2
2
1
13
2
2
2
32
19
19
The plan assets (liabilities)
As of December 31
2011
2010
NIS in millions
Liabilities in respect of a defined benefit plan
Fair value of the plan assets
Total net liabilities
(125)
102
(117)
99
(23)
(18)
Cumulative amounts in respect of the value of the liabilities and in respect of the value of the
rights in the plan assets.
NOTE 23: - ASSETS AND LIABILITIES IN RESPECT OF EMPLOYEE BENEFITS (Cont.)
3.
Changes in the present value of the liability in respect of a defined benefit plan
2011
2010
NIS in millions
4.
117
112
Interest expenses
Current service cost
Benefits paid
Net actuarial loss (profit)
5
19
(20)
4
5
19
(18)
(1)
125
117
The plan assets
a)
The plan assets
The Plan Assets include assets that are held by a long-term employee benefit fund as well
as in appropriate insurance policies.
b)
The movement in the fair value of the plan assets
2011
2010
NIS in millions
33
88
Expected yield
Deposits by the employer into the plan
Benefits paid
Net actuarial loss
4
19
(12)
(8)
4
20
(13)
-
102
99
2011
2010
2009
NIS in millions
2
Actual yield on the plan assets
5.
4
13
The principal assumptions in the determination of the liability in respect of a defined benefit
plan
2011
2010
%
2009
The discount rate
4.34
4.6
4.3
Expected yield on the plan assets
4.51
4.8
4.5
Expected rate of salary increases
2-4
2–4
2-4
NOTE 24: - OTHER LONG-TERM PAYABLES
Composition:
December 31
2011
2010
NIS in millions
Liability to the government (1)
Liability for financial leases (2)
Liability for in respect of financial instruments (3)
Liability for in respect of senior employees (4)
Liability for in respect of a marketing agreement (5)
Liability to the Ministry of Communications (6)
Payables for in respect of purchase (7)
Long-term trade payables
Deposits for in respect of converters
127
105
3
6
25
19
341
10
3
152
61
4
10
5
Less current maturities
639
(84)
234
(58)
555
176
(1)
(2)
On December 31, 2011 and in accordance with the change in the Company management’s
forecast in respect of the change in the Group’s future revenues, the liability to the
government was increased by NIS 4 million (year ended December 31, 2010- NIS 11
million).
(a)
Composition
December 31, 2011
Denoted
interest rate
%
Effective
interest rate
%
0–7
2.97
Principal amount
NIS in millions
Denoted
interest rate
%
Effective
interest rate
%
61
1.58 – 3.54
2.01
Principal amount
NIS in millions
Liability for
finance lease
105
Balance
NIS in millions
Balance less
current
maturities
NIS in millions
105
84
Balance
NIS in millions
Balance less
current
maturities
NIS in millions
61
49
December 31, 2010
Liability for
finance lease
NOTE 24: - OTHER LONG-TERM PAYABLES (Cont.)
(b)
The following is information for finance leasing in accordance with the distribution
of the payment times
December 31, 2011
December 31, 2010
NIS in millions
Present
value of the
Minimum
minimum
future lease The interest
lease
payments
component
payments
In the first year
Second year to fifth year
After the fifth year
(c)
(3)
Minimum
future lease
payments
Present
value of the
minimum
The interest
lease
component
payments
25
75
20
4
8
3
21
67
17
14
44
12
2
5
2
12
39
10
120
15
105
70
9
61
(1)
The Group leases equipment under finance leasing agreements. The
agreements enable the Group to purchase the leased equipment at an
opportunity price. An arrangement exists within the framework of the leases,
which does not meet the legal definition of leasing, but which is treated as a
leasing agreement, based upon its terms. The leased equipment serves as
collateral for the liabilities under the lease contract. As of December 31,
2011 the net carrying amount of the leased facilities and equipment is NIS
191 million (2010- NIS 181 million).
(2)
Mirs has finance leasing in an amount of NIS 18 million, in respect of
investments in leasehold improvements in accordance with Mirs' rental
contract with the company "Airport City" Ltd., which is for a period of 10
years ending in 2019. As of December 31, 2011 the net carrying value of the
leasing improvements is NIS 17 million.
(3)
The Group has recorded finance leasing in respect of the Bezeq agreement
that is described in Note 26B(4). As of December 31, 2011 the finance
leasing commitment in respect of the long-term Bezeq rental fees was
updated by an amount of NIS 3 million, as a result of additional payments
made in respect of the leasing in the reporting period (as of December 31,
2010- NIS 6 million).
In 2008 the Company entered into an IRS (Interest Rates Swap) transaction with a
financing institution (hereinafter - the financing institution) in an amount of NIS 100
million, which is expected to expire in 2012, in parallel to the repayment of credit from
another financing institution.
As of December 31, 2011 the value of the IRS transaction is NIS 1 million (reported
under other payables in an amount of NIS 1 million) (2010 - NIS 4 million, reported
under other payables in an amount of NIS 3 million). Furthermore, the balance as of
December 31, 2011 includes a balance of NIS 2 million of embedded derivatives (stated
under other payables in an amount of NIS 1 million).
(4)
On May 19, 2008 the Company's Audit Committee and Board of Directors decided upon a
phantom options plan (hereinafter - the options) for senior office holders in the Company
(hereinafter - the plan). It was determined that the total number of the options that the
Company is to make available for the purpose of the exercise of the plan and their allocation
to all of the Company's offerss is 1,588,666 options, of which an amount of 1,278,860
options, have been actually allocated.
At the time of the approval, as aforesaid, options were allocated to 13 office holders, and
up to the balance sheet date nine office holders, who were within the framework of the
plan, have announced that they were leaving the Company and accordingly the grant
agreement in respect of them has been cancelled (818,147 options) and the plan remains
in place in respect of four office holders, to whom 460,713 options have been allocated.
The options are exercisable into a monetary grant and not into shares of the Company.
The phantom grant is a monetary grant in cash in an amount that is equivalent to the
difference by which the market price of the Company’s shares at the time of the exercise,
exceeds the exercise price, as defined in the plan, and this is for each option that may be
exercised in accordance with the terms of the plan.
On October 11, 2010, the Company's Audit Committee and Board of Director approved
an amendment to the plan and the agreements between the Company and the office
holders, such that the exercise period of the options that had been granted and/or that
would be granted in accordance with the phantom plan, which was a period of two years
after the end of the vesting period for each tranche, was increased to five years after the
end of the vesting period, as aforesaid, the exercise price for some of the offerees under
the plan was reduced to an amount of NIS 40. Furthermore, at the same time it was
decided to make an additional allocation of a further 39,717 options to an offeree to
whom options had been allocated in the past. In accordance with the terms of the
allocation for the additional 39,717 options, the options will vest in three annual tranches,
with an exercise price of NIS 40. The exercise period of the options until expiry is five
years from the time of the vesting of the last tranche.
The economic value of the options (which has been determined in accordance with the
binomial model) for all of the option warrants that were in force as of December 31, 2011
and 2010 is NIS 6.3 million and NIS 10.6 million, respectively. The economic value of
those option warrants as of December 31, 2011 was determined based on the following
main principles: a standard deviation of 34.46% - 46.8% (2010 – 39.5% - 44.3%), a risk
free interest rate of 2.8% - 3.6% (2010 - 3.6% - 4.3%), an average lifetime of 2.7 – 5.1
years, an exercise price of NIS 40 - 40.08 per option (2010 – NIS 40 – 40.08) (in
accordance with the length of service of each senior employee) and a share price of NIS
47.4 as of December 31, 2011 (2010 - NIS 59.7).
In accordance with the provisions of IFRS 2, the fair value of the options has been
recorded (proportionately to the vesting period that has passed) as a liability in the
Company's financial statements, in parallel to the recording of salary expenses. In the
year ended December 31, 2011 a decrease of NIS 3 million was recorded in the expenses,
against a parallel decrease in the liability (2010 – an increase of NIS 4.8 million in salary
expenses against a parallel increase in the liability).
As of December 31, 2011 the said plan applied to four office holders, to whom 500,430
options had been issued and the balance of the options that have not yet been exercised in
respect of it is 314, 430 options.
(5)
Mirs pays fixed and variable amounts in respect of the recruitment of subscribers in respect of
a marketing contract that it has with a marketer, which is in force until December 31, 2013.
Within the framework of the transaction for the acquisition of Mirs, a surplus cost was
attributed to a liability. The liability in respect of the marketing contract is being amortized
over a period of 7 years at variable annual rates in parallel to the period of the commitment in
respect of the marketing contract.
(6)
In continuation of what is stated in Note 1A(6)(a)(2) on the subject of a conditional guarantee
to the Ministry of Communications in connection with the frequency usage license, the fair
value of the conditional payment to the Ministry of Communications in respect of the license
is estimated at NIS 19 million, based on an expert opinion and in accordance with the
scenarios for the accumulation of market share (see also Note 26C(6)(d)).
(7)
See Note 3.
NOTE 25: - TAXES ON INCOME
A.
The tax laws that apply to the Group companies
The merger agreement was signed on May 8, 2006. Within the framework of this agreement it
was stipulated that the determining date for the actual execution of the activity involved in the
merger would be January 1, 2006. As aforesaid in Note 4, the merger transactions between the
cable companies was, in practice, completed on December 31, 2006. Accordingly, all the
required reports under the law were furnished to the Income Tax Authority, according to which
the determining date for the execution of the activity involved in the merger was also January 1,
2006, which is different from the time of the completion of the transaction, which is to sat
December 31, 2006, and their recording in the Company's accounting records.
In accordance with the Company's opinion and its legal advisers, the timing of the tax event as a
result of the transfer of the assets in the merger is January 1, 2006, and this is despite the fact
that for accounting purposes the activity was recorded on the date of the completion of the
transaction, which is to sat December 31, 2006.
In accordance with the outline of the transaction, amounts were allocated out of the cost of the
acquisition, which amounted to NIS 4.4 billion, to intangible assets as well as the surplus
accounting cost, which was attributed to property, plant and equipment (hereinafter, together the surplus costs).
In accordance with the provisions of the Income Tax Regulations (The depreciation rate for
goodwill) - 2003, it was stipulated that the annual depreciation rate for goodwill that was paid
for will be 10%, and this is in accordance with the conditions as set in the said regulations.
In the opinion of the Company's management, the surplus costs can be amortized as an expense
for tax purposes, and this is in accordance with the provisions of the Income Tax Ordinance and
the regulations promulgated thereunder.
As aforesaid, the implications of the merger from the tax perspective include various issues and
aspects, in respect of the date of the merger and the manner and the pace of the depreciation of
the assets and the liabilities that were acquired and/or transferred within the framework of the
merger (including the cables infrastructure) for tax purposes. The Company's management, in
consultation with its professional advisers, has recorded a provision within the framework of the
deferred tax item, for the sake of conservatism, which in its assessment reflects the Company's
exposure in respect of the timing of the allowance of the expenses in connection with the
aforesaid issues.
As part of the merger of the cable companies, all of the Group Companies have been registered
within the framework of a unification of businesses in the name of the Company.
NOTE 25: - TAXES ON INCOME (Cont.)
B.
The Income Tax Law (Inflationary adjustments) - 1985
In accordance with the Law, until the end of the year 2007 the results for tax purposes in Israel
were adjusted for the changes in the Israeli Consumer Prices Index.
In February 2008 the" Knesset" (Israeli Parliament) passed an Amendment to the Income Taxes
Law (Inflationary adjustments) - 1985, which limits the scope of the Law from the year 2008
and thereafter. As from the year 2008, the results for tax purposes are measured in nominal
values except for certain adjustments in respect of changes in the Israeli Consumer Prices index
in the period up to December 31, 2007. Adjustments relating to capital gains, such as in respect
of the sale of property (betterment) and securities, continue to apply until the time of the
disposal. The amendment of the Law includes, inter alia, the cancellation of the inflationary
additions and the additional deduction for depreciation (for depreciable assets purchased after
the 2007 tax year) as from the year 2008.
C.
The rates that apply to the Company
The Israeli corporate tax rate was 26% in the year 2009, 25% in the year 2010 and 24% in the
year 2011.
A company is chargeable to taxation on real (non-inflationary) capital gains at the corporate tax
rate that applies in the year of the sale. It was determined as a temporary provision for the years
2006 – 2009 that on the sale of an asset other than a quoted security (except for goodwill that
was not acquired), which was purchased before January 1, 2003 and sold until December 31,
2009 – corporate tax at the rate determined in the Israeli Income Tax Ordinance in the year of
the sale will apply to the part of the real capital gain that is linearly attributed to the period up to
December 31, 2002 and tax at a rate of 25% will apply to the part of the real capital gain that is
linearly attributed to the period from January 1, 2003 and up to the time of the sale.
On December 5, 2011 the Israeli Parliament (the "Knesset") passed the Law for Tax Burden
Reform (Amendments to legislation) – 2011 (hereinafter – the Law). Within the framework of
the Law, inter alia, as from the year 2012 the outline for the reduction of the corporate tax rate
was cancelled. Furthermore, with the framework of the Law the corporate tax rate was raised to
25% as from the year 2012. In the light of the increasing of the corporate tax rate to 25%, as
aforesaid, the tax rate on real capital gains and the tax rate on real betterments in Israel were
also increased.
The impact of the said change on the deferred tax balances was to lead to a decrease of
approximately NIS 29 million in the deferred tax balances. The updating of the deferred tax
balances lead to a reduction of approximately NIS 29 million in the net income for the year
2011, which has been recorded under taxes on income, to a reduction of approximately NIS 29
million in the overall comprehensive income for the year 2011 and to a reduction of
approximately NIS 29 million in shareholders' equity as of December 31, 2011.
D.
Tax assessments
In December 2009 and in the course of the year 2010, the Company received tax assessments
for the 2006-2008 tax years, in accordance with section 145(A)(2)(b) of the Income Tax
Ordinance. In accordance with the tax assessments, expenses amounting to approximately NIS
1.1 billion were adjusted for the company for tax purposes as of the end of the year 2008, and
this was as a result of a disagreement between the Company and the Tax Authority in Israel,
primarily in respect of the pace of the recognition of depreciation expenses in respect of the
cables network and additional issues. If the said position of the Tax Authority in relation to the
assessments that were issued to the Company in respect of the 2006, 2007 and 2008 tax years is
received, the Company will be exposed to a demand for the payment of tax in a cumulative
amount of NIS 120 million. Linkage differentials and interest will be added to this amount.
Furthermore, the Company will be exposed to a demand for the payment of additional taxation
in significantly larger amounts in respect of the 2009 tax year, and this will be significantly
different from the Company's position.
The Company's management, on the basis of its position in the self-assessments and based upon
its professional advisers, has presented an objection against the tax assessments for the years
2006 – 2008 and in the opinion of the Company's management and its professional advisers, the
Company has well founded arguments against the claims made in the tax assessments for the
years 2006 – 2008, which could significantly change the results of the tax assessments for those
years and in any event, also the implications deriving from them in respect of the tax years later
than 2008.
At the present time, discussions are being held on the assessments, within the framework of
Stage B for the years 2006 – 2008 and within the framework of Stage A for the 2009 tax year. A
dispute has arisen within the framework of the discussions in relation to the manner of the
amortization of the intangible assets – brand, goodwill and customer relationships. Up to the
time of the publication of the financial statements, no assessment has yet been issued in respect
of the aforesaid.
A provision has been recorded within the framework of the financial statements in respect of the
Company's estimated exposure in respect of the dispute with the tax authorities in respect of
open tax years.
The Company has been issued with final tax assessments up to and including the 2005 tax year.
The consolidated companies HOT Haifa and HOT Eidan have been issued with final tax
assessments up to and including the 2001 tax year. The consolidated companies HOT Edom and
Hot Net (formerly HOT Investments and Finance) have been issued with final tax assessments
up to and including the 2002 tax year. The consolidated company HOT T.L.M. has been issued
with final tax assessments up to and including the 2004 tax year. The consolidated companies
Drom Hasharon and HOT Properties have been issued with final tax assessments up to and
including the 2008 tax year.
The consolidated companies HOT T.L.M, HOT Eidan and HOT Haifa have tax assessments that
are considered to be final up to and including the 2005 tax year. The consolidated companies
HOT Edom, Hot Net (formerly HOT Investments and Finance) and Mirs have tax assessments
that are considered to be final up to and including the 2006 tax year. The said assessments are
considered to be final subject to the powers that have been afforded to the Director of the Tax
Authority in Israel in accordance with section 145, 147 and 152 of the Income Tax Ordinance.
E.
Losses carried forward for tax purposes and other temporary differences
In accordance with the draft tax reports, which have not yet been presented, for the year 2011,
the Company has losses for tax purposes that are available to be carried forward to future years,
which in the assessment of the Company's management amounted to approximately NIS 1.1
billion as of December 31, 2011 (approximately NIS 1.2 billion as of December 31, 2010).
Consolidated companies have losses for tax purposes, which in the assessment of the
Company's management amounted to approximately NIS 0.3 billion as of that time
(approximately NIS 0.3 billion as of December 31, 2010).
As of December 31, 2011 a deferred tax asset, which is estimated at NIS 49 million, has not
been recognized in respect of temporary differences in the Group because their utilization in the
future is not probable (2010 – NIS 80 million).
Composition:
Balance sheet
December 31
2011
2010
Statement of income
2011
2010
2009
NIS in millions
Deferred tax liabilities
Depreciable property, plant
and equipment
Intangible assets
Available for sale investments
presented at fair value (2)
Others
Deferred tax assets
Depreciable property, plant
and equipment
Allowance for doubtful
accounts
Provision for claims
Other liabilities
Employee benefits
Deferred taxes was net
provided
Deferred tax liabilities, net
(106)
(176)
(87)
(10)
(137)
(23)
(35)
(429)
(145)
172
152
21
8
35
11
9
9
26
10
(49)
(80)
198
126
(231)
(19)
101
(6)
(8)
(1)
The Company records deferred tax assets up to the amount of the deferred tax liability,
where there exists an enforceable legal right that enables the setting off of deferred tax
assets and deferred tax liabilities and this too up to the level of the deferred tax liabilities
in the event that it is expected that their exploitation will be similar or late than the pace
of the exploitation of the deferred tax assets. In the event that there is no certainty in
respect of the timing of the reversal of the deferred tax liabilities , the Company does not
record deferred tax assets in respect of temporary differences, as aforesaid.
(2)
Changes in the deferred taxes in respect of available for sale investments that are
presented at fair value are reflected in the statement of other comprehensive income and
not within the framework of tax expenses and income.
The deferred taxes are presented in the balance sheet as follows:
December 31
2011
2010
NIS in millions
Non-current assets
Non-current liabilities
71
(302)
39
(58)
(231)
(19)
The deferred taxes have been calculated in accordance with an average tax rate of 25% (2010 –
20.8%) based on the tax rates that are expected to apply upon realization.
Taxes on income that relate to elements of other comprehensive income
The deferred tax amount that have been reflected in comprehensive income in respect of:
2011
2010
2009
NIS in millions
Loss (gain) due to available for sale financial
assets
F.
(13)
(1)
5
Taxes on income recorded in the statements of comprehensive income
2011
2010
2009
NIS in millions
Current taxes (current advances for sun plus
expenses)
Deferred taxes
Reconciliation of the deferred tax balances
following the change in the tax rates
G.
(1)
72
(6)
2
(8)
29
-
-
100
(6)
(6)
Theoretical tax
The reconciliation between the tax expense, assuming that all the income and expenses, gains
and losses in the statement of income were taxed at the statutory tax rate and the taxes on
income recorded in profit or loss is as follows:
2011
2010
2009
NIS in millions
Income before taxes on income
441
100
79
24%
25%
26%
Tax computed at the statutory tax rate
Increase (decrease) in taxes on income as a
result of:
The updating of the deferred tax balances due to
changes in the tax rates
Non deductible expenses for tax purposes and
exempt income
Losses for tax purposes and temporary
differences for which deferred taxes have not
been recognized, net
106
25
21
29
-
-
6
15
(7)
(41)
(46)
(20)
Taxes on income (tax benefit)
100
(6)
(6)
23%
(6%)
(7%)
The statutory tax rate
The effective tax rate
NOTE 26: - CONTINGENT LIABILITIES, COMMITMENTS, GUARANTEES AND LIENS
A.
Contingent liabilities
1.
Within the framework of the merger of the cable companies, as described in Note 4, the
Company has assumed responsibility for the existing claims in the field of activity of the
acquired companies (the cable companies in their former format), furthermore, it was
determined that the Company is to assume responsibility for any claim that may be filed in
the interim period by any of the acquired companies after the time of the completion of the
cable companies.
In addition, the Company has entered into a commitment under an indemnification
agreement with each of the three previous holders of the rights in the HOT Gold
Partnership (the Tevel Group, the Yedioth Communications and the Fishman Group) in
accordance with which the Company has undertaken to fully indemnify the partners in the
HOT Gold Partnership, prior to the completion of the merger transaction, so that they will
be released from all responsibility, commitment or debt of any sort whatsoever that HOT
Gold had on December 31, 2006 or that HOT Gold may have after that date, and which
relate to the period prior to the completion of the merger, including in respect of claims and
legal proceedings.
2.
Lawsuits have been filed and are pending against companies in the Group in the routine
course of business and various legal proceedings are outstanding against it (hereinafter –
Lawsuits).
In the opinion of the managements of the Group companies, based, inter alia, on legal
opinions in respect of the chances of the lawsuits, appropriate provisions have been
recorded in the financial statements as of December 31, 2011 in an amount of NIS 168
million, were provisions are required, to cover the exposure in respect of the said lawsuits.
In the opinion of the management of the Group companies the additional exposure in an
amount of NIS 5.1 billion (over and above the provisions that have been recorded in these
financial statements), as of December 31, 2011 in respect of Lawsuits that have been filed
against companies in the Group on various issues is as follows:
a)
An amount of approximately NIS 2.9 billion in respect of claims, the chances that
they will be accepted, in the assessment of the Company's management, in reliance
on the opinion of its legal advisors, the chances of their being accepted do not
exceed 50%.
b)
An amount of approximately NIS 532 million in respect of claims, in respect of
which it is not yet possible to make an assessment, the main ones being in
connection with the approval of class actions that were presented close to the date
of the financial statements.
c)
An amount of approximately NIS 1.7 billion in respect of claims which, in the
assessment of the Company's management, in reliance upon the opinions of its
legal advisors, their chances of being accepted exceed 50%.
The following is an abbreviated summary of the Group's contingent liabilities effective as
of December 31, 2011 in accordance with groupings having similar characteristics:
a)
Claims by customers
As of December 31, 2011 the amount of the additional exposure (over the
provisions that have been recorded in these financial statements), in respect of
claims by customers amounts to approximately NIS 5 billion. Of the said claims an
amount of NIS 529 million relates to claims which it is not possible to assess at this
stage and which relate primarily to applications for the approval of class actions,
which were presented after the balance sheet date.
NOTE 26: - CONTINGENT LIABILITIES, COMMITMENTS, GUARANTEES AND LIENS (Cont.)
In the opinion of the managements of the companies in the Group, based, inter alia,
on legal opinions in respect of the chances of the claims, appropriate provisions
have been recorded in the financial statements in an amount of NIS 8 million have
(including an increase in the net expense by NIS 2 million in the year ended
December 31, 2011), and this in connection with proceedings in relation to which
provisions have been required in order to cover the exposure as the result of the
those claims.
b)
Claims in connection with copyright
provisions that have been recorded in these financial statements) in respect of
claims in connection with allegations of breach of copyright and the payment of
appropriate royalties by the Group, amounts to NIS 99 million. In the opinion of
the managements of the companies in the Group, based, inter alia, on legal
opinions in respect of the chances of the claims, appropriate provisions have been
recorded in the financial statements in an amount of NIS 158 million (including a
decrease in the net expense by NIS 93 million in the year ended December 31,
2011), and this in connection with proceedings in relation to which provisions have
been required in order to cover the exposure as the result of those claims. The
amount of the provision includes an amount of NIS 115 million in respect of a
compromise agreement with Acum and Tali for the years 2003 – 2010.
In June 2011 the Company signed on a compromise agreement with Tali - The
Collecting Society of Film and Television Creators in Israel Ltd., in respect of the
payment of royalties in respect of the years 2003 to 2014. The said compromise
arrangement did not have a significant impact on the Company's financial
statements for the year ended December 31, 2011.
On September 8, 2011 the Company received a judgment that had been passed
down by the District Court (Central district) in a claim in an amount of 20 million
Dollars, which had been presented on March 28, 2000 against the Company and
the other cable companies (which have since been merged into it) by AGICOA –
The Association for the International Collective Management of Audiovisual
Works (hereinafter – the plaintiff), which is an association that collectively
manages copyrights for audio-visual works and which brings together producers
from across the globe. The plaintiff alleges that there was a breach of the
copyrights of producers who are presented by her within the context of the
secondary broadcasts by the cable companies. It was determined in the judgment
that the Company is to pay an amount of NIS 10 million to the plaintiffs, with the
addition of linkage differentials and interest, as from the date on which the claim
was presented as well as the costs of the lawsuit and attorneys' fees amounting to
NIS 500 thousand. The plaintiff filed an application for the correction of a typing
error in the judgment, according to which the intention had been to hand down a
ruling in an amount of 10 million US Dollars. The Court rejected the application.
As of the date of this report, the plaintiff has filed an appeal on its behalf and the
Company has filed an appeal on the judgment to the Supreme Court and a time has
been set for the presentation of the summaries of the parties' claims in the appeals.
In the Company's assessment, based on the opinion of its legal advisers, the
Company has recorded a provision that reflects the provisions of the judgment.
On July 19, 2010, the Company received a ruling by an arbitrator which was
handed down within the framework of arbitration proceedings that were being
conducted between the Company and Acum - The Association for Composers,
lyricists, and music publishers in Israel Ltd. (Acum) in connection with the setting
of a mechanism for the setting of the annual royalties in respect of the use of
works, the rights to which are protected by Acum. The arbitration ruling accepted
the outline for the model for the purpose of calculating the royalties, which was
presented by Acum in the Statement of Claim in principle, and this was done with
the exception of certain changes.
It was further determined that the said calculation model was also to apply in
respect of the issue of the payment of differentials on royalties in respect of
previous years, commencing as from January 1, 2003, and that the calculation of
the differences was to be conducted between the parties in an agreed manner. In
accordance with the arbitration agreement that was signed between the Company
and Acum and the right of appeal that is available to the Company thereunder, on
November 4, 2010 an appeal was filed against the arbitration ruling on the
Company's behalf.
On December 13, 2011 the Company and Acum signed on a compromise
agreement, within the framework of which all of Acum's claims vis-à-vis HOT in
respect of the years 2003 to 2010 were arranged. Furthermore, the annual royalty
rates for the years 2011 to 2016 were agreed upon.
The impact of the results of the compromise agreement on the Company's financial
statements for the year 2011 in respect of the reduction of the amount of the
provision in respect of the compromise agreement with Acum is NIS 87 million,
net of tax.
It should be clarified that in tandem with the signing on the said compromise
agreement, the parties signed on an agreement, within the framework of which the
Company received a license from Acum for the broadcasting of works, in respect
of which Acum holds the copyright (hereinafter - the Acum repertoire) within the
framework of the Company's television and internet broadcasts. The said
agreement determines the formula for the calculation of the royalties that will be
due to Acum in respect of the use of the Acum repertoire by the Company,
including in respect of the use thereof within the framework of the internet
broadcasts and the cellular applications, and it places a duty on the Company to
make reports to Acum in respect of the extent of the use of the Acum Repertoire by
the Company in its broadcasts. The agreement will apply retrospectively from the
beginning of 2011 and is in force until December 31, 2016, and Acum has the right
to cancel the agreement in exceptional circumstances (the dissolution of the
Company, a stay of execution, the cancellation of the Company's broadcasting
license and an arrangement with creditors that could affect the Company's ability to
meet its commitments to pay royalties).
c)
Claims by suppliers and communications providers
provisions that have been recorded in these financial statements) in respect of
claims by suppliers and communications providers, amounts to NIS 39 million. In
the opinion of the managements of the companies in the Group, based, inter alia,
on legal opinions in respect of the chances of the claims, appropriate provisions
have been recorded in the financial statements in an amount of NIS 2 million
(including an increase of NIS 2 million in the net expense in the year ended
December 31, 2011), and this in connection with proceedings in relation to which
provisions have been required in order to cover the exposure as the result of those
claims.
d)
Claims by employees
As of December 31, 2011 the amount of the additional exposure (over and above
the provisions that have been recorded in these financial statements), in respect of
claims by employees amounts to NIS 5 million, and it relates primarily to
individual claims. In the opinion of the managements of the companies in the
Group, based, inter alia, on legal opinions in respect of the chances of the claims,
appropriate provisions have been recorded in the financial statements in an amount
of NIS 349 thousand (unchanged in the year ended December 31, 2011), where
provisions are required to cover the exposure as the result of the claims.
B.
Commitments
1.
Royalties to the Ministry of Communications and other payments to the government
a)
The Company is committed to pay annual royalties out of its overall income that is
chargeable with royalties (hereinafter - the chargeable income) at rates of 2.5% in
the year 2007, 2% in the course of the year 2008, 1.5% in the year 2009 and 1% in
the year 2010. In accordance with the Telecommunications Regulations
(Telecommunications and Broadcasts) (Royalties) (Temporary Directives) - 2011,
which apply to the royalties that are paid by HOT Telecom in respect of national
provider services, in the years 2011 - 2012 the royalties rates have been increased
and they stand at a rate of 1.75%, which has been determined for the year 2011 and
a rate of 2.5%, which has been set for the year 2012.
In addition, conditions have been set in the regulations, which if met will cause the
expiration of the validity of the temporary directives.
In accordance with the Telecommunications Regulations (Telecommunications and
Broadcasts) (Royalties) (Temporary Directives) - 2011 (hereinafter - The
temporary directives), which apply to the royalties that are paid by HOT Telecom in
respect of national provider services, the royalties will stand at 1% in the year 2013. It
was further determined that in the event that competition arises in the sector by
way of the entry of additional competitors, the said increases will be cancelled.
On June 13, 2011 the Finance Committee approved an amendment to the
Concession Regulations, according to which the royalties rate will stand at 2.5% as
from July 1, 2011 and until December 31, 2012. During the course of March 2011
HOT Telecom filed a petition in the High Court for the cancellation of the
temporary directive. Petitions were also filed on this issue by the cellular telephone
companies Pelephone, Partner and Cellcom as well as by the Bezeq company.
In continuation of the compromise proposal, which was suggested by the Court and
accepted by the State, on July 25, 2011 the Finance Committee of the Israeli
parliament (The Knesset) approved an amendment to the concession regulations,
according to which the royalties that are paid by a holder of a cable broadcasting
license holder in the years 2011 and 2012 will stand at a rate of 1.75%.
Furthermore, draft regulations were passed to the Legislation Sub-Committee in
the Ministry of Justice according to which the rate of the royalties that are paid by
the Company and by HOT Telecom, under the Concessions Regulations and the
Royalties Regulations, respectively, at a rate of 1.75% in the years 2011 and 2012
and thereafter, in the year 2013 will be reduced to 0%.
In accordance with the decision handed down by the Court, on August 2, 2011,
HOT Telecom announced that it was accepting the State's announcement and that
it was asking that after the approval of the Regulations, the validity of a court
judgment should be given to the agreement by the parties to the proposed
compromise. Since the implementation of the arrangement that was proposed by
the Court required the amendment of regulations, which are subject to the approval
of the Finance Committee of the Knesset, the State announced to the Court that a
draft of the regulations had been prepared accordingly. In continuation of this, on
January 30, 2012 the Finance Committee approved an amendment to the
Telecommunications Regulations (Concessions) according to which the royalties
that are paid by a holder of a cable television broadcasting license will stand at a
rate of 0% as from 2013. A parallel amendment to the Telecommunications
Regulations (Royalties), which apply to HOT Telecom has not yet been approved
by the Finance Committee.
b)
In accordance with the Telecommunications Regulations (Telecommunications and
Services) (Royalties) - 2001 (hereinafter - the Royalties Regulations), Mirs is
required to pay royalties to the State each quarter, as a percentage of its income
from radio telephone services, less the payments that Mirs has to pay to another
license holder (in respect of a reciprocal connection or roaming services).
In January 2011 the Royalties Regulations were amended by means of a temporary
directive, where according to the temporary directive the royalty rate for the years
2011 and 2012 is 1.75% and 2.5% respectively. It was also determined that the
amendment would remain until the Director of the Ministry of Communications
publishes an announcement in the Official Gazette that one of the following has
been met: (a) A holder of a general license for the provision of radio telephone
services has began to provide In Country roaming services; (b) a holder of another
license as a virtual operator (MVNO) has began to operate, and the market share of
all of the virtual radio telephone operators is at least 5%. After one of the two
aforesaid situations has arisen, the royalties rate will once again stand at 1%.
In March 2011 petitions were filed in the High Court seeking to cancel the
temporary directive. During a hearing on the petitions, which was held on June 16,
2011, the Court raised a suggestion that the royalty rate should stand at 1.75% in
2012, whereas in respect of the following years the royalties rate should be reduced
until the royalties were absolutely cancelled in 2012, unless "circumstances that
have significantly adverse implications on the state of the economy at the relevant
times" were to occur. In accordance with a decision by the Court, the State was
required to announce its position in relation to the offer by August 1, 2011. On
January 3, 2012 the State presented draft regulations for the approval of the
Finance Committee of the Knesset. As of the date of the report, the Finance
Committee has not yet approved a version of the draft regulations and no date has
yet been set for an additional hearing.
c)
In July 2001 the cables companies, including the Company, entered into a
commitment under an agreement with the State of Israel on the subject of a
solution to the disputes between the cable companies and the State in respect of the
right of each company to operate the existing cables infrastructure in each of the
concession areas after the end of the period of the concessions.
It was stipulated in the agreement that the State undertakes to waive all of its
claims and its rights in respect of the cables infrastructure such that each cables
company would be the owner of all of the rights, including property rights, in the
cables infrastructure that it held in the area of its concession and that it would have
available to it the right to continue to operate it even at the end of the concession
period. In consideration for this, it was stipulated that each company was to pay to
the State, on an annual basis and for a period of 12 years (commencing on January
1, 2003), its relative share, as determined in the agreement, of an amount that is
equivalent to the multiple of certain incomes (as determined in the agreement) of
each of the cable companies on a graduated scale (in accordance with the level of
income, as aforesaid) at a rate of from 0% to 4%. The relative share of each
company can be altered by agreement between the cables companies.
In addition, it was stipulated that each company is to pay approximately 12% of the
overall consideration from the sale of operations that are executed through the
cables infrastructure or which touch upon the cables infrastructure (as defined in
the agreement) for a period of 12 years. It was also stipulated in the agreement that
in so far as the Company has received any amount whatsoever in consideration for
the issuance of its shares to the public or to an external investor or in consideration
for the sale of shares of another company from among the cables companies, part
of the consideration from the issue or the sale, as aforesaid, is to serve as an
advance payment for the payment of the relevant portion of the consideration that
remains to be paid under the agreement, in accordance with a formula that will be
determined by the parties by agreement. It is further stipulated in the agreement
that it shall apply to the cables companies or to any company that is split or merged
even if structural changes are made of any sort whatsoever, and accordingly, with
the completion of the merger, the agreement applies to the Company as an merged
company.
2.
d)
In accordance with the Wireless Telegraph Regulations (Licensing, Certificate and
Levies) – 1978, Mirs is required to pay a fixed annual payment for each frequency
that it uses. Mirs paid an amount of NIS 20 million in respect of the year 2011 (an
amount of NIS 2 million in respect of December 2011).
e)
The license to operate a broadcasting center: It is determined in the broadcasting
center operating license that the license holder is to pay a fee for the license at such
rates and at such times as may be determined by the Ministry of Communications
in accordance with the Communications Law and the Wireless Telegraph
Ordinance (New Version) – 1972.
Other royalties
a)
Within the framework of the Group's routine operations in the field of
broadcasting, the Group enters into commitments under arrangements and
agreements under which the Group pays royalties to various authors' organizations.
The amounts of the royalties that have been reflected by the Group within this
context in the years 2011, 2010 and 2009 amounted to NIS 40 million, NIS 51
million and NIS 29 million, respectively (see also section A(2)(b) above).
b)
On January 30, 2012 a draft of the Authors and Performers Law (Judgment on
Royalties Issues) -2012 (hereinafter, in this section – the draft law) was placed
before the Knesset. The draft law was intended to create a royalties court by
empowering one of the District Court Judges to hear cases in royalties issues,
royalty rates and disputes in royalty issues (in other words, a dispute on the issue of
royalty rates between a collective management entity and a user or users of a
repertoire).
This draft, if it is accepted, may have an implication for the issue of the payment of
royalties to various organizations. The Company is unable to assess, as of the date
of this report, what the impact of the said legislation, if passed, will be on its
business results.
3.
A commitment to invest in original productions
In accordance with the provisions of the Communications Law, the rules of the
communication and the decision made by the Council require the Company, inter alia, to
invest amounts in original productions at a rate of 8% of its annual income from
subscription fees. During the course of the years 2009, 2010 and 2011 the Company
complied with the investment rate that is required, as aforesaid. See also Note
1A(4)(b)(5)(b).
4.
Agreement to deploy and maintain a cables network
On January 1, 1990 and on May 1, 1989 Tevel International Transmission for Israel Ltd.
and HOT Gold & Co. (hereinafter together – The cable companies) entered into
commitments under agreements for the provision of planning, installation and
maintenance services of the cables network with the Bezeq company (the provisions of
both of the said agreements are similar, and they will hereinafter in this section be called the agreement). This agreement was endorsed to HOT Telecom as part of the merger
agreement.
In accordance with the agreement, Bezeq, Tevel and HOT Gold planned the cables
network, inter alia, based on the Bezeq company's available infrastructure, which was
deployed in the areas of the concession at the time of the signing of the agreement. Tevel
and HOT Gold supplied the Bezeq company with the base equipment (as defined in the
agreement) that comprises the cables network and the Bezeq company supplied the
additional equipment (as defined in the agreement) that is used for setting up the cables
network.
In accordance with the agreement, a cables network was set up and deployed in a number
of major cities across Israel, and the Bezeq company conducts the routine maintenance of
the cables network and also provides missfunction repair services. The provisions of the
agreement also relate, inter alia, to the possibility of the expansion of the cables network
to additional facilities, the connection of new houses and of new neighborhoods.
It is determined in the agreement that it will remain in force for the length of the period of
the concession, and that it will continue to be in force if the concession or the rights in the
concession are transferred or afforded to another, in whole or in part and directly or
indirectly, during the course of the original concession period or after the end of it. The
Bezeq company is only entitled to cancel the agreement in respect of a breach for which
notice has been given in writing, and which has not been repaired within six months.
A consideration mechanism was set in the agreement, according to which HOT Telecom
pays sums against the performance of the Bezeq company's commitments to setup, to
maintain and to provide missfunction repair services, which are calculated in accordance
with the length of the cables networks that have been deployed, in accordance with the
various types of networks and it also makes non-recurring payments in respect of certain
activities. In accordance with the agreement, the amount of the consideration in respect of
the length of the cable, as aforesaid, is reduced by approximately 65% after 12 years from
the time of the handing over of each section.
The total of the expenses in HOT Telecom's accounting records for the network services
payable to the Bezeq company in the years 2011, 2010 and 2009 amounted to NIS 46
million, NIS 43 million and NIS 42 million, respectively.
It should be noted that from time to time, during the routine course of business, disputes
arrive in connection with the implementation of the agreement, inter alia in respect of the
division of the costs that are involved in the performance of some of the services that are
supplied by the Bezeq company under the agreement, however the parties are continuing
to operate in accordance with the agreement. It is further noted that over the course of the
years additions have been signed to the agreement, primarily in connection with
enhancement and upgrading work on the cables network.
5.
Commitments to lease assets
The Group has commitments under agreements for the leasing of buildings and motor
vehicles for various periods up to the end of the year 2014. The minimal future rental fees
in respect of the rental contracts as of December 31, 2011, exclusive of the option period,
are as follows:
NIS in millions
2011
2012
2013
2014
2015 and thereafter
6.
136
106
70
48
54
414
On July 19, 2011 the Company's Board of Directors approved a commitment under
agreements for the execution of the upgrading of the fiber optic infrastructure (Fiber to
the Building). In accordance with the said commitment, HOT Telecom will purchase
advanced optic equipment, work and services from third parties, in order to upgrade the
infrastructures, in accordance with the deployment and the timetables that will be agreed
upon between the parties from time to time. The cost of the upgrading of the
infrastructure, as aforesaid, which includes the cost of the purchase of the equipment and
the services, for a period until the end of the year 2014, is estimated at NIS 550 million
by the Company , at this stage (over the length of the said period). The updating of the
infrastructure, as aforesaid, will enable the expansion of the traffic capacity on the
network, in favor of the supply of enhanced VOD services, the increasing of the number
of channels that the Group can offer to its subscribers, faster internet services and it will
also enable the company to deal with increased demand for traffic capacity on the
network in the future, which is expected to arrive as a result of the increased use of
applications that require a considerable band width.
7.
On May 27, 2010 a facility agreement was signed between Mirs and Motorola for the
purchase, licensing and instillation of the infrastructure equipment (hardware and
software) which is required in order to operate Mirs' iDEN network. The agreement is in
force for a period of five years from the time that it was signed (hereinafter –the initial
period) and it will be renewed for additional periods of one year each (or for a longer
period that is agreed between the parties), unless a party to the agreement gives notice to
the other party, 90 days before the end of the initial period, or one of the extension
periods, as the case may be, of its desire to terminate the commitment. The agreement
arranged the commitment between the parties for the purpose of the execution of the
work orders that will be presented to Motorola, from time to time, by Mirs for the
purpose of the supply of equipment or software for the iDEN network.
Within the framework of the agreement, Motorola has undertaken that during the initial
period it will hold an inventory of equipment that will enable it to immediately supply the
components that are required for the proper functioning of Mirs' iDEN network, and so
that it will be capable of supplying Mirs with the maintenance services for the equipment
infrastructure and the software that are required to operate the network for a period of
seven years from the time of the signing of the agreement, subject to the purchase of the
said maintenance services by Mirs.
In consideration for Motorola's commitment to sell the equipment and the licenses to
Mirs at the prices that are denoted in the agreement, Mirs has made a commitment to
purchase the infrastructure equipment and the software that is required to operate the
iDEN network from Motorola alone during the period of the agreement.
As part of the commitment with Motorola in respect of the infrastructure for the iDEN
network, Mirs has signed on a system maintenance agreement with Motorola as well as
on an agreement for the maintenance of the equipment and the hardware for the system,
which arrange the manner of the repair of missfunctions and the provision of support by
Motorola for Mirs' iDEN network.
In December 2011 the system maintenance agreement was extended for an additional
period of three years, until the end of 2014.
8.
On May 26, 2010, as part of the sale of the control in Mirs to Altice, Mirs entered into a
commitment under an agreement with Mobility for the purchase of terminal equipment
that supports the iDEN technology.
The agreement is in force for a period of 5 years and it will be renewed for additional
periods of one year each time unless a party to the agreement gives notice to the other
party, 60 days before the end of the initial period, or one of the extension periods, as the
case may be, of its desire to terminate the commitment.
The agreement arranged a mechanism for the ordering and supply of the terminal
equipment (including quarterly forecasts by Mirs) with Mirs being responsible for the
importing of the terminal equipment from abroad.
The supplier has received an option and the right of first refusal for the repurchase from
Mirs of all of the terminal equipment that it may be holding at the time of the termination
of the agreement, in accordance with a mechanism that was set in the agreement.
9.
Within the framework of the preparations for the setting up of the new network, Mirs
entered into commitments under agreements with various suppliers for the purchase of
terminal equipment that it will use on the UMTS network. During the course of February
2012 Mirs signed on framework agreements with additional suppliers. Furthermore, as of
the date of the financial statements, Mirs is conducting negotiations in advance of signing
agreements with additional suppliers.
10.
On June 16, 2011 Mirs entered into a commitment with Nokia Siemens Networks Israel
Ltd. (hereinafter – the supplier) for the setting up of the infrastructure for Mirs new
network.
In accordance with the terms of the agreement, the supplier will plan and set up the new
network for Mirs as a turnkey contractor.
In the first stage, which is expected to be completed during the course of 2012, the
supplier will completed the setting up of the systems that are required for the purpose of
operating the new system with a coverage of approximately 20%, which Mirs must meet
in accordance with the terms of the tender within two years from the time of the receipt of
the new radio telephone license. After the completion of the first stage, Mirs has been
given the right to expand the new network, both from the perspective of the coverage and
also from the perspective of the LTE capability.
The agreement arranges the work arrangements between the supplier and Mirs, the
manner of the handing over of the system to Mirs and the manner of the maintenance of
the system by the supplier.
The agreement is in force for 15 years, and it contains warranties for the proper
functioning of the components of the system for a period of two years from the time of
the handing over of each component in accordance with the agreement, as well as
warranties for the entire period of the agreement that the system will operate in
accordance with the system requirements that Mirs placed (in terms of availability,
functioning and capacity), subject to their being a maintenance agreement in force
between the parties.
In consideration for the completion of the first stage in accordance with the agreement
and the performance of all of the supplier's commitments by the year 2013, the Group
will pay the supplier an amount of 52 million Dollars. The overall consideration in the
agreement for all of the services up to the year 2017 is approximately 120 million US
Dollars, according to Mirs assessment.
11.
Commitment with main customer
Mirs supplies a range of services to the Ministry of Defense: cellular telephones, data
telecommunications and PTT services. The company's overall income from the Ministry
of Defense in 2011 constitutes approximately 12.5% of Mirs income in that year
(approximately 14.4% of Mirs income in December 2011) and the number of subscribers
constitutes approximately 15.5% of Mirs' subscribers.
Mirs and the Ministry of Defense are acting under the force of a number of agreements
with the largest and the most important being an agreement for the supply of cellular
telephones, the tender for which was won by the company in the year 2005. In October
2008 the Ministry of Defense exercised an option that was awarded it in the tender for the
extension of the agreement until October 2011 (the year 2012 is considered to be a
transition year).
On December 28, 2011 the Ministry of Defense published a tender for the supply of
cellular equipment and services to the IDF. The tender is for some 68,000 subscribers
with the possibility of increasing this to 120,000 subscribers. The tender includes
threshold conditions, which prima facie prevent Mirs from having the possibility of
competing within the framework of the tender. Mirs has presented an objection to the
existence of these conditions. The objection was turned down by the Ministry of Defense
and in the light of this Mirs is considering making an appropriate approach to the courts.
12.
Capitalized leasing rights on land from the Israel Lands Authority
Capitalized leasing rights on land from the Israel Lands Authority over n area of 14,296
square meters on which the Group's buildings are located. The amount that is attributed to
the capitalized rights is presented as a prepaid expenses in respect of operating leases in
the balance sheet and is amortized over the period of the leases. See also Note 2L. The
lease periods end in the years 2021-2045.
13.
Commitments between companies in the Group
a)
There is a mutual agreement for the provision of services between HOT Telecom
and the Company, which has been in force since January 1, 2007. Within the
framework of the agreement the Company has undertaken to supply HOT Telecom
with services in various fields, including the fields of purchasing and marketing.
The said services are provided primarily by the employees of the Company and of
HOT Telecom, as the case may be. It was stipulated that the consideration for the
provision of the services, to which each party will be entitled, will be an amount
that is equivalent to the cost of the provision of the services, which will be
determined by the parties by agreement, from time to time.
In May 2008 the Company’s Board of Directors and HOT Telecom's Board of
Directors approved the updating of the mutual charging mechanism between the
Company and HOT Telecom retrospectively as from January 1, 2008.
b)
As from January 1, 2007, there has been an agreement in force between HOT
Telecom and the Company, in accordance with which HOT Telecom will provide
the Company with cable broadcasting distribution services and broadcasting center
services. The agreement cannot be cancelled unilaterally by one of the parties but
rather solely by a final judgment by an authorized court, or if a party to the
agreement has received approval from the Council or the Ministry of
Communications that the other party has ceased to provide its services in
accordance with the license. Despite the aforesaid, the Company is entitled to
announce the termination of this agreement at the end of a period of ten years from
the date of its signing, or at the end of the period of validity of the broadcasting
license, or at the end of any extension period of the broadcasting license. The
services will be performed by employees of HOT Telecom.
Under the force of the national operator license, HOT Telecom has been given the
exclusive right to use the cables network, to operate it, to develop it, to improve it
and the execute any activity on it in accordance with the national operator license
and in accordance with the law. As from January 1, 2007 HOT Telecom has been
charging the Company for the services in accordance with the amounts that are
determined by the parties agreement, based on the formula that was set in a
decision by the Minister of Communications on August 23, 2007 on the issue of
the transmission fee to be paid by a special license holder to HOT Telecom in
respect of the transmission of its broadcasts on HOT Telecom's infrastructure.
At the time of the approval of the Company’s financial statements of December 31,
2009 the Company's Board of Directors and HOT Telecom's Board of Directors
approved a mechanism for the transmission fees between the Company and HOT
Telecom such that the consideration that will be paid for the services that are
supplied in connection with the analogical channels, is to be reduced in accordance
with the average number of analogical subscribers in that calendar year, except for
the year 2009 in which a maximum discount of 7% would be given.
At the time of the approval of the partnership's financial statements of December
31, 2011 the parent company's Board of Directors and the partnership's Board of
Directors approved the updating of the mechanism for the transmission fees
between the parent company and the partnership such that as from the year 2012 a
discount will be given in accordance with the number of channels that are
transmitted on the partnership's infrastructure in accordance with a graded scale.
During the course of the years 2011, 2010 and 2009 HOT Telecom charged the
Company the amounts of NIS 987 million, NIS 974 million and NIS 950 million,
respectively.
c)
As from January 1, 2007 the Company's operating, marketing, selling,
administrative and general expenses are loaded on the Company and the
Company's subsidiary companies, in accordance with the ratio of the income of
each company, which properly reflects the services that have been provided by the
Company.
d)
On April 14, 2011 the Company’s Audit Committee approved a transaction with
Mirs for the purchase of text message sending services from Mirs: in accordance
with the transactions, Mirs will supply the Company with text message sending
services (SMS). The volume of the services will be as may be required from time
to time by the Company.
In accordance with the Company's current volume of text message sending activity,
the annual consideration that will be paid to Mirs in respect of these services stands
at NIS 2.5 million.
e)
On July 17 and 19, 2011 the Company’s Audit Committee and Board of Directors,
respectively, approved a commitment by the Company under a transaction for the
supply of infrastructure services with Mirs. In accordance with the transaction that
was approved, HOT Telecom will connect Mirs cellular communications sites to its
communications centers, by means of the cables infrastructure. The transaction that
was approved is for the connection of at least 550 communications sites (the
completion of the connection of which is expected to take place by the end of
2014), with the consideration in respect of each site being determined in
accordance with the technical requirements and the band width that is required.
The commitment in connection with each site is for a period of ten years.
In accordance with the Company's assessment, at this stage, the overall amount of
the consideration that is expected for the said consideration could reach NIS 250
million, and will not fall below NIS 150 million.
f)
C.
The Company is entitled to receive management fees at a rate of 1% of Mirs annual
income.
Guarantees and liens
1.
As collateral for the Company's liabilities, the investee partnership HOT Telecom and the
subsidiary company HOT Net vis-à-vis financial institutions in accordance with the credit
agreement, first ranking fixed charges and endorsement by way of the charge have been
placed in an unlimited amount.
2.
As collateral for the commitments of the Company and the investee partnership HOT
Telecom and the subsidiary company HOT Net, the Company and the partnership have
given guarantees for the payment of their liabilities in unrestricted guarantees.
3.
As collateral for commitments of the Company and the investee partnership HOT
Telecom vis-à-vis financial institutions in accordance with the credit agreement, the
following have been placed:
a)
b)
c)
d)
e)
First ranking fixed charges on the rights of the companies in the Group.
Endorsements by way of a charge on:
(1) The Group's subscription agreements with its subscribers.
(2) The supplier numbers of companies in the Group with credit card
companies.
(3) Rights under the agreement for the provision of services between HOT
Telecom and the Company.
Fixed charges on the equipment of companies in the Group.
Fixed charges on the land assets of companies in the Group.
Fixed charges on the bank accounts of companies in the Group.
The said charges are in unrestricted amounts, jointly and severally vis-à-vis the Company,
the investee partnership – HOT Telecom and the subsidiary company - HOT Net.
4.
As collateral for the commitments of the Company, the investee partnership HOT
Telecom and the subsidiary company HOT Net, first ranking floating charges have been
placed in unlimited amounts in favor of the borrowers, on all of the chargeable assets and
the rights of companies in the Group and a fixed charge on the goodwill and the unpaid
share capital of the Companies in the Group.
5.
As collateral for the Company's commitments in respect of the royalties agreement, as set
forth in section B(1) above, a second ranking floating charge has been placed in favor of
the State.
6.
As collateral for the Group's commitments, as determined in the Group's licenses and in
the decision by the Director and the Council, the Group has issued a number of
guarantees, as follows:
a)
Bank guarantees to the Ministry of Communications, in respect of the national
operator license that was granted to HOT Telecom amounting to 8.4 million
Dollars, in force until June 2012, December 2012 and December 2025.
b)
Guarantees in an amount of NIS 33.4 million (index-linked) to the Council in
respect of the broadcasting license, which are in force until April, June and
December 2012.
c)
A bank guarantee in an amount of 2 million Dollars to the Director in respect of the
Company’s compliance with the terms of the merger as determined by the Director,
which are in force until December 2012.
d)
A bank guarantee in an amount of NIS 695 million, which was made available by
Mirs within the framework of its win in a tender for the allocation of frequencies
and as collateral for its commitment in favor of the Ministry of Communications,
which is in force until December 31, 2018.
In accordance with the wording of the guarantee that was written by the Ministry of
Communications, there is no restriction in the guarantee on the endorsement,
assignment or transfer of the guarantee to a third party. Furthermore, Mirs has a
duty to bear any expense that is involved in the exercise or the extension of the
guarantee.
In the light of the aforesaid terms, MIRS has signed on a letter of undertaking and
endorsement vis-à-vis a bank, according to which the company waives and is
prevented from raising any claim against the bank in connection with the wording
of the said guarantee, and it will indemnify and compensate the bank in respect of
any expenses incurred for the purpose of conducting administrative and legal
proceedings in connection with the said issues.
On November 28, 2011, Mirs and the former parent company signed on an
irrevocable letter of commitment vis-à-vis Bank Hapoalim Ltd. (hereinafter the
bank). The letter of undertaking was signed as a condition for the making available
of a bank guarantee in an amount of NIS 695 million, as collateral for the
Company's commitments vis-à-vis the Ministry of Communications within the
context of the Company's win in a frequencies tender for the setting up of a third
generation cellular network (UMTS).
The second winner in the tender for the allocation of frequencies is the Golan
Telecom Group, which offered a maximum amount of NIS 360 million in respect
of the frequencies within the framework of the tender. Golan Telecom made the
required bank guarantee, in an amount of NIS 350 million available (NIS 10
million was paid in cash). In the wake of this, the Company sent the Ministry of
Communications a letter demanding the reduction of the level of the fee for its
license to NIS 10 million (which is the minimal amount in the tender) and
alternatively to equalize it with the level of Golan Telecom's winning offer – NIS
360 million. As of date of this report, no response has yet been received from the
Ministry of Communications.
7.
The Group has extended a number of bank guarantees to various bodies in an overall
amount of NIS 15.5 million.
8.
Guarantees to HOT Telecom
9.
a)
The Group has given guarantees in a cumulative amount of 16 million Dollars as
collateral for payments by HOT Telecom to the Cisco company.
b)
The Group has extended a guarantee in an amount of NIS 238 million (indexlinked) as collateral for HOT Telecom's commitments vis-à-vis an interested party
with which it has signed a rental agreement.
There exist mutual guarantees between the Company and companies in the Group, in
unrestricted amounts, in favor of financial institutions as collateral for the repayment of
the Group's liabilities to those financial institutions.
NOTE 27: - EQUITY
A.
The Composition of the share capital
December 31, 2011
Issued and
Registered
paid-up
Ordinary shares of NIS 1 par value each 150,000,000
77,672,126
December 31, 2010
Issued and
Registered
paid-up
150,000,000
76,149,214
NOTE 27: - EQUITY (Cont.)
B.
Movements in the Share capital
Number of
shares and
NIS 1
Par value
Balance at January 1, 2010
76,071,562
Exercise of employees' options into shares
Private allocation
Exercise of employees' options into shares
77,652
76,149,214
1,521,883
1,029
77,672,126
C.
The Company's shares are registered for trade on the Tel-Aviv Stock Exchange (hereinafter –
The Stock Exchange).
D.
On June 27, 2006 the Company’s general meeting approved, inter alia, the increasing of the
Company's registered share capital by an additional 50 million ordinary shares of NIS 1 par
value each.
On December 31, 2006, within the framework of the completion of the merger of the cable
companies, the Company allocated shares to holders of shares and of rights in the other cable
companies (hereinafter - the holders of the rights). Within this context, the Company allocated
approximately 45,649 thousand shares to the holders of the rights.
See also Note 26C(4) on the subject of a charge on the Company's unpaid share capital.
E.
During the course of the year 2009 the ownership structure in the Company was changed as the
result of a number of transactions that were executed by former related parties in the Company Bank Leumi Le'Israel Ltd., The First International Bank of Israel Ltd., Bank Hapoalim Ltd. and
the Delek Group Ltd., and also as a result of the special purchase offer to the Company's
shareholders. Within the context of the said transactions, Cool, which is controlled by Mr.
Patrick Drahi through companies that he controls, acquired 34,050,864 shares in the Company,
which as of the time of the said transaction constituted 44.76% of the Company's share capital.
9,779,682 of these shares were acquired within the framework of the special purchase offer at a
price of NIS 35 a share. On October 27, 2010 Cool Holdings Ltd. (hereinafter – Cool)
announced to the Company that it had entered into two agreements, with the Fishman Group,
which as of the time of the announcement held approximately 12.61% of the shares in the
Company and with Yedioth Communications Ltd. (hereinafter – Yedioth Communications),
which as of the time of the announcement held approximately 16.79% of the shares in the
Company. The said agreements were made conditional, inter alia, on the execution of a private
allocation in accordance with the provisions of section 328 of the Companies Law, which was
intended to afford Cool a holding of more than 45% of the Company's issued share capital.
1.
On March 16, 2011, following the completion of the private allocation to Cool, as
detailed above, Cool completed the acquisition of 4,565,493 shares in the Company from
the Fishman Group at a price of NIS 54.5 per share (with the addition of interest at an
annual rate of 5% from December 31, 2010 to March 16, 2011), under the force of an
agreement between the parties (hereinafter - the Fishman agreement).
2.
On November 28, 2011, Cool completed the purchase of 10,012,003 ordinary shares in
the Company from Yedioth Communications, for a consideration reflecting an amount of
NIS 65.099 per share (a price of NIS 65 per share in accordance with the agreement with
the addition of interest, as aforesaid), in accordance with an option agreement between
the parties (hereinafter - the Yedioth Communications agreement).
Within the framework of the Yedioth Communications agreement, various provisions
were set that relate to the period until the time of the execution and thereafter. Cool gave
an undertaking, so long as Yedioth holds more than 2.5% and less than 5% of the shares
in the Company not to carry out any activity or execute any transaction as a result of
which the public's holding rate would fall below 20%. In addition, Cool gave an
undertaking on its part that until the earlier of: (a) the time at which Yedioth
Communication's holding would be less than 2.5% of the shares in the Company; or (b) 3
years from the time of the completion of the transaction between them, it would not take
any action that would cause the Company to become a private company or the removal of
its shares from the registration for trading on the Stock Exchange. In addition, Yedioth
Communications has granted Cool the right of first refusal in respect of the other shares
that Yedioth Communications would hold after the completion of the transaction with it
and the right to make an enforced sale of the shares in the Company that it holds (Drag
Along) and against this Cool awarded Yedioth Communications the right to join in a sale
of shares in the Company (Tag Along).
To the best of the Company's knowledge, as from the time of the completion of the
Yedioth Communications agreement and the Fishman agreement, Yedioth
Communications ceased to be an related party in the Company whereas the Fishman
Group is an related party in the Company as a result of its holding of 6.47% of the
Company's issued and paid up share capital and of 6.19% of the Company's issued and
paid up share capital at full dilution.
3.
On March 16, 2011 a private allocation of 1,521,883 shares in the Company to Cool
(constituting approximately 2% of the Company's issued share capital, prior to the
execution of the private allocation and approximately 1.97% of the Company's issued
share capital after the execution of the private allocation), for an overall consideration of
NIS 83 million, reflecting a share price starting at approximately NIS 54.5 (with the
addition of interest at a rate of 5% a year from December 31, 2010 to March 16, 2011( (a
weighted price of NIS 55.06 a share).
With the completion of the private allocation, at a number that is equivalent to 2% of the
Company's issued share capital (prior to the allocation) and the completion of the
agreements that are detailed in section 1 and 2 above, Cool holds approximately 64.57%
of the shares in the Company.
F.
The allocation of options to senior employees
1.
Options for the Chief Executive Officer
On November 4, 2008 and on November 5, 2008, the Company's Audit Committee and
Board of Directors, respectively, approved the appointment of Mr. Herzl Ozer as Chief
Executive Officer of the Company and the terms of his employment. The employment
agreement between the Company and the Company's CEO (hereinafter - the employment
agreement) entered force on December 1, 2008. The employment agreement includes the
fixing of the CEO's monthly salary, his entitlement to an annual grant based upon the
increase in the EBITDA, as set forth in the employment agreement and the granting of
option warrants, as set forth below.
The granting of 1,064,664 option warrants, constituting approximately 1.4% of the issued
and paid up share capital of the Company (hereinafter – the option warrants), which will
be granted to a trustee for him in accordance with section 102 of the Income Tax
Ordinance on an income from labor path, and which will be exercisable (in accordance
with the cashless method) into shares of the Company, subject to adjustments.
The option warrants can be exercised in consideration for an additional payment on the
exercise of approximately NIS 38.5 per option warrant, subject to certain adjustments. In
accordance with this plan the option warrants will be exercisable at five different vesting
times over the length of the period of the CEO's employment in the Company, as detailed
below, at the end of a period of two years from the time of the start of his work in the
Company 25% of the quantity of the options will vest. Thereafter he will be entitled to
exercise a further 18.75% of the quantity of the options each six months, as from the
middle of the third year of his work in the Company and until he becomes entitled to the
full amount at the end of the fourth year of his work in the Company. Each tranche, as
aforesaid, will be exercisable for a period of two years from the time at which it vested,
unless the options or some of them have expired before the end of the exercise period in
accordance with the provisions of the grant agreement. This includes a provision that the
all of the options that have vested prior to the time at which his employment with the
Company ends will expire at the end of a period 90 days from the said time.
In any case in which the options are exercised, the Company's Board of Directors will be
entitled to convert his right to shares in the Company in respect of the options that have
been exercised (hereinafter – the exercise shares) with a cash grant, and this in such
manner that he will receive a monetary grant instead of the exercise shares, in the amount
of the value of the exercise shares, in accordance with their price on the Stock Exchange
at the time of the exercise (a phantom grant). As of the time of the approval of the
financial statements, the Board of Directors has not made a decision in respect of the
conversion of the right to shares in the Company into a monetary grant.
The average economic value of the said option warrants (which has been determined in
accordance with the binomial model) as of the date of the grant is approximately NIS
3.94 for each option warrant, which was determined on the basis of the following
principles: the additional amount payable on exercise, as detailed above, a standard
deviation at a rate of 31.34% - 32.63%, a risk free interest rate of 5.29% - 5.98%, an
average lifetime of 4 – 6 years and a share price at the date of the grant of NIS 21.84.
The exercise price was set at the time of the approval of the transaction with the
Company's CEO by the Board of Directors on November 5, 2008. The exercise price,
which is significantly higher than the Company's Share price on the Stock Exchange as of
the date of the grant (NIS 21.84), was set in negotiations between the Company and the
Company’s CEO and is NIS 38.5.
In February 2010 the Company's Audit Committee and Board of Directors approved the
updating of the terms of employment of the CEO who holds office, and these included,
inter alia, the terms of the option warrants that had been granted to him, such that from
the times of the vesting of the option warrants that had been allocated to him within the
framework of the terms of the original employment agreement were updated, such that a
third of the option warrants, which had been allocated to him would vest on December 1,
2010 two years after the start of his period of office, an additional third would vest on
December 1, 2011 and an additional third, constituting the balance of the option warrants,
on December 1, 2012.
The Company has measured the impact of the change in the terms of the option warrants
on their fair value and it has included a cumulative additional expense of NIS 0.2 million
in its financial statements, as from the first quarter of 2010 (in respect of all of the option
warrants and for all of the vesting periods), which reflects the amount of the additional
benefit that the CEO in office received as a result of the said change in the terms.
On October 11, 2010 the Company's Audit Committee and Board of Directors approved
the updating of the terms of employment of the Company's CEO such that the exercise
period of the options that had stood at two years from the date of the vesting of each
tranche of option warrants, was extended, such that the CEO will be entitled to exercise
the options as from the vesting time of each tranche and up to the end of a period of five
years from the vesting time of that tranche. The value of the benefit deriving from the
extension of the vesting period of the option warrants, as aforesaid, amounts to NIS 3.5
million, in accordance with the binomial model.
On December 23, 2010 the Company's CEO exercised 150,000 option warrants and their
balance, as of December 31, 2011 is 914,664 option warrants.
2.
Additional options for employees and office holders
On October 11, 2010, the Company's Audit Committee and Board of Directors approved
a plan for the granting of options in the Company to 59 employees and office holders of
the Company and of entities that it controls. This was up to an overall number of
1,530,541 option warrants, which are exercisable into 1,530,541 ordinary shares of NIS 1
par value each in the Company.
The option warrants that will be allocated within the framework of this plan will be
granted to a trustee for the employees and office holders, in accordance with section 102
of the Income Tax Ordinance on an income from labor path, and which will be
exercisable (in accordance with the cashless method) into shares of the Company, subject
to adjustments.
Furthermore, subject to the provisions of the law and/or the agreement, the Company will
have a preferential right to purchase any share that derives from the exercise of those
options from the offerees to whom options have been allocated in accordance with the
said plan.
In accordance with the abovementioned plan, the following options have been allocated:
(a)
Up to December 31, 2010, 786,391 options had been allocated. On March 9, 2011
an additional 600,000 options were allocated. Furthermore, at the same time
approval was given for bringing forward the exercise date for the first tranche of
the options to January 1, 2012.
The option warrants are exercisable for an additional consideration on exercise of
approximately NIS 40 for each option warrant, subject to certain adjustments. In
accordance with this plan, the option warrants will be exercisable at 3- 4 different
vesting dates (different vesting dates for different employees) over the length of the
period of the employment of the employees and the office holders, at the end of a
period of five years from the said vesting date.
b)
(c)
The average economic value of the said option warrants (which has been
determined in accordance with the binomial model) as of the date of the grant is
NIS 27 million. The economic value of these options was determined on the basis
of the following principles: the additional amount payable on exercise, as detailed
above, a standard deviation at a rate of 38.5% - 39.8%, a risk free interest rate of
3.86% - 4.37%, an average lifetime of 5.89 – 8.89 years and a share price at the
date of the grant of NIS 42.85.
On May 4, 2011 the Options Committee of the Company's Board of Directors
approved an allocation of 47,500 non-marketable options in the Company to a
trustee for four employees (hereinafter - the offerees).
approximately NIS 45 for one offeree and NIS 60 for three offerees for each option
warrant, subject to certain adjustments. In accordance with this plan, the option
warrants will be exercisable at 4 different vesting dates (different vesting dates for
different employees) over the length of the period of the employment of the
employees and the office holders, at the end of a period of five years from the said
vesting date.
NIS 1.5 million. The economic value of these options was determined on the basis
4.82% - 5.25%, an average lifetime of 5.66 - 9 years and a share price at the date of
the grant of NIS 60.96.
On December 19, 2011 the Options Committee of the Company's Board of
Directors approved an allocation of 206,650 non-marketable options in the
Company to a trustee for six employees (hereinafter - the offerees).
NIS 65 for each option warrant, subject to certain adjustments. In accordance with
this plan, the option warrants will be exercisable at 4 different vesting dates over
the length of the period of the employment of the employees and the office holders,
at the end of a period of five years from the said vesting date.
NIS 3.7 million. The economic value of these options was determined on the basis
3.81% - 4.43%, an average lifetime of 6.01 - 9.04 years and a share price at the
date of the grant of NIS 46.63.
3.
The terms of employment of the Chairman of the Board of Directors
On March 27 and 28, 2011 the Company's Audit Committee and Board of Directors
approved the terms of office of Ms. Stella Handler as the active Chairwoman of the
Company's Board of Directors (hereinafter - the Chairwoman of the Board of Directors).
On May 3, 2011 the terms of the Chairwoman of the Board of Directors' office were
approved by a special general meeting of the Company's shareholders, with effect from
May 1, 2011. The employment agreement includes the setting of the Chairwoman of the
Board of Directors' monthly salary, her entitlement to social benefits, annual grants in
accordance with economic parameters and in accordance with the judgment of the Board
of Directors at an amount that may not exceed twice the annual salary and the granting of
option warrants, as described below.
The grant of 1,165,066 option warrants, constituting approximately 1.48% of the
Company's issued and paid up share capital (hereinafter- the option warrants) which will
be granted to a trustee for her, in accordance with section 102 of the Income Tax
Ordinance on an income from labor path, and which will be exercisable (in accordance
with the cashless method) into shares of the Company, subject to adjustments.
The option warrants can be exercised in consideration for an additional payment on the
exercise of approximately NIS 65 per option warrant, subject to certain adjustments. In
accordance with this plan the option warrants will be exercisable at four different vesting
dates: one year, two years, three years and four years as from the date of the grant. Each
tranche, as aforesaid, will be exercisable for a period of three years from the date at which
it vested, unless the options or some of them have expired before the end of the exercise
period in accordance with the provisions of the grant agreement. This includes a
provision that the all of the options that have vested prior to the time at which his
employment with the Company ends will expire at the end of a period 90 days from the
said date.
The average economic value of the said option warrants (which has been determined in
accordance with the binomial model) as of the date of the grant is NIS 32.8 million. The
economic value of these options was determined on the basis of the following principles:
the additional amount payable on exercise, as detailed above, a standard deviation at a
rate of 39.54% - 47.16%, a risk free interest rate of 4.46% - 5.2%, an average lifetime of
4 - 7 years and a share price of NIS 63.63.
G.
Expenses that have been recognized in the financial statements
The expenses that have been recognized in the Company's financial statements in respect of
services that have been received from its employees are presented in the following table:
2011
2010
2009
NIS millions
Equity-settled share based payment plans (*)
(*)
22
8
6
Includes expenses in respect of options to related parties in the amounts of NIS 17
million, NIS 8 million and NIS 1 million in the years ended December 31, 2011, 2010
and 2009, respectively.
H.
Movements in the course of the year
The following table contains the number of options for shares, their weighted average exercise
price and modification in the options plan for employees during the course of the current year:
For the year ended
December 31,2011
Weighted
average
Number of
exercise
options
price (NIS)
For the year ended
December 31,2009
Weighted
average
Number of
exercise
options
price (NIS)
Share options outstanding at the
beginning of the year
1,703,056
39.18
1,173,202
38.35
2,362,765
36.77
Share options that were granted
during the year (3)
2,006,714
57.31
786,391
40.00
-
-
Share options that were forfeited
during the year
(220,197)
40.00
-
-
(288,445)
35.35
(2,000)
31.32
(256,537)
37.85
(901,118)
35.17
Share options outstanding at the end
of the year (1)
3,487,573
49.57
1,703,056
39.18
1,173,202
38.35
Share options that are exercisable at
the end of the year
710,700
38.82
206,888
38.43
108,538
36.83
Share options that were exercised
during the year (1)
I.
For the year ended
December 31,2010
Weighted
average
Number of
exercise
options
price (NIS)
(1)
The weighted average share price on the date of the exercise of the options that were
exercised in the years 2011, 2010 and 2009 is NIS 63.15, NIS 52.84 and NIS 36.95,
respectively.
(2)
The weighted average remaining contractual life for the share options outstanding as of
December 31, 2011 is 5.52 years (2010 - 5.76 years).
(3)
The fair value of the share options that were granted in the course of 2011 is NIS 11.33
(2010 - NIS 19).
On January 31, 2012 the Company declared a dividend in the amount of NIS 365 million to the
Company's shareholders, with the determining date for the dividend being set for February 7,
2012. The dividend per share is NIS 4.699.
As of the reporting date, the dividend the dividend was paid on February 19, 2012.
NOTE 28: - ADDITIONAL INFORMATION ON COMPONENTS OF THE STATEMENT OF INCOME
2011
2010
2009
NIS in millions
A.
Revenues
Cable television
Cellular communications
In Country landline telephony
Broadband internet access services
Transmission services
Inter-segmental revenues
B.
26221
117
211
1,038
26291
)382(
26638
272
261
1,005
26187
)318(
96972
96212
96623
221
297
212
11
193
668
91
112
268
21
113
216
216
16
61
2
19
297
27
3
12
221
28
61
19
66126
66133
66728
36
31
61
68
66
69
78
32
61
1
61
2
82
71
61
2
8
9
222
212
689
76
8
68
2
62
61
66
12
3
68
3
8
3
62
16
62
69
66
62
8
68
Payroll and related expeses
Royalties and other payments to the Israeli
government
Programs and other broadcasts
Expenses involved in completing a call
Subscriber, infrastructure and network
maintenance
Rent and office maintenance
External service center
Frequencies
Others
C.
26233
11
221
163
66111
26913
)331(
Sales, marketing, general and administrative expenses
Sales and marketing expenses
Payroll and related expenses
Advertising and sales promotion
Marketers' commissions
Sales and external retention call center
Others
General and Administrative expenses
Payroll and related expenses
Professional consultancy and legal consulting
Doubtful and bad accounts expenses
Recruiting and placement
Wellbeing
Others
692
623
621
NOTE 28: - ADDITIONAL INFORMATION ON COMPONENTS OF THE STATEMENT OF INCOME
(Cont.)
2011
2010
2009
NIS in millions
D.
Financing income (expenses)
Financing income
Change in fair value of financial derivatives, net
Refund of commissions from subscribers
Exchange differences, net
Other financing income
21
9
2
2
9
9
1
2
96
61
7
-
3
62
-
21
62
77
21
71
1
21
92
613
96
92
667
21
291
216
212
)2(
)69(
68
661
1
)617(
21
6
3
)7(
)2(
6
61
619
)612(
98
Financing expenses
Financing expenses on short-term credit
Changes in the fair value of financial
derivatives, net
Financing expenses in respect of bank charges
and credit card company commissions
Financing expenses on long-term loans
Financing expenses on bonds
Exchange differences, net
Other financing expenses
E.
Other income (expenses)
Updating the liabilities to the government and
others
Updating the provision for contingencies and
for the settlement of claims
Dividends received
Transaction costs in respect of the purchase of
shares in MIRS
Others
NOTE 29: - NET EARNINGS PER SHARE
Details of the number of shares and the net income used in the calculation of the net earnings per
regular share
2010
Weighted
number of
Net income
shares
Net income
NIS in millions
Millions
NIS in millions
2011
Weighted
number of
shares
Millions
2009
Weighted
number of
shares
Millions
Net income
NIS in millions
Number of shares and net income for the
purpose of the calculation of the
basic net earnings per share
77
341
76
106
76
85
Number of shares and net income for the
purpose of the calculation of the
diluted net earnings per share
78
341
76
106
76
85
NOTE 30: - OPERATING SEGMENTS
General
The operating segments have been determined based on information that is reviewed by the
Chief Operating Decision Maker ("CODM") for the purpose of making decisions in respect of
the allocation of resources and the evaluation of performance. Accordingly, for management
purposes, the Group is organized into operating segments, based on the services provided by
three principal operating segments, as follows:
In Country fixed- line
telecommunications
segment
This segment provides the Company, via HOT Telecom, with In
Country landline telecommunications services.
Cable
television segment
This segment provides the Company and its subsidiary companies
with multi-channel cable television broadcasts to subscribers.
Cellular
telecommunications
segment
This segment provides the Company, via Mirs, with telephony,
wireless connection (PPT) and data transfer services.
The accounting policies of the operating segments are identical to that presented in Note 2.
The segment results that are reported to the CODM include items that relate directly to the
segment and items that can reasonably be attributed to it. Unallocated items, financing costs
(including financing income and expenses) and taxes on income are managed on a group basis.
Segmental assets do not include deferred taxes and cash and cash equivalents since those assets
are managed on a Group basis.
The segmental liabilities do not include deferred taxes and short-term and long-term credit,
including interest payable, since those liabilities are managed on a Group basis.
Capital investments include purchases of property, plant and equipment and intangible assets.
See Note 26B(13) on the subject of the mechanism by which Hot Telecom charges the
Company for the use of the cable infrastructure, terminal equipment and the other operational
property, plant and equipment that are held by HOT Telecom.
NOTE 30: - OPERATING SEGMENTS (Cont.)
For the year ended December 31, 2011
Cellular
communications **)
In Country fixed-line
telecommunications
Cable
television
Other
Intersegmental
income *)
Total
Consolidated
NIS in millions
External revenues
11
26112
26233
-
)331(
96972
Segment income (loss)
)1(
231
612
)8(
-
192
Unattributed other
income, net
1
Operating income
121
Financing expenses, net
)633(
Income before taxes on
income
226
*)
Revenues attributed primarily to the In Country landline telecommunications segment.
**)
As from November 28, 2011
Cellular
telecommunications
segment
December 31, 2011
In Country landline
Cable
telecommunications
television
segment
segment
Other
Total
consolidated
NIS in millions
Additional Information
Segmental assets
Assets not allocated to segments
66172
96112
66212
2
16119
Total consolidated assets
Segment liabilities
Liabilities not allocated to
segments
16282
673
231
191
791
-
66111
96677
26792
Total consolidated liabilities
Capital investments
98
286
33
6
163
69
111
672
6
822
In Country landline
telecommunications
segment
External revenues
Segment income (loss)
Cable television
segment
Other
NIS millions
Intersegmental
income
Total
consolidated
26161
26221
-
)* )382(
96212
298
)676(
)6(
-
211
21
Other unassigned revenues
236
Operating profit
)636(
Net financing expenses
611
Profit before taxes on income
*)
Revenues attributed to the In Country landline telecommunications segment.
December 31, 2010
In Country landline
telecommunications
segment
Cable
television
segment
Other
NIS in millions
Total
consolidated
Segmental assets
Assets not allocated to segments
3,837
1,298
3
5,389
Total consolidated assets
Segment liabilities
Liabilities not allocated to segments
5,138
251
467
792
-
1,259
2,609
3,868
Total consolidated liabilities
Capital investments
636
74
3
713
620
162
-
782
In Country landline
Cable
Intertelecommunications
television
segmental
Total
segment
segment
income
consolidated
NIS in millions
External revenues
Segment earnings (losses)
1,889
271
2,198
)* )318(
96623
-
211
(10)
3
Other unassigned revenues
Operating profit
274
)631(
Net financing expenses
73
Profit before taxes on income
*)
Revenues attributed to the In Country landline telecommunications segment.
In Country landline
telecommunications
segment
Cable
television
segment
Other
NIS in millions
Total
consolidated
Capital investments
597
83
-
680
774
90
-
864
NOTE 31: - BALANCES AND TRANSACTIONS WITH INTERESTED PARTIES AND RELATED
PARTIES
A.
Balances with related parties
As of December 31
2011
2010
NIS in millions
Trade receivables
Trade payables and expenses payable
6
21
1
25
22
26
2011
2010
2009
NIS in millions
B.
Salaries and profit participation grants
1.
To directors who are not employed by the
Company
2
2
2
66
62
62
Cost of salaries in NIS millions
8
9
2
Number of recipients
2
6
6
2
9
6
72
71
81
Professional services
2
2
9
E.
Financing income
-
-
-
F.
Financing expenses
-
-
21
G.
Purchase of property, plant and equipment
-
-
-
H.
Benefits for key management personnel
Short-term benefits
1
62
3
Post-employment benefits
-
-
-
Other long-term benefits
-
-
6
67
2
6
Payments in NIS millions
Number of directors
2.
To related parties who are employed by the
Company (see Note 27F)
C.
Revenues
D.
Expenses
Purchases and receipt of services from suppliers
Other benefits in respect of capital instruments
PARTIES (Cont.)
I.
An insignificant transactions
On August 30, 2010 the Company's Board of Directors decided to adopt guidelines and
principles for the classification of a transaction by the Company or by its affiliated company
with an interested party as well as transaction by the Company with a controlling interest therein
or with a person in whom a controlling interest has a personal interest (hereinafter – an related
party transaction) as an insignificant transaction, within the definition of that term in Regulation
41 of the Securities Regulations (Annual financial statements) – 2010.
These principles and guidelines are also to be used for the testing of the extent of the disclosure
in the periodic report and in a prospectus (including the shelf offer reports) in respect of a
transaction with the controlling interest or in which the controlling interest has a personal
interest in its approval, as determined in Regulation 22 of the Securities Regulations (Periodic
and Immediate Reports) - 1970 (hereinafter - the reporting regulations) and in Regulation 54 of
the Securities Regulations (Details in a Prospectus and in a Draft Prospectus – Structure and
Form) - 1969 as well as for the testing of the need to deliver an immediate report in respect of
such a transactions, as determined in Regulation 37(A)(6) of the reporting regulations.
On February 27, 2011 the Company’s Board of Directors decided to update the guidelines and
principles for the classification of a transaction with an related party as an insignificant
transaction.
The Company’s Board of Directors determined that in the absence of especial qualitative
considerations arising from the range of the circumstances of the case, a transaction with an
ralated party will be considered to be an "insignificant transaction" if (a) the transactions is
executed in the ordinary course of the Company's business, including but not exclusively, cooperations with other telecommunications companies, the purchase of services and equipment;
as well as (b) the transaction is at market terms and its terms are customary in the relevant
market; and (c) the relevant criterion for the transaction is at a rate of less than 0.2% (on the
basis of the parameters that will be detailed below) and also the annual volume of the
transaction does not exceed NIS 1 million (which amount is linked to the Consumer Prices
Index for the month of January 2011), whether this is one commitment or a series of
commitments on the same matter in the course of that year, in every transaction with an related
party that is being tested for classification as an "insignificant transaction".
In every transaction with an related party that is tested for classification as an insignificant
transaction, one or more of the following criteria, which is relevant for the specific transaction,
on the basis of the Company’s audited consolidated financial statements for the last reporting
year: (a) the ratio of the asset being purchased to the total of the assets; (b) the ratio of the
monetary liability as compared with the overall amount of the liabilities; (c) the ratio of the
income from the transaction as compared with the overall income; (d) the ratio of the expense in
the transaction to the overall amount of the operating expenses (less salary expenses and
depreciation expenses). Thus for example, a transaction for the purchase of services, will be
considered as insignificant if the volume of the expense for the Company in the transaction is
less than 0.2% of the overall operating expenses (less salary expenses and depreciation
expenses) in accordance with the Company’s consolidated financial statements for that
reporting year and less than NIS 1 million (which amount is linked to the Consumer Prices
Index for the month of January 2011). In relation to multi-annual transactions, the volume of the
transaction is to be taken on an annual basis for the purpose of testing for insignificance.
For this purpose – in the event that in a specific transaction the Company does not have all of
the rights and the duties in the transaction, the transaction is to be tested in accordance with the
Company's relative share in the transaction.
PARTIES (Cont.)
In cases in which, in accordance with the Company's judgment, any of the criteria that are
mentioned above is not relevant for the testing of the insignificance of a transaction with an
interested party, the transaction shall be considered to be an insignificant transaction, in
accordance with another relevant criterion, which shall be determined by the Company alone,
and solely that the relevant criteria that is calculated for the transaction shall be at a rate of not
more than 0.2% and also the annual volume of the transaction shall be less than NIS 1 million
(which amount is linked to the Consumer Prices Index for the month of January 2011).
However, the testing of quantitative consideration for a transaction with an interested party may
lead to a contradiction with the assumption that is stipulated above on the subject of the
insignificance of the transaction. Thus for example and solely for illustrative purposes, a
transaction with an interested party will not generally be considered to be an insignificant
transaction, if it is perceived as significant by the Company's management and serves as the
basis for managerial decision making, or if within the framework of the transaction the
interested party is expected to receive benefits which it is important that a report thereon be
furnished to the public.
NOTE 32: - MATERIAL EVENTS POST BALANCE SHEET DATE EVENTS
A.
On January 31, 2012 HOT Haifa entered into a commitment with K.D. Kahiri Assets and
Investments Ltd. (hereinafter - the Seller) under an agreement for the purchase of the building in
Beersheba that Group Companies leased from the seller, including all of the seller’s rights
and/or commitments in respect of the land and all that is built thereon, for an overall
consideration of NIS 36.3 million (with the addition of VAT).
B.
See Note 1A(4)(b)(1) on the subject of the approval of the Finance Committee of the Knesset
for the second and third readings of the draft Distribution of broadcasts via digital broadcasting
stations Law in January 2012.
C.
See Note 1A(5)(b)(2) on the subject of the publication of the Communications Regulations
(Telecommunications and Broadcasts) (Consultative committee) (Temporary directive, 2011).
D.
See Note 1A(7) on the subject of the starting of the provision of ISP services to private
subscribers by HOT Net on February 15, 2012.
E.
See Note 1(A)8 on the subject of a letter that was received by the Company from the Ministry
of Communications on the subject of packages of services on February 14, 2012, and on the
subject of an approach from the Ministry of Communications on the subject of a breach of a
duty of structural separation.
F.
See Note 1A(9) on the subject of an approach made by Mirs to the Ministry of Communications
applying for a general license for the provision of international telecommunications services.
G.
See Note 26B(1)(a) on the subject of an amendment to the Telecommunications Regulations
(Concessions) on the matter of the royalties rate paid by cable broadcast license holders.
H.
See Note 26B(1)(b) on the subject of a draft amendment to the Communications Regulations
(Telecommunications and Services) (Royalties - 2001), which was presented to the Finance
Committee of the Knesset for approval.
I.
See Note 26B(2)(b) on the subject of a draft Copyright and Performers Law (Judicial authority
concerning royalties) - 2012.
J.
See Note 27I on the subject of the distribution of a dividend that was approved by the
Company's Board of Directors on January 31, 2012
List of Principal Investee Companies
December 31, 2011
Ownership and
holding rate
Name of the Company
HOT Cable Telecommunication Systems Haifa - Hadera Ltd.
611%
Consolidated
HOT Net Internet Services Ltd. (formerly HOT Investments and Finance Ltd.)
611%
Consolidated
HOT Properties Ltd.
611%
Consolidated
HOT Vision Ltd.
611%
Consolidated
11%
affiliated
611%
Consolidated
Drom Hasharon Telecommunications (1990) Ltd.
611%
Consolidated
Isracable Ltd.
611%
Consolidated
611%
Consolidated
HOT Edom Ltd.
611%
Consolidated
HOT Idan Cable Systems (Holdings) 1987 Ltd.
611%
Consolidated
HOT Idan Cable Systems Israel Ltd.
611%
Consolidated
HOT Gold & Co.
611%
Consolidated
611%
Consolidated
MIRS Communications Ltd
611%
Consolidated
--------------

hot - telecommunication systems ltd. consolidated financial

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