*calculated per year, based on fair value at date of grant, with the value of the options amortized as compensation over the vesting period.
The ranges stated above represent the targeted compensation mix desired by the Company; however, the actual ratio between fixed and variable elements may vary based on performance. For example, in a year with no or limited Annual Cash Bonus, the percentage of base salary out of total compensation may be higher than stated above. The ranges above do not consider any Special Cash Bonus that our Compensation Committee and Board of Directors (and shareholders – in relation to our CEO) may decide to grant to an executive officer, as detailed under Special Cash Bonus below.
Our cash bonus and equity-based compensation awards are considered “at-risk” pay because they are not guaranteed and the recipients of the Annual Cash Bonus awards must achieve specific performance objectives at corporate and individual levels to receive any payment.
Accordingly, base salary shall generally target the 25%-75% percentiles of each executive officer's peer group salary, taking into consideration the aforementioned individual characteristics, as shall be reflected in a peer group analysis conducted by an independent consultant and reviewed by our Compensation Committee and Board of Directors, when such salary is set and/or updated.
The base salary may be linked to the Israeli Consumer Price Index, or CPI.
We may offer additional benefits and perquisites to the executive officers, which will be comparable to customary market practices, such as: company cellular phone and the costs of the use thereof; company car benefits; gifts for holidays and personal occasions (such as nuptials or birth of a child or grandchild), or for special projects; medical insurance, annual medical examination, professional associations membership fees etc., including tax gross-ups; provided however, that such additional benefits and perquisites shall be determined in accordance with our policies and procedures and with reference to the practice in peer group companies. The value of such additional benefits shall not exceed 30% of the executive officer's base salary.
The Annual Cash Bonus payout is determined based on actual performance of the Company and the executive officer in question (after elimination of material one time and reevaluation influences), in each of the performance objectives set for each executive officer, measured on a performance matrix. The results for each group of objectives (as detailed hereunder) are then combined into one performance score, based on the weight each performance objective was given.
Corporate performance objectives may include adjusted EBITDA,* net income, free cash flow*and other Company performance objectives which the Company decides to focus on in a specific year. Our CEO's corporate performance objectives were determined by our shareholders general meeting to be the Company's adjusted EBITDA target for the relevant year.** Corporate performance objectives weigh between 30% to 50% of the overall performance score of each executive officer and 80% for our CEO. In extreme cases, such as major changes in our market leading to annual work plan or budget adjustments, our Compensation Committee and Board of Directors may update the objectives to match such changes, during the first half of the relevant year.
| · | Corporate performance objectives may include EBITDA,* net income, free cash flow*, Net Promoter Score, or NPS (indicating our subscribers' satisfaction with our services) and other Company performance objectives which the Company decides to focus on in a specific year. Our CEO's corporate performance objectives were determined by our shareholders general meeting to be the Company's EBITDA target for the relevant year.** Corporate performance objectives weigh between 30% to 50% of the overall performance score of each executive officer and 80% for our CEO. In extreme cases, such as major changes in our market leading to annual work plan or budget adjustments, our Compensation Committee and Board of Directors may update the objectives to match such changes, during the first half of the relevant year.
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Quantitative individual performance objectives may include the budget for the unit relevant to the executive officer, revenues from sales by the unit, recruiting subscribers by the unit and quality of network. These objectives weigh between 30% and 50% of the overall performance score of each executive officer.
| · | Quantitative individual performance objectives may include specific NPS, the budget for the unit relevant to the executive officer, revenues from sales by the unit, recruiting subscribers by the unit and quality of network. These objectives weigh between 30% and 50% of the overall performance score of each executive officer. |
| · | Qualitative individual performance objectives may include corporate governance, risk management, leadership, response to major business changes, executing special projects, as per the CEO's evaluation of each executive officer and as per the evaluation of the CEO by the Compensation Committee and the Board of Directors. This component will weigh up to 20% of the overall performance score of each executive officer (including the CEO). |
Qualitative individual performance objectives may include corporate governance, risk management, leadership, response to major business changes, executing special projects, as per the CEO's evaluation of each executive officer and as per the evaluation of the CEO by the Compensation Committee and the Board of Directors. This component will weigh up to 20% of the overall performance score of each executive officer (including the CEO).
*Adjusted EBITDA and Free Cash Flow are non-IFRS measures. For a definition of adjusted EBITDA, see footnote (5) under "Item 5. Operating and financial review and prospects – Results of operations – Comparison of 2015, 20162017, 2018 and 2017"2019". For a definition of Free Cash Flow see under "Item 5. Operating and financial review and prospects – A. Operating results – Overview – General".
** Our former CEO's performance score of his performance objectives in 20172019 is 92.3%102.3%.
Any payout of Annual Cash Bonuses for any year will be subject to an additional minimum requirement of achieving an annual adjusted EBITDA of not less than 75% of the Company's adjusted EBITDA for the previous year. We have met this threshold. Such minimum requirements are in no way indicative of the Company's expectations or estimations for any fiscal year, and are provided in order to assure shareholders that no Annual Cash Bonuses will be paid to office holders according to the Compensation Policy in years when the Company’s performance has deteriorated materially compared to the prior year.
Our Compensation policy sets a minimal threshold score of 75% of the combined target performance and a target Annual Cash Bonus of 10 monthly salaries for our CEO and 5-7 monthly salaries for our other executive officers ("Target Bonus") for the target performance objectives, in line with each executive officer's capability to influence the Company's results of operations. Performance below the minimum threshold results in no payout. Performance score under the combined performance target and above the threshold results in a linear reduction in which a 5% reduction of the combined performance score represents a reduction of 10% of the Target Bonus (i.e. down to 50% of the Target Bonus for a performance score of 75% of the combined performance target). Performance score above the combined target performance rewards the executive officer with a linear addition to the Target Bonus in which a 5% addition of the combined performance score represents an addition of 10% to the Target Bonus and up to a maximum of 150% of the Target Bonus.
Following is a graphic representation of the Annual Cash Bonus our executive officers may be entitled to:
Notwithstanding the aforesaid, for our executive officers, except the CEO, the Compensation Committee and the Board of Directors will have full discretion to determine the final Annual Cash Bonus payout based, among other things, on the Annual Cash Bonus performance score and/or additional considerations relevant to the performance and objectives of the Company and the relevant executive officer, including qualitative criteria.
Subject to the conditions and limitations set above, an executive officer who ceases to perform his/her role as an executive officer but has provided services to the company for at least 6 months of the relevant year, will be entitled to receive an Annual Cash Bonus for that year, relative to the period in which he/she performed their duties during the relevant year. An executive officer who provides services to the Company for less than 6 months during the relevant year of cessation, will not be entitled to an Annual Cash Bonus for that year. An executive officer who joins the Company during the relevant year, will be entitled to a portion of the Annual Cash Bonus, relative to the period in which he/she performed their duties during the relevant year and provided such period is at least 6 month long.
The aggregate maximum payout of all of the executive officers' Annual Cash Bonuses per annum shall not exceed 2% of the adjusted EBITDA for that calendar year (after elimination of material one time and reevaluation influences). In case of a positive adjusted EBITDA but negative net profit in a particular year, the Compensation Committee and the Board of Directors of the Company shall examine the circumstances leading to a negative net profit and shall consider reducing or cancelling the Annual Cash Bonus for that year. For 2019, our Compensation Committee and the Board of Directors resolved not to award an Annual Cash Bonus, given the Company's results of operations.
Special Cash Bonus. The Company may grant, subject to approvals required by law, a special bonus to one or more executive officers that have shown a special contribution, considerable efforts or special achievements, in relation to a unique or extraordinary business activity or other special circumstances, in advancement of the Company's goals (the "Special Cash Bonus"). The Special Cash Bonus is a separate bonus from the Annual Cash Bonus mentioned above. The Special Cash Bonus will be determined by quantitative and/or qualitative parameters, and while considering the personal contribution of the executive officer. The maximum payout for the Special Cash Bonus during the term of the Compensation Policy with respect to any executive officer will be the greater of: (a) 9 base salaries for our CEO and 7 base salaries for our other executive officers, or (b) 150% of the Target Bonus minus any Annual Cash Bonus payout for the relevant year. Any Special Cash Bonus with respect to the CEO will require approval by our shareholders' meeting in addition to the Compensation Committee and board of directors' approval. The aggregate maximum payout cap for Annual Cash Bonuses of all of the executive officers, as described in the previous section of this policy, shall apply also to the aggregate payout of the Special Cash Bonus of all of the executive officers, so that the aforesaid cap shall apply to the aggregate payout of all cash bonuses under this policy.
Equity-based compensation Plan. Under the Company's 2015 Share Incentive Plan or under any equity-based compensation plan adopted by the Company in the future, the Compensation Committee and Board may resolve to grant, from time to time, options or restricted share units ("RSUs"), or other instruments of equity-based compensation, to our executive officers.
The decision on equity-based compensation grant shall take into consideration each executive officer's position, scope of responsibilities, as well as its past performance and contribution to the Company.
In order to align executive officer and investor interests for creation of long term value, equity-based awards will include the following terms:
· | Awards will vest linearly over a minimum period of three years beginning on the first anniversary of the grant date. The terms of such equity-based awards may include provision for acceleration of vesting in certain events, such as in the event of a merger, a consolidation, a sale of all or substantially all of our consolidated assets, change of controlling shareholder, or the sale or other disposition of all or substantially all of our outstanding shares. |
Awards will vest linearly over a minimum period of three years beginning on the first anniversary of the grant date. The terms of such equity-based awards may include provision for acceleration of vesting in certain events, such as in the event of a merger, a consolidation, a sale of all or substantially all of our consolidated assets, change of controlling shareholder, or the sale or other disposition of all or substantially all of our outstanding shares.
· | The exercise price of equity-based awards will be set so as to induce an incentive for long term value creation, but in any case, not lower than the higher of 5% above the average market price of the Company's share during the 30 day period preceding the date of grant, and the market price of the Company's share at the end of the trading day preceding the date of grant, and will be subject to customary adjustments including for dividend distributions. |
The exercise price of equity-based awards will be set so as to induce an incentive for long term value creation, but in any case, not lower than the higher of 5% above the average market price of the Company's share during the 30 day period preceding the date of grant, and the market price of the Company's share at the end of the trading day preceding the date of grant, and will be subject to customary adjustments including for dividend distributions.
· | The value of equity-based awards at the date of grant (in accordance with acceptable accounting principles) per each vesting annum (calculated on a linear basis), in addition to the Target Bonus (whether or not actually paid), will not exceed 70% of our CEO's and 60% of our other executive officers' total cost of employment in that calendar year. We believe a grant date cap is more appropriate than an exercise date cap as it better aligns long term value creation objectives. |
· | The annual exercise of shares reserved for issuance upon the exercise of options of all the Company's executive officers will not dilute the Company's shareholders by more than 2% (in regards to option plans which contain a 'net exercise mechanism') of the Company's outstanding share capital for the year in which such options may be exercised. In addition, our board of directors committed to DIC that the Company will not issue options or shares pursuant to executive officers or employees compensation, which may lead to a dilution of the Company's shareholders by more than 0.5% of the Company's outstanding share capital for the year in which such options may be exercised. |
The annual exercise of shares reserved for issuance upon the exercise of options of all the Company's executive officers will not dilute the Company's shareholders by more than 2% (in regards to option plans which contain a 'net exercise mechanism') of the Company's outstanding share capital for the year in which such options may be exercised. In addition, our board of directors committed to DIC that the Company will not issue options or shares pursuant to executive officers or employees' compensation, which may lead to a dilution of the Company's shareholders by more than 0.5% of the Company's outstanding share capital for the year in which such options may be exercised..
Termination and Retirement. Our executive officers may be entitled to up to a 3 months advance notice period upon termination of their employment with the Company if worked in the Company for up to 3 years, or up to 6 month advance notice period if worked in the Company for over three years and will be required to provide the Company with the same notice when they initiate retirement from their position. The executive officer is obligated to work during such period and Company may decide, at its sole discretion, to waive actual work during that period, in whole or in part. Under special circumstances, the Company may, as approved by our Compensation Committee and Board of directors, grant an executive officer who worked in the Company for a minimum of two years and was not terminated for cause, a termination bonus equal to up to 3 monthly salaries of the executive officer, including benefits or an adjustment period of up to 3 month during which the executive officer will be entitled to continue to enjoy all compensation and benefits. In case the executive officer worked in the Company for a minimum period of five years, such termination bonus or adjustment period, may be up to 6 monthly salaries or 6 months, respectively. In deciding on the grant of a termination bonus or the like, our Compensation Committee and Board of Directors shall take into consideration the executive officer's term of employment, his/her compensation during his/her employment with the Company, the Company's performance during that period, the contribution of the executive officer to achieving the Company's objectives and increasing its profits and the circumstances of termination.
The Company may approve, upon termination of an executive officer’s employment, amendment of the terms in connection with the executive officer’s equity-based compensation grants, such as extending the period for exercise of equity-based compensation upon termination, for longer periods than as set forth in the applicable plan, enabling acceleration of vesting of unvested equity-based compensation, while considering the same considerations stated above for a termination bonus.
The Company will not pay its executive officers any non-competition fees for post termination periods, although executive officers may be bound by post termination non-competition obligations.
Compensation for our directors
All directors (other than Executive Directors, as defined hereinafter), including external directors, independent directors, directors who are affiliated with our controlling shareholder or nominated or appointed by our controlling shareholders ("Controlling Shareholder Directors") and other directors, will be entitled to a directors fees in accordance with the amounts of statutory compensation to an external director of a dual-listed company allowed by the applicable Israeli law and regulations (as shall be updated from time to time and up to the maximum amounts allowed) and will not receive cash bonuses or equity-based compensation. Such directors' fees in relation to Controlling Shareholder Directors may be paid either directly to the director or to the controlling shareholder through a management agreement (if such agreement is in effect).
Our Controlling Shareholder Directors who hold an active role in the Company ("Executive Directors"), which may include the chairman of the Board of Directors, may be entitled to compensation from the Company (instead of the above directors fees) which may include an annual fixed payment and equity-based compensation. The provisions regarding our CEO's base salary and equity–based compensation detailed above in this policy, shall apply mutatis mutandis to the annual fixed payment and equity-based compensation such Executive Directors shall receive for their services, assuming a full time position as our Executive Directors. A part-time position may entitle our Executive Directors to a corresponding portion of annual fixed payment and equity-based compensation. Our Executive Directors are not entitled to receive a cash bonus. Director's fees for our executive officers was reduced by 25% for a limited period, since May 2019, as per agreement with the employee representatives.
Indemnification
Exemption from liability and liability insurance policy. Our articles of association allow us to exempt in advance a director and executive officer, or office holders, from liability to the company, in whole or in part, for a breach of his or her duty of care (except in connection with distributions) and we may enter into a contract for insurance against liability of any of our office holders with respect to certain breaches of his/her duties and certain financial liabilities and litigation expenses.
We maintain a liability insurance policy for the benefit of our office holders. Our directors and executive officers' coverage will not exceed US$100 million per claim and in the aggregate, and additional reasonable expenses in connection with defending lawsuits, and the premium will not exceed US$ 12 million per annum in any renewal or extension or substitution of the policy and the deductible will not exceed US$ 0.55 million per claim. Any such renewal or extension or substitution of the liability insurance policy for the benefit of our office holders (including those who are or are related to controlling shareholders or in respect of whom our controlling shareholders have a personal interest, who shall be insured under identical terms) does not require a separate approval of the Company's shareholders, in addition to the approval of this compensation policy (which in itself requires approval once every three years) if our compensation committee resolves that such renewal or extension or substitution upholds the limitations set above.
Indemnification. Our articles of association provide that we may indemnify our office holders against certain financial liability and litigation expenses. We have undertaken to indemnify our office holders for certain events listed in the indemnification letters given to them. Excluding reasonable litigation expenses, as noted above, the aggregate amount payable to all directors and officers and other employees who may have been or will be given such indemnification letters is limited to the amounts we receive from our insurance policy plus 30% of our shareholders’ equity as of December 31, 2001, or NIS 486 million, and to be adjusted by the Israeli CPI. The approval of the compensation policy by our shareholders shall not be considered as approval of the indemnification amount to the Company's office holders (over the amounts received from the Company's insurance policy).
The above exemption, indemnification and insurance coverage, are subject to the limitations set in the Companies Law.
Executive Officer and Director Compensation
The aggregate direct compensation we paid to all our executive officers and directors as a group (17 persons) for 20172019 was approximately NIS 14.314 million, of which approximately NIS 2.11.9 million was set aside or accrued to provide for pension, retirement, severance or similar benefits. These amounts do not include expenses we incurred for other payments, including dues for professional and business associations, business travel and other expenses and benefits commonly reimbursed or paid by companies in Israel. In addition,2019 we did not record any equity based compensation costs in 2017 we recorded the sum of approximately NIS 1.4 million, as a compensation cost relatedrelation to the options granted to all our executive officers under our share incentive plans.officers. See “6. Directors, Senior Management and Employees – E. Share Ownership – Share Incentive Plans”. We pay our executive officers an annual bonus based on our overall performance and individual performance, in accordance and subject to the provisions of our compensation policy (described above). For 2017,2019, our compensation committee and board of directors resolved not to pay our executive officers (excluding our CEO) an Annual Cash Bonus and Special Cash Bonus in an aggregate sum of approximately NIS 5.1 million and approximately NIS 2.0 million to Mr. Sztern, our CEO (including Mr. Sztern's Special Cash Bonus, which was approved by our shareholders and after Mr. Sztern waived 10% of his Annual Cash Bonus), according to our compensation policy.
The table below reflects the compensation granted to our five most highly compensated office holders during or with respect to the year ended December 31, 2017.2019. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.” All amounts reported in the table are in terms of cost to the Company, as recognized in our financial statements for the year ended December 31, 2017,2019, which includes compensation paid or to be paid to such Covered Executive following the end of the year in respect of services provided during the year. Each of the Covered Employees was covered by our D&O liability insurance policy and was entitled to indemnification and exculpation in accordance with applicable law and our articles of association. The amounts set forth in the table below are given in thousands of New Israeli Shekels (NIS).
Name and Principal Position (1) | Salary Cost (2) | Bonus(3) | Equity-Based Compensation(4) | Total |
Nir Sztern, President and Chief Executive Officer | 1,947,967 | | - | 1,947,967 |
Shlomi Fruhling, Chief Financial Officer | 1,271,431 | | - | 1,271,431 |
Ron Shvili, Chief Technology Officer | 1,152,795 | | - | 1,152,795 |
Sharon Amit Vice President HR | 1,087,261 | | - | 1,087,261 |
Liat Menahemi Stadler Vice President of Legal Affairs and Corporate Secretary | 1,082,999 | | - | 1,082,999 |
Name and Principal Position (1) | | Salary Cost (2) | | | Bonus(3) | | | Equity-Based Compensation(4) | | | Total | |
Nir Sztern, President and Chief Executive Officer | | | 2,014 | | | | 2,048 | | | | 542 | | | | 4,604 | |
Shlomi Fruhling, Chief Financial Officer | | | 1,193 | | | | 870 | | | | 92 | | | | 2,155 | |
Liat Menahemi Stadler Vice President of Legal Affairs and Corporate Secretary | | | 1,283 | | | | 668 | | | | 92 | | | | 2,043 | |
Ron Shvili, Chief Technology Officer | | | 1,046 | | | | 626 | | | | 92 | | | | 1,764 | |
Amos Maor, VP Sales and Service | | | 1,058 | | | | 565 | | | | 92 | | | | 1,715 | |
____________________
| (1) | As of December 31, 2019. Mr. Sztern, Mr. Shvili and Ms. Amit have since than resigned their positions. Unless otherwise indicated herein, all Covered Executives are or were employed on a full-time (100)%(100%) basis. |
| (2) | Salary cost includes the Covered Executive's gross salary plus payment of social benefits made by the Company on behalf of such Covered Executive. Such benefits may include, to the extent applicable to the Covered Executive, payments, contributions and/or allocations for savings funds (e.g., Managers' Life Insurance Policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, risk insurances (e.g., life, or work disability insurance), payments for social security and tax gross-up payments, vacation, car, medical insurance and benefits, phone, convalescence or recreation pay and other benefits and perquisites consistent with our policies. |
| (3) | Represents Annual Cash Bonuses approved by our compensation committee and board of directors to the Covered Executives with respect to the year ended December 31, 2017 and Special Cash Bonuses paid in 2017,2019, based on our compensation policy. |
| (4) | Represents the equity-based compensation expenses recorded in our consolidated financial statements for the year ended December 31, 2017,2019, based on the fair value of the applicable options on the date of grant thereof, in accordance with accounting guidance for equity-based compensation. For a discussion of the assumptions used in reaching this valuation, see Note 20 to our consolidated financial statements included elsewhere in this report. We pay each of our external directors the maximum amount of statutory compensation to an external director of a dual-listed company allowed by the applicable law and regulations, which is in the amount of NIS 134,180 (approximately $38,702) per year and NIS 4,035 (approximately $1,164) per meeting which such external director attends (including meetings of committees of the Board of Directors), adjusted for changes in the Israeli CPI for October 2015. As resolved in our annual shareholders meeting held in July 2011, our independent directors (Shlomo Waxe and Ephraim Kunda) are compensated at the same level as a statutory external director of a dual listed company, as described above. |
105We pay each of our external directors the maximum amount of statutory compensation to an external director of a dual-listed company allowed by the applicable law and regulations, which is in the amount of NIS 134,180 (approximately $38,825) per year and NIS 4,035 (approximately $1,168) per meeting which such external director attends (including meetings of committees of the Board of Directors), adjusted for changes in the Israeli CPI for October 2015, or a Director's Fee. As resolved in our annual shareholders meeting held in July 2011, our independent directors (Gustavo Traiber and Ephraim Kunda) are compensated at the same level as a statutory external director of a dual listed company, as described above.
We pay our Controlling Shareholder Directors as follows: Regarding Mr. Ami Erel, our former Chairman of the board of directors, for the period from January 2017 until June 2017 we paid management fees to DIC in the amount equal to the statutory director fee of a dual listed company, as described above; and from June 2017, we paid the monthly remuneration approved by our compensation committee, board of directors and shareholders for his services as an executive director - the amount of NIS 87,500 plus VAT, linked to the Israeli CPI.CPI*. Regarding Mr. Mauricio Wior, our Vice Chairman of the board of directors and Mr. Eran Saar, Director, we paidpay a director's fee in the same amount as the statutory external director of a dual listed company, as described above.Director's Fee* (paid to DIC according to Mr. Saar’s instructions). See "Item 8.Major Shareholders and Related Party Transactions – Related Party Transactions – Relationship With Affiliates".
* Reduced by 25% for a limited period, since May 2019, as per agreement with the employee representatives.
Employment Agreement of Nir Sztern
Mr. Nir Sztern, our Chief Executive Officer from January 2012 to January 2020, was entitled to a gross monthly salary of NIS 120,000 linked to Israeli CPI. Mr. Sztern was not awarded an Annual Cash Bonus nor Special Cash Bonus for 2019. The aggregate monthly cost to us of Mr. Sztern’s employment in 2019 amounted to approximately NIS 162,300 (approximately $47,000). Mr. Sztern was further entitled to an advance notice of three months and additional three months of his salary and benefits.
Employment Agreement of Avi Gabbay
Mr. Avi Gabbay, our Chief Executive Officer as of January 1, 2012,19, 2020, is entitled to a gross monthly salary of NIS 120,000110,000 linked to Israeli CPI. He is also entitled to a company car and the use of a cellular phone. Mr. SzternGabbay may receive an Annual Cash Bonus and Special Cash Bonus as per our Compensation Policy detailed above, in respect of which no social benefits are accrued. Mr. Sztern's Annual Cash BonusGabbay was granted 4,153,472 options to the Company's shares which will vest in five installments at an exercise price of NIS 14.20 per share for 2017the first installment - 967,993 options, NIS 14.99 per share for the second installment - 937,030 options, NIS 16.10 per share for the third installment - 805,570 options, NIS 17.25 per share for the fourth and Special Cash Bonus (approved by our shareholdersfifth installments - 762,509 and paid680,370 options, respectively. The options may be exercised within 3 years from the date of vesting of each installment. We will record the total sum of approximately NIS 12 million as a compensation expense related to Mr. Sztern in 2017) amounted to NIS 2.0 million (after Mr. Sztern waived 10%Gabbay's grant, over a period of his Annual Cash Bonus)five years (nonlinearly). Mr. Sztern isGabbay may also entitled to participate in future grants as per our share option plan. Mr. Sztern’sGabbay’s agreement contains provisions for vacation days, sick leave, managers’ insurance and an education fund. The aggregate monthly cost to us of Mr. Sztern’s employment in 2017 amounted to approximately NIS167,800 (approximately $48,400), not including the bonuses. The agreement is for an unspecified period of time and can be terminated by either party with advance notice of three months.months during the first three years of Mr. Sztern will continue to receive his salaryGabbay's employment with the Company and benefits for a period of three months after termination by either party, unless we terminate the agreement for cause.six month thereafter.
C. BOARD PRACTICES
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices underprescribed by the Companies Law and the regulations promulgated thereunder, relating to such matters as external directors, the audit committee, the compensation committee and the internal auditor. These matters are in addition to the applicable requirements of the New York Stock Exchange and U.S. securities laws. Under the New York Stock Exchange rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the comparable New York Stock Exchange requirements, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members. We follow the Companies Law, the relevant provisions of which are summarized in this annual report, and comply with the New York Stock Exchange requirement to solicit proxies from our shareholders in respect of each meeting of shareholders.
For a summary of the significant differences between our corporate governance practices as a foreign private issuer and those required of U.S. domestic companies under NYSE Listing Standards, see “Item 16G – Corporate Governance”.
Under the Companies Law, our Board of Directors must determine the minimum number of members of our Board of directors required to have financial and accounting expertise, as defined in the regulations of the Companies Law. In determining the number of directors required to have such expertise, the Board of Directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our Board of Directors has determined that we require at least two directors with the requisite financial and accounting expertise and that Messrs. ErelWior and WiorSaar have such financial and accounting expertise. The Companies Law and the regulations promulgated thereunder also require that at least one of our External Directors has financial and accounting expertise, and consider a person who is an audit committee independent financial expert according to U.S. law, and meets a lower standard of "professional qualification" under the Companies Law, to comply with that requirement. Our Board of Directors has determined that Ms. Ronit BaytelMr. Shmuel Hauser qualifies as an "audit committee financial expert" as defined by the SEC in Item 16.A of Form 20-F.
Until December 2017 we were a third layer company in a pyramidal structure (a layer being a public corporation or a private company that issued certain securities to the public) as defined in the Concentration Law, and our board of directors' composition accorded with the independent and external directors requirements set in such law (the majority of the Board of Directors were required to be independent directors and half the Board of Directors minus one (rounded up) but not less than two, were required to be external directors). As of December 2017 we are a second layer company according to such law and the requirements that were imposed on us as a third layer company are no longer applicable to us.
Board of Directors and Officers
Our articles of association provide that we must have at least five directors. Each director (other than external directors and directors required to be appointed by Israeli citizens and residents from among our founding shareholders) will hold office until the next annual general meeting of our shareholders following his or her election. The approval of at least a majority of the voting rights represented at a general meeting and voting on the matter is generally required to remove any of our directors from office (other than external directors and directors required to be appointed by Israeli citizens and residents from among our founding shareholders), provided that directors appointed by the Board of Directors may also be removed by the Board of Directors. A majority of our shareholders at a general meeting may elect directors or fill any vacancy, however created, in our Board of Directors (other than external directors and directors required to be appointed by Israeli citizens and residents from among our founding shareholders). In addition, directors, other than an external director or a director required to be appointed by Israeli citizens and residents from among our founding shareholders, may be appointed by a vote of a majority of the directors then in office. We do not enter into service contracts with our directors.
Our Board of Directors currently consists of sevensix directors, including four independent directors under the rules of the NYSE, of whom two also qualify as external directors under the Companies Law. Two of our current directors, Mr. WaxeKunda and Mr. Kunda (who areTraiber, our independent directors)directors, were elected at our annual shareholders meeting held in December 2017.March 2019 until our next annual meeting. Mr. Wior who was also elected by our 2017 general meeting, was later on (February 2018) appointed in February 2018 by the Israeli shareholders, in accordance with our license and articles of association’s requirement that at least 10% of our directors be appointed by Israeli citizens and residents from among our founding shareholders, or Israeli Shareholders. Mr. Erel (who had been previously appointed by DIC in its capacity as our previous Israeli Shareholder)Saar was appointed by our board of directors in February 2018, until our next annual meeting and Mr. Lapidot was appointed by our board of directors in March 2018,September 2019, until our next annual meeting. Our external directors, Mr. BarneaHauser and Ms. Baytel,Liberman, were electedappointed in our annual shareholdersshareholder meeting held in June 2017March 2019 for an additionala term until our 2018 annual general meeting.of three years, as per the Companies Law stipulations.
Our articles of association provide, as allowed by Israeli law, that any director may, by written notice to us, appoint another person who is not a director to serve as an alternate director (subject to the approval of the chairman of the Board of Directors; and in the case of an appointment made by the chairman, such appointment shall be valid unless objected to by the majority of other directors) and may cancel such appointment. The term of appointment of an alternate director is unlimited in time and scope unless otherwise specified in the appointment notice, or until notice is given of the termination of the appointment. No director currently has appointed any other person as an alternate director. The Companies Law stipulates that a person who serves as a director may not serve as an alternate director except under very limited circumstances. In addition, the Companies Law provides that an external director cannot appoint an alternate director to serve on the Board of Directors, and an external director cannot appoint another external director to serve as his or her alternate on a committee of the Board of Directors unless the alternate has the same qualifications as the appointing director. Similarly, an independent director cannot appoint an alternate director, unless the alternate director has the qualifications to serve as an independent director. An alternate director has the same responsibility as a director. Appointment of an alternate director does not negate the responsibility of the appointing director.
Each of our executive officers serves at the discretion of our Board of Directors and holds office until his or her successor is elected or until his or her earlier resignation or removal. There are no family relationships among any of our directors or executive officers.
External Directors
Qualifications of external directors
Companies incorporated under the laws of the State of Israel whose securities are listed on a stock exchange are required by the Companies Law to appoint at least two external directors. External directors are required to possess professional and other qualifications as set out in the Companies Law and the regulations promulgated thereunder. Our external directors were appointed by our shareholders in May 2007March 2019 for an initial term of three years, and were thereafter reelected to additional three year terms in April 2010 and 2013, in May 2016 for an additional one year term and in June 2017 for an additional term until our 2018 annual general meeting.years. The Companies Law provides that a person may not be appointed as an external director of a company that has a controlling shareholder if the person is a relative of the controlling shareholder, or if the person, or the person’s relative, partner, employer, direct or indirect supervisor or any entity under the person’s control has or during the two years preceding the date of appointment had, an affiliation with the company or any entity controlling, controlled by or under common control with the company.
The term “office holder” is defined in the Companies Law as a general manager, chief business manager, deputy general manager, vice general manager, any manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions, without regard to such person’s title, and a director. Each person listed above under “Item 6.A - Directors and Senior Management,” except our controller, is an office holder for this purpose.
No person may serve as an external director if the person’s position or other business interests creates, or may create, a conflict of interest with the person’s responsibilities as a director or may otherwise interfere with the person’s ability to serve as a director. If at the time an external director is appointed all current members of the board of directors are of the same gender, then that external director must be of the other gender.
For two years following the termination of an external director’s service, the company and its controlling shareholder may not appoint the external director, or his or her spouse or child, as an office holder in that company or another company under common control, and cannot employ or receive services from that person for pay or grant any benefit, either directly or indirectly, including through a corporation controlled by that person. The same restrictions apply in regards to a relative who is not the external director’s spouse or child for a period of one year.
Election of external directors
External directors are typically elected by a 'Special Majority', meaning a majority vote at a shareholders’ meeting, provided that either:
| · | a majority of the aggregate number of shares voted at the meeting by non-controlling shareholders and shareholders who do not have a personal interest in the matter are voted in favor of the election of the external director; or |
a majority of the aggregate number of shares voted at the meeting by non-controlling shareholders and shareholders who do not have a personal interest in the matter (other than a personal interest that is not the result of the shareholder's connections with a controlling shareholder) are voted in favor of the election of the external director (disregarding abstentions); or
| · | the total number of shares of non-controlling shareholders and shareholders who do not have an applicable personal interest in the matter voted against the election of the external director does not exceed 2% of the aggregate voting rights in the company. |
the total number of shares of non-controlling shareholders and shareholders who do not have an applicable personal interest in the matter voted against the election of the external director does not exceed 2% of the aggregate voting rights in the company.
The initial term of an external director is three years and he or she may be reelected to up to two additional terms of three years each by means of one of the following mechanisms: (i) the board of directors proposed the nominee and the nominee's appointment was approved by the shareholders by a Special Majority, or (ii) a shareholder holding 1% or more of the voting rights or the external director proposed the nominee, and the nominee is approved by the shareholders by a Special Majority, and that the nominee is not the proposing shareholder or a 5% shareholder who is an affiliate or competitor of the company or a relative or affiliate of such a shareholder. Thereafter, in dual listed companies like us, an external director may be reelected by our shareholders for additional periods of up to three years each under certain conditions. An external director may only be removed by the same percentage of shareholders votes as is required for the election of an external director, or by a court, and then only if the external director ceases to meet the statutory qualifications or violates his or her duty of loyalty to the company. If an external directorship becomes vacant, a company’s board of directors is required under the Companies Law to call a shareholders’ meeting promptly to appoint a new external director.
Each committee of a company’s board of directors that has the right to exercise a power delegated by the board of directors is required to include at least one external director, and the audit and compensation committees are required to include all of the external directors. An external director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with services provided as an external director.
Israeli-appointed directors
Our license requires that at least 10% of our directors will be appointed and removed by shareholders who are Israeli Shareholders. If our Board of Directors is comprised of 14 directors or less, the Israeli Shareholders will be entitled to appoint one director, and if our Board of Directors is comprised of between 15 and 24 directors, the Israeli shareholders will be entitled to appoint two directors. Our articles of association so provide. Mr. Mauricio Wior is the director appointed by the Israeli Shareholders.
Board Committees
Our Board of Directors has established an audit committee, analysis committee, option committee, compensation committee and a security committee.
Audit committee
Under the Companies Law, the board of directors of a public company must establish an audit committee. The audit committee must consist of at least three directors and must include all of the company’s external directors, and the majority of its members is required to be independent (as such term is defined under the Israeli Companies Law). The chairman of the audit committee is required to be an external director. The members of the audit committee are also required to meet the independence requirements established by the SEC in accordance with the requirements of the Sarbanes-Oxley Act.
Our audit committee provides assistance to our Board of Directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting and internal control functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management and is responsible for reviewing and approving certain related party transactions, as described below
Our audit committee is composed entirely of independent members (both under the Israeli Companies Law and the Sarbanes-Oxley Act) and includes all the external directors. The members of our audit committee are Messrs. BarneaHauser (chairman), Waxe,Traiber, and Kunda and Ms. Baytel.Liberman. Our board of directors determined Ms. BaytelMr. Hauser to be qualified to serve as an "audit committee financial expert" as defined by the SEC's rules.
Financial exposure management subcommittee
Our financial exposure management subcommittee, which is a subcommittee of our audit committee, was nominated by our Board of Directors and reviews our financial exposures, investment and hedging policies and recommends to our Board of Directors how we might enhance our investment and hedging performance. Our financial exposure management subcommittee consists of our external directors, Mr. BarneaMessrs. Hauser and Ms. Baytel.Traiber.
Analysis committee
Our analysis committee reviews our costs and annual budget and recommends ways to achieve cost efficiency in our activities to our Board of Directors. Our analysis committee also reviews our operations and future plans and recommends how we might enhance our present and future performance to our Board of Directors. Our analysis committee consists of all our board members.Messrs. Wior, Traiber, Hauser, and Kunda and Ms. Liberman.
Option committee
Our option committee administers the issuance of options and Restricted Shares Units, or RSUs under our 2015 Share Incentive Plan to our employees who are not office holders, as well as any actions and decisions necessary for the ongoing management of the plan. Our option committee consists of Messrs. Erel (chairman)Mr. Saar and Barnea.Ms. Liberman.
Security committee and observer
Our security committee, which we were required to appoint once we became a public company pursuant to our license, deals with matters concerning state security. Only directors who have the requisite security clearance by Israel’s General Security Services may be members of this committee. The committee is required to be comprised of at least four members, including at least one external director. In addition, the Minister of Communications is entitled under our license to appoint a state employee with security clearance to act as an observer in all meetings of our Board of Directors and its committees. Such an observer was appointed in February 2008. Our security committee consists of Messrs. Erel, Waxe, Kunda, Hauser, Saar and Barnea.Traiber.
Compensation committee
Under the Companies Law, the board of directors of a public company must establish a compensation committee. The compensation committee must consist of at least three directors and must include all of the company’s external directors and the external directors must constitute the majority of its members. The chairman of the compensation committee must be one of the external directors. Other members of the committee should be directors whose terms of compensation are the same as external directors. Under the Companies Law, the compensation committee functions are to recommend to the board of directors, for ultimate shareholder approval by a special majority, a policy governing the compensation of office holders, based on specified criteria, to review modifications to the compensation policy from time to time, to review its implementation and to approve the actual compensation terms of office holders. The composition of our compensation committee complies with the requirements described above. Our compensation committee consists of Ms. BaytelLiberman (chairperson), Mr. Kunda and Mr. Barnea.Hauser.
Internal Auditor
Under the Companies Law, the board of directors of a public company must appoint an internal auditor nominated by the audit committee. The role of the internal auditor is to examine whether a company’s actions comply with applicable law and orderly business procedure. Under the Companies Law, the internal auditor may not be an interested party or an office holder, or a relative of any of the foregoing, nor may the internal auditor be the company’s independent accountant or its representative. An interested party is generally defined in the Companies Law as a 5% or greater shareholder, any person or entity who has the right to designate one director or more or the chief executive officer of the company or any person who serves as a director or as the chief executive officer. Our internal auditor is Mr. Itzik Ravid of Rave Ravid and Associates, a leading Israeli internal auditing firm.
Approval of Specified Related Party Transactions under Israeli Law
Fiduciary duties of office holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company. The duty of care requires an office holder to act with the degree of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means, in light of the circumstances, to obtain:
| · | information on the appropriateness of a given action brought for his or her approval or performed by virtue of his or her position; and |
information on the appropriateness of a given action brought for his or her approval or performed by virtue of his or her position; and
| · | all other important information pertaining to these actions. |
all other important information pertaining to these actions.
The duty of loyalty of an office holder includes a duty to act in good faith and for the best interests of the company, including to:
| · | refrain from any conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs; |
refrain from any conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs;
| · | refrain from any activity that is competitive with the company; |
refrain from any activity that is competitive with the company;
| · | refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and |
refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and
| · | disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder. |
disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder.
Personal interests of an office holder
The Companies Law requires that an office holder disclose any personal interest that he or she may have and all related material information known to him or her relating to any existing or proposed transaction by the company promptly and in any event no later than the first meeting of the board of directors at which such transaction is considered. If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of these people.
Under the Companies Law, an extraordinary transaction is a transaction:
| · | other than in the ordinary course of business; |
| · | that is not on market terms; or |
| · | that is likely to have a material impact on the company’s profitability, assets or liabilities. |
112that is not on market terms; or
that is likely to have a material impact on the company’s profitability, assets or liabilities.
Under the Companies Law, once an office holder complies with the above disclosure requirement, the transaction can be approved, provided that it is in the best interest of the company. A director who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee, will generally not be present at this meeting or vote on this matter unless a majority of the directors or members of the audit committee have a personal interest in the matter. If a majority of the directors have a personal interest in the matter, the matter also generally requires approval of the shareholders of the company. Under the Companies Law, unless the articles of association provide otherwise, a transaction with an office holder, or a transaction with a third party in which the office holder has a personal interest, requires approval by the board of directors. If it is an extraordinary transaction, audit committee approval is required, as well. For the approval of the compensation, indemnification or insurance of an officer holder, see "Compensation arrangements" below. Our articles of association provide that a non-extraordinary transaction with an office holder, or with a third party in which an office holder has a personal interest, may be approved by our Board of Directors, by our Audit Committee or, if the transaction involves the provision of our communications services and equipment or involves annual payments not exceeding NIS 250,000 per transaction, by our authorized signatories.
Personal interests of a controlling shareholder
Under the Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. A controlling shareholder for this purpose is a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from his or her position on the board of directors or any other position with the company. Accordingly, Koor, DIC, our Israeli Shareholders, and entities and persons that directly or indirectly control DIC, are considered to be our controlling shareholders. Extraordinary transactions with a controlling shareholder or with relatives of a controlling shareholder or in which a controlling shareholder has a personal interest, directly and indirectly, including through a company controlled by him or her, and any transaction for him or her to provide services to the company (for arrangements regarding the compensation, indemnification or insurance of a controlling shareholder, see "Compensation arrangements" below), require the approval of the audit committee, the board of directors and a majority of the shareholders of the company, in that order. In addition, the shareholders' approval must be by a Special Majority.
In addition, any such extraordinary transaction whose term is more than three years generally requires approval as described above every three years.
Compensation arrangements
Every Israeli public company must adopt a compensation policy, recommended by the compensation committee and approved by the board of directors and the shareholders, in that order. The shareholder approval requires a Special Majority. In general, all office holders’ terms of compensation – including fixed remuneration, bonuses, equity compensation, retirement or termination payments, indemnification, liability insurance and the grant of an exemption from liability – must comply with the company's compensation policy.
In addition, the compensation terms of directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder generally must be approved separately by the compensation committee, the board of directors and the shareholders of the company by a Special Majority, in that order. The compensation terms of other officers require the approval of the compensation committee and the board of directors.
Duties of shareholders
Under the Companies Law, a shareholder has a duty to refrain from abusing his or her power in the company and to act in good faith in exercising its rights in, and performing its obligations to the company and other shareholders, including, among other things, voting at general meetings of shareholders on the following matters:
| · | an amendment to the articles of association; |
an amendment to the articles of association;
| · | an increase in the company’s authorized share capital; |
an increase in the company’s authorized share capital;
| · | approval of related party transactions that require shareholders' approval. |
approval of related party transactions that require shareholders' approval.
In addition, any controlling shareholder, any shareholder who knows that its vote can determine the outcome of a shareholders’ vote and any shareholder who, under the company’s articles of association, can appoint or prevent the appointment of an office holder or holds any other right in respect of the company, is required to act with fairness towards the company. The Companies Law does not describe the substance of this duty except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, and this duty is the subject of ongoing judicial interpretation.
Approval of Private Placements
Under the Companies Law, a private placement of securities requires approval by the board of directors and the shareholders of the company if it will cause a person to become a controlling shareholder or if:
| · | the securities issued amount to 20% or more of the company’s outstanding voting rights before the issuance; |
the securities issued amount to 20% or more of the company’s outstanding voting rights before the issuance;
| · | some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and |
some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and
| · | the transaction will increase the relative holdings of a shareholder that holds 5% or more of the company’s outstanding share capital or voting rights, or will cause any person to become, as a result of the issuance, a holder of more than 5% of the company’s outstanding share capital or voting rights. |
the transaction will increase the relative holdings of a shareholder that holds 5% or more of the company’s outstanding share capital or voting rights, or will cause any person to become, as a result of the issuance, a holder of more than 5% of the company’s outstanding share capital or voting rights.
D. EMPLOYEES
Our ability to achieve our strategic goals largely depends on our employees. Consequently, we strive to recruit the most suitable candidates for each position, to give our employees the best training needed to qualify them for their tasks within our organization and aim to keep them satisfied while being productive and efficient. We implement a comprehensive review system that periodically analyzes our employees’ performance in order to improve their performance and in order to enable us to properly compensate, retain and promote our best employees. Since we are committed to providing the best service to our subscribers, approximately 74% of our work force is engaged in customer-facing positions.
The numbers and breakdowns of our full-time equivalent employees as of the end of the past three years are set forth in the following table:
| | Number of Full-Time Equivalent Positions | | | Number of Full-Time Equivalent Positions | |
Unit | | | | | | | | | | | | | | | | | | |
Management and headquarters | | | 43 | | | | 40 | | | | 42 | | | 42 | | | 44 | | | 43 | |
Human resources | | | 92 | | | | 98 | | | | 99 | | | 99 | | | 100 | | | 88 | |
Marketing | | | 63 | | | | 59 | | | | 58 | | | 58 | | | 53 | | | 47 | |
Customers* | | | 2,653 | | | | 2,514 | | | | 2,443 | | | 2,443 | | | 2,482 | | | 2,365 | |
Finance | | | 135 | | | | 130 | | | | 128 | | | 128 | | | 154 | | | 148 | |
Technologies | | | 516 | | | | 540 | | | | 537 | | | 537 | | | 500 | | | 514 | |
Operation and administration** | | | - | | | | - | | | | | | |
Our subsidiaries***, excluding our wholly owned dealer | | | 142 | | | | 181 | | | | 51 | | |
Our subsidiaries**, excluding our wholly owned dealer | | | | | | | | | | | | | |
Total | | | 3,645 | | | | 3,563 | | | | 3,358 | | | | | | | | | | | | 3,265 | |
_______________________
*Includes the customer-facing units: business customers, sales and services and supply chain.
** In 2015 the functions composing the operation and administration unit were transferred to other units as follows: the finance unit - 45 employees, human resources unit – 30 employees and marketing unit - 11 employees.
***Includes companies in which we hold 50% or more of the issued share capital. Includes 100 and 133 employees in 2015 and 2016, respectively, of one of our subsidiaries which was sold in 2017.
**** In February 2018, following the transfer of 013 Netvision's operations into Cellcom Fixed Line Communications Limited Partnership (both our wholly owned subsidiaries), all 013 Netvision employees became employees of Cellcom Israel Ltd.
In 2015,2018, we entered into a collective employment agreement with the Company's employees' representatives and the Histadrut, an Israeli labor union, for a term of three years (2015-2017). We are negotiating(2018-2020) and in 2019 and 2020 we entered into a new collective employment agreements which amended the renewal of2018 agreement. Under the agreement.2019 agreement we reduced our expenses in relation to the collective employment agreement and granted entitled employees options and RSUs under our 2015 Share Incentive Plan; under the 2020 agreement we agreed on a voluntary retirement program, granted entitled employees options and RSUs under our 2015 Share Incentive Plan and granted our employees the right to appoint a director to our board. The agreement applies to the Company's employees, excluding certain managerial and specific positions. The agreement defines employment policy and terms in various aspects, which are more favorable to our employees than the requirements of Israeli law, including minimum wage, annual salary increase, incentives, benefits, contribution to an education fund, participation in our operational income over a certain threshold and other one time or annual payments to the employees, as well as a welfare budget and procedures relating to manning a position, change of place of employment and dismissal. In November 2016, Dynamica, our wholly owned dealer, entered intoJanuary and September 2019, following the Company's intention to execute a collective employment agreement with Dynamica's employees' representatives and the Histadrut, which is substantially similar to our collective employment agreement. In March 2018,substantial reduction in manpower, the Histadrut announced a labor dispute at the Company.Company and Dynamica, under which our employees would be entitled to take organizational steps (including a strike). Simultaneously with the September 2019 declaration of a labor dispute, the employees' representatives commenced a sudden and unlawful strike which ended the following day, following an understanding as to negotiations on the matter. The January 2019 declaration of labor dispute ended with the execution of the 2019 agreement and the September 2019 declaration ended with the execution of the 2020 agreement. See also "Item 3. Key Information – D. Risk Factors – Risks Related to our Business – The unionizing of our employees may impede necessary organizational and personnel changes, result in increased costs or disruption to our operation".
Israeli labor laws govern many aspects of the terms and conditions of employment and dismissal of employees, including minimum wages for employees, severance pay (Israeli law generally requires severance pay upon the retirement or death of an employee or termination of employment) and the employer's obligation to contribute certain percentages of the wages to a pension plan. As of January 2017, contribution to a pension plan by the employee is 6% of the employee’s wages, with an additional 6.5% contribution by the employer. According to our collective employment agreement, such payments were increased as of 2020 to 7% and 7.5%, respectively, for employees who completed 3 years of employment with us. We contribute to part of our employees' pension arrangements a percentage higher than that required by applicable regulation, which contributions are also intended to cover future severance payments. Under the collective employment agreement, the contributions to severance payment of the employees shall amount to 8.3% of the employee wages, after completing 3 years of employment with us.us, whereas contributions to severance payment of other employees amounts to 6%. A provision in our consolidated financial statements covers severance pay in other cases, such as to those employees who were not entitled to managers’ insurance or other pension arrangements. Furthermore, we and our employees are required to make payments to the National Insurance Institute, which is similar to the U.S. Social Security Administration. Such amounts also include payments by the employee for health insurance. As of January 1, 2018,2019, the total payments to the National Insurance Institute are)are up to 18%19.6% of an employee’s wages (up to a specified amount), of which the employee contributes approximately 12% and the employer contributes approximately 6%7.6%.
The Israeli labor law subjects employers to increased liability, including monetary sanctions and criminal liability, in cases of violations of certain labor laws and certain violations by contractors providing maintenance, security and cleaning services.
In 2015, the Minimum Wage Law was amended to increase the minimum wage paid to employees in Israel in four installments, from April 2015 to December 2017. The increase has adversely affected our results of operations. In April 2018, the hourly minimum wages increased again as a result of shortening of the work week in Israel.
We enter into personal employment agreements with our employees on either a monthly (in most cases, full-time positions) or hourly basis. Employment agreements of our employees who are included in the collective agreement are subject to the provisions of the collective employment agreement. Substantially all of our employees have signed non-disclosure and non-competition agreements, although the enforceability of non-competition agreements is limited under Israeli law
Our employee compensation structure is aimed at encouraging and supporting employee performance towards enabling us to meet our strategic goals. Approximately 87%85% of our customer-facing employees are entitled to performance-based incentives, which are granted mainly to customer-facing personnel. In addition, some of our employees are entitled to an annual bonus based on our overall performance and individual performance, subject to the discretion of our Board of Directors. Under the collective employment agreement, some of our employees are entitled to an annual bonus. We also contribute funds on behalf of some of our employees to an education fund and under the collective employment agreement to all employees after completing 3 years of employment with us.
We have entered into agreements with a number of services companies under which they provide us with temporary workers.
In the second quarter of 2014 to 2016 and 2018 and the first quarter of 2020 we launched, together with the employees representing labor union, voluntary retirement plans for employees, in which approximately 380, 330 and 190 employees, respectively, have retired, following which we incurred costs of approximately NIS 3913 million, NIS 2526 million and NIS 1345 million, respectively.
E. SHARE OWNERSHIP
As of DecemberJanuary 31, 2017,2020, Koor beneficially owned 42,514,00260,412,844 ordinary shares in addition to 7,364,424 ordinary shares which are held (through a lending transaction) by two Israeli shareholders, which are considered joint controlling shareholders with Koor, and the voting rights in an additional 3,412,500 ordinary shares are held by Koor. In January 2018, 5%addition, Koor also holds series 3 and 4 options exercisable for 7,287,852 ordinary shares issuable upon the exercise of our outstanding share capitalTASE-listed options held by Koor was transferred (through a lending transaction) to two Israeli Shareholders, which are considered joint controlling shareholders with Koor. In addition, as of December 31, 2017, 680,288 ordinary shares were held by an indirect subsidiary of IDB Development Ltd., or IDB (controlled by corporations controlled by Mr. Eduardo Elzstain) for its own account.until April 2020 and September 2020, respectively. This does not include a total of 5,760,060200,269 ordinary shares held as of that dateJanuary 31, 2020 by a subsidiary of DIC, all for members of the public through among others, provident funds, mutual funds, pension funds, insurance policies and unaffiliated third-party client accounts, which are managed by indirect subsidiaries of IDBthis company. Certain reporting persons under DIC's and DIC. Each of these entities (other than Koor, DIC and the Israeli Shareholders, respectively) and persons disclaims beneficial ownership of such shares, and all of these entities and personsKoor's Schedule 13D/A disclaim beneficial ownership of ourcertain shares held under management of subsidiaries of IDB or DIC for others.reported therein. Except as described above, none of our executive officers or directors beneficially owns 1% or more of our outstanding ordinary shares.
Share Incentive Plans
We have introduced two Share Incentive Plans, the first in September 2006 and the second in March 2015. The 2015 option plan, or the Plans. These option plans arePlan, is open to all our employees, directors, consultants and sub-contractors and to those of our affiliates and our shareholders’ affiliates. Under the plan, our Board of Directors (or an option committee to which such authority may be delegated by our Board of Directors) is authorized to determine the terms of the awards, including the identity of grantees, the number of options or restricted stock units (“RSUs”) to be granted, the vesting schedule and the exercise price. The options or RSUs have a term of six years and under the 2006 plan vest in four equal installments on each of the first, second, third and fourth anniversary of the date of grant and under the 2015 plan vest in three equal installments on each of the first, second and third anniversary of the date of grant. Under the Plans,Plan, unvested options or RSUs terminate immediately upon termination of employment or service. The Plans definePlan defines acceleration events of options or RSUs granted, including a merger, a consolidation, a sale of all or substantially all of our consolidated assets, or the sale or other disposition of all or substantially all of our outstanding shares. The Plans terminatePlan terminates upon the earlier of ten years from its adoption date or the termination of all outstanding options or RSUs pursuant to an acceleration event. The terms of the PlansPlan provide for a net exercise mechanism, the result of which is to require us to issue a smaller number of ordinary shares than represented by the outstanding options. Unless the Board of Directors otherwise approves, the number of ordinary shares issuable by us upon the exercise of an option will represent a market value that is equal to the difference between the market price of the ordinary shares and the option exercise price of the exercised options, at the date of exercise. Distribution of cash dividends before the exercise of the options reduces the exercise price of each option by an amount equal to the gross amount of the dividend per share distributed.
In December 2013, our compensation committee and board of directors resolved to grant 234,000 options under the 2006 share incentive plan to two executive officers, at an exercise price of US$ 14.65 per share. The options granted, in accordance and subject to our compensation policy provisions, vested in three equal installments on each of the first, second and third anniversary of the date of grant. The options of the third installment may be exercised with 18 month from their vesting.130
In August 2015, our compensation committee and board of directors resolved to grant 2,660,000 options under the 2015 share incentive plan to certain non-director officers and senior employees, of which 1,740,000 options were granted to the Company's executive officers, including 525,000 options to Mr. Sztern, the Company's CEO, at an exercise price of NIS 25.65 per share. Mr. Sztern's grant was further subject to shareholders approval in accordance with the Israeli Companies Law, which was received in October 2015. In November 2016, our board of directors resolved to grant 63,000 options under the 2015 share incentive plan to certain senior employees, at an exercise price of NIS 29.97 per share. The options granted will bewere vested in three equal installments on each of the first, second and third anniversary of the date of grant. The options of the first installment may be exercised within 24 months from their vesting, and the options of the second and third installments may be exercised with 18 month from their vesting. We will recordrecorded the total sum of approximately NIS 120.4 million, as a compensation cost related to these grants, over the vesting period (2015 – 2019).
In November 2017, seniorMay and June 2019, the Company's board of directors resolved to grant employees and non-director officers of the Company sold(who are not office holders or directors) and a non-profit organization for the employees a total amount of 2,944,197 options at an aggregateexercise price of 399,078 sharesNIS 15.66 and 1,019,400 RSUs. The options and RSUs granted to the employees will be vested in four equal installments on each of the Company issued to them upon their exercise of vested options, constituting approximately 0.39%first, second, third and fourth anniversary of the Company’s issueddate of grant and the RSUs granted to the non-profit organization will be vested in two equal installments on each of the first and second anniversary of the date of grant. The options of the first installment may be exercised within 18 months from their vesting, and the options of the second, third and fourth installments may be exercised with 12 months from their vesting. We will record the total sum of approximately NIS 20 million, as a compensation cost related to these grants, over the vesting period 2019-2023.
In January 2020, our compensation committee and board of directors resolved to grant 4,153,472 options under the 2015 share capital,incentive plan to financial institutions. To our knowledge,Mr. Gabbay, the purchasers intendedCompany's new CEO. The options granted will vest in five installments on the first, second, third, fourth and fifth anniversaries of the date of grant at an exercise price of NIS 14.20 per share for the first installment - 967,993 options, NIS 14.99 per share for the second installment - 937,030 options, NIS 16.10 per share for the third installment - 805,570 options, NIS 17.25 per share for the fourth and fifth installments - 762,509 and 680,370 options, respectively. The options may be exercised within 3 years from the date of vesting of each installment. Mr. Gabbai's grant was further subject to place such shares for sale outsideshareholders approval in accordance with the United StatesCompanies Law, which was received in March 2020. We will record the total sum of approximately NIS 12 million as a compensation expense related to non-US investors.Mr. Gabbay's grant, over a period of seven years (nonlinearly).
As of December 31, 2017,2019, an aggregate of 963,6654,550,541 ordinary shares were issuable upon exercise of options and RSUs according to the terms above.
In February 2020, we entered a new collective employment agreement with our employees representatives and the Histadrut, under which the Company will grant entitled employees options and RSUs, subject to all approvals and procedures required by law in three grants, as follows: (1) On June 1, 2020; (2) if the Company's net income for the fourth quarter of 2020 as reflected in its 2020 annual financial report is positive; (3) if the Company's net income for 2021 as reflected in its 2021 annual financial report is positive. The second and third grants may be delayed if the relevant conditions precedent aren't met, but no later than the annual financial report for 2022, in which time, if the conditions precedent are not met, the relevant grants will be annulled. The options and RSUs granted to the employees will be vested in four equal installments on each of the first, second, third and fourth anniversary of the date of grant. The options' exercise price shall be in line with the requirements set in the Company's compensation policy. The options of the first installment may be exercised within 18 months from their vesting, and the options of the second, third and fourth installments may be exercised with 12 month from their vesting. We will record the total sum of approximately NIS 14 million as a compensation expense related to each of the three grants, each over the vesting period. As of the date of this report, the precedent conditions for the grant of such options and RSUs have not yet been fulfilled.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth information regarding beneficial ownership of our shares as of DecemberJanuary 31, 2017,2020, by each person, or group of affiliated persons, known to us to be the beneficial owner of 5% or more of our outstanding shares.
In accordance with the rules of the SEC, beneficial ownership includes voting or investment power with respect to securities and includes any shares issuable pursuant to options that are exercisable within 60 days of DecemberJanuary 31, 2017.2020. Any shares issuable pursuant to options are deemed outstanding for computing the percentage of the person holding such options but are not outstanding for computing the percentage of any other person. The percentage of beneficial ownership for the following table is based on 101,044,557148,279,166 ordinary shares outstanding as of DecemberJanuary 31, 2017.2020. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, our major shareholders do not have different voting rights and the persons named in the table have sole voting and investment power with respect to all ordinary shares held by them.
| | Shares Beneficially Owned | |
| | | | | | |
| | | | | | |
Koor Industries Ltd., or Koor * | | | 78,477,620 | | | | 52.93 | % |
| | | | | | | | |
Menora Mivtachim Holdings Ltd.** | | | 9,271,818 | | | | 6.25 | % |
Directors and executive officers as a group (16 persons)*** | | | 242,000 | | | | 0.16 | % |
| | Shares Beneficially Owned | |
Name of Beneficial Owner | | | | | | |
| | | | | | |
Koor Industries Ltd., or Koor * | | | 45,926,502 | | | | 45.45 | % |
Psagot Investment House Ltd.** | | | 6,440,219 | | | | 6.37 | % |
Clal Insurance Enterprises Holdings Ltd., or Clal*** | | | 6,072,646 | | | | 6.01 | % |
Directors and executive officers as a group (16 persons)**** | | | 78,000 | | | | 0.08 | % |
* | In September 2017, our shares held by DIC (as well as DIC's holdings in DIC Communication and Technology Ltd., or DICC, an Israeli company, a wholly owned subsidiary of DIC which also holds our shares), were transferred to Koor. Koor is a private company, wholly owned by Discount Investment Corporation Ltd., or DIC. DIC, a public Israeli company traded on the Tel Aviv Stock Exchange, is owned approximately 84% by Dolphin IL Investment Ltd., or Dolphin IL, and Tyrus S.A., both private companies controlled by various companies controlled by Mr. Eduardo Elzstain. |
As of December 31, 2017, Koor's holdings included 30,325,647include: (1) 60,412,844 ordinary shares held by Koor directly, 12,188,355directly; (2) 7,364,424 ordinary sharesshared held by DICC and 3,412,500 ordinarythe two Israeli shareholders (3,682,212 shares representing approximately 3.38% of our issued and outstanding shares, held by feweach) who are considered joint controlling shareholders whose voting rights are vested in Koor. Does not include (1) the holdings of Clal, which is a subsidiary of IDB, noted separately in the table, and (2) 367,702 ordinary shares (representing approximately 0.36% of our issued and outstanding shares) held as of December 31, 2017 for members of the public through, among others, provident funds, mutual funds, pension funds, insurance policies and unaffiliated third-party client accounts, which are managed by an indirect subsidiary of DIC.
In January 2018, 5% of our outstanding share capital held bywith Koor was transferred (through a lending transaction) to two Israeli Shareholders (2.5% to each). One(one of themwhich is controlled by Mr. Mauricio Wior, the vice chairman of the Company, and the other one of which is controlled by Mr. Blejer, an officer of a company controlled by the Company's controlling shareholder. The Israeli Shareholdersshareholder); (3) 3,412,500 ordinary shares (representing approximately 2.3% of our issued and outstanding shares) held by a few shareholders whose voting rights are considered joint controlling shareholders with Koor. See "- Agreements Amongvested in Koor; and (4) 7,287,852 ordinary shares issuable upon the exercise of our Shareholders" below.TASE-listed series 3 and 4 options held by Koor that are fully exercisable. Does not include 200,269 ordinary shares (representing approximately 0.14 % of our issued and outstanding shares) held as of January 31, 2020, by a subsidiary of DIC, all for members of the public through mutual funds, which are managed by this company.
The Israeli Shareholdersshareholders have appointed one member of our board of directors pursuant to our cellular license and our Articles of Association, and in March 2018 DIC's CEO was appointedserves as a member of our board of directors.
DIC, a public Israeli company traded on the Tel Aviv Stock Exchange, was owned 70.74% by IDB until December 2017. In November 2017, as part of IDB's alignment with the limitations set in the Concentration Law regarding pyramidal structure, IDB completed the sale of its holdings in DIC to a private company controlled by various companies controlled by Mr. Eduardo Elzstain. Such private company currently holds approximately 77%Approximately 82% of DIC's outstanding shares. Pursuant to such sale these DIC's shares haveshare capital has been pledged as collateral to IDB's debentures'debenture holders and IDB, in several pledges of different rank.
varying ranks pursuant to the previously reported sale of DIC to Dolphin IL. Based on the foregoing, Dolphin IL (by reason of its control of DIC), DIC (by reason of its control of Koor), companies controlled by Eduardo Elsztain (as described above), and Eduardo Elsztain may be deemed to share with Koor the power to vote and dispose of our shares beneficially owned by Koor. Each of these entities (other than Koor, DICCertain reporting persons under DIC's and the Israeli Shareholders, respectively) and persons disclaims beneficial ownership of such shares, and all of these entities and personsKoor's Schedule 13D/A disclaim beneficial ownership of ourcertain shares held under management of subsidiaries of IDB or DIC for others.reported therein.
** | Based on a Schedule 13G filed by Psagot Investment HouseIncludes the holdings of Menora Mivtachim Holdings Ltd. with the SEC on February 12, 2018, it has shared dispositive power with respect to 6,440,219 shares and shared voting power with respect to 3,229,193 shares.its affiliated entities.. |
*** | Includes 242,000 ordinary shares issuable upon the exercise of stock options that expired as of February 13, 2020. |
*** Clal is a TASE-listed subsidiary of IDB. Based on a Schedule 13G filed by Clal with the SEC on February 14, 2018, 680,288 shares are held for its own account and the remainder is held for members of the public through, among others, provident funds, pension funds, insurance policies which are managed by subsidiaries of Clal, which subsidiaries operate under independent management and make independent voting and investment decisions.
132
****Includes 78,000 ordinary shares issuable upon the exercise of stock options that are exercisable on, or within 60 days following December 31, 2017.
As of December 31, 2017,2019, we had 1915 holders of record of our equity securities who are, to our knowledge, located in the United States. The shares held by these holders of record represent 94.3%64.27% of our outstanding ordinary shares. However, this number is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are located because nearly all of such ordinary shares were held of record by Cede & Co. for the account of the brokers or other nominees, including the Tel Aviv Stock Exchange; approximately 42.07%45.71% of our ordinary shares owned directly and indirectlythrough agreements with other shareholders of the Company by Koor as of DecemberJanuary 31, 20172020 is also held of record by Cede & Co.
In 2016, DIC purchased approximately 0.5% of our issued share capital on the TASE.
B. RELATED PARTY TRANSACTIONS
Agreements among our Shareholders
In January 2018, Koor entered into a lending transaction under which 5% of our outstanding share capital held by Koor was transferred to two Israeli Shareholders (2.5% to each), or the Transferred Shares. One of them is controlled by Mr. Mauricio Wior, the vice chairman of the Company, and the other is controlled by an officer of DIC and of a company controlled by the Company's controlling shareholder. The main terms of the agreement are:
| · | The agreement will be in force until December 31, 2018 and will be automatically extended by a one year term until terminated according to its terms. |
The agreement will be in force until December 31, 2018 and will be automatically extended by a one year term until terminated according to its terms.
| · | Koor will have the right to terminate the agreement at any time and receive all or part of the Transferred Shares. The Israeli Shareholders will not be able to transfer the Transferred Shares without Koor's approval and subject to additional terms, including the transferees assuming the Israeli Shareholder's obligation towards Koor pursuant to the Agreement, the transferees being "Israeli Shareholders" under the Company's cellular license and the MOC's prior approval of such transfer, if required. |
Koor will have the right to terminate the agreement at any time and receive all or part of the Transferred Shares. The Israeli Shareholders will not be able to transfer the Transferred Shares without Koor's approval and subject to additional terms, including the transferees assuming the Israeli Shareholder's obligation towards Koor pursuant to the Agreement, the transferees being "Israeli Shareholders" under the Company's cellular license and the MOC's prior approval of such transfer, if required.
| · | As long as such requirement exits in the Company's cellular license, the Israeli Shareholders will have the right to appoint 10% of our directors )currently – one director). The Israeli Shareholders will vote with Koor in all shareholders resolutions (including the nomination of directors suggested by Koor). The Israeli Shareholders will be considered as joint-holders with Koor in our shares according to the Israeli Securities Law and, therefore, joint controlling shareholders. |
As long as such requirement exits in the Company's cellular license, the Israeli Shareholders will have the right to appoint 10% of our directors )currently – one director). The Israeli Shareholders will vote with Koor in all shareholders resolutions (including the nomination of directors suggested by Koor). The Israeli Shareholders will be considered as joint-holders with Koor in our shares according to the Israeli Securities Law and, therefore, joint controlling shareholders.
| · | The Transferred Shares (including all rights or income therefrom) will be pledged by a first-degree pledge in favor of Koor, and any realization of such pledge will be subject to the receipt of the MOC's approval, if required. |
The Transferred Shares (including all rights or income therefrom) will be pledged by a first-degree pledge in favor of Koor, and any realization of such pledge will be subject to the receipt of the MOC's approval, if required.
| · | In case of any dividend or other distribution (including rights by way of a rights offering), these will be transferred by the Israeli Shareholders to Koor. In case of other corporate actions, including conversion, sub-division, consolidation etc., Koor may notify the Israeli Shareholders, at its sole discretion, if such rights will be part of the Transferred Shares or shall be transferred to Koor. |
133
In case of any dividend or other distribution (including rights by way of a rights offering), these will be transferred by the Israeli Shareholders to Koor. In case of other corporate actions, including conversion, sub-division, consolidation etc., Koor may notify the Israeli Shareholders, at its sole discretion, if such rights will be part of the Transferred Shares or shall be transferred to Koor.
Minority shareholders agreements
Original minority shareholders (or their successors and assignees) currently own approximately 3.38%2.3% of our outstanding ordinary shares. These minority shareholders have granted the voting rights in these shares to Koor and are restricted from transferring these shares without the prior written consent of Koor and their transfer are subject to a right of first refusal in favor of Koor. Each of these minority shareholders has also committed not to compete, directly or indirectly, with our cellular communications business in Israel so long as he is a shareholder and for a period of one year thereafter.
Migdal 2006 share purchase agreement
In 2006, DIC sold 4% of our then outstanding ordinary shares to Migdal Insurance Company Ltd. and two of its affiliates, or the Migdal shareholders. As part of this transaction, DIC granted the Migdal shareholders a tag along right, in the event it sells shares resulting in it no longer being a controlling shareholder. In return, DIC has the right to force the Migdal shareholders to sell their shares in a transaction in which DIC sells all of its shares to a purchaser outside DIC or IDB and their affiliates. To the best of our knowledge, no such right has materialized.
Relationship with Affiliates
As of December 31, 2017,2019, an aggregate amount of approximately NIS 1910 million principal amount of our Series F G,and H I, J and Kthrough L Debentures were held by entities affiliated with DIC and IDB’sDIC’s principal shareholders or officers for the benefit of members of the public through provident funds, mutual funds, pension funds and unaffiliated third-party client accounts.funds.
As of December 31, 2017, 680,288 of our ordinary shares were held by an indirect subsidiary of IDB for its own account and2019, an aggregate of 5,760,0601,972,331 of our ordinary shares were held by members of the public through among others, provident funds, mutual funds pension funds, insurance policies and unaffiliated third-party client accounts, which are managed by indirect subsidiariesa subsidiary of IDB and DIC. Such holdings are not included in the holdings set forth in the Beneficial Owners' table above.
In October 2006, we entered into an agreement with DIC pursuant to which DIC provided us with services in the areas of management, finance, business and accountancy and with employees and officers of DIC and its affiliates and subsidiaries to be directors of the Company, including the services of the chairman of our board of directors. This agreement is for a term of one year and is automatically renewed for one-year terms unless either party provides 60 days’ prior notice to the contrary. In 2015, the agreement was amended so that the annual consideration for DIC's management services would be equal to the director's fees (both the annual fee and the meeting attendance fee) paid to our external and independent directors (see "– Executive Officer and Director Compensation" above), for each director that DIC nominates or proposes to our Board of Directors, but no more than five directors.
Under the Israeli Companies Law, an agreement with a controlling shareholder, such as our management services agreement with DIC, cannot continue for more than three consecutive years unless re-approved by the audit committee, board of directors and minority shareholders. Accordingly, our audit committee, board of directors and minority shareholders approved the agreement for a term ending in October 2018. In 2017, we paid such management fees to DIC for the services of Mr. Ami Erel, our Chairman of the board of directors, for the period commencing January 2017 and ending June 2017 (when a monthly remuneration to Mr. Ami Erel as an executive director was approved). Since then and until the end of 2017, no director's services were included in the management agreement and no management fees were paid to DIC (or Koor).
In the ordinary course of business, from time to time, we purchase, lease, sell and cooperate in the sale of goods and services, or otherwise engage in transactions with DIC, IDB or affiliates thereof, entities affiliated with DIC or IDB’s principal shareholders or officers and entities otherwise engaged with such DIC or IDB member or affiliates in a manner that may create a personal interest of our controlling shareholders or directors. We believe that all such transactions are on commercial terms comparable to those that we could obtain from unaffiliated parties. These transactions are subject to rigorous corporate governance rules, as described under Item 6.C under "Approval of Specified Related Party Transactions under Israeli Law".
Registration Rights Agreement
In 2006, we entered into a registration rights agreement with DIC, two wholly-owned subsidiaries of DIC (one of whom ceased to exist in 2011) which are shareholders and six other shareholders (some of whom no longer hold the registrable shares). For a summary of the terms of the agreement, see “Item 10. Additional Information – C. Material Contracts.”
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Consolidated Financial Statements
See Item 18.
Legal Proceedings
General
We are served from time to time with claims concerning various matters, including disputes with customers, former employees, commercial disputes with third parties with whom we do business and disputes with government entities, including local planning and building committees and the Ministry of Communications. These include purported class actions, filed mainly by our subscribers, regarding claims such as alleged overcharging of tariffs, misleading representations, providing services not in compliance with applicable law, our license’s requirements or a subscriber’s agreement. The following is a summary of all significant or potentially significant litigation as well as all our purported class actions, pending as of the date of this annual report.
Increased number of requests for certification of class action lawsuits against us may increase our legal exposure as a result of such class action lawsuits and our legal costs in defending against such suits. See “Item 3. Key Information – D. Risk Factors – We are exposed to, and currently are engaged in, a variety of legal proceedings, including class action lawsuits.”
In cases where the claim is approved, all amounts noted below will be adjusted to reflect changes in the Israeli CPI and statutory interest, from the date that each claim was filed.
Based on advice of counsel, we believe it is more likely than not that substantially all the claims and disputes detailed below will be determined in our favor and accordingly, no provision has been made in the financial statements in respect of these claims and disputes. We have made a provision in the amount of approximately NIS 4958 million for the claim/s and dispute/s we are willing to settle or for which we cannot reach a conclusion that it is more likely than not that the claim/s and dispute/s will be determined in our favor.
Purported class actions
3534 purported class actions have been filed against us in connection with allegations that we, among others (i) unlawfully, in violation of our license or agreements with our subscribers, charged or overcharged our subscribers for our services, (ii) misled our subscribers, or(iii) unlawfully sent our subscribers and other parties commercial messages, (iii)(iv) unlawfully, in violation of our license or agreements with our subscribers, discriminated among our subscribers, or (iv)(v) failed to provide service quality or customer care in accordance with the provisions of our license and applicable law.law, or (vi) unlawfully, in violation of agreements with our subscribers and applicable law, misused our subscribers' personal data. The amount claimed estimated by the plaintiffs in these purported class actions ranges from approximately NIS 3.22.5 million to NIS 405 million, or was not estimated by the plaintiffs if the lawsuits are certified as class actions or were filed against us and other defendants without specifying the amount claimed from us. In addition, in Fourone purported class actions, three in which the aggregate amount claimed estimated by the plaintiffs was approximately NIS 104 million and a fourth in whichaction no amount claimed was estimated by the plaintiffs, werewas dismissed (in whole or in part) and appealed by the plaintiffs or us (for details of those which were approved and appealed see "-Class actions" below). In addition, in twoone purported class action, a settlement agreement was approved by the court (see details below) and in four purported class actions, for which the aggregate amount claimed estimated by the plaintiffs was approximately NIS 15.1 billion,152 million, and one purported class action in which the amount claimed was not estimated by the plaintiffs, settlement agreements were filed with the court and the proceedings are still pending.
We have recorded appropriate provisions for each of the settlement agreements filed with the courts and described above.
In 2015, a purported class action was filed against us, by plaintiffs alleging to be subscribers of the Company, claiming compensation for non-monetary damages in the amount of NIS 15 billion, in connection with allegations that we unlawfully violated the privacy of our subscribers and were unlawfully enriched by so doing. The amount claimed from us, ifIn March 2020, the lawsuit is certified as class action is estimated by the plaintiffs to be NIS 15 billion. In February 2017,court approved a settlement agreement was filed with the court andin February 2017. The settlement shall not have a material effect on the proceedings are still pending.Company's financial statements. .
A purported class action filed against us and two other Israeli cellular operators in December 2015, alleging that the defendants unlawfully offer cellular pre-paid calling cards for very high prices by allegedly coordinating such prices, was dismissed in September 2016 and the plaintiff's appeal was dismissed in January 2017.
Class actions
In August 2016, the district court approved a request to certify a lawsuit filed against us in February 2015 as a class action, relating to an allegation that we unlawfully charged our subscribers with early termination fees. The total amount claimed was estimated by the plaintiff to be approximately NIS 15 million. In January 2018, a settlement agreement was filed with the court and the proceedings are still pending.
In October 2016, the district court approved a request to certify a lawsuit filed against us in January 2013 as a class action, relating to an allegation that we unlawfully charged our subscribers before the subscribers' portability to our network was completed. The total amount claimed was estimated by the plaintiff to be approximately NIS 19 million. In February 2019, a settlement agreement was filed with the court and the proceedings are still pending.
In December 2016, the district court partially approved a request to certify a lawsuit filed against us in July 2014 as a class action, relating to an allegation that the commercial messages we sent to our subscribers failed to meet the requirements of applicable law. In January 2017, the plaintiffs appealed the dismissal of the allegations which were not approved, to the Supreme Court.Court, and in September 2019 the plaintiff's appeal was dismissed. The total amount claimed was estimated by the plaintiffs to be approximately NIS 21 million.
In January 2017, the district court partially approved a request to certify a lawsuit filed against us in February 2013 as a class action, relating to an allegation that we failed to disconnect customers within the time frame set in our license and applicable law. In March 2017, the plaintiffs appealed the dismissal of the allegations which were not approved, to the Supreme Court. In September 2018 plaintiff's appeal was consensually dismissed. The total amount claimed had the purported class action been approved was estimated by the plaintiffs to be approximately NIS 72 million.
In December 2017, the district court partially approved a request to certify a lawsuit filed against us in May 2015 as a class action, relating to an allegation that we breached the agreements with our subscribers by charging them for a call details service, which was previously provided free of charge, without obtaining their consent. In February 2018, we appealed the approval of this allegation to the Supreme Court and the plaintiff appealed the dismissal of other allegations. In January 2019 our appeal was consensually dismissed and the plaintiff's appeal was consensually accepted. The total amount claimed was not estimated by the plaintiffs.
In April 2018, the district court approved a request to certify a lawsuit filed against us in December 2014 as a class action, relating to an allegation that we unlawfully charged our subscribers who disconnected from our services during a certain billing cycle for a full monthly payment. The total amount claimed was not estimated by the plaintiff.
In July 2018, a request to certify a lawsuit filed against the Company in June 2015 was approved as a class action, relating to an allegation that the Company unlawfully charged subscribers for collection expenses due to lack of payment or late payment. In January 2019, we appealed the approval of this allegation to the Supreme Court and the plaintiff appealed the dismissal of other allegations. The total amount claimed relating to the original lawsuit was estimated by the plaintiffs to be millions of NIS.
Dividend Policy
Our dividend policy targets the distribution of at least 75% of our annual net income on a quarterly basis, subject to applicable law, our license and our contractual obligations and provided that such distribution would not be detrimental to our cash needs or to any plans approved by our Board of Directors. Our debentures and other credit facilities include additional limitations, including a covenant not to distribute more than 95% of the profits available for distribution according to the applicable Israeli law (“Profits”), provided that if net leverage (defined as the ratio of net debt to EBITDA over four consecutive quarters) exceeds 3.5:1, we will not distribute more than 85% of the Profits and if net leverage exceeds 4.0:1, we will not distribute more than 70% of the Profits. See "Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Debt Service" and "– Other Credit Facilities". Our Board of Directors will consider, among other factors, our expected results of operation, including changes in pricing, regulation and competition, planned capital expenditure including for acquisitions and technological upgrades, and changes in debt service needs, including due to changes in interest rates or currency exchange rates, as well as our debentures' rating, in order to conclude whether there is no reasonable concern that a distribution of dividends will prevent us from satisfying our existing and foreseeable obligations as they become due. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends or to pay dividends at a ratio to net income that is less than that paid in the past. For example, our Board of Directors may determine not to distribute dividends in order to strengthen our balance sheet, that market conditions are uncertain or that our cash needs for debt service, capital expenditures or operations require that we do not pay dividends when considered. Accordingly, shareholders should not expect that any particular amount or at all will be distributed by us as dividends at any time, even if we have previously made dividend payments in such amount.
Our ability to pay dividends is subject to the following limitations under Israeli law: (1) dividends may only be paid out of cumulative retained earnings or out of retained earnings over the prior two years, provided that there is no reasonable concern that the payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due; and (2) our license requires that we and our 10% or more shareholders maintain at least $200 million of combined shareholders’ equity. Our shareholders’ equity on December 31, 20172019 was over $ 200 million.
When we declare dividends, we do so in NIS and convert them for payment in US$ (where applicable) based upon the daily representative rate of exchange as published by the Bank of Israel prior to the distribution date.
In 2015, 20162017, 2018 and 20172019 our Board of Directors chose not to declare dividends given the intensified competition and its adverse effect on our results of operations and in order to strengthen our balance sheet.
B. SIGNIFICANT CHANGES
No significant change has occurred since December 31, 2015,2019, except as otherwise disclosed in this annual report.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Trading in Israel
Our ordinary shares have traded on the Tel Aviv Stock Exchange, or the TASE, under the symbol CEL since July 1, 2007. Our ordinary shares do not trade on any other trading market in Israel.
The following table sets forth, for the periods indicated, the reported high and low prices in NIS for our ordinary shares on the TASE, as retroactively adjusted by the TASE to reflect the payment of dividends.
| | High | | | Low | |
| | NIS | | | NIS | |
Annually | | | | | | |
| | | | | | |
2013 | | | 49.3 | | | | 26.3 | |
2014 | | | 48.5 | | | | 33.5 | |
2015 | | | 32.7 | | | | 13.9 | |
2016 | | | 32.7 | | | | 22.3 | |
2017 | | | 41.1 | | | | 30.3 | |
| | | | | | | | |
Quarterly | | | | | | | | |
2016 | | | | | | | | |
First Quarter | | | 27.3 | | | | 22.3 | |
Second Quarter | | | 32.5 | | | | 22.4 | |
Third Quarter | | | 29.8 | | | | 25.0 | |
Fourth Quarter | | | 32.7 | | | | 27.3 | |
2017 | | | | | | | | |
First Quarter | | | 41.1 | | | | 31.4 | |
Second Quarter | | | 38.5 | | | | 32.3 | |
Third Quarter | | | 35.1 | | | | 30.3 | |
Fourth Quarter | | | 37.4 | | | | 32.9 | |
| | | | | | | | |
Monthly | | | | | | | | |
2017 | | | | | | | | |
September | | | 34.1 | | | | 31.2 | |
October | | | 34.6 | | | | 32.9 | |
November | | | 35.9 | | | | 32.9 | |
December | | | 37.4 | | | | 34.2 | |
2018 | | | | | | | | |
January | | | 36.6 | | | | 31.8 | |
February | | 31.2 | | | | 28.1 | |
| | | | | | | | |
On March 22, 2018, the closing price per share of our ordinary shares on the TASE was NIS 25.62.
Trading in the United States
Our ordinary shares have traded on the New York Stock Exchange, or NYSE, under the symbol CEL since February 7, 2007.
The following table sets forth, for the periods indicated, the high and low prices in $ for our ordinary shares on the NYSE, as retroactively adjusted by the NYSE to reflect the payment of dividends.
| | High | | | Low | |
| | $ | | | $ | |
Annually | | | | | | |
| | | | | | |
2013 | | | 14.1 | | | | 7.1 | |
2014 | | | 14.0 | | | | 8.5 | |
2015 | | | 8.4 | | | | 3.6 | |
2016 | | | 8.6 | | | | 5.7 | |
2017 | | | 11.1 | | | | 8.4 | |
Quarterly | | | | | | | | |
2016 | | | | | | | | |
First Quarter | | | 8.4 | | | | 9.0 | |
Second Quarter | | | 5.2 | | | | 9.0 | |
Third Quarter | | | 7.2 | | | | 8.4 | |
Fourth Quarter | | | 8.1 | | | | 9.1 | |
2017 | | | | | | | | |
First Quarter | | | 11.1 | | | | 9.0 | |
Second Quarter | | | 10.7 | | | | 9.0 | |
Third Quarter | | | 9.8 | | | | 8.4 | |
Fourth Quarter | | | 10.4 | | | | 9.1 | |
| | | | | | | | |
Monthly | | | | | | | | |
2017 | | | | | | | | |
September | | | 9.7 | | | | 8.8 | |
October | | | 9.8 | | | | 9.1 | |
November | | | 10.2 | | | | 9.2 | |
December | | | 10.4 | | | | 9.6 | |
2018 | | | | | | | | |
January | | | 10.6 | | | | 9.3 | |
February | | | 9.1 | | | | 8.0 | |
On March 22, 2018, the closing price per share of our ordinary shares on the NSYE was $ 7.15.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Our ordinary shares are listed on the NYSE and TASE under the symbol “CEL.”
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Objects and Purposes
Our registration number with the Israeli registrar of companies is 51-1930125. Our object is to engage, directly or indirectly, in any lawful undertaking or business whatsoever as determined by our Board of Directors, including, without limitation, as stipulated in our memorandum of association.
Transfer of Shares
Fully paid ordinary shares are issued in registered form and may be freely transferred unless the transfer is restricted or prohibited by our articles of association, applicable law, our licenses the rules of the SEC or the rules of a stock exchange on which the shares are traded. The ownership or voting of ordinary shares by non-residents of Israel is not restricted in any way by our articles of association or the laws of the State of Israel, except for ownership by nationals of some countries that are, or have been, in a state of war with Israel.
The restrictions included in our licenses regarding holding and transferring of our means of control are included in our articles of association. For more details relating to these restrictions, see “Item 4. Information on the Company – B. Business Overview – Government Regulations – Cellular Segment – Our Cellular License” and our principal license, a convenience translation of which has been filed with the SEC. See "Item 19 – Exhibits". The holding and transfer restrictions under our licenses are posted on our website at http://investors.cellcom.co.il under “Investor Relations – Corporate Governance –Legal and Corporate.”
Voting
Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholder meeting. Shareholders may vote at shareholder meetings either in person, by proxy or by written ballot. Shareholder voting rights may be affected by the grant of special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. As required under our license, our articles of association provide that any holdings of our ordinary shares that contravene the holding or transfer restrictions contained in our license (see “—Transfer of Shares” above) will not be entitled to voting rights. In addition, our license requires that as a condition to voting at any meeting of shareholders, in person or by proxy, each shareholder must certify that its holdings of our shares do not contravene the restrictions contained in our license.
Election of Directors
Our ordinary shares do not have cumulative voting rights for the election of directors. Rather, under our articles of association our directors (other than external directors and directors appointed by Israeli Shareholders – see “Item 6.A – Directors and Senior Management—External Directors” and “-Israeli Appointed Directors.” above) are elected at a shareholders meeting by a simple majority of our ordinary shares. Directors may also be appointed for office by our Board of Directors, in which case they shall serve until the next annual general meeting of shareholders.
Dividend and Liquidation Rights
Our board of directors may, subject to the Companies Law, our financing agreements, and our licenses, declare a dividend to be paid to the holders of ordinary shares on a pro rata basis. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares on a pro rata basis. This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Shareholders Meetings
We are required to convene an annual general meeting of our shareholders once every calendar year within a period of not more than 15 months following the preceding annual general meeting. Our board of directors is required to convene a special general meeting of our shareholders at the request of two directors or one quarter of the members of our Board of Directors or at the request of one or more holders of 5% or more of our share capital and 1% of our voting power or the holder or holders of 5% or more of our voting power. All shareholders meetings require prior notice of at least 21 days, or up to 35 days if required by applicable law or regulation. We aim to provide at least 40 day advance written notice, in accordance with the NYSE’s rules.recommendations. The chairperson of our Board of Directors presides over our general meetings. Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the date of the meeting.
Quorum
Our articles of association provide that the quorum required for any meeting of shareholders shall consist of at least two shareholders present, in person or by proxy or written ballot, who hold or represent between them at least one-third of the voting power of our issued share capital. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or, if not set forth in the notice to shareholders, to a time and place set by the chairperson of the meeting with the consent of the holders of a majority of the voting power represented at the meeting and voting on the question of adjournment. At the reconvened meeting, the required quorum consists of at least two shareholders present, in person or by proxy or written ballot, unless the meeting was called pursuant to a request by our shareholders in which case the quorum required is the number of shareholders required to call the meeting as described under “—Shareholder Meetings.”
Resolutions
An ordinary resolution at a shareholders meeting requires approval by a simple majority of the voting rights represented at the meeting, in person, by proxy or written ballot, and voting on the resolution. Under the Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple majority. AIn accordance with our articles of association a resolution for the voluntary winding up of the company requires the approval by holders of 75% of the voting rights represented at the meeting, in person or by proxy or written ballot, and voting on the resolution.
Modification of Class Rights
The rights attached to any class, such as voting, liquidation and dividend rights, may be amended by written consent of holdersa vote of a majority of the issued shares of that class, or by adoption of a resolution by a simple majority of the shares of that class represented at a separate class meeting.meeting, or by a written consent of all holders of the issued shares of that class.
Insurance, Indemnification and exemption of Directors and Officers
Under the Companies Law, an Israeli company may not exempt an office holder from liability for breach of his duty of loyalty, but may exempt in advance an office holder from liability to the company, in whole or in part, for a breach of his or her duty of care (except a director in connection with distributions)unlawful distributions and with regard to a director or CEO in connection with certain failures upon insolvency), provided the articles of association of the company allow it to do so. Our articles of association allow us to do so.
Our articles of association provide that, subject to the provisions of the Companies Law, we may enter into a contract for insurance against liability of any of our office holders with respect to each of the following:
| · | a breach of his or her duty of care to us or to another person; |
a breach of his or her duty of care to us or to another person;
| · | a breach of his or her duty of loyalty to us, provided that the office holder acted in good faith and had reasonable grounds to assume that his or her act would not prejudice our interests; |
a breach of his or her duty of loyalty to us, provided that the office holder acted in good faith and had reasonable grounds to assume that his or her act would not prejudice our interests;
| · | a financial liability imposed upon him or her in favor of another person concerning an act performed in the capacity as an office holder. |
a financial liability imposed upon him or her in favor of another person concerning an act performed in the capacity as an office holder.
| ·• | reasonable litigation expenses, including attorney fees, incurred by the office holder as a result of an administrative enforcement proceeding instituted against him, including a payment imposed on the office holder in favor of an injured party as set forth in the Israeli Securities Law and expenses that the office holder incurred in connection with a relevant proceeding under the Israeli Securities Law, including reasonable legal expenses, which term includes attorney fees. |
We maintain a liability insurance policy for the benefit of our officers and directors. See details under "Item 6. Directors, Senior Management and Employees - B. Compensation – Compensation Policy – Indemnification."
Our articles of association provide that we may indemnify an office holder against:
| · | a financial liability imposed on or incurred by an office holder in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court concerning an act performed in his or her capacity as an office holder. Such indemnification may be approved (i) after the liability has been incurred or (ii) in advance, provided that the undertaking is limited to types of events which our Board of Directors deems to be foreseeable in light of our actual operations at the time of the undertaking and limited to an amount or criterion determined by our Board of Directors to be reasonable under the circumstances, and further provided that such events and amounts or criteria are set forth in the undertaking to indemnify; |
a financial liability imposed on or incurred by an office holder in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court concerning an act performed in his or her capacity as an office holder. Such indemnification may be approved (i) after the liability has been incurred or (ii) in advance, provided that the undertaking is limited to types of events which our Board of Directors deems to be foreseeable in light of our actual operations at the time of the undertaking and limited to an amount or criterion determined by our Board of Directors to be reasonable under the circumstances, and further provided that such events and amounts or criteria are set forth in the undertaking to indemnify;
| · | reasonable litigation expenses, including attorney’s fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding was concluded without the filing of an indictment against him or her and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; or in connection with an administrative enforcement proceeding or a financial sanction, including a payment imposed on the office holder in favor of an injured party as set forth in the Israeli Securities Law, 1968, as amended (the "Securities Law"), and expenses that the office holder incurred in connection with a relevant proceeding under the Securities Law, including reasonable legal expenses, which term includes attorney fees; and |
reasonable litigation expenses, including attorney’s fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding was concluded without the filing of an indictment against him or her and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; or in connection with an administrative enforcement proceeding or a financial sanction, including a payment imposed on the office holder in favor of an injured party as set forth in the Israeli Securities Law, and expenses that the office holder incurred in connection with a relevant proceeding under the Israeli Securities Law, including reasonable legal expenses, which term includes attorney fees; and
| · | reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or charged to him or her by a court, in proceedings instituted by us or on our behalf or by another person, or in a criminal indictment from which he or she was acquitted, or a criminal indictment in which he or she was convicted for a criminal offense that does not require proof of intent, in each case relating to an act performed in his or her capacity as an office holder. |
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or charged to him or her by a court, in proceedings instituted by us or on our behalf or by another person, or in a criminal indictment from which he or she was acquitted, or a criminal indictment in which he or she was convicted for a criminal offense that does not require proof of intent, in each case relating to an act performed in his or her capacity as an office holder.
We have undertaken to indemnify our directors, officers and certain other employees for certain events listed in the indemnification letters given to them. In respect of office holders whom our controlling shareholders have a personal interest in their receiving indemnification letters from us, such indemnification was approved for a period of three years from our annual shareholder meeting held in 2011 and in 2014 and 2017 was extended by our audit committee and board of directors for a three year period until 2020, according to regulations promulgated under the Israeli Companies Law. Excluding reasonable litigation expenses, as described above, the aggregate amount payable to all directors and officers and other employees who may have been or will be given such indemnification letters is limited to the amounts we receive from our insurance policy plus 30% of our shareholders’ equity as of December 31, 2001, or NIS 486 million, and to be adjusted by the Israeli CPI.
The Companies Law provides that a company may not exempt or indemnify an office holder, or enter into an insurance contract, which would provide coverage for any monetary liability incurred as a result of any of the following:
| · | a breach by the office holder of his or her duty of loyalty unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
a breach by the office holder of his or her duty of loyalty unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
| · | a breach by the office holder of his or her duty of care if the breach was done intentionally or recklessly; |
a breach by the office holder of his or her duty of care if the breach was done intentionally or recklessly;
| · | any act or omission done with the intent to derive an illegal personal benefit; or |
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any act or omission done with the intent to derive an illegal personal benefit; or
| · | any fine or penalty levied against the office holder. |
any fine or penalty levied against the office holder.
The new Insolvency and Economic Rehabilitation Law, 2018 (in force as of September 15, 2019), provides that a company may not exempt or indemnify a director or the CEO of a company for a breach of his or her duty of care to the company (i.e. if the director or CEO knew or should have known that the company is insolvent and didn't take any measures to reduce it's scope).
Any exemption of, indemnification of, or procurement of insurance coverage for, our office holders must be approved according to the procedures required for the approval of compensation under "Item 6. Directors, Senior Management and Employment – C. Board Practices - Approval of Specified Related Party Transactions Under Israeli Law - Compensation Arrangements".
Mergers and Acquisitions under Israeli Law
The Companies Law requires that each company that is a party to a merger have the transaction approved by its board of directors and a vote of the majority of its shares at a shareholders meeting. Upon the request of a creditor of either party of the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the requisite proposal for the merger has been filed by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each party.
The Companies Law also provides that an acquisition of shares of a public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder in the company. An acquisition of shares of a public company must also be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company and there is no existing 45% or greater shareholder in the company. These requirements do not apply if the (i) acquisition occurs in the context of a private placement by the company that received shareholder approval, (ii) the purchase of shares is from a 25% or greater shareholder of the company and results in the acquirer becoming a 25% shareholder of the company or more or (iii) the purchase of shares is from a 45% shareholder of the company and results in the acquirer becoming a 45% shareholder of the company.company or more. The special tender offer must be extended to all shareholders but the offeror is not required to purchase shares representing more than 5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are tendered by shareholders. The special tender offer may be consummated only if (i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror and (ii) the numbermajority of shares tenderedthe offerees who responded to the offer accepted the offer, excluding offerees who are controlling shareholders of the offeror, offerees who hold 25% or more of the voting rights in the company or who have a personal interest in accepting the tender offer, exceedsor anyone on their behalf or on behalf of the numberofferor including the relatives of shares whose holders objected to the offer.or corporations controlled by these persons..
If, as a result of an acquisition of shares, the acquirer will hold more than 90% of a company’s outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares. If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to it. The law provides for appraisal rights if any shareholder files a request in court within six months following the consummation of a full tender offer, but the acquirer may stipulate that any shareholder tendering his shares will not be entitled to appraisal rights. If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders who are not exempt from Israeli income tax under Israeli law or an applicable tax treaty. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies by certain shareholders are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, tax then becomes payable even if no actual disposition of the shares has occurred. For information regarding Israeli tax on the sale of our shares, see “Item 10.E - Taxation—Israeli Tax Considerations—Capital Gains Tax on Sales of Our Ordinary Shares.”
Anti-Takeover Measures under Israeli Law
The Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including shares providing certain preferred or additional rights to voting, distributions or other matters and shares having preemptive rights. We do not have any authorized or issued shares other than ordinary shares. In the future, if we do create and issue a class of shares other than ordinary shares, such class of shares, depending on the specific rights that may be attached to them, may delay or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization of a new class of shares will require an amendment to our articles of association and to our memorandum, which requires the prior approval of our shareholders by a simple majority of ourthe shares represented and votingvoted upon at a shareholders meeting. Our articles of association provide that our Board of Directors may, at any time in its sole discretion, adopt protective measures to prevent or delay a coercive takeover of us, including, without limitation, the adoption of a shareholder rights plan.
C. MATERIAL CONTRACTS
For a description of our material suppliers, see “Item 4. Information on the Company – B. Business Overview – – Network and Infrastructure – Cellular Segment – Network Sharing Agreements”, “Item 4. Information on the Company“ – B. Business Overview –Suppliers.”Fixed-line Segment – Investment in IBC” and “–Suppliers” thereunder.
For a description of our debt agreements, see “Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Debt Service” and "– Other Credit Facilities".
Registration Rights Agreement
DIC and certain other shareholders entered into a registration rights agreement with us in 2006. As of DecemberJanuary 31, 2017, 42,514,0022020, 67,777,268 ordinary shares, held by DIC directly and through its wholly-owned subsidiary,Koor, are entitled to registration rights as well as any additional shares still held, if held, by the other shareholders who joined the agreement.
The registration rights holders are entitled to one demand registration per 12-month period, so long as such request is initiated by registration rights holders of at least 3.25% of the then outstanding registrable securities and the demand refers to a minimum of 3% of our then outstanding share capital, subject to customary deferral rights. In addition, in connection with any public offerings that we initiate in the future, if we propose to register any of our securities for our own account or for the account of any of our shareholders other than in a demand registration, the registration rights holders have piggyback rights to include their shares, subject to customary underwriters’ cutback rights.
All registration rights terminate, with respect to any individual registration rights holder, at such time as all registrable shares of such holder may be sold without registration pursuant to Rule 144 under the Securities Act during any three-month period. We are required to pay all expenses incurred in carrying out the above registrations, as well as the reasonable fees and expenses of one legal counsel for the selling registration rights holders, except for underwriter discounts and commissions with respect to the shares of such holders. The agreement provides for customary indemnification and contribution provisions.
D. EXCHANGE CONTROLS
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions.
E. TAXATION
U.S. Federal Income Tax Considerations
The following is a general discussion of certain material U.S. federal income tax consequences to the U.S. holders described below of ownership and disposition of the Company’s shares. This discussion does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a U.S. holder in light of the U.S. holder’s particular circumstances and does not address U.S. state, local and non-U.S. tax consequences. This discussion does not address the potential application of the provisions of the Internal Revenue Code of 1986, as amended, or the Code, known as the Medicare contribution tax or any alternative minimum tax consequences. The discussion applies only to U.S. holders that hold the Company's shares as capital assets for U.S. federal income tax purposes, and it does not describe all of the tax consequences that may be relevant to U.S. holders subject to special rules, such as certain financial institutions, insurance companies, dealers or traders in securities, or foreign currencies, persons holding the shares as part of a hedge, straddle, conversion transaction or other integrated transaction, persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar, partnerships or other entities classified as partnerships for U.S. federal income tax purposes, tax-exempt organizations, shareholders that own or are deemed to own 10% or more of the Company’s stock by vote or value, or shareholders that own our shares in connection with a trade or business conducted outside of the United States.
This discussion is based on the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury regulations and the U.S.-Israel income tax treaty, all as of the date hereof. These laws are subject to change, possibly on a retroactive basis. Shareholders are urged to consult their tax advisors regarding the U.S. federal, state, local and foreign tax consequences of purchasing, owning and disposing of the Company's shares in light of their particular circumstances.
The discussion below applies only to U.S. holders. As used herein, a “U.S. holder” is a person that is, for U.S. federal income tax purposes, a beneficial owner of the Company’s shares thatand is either:
| · | a citizen or resident of the United States; |
a citizen or resident of the United States;
| · | a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or |
a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or
| · | an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source. |
an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
If an entity that is classified as a partnership for U.S. federal income tax purposes owns the Company's shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the entity. Such entities and their partners or members should consult their tax advisors regarding the tax consequences of ownership of the Company’s shares.
Except as described below, this discussion assumes that the Company is not a passive foreign investment company, or PFIC, for any taxable year.
Taxation of Distributions
Distributions paid on the Company’s shares, other than certain pro rata distributions of ordinary shares, will be treated as dividends to the extent paid out of current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Since the Company does not maintain calculations of its earnings and profits under U.S. federal income tax principles, U.S. holders will generally be required to treat such distributions as taxable dividends and include them in income on the date of receipt. Subject to applicable limitations, dividends paid to certain non-corporate U.S. holders will be taxable at favorable rates applicable to long-term capital gains. The dividend income will include any amounts withheld by the Company or its paying agent in respect of Israeli taxes. The dividend will be treated as foreign-source income and will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code.
Dividends paid in NIS will be included in a U.S. holder’s income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt. Such gain or loss would generally be treated as U.S.-source ordinary income or loss.
Subject to applicable limitations that vary depending upon a U.S. holder’s particular circumstances, Israeli taxes withheld from dividends at a rate not exceeding any applicable rate provided by the U.S.-Israel income tax treaty may be creditable against the U.S. holder’s U.S. federal income tax liability. The limitation on a U.S. holder’s eligibility for foreign taxes credittax credits is calculated separately with respect to specific classes of income. Instead of claiming a credit, a U.S. holder may, at the U.S. holder’s election, deduct the otherwise creditable foreign taxes in computing the taxable income for the year, subject to generally applicable limitations under U.S. federal income tax law. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all foreign taxes paid or accrued in the taxable year. The rules governing foreign tax credits are complex and U.S. holders should consult their tax advisors regarding the availability of foreign tax credits and the deductibility of foreign taxes in their particular circumstances.
Sale and Other Disposition of the Company’s Shares
Gain or loss realized on the sale or other disposition of the Company's shares will be capital gain or loss, and will be long-term capital gain or loss if the U.S. holder owned the shares for more than one year. The amount of gain or loss will be equal to the difference between the U.S. holder's tax basis in the shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. Such gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. The deductibility of capital losses is subject to limitations.
Passive Foreign Investment Company Rules
The Company believes that it was not a PFIC for the taxable year of 2017.2019. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets from time to time (and since the market value of the Company’s assets may be determined, in part, by reference to the market value of its shares, which has been volatile and may decline), there can be no assurance that the Company will not be a PFIC for any taxable year. If the Company were a PFIC for any taxable year during which a U.S. holder owned a share in the Company, certain adverse consequences could apply to the U.S. holder. Specifically, gain recognized by a U.S. holder on a sale or other disposition of a share would be allocated ratably over the U.S. holder’s holding period for the share. The amounts allocated to the taxable year of the sale or other disposition and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the resulting tax liability. Further, any distribution in excess of 125% of the average of the annual distributions received by the U.S. holder on the Company's shares during the preceding three years or the U.S. holder’s holding period, whichever is shorter, would be subject to taxation as described immediately above. Certain elections (such as a mark-to-market election) may be available to U.S. holders and may result in alternative tax treatment. In addition, if the Company were a PFIC for a taxable year in which we pay a dividend or the prior taxable year, the favorable dividend rates discussed above with respect to dividends paid to certain non-corporate holders would not apply. If the Company were a PFIC for any taxable year in which a U.S. holder owned the Company’s shares, the U.S. holder would generally be required to file annual returns with the Internal Revenue Service, or the IRS, on IRS Form 8621. Furthermore, if the Company is a PFIC for any taxable year during which a U.S. holder owned its shares, the Company will generally continue to be a PFIC with respect to such U.S. holder’s shares even if the Company ceases to be a PFIC for subsequent taxable years.
Information Reporting and Backup Withholding
Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries may be subject to information reporting and backup withholding unless (i) the U.S. holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. holder provides a correct taxpayer identification number and certifies that the U.S. holder is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. holder will be allowed as a credit against the U.S. holder’s U.S. federal income tax liability and may entitle the U.S. holder to a refund, provided that the required information is timely furnished to the IRS.
Certain U.S. holders who are individuals and certain specified entities closely-held by individuals may be required to report on IRS Form 8938 information relating to their holdings of the Company's shares, subject to certain exceptions (including an exception for securities held in accounts maintained by U.S. financial institutions). U.S. holders should consult their tax advisers regarding the application of these rules in the U.S. holders’ particular circumstances.
Israeli Tax Considerations
The following is a discussion of certain material Israeli tax consequences to purchasers of our ordinary shares. The discussion also contains a description of certain relevant material provisions of the current Israeli income tax system applicable to companies in Israel. This discussion is based upon the tax laws of Israel with special referenceand regulations promulgated thereunder as of the date hereof, which are subject to its effect on us.change. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion.
This discussion applies to shareholders who or that hold our ordinary shares as capital assets and does not address all of the tax consequences that may be relevant to holders of our ordinary shares in light of their particular circumstances or certain types of holders of our ordinary shares subject to special tax treatment. Because individual circumstances may differ, shareholders should consult their tax advisors to determine the applicability of the rules discussed below to them, including the application of Israeli or other tax laws. The discussion below is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Each prospective investor should consult his, her or its own tax or legal adviser of acquiring, holding and disposing of our ordinary shares.
Taxation of Israeli Companies
General Corporate Tax Structure
Generally, Israeli companies wereare generally subject to corporate tax on their taxable income currently at the rate of 26.5% for the 2015 tax year, 25% for the 2016 tax year and 24% for the 2017 tax year. Under an amendment to the Israeli Income Tax Ordinance enacted in December 2016, the corporate tax rate will decrease to 23% for 2018 and subsequent tax years.. Israeli companies are generally subject to capital gains tax at the corporate tax rate.
Capital Gains Tax on Sales of Our Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of any capital assets, by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli resident companies, by non-residents of Israel,Israeli and non- Israeli residents, unless, with respect to non-Israeli residents, a specific exemption is available or unless a tax treaty between Israel and the shareholder’ssuch non-Israeli resident’s country of residence provides otherwise.otherwise and subject to the receipt in advance of a valid certificate from the Israel Tax Authority. In calculating capital gain, the law distinguishes between real gain and inflationary surplus. The inflationary surplus is the portion of the total capital gain equal to the increase in the relevant asset’s value that is attributable to the increase in the Israeli CPI between the date of purchase and the date of sale. The real capital gain is the excess of the total capital gain over the inflationary surplus. The inflationary surplus is generally exempt from tax. A non-resident that invests in taxable assets with foreign currency, or any individual who holds securities the price of which is stated in foreign currency, may elect to calculate the amount of inflationary surplus in that foreign currency.
Taxation of Israeli Residents
The tax rate generally applicable to real capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 30%. Additionally, if such shareholder is considered a significant shareholder"significant shareholder" at the time of the sale or at any time during the 12-month period preceding such sale, the tax rate will be 30%. For this purpose, a significant shareholder is one that holds, directly or indirectly, includingalone or together with others, at least 10% of certainany of our means of control (including, among other things, the right to receive profits of the company, voting rights, the right to receive the company’s liquidation proceeds and the right to appoint a director).. An additional tax of 3% will be imposed on individuals whose annual taxable income exceeds a certain threshold (NIS 651,600 for 2020). Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to “business income”: currently, 23% for companies and a company.marginal tax rate of up to 47% for individuals, plus an additional tax of 3%, which is imposed on individuals whose annual taxable income exceeds a certain threshold (NIS 651,600 for 2020).
Israeli companies are generally subject to the corporate tax rate (see above) on capital gains derived from the sale of shares listed on a stock market.
As of January 1, 2013, shareholders that are individuals who have taxable income that exceeds NIS 800,000 in a tax year (linked to the Israeli CPI each year), will be subject to an additional tax, referred to as High Income Tax,market currently at the rate of 2% on their taxable income for such tax year which exceeds such threshold. For this purpose, taxable income will include taxable capital gains from the sale of our shares and taxable income from dividend distributions. Under an amendment to the Israeli Income Tax Ordinance enacted in December 2016, for 2017 and subsequent years the rate of High Income Tax will increase to 3% and will be applicable to annual income exceeding NIS 640,000 (linked to the CPI each year) (NIS 641,880 in 2018)23%.
Taxation of Non-Israeli Residents
Non-Israeli residents (individuals and entities) are generally exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on the Tel Aviv Stock Exchange or a recognized stock exchange outside of Israel (including the New York Stock Exchange), provided that such shareholders did not acquire their shares prior to the issuer’s initial public offering (in which case a partial exemption may be available) and that the gains were not derived from a permanent establishment maintained by such shareholders in Israel. Shareholders that do not engage in activity in Israel generally should not be subject to such tax. However, a non-Israeli corporationentities will not be entitled to the exemption from capital gains tax if Israeli residents (i) have a controlling interest of more than 25% in such non-Israeli corporationentity or (ii) are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli corporation,entities, whether directly or indirectly.
In addition, a sale of securities may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the U.S.-Israel income tax treaty, the sale of our ordinary shares by a shareholder who qualifies as a resident of the United States within the meaning of the U.S.-Israel income tax treaty and who is entitled to claim the benefits afforded to such person by the U.S.-Israel income tax treaty, referred to as a treaty U.S. resident, and who holds itsour ordinary shares as a capital asset, is also exempt from Israeli capital gains tax unless (i) the treaty U.S. resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, (ii) the capital gains arising from such sale are attributable to a permanent establishment of the treaty U.S. resident that is located in Israel, or (iii) the treaty U.S. resident, if an individual, is present in Israel for at leasta period or periods of 183 days or more in the aggregate during the taxabletax year. However, under the U.S.-Israel income tax treaty, a treaty U.S. resident would be permitted to claim a credit for taxes paid in Israel against the U.S. federal income tax imposed on the sale, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel income tax treaty does not relate to U.S. state or local taxes. Eligibility to benefit from tax treaties is conditioned upon the shareholder presenting a withholding certificate issued by the Israel Tax Authority prior to the applicable payment.
Taxation of Dividends Paid on Our Ordinary Shares
Taxation of Israeli Residents
Individuals who are Israeli residents are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25%, unless the recipient is a significant shareholder (as defined above) at the time of the distribution or at any time during the 12-month period preceding the distribution, in which case the applicable tax rate is 30%. The company distributing the dividend is required to withhold tax at the rate of 25% (a different rate may apply to dividends paid on shares deriving from the exercise of stock options or other equity-based awards granted as compensation to employees or office holders of the company). Companies which are Israeli residents are generally exempt from income tax on the receipt of dividends from another Israeli company, unless the source of such dividends is located outside of Israel, in which case tax will generally apply at a rate of 25%.company.
For information with respect to the applicabilityMoreover, an additional tax of Israeli High Income Tax3% will be imposed on distributions of dividends, see "– Capital Gains Tax on Sales of Our Ordinary Shares - Taxation of Israeli Residents" above.individuals whose annual taxable income exceeds a certain threshold (NIS 651,600 for 2020).
Taxation of Non-Israeli Residents
Non-residents of Israel (whether individuals or entities) are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25% unless the recipient is a significant shareholder at the time of the distribution or any time during the 12-month period preceding the distribution, in which case the applicable tax rate will be 30% unless a reduced rate is provided under an applicable tax treaty (subject to receipt of a valid withholding certificate from the Israel Tax Authority allowing for such reduced withholding tax rate). The company distributing the dividend is required to withhold tax at the source at the rate of 25%.
Under the U.S.-Israel income tax treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a treaty U.S. resident is 25%. The maximum rate of withholding tax on dividends that are paidmay be reduced to 12.5% in certain circumstances towhere the recipient of the dividend is a U.S. corporation holding 10% or more of our outstanding voting power throughoutduring the tax year in which the dividend is distributed as well as during the previouswhole of its prior tax year, provided that not more than 25% of the gross income for such preceding year consists of certain types of interest or dividends and certain other conditions under the U.S.-Israel income tax treaty are met.. Eligibility for such reduced rate is 12.5%.conditioned upon presenting a withholding certificate issued by the Israel Tax Authority allowing for withholding at such reduced rate. The aforementioned rates under the U.S.-Israel income tax treaty will not apply if the dividend income was derived through a permanent establishment of the treaty U.S. resident in Israel.
A non-resident of Israel who has dividend income derived from or accrued in Israel, from which tax was withheld at source, is generally exempt from the obligation to file tax returns in Israel in respect of such income, provided that (i) such income was not derived from a business conducted in Israel by such non-Israeli resident.resident, and (ii) the non-resident of Israel has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act, applicable to foreign private issuers. As a foreign private issuer, we are exempt from certain rules and regulations under the Exchange Act prescribing the content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act, with respect to their purchase and sale of our ordinary shares. In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we file annual reports with the SEC on Form 20-F containing financial statements audited by an independent accounting firm. We also furnish reports to the SEC on Form 6-K containing unaudited financial information for the first three quarters of each fiscal year and other material information, in accordance with the reporting requirements applicable to us as a dual listed company and as required due to our controlling shareholder's reporting obligations with respect to us. You may read and copy any document we file, including any exhibits, with the SEC without charge at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Substantially all of our SEC filings are also available to the public at the SEC's website at http://www.sec.gov and as of July 2007 also at the TASE's website at http://maya.tase.co.il and at the Israeli Securities Authority's website at http://www.magna.isa.gov.il.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the course of our normal operations, we are exposed to market risks including fluctuations in foreign currency exchange rates, interest rates and the Israeli CPI. We are exposed to currency risks primarily as a result of purchasing inventory and fixed assets mainly in U.S. dollars while almost all of our cash receipts are in NIS. A substantial amount of our cash payments are incurred in, or linked to foreign currencies. In particular, in 20162018 and 2017,2019, such payments represented approximately 14%17% and 16%14%, respectively, of total cash outflows (including payments of principal and interest on our debentures). Also, we are exposed to interest rate risks through our hedging instruments and to possible fluctuations in the Israeli CPI through our Series F, H and J debentures.
In order to protect ourselves from fluctuations in foreign currency exchange rates, we have established a foreign currency hedging program. Under this program, we currently hedge part of our U.S. dollar liabilities, firm commitments and budgeted expenditures for up to 12 months using foreign currency forward exchange contracts and currency options. A foreign currency forward exchange contract is a contract whereby we agree to buy or sell a foreign currency at a predetermined exchange rate at a future date. A currency option is an option to buy or sell a foreign currency at a predetermined exchange rate at a future date. The exchange rate fluctuations that impact our foreign currency denominated financial liabilities, firm commitments and budgeted expenditures are intended to be offset by gains and losses on these hedging instruments.
The goal of our hedging program is to limit the impact of exchange rate fluctuations on our transactions denominated in U.S. dollars. We do not hold derivative financial instruments for trading purposes. Nevertheless, under IFRS, we are required to treat our hedges of budgeted expenditures for which there is no contractual commitment as though they were speculative investments. As a result, we are required to value these hedge positions at the end of each fiscal quarter and record a gain or loss equal to the difference in their market value from the last balance sheet date, without any reference to the change in value to the related budgeted expenditures. Accordingly, these differences could result in significant fluctuations in our reported net income.
In addition, as of the beginning of 2020, we designate certain derivatives as hedging instruments in order to hedge changes in cash flows that relate to highly probable forecasted transactions and which derive from changes in U.S. dollars exchange rates (hedge accounting). At the end of each fiscal quarter the effective portion of changes in fair value of these derivatives is recognized in other comprehensive income. when the hedged forecasted cash flows occur, the amounts accumulated in the hedging reserve and cost of hedging reserve are reclassified to profit or loss in the same period, or periods, in which the hedged forecasted future cash flows affect profit or loss.
As of December 31, 2017,2019, we had three outstanding series of debentures, which are linked to the Israeli CPI, in an aggregate principal amount of approximately NIS 1.71.1 billion. As of December 31, 2017,2019, we had forward Israeli CPI / NIS transactions, in a total amount of approximately NIS 0.50.4 billion, with an average maturity period of seventhree months, in order to hedge our exposure to fluctuations in the Israeli CPI. We periodically review the possibility of entering into additional transactions in order to lower the exposure in respect of the debentures.
Set forth below is the composition of the derivative financial instruments (excluding (embedded derivatives) at the following dates:
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Forward contracts on foreign currency exchange rate (mainly US$– NIS) | | | 105 | | | | (1 | ) | | | 203 | | | | 4 | | | | 128 | | | | (2 | ) |
Forward contracts on Israeli CPI rate | | | 500 | | | | (17 | ) | | | 400 | | | | (1 | ) | | | 360 | | | | (3 | ) |
Options on the foreign currency exchange rate (mainly US$– NIS) | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | | | | | | | | | | | |
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Forward contracts on foreign currency exchange rate (mainly US$– NIS) | | | 98 | | | | 1 | | | | 95 | | | | 1 | | | | 105 | | | | (1 | ) |
Forward contracts on Israeli CPI rate | | | 1,200 | | | | (32 | ) | | | 800 | | | | (22 | ) | | | 500 | | | | (17 | ) |
Options on the foreign currency exchange rate (mainly US$– NIS) | | | 137 | | | | - | | | | (95 | ) | | | 1 | | | | (105 | ) | | | 1 | |
Total | | | 1,435 | | | | (31 | ) | | | 800 | | | | (20 | ) | | | 500 | | | | (17 | ) |
Sensitivity information
Without taking into account our hedging instruments and based upon our debt outstanding as at December 31, 2017,2019, fluctuations in foreign currency exchange rates, or the Israeli CPI would affect us as follows:
| · | an increase of 1% of the Israeli CPI would result in an increase of approximately NIS 2.0 million in our financing expenses; |
an increase of 1% of the Israeli CPI would result in an increase of approximately NIS 8 million in our financing expenses.
| · | a devaluation of the NIS against the U.S. dollar of 1% would increase our financing expenses by approximately NIS 0.1 million. |
For additional details see note 21 to our financial statements, included elsewhere in this report.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of December 31, 2017,2019, have concluded that, as of such date, our disclosure controls and procedures were effective and ensured that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
Management Annual Report on Internal Control Overover Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS and includes those policies and procedures that:
· | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
· | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
141Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
· | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition and use of disposition of the Company’s assets that could have a material effect on the financial statements. |
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition and use of disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting, as of December 31, 2017.2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on our assessment, management believes that as of December 31, 20172019 our internal control over financial reporting is effective based on these criteria.
Attestation Report of the Registered Public Accounting Firms
The effectiveness of management's internal control over financial reporting as of December 31, 20172019 has been audited by our independent registered public accounting firm, Somekh Chaikin,Keselman & Keselman, a member firm of KPMGPricewaterhouseCoopers International Limited, and its report as of March 25, 2018,23, 2020, expresses an unqualified opinion on the Company's internal control over financial reporting.
This report is included in page F-3 of this Form 20-F.
Changes in Internal Control Over Financial Reporting
There were noDuring the period covered by this annual report, the changes in our internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.reporting were:
In connection with the implementation of IFRS 16, a new accounting standard for leases that replaces IAS 17 and is applicable for annual periods as of January 1, 2019 the Company has designed an internal control over the process of identifying existing leases and calculating the effect of the new standard on the Company's financial reporting as at December 31, 2019. During 2019, the Company implemented an internal control process for the ongoing implementation of this standard so as to ensure effective internal control for the prevention of errors in financial reporting in the leasing process.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Ms. BaytelMr. Hauser qualifies as “audit committee financial expert” as defined in Item 16A of Form 20-F. Ms. BaytelMr. Hauser qualifies as an independent director under the independence standards applicable to listed company audit committee members, pursuant to Rule 10A-3 under the Securities Exchange Act.
Our Code of Ethics applies to all of our officers, directors and employees. We have posted a copy of our Code of Ethics on our website at http://investors.cellcom.co.il under “Investor Relations – Corporate Governance – Legal and Corporate - Code of Ethics.”
ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES
Somekh Chaikin, a member firm of KPMG International, served as our sole independent registered public accounting firm until May 2016. From May 2016 until July 2017, Somekh Chaikin and Keselman & Keselman, a member of PricewaterhouseCoopers International Limited, servedserves as our joint independent registered public accounting firms. As of July 25, 2017 Keselman & Keselman concluded their services and Somekh Chaikin returned to being our sole independent registered public accounting firm. See Item 16F below.
These accountants billed the following fees to us for professional services in each of those fiscal years:
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Audit Fees | | | 2,450 | | | | 2,300 | |
Tax Fees and other | | | | | | | | |
Total | | | | | | | | |
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Audit Fees | | | 2,575 | | | | 2,370 | |
Tax Fees | | | 175 | | | | 73 | |
Total | | | 2,750 | | | | 2,443 | |
“Audit Fees” are the aggregate fees billed for the audit of our annual financial statements. This category also includes services that generally the independent accountant provides, such as consents and assistance with and review of documents filed with the SEC. These fees also include accounting consultations regarding the accounting treatment of matters that occur in the regular course of business, implications of new accounting pronouncements and other accounting issues that occur from time to time. “Tax Fees” are the aggregate fees billed for professional services rendered for tax compliance, tax advice, other than in connection with the audit. Tax compliance involves audit of original and amended tax returns, tax planning and tax advice.
155
Our Audit Committee has adopted a pre-approval policy for the engagement of our independent accountant to perform certain audit and non-audit services. Pursuant to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, the audit committee pre-approves annually a catalogmaximum amount for certain potential services and approval is provided prior to any service performed by the independent accountant. Prior to any engagement of specificthe independent accountant by the Company or its subsidiaries to render audit andor non-audit services, ina detailed description of the categories of auditparticular service audit-related service and tax services that mayto be performed by our independent accountants, andas well as the maximumfee structure are pre-approved fees that may be paid as compensation for each pre-approved service in those categories. Any proposed services exceeding the maximum pre-approved fees or audit matters that were not pre- aproved require specific approval by the Audit Committee.Company's audit committee.
The Audit Committee has delegated part of its pre-approval authority to the chairman of the Audit Committee, subject to ratification by the entire Audit Committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANTOn July 25, 2017, Keselman & Keselman declined to stand for re-election as our joint independent registered public accounting firm together with Somekh Chaikin by mutual consent with us. Keselman & Keselman's audit report on our consolidated financial statements for the fiscal year ended December 31, 2016 (the only consolidated financial statements of ours that they audited) did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During our fiscal year ended December 31, 2016 and the subsequent interim period through July 2017, there were no disagreements between us and Keselman & Keselman on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Keselman & Keselman's satisfaction, would have caused Keselman & Keselman to make reference to the matters in connection with their reports on our consolidated financial statements. During our fiscal year ended December 31, 2016 and the subsequent interim period through July 2017, there were no “reportable events,” as that term is described in Item 16F(a)(1)(v) of Form 20-F.
ITEM 16G.CORPORATE GOVERNANCE
The following are the significant ways in which our corporate governance practices differ from those followed by domestic companies under the listing standards of the NYSE:
Nominating/Corporate Governance Committee - Under Section 303A.04 of the NYSE Listed Companies Manual, or LCM, a U.S. domestic listed company, other than a controlled company, must have a nominating/corporate governance committee composed entirely of independent directors. We do not have a nominating/corporate governance committee as we are not required to have such a committee under the Israeli Companies Law.
Compensation Committee - Under Section 303A.05 of the LCM, a U.S. domestic listed company, other than a controlled company, must have a compensation committee composed entirely of independent directors that operates pursuant to a written charter addressing its purpose, responsibilities and membership qualifications and may receive counseling from independent consultants, after evaluating their independence. We have a compensation committee whose purpose, responsibilities and membership qualifications are governed by the Israeli Companies Law. There are no specific independence evaluation requirements for outside counsel. IsraeliThe Companies lawLaw requires our compensation committee to include a majority of external directors (who are also independent directors). Our compensation committee is currently composed entirely of independent directors.
Separate Meetings of Non-Management Directors -Under Section 303A.03 of the LCM, the non-management directors of each U.S. domestic listed company must meet at regularly scheduled executive sessions without management. We do not have a similar requirement under the Israeli Companies Law, and our independent directors do not meet separately from directors who are not independent, other than in the context of audit committee meetings.
Audit Committee - Under Section 303A.06 of the LCM, domestic listed companies are required to have an audit committee that complies with the requirements of Rule 10A-3 of the Securities and Exchange Act of 1934. Rule 10A-3 requires the audit committee of a U.S. company to be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review, or attest services, and that each such firm must report directly to the audit committee. However, Rule 10A-3 provides that foreign private issuers may comply with applicable home country law that (i) requires or permits shareholders to appoint the registered public accounting firm or (ii) prohibits the delegation of responsibility to the issuer’s audit committee without being in conflict with Rule 10A-3. Pursuant to the Israeli Companies Law, our registered public accounting firm is appointed by the shareholders at the annual meeting of shareholders. Our audit committee is responsible for recommending to the shareholders the appointment of our registered public accounting firm and to pre-approve the amounts to be paid to our registered public accounting firm. Pursuant to our audit committee charter, our audit committee is responsible for overseeing the work of our registered public accounting firms.
Equity Compensation Plans - Under Section 303A.08 of the LCM, shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, with certain limited exemptions as described in the Rule. We follow the requirements of the Israeli Companies Law, under which approval of equity-compensation plans and material revisions thereto is within the authority of the board of directors. However, any compensation to directors, or the chief executive officer or office holders with relation to whom our controlling shareholders have a personal interest, including equity based compensation, generally requires the approval of the compensation committee, the board of directors and the shareholders, in that order. The compensation of office holders is generally required to comply with a shareholder-approved compensation policy, which is required to include a monetary cap on the value of equity compensation that may be granted to any office holder. Our compensation policy complies with that requirement.
Corporate Governance Guidelines - Under Section 303A.09 of the LCM, domestic listed companies must adopt and disclose their corporate governance guidelines. We do not have a similar requirement under the Israeli Companies Law and therefore, other than as disclosed in this annual report on Form 20-F, we do not to disclose our corporate governance guidelines.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
PART IIIII
ITEM 17.FINANCIAL STATEMENTS
See Item 18.
ITEM 18.FINANCIAL STATEMENTS
See pages F-1 through F-77 F-93 of this annual report.
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| | We agree to furnish to the SEC upon request, copiesshareholders of our such agreements.Golan*
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101.INS | | XBRL Instance Document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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(1) | Incorporated by reference to our registration statement on Form F-1 (registration no. 333-140030) filed with the SEC on January 17, 2007. |
(2) | Incorporated by reference to our annual report on Form 20-F for the year 2007 filed with the SEC on March 18, 2008. |
(3) | Incorporated by reference to our annual report on Form 20-F for the year 2009 filed with the SEC on March 2, 2010. |
(4) | Incorporated by reference to our annual report on Form 20-F for the year 2011 filed with the SEC on March 7, 2012. |
(5)(3)
| Incorporated by reference to our annual report on Form 20-F for the year 2014 filed with the SEC on March 16, 2015. |
(6)(4)
| Incorporated by reference to our registration statement on Form S-8 filed with the SEC on November 15, 2012. |
(7) | Incorporated by reference to our registration statement on Form S-8 filed with the SEC on August 13, 2015. |
(8) | Incorporated by reference to our annual report on Form 20-F for the year 2016 filed with the SEC on March 20, 2017. |
(5) | Incorporated by reference to our annual report on Form 20-F for the year 2017 filed with the SEC on March 26, 2018. |
(6) | Incorporated by reference to our registration statement on Form S-8 filed with the SEC on August 13, 2015. |
(7) | Incorporated by reference to our annual report on Form 20-F for the year 2017 filed with the SEC on March 26, 2018. |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| Cellcom Israel Ltd.
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| By: | /s/ Nir Sztern Avi Gabbay | |
| | Name: | Nir SzternAvi Gabbay | |
| | Title: | President and Chief Executive Officer | |
Date: March 26, 201823, 2020
Cellcom Israel Ltd. and Subsidiaries Consolidated Financial Statements As at December 31, 20172019 (Audited) |
Contents
Page
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| F-3 - F-6F-5 |
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Consolidated Financial Statements | |
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| F-7 F-6 |
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| F-8 F-7 |
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| F-9 F-8 |
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| F-10 F-9 |
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| F-11 F-10 - F-12F-11 |
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| F-13 F-12 - F-77F-93 |
Somekh Chaikin
KPMG Millennium Tower
17 Ha’arba’a Street, PO Box 609
Tel Aviv 61006, Israel
+972 3 684 8000
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
and Shareholders of
Cellcom Israel Ltd.:
Opinions on the Consolidated Financial Statements and Internal Control Overover Financial Reporting
We have audited the accompanying consolidated statement of financial position of Cellcom Israel Ltd. and subsidiariesits subsidiaries (the Company)“Company”) as of December 31, 2017,2019, and the related consolidated statementstatements of income, comprehensive income, changes in equity, and cash flows for the year then ended, December 31, 2017, andincluding the related notes (collectively referred to as the consolidated“consolidated financial statements)statements”). We also have audited the Company’sCompany's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017,2019, and the results of its operations and its cash flows for the year then ended, December 31, 2017, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.COSO.
Change in Accounting Principle
As discussed in Note 2F to the consolidated financial statements, the Company has changed its method of accountingthe manner in which it accounts for revenue recognition as of January 1, 2017 due to the adoption of International Financial Reporting Standard No. 15 Revenue from Contracts with Customers.Leases in 2019.
Convenience Translation
The consolidated financial statements as of and for the year ended December 31, 20172019 have been translated into United States dollars (“dollars”) solely for the convenience of the reader. We have audited the translation and, in our opinion, the consolidated financial statements expressed in New Israeli Shekels have been translated into dollars on the basis set forth in Note 2D to the consolidated financial statements.
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Annual Report on Internal Control over Financial Reporting.Reporting appearing under Item 15. Our responsibility is to express an opinionopinions on the Company’s consolidated financial statements and an opinion on the Company’sCompany's internal control over financial reporting based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our auditsaudit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditsaudit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.
Definition and Limitations of Internal Control Overover Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1)(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3)(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Kesselman & Kesselman | |
Certified Public Accountants (Isr.) | |
A member firm of PricewaterhouseCoopers International Limited | |
/s/ Somekh ChaikinTel Aviv, Israel
Certified Public Accountants (Isr.)March 23, 2020
Member Firm of KPMG International
We have served as the Company’s auditor since 1994.
Tel Aviv, Israel
March 25, 2018
2018.
Report of Independent Registered Public Accounting FirmsFirm
To the Shareholders and Board of
Directors
Cellcom Israel Ltd.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statementsstatement of financial position of Cellcom Israel Ltd. (hereinafter – “the Company”) and its subsidiaries (the “Company”) as of December 31, 20162018, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended, December 31, 2016. The Company’s management and Board of Directors are responsible for these consolidatedincluding the related notes (collectively the “consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements”). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and Board of Directors, and evaluating the overall financial statement presentation. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 20162018 and the results of theirits operations and theirits cash flows for the year then ended, December 31, 2016, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
/s/ Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International
Tel Aviv, Israel
March 14, 2017
| /s/ Kesselman & Kesselman
Certified Public Accountants (lsr.)
A member firm of PricewaterhouseCoopers
International Limited
|
Somekh Chaikin
KPMG Millennium Tower
17 Ha’arba’a Street, PO Box 609
Tel Aviv 61006, Israel
+972 3 684 8000
Report of Independent Registered PublicChange in Accounting FirmPrinciple
As discussed in Note 2F to the consolidated financial statements, the Company changed the manner in which it accounts for financial instruments in 2018.
To the Shareholders and Board of DirectorsBasis for Opinion
Cellcom Israel Ltd.
We have audited the accompanying consolidated statements of income, comprehensive income, changes in equity, and cash flows of Cellcom Israel Ltd. (hereinafter – “the Company”) and subsidiaries for the year ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Anmisstatement, whether due to error or fraud.
Our audit includesof the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. AnOur audit also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Kesselman & Kesselman | /s/ Somekh Chaikin |
Certified Public Accountants (Isr.) | Certified Public Accountants (Isr.) |
A member firm of PricewaterhouseCoopers International Limited | Member Firm of KPMG International |
| |
Kesselman & Kesselman have served as the Company’s auditor since 2018.
Tel Aviv, Israel March 18, 2019 | Somekh Chaikin have served as the Company’s auditor from 1994 to 2018. |
Somekh Chaikin
KPMG Millennium Tower
17 Ha’arba’a Street, PO Box 609 Tel Aviv 61006, Israel
+972 3 684 8000
Report of Independent Registered Public Accounting Firms
To the Shareholders and Board of Directors
Cellcom Israel Ltd.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statement presentation.of income, comprehensive income, changes in equity, and cash flows of Cellcom Israel Ltd. and subsidiaries (the Company) for the year ended December 31, 2017, and the related notes (collectively, the consolidated financial statements).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Change in Accounting Principle
As discussed in Note 2F to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition as of January 1, 2017 due to the adoption of International Financial Reporting Standard No. 15 Revenue from Contracts with Customers.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the Company and subsidiaries’ operations and their cash flows for the year ended December 31, 2015, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
/s/ Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International
Tel Aviv, Israel
March 14, 2016
25, 2018
Cellcom Israel Ltd. and Subsidiaries
Consolidated Statements of Financial Position
| | | | | | | | | | | Convenience | |
| | | | | | | | | | | translation into | |
| | | | | | | | | | | US dollar (Note 2D) | |
| | | | | December 31, | | | December 31, | | | December 31, | |
| | | | | 2016 | | | | 2017* | | | | 2017* | |
| | Note | | | NIS millions | | | NIS millions | | | US$ millions | |
| | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | |
Cash and cash equivalents | | 8 | | | | 1,240 | | | | 527 | | | | 152 | |
Current investments, including derivatives | | | | | | 284 | | | | 364 | | | | 105 | |
Trade receivables | | 9 | | | | 1,325 | | | | 1,280 | | | | 369 | |
Current tax assets | | 28 | | | | 25 | | | | 4 | | | | 1 | |
Other receivables | | 9 | | | | 61 | | | | 89 | | | | 26 | |
Inventory | | 10 | | | | 64 | | | | 70 | | | | 20 | |
| | | | | | | | | | | | | | | |
Total current assets | | | | | | 2,999 | | | | 2,334 | | | | 673 | |
| | | | | | | | | | | | | | | |
Trade and other receivables | | 9 | | | | 796 | | | | 895 | | | | 258 | |
Property, plant and equipment, net | | 11 | | | | 1,659 | | | | 1,598 | | | | 461 | |
Intangible assets and others, net | | 12 | | | | 1,207 | | | | 1,260 | | | | 364 | |
Deferred tax assets | | 28 | | | | 1 | | | | - | | | | - | |
| | | | | | | | | | | | | | | |
Total non- current assets | | | | | | 3,663 | | | | 3,753 | | | | 1,083 | |
| | | | | | | | | | | | | | | |
Total assets | | | | | | 6,662 | | | | 6,087 | | | | 1,756 | |
| | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | |
Current maturities of debentures and of loans from financial institutions | | 17 | | | | 863 | | | | 618 | | | | 179 | |
Trade payables and accrued expenses | | 13 | | | | 675 | | | | 652 | | | | 188 | |
Current tax liabilities | | 28 | | | | - | | | | 4 | | | | 1 | |
Provisions | | 14 | | | | 108 | | | | 91 | | | | 26 | |
Other payables, including derivatives | | 15 | | | | 279 | | | | 277 | | | | 80 | |
| | | | | | | | | | | | | | | |
Total current liabilities | | | | | | 1,925 | | | | 1,642 | | | | 474 | |
| | | | | | | | | | | | | | | |
Long-term loans from financial institutions | | 17 | | | | 340 | | | | 462 | | | | 134 | |
Debentures | | 17 | | | | 2,866 | | | | 2,360 | | | | 681 | |
Provisions | | 14 | | | | 30 | | | | 21 | | | | 6 | |
Other long-term liabilities | | 16 | | | | 31 | | | | 15 | | | | 4 | |
Liability for employee rights upon retirement, net | | 18 | | | | 12 | | | | 15 | | | | 4 | |
Deferred tax liabilities | | 28 | | | | 118 | | | | 131 | | | | 38 | |
| | | | | | | | | | | | | | | |
Total non- current liabilities | | | | | | 3,397 | | | | 3,004 | | | | 867 | |
| | | | | | | | | | | | | | | |
Total liabilities | | | | | | 5,322 | | | | 4,646 | | | | 1,341 | |
| | | | | | | | | | | | | | | |
Equity attributable to owners of the Company | | 19 | | | | | | | | | | | | | |
Share capital | | | | | | 1 | | | | 1 | | | | - | |
Cash flow hedge reserve | | | | | | (1 | ) | | | - | | | | - | |
Retained earnings | | | | | | 1,322 | | | | 1,436 | | | | 414 | |
| | | | | | | | | | | | | | | |
Non-controlling interests | | | | | | 18 | | | | 4 | | | | 1 | |
| | | | | | | | | | | | | | | |
Total equity | | | | | | 1,340 | | | | 1,441 | | | | 415 | |
| | | | | | | | | | | | | | | |
Total liabilities and equity | | | | | | 6,662 | | | | 6,087 | | | | 1,756 | |
Date of approval of the consolidated financial statements: March 25, 2018. |
* See Note 2F regarding the early adoption of IFRS 15, Revenue from Contracts with Customers.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | Convenience | |
| | | | | | | | | | | translation into | |
| | | | | | | | | | | US dollar (Note 2D) | |
| | | | | December 31, | | | December 31, | | | December 31, | |
| | | | | 2018 | | | 2019* |
| | 2019* |
|
| | Note | | | NIS millions | | | NIS millions | | | US$ millions | |
| | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 9 | | | | 1,202 | | | | 1,006 | | | | 291 | |
Current investments, including derivatives | | | | 404 | | | | 473 | | | | 137 | |
Trade receivables | | | 10 | | | | 1,152 | | | | 1,142 | | | | 330 | |
Current tax assets | | | 30 | | | | 11 | | | | 3 | | | | 1 | |
Other receivables | | | 10 | | | | 84 | | | | 69 | | | | 20 | |
Inventory | | | 11 | | | | 94 | | | | 66 | | | | 19 | |
| | | | | | | | | | | | | | | | |
Total current assets | | | | | | | 2,947 | | | | 2,759 | | | | 798 | |
| | | | | | | | | | | | | | | | |
Trade and other receivables | | | 10 | | | | 852 | | | | 782 | | | | 227 | |
Property, plant and equipment, net | | | 12 | | | | 1,652 | | | | 1,432 | | | | 414 | |
Intangible assets and others, net | | | 13 | | | | 1,298 | | | | 1,294 | | | | 374 | |
Investments in equity accounted investees | | | 8 | | | | - | | | | 150 | | | | 43 | |
Right-of-use assets, net | | | 14 | | | | - | | | | 745 | | | | 216 | |
| | | | | | | | | | | | | | | | |
Total non- current assets | | | | | | | 3,802 | | | | 4,403 | | | | 1,274 | |
| | | | | | | | | | | | | | | | |
Total assets | | | | | | | 6,749 | | | | 7,162 | | | | 2,072 | |
| | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Current maturities of debentures and of loans from financial institutions | | | 19 | | | | 620 | | | | 509 | | | | 147 | |
Current taxation liabilities | | | 30 | | | | - | | | | 6 | | | | 2 | |
Current maturities of lease liabilities | | | 14 | | | | - | | | | 226 | | | | 65 | |
Trade payables and accrued expenses | | | 15 | | | | 696 | | | | 687 | | | | 199 | |
Provisions | | | 16 | | | | 105 | | | | 99 | | | | 29 | |
Other payables, including derivatives | | | 17 | | | | 257 | | | | 299 | | | | 86 | |
| | | | | | | | | | | | | | | | |
Total current liabilities | | | | | | | 1,678 | | | | 1,826 | | | | 528 | |
| | | | | | | | | | | | | | | | |
Long-term loans from financial institutions | | | 19 | | | | 334 | | | | 300 | | | | 87 | |
Debentures | | | 19 | | | | 2,911 | | | | 2,511 | | | | 727 | |
Long-term lease liabilities | | | 14 | | | | - | | | | 533 | | | | 154 | |
Provisions | | | 16 | | | | 20 | | | | 22 | | | | 6 | |
Other long-term liabilities | | | 18 | | | | 16 | | | | 4 | | | | 1 | |
Liability for employee rights upon retirement, net | | | 20 | | | | 14 | | | | 19 | | | | 5 | |
Deferred tax liabilities | | | 30 | | | | 99 | | | | 60 | | | | 17 | |
| | | | | | | | | | | | | | | | |
Total non- current liabilities | | | | | | | 3,394 | | | | 3,449 | | | | 997 | |
| | | | | | | | | | | | | | | | |
Total liabilities | | | | | | | 5,072 | | | | 5,275 | | | | 1,525 | |
| | | | | | | | | | | | | | | | |
Equity attributable to owners of the Company | | | 21 | | | | | | | | | | | | | |
Share capital | | | | | | | 1 | | | | 2 | | | | 1 | |
Share premium | | | | | | | 325 | | | | 623 | | | | 180 | |
Receipts on account of share options | | | | | | | 10 | | | | 24 | | | | 7 | |
Retained earnings | | | | | | | 1,339 | | | | 1,236 | | | | 358 | |
| | | | | | | | | | | | | | | | |
Non-controlling interests | | | | | | | 2 | | | | 2 | | | | 1 | |
| | | | | | | | | | | | | | | | |
Total equity | | | | | | | 1,677 | | | | 1,887 | | | | 547 | |
| | | | | | | | | | | | | | | | |
Total liabilities and equity | | | | | | | 6,749 | | | | 7,162 | | | | 2,072 | |
| | | | | | | | | | | | | | | | |
Date of approval of the consolidated financial statements: March 23, 2020. | |
* See Note 2 (F) regarding initial application of IFRS 16, Leases. | | | | | |
| | | | | | | | | | | Convenience | |
| | | | | | | | | | | translation into US | |
| | | | | | | | | | | dollar (Note 2D) | |
| | Year ended | | | Year ended | | | Year ended | | | Year ended | |
| | December 31, | | | December 31, | | | December 31, | | | December 31, | |
| | 2015 | | | 2016 | | | 2017 | | | 2017 | |
| | NIS millions | | | NIS millions | | | NIS millions | | | US$ millions | |
| | | | | | | | | | | | |
Profit for the year | | | 97 | | | | 150 | | | | 113 | | | | 33 | |
Other comprehensive income items that after initial recognition in comprehensive income were or will be transferred to profit or loss | | | | | | | | | | | | | | | | |
Changes in fair value of cash flow hedges transferred to profit or loss, net of tax | | | 1 | | | | 1 | | | | 1 | | | | - | |
Total other comprehensive income for the year that after initial recognition in comprehensive income was or will be transferred to profit or loss, net of tax | | | 1 | | | | 1 | | | | 1 | | | | - | |
Other comprehensive income items that will not be transferred to profit or loss | | | | | |
Re-measurement of defined benefit plan, net of tax | | | (2 | ) | | | (1 | ) | | | - | | | | - | |
Total other comprehensive loss for the year that will not be transferred to profit or loss, net of tax | | | (2 | ) | | | (1 | ) | | | - | | | | - | |
Total other comprehensive income (loss) for the year, net of tax | | | (1 | ) | | | - | | | | 1 | | | | - | |
Total comprehensive income for the year | | | 96 | | | | 150 | | | | 114 | | | | 33 | |
Total comprehensive income attributable to: | | | | | | | | | | | | | |
Owners of the Company | | | 94 | | | | 148 | | | | 113 | | | | 33 | |
Non-controlling interests | | | 2 | | | | 2 | | | | 1 | | | | - | |
Total comprehensive income for the year | | | 96 | | | | 150 | | | | 114 | | | | 33 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | | | | Convenience | |
| | | | | | | | | | | | | | translation into US | |
| | | | | | | | | | | | | | dollar (Note 2D) | |
| | | | | Year ended | | | Year ended | | | Year ended | | | Year ended | |
| | | | | December 31, | | | December 31, | | | December 31, | | | December 31, | |
| | | | | 2017 | | | 2018 | | | 2019* |
| | 2019* |
|
| | Note | | | NIS millions | | | NIS millions | | | NIS millions | | | US$ millions | |
| | | | | | | | | | | | | | | | | |
Revenues | | | 24 | | | | 3,871 | | | | 3,688 | | | | 3,708 | | | | 1,073 | |
Cost of revenues | | | 25 | | | | (2,680 | ) | | | (2,661 | ) | | | (2,725 | ) | | | (788 | ) |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | | | | | 1,191 | | | | 1,027 | | | | 983 | | | | 285 | |
| | | | | | | | | | | | | | | | | | | | |
Selling and marketing expenses | | | 26 | | | | (479 | ) | | | (567 | ) | | | (610 | ) | | | (177 | ) |
General and administrative expenses | | | 27 | | | | (426 | ) | | | (360 | ) | | | (329 | ) | | | (95 | ) |
Other income (expenses), net | | | 28 | | | | 42 | ** | | | 1 | ** | | | (20 | ) | | | (6 | ) |
| | | | | | | | | | | | | | | | | | | | |
Operating profit | | | | | | | 328 | | | | 101 | | | | 24 | | | | 7 | |
| | | | | | | | | | | | | | | | | | | | |
Financing income | | | | | | | 21 | ** | | | 19 | ** | | | 49 | | | | 14 | |
Financing expenses | | | | | | | (196 | ) | | | (190 | ) | | | (193 | ) | | | (56 | ) |
Financing expenses, net | | | 29 | | | | (175 | ) | | | (171 | ) | | | (144 | ) | | | (42 | ) |
| | | | | | | | | | | | | | | | | | | | |
Share in losses of equity accounted investees | | | | - | | | | - | | | | (10 | ) | | | (3 | ) |
| | | | | | | | | | | | | | | | | | | | |
Profit (loss) before taxes on income | | | | 153 | | | | (70 | ) | | | (130 | ) | | | (38 | ) |
| | | | | | | | | | | | | | | | | | | | |
Tax benefit (Taxes on income) | | | 30 | | | | (40 | ) | | | 6 | | | | 23 | | | | 7 | |
Profit (loss) for the year | | | | | | | 113 | | | | (64 | ) | | | (107 | ) | | | (31 | ) |
Attributable to: | | | | | | | | | | | | | | | | | | | | |
Owners of the Company | | | | | | | 112 | | | | (62 | ) | | | (107 | ) | | | (31 | ) |
Non-controlling interests | | | | | | | 1 | | | | (2 | ) | | | - | | | | - | |
Profit (loss) for the year | | | | | | | 113 | | | | (64 | ) | | | (107 | ) | | | (31 | ) |
| | | | | | | | | | | | | | | | | | | | |
Earnings (loss) per share | | | 21 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Basic earnings (loss) per share (in NIS) | | | | 1.11 | | | | (0.58 | ) | | | (0.90 | ) | | | (0.26 | ) |
| | | | | | | | | | | | | | | | | | | | |
Diluted earnings (loss) per share (in NIS) | | | | 1.10 | | | | (0.58 | ) | | | (0.90 | ) | | | (0.26 | ) |
| | | | | | | | | | | | | | | | | | | | |
Weighted-average number of shares used in the calculation of basic earnings (loss) per share (in shares) | | | | 100,654,935 | | | | 107,499,543 | | | | 118,376,455 | | | | 118,376,455 | |
| | | | | | | | | | | | | | | | | | | | |
Weighted-average number of shares used in the calculation of diluted earnings (loss) per share (in shares) | | | | 100,889,661 | | | | 107,499,543 | | | | 118,376,455 | | | | 118,376,455 | |
| | | | | | | | | | | | | | | | | | | | |
* See Note 2(F) regarding initial application of IFRS 16, Leases. | | | | | |
** Reclassified – see Note 2(F) regarding voluntary change in accounting policy | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | Convenience | |
| | | | | | | | | | | translation into US | |
| | | | | | | | | | | dollar (Note 2D) | |
| | Year ended | | | Year ended | | | Year ended | | | Year ended | |
| | December 31, | | | December 31, | | | December 31, | | | December 31, | |
| | 2017 | | | 2018 | | | 2019 | | | 2019 | |
| | NIS millions | | | NIS millions | | | NIS millions | | | US$ millions | |
| | | | | | | | | | | | |
Profit (loss) for the year | | | 113 | | | | (64 | ) | | | (107 | )* | | | (31 | )* |
Other comprehensive income items that after initial recognition in comprehensive income were or will be transferred to profit or loss | | | | | | | | | | | | | | | | |
Changes in fair value of cash flow hedges transferred to profit or loss, net of tax | | | 1 | | | | - | | | | - | | | | - | |
Total other comprehensive income for the year that after initial recognition in comprehensive income was or will be transferred to profit or loss, net of tax | | | 1 | | | | - | | | | - | | | | - | |
Other comprehensive income items that will not be transferred to profit or loss | | | | | |
Re-measurement of defined benefit plan, net of tax | | | - | | | | (1 | ) | | | (4 | ) | | | (1 | ) |
Total other comprehensive loss for the year that will not be transferred to profit or loss, net of tax | | | - | | | | (1 | ) | | | (4 | ) | | | (1 | ) |
Total other comprehensive income (loss) for the year, net of tax | | | 1 | | | | (1 | ) | | | (4 | ) | | | (1 | ) |
Total comprehensive income (loss) for the year | | | 114 | | | | (65 | ) | | | (111 | ) | | | (32 | ) |
Total comprehensive income (loss) attributable to: | | | | | | | | | | | | | |
Owners of the Company | | | 113 | | | | (63 | ) | | | (111 | ) | | | (32 | ) |
Non-controlling interests | | | 1 | | | | (2 | ) | | | - | | | | - | |
Total comprehensive income (loss) for the year | | | 114 | | | | (65 | ) | | | (111 | ) | | | (32 | ) |
| | | | | | | | | | | | | | | | |
* See Note 2(F) regarding initial application of IFRS 16, Leases. | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
* See Note 2(F) regarding initial application of IFRS 16, Leases.
The accompanying notes are an integral part of these consolidated financial statements.
Cellcom Israel Ltd. and Subsidiaries
Consolidated Statements of
Cash FlowsChanges in Equity
| | | | | | | | | | | Convenience | |
| | | | | | | | | | | translation into US | |
| | | | | | | | | | | dollar (Note 2D) | |
| | Year ended | | | Year ended | | | Year ended | | | Year ended | |
| | December 31, | | | December 31, | | | December 31, | | | December 31, | |
| | 2017 | | | 2018 | | | 2019* |
| | 2019* |
|
| | NIS millions | | | NIS millions | | | NIS millions | | | US$ millions | |
Cash flows from operating activities | | | | | | | | | | | | |
Profit (loss) for the year | | | 113 | | | | (64 | ) | | | (107 | ) | | | (31 | ) |
Adjustments for: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 555 | | | | 584 | | | | 898 | | | | 260 | |
Share based payments | | | 2 | | | | 2 | | | | 8 | | | | 2 | |
Gain on sale of property, plant and equipment, intangible assets and others | | | (1 | ) | | | - | | | | (8 | ) | | | (2 | ) |
Gain on sale of shares in a consolidated company | | | (10 | ) | | | - | | | | - | | | | - | |
Net change in fair value of investment property | | | - | | | | - | | | | 6 | | | | 2 | |
Income tax expense (tax benefit) | | | 40 | | | | (6 | ) | | | (23 | ) | | | (7 | ) |
Financing expenses, net | | | 175 | ** | | | 171 | ** | | | 144 | | | | 42 | |
Other expenses | | | - | | | | - | | | | 3 | | | | 1 | |
Share in losses of equity accounted investees | | | - | | | | - | | | | 10 | | | | 3 | |
| | | | | | | | | | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | |
Change in inventory | | | (6 | ) | | | (24 | ) | | | 28 | | | | 8 | |
Change in trade receivables (including long-term amounts) | | | 101 | ** | | | 166 | ** | | | 80 | | | | 23 | |
Change in other receivables (including long-term amounts) | | | (191 | ) | | | (21 | ) | | | 13 | | | | 4 | |
Change in trade payables, accrued expenses and provisions | | | (27 | ) | | | (26 | ) | | | (27 | ) | | | (8 | ) |
Change in other liabilities (including long-term amounts) | | | 28 | | | | 11 | | | | 23 | | | | 6 | |
Payments for derivative hedging contracts, net | | | (3 | ) | | | - | | | | (10 | ) | | | (3 | ) |
Income tax paid | | | (44 | ) | | | (23 | ) | | | (12 | ) | | | (4 | ) |
Income tax received | | | 42 | | | | - | | | | 10 | | | | 3 | |
Net cash from operating activities | | | 774 | | | | 770 | | | | 1,036 | | | | 299 | |
| | | | | | | | | | | | | | | | |
Cash flows used in investing activities | | | | | | | | | | | | | |
Acquisition of property, plant, and equipment | | | (346 | ) | | | (356 | ) | | | (324 | ) | | | (94 | ) |
Acquisition of intangible assets and others | | | (237 | ) | | | (237 | ) | | | (233 | ) | | | (67 | ) |
Acquisition of equity accounted investee | | | - | | | | - | | | | (16 | ) | | | (5 | ) |
Change in current investments, net | | | (77 | ) | | | (56 | ) | | | (49 | ) | | | (14 | ) |
Receipts from other derivative contracts, net | | | - | | | | 3 | | | | 9 | | | | 3 | |
Proceeds from sale of property, plant and equipment, intangible assets and others | | | 1 | | | | 1 | | | | 181 | | | | 52 | |
Grant of long-term loans to equity accounted investees | | | - | | | | - | | | | (141 | ) | | | (41 | ) |
Interest received | | | 12 | | | | 14 | | | | 13 | | | | 4 | |
Proceeds from sale of shares in a consolidated company, net of cash disposed | | | 3 | | | | - | | | | - | | | | - | |
Net cash used in investing activities | | | (644 | ) | | | (631 | ) | | | (560 | ) | | | (162 | ) |
* See Note 2(F) regarding initial application of IFRS 16, Leases.
** Reclassified – see Note 2(F) regarding voluntary change in accounting policy.
| | Attributable to owners of the Company | | | Non-controlling interests | | | Total equity | | | Convenience translation into US dollar (Note 2D) | |
| | Share capital | | | Capital reserve | | | Retained earnings | | | Total | | | | | | | | | | |
| NIS millions | | | US$ millions | |
| | | | | | | | | | | | | | | | | | | | | |
Balance as of January 1, 2015 | | | 1 | | | | (3 | ) | | | 1,078 | | | | 1,076 | | | | 16 | | | | 1,092 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income for the year | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the year | | | - | | | | - | | | | 95 | | | | 95 | | | | 2 | | | | 97 | | | | |
Other comprehensive income (loss) for the year, net of tax | | | - | | | | 1 | | | | (2 | ) | | | (1 | ) | | | - | | | | (1 | ) | | | |
Transactions with owners, recognized directly in equity | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share based payments | | | - | | | | - | | | | 3 | | | | 3 | | | | - | | | | 3 | | | | |
Dividend to non-controlling intererst in a subsidiary | | | - | | | | - | | | | - | | | | - | | | | (1 | ) | | | (1 | ) | | | |
Options written over non-controlling interests in a consolidated company | | | - | | | | - | | | | (4 | ) | | | (4 | ) | | | (1 | ) | | | (5 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2015 | | | 1 | | | | (2 | ) | | | 1,170 | | | | 1,169 | | | | 16 | | | | 1,185 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income for the year | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the year | | | - | | | | - | | | | 148 | | | | 148 | | | | 2 | | | | 150 | | | | |
Other comprehensive income (loss) for the year, net of tax | | | - | | | | 1 | | | | (1 | ) | | | - | | | | - | | | | - | | | | |
Transactions with owners, recognized directly in equity | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share based payments | | | - | | | | - | | | | 5 | | | | 5 | | | | 1 | | | | 6 | | | | |
Dividend to non-controlling intererst in a subsidiary | | | - | | | | - | | | | - | | | | - | | | | (1 | ) | | | (1 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2016 | | �� | 1 | | | | (1 | ) | | | 1,322 | | | | 1,322 | | | | 18 | | | | 1,340 | | | | 386 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income for the year | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the year | | | - | | | | - | | | | 112 | | | | 112 | | | | 1 | | | | 113 | | | | 33 | |
Other comprehensive income for the year, net of tax | | | - | | | | 1 | | | | - | | | | 1 | | | | - | | | | 1 | | | | - | |
Transactions with owners, recognized directly in equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share based payments | | | - | | | | - | | | | 2 | | | | 2 | | | | - | | | | 2 | | | | - | |
Derecognition of non-controlling interests due to loss of control in a consolidated company (see Note 7B) | | | - | | | | - | | | | - | | | | - | | | | (15 | ) | | | (15 | ) | | | (4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2017 | | | 1 | | | | - | | | | 1,436 | | | | 1,437 | | | | 4 | | | | 1,441 | | | | 415 | |
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
* See Note 2F regarding the early adoption of IFRS 15, Revenue from Contracts with Customers.
The accompanying notes are an integral part of these consolidated financial statements.
Note 1 - Reporting Entity
A. | Cellcom Israel Ltd. ("the Company") is a company incorporated and domiciled in Israel and its official address is 10 Hagavish Street, Netanya 4250708, Israel. The consolidated financial statements of the Group as at December 31, 2017Cellcom Israel Ltd. ("the Company") is a company incorporated and domiciled in Israel and its official address is 10 Hagavish Street, Netanya 4250708, Israel. The consolidated financial statements of the Group as at December 31, 2019, comprise the Company and its subsidiaries (together referred to as the "Group") and the Group’s holdings in included entities. The Group operates and maintains a cellular mobile telephone system in Israel and provides cellular telecommunications services, landline telephony services, internet services, international calls services, television over the internet services and transmission services. The Company is controlled by Koor Industries Ltd. (directly and through agreements with other shareholders of the Company), a wholly owned subsidiary of Discount Investment Corporation Ltd. ("DIC"), which is controlled by companies controlled by Mr. Eduardo Elsztain. The Company's shares are traded on the Tel Aviv Stock Exchange (TASE) and on the New York Stock Exchange (NYSE). The Group operates and maintains a cellular mobile telephone system in Israel and provides cellular and fixed line telecommunications services, internet services, international calls services, television over the internet services (known as Over the Top TV services, or OTT TV services) and transmission services. The Company is controlled by Koor Industries Ltd., a wholly owned subsidiary of Discount Investment Corporation Ltd. ("DIC"), which is controlled by companies controlled by Mr. Eduardo Elsztain. |
B. | Material event in the reporting period - Change in estimate |
In the reporting period, the Company has changed the expected useful life of certain fixed and intangible asset items. For further information, see Note 2E, regarding the Basis of Preparation of the Financial Statements.
Note 2 - Basis of Preparation of the Financial Statements
A. | Statement of compliance |
The consolidated financial statements have been prepared by the Group in accordance with International Financial Reporting Standards (IFRSs), as issued by the International Accounting Standards Board (IASB).
These consolidated financial statements were approved by the Company's Board of Directors on March 25, 2018.23, 2020.
B. | Functional and presentation currency |
These consolidated financial statements are presented in New Israeli Shekels ("NIS"), which is the Group's functional currency, and are rounded to the nearest million unless otherwise indicated. NIS is the currency that represents the primary economic environment in which the Group operates.
These consolidated financial statements have been prepared on the basis of historical cost except for the following assets and liabilities: current investments and derivative financial instruments that are measured at fair value through profit or loss, investment property that are measured at fair value, deferred tax assets and liabilities, provisions, assets and liabilities in respect of employee benefits and provisions.Investments in associates and joint ventures.
For further information regarding the measurement of these assets and liabilities see Note 3, regarding Significant Accounting Policies.
.
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Basis of Preparation of the Financial Statements (cont'd)
D. | Convenience translation into U.S. dollars ("dollars" or "$") |
For the convenience of the reader, the reported NIS figures as of December 31, 20172019 and for the year then ended, have been presented in dollars, translated at the representative rate of exchange as of December 31, 20172019 (NIS 3.4673.456 = US$ 1.00). The dollar amounts presented in these financial statements should not be construed as representing amounts that are receivable or payable in dollars or convertible into dollars, unless otherwise indicated.
Note 2 - Basis of Preparation of the Financial Statements (cont'd)
E. | Use of estimates and judgments |
UseThe preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. The preparation of accounting estimates used in the preparation of the Group’s financial statements requires that management of the Company makes assumptions regarding circumstances and events that involve considerable uncertainty. Company Management prepares the estimates on the basis of past experience, various facts, external circumstances, and reasonable assumptions according to the pertinent circumstances of each estimate. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Information about estimates, uncertainty and critical judgments about provisions and contingent liabilities, is described in Notes 1416 and 31.32. In addition, information about critical estimates, made while applying accounting policies and that have the most significant effect on the consolidated financial statements are described below:
Impairment testing of trade and other receivables
The financial statements include an impairment loss in trade and other receivables which properly reflect, according to management's estimation, the potential loss from non-recoverable amounts. The Group provides for impairment loss based on its experience in collecting past debts, as well as on information on specific debtors. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. See also Note 21.23.
Impairment testing and useful life of assets
The Group regularly reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. See also Note 3H.3(I).
The useful economic life of the Group's assets is determined by management at the time the asset is acquired and regularly reviewed for appropriateness. The Group defines useful life of its assets in terms of the assets' expected utility to the Group. This judgment is based on the experience of the Group with similar assets. The useful economic life of licenses is based on the duration of the license agreement.agreement period. The useful economic life of capitalized customer acquisition costs is based on the expected service period from these contracts. See also Notes 3D3(D) and 3F.3(F).
Impairment testing of goodwill
The Group reviews a cash generating unit containing goodwill for the purpose of testing it for impairment at least once a year. Determining the recoverable amount requires management to make an estimate of the projected future cash flows from the continuing use of the cash-generating unit and also to choose a suitable discount rate for those cash flows which represents market estimates as for the time value of the money and the specific risks that are related to the cash-generating unit. Determining the estimates of the future cash flows is based on management past experience and management best estimates as for the economic conditions that will exist over the rest of the remaining useful life of the cash generating unit. Further details are given in Note 3H.3(I).
Note 2 - Basis of Preparation of the Financial Statements (cont'd)
E. Use of estimates and judgments (cont'd)
Legal claims
In estimating the likelihood of outcome of legal claims filed against the Company and its investees, the Group takes into consideration the opinion of its legal counsels and their best professional judgment, 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. See also Note 31.32.
Uncertain tax positions
When assessing amounts of current and deferred taxes, the Group takes into consideration the effect of the uncertainty that its tax positions will be accepted and the risk of the Groupit incurring any additional tax and interest expenses.
The Group is of the opinion that the cumulative tax liability is fair for all the years in respect of which final tax assessments have not yet been received, based on an analysis of a number of matters including interpretations of tax laws and the Group’s past experience. This assessment is based on estimates and assumptions that may also include assessments and exercising judgment regarding future events. It is possible that new information will become known in future periods that will require the Group to change its estimate regarding the tax liability that was recognized, and any such changes will be expensed immediately in that period. See also Note 28.30.
ChangeRecognition of deferred tax asset in estimatesrespect of tax losses
DuringThe Group assesses the year ended December 31, 2017 management has updated estimatesprobability that in the future there will be taxable profits against which carried forward losses can be utilized and accordingly the Group recognizes (or not recognizes) a deferred tax asset in respect of losses carried forward. In the absence of certainty for the existence of taxable income, deferred taxes are not recognized as follows:an asset in the carrying amount. The possible effects of this estimate is the recognition or cancellation of deferred tax assets in statement of income.
For information on losses for which a deferred tax asset was recognized, see Note 30 regarding taxes on income.
| 1. | Towards the end of the Company's 2G and 3G frequencies (the "Frequencies") original amortization period, the Company's annual depreciation committee examined the estimated useful life of the Frequencies. Based on Company's estimate, the Company will continue to use the Frequencies at least for the next 10 years. |
Determining the lease term and the discount rate of a lease liability
In order to determine the lease term, the Group takes into consideration the period over which the lease is non-cancellable, including renewal options that it is reasonably certain it will exercise and/or termination options that it is reasonably certain it will not exercise. In addition, The estimated useful lifeGroup discounts the lease payments using its incremental borrowing rate. The Possible effects of the Frequencies was determinedthis estimate is an increase or decrease in the past according to the period of the Company's cellular license (until 2022).right-of-use asset and lease liability and in depreciation and financing expenses in subsequent periods. See also Note 14.
According to applicable law, the Company's cellular license may be extended for additional 6-year periods, subject to the requirements set in the license. The Company estimates that based on its experience and acquaintance with the communications market in Israel, if current conditions continue, there is high probability that the license will be extended for an additional term of 6 years.
In light of the aforesaid, the estimated useful life of the Frequencies has been re-evaluated for the first time, for an additional period of ten years, starting from the beginning of the second quarter of 2017 and ending in 2028 (instead of 18-20 years ending in 2022, as originally estimated).
| 2. | In light of the accumulated experience in the Group's operation in connection with internet services and television over the internet services, the Company's annual depreciation committee examined the estimated useful life of certain fixed asset items that are used for these services. Following this examination, the estimated useful life of these items has been re-evaluated for the first time, starting from the beginning of the fourth quarter of 2017 to 3-6 years from their purchase date (instead of 2-3 years, as originally estimated). |
The effect of these changes on the consolidated financial statements, in current and future years is as follows:
| | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Subsequently | |
| | NIS millions | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Decrease (Increase) in depreciation expenses | | | 19 | | | | 33 | | | | 17 | | | | 5 | | | | 6 | | | | (80 | ) |
Note 2 - Basis of Preparation of the Financial Statements (cont'd)
F. | Changes in the accounting policies |
IFRS15, Revenue from Contracts with Customers
| 1. | Initial application of new standards, amendments to standards and interpretations |
As from January 1, 20172019 (hereinafter: “the date of initial application”) the Group early adoptedapplies International Financial Reporting Standard 15 (“IFRS 15”16, Leases (hereinafter: “IFRS 16” or “the standard”), which provides guidance on revenue recognition.replaced International Accounting Standard 17, Leases (hereinafter: "IAS 17" or "the previous standard").
The standard introducesmain effect of the standard’s application is reflected in annulment of the existing requirement from lessees to classify leases as operating (off-balance sheet) or finance leases and the presentation of a new five stepunified model for recognizing revenuelessees to account for all leases similarly to the accounting treatment of finance leases in the previous standard. Until the date of application, the Group classified most of the leases in which it is the lessee as operating leases, since it did not substantially bear all the risks and rewards from contracts with customers:the assets.
| 1. | Identifying the contract with the customer. |
| 2. | Identifying separate performance obligations in the contract. |
| 3. | Determining the transaction price. |
| 4. | Allocating the transaction price to separate performance obligations. |
| 5. | Recognizing revenue when the performance obligations are satisfied. |
In accordance with IFRS 16, for agreements in which the Group is the lessee, the Group recognizes a right-of-use asset and a lease liability at the inception of the lease contract for all the leases in which the Group has a right to control identified assets for a specified period of time, other than exceptions specified in the standard. Accordingly, the Group recognizes depreciation and amortization expenses in respect of a right-of-use asset, tests a right-of-use asset for impairment in accordance with IAS 36 and recognizes financing expenses on a lease liability. Therefore, as from the date of initial application, lease payments relating to assets leased under an operating lease, which were presented as part of expenses in the statement of income, are capitalized to assets and written down as depreciation and amortization expenses.
The Group elected to apply the standard was applied using the cumulative effect approach, as fromin which the Group recognized a lease liability at the initial implementation date according to the present value of application.
In respectthe remaining future lease payments capitalized at the incremental borrowing rate of contracts which have not been concluded untilthe lessee at that date, and concurrently recognized a right-of-use asset at the same amount of the liability, adjusted for any prepaid or accrued lease payments that recognized as an asset or liability before the date of transition, such changeinitial implementation. Therefore, application of the standard did not have a material impactan effect on the balance of retained earnings at the initial date of initial application.
In the frameworkFurthermore, as part of the initial application of the standard, the Group has chosen to apply the following exemptions:expedients:
| 1.(1) | Applicationretain the definition and/or assessment of whether an arrangement is a lease in accordance with current guidance with respect to agreements that exist at the date of initial implementation; |
(2) apply a single discount rate to a portfolio of leases with reasonably similar characteristics;
| (3) | exclude initial direct costs from measurement of the cumulative effect approach only for contracts not completedright-of-use asset at the transition date; anddate of initial application; |
| 2.(4) | Examininguse hindsight when determining the aggregate effect oflease term if the contract changes that occurredincludes an extension or termination option; |
| (5) | assess whether a contract is onerous in accordance with IAS 37 immediately before the date of initial application,implementation instead of examining each change separately.assessing impairment of right-of-use assets. |
The main impactIn measurement of the standard on the Group's financial statements is that customer acquisition costs are capitalized when it is expected thatlease liabilities, the Group will recover these costs, instead of recognizing these costs in profit or loss as incurred, asdiscounted lease payments using the incremental borrowing rate at January 1, 2019. The weighted average discount rate used to measure the lease liability was done prior to the adoption of the standard. Accordingly, incremental incentives and commissions paid to Group employees and resellers for securing contracts with customers, are recognized as an asset and are amortized to profit or loss, in accordance with the expected service period from these contracts (over a period of 2-3 years)3.0%. Such customer acquisition costs capitalization, had a material positive effect on the Group's results of operations for 2017, which is expected to continue in the coming years, and will be leveled off in later years.
In the statements of cash flows, customer acquisition costs paid are presented as part of cash flows used in investing activities and the amortization of capitalized customer acquisition costs, is presented under depreciation and amortization as part of cash flows from operating activities.
The Group applies the practical exemption specified in the standard and recognizes customer acquisition costs in profit or loss when the expected amortization period of these costs is one year or less.
Note 2 - Basis of Preparation of the Financial Statements (cont'd)
F. | Changes in the accounting policies (cont'd) |
IFRS15, Revenue from Contracts with Customers (cont'd)
| 1. | Initial application of new standards, amendments to standards and interpretations (cont'd) |
| A. | IFRS 16, Leases (cont'd) |
The tables below present the effects ondifference between the Group's consolidated statementscontractual commitments in respect of financial positionthe minimum contractual lease fees in the amount of NIS 741 million as at December 31, 2017 and on the Group's consolidated statementsreported in Note 35 "Operating Leases" of income for the year ended at December 31, 2017, assuming2018 to the lease liabilities recognized as of the initial implementation date of the Standard in the amount of NIS 830 million is mainly due to extension options of the lease period which are not included in applying IFRS 16 which was partially offset by a decrease resulted from the discounted lease payments according to IFRS 16.
Impact of the application of IFRS 16 in the reporting period
As a result of applying IFRS 16, in relation to the leases that were classified as operating leases according to IAS 17, the previous revenue recognition policy would have continued in that period:
The effect on the consolidated statements of financial positionGroup recognized right-of-use assets, net and Investment property as at December 31, 2017:2019 in the amount of NIS 745 million and lease liabilities as at December 31, 2019 in the amount of NIS 759 million.
| | According to the previous policy | | | Effect of the standard* | | | According to IFRS 15 | |
| | | | | | |
| | | | | | |
| | NIS millions | |
Intangible assets and others, net | | | 1,167 | | | | 93 | | | | 1,260 | |
Current tax assets, net | | | 22 | | | | (22 | ) | | | - | |
Retained earnings | | | 1,365 | | | | 71 | | | | 1,436 | |
The effect onFurthermore, instead of recognizing lease expenses in the consolidated statementsamount of income forNIS 275 million in relation to those leases, during the yearperiod ended December 31, 2017:2019 the Group recognized additional depreciation expenses and change in fair value of investment property in the amount of NIS 258 million, and additional financing expenses in the amount of NIS 24 million. For the impact of applying IFRS 16 on the Adjusted EBITDA, see note 6, regarding Operating Segments.
The main changes in accounting policies following the application of IFRS 16:
| | According to the previous policy | | | Effect of the standard* | | | According to IFRS 15 | |
| | | | | | |
| | | | | | |
| | NIS millions | |
| | | | | | | | | |
Revenues | | | 3,871 | | | | - | | | | 3,871 | |
Cost of revenues | | | (2,680 | ) | | | - | | | | (2,680 | ) |
| | | | | | | | | | | | |
Gross profit | | | 1,191 | | | | - | | | | 1,191 | |
| | | | | | | | | | | | |
Selling and marketing expenses | | | (572 | ) | | | 93 | | | | (479 | ) |
General and administrative expenses | | | (426 | ) | | | - | | | | (426 | ) |
Other income, net | | | 11 | | | | - | | | | 11 | |
| | | | | | | | | | | | |
Operating profit | | | 204 | | | | 93 | | | | 297 | |
| | | | | | | | | | | | |
Financing income | | | 52 | | | | - | | | | 52 | |
Financing expenses | | | (196 | ) | | | - | | | | (196 | ) |
Financing expenses, net | | | (144 | ) | | | - | | | | (144 | ) |
| | | | | | | | | | | | |
Profit before taxes on income | | | 60 | | | | 93 | | | | 153 | |
| | | | | | | | | | | | |
Taxes on income | | | (18 | ) | | | (22 | ) | | | (40 | ) |
Profit for the period | | | 42 | | | | 71 | | | | 113 | |
Attributable to: | | | | | | | | | | | | |
Owners of the Company | | | 41 | | | | 71 | | | | 112 | |
Non-controlling interests | | | 1 | | | | - | | | | 1 | |
Profit for the period | | | 42 | | | | 71 | | | | 113 | |
| | | | | | | | | | | | |
Earnings per share | | | | | | | | | | | | |
Basic earnings per share (in NIS) | | | 0.40 | | | | 0.71 | | | | 1.11 | |
| | | | | | | | | | | | |
Diluted earnings per share (in NIS) | | | 0.40 | | | | 0.70 | | | | 1.10 | |
(1) Determining whether an arrangement contains a lease
On the inception date of the lease, the Group determines whether the arrangement is a lease or contains a lease, while examining if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In its assessment of whether an arrangement conveys the right to control the use of an identified asset, the Group assesses whether it has the following two rights throughout the lease term:
(a) The right to obtain substantially all the economic benefits from use of the identified asset; and
(b) The right to direct the identified asset’s use.
For cell and switches sites lease contracts that contain non-lease components, such as services or maintenance, that are related to a lease component, the Group elected to account for the contract as a single lease component without separating the components.
For office buildings, warehouses, service centers, retail stores and motor vehicles lease contracts that contain non-lease components, such as services or maintenance, that are related to a lease component, the Group elected to separate the components and account the lease component separately.
Note 2 - Basis of Preparation of the Financial Statements (cont'd)
G.F. | Changes in the accounting policies (cont'd) |
IFRS15, Revenue from Contracts
| 1. | Initial application of new standards, amendments to standards and interpretations (cont'd) |
| A. | IFRS 16, Leases (cont'd) |
(2) Leased assets and lease liabilities
Upon initial recognition, the Group recognizes a liability at the present value of the balance of future lease payments, and concurrently recognizes a right-of-use asset at the same amount of the lease liability, adjusted for any prepaid or accrued lease payments.
Since the interest rate implicit in the Group's leases is not readily determinable, the incremental borrowing rate of the lessee is used.
Subsequent to initial recognition, the right-of-use asset is accounted for using the cost model, and depreciated over the shorter of the lease term or useful life of the asset.
(3) The lease term
The lease term is the non-cancellable period of the lease plus periods covered by an extension or termination option if it is reasonably certain that the lessee will or will not exercise the option, respectively.
(4) Depreciation of right-of-use asset
After lease commencement, a right-of-use asset is measured on a cost basis less accumulated depreciation and accumulated impairment losses and is adjusted for re-measurements of the lease liability. Depreciation is calculated on a straight-line basis over the useful life or contractual lease period, whichever earlier, as follows:
● | Cell and switches sites | 4 years |
● | Office buildings, warehouses, service centers and retail stores | 3 years |
● | Motor vehicles | 2 years |
(5) Reassessment of lease liability
Upon the occurrence of a significant event or a significant change in circumstances that is under the control of the Group and had an effect on the decision whether it is reasonably certain that the Group will exercise an option, which was not included before in the lease term, or will not exercise an option, which was previously included in the lease term, the Group re-measures the lease liability according to the revised leased payments using a new discount rate. The change in the carrying amount of the liability is recognized against the right-of-use asset, or recognized in profit or loss if the carrying amount of the right-of-use asset was reduced to zero.
(6) Lease modifications
When a lease modification increases the scope of the lease by adding a right to use one or more underlying assets, and the consideration for the lease increased by an amount commensurate with Customersthe stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the contract’s circumstances, the Group accounts for the modification as a separate lease.
In all other cases, on the initial date of the lease modification, the Group allocates the consideration in the modified contract to the contract components, determines the revised lease term and measures the lease liability by discounting the revised lease payments using a revised discount rate.
Note 2 - Basis of Preparation of the Financial Statements (cont'd)
F. | Changes in the accounting policies (cont'd) |
| 1. | Initial application of new standards, amendments to standards and interpretations (cont'd) |
| A. | IFRS 16, Leases (cont'd) |
(6) Lease modifications (cont'd)
For lease modifications that decrease the scope of the lease, the Group recognizes a decrease in the carrying amount of the right-of-use asset in order to reflect the partial or full cancellation of the lease, and recognizes in profit or loss a profit (or loss) that equals the difference between the decrease in the right-of-use asset and re-measurement of the lease liability.
For other lease modifications, the Group re-measures the lease liability against the right-of-use asset.
(7) Subleases
In leases in which the Group subleases the underlying asset, the Group examines whether the sublease is a finance lease or operating lease with respect to the right-of-use received from the head lease. The Group examined the subleases existing on the date of initial application based on the remaining contractual terms at that date.
The table below presents the effects of the items affected by the initial application on the statement of financial position as at January 1, 2019:
| | According to IAS 17
| | | The change
| | | According to IAS 16 | |
| | NIS millions | |
| | | | | | | | | |
Trade and other receivables (including long-term amounts)
| | | 2,088 | | | | 2
| | | | 2,090
| |
Right-of-use assets and Investment property
| | | - | | | | 826
| | | | 826
| |
Lease liabilities
| | | - | | | | 830
| | | | 830
| |
Trade payables and accrued expenses
| | | 696 | | | | (2 | ) | | | 694
| |
Note 2 - Basis of Preparation of the Financial Statements (cont'd)
F. | Changes in the accounting policies (cont'd) |
| 1. | Initial application of new standards, amendments to standards and interpretations (cont'd) |
| B. | IFRS 9 (2014), Financial Instruments |
As from January 1, 2018 the Group applies IFRS 9, Financial Instruments (in this item: “the standard” or “IFRS 9”), which replaces IAS 39, Financial Instruments: Recognition and Measurement (in this item “IAS 39”).
Additionally, following the application of IFRS 9, the Group has adopted consequential amendments to IFRS 7, Financial Instruments: Disclosures, and to IAS 1, Presentation of Financial Statements.
The Group has chosen to apply the standard and the amendment to the standard as from January 1, 2018 (in this item: “date of initial application”) without amendment of the comparative data, with an adjustment to the balance of retained earnings and other components of equity as at the date of initial application.
The table hereunder summarizes the effects of the transition to IFRS 9 on the opening balances of assets and liabilities and retained earnings, including the tax effect:
| | According to the previous policy | | | | | | | |
| | | |
Trade and other receivables (including long-term amounts) (1) | | | 2,175 | | | | (12 | ) | | | 2,163 | |
Debentures, including current maturities (2) | | | (2,900 | ) | | | (34 | ) | | | (2,934 | ) |
Deferred tax liabilities | | | (131 | ) | | | 10 | | | | (121 | ) |
Retained earnings | | | (1,436 | ) | | | 36 | | | | (1,400 | ) |
| 1) | The standard includes a new ‘expected credit loss’ model, which following its application, the amount of the provision for impairment of all the financial assets decreased by an amount of NIS 12 million as at January 1, 2018. |
| 2) | According to the standard, in cases that a change in terms or exchange of financial liabilities is immaterial and does not lead to de-recognition, the new cash flows should be discounted at the original effective interest rate, with the difference between the present value of the financial liability having the new terms and the present value of the original financial liability being recognized in profit or loss. As a result of applying the standard, the carrying amount of a Series of debentures whose terms were changed and for which a new effective interest rate was calculated at the time of the change in terms according to IAS 39, was recalculated from the date of the change in terms using the original effective interest rate. Accordingly, the balance of the liability decreased by the amount of NIS 34 million. |
Note 2 - Basis of Preparation of the Financial Statements (cont'd)
F. | Changes in the accounting policies (cont'd) |
| 1. | Initial application of new standards, amendments to standards and interpretations (cont'd) |
| C. | Amendment to IAS 28, Investments in Associates and Joint Venture: Long-Term Interests in Associates or Joint Ventures |
The Amendment clarifies that for long-term interests that form part of the entity’s net investment in the associate or joint venture, the entity shall first apply the requirements of IFRS 9 and then apply the instructions of IAS 28 with respect to the remainder of those interests, so that the long-term interests are in the scope of both IFRS 9 and IAS 28.
The application of the amendment did not have a material effect on the consolidatedGroup's financial statements of cash flow for the year ended December 31, 2017:.
| | Year ended December 31, 2017 | |
| | According to the previous policy | | | Effect of the standard* | | | According to IFRS 15 | |
| | NIS millions | |
| | | | | | | | | |
Net cash from operating activities | | | 667 | | | | 107 | | | | 774 | |
Net cash used in investing activities | | | (537 | ) | | | (107 | ) | | | (644 | ) |
| D. | IFRIC 23, Uncertainty Over Income Tax Treatments |
*IFRIC 23 clarifies how to apply the recognition and measurement requirements of IAS 12 for uncertainties in income taxes. According to IFRIC 23, when determining the standard, incremental costs of obtaining a contract with a customer are recognized as an assettaxable profit (loss), tax bases, unused tax losses, unused tax credits and tax rates when there is uncertainty over income tax treatments, the entity should assess whether it is probable that the Grouptax authority will recover those costs. Accordingly, incremental incentives and commissions paidaccept its tax position. Insofar as it is probable that the tax authority will accept the entity’s tax position, the entity will recognize the tax effects on the financial statements according to Group employees and resellers for securing contracts with customers, are recognized as an asset and amortized to profit or loss in accordance withthat tax position. On the expected service period from these contracts.
Amendment to IAS 7, Statement of Cash Flows
According toother hand, if it is not probable that the Amendment, ittax authority will accept the entity’s tax position, the entity is required to reflect the uncertainty in its accounts by using one of the following methods: the most likely outcome or the expected value. IFRIC 23 clarifies that when the entity examines whether or not it is probable that the tax authority will accept the entity’s position, it is assumed that the tax authority with the right to examine any amounts reported to it will examine those amounts and that it has full knowledge of all relevant information when doing so. Furthermore, according to IFRIC 23 an entity has to consider changes in circumstances and new information that may change its assessment. IFRIC 23 also emphasizes the need to provide disclosures that will enableof the usersjudgments and assumptions made by the entity regarding uncertain tax positions.
The application of IFRIC 23 did not have a material effect on the financial statements.
Note 2 - Basis of Preparation of the Financial Statements (cont'd)
F. | Changes in the accounting policies (cont'd) |
| 2. | Voluntary change in accounting policy |
During the period, management has updated the accounting policy about the effect of long-term credit arrangements, on the financial performance of the Group as follows:
New accounting policy
Revenues from long-term credit arrangements (more than 12 monthly payments) are recognized on the basis of the present value of future cash flows, discounted according to market interest rates at the time of the transaction. The difference between the original credit and its present value is recorded as other income over the credit period.
Previous accounting policy
Revenues from long-term credit arrangements (more than 12 monthly payments) are recognized on the basis of the present value of future cash flows, discounted according to market interest rates at the time of the transaction. The difference between the original credit and its present value is recorded as interest income over the credit period.
The voluntary change in accounting policy is intended to provide shareholders with a better expression of its business activities, to enhance the comparability of its financial statements to evaluate changesits peers and to prepare the consolidated financial statements in liabilities arising from financing activities, including both changes arising from cash flowa more reliable and non-cash changes. These disclosures are to be provided with respect to the following changes in liabilities arising from financing activities:more relevant way.
| · | changes from financing cash flows; |
The application of the change in the accounting policy was apply retrospectively. Retrospective application is applied a new accounting policy to transactions as if that policy had always been applied.
The effect of this change on the condensed consolidated interim financial statements in previous periods is as follows:
| | Year ended December 31, 2017 | | | Year ended December 31, 2018 | |
| | NIS millions | | | NIS millions | |
| | | | | | |
Increase in other income | | | 31 | | | | 27 | |
Decrease in financing income | | | (31 | ) | | | (27 | ) |
| · | changes arising from obtaining or losing control of subsidiaries or other businesses; |
| · | the effect of changes in foreign exchange rates; |
| · | changes in fair values; and other changes.
|
The Amendment is applicable prospectively. The new disclosure requirements were included in Note 17 regarding Debentures and Long-term Loans from Financial Institutions.
H.G. | Exchange rates and known Consumer Price Indexes are as follows: |
| | Exchange rates of US$ | | | Consumer Price Index (points)* | |
As of December 31, 2017 | | | 3.467 | | | | 221.35 | |
As of December 31, 2016 | | | 3.845 | | | | 220.68 | |
As of December 31, 2015 | | | 3.902 | | | | 221.35 | |
| | | | | | | | |
Change during the year: | | | | | | | | |
| | | | | | | | |
Year ended December 31, 2017 | | | (9.83 | )% | | | 0.30 | % |
Year ended December 31, 2016 | | | (1.46 | )% | | | (0.30 | )% |
Year ended December 31, 2015 | | | 0.33 | % | | | (0.90 | )% |
| | Exchange rates | | | Consumer Price | |
| | | | | | |
As of December 31, 2019 | | | 3.456 | | | | 224.67 | |
As of December 31, 2018 | | | 3.748 | | | | 224.00 | |
As of December 31, 2017 | | | 3.467 | | | | 221.35 | |
| | | | | | | | |
Change during the year: | | | | | | | | |
| | | | | | | | |
Year ended December 31, 2019 | | | (7.79 | )% | | | 0.30 | % |
Year ended December 31, 2018 | | | 8.10 | % | | | 1.20 | % |
Year ended December 31, 2017 | | | (9.83 | )% | | | 0.30 | % |
*According to 1993 base index.
Note 3 - Significant Accounting Policies
The accounting policies set out below have been applied consistently by the Group for all periods presented in these consolidated financial statements, except as described in changes in the accounting policies section in Note 2, regarding Basis of Preparation of the Financial Statements.
Subsidiaries are entities controlled directly or indirectly by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control is lost. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group.
| 2. | Non-controlling interests |
Non-controlling interests comprise the equity of a subsidiary that cannot be attributed, directly or indirectly, to the parent company.
Measurement of non-controlling interests on the date of the business combination
Non-controlling interests that are instruments that give rise to a present ownership interest and entitle the holder to a share of net assets in the event of liquidation (for example: ordinary shares), are measured at the date of the business combination at either fair value, or at their proportionate interest in the identifiable assets and liabilities of the acquiree, on a transaction-by-transaction basis. This accounting policy choice does not apply to other instruments that meet the definition of non-controlling interests (for example: options to ordinary shares). Such instruments will be measured at fair value or in accordance with other relevant IFRSs.
Allocation of profit or loss and other comprehensive income to the shareholders
Profit or loss and each component of other comprehensive income are attributableallocated to the owners of the parent companyCompany and tothe non-controlling interests. Total profit or loss is allocated to the owners of the Company and the non-controlling interests even if the result is a negative balance of non-controlling interests.
Transactions with non-controlling interests, while retaining control
Transactions with non-controlling interests while retaining control are accounted for as equity transactions.
Issuance of put option to non-controlling interests
A put option issued by the Group to non-controlling interests that is settled in cash or another financial instrument is recognized as a liability at the present value of the exercise price. In subsequent periods, changes in the value of the liability in respect of put options by the Group to non-controlling interests are recognized in profit or loss according to the effective interest method.
The Group’s share of a subsidiary’s profits includes the share of the non-controlling interests to which the Group issued a put option.
Note 3 - Significant Accounting Policies (cont'd)
A. | Basis of consolidation (cont'd) |
Upon the loss of control, the Group derecognizes the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. The difference between the sum of the proceeds and fair value of the retained interest, and the derecognized balances is recognized in profit or loss under other income or other expenses.
| 4. | Investment in associates and joint ventures (equity accounted investees) |
Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. There is a rebuttable presumption that significant influence exists when the Group holds between 20% and 50% of another entity. In assessing significant influence, potential voting rights that are currently exercisable or convertible into shares of the investee are taken into account.
Joint ventures are joint arrangements in which the Group has rights to the net assets of the arrangement.
Associates and joint ventures are accounted for using the equity method and are recognized initially at cost. The cost of the investment includes transaction costs. Transaction costs that are directly attributable to an expected acquisition of an associate or joint venture are recognized as an asset as part of the item of deferred expenses in the statement of financial position. These costs are added to the cost of the investment on the acquisition date.
The consolidated financial statements include the Group’s share of the income and expenses in profit or loss of equity accounted investees, after adjustments to align the accounting policies with those of the Group, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases.
Long-term interests that are in substance form part of the net investment, such as long-term loans that their repayment is not expected and is unlikely to occur in the foreseeable future, are first accounted for in accordance with the instructions of IFRS 9 and then apply the instructions of IAS 28 with respect to the remainder of those interests, so that the long-term interests are in the scope of both IFRS 9 and IAS 28.
| 5. | Transactions eliminated on consolidation |
Intra-group balances and transactions in the Group, and any unrealized income and expenses arising from intra-group transactions, were eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with associates and joint ventures are eliminated against the investment to the extent of the Group’s interest in these investments.
Note 3 - Significant Accounting Policies (cont'd)
B. | Foreign currency transactions |
Transactions in foreign currencies are translated to NIS at the prevailing foreign exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies as of the reporting date are translated to NIS at the prevailing foreign exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured in terms of historical cost, are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to NIS at the exchange rate at the date that the fair value was determined. Foreign exchange differences arising on translation are recognized in profit and loss.
(1) Non-derivative financial assets – policy applicable as from January 1, 2018
Initial recognition and measurement of financial assets
The Group initially recognizes trade receivables and debt instruments issued on the date that they are created. All other financial assets are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.
A financial asset is initially measured at fair value plus transaction costs that are directly attributable to the acquisition or issuance of the financial asset. A trade receivable without a significant financing component is initially measured at the transaction price. Receivables originating from contract assets are initially measured at the carrying amount of the contract assets on the date classification was changed from contract asset to receivables.
Derecognition of financial assets
Financial assets are derecognized when the contractual rights of the Group to the cash flows from the asset expire, or the Group transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. When the Group retains substantially all of the risks and rewards of ownership of the financial asset, it continues to recognize the financial asset.
Classification of financial assets into categories and the accounting treatment of each category
Financial assets are classified at initial recognition to one of the following measurement categories: amortized cost or fair value through profit or loss.
Financial assets are not reclassified in subsequent periods unless, and only if, the Group changes its business model for the management of financial debt assets, in which case the affected financial debt assets are reclassified at the beginning of the period following the change in the business model.
A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated at fair value through profit or loss:
It is held within a business model whose objective is to hold assets so as to collect contractual cash flows; and
The contractual terms of the financial asset give rise to cash flows representing solely payments of principal and interest on the principal amount outstanding on specified dates.
Note 3 - Significant Accounting Policies (cont'd)
C. | Financial instruments (cont'd) |
(1) Non-derivative financial assets – policy applicable as from January 1, 2018 (cont'd)
Classification of financial assets into categories and the accounting treatment of each category (cont'd)
All financial assets not classified as measured at amortized cost or financial assets designated at fair value through profit or loss, are measured at fair value through profit or loss. On initial recognition, the Group designates financial assets at fair value through profit or loss if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.
The Group early adopted IFRS 9 (2009),has balances of trade and other receivables that are held within a business model whose objective is collecting contractual cash flows. The contractual cash flows of these financial assets represent solely payments of principal and interest that reflects consideration for the time value of money and the credit risk. Accordingly, these financial assets are measured at amortized cost.
Assessment of the business model for debt assets
The Group assesses the objective of the business model within which the financial asset is held on the level of the portfolio, since this best reflects the manner by which the business is managed and information is provided to management. The following considerations are taken into account in the assessment of the Group’s business model:
The stated policies and objectives for the portfolio and the operation of those policies in practice. These include whether management's strategy focuses on earning contractual interest income, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of any related liabilities or expected cash outflows or realizing cash flows through the sale of the assets;
How the performance of the business model and the financial assets within the model is evaluated and reported to the entity’s key management people;
The risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed;
Assessment whether cash flows are solely payments of principal and interest
For the purpose of assessing whether the cash flows are solely payments of principal and interest, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin.
In assessing whether the contractual cash flows are solely payments of principal and interest, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making this assessment, the Group considers:
Contingent events that would change the timing or amount of the cash flows;
Terms that may change the stated interest rate, including variable interest;
Extension or prepayment features; and
Terms that limit the Group's claim to cash flows from specified assets.
Note 3 - Significant Accounting Policies (cont'd)
C. | Financial instruments (cont'd) |
(1) Non-derivative financial assets – policy applicable as from January 1, 2018 (cont'd)
Subsequent measurement and gains and losses
Financial assets at fair value through profit or loss
These assets are subsequently measured at fair value. Net gains and losses, including any interest income or dividend income, are recognized in profit or loss (other than certain derivatives designated as hedging instruments).
Financial assets at amortized cost
These assets are subsequently measured at amortized cost using the classificationeffective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss. Financial assets at amortized cost comprise cash and cash equivalents and trade and other receivables. Cash and cash equivalents include cash balances available for immediate use and call deposits. Cash equivalents include short-term highly liquid investments (with original maturities of three months or less) that are readily convertible into known amounts of cash and are exposed to insignificant risks of change in value.
(2) Non-derivative financial assets – policy applicable before January 1, 2018
Initial recognition and measurement of financial assets without early adopting all the other rules of the final version of IFRS 9 (2014), Financial Instruments, as mentioned in section R below. According to IFRS 9 (2009), an entity shall classify and measure its financial assets at amortized cost or at fair value, considering its business model for managing financial assets and with respect to the contractual cash flows characteristics of these financial assets.
| (1) | Non-derivative financial assets |
Initial recognition of financial assets
The Group initially recognizes loans and receivables and deposits on the date that they are created. All other financial assets acquired in a regular way purchase, including assets designated at fair value through profit or loss, are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument, meaning on the date the Group undertook to purchase or sell the asset. Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, and cash and cash equivalents.
Financial assets are initially measured at fair value. If the subsequent measurement of the financial asset is not subsequently accounted for at fair value through profit orand loss, then the initial measurement includes transaction costs that arecan be directly attributableattributed to the asset acquisition or creation.creation of the asset.
The Group subsequently measures financial assets at either fair value or amortized cost, as described below:
Financial assets measured at amortized cost
A financial asset is subsequently measured at amortized cost, using the effective interest method and net of any impairment loss, if:
| ● | the asset is held within a business model with an objective to hold assets in order to collect 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; and |
| ● | the Group has not elected to designate them at fair value through profit or loss in order to reduce or eliminate an accounting mismatch. |
Financial assets measured at amortized cost include cash and cash equivalents and trade and other receivables.
Cash and cash equivalents comprise cash balances available for immediate use and call deposits.
Cash equivalents comprise short-term highly liquid investments (with original maturities of three months or less) that are readily convertible into known amounts of cash and are exposed to insignificant risks of change in value.
Financial assets measured at fair value
Financial assets other than those classified as measured at amortized cost are subsequently measured at fair value with all changes in fair value recognized in profit or loss.
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
Note 3 - Significant Accounting Policies (cont'd)
| (1) | Non-derivative financial assets (cont'd) |
Derecognition of financial assets
Financial assets are derecognized when the contractual rights of the Group to the cash flows from the asset expire, or the Group transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred.
Regular way sales of financial assets are recognized on the trade date, meaning on the date the Group undertook to sell the asset. As to the Group’s policy on impairment see Paragraph H.
Classification of financial assets into categories and the accounting treatment of each category
The Group classifies its financial assets according to the following categories:
Note 3 - Significant Accounting Policies (cont’d)
C. Financial instruments (cont'd)
Financial assets at fair value through profit or loss
A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group’s documented risk management or investment strategy, providing that the designation is intended to prevent an accounting mismatch, or the asset is a combined instrument including an embedded derivative.
Attributable transaction costs are recognized in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.
Financial assets classified as held-for-trading comprise securities that are held to support the Group’s short-term liquidity needs.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses.
Loans and receivables comprise cash and cash equivalents and trade and other receivables.
Cash and cash equivalents include cash balances available for immediate use and call deposits. Cash equivalents include short-term highly liquid investments (with original maturities of three months or less) that are readily convertible into known amounts of cash and are exposed to insignificant risks of change in value.
Offset of financial instruments - See section 23 below.
| (2) | (3)Non-derivative financial liabilities
Non-derivative financial liabilities include: loans and borrowings from banks and others, marketable debt instruments, finance lease liabilities, and trade and other payables.
Initial recognition of financial liabilities |
The Group initially recognizes debt securities issued on the date that they originated. All other financial liabilities are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.
Subsequent measurement of financial liabilities
Financial liabilities are recognized initially at fair value plusless any directly attributable transaction costs. The Group subsequently measuresSubsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method. Financial liabilities are designated at fair value through profit or loss if the Group manages such liabilities and their performance is assessed based on their fair value in accordance with the Group’s documented risk management strategy, providing that the designation is intended to prevent an accounting mismatch.
Transaction costs directly attributable to an expected issuance of an instrument that will be classified as a financial liability are recognized as an asset in the framework of deferred expenses in the statement of financial position. These transaction costs are deducted from the financial liability upon its initial recognition, or are amortized as financing expenses in the statement of income when the issuance is no longer expected to occur.
Note 3 - Significant Accounting Policies (cont’d)
C. Financial instruments (cont'd)
(3)Non-derivative financial liabilities include debentures, loans from(cont'd)
Derecognition of financial institutions and trade and other payables.
liabilities
Financial liabilities are derecognized when the obligation of the Group, as specified in the agreement, expires or when it is discharged or cancelled.
Offset of financial instruments
Financial assets and liabilities are offset and the net amount is presented in the statement of financial position when, and only when, the Group currently has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
ChangeSubstantial modification in terms of debt instruments
An exchange of debt instruments having substantially different terms, is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Furthermore, a substantial modification of the terms of an existing financial liability, or an exchange of debt instruments having substantially different terms between an existing borrower and lender, isare accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability at fair value.
In such cases the entire difference between the amortized cost of the original financial liability and the fair value of the new financial liability is recognized in profit or loss as financing income or expense.
The terms are substantially different if the discounted present value of the cash flows according to the new terms, including any commissions paid, less any commissions received and discounted using the original effective interest rate, is different by at least ten percent from the discounted present value of the remaining cash flows of the original financial liability.
In addition to the aforesaid quantitative criterion, the Group examines, inter alia, whether there have also been changes in various economic parameters inherent in the exchanged debt instruments, therefore, as a rule, exchanges of CPI-linked debt instruments with unlinked instruments are considered exchanges with substantially different terms even if they do not meet the aforementioned quantitative criterion.
Non-substantial modification in terms of debt instruments - policy applicable after January 1, 2018
In a non-substantial modification in terms (or exchange) of debt instruments, the new cash flows are discounted using the original effective interest rate, and the difference between the present value of the new financial liability and the present value of the original financial liability is recognized in profit or loss.
Offset of financial instruments
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
Expansion of debentures for cash
When expanding debentures for cash, debentures are initially measured at their fair value, which is the proceeds received from the issuance (since this is the best market which the issuer has an immediate access to), with no effect on profit or loss in respect of the difference between the proceeds from issuance and the market value of the tradable debentures close to their issuance.