SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission file number: 0-30198
INTERNET GOLD - GOLDEN LINES LTD.
(Exact Name of Registrant as Specified in Its Charter
and Translation of Registrant's Name Into English)
ISRAEL
(Jurisdiction of
Incorporation or Organization)
1 Alexander Yanai Street, Petach-Tikva, Israel
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None N/A
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares, NIS 0.01 Par Value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Ordinary Shares, par value NIS 0.01
as of December 31, 2004...................................... 18,431,500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 [ ] Item 18 [X]
INTRODUCTION
Internet Gold - Golden Lines Ltd. is principally an Internet access
business. We provide a wide array of Internet services tailored to meet the
needs of our residential, small office and home office, or SOHO, and business
subscribers, including Internet access and related value-added services, content
and e-commerce activities through portals, as well as international telephony
services. Our Internet access packages include basic access accounts,
asymmetrical digital subscriber lines, or ADSL, and cable services, virtual
private networks, or VPN, ISDN dial-up accounts, leased and frame relay lines
and dial-up networking. We also provide hosting, integration, technological
services and value-added solutions. Since our public offering in August 1999
until July 2001, our ordinary shares were listed on the NASDAQ Stock Market
(symbol: IGLD), when the listing of our ordinary shares was transferred to the
NASDAQ SmallCap Market. Beginning in February 2005, our shares are again listed
on the NASDAQ National Market. Since March 2005, our shares have been traded on
the Tel Aviv Stock Exchange, or TASE, as well. In April 2005, we completed an
offering of convertible debentures and options, that are traded on the TASE,
through the TASE. The offering was made exclusively in Israel, to Israeli
residents. As used in this annual report, the terms "we," "us" and "our" mean
Internet Gold - Golden Lines Ltd. and its subsidiaries, unless otherwise
indicated.
Except for the historical information contained in this annual report, the
statements contained in this annual report are "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995, as amended, with respect to our
business, financial condition and results of operations. Such forward-looking
statements reflect our current view with respect to future events and financial
results.
Statements which use the terms "anticipate," "believe," "expect," "plan,"
"intend," "estimate," "anticipate" and similar expressions are intended to
identify forward looking statements. We remind readers that forward-looking
statements are merely predictions and therefore inherently subject to
uncertainties and other factors and involve known and unknown risks that could
cause the actual results, performance, levels of activity, or our achievements,
or industry results, to be materially different from any future results,
performance, levels of activity, or our achievements expressed or implied by
such forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Except as required by applicable law, including the securities laws of
the United States, we undertake no obligation to publicly release any update or
revision to any forward looking statements to reflect new information, future
events or circumstances, or otherwise after the date hereof. We have attempted
to identify significant uncertainties and other factors affecting
forward-looking statements in the Risk Factors section that appears in Item 3D.
"Key Information - Risk Factors"
Our consolidated financial statements appearing in this annual report are
prepared in New Israeli Shekels, or NIS, and in accordance with the generally
accepted accounting principles of the Israeli GAAP. All references in this
annual report to "dollars" or "$" are to U.S. dollars and all references in this
annual report to "NIS" are to New Israeli Shekels.
Statements made in this annual report concerning the contents of any
contract, agreement or other document are summaries of such contracts,
agreements or documents and are not complete descriptions of all of their terms.
If we filed any of these documents as an exhibit to this annual report or to any
registration statement or annual report that we previously filed, you may read
the document itself for a complete description of its terms.
TABLE OF CONTENTS
Page No.
--------
PART I.................................................................................... 3
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS....................... 3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..................................... 3
ITEM 3. KEY INFORMATION............................................................. 3
A. Selected Financial Data................................................. 3
B. Capitalization and Indebtedness......................................... 5
C. Reasons for the Offer and Use of Proceeds............................... 5
D. Risk Factors............................................................ 6
ITEM 4. INFORMATION ON THE COMPANY.................................................. 22
A. History and Development of the Company.................................. 22
B. Business Overview....................................................... 24
C. Organizational Structure................................................ 44
D. Property, Plants and Equipment.......................................... 45
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................................ 46
A. Operating Results....................................................... 46
B. Liquidity and Capital Resources......................................... 63
C. Research and Development, Patents and Licenses.......................... 65
D. Trend Information....................................................... 65
E. Off-Balance Sheet Arrangements.......................................... 67
F. Tabular Disclosure of Contractual Obligations........................... 67
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.................................. 67
A. Directors and Senior Management......................................... 67
B. Compensation............................................................ 70
C. Board Practices......................................................... 71
D. Employees............................................................... 79
E. Share Ownership......................................................... 81
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS........................... 82
A. Major Shareholders...................................................... 82
B. Related Party Transactions.............................................. 83
C. Interests of Experts and Counsel........................................ 85
ITEM 8. FINANCIAL INFORMATION....................................................... 85
A. Consolidated Statements and Other Financial Information................. 85
B. Significant Changes..................................................... 86
ITEM 9. THE OFFER AND LISTING....................................................... 86
A. Offer and Listing Details............................................... 86
B. Plan of Distribution.................................................... 87
C. Markets................................................................. 87
i
D. Selling Shareholders...................................................... 87
E. Dilution.................................................................. 87
F. Expense of the Issue...................................................... 87
ITEM 10. ADDITIONAL INFORMATION........................................................ 87
A. Share Capital............................................................. 87
B. Memorandum and Articles of Association.................................... 88
C. Material Contracts........................................................ 91
D. Exchange Controls......................................................... 91
E. Taxation.................................................................. 92
F. Dividend and Paying Agents................................................ 99
G. Statement by Experts...................................................... 99
H. Documents on Display...................................................... 99
I. Subsidiary Information.................................................... 99
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.................... 100
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES........................ 101
PART II..................................................................................... 101
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............................... 101
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.. 101
ITEM 15. CONTROLS AND PROCEDURES....................................................... 103
ITEM 16. RESERVED...................................................................... 103
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.............................................. 103
ITEM 16B. CODE OF ETHICS................................................................ 103
ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES........................................ 104
ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE.... 105
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND PURCHASERS..... 105
PART III.................................................................................... 105
ITEM 17. FINANCIAL STATEMENTS.......................................................... 105
ITEM 18. FINANCIAL STATEMENTS.......................................................... 105
ITEM 19. EXHIBITS...................................................................... 106
S I G N A T U R E S......................................................................... 107
ii
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following selected consolidated financial data for and as of the five
years ended December 31, 2004, are derived from our audited consolidated
financial statements which have been prepared in accordance with Israeli GAAP.
The selected consolidated financial data as of December 31, 2004 and 2003 and
for the years ended December 31, 2004, 2003 and 2002 have been derived from our
audited consolidated financial statements and notes included elsewhere in this
annual report. The selected consolidated financial data as of December 31, 2002,
2001 and 2000 and for the years ended December 31, 2001 and 2000 have been
derived from audited consolidated financial statements not included in this
annual report. The selected consolidated financial data set forth below should
be read in conjunction with and are qualified by reference to Item 5. "Operating
and Financial Review and Prospects" and our consolidated financial statements
and notes thereto included elsewhere in this annual report.
The translation of NIS amounts into dollars has been made solely for the
convenience of the reader at the representative rate of exchange at December 31,
2004 (NIS 4.308 = $1.00).
3
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2000 2001 2002 2003 2004 2004
-------- -------- -------- -------- -------- -----------
CONVENIENCE
TRANSLATION
NIS NIS NIS NIS NIS DOLLARS *
-------- -------- -------- -------- -------- -----------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
ISRAELI GAAP INFORMATION
Revenues:
Access revenues ....................................... 119,848 139,850 156,336 146,906 156,385 36,301
International telephony service ....................... - - - - 9,381 2,178
Other revenues ........................................ 19,684 48,473 27,982 32,736 53,811 12,491
-------- -------- -------- -------- -------- -----------
Total revenues ........................................ 139,532 188,323 184,318 179,642 219,577 50,970
Costs and expenses:
Cost of revenues ...................................... 95,335 116,135 99,564 92,871 96,820 22,474
Selling and marketing expenses ........................ 73,014 51,299 37,125 41,393 73,155 16,981
General and administrative expenses ................... 46,844 38,884 21,209 21,908 24,258 5,631
-------- -------- -------- -------- -------- -----------
Total costs and expenses .............................. 215,193 206,318 157,898 156,172 194,233 45,086
Income (loss) from operations ......................... (75,661) (17,995) 26,420 23,470 25,344 5,884
Financing (expenses) income, net ...................... 3,842 7,308 2,151 (3,235) 122 28
Other (expenses), net ................................. (21) (2,332) (3) (2,592) (1,077) (250)
-------- -------- -------- -------- -------- -----------
Income (loss) from continuing operations .............. (71,840) (13,019) 28,568 17,643 24,389 5,662
Income tax benefits, net .............................. - - - 1,935 301 70
-------- -------- -------- -------- -------- -----------
Income (loss) after income tax ........................ (71,840) (13,019) 28,568 19,578 24,690 5,732
Company's share in net loss of investees from
continued operations................................. (2,193) (682) (1,530) (1,538) (396) (92)
Minority interest in loss of a subsidiary ............. 1 963 - - - -
Loss of a subsidiary which the Company did not
intend to bear ...................................... - 383 - - - -
-------- -------- -------- -------- -------- -----------
Income (loss) from continued operations ............... (74,032) (12,355) 27,038 18,040 24,294 5,640
Loss from discontinued operations ..................... (7,355) (8,843) - - - -
Company's share in loss of investees from
discontinued operations ............................. - - (7,080) (3,737) (4,763) (1,106)
-------- -------- -------- -------- -------- -----------
Net income (loss) ..................................... (81,387) (21,198) 19,958 14,303 19,531 4,534
======== ======== ======== ======== ======== ===========
Income (loss) per share, basic and diluted
Net income (loss) per NIS 0.01 per value of shares (in
NIS) from continued operations ........................ (4.02) (0.67) 1.47 0.98 1.32 0.31
Net income (loss) per NIS 0.01 per value of shares (in
NIS) from discontinued operations ..................... (0.40) (0.48) (0.39) (0.20) (0.26) (0.06)
-------- -------- -------- -------- -------- -----------
(4.42) (1.15) 1.08 0.78 1.06 0.25
-------- -------- -------- -------- -------- -----------
Weighted average number of shares outstanding (in
thousands)........................................... 18,432 18,432 18,432 18,432 18,432 18,432
======== ======== ======== ======== ======== ===========
US GAAP INFORMATION
Net income (loss) from continued operations ........... (70,909) (6,232) 27,051 18,874 27,164 6,305
Net Loss - discontinued operations .................... (12,960) (17,649) (21,128) (6,803) (6,588) (1,529)
Net income (loss) ..................................... (83,869) (23,881) 5,923 12,071 20,576 4,776
AS AT DECEMBER 31,
-----------------------------------------------------------------------
2000 2001 2002 2003 2004 2004
-------- -------- -------- -------- -------- -----------
CONVENIENCE
TRANSLATION
NIS NIS NIS NIS NIS DOLLARS *
-------- -------- -------- -------- -------- -----------
(In thousands, except per share data)
CONSOLIDATED BALANCE SHEETS DATA:
ISRAELI GAAP INFORMATION
Total assets .......................................... 251,765 228,322 169,052 214,004 300,023 69,644
Working capital ....................................... 41,743 48,615 80,904 76,256 41,714 9,683
Total liabilities ..................................... 146,760 144,510 65,284 95,933 176,477 40,965
Total shareholders' equity ............................ 105,005 83,811 103,768 118,071 121,893 28,295
US GAAP INFORMATION
Total assets .......................................... 248,249 219,738 199,101 244,682 305,554 70,927
Total shareholders equity ............................. 105,024 79,429 85,881 104,430 121,193 28,132
----------
* The translation of NIS, amounts into dollars has been made solely for
the convenience of the reader at the representative rate of exchange at
December 31, 2004 (NIS 4.308= $1.00).
4
EXCHANGE RATE INFORMATION
The following table sets forth, for the periods and dates indicated,
certain information regarding the Bank of Israel representative rate of exchange
for dollars, expressed in NIS per one dollar. The representative rate is the
average between the buying rate and the selling rate of exchange.
Such rates are provided solely for the convenience of the reader and
should not be construed as a representation that NIS amounts actually represent
such dollar amounts or that such NIS amounts could have been, or could be,
converted into dollars at that rate or at any other rate. We do not use such
rates in the preparation of our consolidated financial statements included
elsewhere herein. See Note 2 to the consolidated financial statements included
elsewhere in this Form 20-F.
At Period
Period Average (1) High Low End
------ ----------- --------- --------- ---------
Year ended December 31, 2000........................... NIS 4.078 NIS 4.198 NIS 3.967 NIS 4.041
Year ended December 31, 2001........................... 4.203 4.416 4.067 4.416
Year ended December 31, 2002........................... 4.736 4.994 4.416 4.737
Year ended December 31, 2003........................... 4.545 4.924 4.283 4.379
Year ended December 31, 2004........................... 4.478 4.634 4.308 4.308
----------
(1) The average of the representative rates on the last business day of each
month during the relevant period.
High Low
NIS NIS
------ -----
2004
----
December............................................... 4.374 4.308
2005
----
January................................................ 4.414 4.352
February............................................... 4.392 4.357
March.................................................. 4.379 4.299
April.................................................. 4.395 4.360
May.................................................... 4.416 4.348
On June 1, 2005, the representative rate was NIS 4.421 = $1.00.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
5
D. RISK FACTORS
INVESTING IN OUR ORDINARY SHARES INVOLVES A HIGH DEGREE OF RISK AND
UNCERTAINTY. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW BEFORE INVESTING IN OUR ORDINARY SHARES. OUR BUSINESS, PROSPECTS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED DUE TO
ANY OF THE FOLLOWING RISKS. IN THAT CASE, THE VALUE OF OUR ORDINARY SHARES COULD
DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO INTERNET GOLD
WE HAVE EXPERIENCED OPERATING LOSSES IN THE PAST AND MAY INCUR LOSSES IN THE
FUTURE.
Although we have operated profitably since the third quarter of 2001, we
cannot assure you that we will continue to be profitable. Most of our revenues
have been derived from Internet access fees. As contemplated by our business
plan, we intend to increase revenues derived from our various activities, and
specifically, access fees for broadband services, provision of international
telephony services, advertising on our portals and from e-commerce activities.
These activities are expected to involve substantial sales and marketing
expenses, and other costs.
We may be required to make additional investments in order to maintain or
to improve the level of our services, which will impair our profitability and no
assurance can be given that the services will be profitable.
We cannot assure you that we will be able to continue to successfully
implement our business plan in the future.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY CAUSE OUR
SHARE PRICE TO BE VOLATILE.
Our revenues and operating results may vary significantly from quarter to
quarter. As a result, you should not rely on quarter-to-quarter comparisons of
our revenues and operating results as an indication of our future performance.
In addition, due to the volatility in our market we cannot predict our future
revenues or results of operations accurately. It is possible that in one or more
future quarters our operating results will fall below the expectations of
securities analysts and investors. If this happens, the trading price of our
securities is likely to fall.
We expect to be heavily dependent on revenues from subscribers using our
Internet access services for the foreseeable future. As a result, our revenues
will be affected by our ability to retain current subscribers and attract new
profitable subscribers. Our residential subscribers have the option of
discontinuing their subscriptions for any reason at any given month and our
leased line subscribers have the option of discontinuing their subscriptions for
any reason upon 30-days' written notice. As a result, revenues can fluctuate
from month to month without much advance notice. Some of our expense levels,
such as selling and marketing expenses, are based, in part, on our expectations
as to future revenues. To the extent our actual revenues are below expected
revenues, we may be unable to adjust spending quickly enough to offset the
shortfall in revenue, which may cause our business and financial results to
suffer.
6
REGULATORY AND LEGAL UNCERTAINTIES COULD ADVERSELY AFFECT THE TERMS OF OUR
LICENSES AND COULD HARM OTHER ASPECTS OF OUR BUSINESS.
There have been various regulations and lawsuits, mainly in the United
States, relating to the liability of Internet service providers, or ISPs, and
portal operators for information carried on or through their services. The law
in this area is unsettled and there may be new legislation and court decisions
that expose companies such as ours to liabilities or affect their services.
Additional laws and regulations may be adopted with respect to the Internet,
covering issues such as content, user privacy, pricing, commerce, export and
other controls. Regulatory developments could harm our business. Our Internet
access business is subject to a license granted by the Israeli Ministry of
Communications, which was renewed in January 2002 for an additional period of
five years. The license grants us the right to provide Internet and related
services, subject to several conditions mentioned in the license. The tendency
of the Ministry of Communications not to limit the number of Internet service
licenses is likely to increase competition, and may lead to a reduction in fees
charged to subscribers. In April 2002, the Ministry of Communications granted
cable television network providers licenses permitting them to supply
infrastructure for the provision of Internet access through the current ISPs,
but does not allow them to become ISPs themselves. However, we cannot predict
whether the cable television network providers will be allowed to become ISPs in
the future or if their licenses may be amended in any way, and how this will
affect us. In addition, we cannot assure you that unfavorable regulations would
not adversely affect our business.
In June 2004, we received a license to provide international telephony
services for a period of twenty years, commencing on the date of receipt of the
license, which may be extended by the Ministry of Communications for additional
10-year periods. The license grants us the right to provide international
telecommunication voice services and other related services, subject to several
conditions mentioned in the license. We cannot be sure how the launch of the new
international telephony services by Netvision Ltd., or Netvision, and Xfone 018
Ltd., or Xfone, new international telephony services providers in Israel, or how
the grant of additional licenses by the Ministry of Communications will affect
us. In addition, we cannot assure you that unfavorable regulations would not
adversely affect our business.
We may be exposed to substantial liabilities arising out of our business,
especially those liabilities that are related to Internet activities. Currently,
we have a professional liability insurance policy which may not cover all such
exposure. In the event that we are found to be responsible for any such
liability and/or required to pay for any damages resulting from any such
responsibility, our business may be adversely affected.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE AND WE MAY BE UNABLE TO
COMPETE SUCCESSFULLY.
ISP MARKET. We operate in the Internet access services markets, which by
their nature have low barriers to entry and are extremely competitive. We expect
intense competition in our markets to continue in the future. Increased
competition could require us to lower our prices, grant incentives to
subscribers and increase our selling and marketing expenses and related
subscriber acquisition costs, and could also result in increased subscriber
cancellations, loss of visitors to our portals and lower advertising revenues.
We may not be able to offset the effect of these increased costs through an
increase in the number of our subscribers, subscriber revenues or revenues from
other sources.
7
The ISP market in Israel is characterized by many participants. We also
expect to face competition from telephone and cellular phone companies, cable
television and DBS providers, wireless voice and data service providers and
others. These companies could exploit their current established network
infrastructure, high rate of penetration of households, and their ability to
provide Internet access at significantly faster speeds and potentially include
Internet access in their basic bundle of services or offer access for a nominal
additional charge. In April 2002, the Ministry of Communications granted the
cable television network providers licenses permitting supply of infrastructure
for the provision of Internet access through the current ISPs in addition to
Bezeq's license. However, we cannot predict whether the cable television network
providers or Bezeq will become ISPs and consequently our competitors in the
future or how these licenses may be amended in the future and how this will
affect us. Additional international ISPs may also enter the Israeli market.
PORTAL ADVERTISING. In order to attract advertisers, we need to continue
to increase the amount of user traffic on our portals. Currently, there are
other popular portals in Israel and many Israeli Internet users also use
international portals, such as Yahoo! and MSN.com. We compete with these other
portals, as well as other media, such as television, radio and print, for
advertisers.
E-COMMERCE. In 2004 there was extensive activity in the e-commerce market
in Israel. The market is principally comprised of large retailers, importers of
commercial products and manufacturers offering their own products and services
over the Internet through their websites. There currently are very few companies
that engage solely in e-commerce. Competition in e-commerce is intense and is
likely to grow significantly as the e-commerce market evolves. We cannot
guarantee that Gold Trade (Electronic Commerce) Ltd., or Gold Trade, or MSN
Israel Ltd., or MSN Israel, will be successful, or that we will be able to
compete effectively and succeed in this market.
INTERNATIONAL TELEPHONY. The international telephony market is highly
competitive. The intense competition and the fact that the customers are
generally sophisticated customers with little loyalty, required us to lower the
prices for our international telephony services in order to remain competitive.
We cannot be sure if this will enable us to remain profitable or how the intense
competition will affect us.
Currently, the cellular telephony providers are restricted from providing
international telephony services. The Ministry of Communications may grant them
or other providers with additional licenses for the operation of international
telephony services. We do not know how this will influence the competition in
this market or how it will affect our ability to compete.
In addition, as per our license, we have to pay royalties to the Ministry
of Communications for our use of frequencies, for operation and registration.
The requirement to make royalties payment, makes it more difficult for us to
offer competitive prices to our customers in comparison to unlicensed VoIP
operators.
We expect the financial scope of the VoIP market in Israel will decrease
in the coming years, as a result of the entrance of new competitors to the
market, the cheap prices for the use of VoIP technology in comparison to the
analog technology used in the past and because of various Internet software
which allow free international communication on the Internet. We cannot evaluate
the impact of these expected market changes and their affect on our ability to
compete successfully.
8
OUR FAILURE TO MANAGE GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS.
Our growth has placed, and is likely to continue to place, a significant
strain on our operational, administrative and financial resources, including our
system of internal controls that we have modified or are in the process of
modifying to accommodate the expansion of our business. The demand on our
network infrastructure, technical and customer support staff and other resources
has grown with our expanding subscriber base and is expected to continue to grow
as we expand our Internet, international telephony, our portals and our
e-commerce business.
We cannot guarantee that our infrastructure, technical and customer
support staff, operational and billing systems and other resources will
adequately accommodate or facilitate the growth of our business. While we
believe we have made adequate allowances for the costs and risks associated with
our growth and activities, there is no guarantee that these allowances will be
adequate, that our systems, procedures or controls will be sufficient to support
our operations or that our management will be able to successfully offer and
expand our services in Israel or internationally.
OUR STRATEGY MAY NOT SUCCEED IN THE FUTURE.
Since the fourth quarter of 2002, the significant increase in demand for
broadband has been coupled with intense competition between all of the ISPs in
Israel, which resulted in price reductions for services offered by all of the
ISPs. Due to this tough market environment, we adopted a more aggressive
marketing policy in order to attract a greater number of broadband customers
while continuing to keep tight control on our expenses. This strategy yielded a
54% increase in the number of broadband customers in 2004 as compared to 2003.
In order to penetrate the international telephony market and retain customers,
we adopted an aggressive approach which included advertising in all media while
offering the customers fair prices, which were lower than the prices offered by
the then current providers. Although this strategy has been successful to date,
we cannot assure you that this strategy will be successful in the future. Due to
the price reductions caused by the aggressive competition as well as the
expenses associated with our marketing efforts to attract customers, our
profitability may be negatively impacted.
IF WE DO NOT SUCCESSFULLY DEVELOP OUR BRANDS WE MAY BE UNABLE TO ATTRACT ENOUGH
CUSTOMERS TO OUR SERVICES OR SUFFICIENT TRAFFIC TO OUR PORTALS TO BECOME
SUCCESSFUL.
We must establish and strengthen awareness our brands and those of our
subsidiaries. If we fail to create and maintain brand awareness, we are unlikely
to attract enough customers to our Internet, international telephony and value
added services or attract sufficient traffic to our portals to become attractive
to advertisers and suppliers of products and services. Brand recognition may
become even more important in the future with the growing number of Internet
sites and Internet-based communications providers.
We intend to continue to pursue a brand-enhancement strategy, which may
include joint marketing programs and mass market and multimedia advertising,
promotional programs and public relations activities. These initiatives will
involve significant expenses. If our brand enhancement strategy is unsuccessful,
our sales and marketing expenses may never be recovered and we may be unable to
increase future revenues. Successful positioning of our brand and the other
brands associated with each of our services will largely depend on:
9
o the success of our joint marketing programs, advertising and
promotional efforts; and
o our ability to design and maintain attractive, user-friendly
portals.
FAILURE TO ESTABLISH AND MAINTAIN STRATEGIC, MARKETING AND OTHER THIRD-PARTY
RELATIONSHIPS COULD LIMIT OUR ABILITY TO ATTRACT AND RETAIN USERS.
We have focused on and expect to continue to focus on the establishment of
relationships with technology providers, importers of commercial products,
retailers and other suppliers of products and services that we may sell. Because
our agreements with third parties are generally short-term and non-exclusive,
our competitors may seek to use the same partners that we do or attempt to
adversely impact our relationships with our partners. In addition, some of our
joint marketing agreements are based on oral understandings and not written
agreements and so may be terminated at any time. We may not be able to maintain
our third-party relationships or replace them on favorable terms. If our
relationship partners fail to perform their obligations, reduce their business
with us, choose to compete with us or provide their services to a competitor, we
may have more difficulty building our subscriber base and attracting and
maintaining visitors to our portals, and as a result our business and financial
results may suffer. Also, our efforts to establish new relationships in the
future may not be successful, which could affect the growth of our business.
THERE CAN BE NO ASSURANCE THAT OUR INVESTMENTS IN COOPERATION AGREEMENTS WILL BE
SUCCESSFUL.
A key element of our strategy is to enter into cooperation agreements. To
date, we have entered into various cooperation agreements, including our
establishment of MSN Israel with Microsoft Corporation. Our future success
depends in part on the ultimate success of these cooperation agreements. The
failure of one or more of our key joint venture investments could have a
material adverse effect on our business, financial condition and results of
operation.
Although we view our joint venture investments as key factors in our
overall business strategy, there can be no assurance that the other parties to
these agreements view their relationships with us as significant to their
ongoing business or that they will not reassess their commitment to us at any
time in the future. Our results of operations could be materially adversely
affected by changes in the financial condition of a key joint venture
participant.
IF WE LOSE OUR KEY PERSONNEL OR CANNOT RECRUIT ADDITIONAL PERSONNEL, OUR
BUSINESS MAY SUFFER.
Our success depends, to a significant extent, upon the continuing
performance and services of our executive officers and other key employees.
Specifically, Eli Holtzman, our chief executive officer, has been with us since
our inception and has considerable experience in managing our business. Since we
launched our Internet business in 1996, we (excluding our subsidiaries) have
expanded from 99 employees as of December 31, 1996 to 835 full-time and
part-time employees as of December 31, 2004, including a number of key
managerial, marketing, planning, financial, technical and operations personnel.
Most of these individuals have not previously worked together and need to be
integrated as management and technology teams. As a result, our senior managers
and technical personnel may not work together effectively as a team to
successfully manage our growth. Our performance is substantially dependent on
our ability to retain, motivate and successfully integrate our senior management
and other key employees. We do not have "key person" life insurance policies on
any of our key personnel.
10
NETWORK CAPACITY CONSTRAINTS MAY IMPEDE OUR SERVICE TO SUBSCRIBERS AND REQUIRE
US TO EXPAND OUR NETWORK AND SYSTEMS.
Capacity constraints within our network and those of our suppliers have
occurred in the past and will likely occur in the future. Such constraints may
prevent subscribers from gaining access to our system and system-wide services
such as e-mail and news group services and cause subscriber cancellations and
adverse publicity.
As the number of our subscribers using broadband services and the amount
and type of information they wish to transmit over the Internet increases, we
will need to significantly expand and upgrade our technology, processing systems
and network infrastructure, which could be expensive and involve substantial
management time. We do not know whether we will be able to accurately project
the rate or timing of any such increases, or expand and upgrade our systems and
infrastructure on time. The operation of broadband services through ADSL and
cable technology is affecting our international bandwidth needs. As of June 1,
2005 our international bandwidth infrastructure had grown by 400% from the time
we started to provide broadband services. In order to preserve the current
service level to an increasing number of broadband customers, we may be required
to extend our bandwidth by additional 30% by the end of 2005.
A SYSTEM FAILURE COULD INTERRUPT SERVICE TO OUR SUBSCRIBERS AND MAY RESULT IN
SUBSCRIBER CANCELLATIONS.
Our business depends on the efficient and uninterrupted operation of our
computer and hardware and software systems. In addition, sophisticated
information systems are vital to our growth and our ability to monitor costs,
bill and receive payments from customers, reduce credit exposure and achieve
operating efficiencies. Any system failure that causes an interruption in
service or decreases the responsiveness of our network, could impair our
reputation, damage our brand name, lead to subscriber dissatisfaction and
cancellations and reduce our revenues. Our systems and equipment are subject to
hardware defects, software bugs and network failures that may be beyond our
control. At times, for example, our systems and equipment have experienced
failures, which temporarily prevented customers from using our services or
accessing the Internet. We are currently in the process of replacing our billing
and CRM systems and may incur problems in the transition period.
Our operations depend on our ability to successfully expand our network
and integrate new technologies and equipment into our network. Accordingly, we
face an increased risk of system failure and difficulty in making new features
available.
We use network components located both in Israel and abroad, which must
interact successfully without delay or interruption to provide service to
subscribers. Our systems and operations are vulnerable to damage or interruption
from human error, natural disasters, power loss, telecommunications failures,
break-ins, sabotage, computer viruses, intentional acts of web vandalism and
similar events. Any of these events could expose us to a material risk of loss
or litigation. In addition, if a computer virus, sabotage or other failure
affecting our system is highly publicized, our reputation could be damaged and
subscriber growth and portal visits could decrease. While we currently have
partially redundant systems, we do not have full redundancy, a formal disaster
recovery plan or alternative providers of hosting services. In addition, we do
not carry sufficient natural disaster or business interruption insurance to
compensate for losses that could occur.
11
WE DEPEND ON THIRD-PARTY SYSTEMS AND SERVICE PROVIDERS FOR OUR NETWORK TO
PROVIDE OUR CUSTOMERS WITH OUR SERVICES.
We rely on certain third-party computer systems, networks and third-party
service providers, including local and long distance telecommunications
companies such as Bezeq, Bezeq International, Barak I.T.C. (1995) Ltd, or Barak,
MCI, PCCW-BTN and Med1 for leased lines. All Internet access by our customers
is, and will continue to be, connected through leased lines from local and long
distance telecommunications carriers.
Internet access by our customers is dependent on the telecommunications
infrastructure owned and maintained by Bezeq and the local cable companies.
Bezeq has suffered work stoppages on several occasions in recent years as a
result of conflicts with its unionized employees. These work stoppages resulted
in several days of interruption to the services we provide. In addition, at
times Bezeq and the local cable companies have suffered technical network
failures. If our subscribers' access to Israel's fixed-line telecommunications
infrastructure was disrupted, it would significantly impact the services that we
provide to our subscribers and could result in a substantial reduction in
Internet access volume and revenue. An increase in our cost of access to
Israel's fixed-line telecommunications infrastructure could also adversely
impact our results of operations. We also depend on third parties for physical
repair and maintenance of leased lines. If an interruption or deterioration in
performance in these third-party services occurs, our services may be disrupted
or become less profitable.
Many of our relationships with third party providers are terminable upon
short notice. In addition, many of our third party suppliers and
telecommunications carriers sell or lease products and services to our
competitors and may be, or in the future may become, competitors themselves.
Subject to various government regulations, our third party suppliers and
telecommunications carriers could enter into exclusive arrangements with our
competitors or stop selling products and services to us. If any of our
arrangements with third parties is terminated, we may not be able to replace
them, on commercially reasonable terms, or at all.
OUR INTERNATIONAL TELEPHONY SERVICES ARE SUBJECT TO NUMEROUS ADDITIONAL RISKS,
INCLUDING RISKS RELATING TO OUR NETWORK.
Our soft switch system is a highly complex computer system. Although it
has been built with redundancy in mind, it is built to handle only one fault at
a time. Two faults occurring at the same time may severely affect our service.
Also, as the world of voice over IP continues to evolve, we are faced with the
risks associated with the use of new software. Our international telephony
service is based upon the operation of our soft switch system. This system was
developed and is supported by Veraz Networks. Although our engineering staff is
highly trained to support the system, there are numerous functions that they are
unable to perform by themselves. If the level of service we get from Veraz
decreases, it might adversely impact our ability to properly maintain our system
and therefore have direct affect on our service.
12
We do not have a direct connection to all the destinations around the
world, we depend on business partners to connect calls generated from our
services by our customers to their final destinations worldwide. Our level of
service is totally dependent on the level of service we get from our
international partners, both from the call completion perspective as well as
from call quality perspective. Although we make extensive efforts in order to
assure the quality of the calls as well as the world spread of our services, we
cannot be sure that our partners will provide adequate level of service, that in
such case we will be able to successfully replace the partner or that we will be
able to maintain and increase the world spread of our services.
We are neither a local telephone service provider nor a cellular provider,
and are dependent on those providers in order to enable our customers to access
our service. Therefore we are exposed to any change in their services and in the
service level we get from those providers.
IF WE REQUIRE ADDITIONAL CAPITAL, WE MAY BE UNABLE TO RAISE IT ON FAVORABLE
TERMS OR AT ALL.
In April 2005 we raised NIS 220 million (approximately $51.1 million) in
an offering of convertible debentures and options through the TASE. However, in
the future, we may need to raise additional funds in order to fund expansion,
develop new or enhanced services, or respond to competitive pressures. The
availability of funds for future expansion and the development of new or
enhanced services will depend upon a number of factors including our operating
performance, investor interest and marketing conditions. If we raise additional
funds by issuing equity or convertible debt securities, the holdings of our
shareholders will be diluted and their ownership percentage will be reduced.
Furthermore, any new securities could have rights, preferences and privileges
senior to those of the ordinary shares.
In addition, we may require additional substantial funding in the future
to develop and expand the business of MSN Israel. We agreed to invest in MSN
Israel and be responsible for its operating losses and capital expenditures. We
and Microsoft each have the right to terminate the agreement in case the
cumulative losses of MSN Israel reach or exceed $10 million. Although MSN Israel
is currently profitable, we cannot predict what these costs could be and if MSN
will be able to bear such costs. We cannot be certain that additional financing
will be available when and to the extent required or that, if available, it will
be on acceptable terms. If we do not invest additional funds, if and when
required, we shall be in breach of our agreement with Microsoft Corp.
THE INDUSTRY IN WHICH WE OPERATE IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES
AND FREQUENT NEW PRODUCT AND SERVICE INTRODUCTIONS; WE MAY NOT BE ABLE TO KEEP
UP WITH THESE RAPID TECHNOLOGICAL AND OTHER CHANGES.
The markets in which we compete are characterized by rapidly changing
technology, evolving industry standards, frequent new product and service
announcements, introductions and enhancements and changing consumer demands.
These new products, services and technologies may be superior to the services
and technologies that we use, and may render our services and technologies
obsolete or require us to incur substantial expenditures to modify or adapt our
products, services or technologies. Our future success will depend on our
ability to continually improve the performance, features and reliability of our
Internet, international telephony and other services in response to competitive
service and product offerings and the evolving demands of the marketplace.
13
OUR FUTURE SUCCESS DEPENDS ON THE CONTINUED GROWTH IN THE USE OF THE INTERNET,
INTERNATIONAL TELEPHONY SERVICES AND OTHER RELATED SERVICES IN ISRAEL.
We rely on revenues generated from the sale of Internet access,
international telephony, portal advertising and related services, and, to a
limited extent, e-commerce. If acceptance and growth of Internet use and
services do not occur or Internet use declines, our business and financial
results will suffer. Alternatively, if Internet usage grows, the Internet
infrastructure may not be able to support the demands placed on it by such
growth or its performance or reliability may decline.
WE MAY NOT ACHIEVE BROAD MARKET ACCEPTANCE OF OUR SERVICES DUE TO CONCERNS ABOUT
THE RELIABILITY AND SECURITY OF INTERNET COMMUNICATIONS.
The secure transmission of confidential information, such as credit card
numbers, over the Internet is essential in maintaining users' confidence in our
services. We rely on licensed encryption and authentication technology to
securely transmit confidential information, including credit card numbers. It is
possible that advances in computer capabilities, new discoveries or other
developments could result in a compromise or breach of the technology used by us
to protect user transaction data. We incur substantial expenses to protect
against and remedy security breaches and their consequences. A party that is
able to bypass our security systems could steal proprietary information or cause
interruptions in our operations. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
Our insurance policies have coverage limits, which may not be adequate to
reimburse us for losses caused by security breaches. We cannot guarantee that
our security measures will prevent security breaches.
We also face risks associated with security breaches affecting third
parties conducting business over the Internet. Users generally are concerned
with security and privacy on the Internet and any publicized security problems
could inhibit the growth of the Internet and therefore our services, as a means
of conducting commercial business transactions.
WE FACE POTENTIAL LIABILITY FOR INFORMATION ACCESSED AND PRODUCTS AND SERVICES
SOLD THROUGH OUR PORTALS.
We could become liable for false or misleading information accessed
through our portals or content co-branded sites with third parties, and for
defective products and services sold as part of our business. The potential
liability of ISPs and portals such as ours for information accessed through
their portals is uncertain. It is possible that claims may be filed against us
based on defamation, obscenity, negligence, copyright or trademark infringement
or other theories. These types of claims have been brought, sometimes
successfully, against providers of Internet services in the past.
Gold Trade and MSN Israel are involved in the sale of products and
services by third parties over the Internet (e-commerce). If these products or
services were defective or were manufactured or supplied in breach of others'
intellectual property rights, Gold Trade and MSN Israel could be liable to
customers who purchase these products or services or to the owners of the
intellectual property.
14
Although we attempt to reduce our liability through contractual
indemnification from our suppliers and disclaimers, there is no guarantee that
we would be successful in protecting ourselves against this type of liability.
Even if we ultimately succeeded, legal action against us would divert management
time and resources, could be costly and is likely to generate negative publicity
for our portals and our business generally. We may also be forced to implement
expensive measures to alter the way our services are provided to avoid any
further liability.
INADEQUATE INTELLECTUAL PROPERTY PROTECTION COULD PREVENT US FROM ENFORCING OR
DEFENDING OUR INTELLECTUAL PROPERTY.
We have various trademark applications, trade secrets and copyrightable
materials, as well as domain names and licenses to use third party software. If
we are not successful in protecting our intellectual property, our business and
financial results could suffer.
TRADEMARKS. In order to refresh our image, as well as part of our
preparations for the provision of international telephony services, we changed
our logos and applied for their registration as trademarks in Israel. There is
no guarantee that these trademarks will be registered or that we will obtain
registration of other trademarks for which we may seek protection in the future.
DOMAIN NAMES. We and our subsidiaries and affiliates, hold numerous
Internet domain names. Domain names generally are regulated by Internet
regulatory bodies. The regulation of domain names in Israel and other countries
is subject to change. Regulatory bodies could establish additional top-level
domains, appoint additional domain name registrars or modify the requirements
for holding domain names.
LICENSES. We have obtained licenses to bundle various third party software
products in our front-end configuration software product. We cannot guarantee
that renewals of these licenses or any licenses of additional software, which
may be required, will be available as needed. While third party licensors have
represented to us that they have the right to license such software and in some
cases agreed to indemnify us, we cannot guarantee that our use of third party
software does not infringe the rights of others. Any infringement claims, even
if not meritorious, could result in the expenditure of significant financial and
managerial resources.
COMPLIANCE WITH THE CHANGING CORPORATE GOVERNANCE REGULATIONS AND PUBLIC
DISCLOSURE REQUIREMENTS MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities
and Exchange Commission regulations and NASDAQ Stock Market rules, are creating
uncertainty for companies such as ours. We are committed to maintaining high
standards of corporate governance and public disclosure. As a result, we intend
to invest reasonably necessary resources to comply with evolving standards, and
this investment may result in increased general and administrative expenses and
a diversion of management time and attention from revenue-generating activities
to compliance activities, which could harm our operating results and business
prospects.
15
RISKS RELATING TO OUR RELATIONSHIP WITH THE EUROCOM GROUP
OUR PRINCIPAL SHAREHOLDER OWNS A CONTROLLING INTEREST IN OUR COMPANY AND IS ABLE
TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR BUSINESS, INCLUDING WAYS WHICH MAY BE
ADVERSE TO OUR PUBLIC SHAREHOLDERS.
Our controlling shareholder, Euronet Communications Ltd., or Euronet
Communications, holds 68.81% of our ordinary shares. Euronet Communications is a
wholly owned subsidiary of Eurocom Communications Ltd., or Eurocom
Communications, which is a 50.33% owned subsidiary of Eurocom Holdings Ltd., or
Eurocom Holdings (an additional 0.67% interest is owned by Mr. Shaul Elovitch,
our chairman, and the chairman of the board of directors of Eurocom Holdings).
As a result, Eurocom Communications and Eurocom Holdings will continue to be
able to exercise considerable influence over our operations and business
strategy and control the outcome of all matters involving shareholder approval,
although their holding in us may be diluted following our March 2005 offering,
including:
o the composition of our board of directors including the appointment
and removal of officers;
o mergers or other business combinations involving us;
o acquisitions or dispositions of our assets;
o future issuances of our ordinary shares or other securities;
o our incurrence of debt;
o various agreements, amendments, waivers and modifications to the
agreements between us and Eurocom Communications, Eurocom Holdings
and their affiliates; and
o payments of dividends on our ordinary shares.
THERE MAY BE CONFLICTS OF INTEREST BETWEEN OUR CONTROLLING SHAREHOLDER AND US.
Our relationship with Eurocom Communications may eliminate or reduce some
opportunities for revenue growth and reducing costs. Eurocom Communications,
which indirectly controls us, or its affiliates could prevent us from entering
into commercial relationships with third parties, such as its competitors,
additionally its competitors may choose not to enter into commercial
relationships with us because of our close relationship with Eurocom
Communications and its affiliates.
Some of our directors are also directors, officers or employees of Eurocom
Communications and own its equity securities. Accordingly, conflicts of interest
may arise from time to time between their interests in Eurocom Communications
and us particularly with respect to our contractual relationships and the
pursuit of overlapping corporate opportunities. We have not adopted any formal
plan or arrangement to address such potential conflicts of interest and intend
to review related-party transactions with Eurocom Communications or any of its
affiliates in accordance with the provisions of the law, on a case-by-case
basis.
16
Because we have interlocking directors with Eurocom Communications, there
also may be inherent conflicts of interest when such directors make decisions
related to transactions between Eurocom Communications or its affiliates and us.
We could lose valuable management input from such conflicted directors and
officers.
RISK RELATED TO OUR ORDINARY SHARES
OUR SHARE PRICE HAS BEEN VERY VOLATILE AND MAY DECLINE IN THE FUTURE.
The market price of our ordinary shares is likely to be highly volatile
and could be subject to wide fluctuations in response to factors such as the
following, some of which are beyond our control:
o quarterly variations in our operating results;
o operating results that vary from the expectations of securities
analysts and investors;
o changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
o changes in market valuations of other Internet or online service
companies;
o announcements of technological innovations or new services by us or
our competitors;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o changes in the status of our intellectual property rights;
o announcements by third parties of significant claims or proceedings
against us;
o additions or departures of key personnel;
o future sales of our ordinary shares; and
o stock market price and volume fluctuations.
Domestic and international stock markets often experience extreme price
and volume fluctuations. Market fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations or political events or hostilities in or surrounding Israel, could
adversely affect the market price of our ordinary shares.
17
OUR SHARE PRICE COULD BE ADVERSELY AFFECTED BY THE SALE OR THE PERCEPTION THAT
CERTAIN SHAREHOLDERS COULD REQUIRE US TO SELL THEIR SHARES.
Prior to our IPO we granted Euronet Communications and other shareholders,
who together hold 69.7% of our ordinary shares, registration rights under the
U.S. Securities Act of 1933 with respect to their shares, giving them rights to:
o include their shares in any registration statement filed by us
following our 1999 initial public offering excluding any
registration of employees' shares on Form S-8 or a similar form; and
o demand registration of their shares at any time after February 2000,
in each case subject to certain conditions.
Following such registration, these shares will be available for sale in
the open market. We cannot predict if future sales of our ordinary shares, or
the availability of our ordinary shares for sale, will adversely affect the
market price of our ordinary shares or our ability to raise capital by offering
equity securities.
ANTI-TAKEOVER PROVISIONS COULD NEGATIVELY IMPACT OUR SHAREHOLDERS.
Provisions of Israeli law, our articles of association and the terms of
our licenses may have the effect of delaying, preventing or making more
difficult a merger or other acquisition of us, even if doing so would be
beneficial to our shareholders. Specifically, under the terms of our licenses,
any change of control requires the consent of the Israeli Ministry of
Communications. In addition, the approval of the General Director of the Israeli
Antitrust Authority may be required.
Under our articles of association, directors elected at the annual general
meeting of our shareholders are classified into three classes. At each annual
general meeting of shareholders, only directors for the class whose term is
expiring will be up for election, and upon election such directors will serve a
three-year term. The outside directors are not classified into the three classes
stated above, and their term of appointment expires as provided by the Israeli
Companies Law.
Israeli law regulates mergers, votes required to approve a merger,
acquisition of shares through tender offers and transactions involving
significant shareholders. Anti-takeover provisions could negatively impact our
shareholders. Some of the provisions of Israeli law could:
o discourage potential acquisition proposals;
o delay or prevent a change in control over us; and
o limit the price that investors might be willing to pay in the future
for our ordinary shares.
18
Generally, under Israeli corporate law, a merger must be approved by the
board of directors and the shareholders of each of the merging companies. If the
share capital of the non-surviving company consists of more than one class of
shares, the approval of each class is also required. Further, if the company was
incorporated before February 1, 2000, as we were, the approval of the merger
requires a 75% majority of the shareholders present and voting at a meeting,
unless such company amends its bylaws to require a different voting requirement.
In certain cases, court approval is also required. Under the Israeli Companies
Law, a merger may be completed only after 70 days have elapsed from the date all
the necessary approvals and the merger proposals have been submitted to the
Israeli Companies Registrar. The Israeli Companies Law also provides that an
acquisition of shares of a public company must be made by means of a tender
offer if, as a result of such acquisition, the purchaser would become a 25% or
more shareholder of the company. This rule does not apply if there is already
another 25% shareholder of the company. Similarly, the Israeli Companies Law
provides that an acquisition of shares in a public company must be made by means
of tender offer if, as a result of the acquisition, the purchaser would become a
45% shareholder of the company, unless someone else already holds a majority of
the voting power of the company. The purchase of shares leading to a 90% holding
or more requires a full tender offer. These rules do not apply if the
acquisition is made by way of a merger. Regulations promulgated under the
Israeli Companies Law provide that, generally, these provisions do not apply to
companies whose shares are listed for trading outside of Israel in certain stock
exchanges. The requirements of Israeli corporate law generally make these forms
of acquisition significantly more difficult than under United States corporate
laws. Other potential means of acquiring a public Israeli company might involve
significant obstacles, such as a requirement for court approval for the
acquisition. In addition, a body of case law has not yet developed with respect
to the Israeli Companies Law. Until this happens, uncertainties will exist
regarding its interpretation.
Finally, Israeli tax law treats some acquisitions, particularly
stock-for-stock swaps between an Israeli company and a foreign company, less
favorably than United States tax law. Israeli tax law may, for instance, subject
a shareholder who exchanges our shares for shares of a foreign corporation to
immediate taxation in case of gain to such shareholder.
These provisions of Israeli corporate and tax law and the uncertainties
surrounding such law may have the effect of delaying, preventing or making more
difficult a merger or acquisition involving our company. This could prevent a
change of control in our company and depress the market price of our ordinary
shares that might otherwise rise as a result of such change of control.
RISKS RELATED TO OUR DEBENTURES
WE MAY NOT BE ABLE TO MAKE OUR DEBT PAYMENTS IN THE FUTURE.
In March 2005, we offered securities to the public in Israel, including
convertible debentures. Our ability to meet our debt obligations will depend on
whether we can successfully implement our strategy, as well as on financial,
competitive, legal, regulatory and technical factors, including some factors
that are beyond our control.
19
In addition, if we are unable to generate sufficient cash flow from
operations to meet principal and interest payments on our debt, we may have to
refinance all or part of our indebtedness. Furthermore, cash flows from our
operations may be insufficient to repay the debentures in full at maturity. Our
ability to refinance our indebtedness, including the debentures, will depend on,
among other things:
o our financial condition at the time;
o restrictions in agreements governing our debt; and
o other factors, including market conditions.
We cannot ensure you that any such refinancing would be possible on terms
that we could accept or that we could obtain additional financing. If
refinancing will not be possible or if additional financing will not be
available, we may have to sell our assets under circumstances that might not
yield the highest prices, or default on our debt obligations, including the
debentures, which would permit the holders of our debentures to accelerate their
maturity dates.
RISKS RELATED TO OUR OPERATION IN ISRAEL
CONDUCTING BUSINESS IN ISRAEL ENTAILS SPECIAL RISKS.
We are incorporated and based in, and currently derive all our revenues
from markets within the State of Israel. Accordingly, we are directly influenced
by the political, economic and military conditions affecting Israel.
Specifically, we could be adversely affected by any major hostilities involving
Israel, a full or partial mobilization of the reserve forces of the Israeli
army, the interruption or curtailment of trade between Israel and its present
trading partners, or a significant downturn in the economic or financial
condition of Israel.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Since September 2000, there has been
a marked increase in violence, civil unrest and hostility, including armed
clashes, between the State of Israel and the Palestinians, and acts of terror
have been committed inside Israel and against Israeli targets in the West Bank
and Gaza. There is no indication as to how long the current hostilities will
last or whether there will be any further escalation. Any continuation of, or
further escalation in these hostilities or any future armed conflict, political
instability or violence in the region may have a negative effect on our business
condition, harm our results of operations and adversely affect our share price.
Furthermore, there are a number of countries that restrict business with Israel
or Israeli companies. Restrictive laws or policies of those countries directed
towards Israel or Israeli businesses had, and may in the future continue to
have, an adverse impact on our operations, our financial results or the
expansion of our business. No predictions can be made as to whether or when a
final resolution of the area's problems will be achieved or the nature thereof
and to what extent the situation will impact Israel's economic development or
our operations.
OUR RESULTS OF OPERATIONS MAY BE NEGATIVELY AFFECTED BY THE OBLIGATION OF OUR
PERSONNEL TO PERFORM MILITARY SERVICE.
Many of our executive officers and employees in Israel are obligated to
perform annual reserve duty in the Israeli Defense Forces and may be called for
active duty under emergency circumstances at any time. If a military conflict or
war arises, these individuals could be required to serve in the military for
extended periods of time. Our operations could be disrupted by the absence for a
significant period of one or more of our executive officers or key employees or
a significant number of other employees due to military service. Any disruption
in our operations could adversely affect our business.
20
THE ECONOMIC CONDITIONS IN ISRAEL HAVE NOT BEEN STABLE IN RECENT YEARS.
In recent years Israel has gone through a period of recession in economic
activity, resulting in low growth rates and growing unemployment. Our operations
could be adversely affected if the economic conditions in Israel deteriorate.
OUR BUSINESS MAY BE IMPACTED BY NIS EXCHANGE RATE FLUCTUATIONS.
Most of our communications and advertising costs are quoted in dollars. As
of June 13, 2002 we are required by law to state our prices in NIS to our
residential and SOHO customers. Furthermore, if we expand our business into
other countries, we may earn additional revenue and incur additional expenses in
other currencies. We also have U.S. dollar denominated liabilities (rights of
use leasing obligations for our international lines). In future periods, our
dollar assets (deposits) and our dollar denominated liabilities might
commercially serve as partial economic hedges against future exchange rate
fluctuations. Because all foreign currencies do not fluctuate in the same
manner, we cannot quantify the effect of exchange rate fluctuations on our
future financial condition or results of operations.
A substantial devaluation of the NIS in relation to the dollar would
substantially increase the cost of our services to Israelis, who pay us in NIS,
and is likely to result in subscriber cancellations and a reduction in Internet
use and e-commerce in Israel.
PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE THE ACQUISITION OF OUR
COMPANY DIFFICULT, WHICH COULD PREVENT A CHANGE OF CONTROL AND THEREFORE DEPRESS
THE PRICE OF OUR SHARES.
Provisions of Israeli corporate and tax law may have the effect of
delaying, preventing or making more difficult a merger with, or other
acquisition of, us. This could cause our ordinary shares to trade at prices
below the price for which third parties might be willing to pay to gain control
of us. Third parties who are otherwise willing to pay a premium over prevailing
market prices to gain control of us may be unable or unwilling to do so because
of these provisions of Israeli law.
YOUR RIGHTS AND RESPONSIBILITIES AS A SHAREHOLDER WILL BE GOVERNED BY ISRAELI
LAW AND DIFFER IN SOME RESPECTS FROM THE RIGHTS AND RESPONSIBILITIES OF
SHAREHOLDERS UNDER U.S. LAW.
We are incorporated under Israeli law. The rights and responsibilities of
holders of our ordinary shares are governed by our memorandum of association,
articles of association and by Israeli law. These rights and responsibilities
differ in some respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, shareholder of an Israeli company has
a duty to act in good faith in exercising his or her rights and fulfilling his
or her obligations toward the company and other shareholders and to refrain from
abusing his power in the company, including, among other things, in voting at
the general meeting of shareholders on certain matters. Israeli law provides
that these duties are applicable in shareholder votes on, among other things,
amendments to a company's articles of association, increases in a company's
authorized share capital, mergers and interested party transactions requiring
shareholder approval. In addition, a controlling shareholder of an Israeli
company or a shareholder who knows that it possesses the power to determine the
outcome of a shareholder vote or who has the power to appoint or prevent the
appointment of a director or executive officer in the company has a duty of
fairness toward the company. However, Israeli law does not define the substance
of this duty of fairness. Because Israeli corporate law has undergone extensive
revision in recent years, there is little case law available to assist in
understanding the implications of these provisions that govern shareholder
behavior.
21
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We were incorporated under the laws of the State of Israel in April 1992
under the name Euronet Golden Lines (1992) Ltd. In June 1999 we changed our name
to Internet Gold - Golden Lines Ltd. We are a public limited liability company
under the Israeli Companies Law 1999 and operate under this law and associated
legislation. Our registered offices and principal place of business are located
at 1 Alexander Yanai Street, Petach Tikva, Israel, and our telephone number is
972-3-939-9848. Our address on the Internet is www.zahav.net.il or
www.zahav.msn.co.il. We also have an investor information site at www.igld.com.
The information on our websites is not incorporated by reference into this
annual report on Form 20-F.
We began our Internet access business in January 1996 under the brand name
"Internet Gold." We currently provide a wide array of Internet services tailored
to meet the needs of our residential, small office and home office, or SOHO, and
business subscribers, including Internet access and related value-added
services, content and e-commerce activities through portals, as well as
international telephony services. Our Internet access packages include basic
access accounts, asymmetrical digital subscriber lines, or ADSL and cable
services, virtual private networks, or VPN, ISDN dial-up accounts, leased and
frame relay lines and dial-up networking. We also provide hosting, integration,
technological services and value-added solutions.
In June 2004, the Israeli Ministry of Communications granted us a license
to provide international telephony services with an international prefix code of
015, sometimes referred to as international telephony services, 015
international telephony services, or 015 services. In August 2004, we launched
the 015 international telephony services.
In November 2004, we received a temporary license, for a trial offering of
local telephony services in Israel. The license expires on November 30, 2005.
Due to disagreements between the Ministry of Communications and Bezeq, we have
not been able to act under the license.
We have six subsidiaries:
MSN Israel - our 50.1% owned joint venture with Microsoft Corporation
(49.9% owned). MSN Israel manages the MSN Israel portal, offering Hebrew-reading
Internet users MSN features such as personalized services, varied Internet
content, e-commerce services (MSN Shops), four of Microsoft Internet's leading
platforms - "Hotmail," "Messenger," "Passport," and "MSN Search" an Internet
search engine as well as news. We agreed with Microsoft that we would invest in
MSN Israel and be responsible for its operating losses and capital expenditures.
We and Microsoft each has the right to terminate the agreement in case the
cumulative losses of MSN Israel reach or exceed $10 million. In 2003, MSN Israel
reached operating profitability as it developed new revenue channels such as
Hosted Exchange, Hotmail's mail platform, and Messenger. In 2004, MSN Israel
increased its revenues and profitability.
22
Gold Mind Ltd., or Gold Mind - a wholly owned subsidiary. Gold Mind is
engaged in the marketing and sale of Internet contents, technologies, virtual
magazines and value added services, such as anti-virus and anti-spam services
and develops selected Internet content ventures. In addition, Gold Mind is the
owner of an Israeli popular Internet interactive games website - Vgames
(www.vgames.co.il) and of a leading Russian-language portal in Israel-
www.zahav.ru.
Start Net Ltd., or Start - In November 2004, Gold Mind acquired 50% of the
shares in Start from Ze'evi Computers & Technology Ltd., under a dissolution
process. In December 2004 Gold Mind acquired the remaining 50% of Start's shares
from MSN Israel. As per an agreement between Start and MSN Israel, MSN Israel
manages the Start portal for Start. In March 2005, Start entered into an
exclusive agreement with GOOP, one of Israel's most popular youth-oriented
portals. Under this agreement, Start purchased all of GOOP's advertising
properties until February 2007 (a period which will be automatically extended,
unless notice is given by either party).
Nirshamim Lalimudim Ltd., or Nirshamim - In March 2005, Gold Mind acquired
50% of the shares of the Nirshamim, a company operating the Israeli portal
"Nirshamim" (www.nirshamim.co.il). The remainder of the shares will continue to
be held by Nirshamim's founders. Nirshamim is a leading academic portal in
Israel, servicing the university and post-university sector. Nirshamim's
revenues derive from advertising educational institutions.
Internet Gold International Ltd., or IGI - IGI is engaged in the promotion
and advancement of cooperation activities with international corporations.
Within the framework of such activities, IGI provides UUNET with Internet
infrastructure segments for the benefit of UUNET's customers in Israel. IGI is
also a distributor of supplemental services in the international telephony
market, including pre-paid and calling card services.
Gold Trade - In December 2004, we purchased all the shares of Gold-Trade
not then held by us, including from Eurocom Marketing Ltd, our affiliated
company. Gold Trade provides e-commerce services on its "P-1000" mega-mall. In
November 2004, Gold Trade's board of directors resolved to cease all its
operations, except for its e-commerce activity on the P-1000 website. Gold Trade
also holds 51% of the rights in one of Israel most popular interactive book shop
sites - www.dbook.co.il.
We made capital expenditures of NIS 23.8 million ($5.5 million) (not
including the purchase of rights of use of the international lines) in the year
ended December 31, 2004, NIS 11.9 million ($2.8 million) in the year ended
December 31, 2003 and NIS 12.6 million ($2.9 million) in the year ended December
31, 2002. Of the NIS 23.8 million of capital expenditures in 2004, an amount of
NIS 18.3 million ($4.2 million) was invested in new network equipment and
computers, NIS 4.2 million ($1 million) in furniture and office equipment and
NIS 1.3 million ($0.3 million) in leasehold improvements.
During 2005, we expect to incur capital expenditures of approximately NIS
13 million ($3 million) (not including the purchase of rights of use of the
international lines), mostly for network equipment and computers. As of June 1,
2005, we are bound by contractual undertakings for $0.28 million of such amount,
mostly for network equipment and computers.
23
B. BUSINESS OVERVIEW
INDUSTRY OVERVIEW
INTERNET SERVICES
GROWTH OF THE INTERNET AND E-COMMERCE. The Internet is an increasingly
significant global medium for communications, information and online commerce.
The Internet has grown rapidly in recent years both in terms of the number of
users and the number of websites. According to a Yankee Group survey, European
broadband users already spend more time with the Internet than watching TV. For
many businesses, the Internet has created a new communications and sales
channel, enabling large numbers of geographically dispersed organizations and
consumers to be reached quickly and cost-effectively.
EVOLUTION OF THE INTERNET SERVICES MARKET. Today, Internet services
consist primarily of Internet access, web hosting, co-location services,
e-commerce solutions and e-advertising. Access services represent the means by
which ISPs interconnect business and consumer users to the resources on the
Internet. Access services vary from dial-up and broadband access for individuals
and small businesses to high-speed dedicated access primarily for larger
organizations, and can range from simple dial-up access to highly organized,
personalized access coupled with value-added services. ISPs vary widely in
geographic coverage, subscriber focus and the nature and quality of services
provided to subscribers. In our experience, consumers are generally focused on
speed and reliability of access, ease of use, subscriber service and price as
they evaluate an ISP. In addition to speed and reliability of access, we believe
many business subscribers want all their Internet-based requirements, such as
access, web hosting, content and services offering and e-commerce applications,
met by a single provider that can provide integrated Internet solutions,
including a single billing statement for all services.
An increasing number of companies provide information and conduct
e-commerce over the Internet, and as a result, Internet operations are
increasingly becoming critical to the commercial and communications operations
of many enterprises. However, many businesses lack the resources and expertise
to develop, maintain and enhance, on a cost-effective basis, the facilities and
network systems necessary for successful Internet access and operations.
Accordingly, businesses increasingly seek outsourcing arrangements to enhance
their website reliability and performance, provide continuous operation of their
Internet solutions and reduce related operating expenses.
As a result, there is increasing demand for ISPs to offer "turnkey"
Internet services. An increasing number of ISPs are beginning to supplement
their basic Internet access services with a variety of commercial services that
facilitate e-commerce, including web hosting, server co-location, remote account
management, and other value-added services. These services expand an ISP's
potential revenue streams from basic monthly access fees to other fees,
including set-up and maintenance charges.
THE ISRAELI MARKET. One of Israel's most important resources is its
experienced and highly educated work force (one third of Israel's labor force
has higher education qualifications). Israel has a population of more than 6.8
million people and approximately 2 million households. With a highly educated
population, Israel has developed an export-oriented, technology-based,
industrialized economy. The Israeli market adapts quickly to new technologies,
especially in the communications technologies field. According to the Israeli
Ministry of Communications, in 2004 Israel had a cellular penetration rate of
95% and a multi-channel television (cables and satellite) penetration of
approximately 72%.
24
Today, Internet services in Israel consist primarily of Internet access,
web hosting, co-location services, content services, e-advertising and
e-commerce solutions. Access services vary from dial-up and broadband access for
individuals and small businesses to high-speed dedicated access primarily for
larger organizations, and can range from simple dial-up access to highly
organized, personalized access coupled with value-added services.
The Israeli market experienced an impressive growth of the broadband
Internet market, which had more than tripled to 640,000 subscribers in 2003,
since 2002. In 2003, 430,000 new subscribers were added, more than twice the
number of new subscribers in 2002. In 2004, there was a 50% increase in the
number of broadband subscribers compared to 2003, and at the end of 2004 there
were 940,000 broadband users. The Ministry of Communications reported that the
broadband access penetration rate for households had risen from 30% in 2003 to
43% in 2004, giving Israel one of the highest rates of broadband access in the
world.
This growth was mainly attributed to attractive prices, competition and
marketing efforts by ISPs and competition between Internet infrastructure
providers. This competition led to massive advertising. The combined effect was
the rapid recruitment of new subscribers for broadband Internet, some of whom
did not have Internet access before at all, although most migrated from dial-up
to broadband service.
INTERNATIONAL TELEPHONY SERVICES
Since the opening of the international telephony market in Israel to
competition in 1996, only three companies (Bezeq International, 012 Golden Lines
and Barak) have provided international telephony services in Israel. The market,
estimated to be two billion minutes and $440 million per year, was equally
divided between the three companies.
On June 2, 2004, we received a license to provide international telephony
services in Israel and launched our international telephony services on August
7, 2004. In November and December 2004, Netvision and Xfone launched
international telephony services in Israel.
The international telephony market is highly competitive and all six
providers had to offer low prices in order to attract or retain subscribers and
minutes. In order to obtain a share in this market, we had to be aggressive,
with low prices and massive use of advertising.
In addition to the retail international telephony market in Israel, we are
also active in the global wholesale market providing call termination services
to more than 30 international carriers.
OUR STRATEGY
From the end of 2000 until the fourth quarter of 2002, we concentrated on
a strategy focused on profitability rather than market share. During the fourth
quarter of 2002, the significant increase in demand for broadband was coupled
with intense competition between all ISPs, which resulted in price reductions
for services offered by all ISPs. Due to this market environment, we adopted a
more aggressive marketing policy in order to attract a greater number of
broadband customers while continuing to keep tight control on our expenses. This
strategy yielded a 224% increase in the number of broadband customers in 2003 as
compared to the year 2002. We have continued this policy during 2004. This
strategy yielded a 54% increase in the number of broadband customers in 2004 as
compared to 2003. Due to price reduction, caused by the aggressive competition
in the broadband and the international telephony markets and our marketing
efforts to attract customers, our profitability may be impaired.
25
On August 7, 2004, we launched our international telephony services. Our
penetration strategy was to use our customer base and Internet channels in order
to penetrate the international telephony market, offering better pricing schemes
than the ones offered by our competitors. The fierce competition, which resulted
in decreasing prices with growing advertising expenses, may impair our
profitability.
SERVICES
We offer a wide range of Internet access alternatives to meet the needs of
our residential and business subscribers. We also offer a broad array of basic
and value-added Internet services to attract and retain subscribers, increase
usage and create additional revenue streams. By offering high-quality,
price-competitive Internet access and related services, we seek to develop both
our residential and business subscriber base.
Since August 2004, we offer international telephony services, both to
subscribers and to subscribers of other providers, both residential and
business. We currently provide international direct calls from Israel abroad. We
intend to expand our services in the near future, by offering supplemental
services, such as pre-paid services, post-paid services and 1-800 services.
INTERNET ACCESS. We offer our high-speed continuous access connections
employing digital leased lines at various bandwidths to meet customers' needs,
as well as ADSL and cable TV access services. In addition, we offer dial-up
modem subscribers Internet access via our 6 points of presence at speeds of up
to 56Kbps for regular analog telephone lines or at 64Kbps (or 128Kbps) for
Integrated Services Digital Network or ISDN. The following table summarizes
several of our most popular Internet access packages in Israel:
26
ACCESS SUMMARY
SERVICES DESCRIPTION TARGET CUSTOMERS CURRENT PRICING INFORMATION
------------------------------------------------------------------------------------------------------------------------
ADSL Accounts Broadband services using Small business Average monthly fee of NIS 35 to NIS 79,
ADSL technology. subscribers and depending on the services provided.
residential users.
------------------------------------------------------------------------------------------------------------------------
Cable Accounts Broadband services using Small business Monthly fee of NIS 35 to NIS 79,
cable technology subscribers and depending on the services provided.
residential users.
------------------------------------------------------------------------------------------------------------------------
Basic Access Internet access using modems Small business Unlimited Package - monthly fee of NIS
Account to dial-up our network. subscribers and 34.9.
Standard Plan residential users. Hour Based Package - fee of NIS 12.49 to
NIS 29.9 for four to ten hours per month.
Additional hours cost NIS 2.5 each.
------------------------------------------------------------------------------------------------------------------------
ISDN Dial-up Basic Account with digital Small business Monthly fee of NIS 34.9.
Accounts service, which provides subscribers and
faster access, also known as residential users.
ISDN access.
------------------------------------------------------------------------------------------------------------------------
64Kbps and up leased Twenty-four hour high speed Business subscribers. Minimum monthly fee of $99, depending on
Frame Relay Line dedicated Internet access to services provided.
carry data traffic at a
speed of 64Kbps and up.
------------------------------------------------------------------------------------------------------------------------
Dial-Up Network Enterprises can connect Business subscribers. Monthly fee of $29 to $69, depending on
(ISDN, ADSL & Cables) their entire PC network to the number of network stations in an
the Internet via one router office and the services provided.
(analog or digital).
------------------------------------------------------------------------------------------------------------------------
VALUE-ADDED SERVICES. We introduced a variety of enhanced, value-added
services that enable our residential and business subscribers to obtain
high-speed Internet access, outsource their Internet facilities and systems
requirements and undertake e-commerce initiatives. The following table
summarizes the current offering of residential and business value-added
services:
27
BUSINESS SERVICE SUMMARY DESCRIPTION TARGET CUSTOMERS
------------------------------------------------------------------------------------------------------------------------
Commercial Website Through this service, a subscriber's website is Business subscribers.
Hosting and Server "hosted" on our servers or its computer is
Co-Location installed in our network operations center. In
either case, the subscriber benefits from our
existing management facilities and receives a
high-speed, full-time connection to the
Internet; direct access to our high speed
network; use of our backed-up power supply,
network monitoring system and daily data
back-up; a secure climate-controlled
environment; and 24/7 technical support. All
access to these websites via our servers or the
co-located servers are processed on our servers.
------------------------------------------------------------------------------------------------------------------------
Global Roaming Our systems are connected to the iPass roaming Business and residential
system, which enables our subscribers to subscribers.
access their Internet accounts while on the road,
without incurring long distance access charges.
iPass provides secure connections to corporate
networks, e-mail and the Internet with over
20,000 available hot spots around the world.
------------------------------------------------------------------------------------------------------------------------
Integrated Expert Installing and maintaining LAN & WAN Business subscribers.
services infrastructures with full technical support.
------------------------------------------------------------------------------------------------------------------------
Security services and Penetration tests for networks and Business subscribers.
products applications, security
assessments, internet fraud investigations
and security maintenance, content
filtering service. Installing and maintaining
firewall machines.
------------------------------------------------------------------------------------------------------------------------
Unified Messaging Allows a subscriber to receive faxes from anywhere Business and residential
to his mailbox at Internet Gold. subscribers.
------------------------------------------------------------------------------------------------------------------------
Virtual Magazines Variety of virtual magazines in many different Residential subscribers.
fields (news, economics, children, food, sports,
computers, lifestyle and leisure, etc.).
------------------------------------------------------------------------------------------------------------------------
"Galim" - The Galim is a leading educational website in Israel. Residential subscribers.
educational website Galim addresses elementary school children (6 to 13
www.galim.org.il years old) and their parents, and offers
experienced and differentiated learning, access
to varied information and develops skills
related to learning and researching through the
Internet.
------------------------------------------------------------------------------------------------------------------------
28
BUSINESS SERVICE SUMMARY DESCRIPTION TARGET CUSTOMERS
------------------------------------------------------------------------------------------------------------------------
Ynet Encyclopedia Ynet is the first encyclopedia in Hebrew
on the Internet, which is updated on a
daily basis. Ynet encyclopedia includes various
information in different formats, including
video, sound and thousands of pictures.
------------------------------------------------------------------------------------------------------------------------
Gold Mail This service allows a subscriber to gain access to Business and residential
his e-mail from any computer. subscribers.
------------------------------------------------------------------------------------------------------------------------
Vgames Vgames.co.il, Israel's first and largest gaming Residential subscribers.
website, operated since October 1999 by our wholly
owned subsidiary, Gold Mind. It supplies Israeli
gamers with daily information about the interactive
entertainment industry: news, previews, reviews and
downloads. Since April 2001, Vgames operates an
online gaming community called "Vgamers Club,"
where paying members receive a semi-weekly online
gaming magazine.
------------------------------------------------------------------------------------------------------------------------
Anti-Virus Integrated anti-virus service which protects the Business and residential
mail box from virus threats. The anti- virus subscribers.
program detects and removes viruses from e-mail
attachments.
------------------------------------------------------------------------------------------------------------------------
Anti-Spam This service enables users to deal better with Business and residential
the proliferation of "junk mail" (spam), saves time subscribers.
and subscribers. prevents waste of storage space.
------------------------------------------------------------------------------------------------------------------------
Web Sites Variety of paid portals and websites in varied Residential subscribers.
topics (sports, children, leisure & life style).
------------------------------------------------------------------------------------------------------------------------
Content Filtering An advanced and effective content
service, enabling parents to control their
children's' exposure to adult and other harmful
content on the web, by using a personal password
login.
------------------------------------------------------------------------------------------------------------------------
On Line Backup This service enables users to automatically Business and residential
backup files and save them for long periods with subscribers.
the ability to retrieve them immediately.
------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL TELEPHONY SERVICES. We offer different packages of
international telephony alternatives to meet the needs of our residential and
business subscribers. The following table summarizes our most popular
international telephony packages:
29
BUSINESS SERVICE SUMMARY DESCRIPTION TARGET CUSTOMERS
------------------------------------------------------------------------------------------------------------------------
Minute based packages Our regular packages - the subscriber pays per Residential Subscribers
usage, for the minutes talked, without any
discounts or monthly fees.
------------------------------------------------------------------------------------------------------------------------
A Monthly fee plan of The subscriber buys a number of minutes per month Business and Residential subscribers
minutes for a monthly fee. For additional minutes, the
subscriber pays a discounted fee.
------------------------------------------------------------------------------------------------------------------------
Tailored packages The subscriber pays per minute. We tailor special Business subscribers
that meet the prices for the subscriber to meet its needs.
subscriber's needs
------------------------------------------------------------------------------------------------------------------------
We intend to expend our services and to offer supplemental services in the
near future, such as pre-paid services, post-paid services and 1-800 services.
E-ADVERTISING AND CONTENT. Through MSN Israel, we offer users personalized
services using MSN features and varied Internet content, such as four of
Microsoft Internet's leading platforms - "Hotmail," "Messenger," "Passport," and
"MSN Search," an Internet search engine, as well as news and a wide variety of
e-advertising services. Through Start-Net, zahav.ru and other portals, we also
offer a vast variety e-advertising services and content.
E-COMMERCE. Through Gold Trade, we offer a vast variety of products and
services by way of electronic tenders, as well as online shopping and
transactional opportunities for a wide range of other products and services. We
emphasize expanding and refining our services to enhance our subscribers'
Internet experience. Our technical staff is engaged in a variety of technical
development and service enhancement activities and continuously evaluates new
and innovative ideas and third-party software products and technology for
potential incorporation into our systems and services. We also regularly update
and expand the online services provided through our portals, organize content
and develop online guides, help screens and other user services and resources.
CUSTOMERS
Generally, we have been successful in attracting and acquiring new
subscribers and retaining existing subscribers. Subscribers for our Internet
access services are those customers to whom we provide broadband, dial-up or
dedicated Internet access. As of December 31, 2004, we had a business customer
base of 3,510 subscribers and of 339,146 residential and SOHO subscribers,
representing a 35% growth rate in our business subscribers and a 9% growth rate
in our residential and SOHO subscribers. Our broadband subscriber base grew by
54%. Our monthly churn rate increased from 1.4% in 2003 to an average of
approximately 1.9% in 2004. Churn rate represents the number of subscribers
canceling or disconnecting during a month as a percentage of the number of
subscribers at the beginning of the month.
Since August 2004, we have offered international telephony services and
have been successful in acquiring subscribers. Subscribers to the international
telephony services are not necessarily customers of our Internet access
services. As of December 31, 2004 we had 86,300 subscribers for our
international telephony services. As of May 31, 2005 our international telephony
subscriber base has increased by 42%.
30
CERTAIN STRATEGIC AND OTHER RELATIONSHIPS.
As part of our strategy, we have entered into strategic and other
relationships with reputable Israeli and international companies. Our principal
relationships are as follows:
MICROSOFT CORPORATION. MSN Israel is 50.1% owned by us and 49.9% owned by
Microsoft Corporation. The MSN Israel portal provides the same look and feel as
MSN Worldwide and uniquely combines leading Israeli content and e-commerce
providers and integrates them with Microsoft's leading network services.
MARKETING AND SALES
Our marketing and sales strategy for both our Internet and international
telephony customers combines brand building and demand increasing advertising
with multi-channel marketing. We use multiple distribution channels:
telemarketing centers, authorized dealers and store chains, cooperation with
business partners, door-to-door sales and mass distribution. We continually
evaluate the effectiveness of our sales and marketing programs, primarily by
analyzing sales statistics such as incoming call volumes, sales volumes, and
incentive offer response, in order to refine our marketing campaigns.
MARKETING OF INTERNET AND ACCESS SERVICES
MARKETING TO RESIDENTIAL SUBSCRIBERS
Our integrated marketing and sales efforts for residential customers
include the following elements:
MARKETING ACTIVITIES. We engage in a variety of marketing and promotional
activities to stimulate awareness of our broadband access services. These
efforts are directed both to consumers who have not previously subscribed to
Internet access services and to Internet users who may switch to our services
after learning of their affordability and reliability. We principally employ
targeted high-visibility media, including television, radio, Internet and
printed media advertising, to solicit new subscribers. Our advertisements
include a toll free 800 number (for regular phones) to allow potential customers
to contact our sales staff.
We believe that our delivery of superior customer service and support and
our associated high levels of customer satisfaction have led to positive
customer referrals. Our sales staff handles calls from prospective subscribers
and follows up on leads generated by current service promotion packages,
advertising at unique events and by proprietary database searches specific to
particular service promotions.
We engage in several activities to increase customer usage of our services
by upgrading their surfing packages and offering them a variety of value added
services and products. Our marketing and sales staff uses our customer database
in order to approach relevant segments and offer them incentives to upgrade
their packages or add wireless residential networks. Our after-sale activities
include offering value-add services such as anti-virus or anti-spam services as
well as a variety of newsletters and content services such as Vgames.
31
We strongly believe that as a leading ISP we should focus on enriching
customers' experiences. As such, our TV activities currently focus on content
marketing via carefully chosen, humoristic programs and specially devised
Internet sites supporting this content. We operate a successful humor channel
under the MSN portal (www.smile.net.il) to promote the fun aspects of broadband
and publish, by mail, a colorful and informative monthly newsletter named "Home
Page" to our subscribers.
JOINT MARKETING PROGRAMS. Our channel marketing program involves the
promotion of our services by our marketing partners to their own customers. We
believe that the subscribers obtained through our relationships with joint
marketing partners accounted for at least 10% of our new subscribers in 2004.
These joint marketing programs provide us with distinct advantages, including:
o ability to gain leverage from the marketing partner's brand through
joint advertising and promotions; and
o cost-savings from contributions from marketing partners to our
advertising and promotions budget.
Our marketing partners typically display our applications and logos in
their retail stores, distribute our promotional materials with their own
products and services, and engage in joint promotion and co-marketing activities
with us. Registering a new customer is easily performed through our unique
on-line registration web-accessed platform. The sources through which we obtain
customers include:
o Israel's major consumer clubs like IDF personnel (www.mcc.co.il) and
Israel's Teachers Union (www.itu.org.il) to which we offer specially
tailored Internet packages;
o home PC retail chains such as BUG (www.bug.co.il) located in the
largest shopping malls in Israel, offering our Internet services
accompanied with relevant software, hardware and communication
products;
o numerous of stand-alone PC stores that promote our Internet service
and are compensated with a success fee; and
o direct marketing partners, specializing in outbound telemarketing
and door-to-door sales.
MARKETING TO BUSINESS CUSTOMERS
In marketing our services to business customers, our integrated marketing
and sales approach is based on a one-stop-shop concept with an end-to-end
solution for our business customers' communication needs, including:
32
DIRECT SALES. We offer our products and services through a consultative
sales approach, which enables us to better understand customers' needs and
provides a variety of bundled Internet, international telephony and IP
application and communication solutions. We offer a broad portfolio of
data-security solutions, Web sites and servers hosting & co-locations solutions,
data VPN and global IP communication solutions as well as professional services
and whole system support services 24X7. Our approach is specifically designed to
meet the budget and quality specifications of each business customer. We believe
that our individualized approach allows us to provide our business customers
with comprehensive solutions and superior ongoing support. We employ business
sales representatives who have strong technical backgrounds and training. This
approach helps us to better understand the needs of each customer's local
business community and become familiar with the products, personalities and
corporate identities of individual local companies. We also use direct
marketing, including direct mail, telemarketing, seminars and trade show
exhibits to target these business customers.
MARKETING PARTNERS. We have entered into business-oriented product
development and marketing alliances with partners. In addition we have built a
network of authorized dealers, mainly business computer network integrators,
which generates a considerable amount of business leads and contracts.
CUSTOMER RETENTION PROGRAM. We have a team of experienced representatives
specializing in residential and business customer retention. This team handles
all incoming calls from customers who wish to cancel services or disconnect
them, and utilizes a series of specially designed "retention tools" to help the
representatives convince customers to stay connected.
MARKETING OF INTERNATIONAL TELEPHONY SERVICES
We launched our international telephony services in August 2004 and have
since acquired an approximately 5% market share. Our marketing and sales
strategy for this market combines brand building and increasing demand through
advertising and multi-channel marketing. We make use of all existing channels
originally developed for Internet subscribers as well as leverage our existing
Internet subscriber base. In addition to continuous evaluation of our sales and
marketing programs, we also employ in-depth analysis of customer activity and
implement usage increase promotions directed at existing customers.
MARKETING TO RESIDENTIAL SUBSCRIBERS. Our integrated marketing and sales
efforts for residential customers include the following elements:
MARKETING ACTIVITIES. Our marketing efforts in this area are directed
primarily at consumers who have not previously subscribed or made use of our
services, and may switch after learning about our price plans and honesty
policy. Our activities focus on below-the-line promotions, utilizing proprietary
databases and a concentrated effort toward niche sectors, such as the
Russian-immigrant community. We also employ targeted media, including
television, radio, Internet and carefully selected printed media advertising, to
solicit new subscribers. Our advertisements include a toll free 800 number (for
non-cellular phones) to allow potential customers to contact our sales staff.
We continue to deliver the same customer service that generated
satisfaction among our Internet customers. Our sales staff handles calls from
prospective subscribers and follows up on leads generated by current service
promotion packages and by analysis of proprietary databases.
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We engage in several activities to increase customer usage of our services
by upgrading their subscription from simple registration to monthly
payment-based programs. Our marketing and sales staff is using our customer
database to approach relevant segments and offer them incentives to upgrade
their packages.
JOINT MARKETING PROGRAMS. We have been able to leverage our joint
marketing programs to the benefit of our international telephony services, such
as Israel Defense Forces personnel (www.mcc.co.il) and Israel's Teachers Union
(www.itu.org.il) to which we offer specially tailored packages. We also added
the country's leading cellular service providers to our list of on-going
partnerships and created new ventures with various new-immigrant organizations.
We also employ our current Internet sales channels, to create new
telephony subscribers. These include stand-alone stores that promote our service
for a success fee, as well as direct sales partners who specialize in outbound
telemarketing and door-to-door sales.
We plan to leverage our customer base as well as our partners and Internet
channels in order to further penetrate to the international telephony market. We
also intend to offer better pricing schemes than the ones offered today by our
competitors and will provide new services to customers.
MARKETING TO BUSINESS SUBSCRIBERS. In marketing our international
telephony services to business customers, our efforts focus on below-the-line
promotions, utilizing proprietary databases and a concentrated effort toward the
existing business customers and special niche markets, like export and import
businesses, embassies, etc. We also use targeted media, including selected
printed media advertising, to solicit new subscribers. Our advertisements
include a toll free 800 number (for non-cellular phones) to allow potential
customers to contact our sales staff.
We provide the same level of customer service to our international
telephony subscribers as to our Internet subscribers. Our sales staff handles
calls from prospective subscribers and follows up on leads generated by current
service promotion packages, and by analysis of proprietary databases.
Our marketing and sales staff uses our customer database to approach
relevant segments and offer them incentives to upgrade their packages.
We engage in several activities to increase customer usage of our services
by upgrading their subscription and by bundling different services together (for
example, Internet service and international telephony service.)
SUBSCRIBER SERVICE
We have a strong commitment to subscriber satisfaction. Subscriber
satisfaction has contributed to our efforts to keep churn rates low and achieve
subscriber growth through subscriber referrals. We believe that the key factors
contributing to subscriber satisfaction are network performance-primarily the
reliability and speed of the Internet access service-subscriber technical
support and the range and quality of our products and services.
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TECHNICAL SUPPORT. Knowledgeable and experienced support teams able to
efficiently diagnose subscriber problems and prescribe corrective measures staff
our technical support team. Technical support is available to all subscribers,
24 hours-a-day, seven days-a-week, 364 days a year. In order to efficiently
service the different levels of support required, we maintain two separate
technical support telephone banks staffed by two separate groups of technical
support representatives to field calls from residential and business
subscribers, respectively. In addition, our technical support staff for
residential subscribers is divided into sub-specialized teams, one dealing with
first time connection and the other providing ongoing support to previously
connected customers. This system enables us to more efficiently address a wide
range of technical problems for a variety of systems. Every subscriber can
access our service and technical support by telephone, e-mail or fax. We also
publish printed reference materials and maintain on our websites comprehensive
descriptions of our subscriber care services, as well as troubleshooting tips
and configuration information. In addition, technical support is available not
only in Hebrew, but also in English, Russian and Arabic. Currently, we have
about 186 technical support personnel for residential subscribers and 28
technical support personnel for business subscribers.
SUBSCRIBER SERVICE. Our subscriber service department answers subscriber
account, registration and other post-sale questions. Subscribers can also
utilize our extranet to obtain real-time interactive subscriber service, and we
have developed an online account information system that enables subscribers to
view their bills and usage records on the Internet. Currently, we have 227
service personnel for residential subscribers and 18 service personnel for
business subscribers.
Non-technical subscriber support for our business subscribers is also
provided by our business sales team, which works closely with the subscriber
support group in handling pre- and post-installation questions raised by
business subscribers. The business sales team also works with the business
technical support group to ensure that subscriber's expectations are met.
NETWORK AND TECHNOLOGY
Our network infrastructure designed to provide subscribers with
reliability and speed and to minimize our costs through efficient use of our
international and domestic bandwidth and implementation of a scalable
infrastructure. Reliability is primarily achieved through redundancy in mission
critical systems that minimizes the number of "single points of failure," i.e.,
points where the failure of a single component of the network could interrupt
service to customers. Speed is achieved through clustered systems, diverse
network architecture, multi-peered Internet backbone connections, aggressive
load balancing and high-speed switching cores. Efficient bandwidth use is
attained through policy-based routing and enhanced Internet web caching that
optimize traffic through our multiple Internet connections.
NETWORK INFRASTRUCTURE. Our network is built in a tiered manner in order
to provide separation between different network functions. The following tiers
exist in our network:
THE ACCESS TIER - there are three major connectivity options for our
customers to access our network:
1. DIAL UP ACCESS- the network currently includes eight points of
presence and has the capability to provide dial-up access, with
local telephone calls, to the entire Israeli population. Each of our
regional points of presence is connected to our two backbone data
centers.
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2. BROADBAND ACCESS - currently broadband access is provided through
either Bezeq, the local telephone provider, offering ADSL lines, or
by HOT, a consortium of the three cable providers, which is the
local cable provider that offers cable-modem access. Our network is
connected to both of the operators and we offer our customers both
types of connectivity. In order to ensure the highest levels of
service to our customers and proper use by them, we have implemented
a broadband aggregation system based on Cisco systems routers and
switches.
3. VARIOUS TYPES OF LEASED LINES - for business customers we offer all
of the types of access offered by the local transmission providers.
These offerings vary from traditional leased lines (e.g. E1 lines)
through ATM connections to advanced Ethernet services. All business
customer lines are connected to dedicated Cisco routers in order to
provide the highest grade of service.
THE CORE TIER - Our network is built around two backbone datacenters (one
in Tel Aviv and one in Petah Tikva, both in central Israel). The two main sites
are interconnected using a coerced wavelength division multiplexing, or CWDM,
optical ring which provides 8Gbits/sec total throughput between the sites. Each
datacenter in itself is built in a dual star topology, in order to achieve
maximum reliability. The network fully supports multi protocol label switching,
or MPLS, which enables us to assure quality of service for critical applications
and utilize advanced techniques such as traffic engineering. MPLS also plays a
crucial role in offering some value added services to business customers, mainly
VPN services.
THE EDGE TIER - This tier is where our network interconnects with other
ISPs' networks which are either other Internet services providers in Israel or
international upstream providers. We are directly connected to all the other
major Israeli ISPs as well as to the Israeli Internet Exchange (IIX). Our
network edge tier spans to three of the world's biggest Internet hubs where we
co-locate edge routers in order to peer with upstream providers. Those hubs are:
New York, London and Frankfurt. This international reach of our network is
designed to assure both geographical redundancy and efficient routing.
INTERNATIONAL BANDWIDTH: Incoming and outgoing - Total of 1,860 MB/sec.
CURRENT SERVICE:
o 9 X 155 MB/sec (STM-1) leased fiber-optic line from Petach Tikva to
London.
o 2 X 155 MB/sec (STM-1) leased fiber-optic line from Petach Tikva to
New York.
o 1 X 155MB/sec (STM-1) leased fiber optic line from Tel-Aviv to
Frankfurt.
We continuously monitor capacity demands on our network, so network
resources grow ahead of market demands. Generally, when the network reaches 70%
to 80% utilization, which may occur at peak hours, we either order new capacity
from third-party vendors or buy the necessary new systems and equipment in order
to handle the current and forecast higher rates of use.
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NETWORK OPERATION CENTER. We operate a 24X7 network operations center
staffed with trained operators who utilize advanced monitoring hardware and
software to assure our service level and immediately handle faults if those
occur. Our network operation center monitors network traffic, quality of service
and security issues, as well as the performance of the equipment located at each
of our various datacenters and points of presence. When required, our network
operators refer issues to our engineering staff.
INTERNATIONAL TELEPHONY OPERATORS. Currently, we principally provide
direct outgoing international dial (DID) service to our customers in Israel. We
are now in the process of establishing our activity in the pre-paid and
post-paid calling cards services.
As a new participant in the market, we decided to build our voice
operations based on the latest technology available - soft switch technology. We
selected Veraz Networks to provide us with their soft switch. The soft switch is
the platform that enables us to connect to local telephone (both fixed and
mobile) operators networks and offer our international telephony services to any
subscriber in Israel.
Our soft switch implements some of the most advanced protocols used today
for voice and VoIP, switching.
For redundancy and reliability reasons, the soft switch is installed in
our two major backbone datacenters (Petach Tikva and Tel Aviv) and like our data
network it is built so that no component will be a single point of failure. From
those two locations we are connected to five different PSTN (Bezeq) switches in
order to provide full redundancy, load balancing and efficient routing of calls.
We are also connected to a growing base of international wholesale voice
carriers (currently we have more then 15 different interconnect partners). This
growing base of carriers ensures our ability to choose the optimal route for any
destination, and also assures a high level of reliability.
Our IP network is able to assure the proper quality of service for each
application. This has enabled us to use the same IP network to support our
international telephony operations as our Internet operations.
In order to increase our voice network reach, we installed a VoIP gateway
at our facility in Frankfurt. This gateway enables us to connect to operators
which do not support VoIP. We intend to install such gateways at our two other
international facilities (London and New York).
In addition, we identified the necessity to protect our customers' and our
own resources from various fraudsters which might damage them. Therefore, we
purchased an advanced anti-fraud system. To fully implement the system's
capabilities, we recruited anti-fraud investigators that were trained to use
this specific system.
The anti-fraud system examines each phone call that is carried out through
our services, and alerts, in real time, on every call that might indicate a
fraudulent behavior. To examine and investigate those warnings, the
investigators use a variety of information sources, some public and some
available to them due to our status as international telephony provider.
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To produce the warnings, the anti-fraud system relies on a set of filters.
Those filters are manually defined by our head anti-fraud field.
Our anti-fraud operation center is manned 24 hours a day, 365 days a year.
The anti-fraud team investigates every warning message produced by the system.
Because of the high sophistication of telephony hackers, the filters are updated
manually and on regular basis to answer any new threat that hackers may come up
with, and to make sure that our usage policy of the telephony system is imposed.
COMPETITION
The market for the provision of Internet access and value added services
is competitive and highly fragmented. As there are no significant barriers to
entry, we expect that competition in this market will intensify and that we may
not be able maintain our strong position in the Israeli market.
We believe that the primary competitive factors determining success as an
Internet service provider are:
o pricing;
o a reputation for reliability and high-quality service;
o effective customer support;
o access speed;
o effective marketing techniques for customer acquisitions; and
o ease of use.
We believe that, we have competed favorably to date, based on the
following factors:
o our strong brand recognition, achieved principally through
innovative marketing programs; and
o our emphasis on providing fast and reliable, high quality services
and superior customer service and support.
ACCESS SERVICES
Our current principal competitors are the four other major ISPs in Israel.
These competitors are: (i) Bezeq International Ltd., our principal competitor, a
subsidiary of Bezeq, Israel's domestic telephone monopoly; (ii) NETVISION,
affiliate of IDB Holding Corporation Ltd., or IDB, one of the largest holding
companies in Israel; (iii) 012 Golden Lines, an affiliate of an Israeli cable
company; and (iv) Barak; These competitors are also international
telecommunications carriers that provide services in Israel. Following the
opening of the international telecommunications market for competition in April
2004, we, as well as Netvision, and Xfone, applied to the Ministry of
Communications for a license to provide international telephony services. On
June 2, 2004, we received our license. Netvision and Xfone were also granted
licenses a few months later.
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In the future we may have additional competition from new local
telecommunication operators, such as Cellcom, Partner and Pelephone, the major
cellular carriers in Israel which have already received ISP licenses, and from
international ISPs. We do not know at present to what effect the entrance of
such new competitors will have on our business.
Moreover, we expect to face competition in the future from companies that
provide connections to consumers' homes, such as telecommunications providers,
direct broadcasting satellite and cable companies. We assume that bundling
packages used by DBS providers, cable providers and Bezeq will increase the
competition in the future.
PORTALS
MSN Israel currently competes with three other major portals in Israel:
Walla, which is its principal competitor, affiliated with Bezeq International
Ltd., Ynet, which is affiliated with the largest media group in Israel - Yedioth
Ahronoth; and Nana, which is affiliated with NetVision.
E-COMMERCE
Gold Trade competes through the brand name "P1000" with three other major
e-commerce providers in Israel. These competitors are: (i) Netaction, which is
affiliated with NetVision; (ii) Olsale, which is a privately-held company; and
(iii) Walla Shops, which is affiliated with Walla and Bezeq International. There
are also several small companies that are active in this area. In addition,
Israelis are able to purchase products and services (including on-line brokerage
services) on international e-commerce websites, such as eBay and Amazon.
Currently, most of the revenues from e-commerce in Israel are derived from
auctions and group sales. We believe this trend will continue in 2005 as well.
ADVERTISING ON PORTALS
Israel's other domestic portals include Walla, Nana, Ynet, The Marker and
Globes. Walla is a Yahoo! style portal, that provides news and mail services.
Nana is a NetVision portal. Ynet is a portal owned by Yedioth Ahronoth, a major
Israeli daily newspaper, and The Marker is owned by Ha'aretz, another major
Israeli daily newspaper. In addition, many Israelis use international portals
such as Yahoo! and MSN.com.
INTERNATIONAL TELEPHONY SERVICES
Since the opening of the international telephony market to competition in
1996, only three companies (Bezeq International, 012 Golden Lines and Barak)
have provided international telephony services in Israel. The market, estimated
to be two billion minutes and $440 million per year, was equally divided between
those three companies.
On August 7, 2004 we launched our international telephony services. Our
penetration strategy was to use our customer base as well as our partners and
Internet channels in order to penetrate to the international telephony market.
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In November 2004 and in December 2004, Netvision and Xfone launched their
international telephony services. There are currently six international
telephony service providers in Israel.
The international telephony market is highly competitive and all the
international telephony providers have to be very aggressive to obtain
subscribers and to increase their market share. As a result of the competition,
prices have significantly decreased and all the international telephony
providers spend a lot of money on advertising and special campaigns, in order to
obtain subscribers and market share. We cannot predict how the entrance of
additional competitors will affect the international telephony market.
GENERAL
Some of our competitors and potential competitors have better brand
recognition and greater financial, technical and marketing resources than us. In
addition, Bezeq and the cable television companies have established network
infrastructure which could provide them with lower cost access to subscriber
homes for a range of competing applications and technologies. Two of our
significant competitors, Barak and Netvision, are controlled by IDB. We cannot
predict how a possible cooperation or merger between them will affect the market
or our ability to compete successfully.
Increased competition could result in:
o limited subscriber growth, increased subscriber cancellations and
loss of market share;
o lower pricing for subscriber access and portal advertising and the
need to offer more free access packages;
o decrease in traffic of international telephony calls;
o the need to increase sales and marketing expenses;
o difficulty in attracting online advertisers resulting in lower
advertising revenues;
o loss of visitors to our portals, including MSN Israel, and fewer
page views; and
o our inability to develop a viable e-commerce business through Gold
Trade.
We cannot guarantee that we will be able to continue to compete
successfully against current or future competitors or that competitive pressures
faced by us will not harm our business and financial results.
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PROPRIETARY RIGHTS
GENERAL. Although we believe that our success is more a function of our
technical and marketing expertise and subscriber service than our proprietary
rights, our success and ability to compete depends in part upon our technology.
We rely on a combination of copyright and trade secret laws, and contractual
restrictions to establish and protect our brand and other proprietary rights. It
is our policy to require employees and consultants and, when possible, suppliers
to execute confidentiality agreements upon the commencement of their
relationships with us. These agreements provide that confidential information
developed or made known during the course of a relationship with us must be kept
confidential and not disclosed to third parties except in specific
circumstances.
TRADEMARKS. In order to refresh our image, as well as part of our
preparations for the provision of international telephony services, we changed
our logos and applied for their registration as trademarks in Israel. There is
no guarantee that these trademarks will be registered or that we will obtain
registration of other trademarks for which we may seek protection in the future.
DOMAIN NAMES. We currently hold numerous Internet domain names, including
the following: "zahav.net.il," "inter.net.il," "internet-zahav.net.il,"
"igld.com," "gold.net.il," "smile.net.il," "igld.net," "015.net.il,"
"015.co.il," "goldmind.co.il." We also hold, through our employees, among other
domain names "vgames.co.il." MSN Israel holds, among other domain names, the
Internet domain names: "msn.net.il," "ilovemessenger.co.il" and "zahav.ru" and
has the right to use the domain names "msn.co.il," and "hotmail.co.il."
Goldtrade holds the Internet domain names: "p1000.co.il," "p2000.co.il,"
"goldtrade.co.il" and "goldsecure.co.il." and Start holds the Internet domain
names of "start.co.il," "msnphoto.co.il" and "msnshops.co.il." Domain names
generally are regulated by Internet regulatory bodies. The regulation of domain
names in Israel and other countries is subject to change. Regulatory bodies
could establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names.
LICENSES. We have obtained licenses to bundle various third party software
products in our front-end configuration software product. We intend to maintain
or negotiate renewals of all existing software licenses and authorizations as
necessary. We may also want or need to license other applications in the future.
We cannot guarantee that such licenses or renewals will be available when
required.
GOVERNMENT REGULATION
GENERAL. The operation of telecommunications services in Israel, including
Internet access services, requires the grant of a general or specific license
under the Communications Law (1982). The Ministry of Communications regulates
the provision of telecommunications services in Israel. As of February 24, 2005,
the Ministry of Communications had issued 57 specific licenses permitting the
provision of Internet services. To date, the Ministry of Communications has not
generally sought to limit the number of licenses granted to potential ISPs.
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LICENSE TO PROVIDE INTERNET AND RELATED SERVICES. We have received a
license from the Israeli Ministry of Communications, which was renewed in
January 2002 for an additional five year period. The license grants us the right
to provide Internet and related services, which includes access to the Internet,
access to electronic databases, e-mail services, encoded data, electronic data
interchange and facsimile services. Our license is subject to several
conditions, including conditions relating to the installation and operation of
equipment, maintenance of equipment, and the use of certain permitted
infrastructure and includes certain prohibitions with respect to services we are
not permitted to provide. Our license also includes requirements regarding
agreements with customers, marketing and advertising, customer service, and
continuity of service. Under the Communications Law, the Ministry of
Communications is entitled to amend the conditions of our license based upon
various considerations such as government policy and public interest.
Furthermore, the Ministry of Communications is entitled to cancel our license if
we fail to comply with its terms and for other reasons specified in the
Communications Law, such as providing false information to the Ministry. The new
license is not identical to the old one, although it does not contain changes
that have material effect on our business, financial conditions or results of
operations.
The Ministry of Communications may cancel, restrict, or suspend our
license as specified in the Israeli Communications Law, if:
o we request that the license be cancelled;
o we violate a material condition of our license;
o we violate or prevent the execution of an instruction of the
Minister given under sections 11(b) or 13 of the Communications Law;
o we cease providing a service under the license;
o we go into liquidation;
o we do not maintain a satisfactory level of telecommunications
services; or
o the Ministry of Communications decides, based upon consideration of
public interest, that such action is required.
In addition, under the terms of our license, the Ministry of
Communications may revoke our license if:
o we do not provide required or accurate disclosures to the Ministry
of Communications; or
o we commit an act or omission which causes harm or restricts
competition in the Internet sector.
In addition, under the terms of our license, the Ministry of
Communications may change our license in case of:
o a change in our suitability to perform the actions required to be
taken under the license or provide the services contemplated under
the license;
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o the change is required in order to ensure competition in the
telecommunication field;
o the change is required in order to ensure the level of the services
provided under the license; or
o technological changes in the telecommunication field justify changes
to the license.
We do, however, have the right to a reasonable hearing prior to the
amendment, cancellation or revocation of our license.
Our license requires that the Ministry of Communications approve in
advance any proposed change of control in our company or any proposed assignment
of our license.
MSN Israel was granted an ISP license that was extended until May 31,
2004. MSN Israel decided not to apply for the extension of the license.
LICENSE TO PROVIDE INTERNATIONAL TELEPHONY SERVICES. On June 2, 2004, we
received a license from the Israeli Ministry of Communications to provide
international telephony services for a period of twenty years, commencing on the
date of receipt of the license. The Ministry of Communications may extend the
license for additional 10-year periods. The license grants us the right to
provide international telecommunication voice services and other related
services. The license is subject to several conditions, including conditions
relating to installation and operation of equipment, maintenance of equipment,
usage of frequencies, tariffs, payments of royalties, liability, insurance and
guarantees. The license also includes requirements regarding agreements with
customers, marketing and advertising customer service and continuity of service.
Under the license, the Ministry of Communication is entitled to amend the
conditions of our license based upon various considerations such as changes in
the field of communications and government policy. Furthermore, the Ministry of
Communications may cancel, restrict or suspend our license as specified in the
Israeli Communication Law and regulations regarding the provision of
international telephony services, if:
o we do not comply with the law;
o we refuse to disclose information which we were obligated to
disclose under law to the Ministry of Communications;
o we do not duly pay royalties or other payments, which we were
required to pay under our license;
o we fail to provide the required bank guarantee;
o there is a change of the control in our company; or
o we violate material conditions of our license, such as:
o we do not provide the services within the required time frame;
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o we cease to provide the services;
o we do not maintain a satisfactory level of telecommunication
services;
o we do not supply the services to the extent required under our
license; or
o we commit an act or omission, which causes harm or restricts
competition in the international telecommunication field.
We do, however, have the right to a reasonable hearing prior to the
amendment, cancellation or revocation of our license. The license prohibits us
to transfer or to encumber our property that is associated with the license,
unless the Minister of Communications gives prior written permission. We have to
pay a fee for the use of frequencies and for operation and registration. We have
to supply the international communication services within six months after the
date our license was granted. We have to supply our customers with international
communication services within nine months after our license was granted.
OTHER REGULATIONS. We are also bound by various other government
regulations, including requirements for registration of electronic databases
under the Protection of Privacy Law (1984). We registered our database as
required under this law.
C. ORGANIZATIONAL STRUCTURE
We are a member of the Eurocom Holdings Group, one of Israel's largest
communications groups. Eurocom Holdings is 100% owned by Messrs. Shaul Elovitch,
chairman of our board of directors (80% of the ordinary shares and 75% of the
management shares), and his brother, Yossef Elovitch, one of our directors (20%
of the ordinary shares and 25% of the management shares). Eurocom Holdings owns
a 50.33% interest and Arison Investments Ltd. owns the remaining 49.0% interest
in Eurocom Communications Ltd. Arison Investments is an Israeli investment
company and the largest member of a consortium that controls Bank Hapoalim. An
additional 0.67% interest in Eurocom Communications is owned by Shaul Elovitch,
directly. Eurocom Communications' main controlled holdings are: Eurocom Cellular
Communications Ltd., the representative of Nokia mobile phones in Israel;
Eurocom Industries (1986) Ltd., a holding company that owns Eurocom Marketing
(1986) Ltd., which markets office electronic equipment and consumer electronic
products; Euronet Communications Ltd., Eurocom Digital Systems Ltd. (formerly
Telbit Ltd.), a provider of customized networking solutions to businesses based
on telephone network equipment and home digital telephones. Eurocom Holdings
indirectly holds 85% (on a fully diluted basis) of Radius Broadcasting Ltd. and
Radio F.M Hashfala Ltd., Israeli companies, each of which owns a regional radio
station. Eurocom DBS Ltd., which is 100% owned by Eurocom Media Communications
EU Ltd. (a company owned 50.33% by Eurocom Holdings Ltd., 49% by Arzaf Ltd.,
(which is 99% owned by Arison Investments Ltd., and 0.67% owned by Shaul
Elovitch) owns approximately 32% of DBS Satellite Services Ltd.
Set forth below is the legal name, location and country of incorporation
and percentage ownership of each of our six subsidiaries. For description of the
business of each of our subsidiaries, see Item 4.A. "Information on the Company
- History and Development of the Company."
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o Gold Mind Ltd., a wholly owned subsidiary incorporated in Israel.
o Start Net Ltd., a wholly owned subsidiary of Gold Mind, incorporated
in Israel.
o Nirshamim Lalimudim Ltd., a 50% owned subsidiary of Gold Mind,
incorporated in Israel.
o Internet Gold International Ltd., a wholly owned subsidiary,
incorporated in Israel.
o Gold Trade (Electronic Commerce) Ltd., a wholly owned subsidiary,
incorporated in Israel.
o MSN Israel Ltd. is an Israeli corporation in which we own a 50.1%
equity interest. Microsoft Corporation holds the remaining 49.9%
interest in MSN Israel.
D. PROPERTY, PLANTS AND EQUIPMENT
Our corporate headquarters are currently located in a 4,250 square meter
leased facility in Petach Tikva, Israel. The term of the lease is ten years
ending September 2009 and is subject to a renewal option for an additional ten
years period. The annual rent for the premises is approximately NIS 2.1 million
($ 0.5 million) linked to the rate of exchange of the U.S. dollar. Our support
department is located in a 250 square meter office in Ramat-Gan, Israel. The
facilities are leased from Eurocom Holdings until June 30, 2007. See Item 7.B.
"Related Party Transactions." In addition, we have six leases for our points of
presence aggregating approximately 100 square meters in Hertzelya, Jerusalem,
Netanya, Ramat-Gan, Airport City and Rosh Ha'yin.
Gold Trade's commerce department and other Internet operations related
departments are located in a 400 square meter leased facility in Petach Tikva.
The term of the lease is 36 months ending December 2007, subject to a renewal
option for an additional 24 months lease.
Our subsidiary, MSN Israel, sub-leased office premises of 325 square
meters from Gold Trade until December 31, 2003 (the termination of the first
option period). In 2004, MSN Israel used 700 square meters and since January
2005 it has been using 800 square meters, on the same terms, although the lease
agreement was not renewed.
Currently, our aggregate monthly rental cost for all the facilities leased
by us and our subsidiaries is $52,000. In the year ended December 31, 2004, we
paid an aggregate of $620,000 in rental costs.
While we believe that our facilities are adequate to serve our current
needs, we may in the future need additional space in connection with the
expansion of our operations. In the year ended December 31, 2004, we invested
NIS 18.3 million ($4.2 million) (not including the purchase the purchase of
rights of use of international lines) in new network equipment and computers,
NIS 4.2 million ($1 million) in furniture and office equipment and NIS 1.3
million ($0.3 million) in leasehold improvements.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON AND SHOULD BE READ IN
CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE RELATED
NOTES, AND THE OTHER FINANCIAL INFORMATION INCLUDED IN THIS REPORT. THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT OUR
CURRENT PLANS, ESTIMATES AND BELIEFS AND INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE
THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS REPORT.
OVERVIEW
We are a leading Israeli Internet service provider serving as of December
31, 2004, 339,146 residential subscribers and 3,510 business subscribers. We
provide a wide array of Internet services tailored to meet the needs of our
subscribers, including Internet access and other value-added services,
e-commerce and content services.
We currently provide Internet services through a nationwide network
providing dial-up, broadband, web hosting, web security and integration
services. We offer a wide range of Internet access packages to meet the needs of
our residential and business subscribers. We also offer related value-added
Internet services, such as web faxing, virtual magazines, anti-virus, anti-spam
and hosting, to attract and retain subscribers, increase usage and create
additional revenue streams. By offering high-quality, price-competitive Internet
access and related services at a varied range, we seek to develop both our
residential and business subscriber base. In addition to providing Internet
access and related services, we are a major operator in the portals and
advertising market through our subsidiary MSN Israel (a joint venture with
Microsoft Corp.) and in the e-commerce market through our e-commerce P-1000
site.
From the end of 2000 until the fourth quarter of 2002, we concentrated on
a strategy focused on profitability rather than market share. During the fourth
quarter of 2002, the significant increase in demand for broadband was coupled
with intense competition between all local ISPs, which resulted in reductions of
service prices by all ISPs. Due to this market environment, we adopted a more
aggressive marketing policy in order to attract a greater number of broadband
customers while continuing to keep tight control on our expenses. This strategy
yielded a 54% increase in the number of broadband customers in 2004 as compared
to 2003. We have decided to continue this policy during 2005. Due to the price
reductions caused by the aggressive competition in the broadband market and the
expenses associated with our marketing efforts to attract customers, our
profitability may be negatively impacted in the future.
On June 2, 2004 we received a license to provide international telephony
services. We launched these services on August 7, 2004. The first service we
offered was direct calls from Israel to the rest of the world (approximately 240
countries). We intend to offer supplemental services in the near future, such as
pre-paid services, post-paid services and 1-800 services. We offer our services
to residential and business subscribers. As of December 31, 2004, we had
approximately 86,300 subscribers for these services.
46
The international telephony market, as well as the Internet market, is a
very competitive market. Due to the conditions of the market and the entrance of
two new competitors (NetVision and Xfone), we have adopted an aggressive
penetration strategy in order to gain subscribers and market share. At this time
we are continuing to keep a tight control on our expenses, but this strategy may
negatively impact our profitability in the future.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to the understanding of
our financial statements. The application of these policies requires management
to make estimates and assumptions that affect the valuation of assets and
expenses during the reporting period. There can be no assurance that actual
results will not differ from these estimates.
We prepare our financial statements in accordance with Israeli GAAP. As
such, we are required to make certain estimates, judgments, and assumptions that
management believes are reasonable based upon the information available. These
estimates, judgments and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. Differences between Israeli
GAAP and U.S. GAAP as they relate to our financial statements are described in
Note 21 to our financial statements.
In accordance with applicable Israeli accounting principles, we maintain
our accounts and present our financial statements in NIS, adjusted for changes
in the Israeli consumer price index through December 31, 2003. Consequently, all
previously published NIS amounts in our financial statements were adjusted each
time we published new financial statements in order to reflect changes in the
Israeli consumer price index, and so all information is presented in NIS
adjusted to December 2003 and constitute the starting point for our nominal
financial reports as of January 1, 2004. See Note 2C to the financial
statements. Any additions made during 2004 are included according to their
nominal values. This presentation of the comparative figures permits the
financial information to be presented in NIS with identical purchasing power.
The translation of NIS amounts into dollars has been made solely for the
convenience of the reader at the representative rate of exchange (as published
by the Bank of Israel) at December 31, 2004 of NIS 4.308 = $1.00.
The significant accounting policies that we believe are most critical to
aid a reader in fully understanding and evaluating our financial condition and
results of operation under Israeli generally accepted accounting principles are
discussed below.
REVENUE RECOGNITION. Most of our revenues are derived from Internet
access. These revenues are recognized ratably over the period that services are
provided. Other revenues include international telephony services, website
hosting, electronic commerce and advertising revenues. Revenues from
international carrier services are recognized according to minutes of traffic.
Website hosting revenues are recognized as the services are performed.
Electronic commerce revenues are recognized as the services are performed or
when the goods are delivered, as applicable. Advertising revenues are recognized
on a straight-line basis over the term of the contract. We consider revenue
recognition to be critical since we have many revenue engines which involve
subjective estimates by our management.
47
Revenues from sale agreements which do not include a general right of
return and which include a number of elements such as hardware, software and
support agreements are split into separate accounting units and are recognized
separately with respect to each accounting unit. An element constitutes a
separate accounting unit if, and only if, it has a separate value to the
customer and there is reliable and objective evidence regarding the fair value
of all the elements of the agreement/the fair value of undelivered elements.
Elements that are not split into an accounting unit due to non-fulfillment of
the conditions specified above are grouped together under one accounting unit.
Revenues from the various accounting units are recognized when the conditions
for recognizing the revenues from the elements included in that same accounting
unit according to their type have been fulfilled, and only up to the amount of
the consideration that is not contingent upon the completion/execution of the
other elements of the contract.
Revenues from the sale of software licenses are recognized when all the
following conditions have been met: the software has been delivered to the
customer, collection of payment is probable, the amount of the contract has been
or can be determined and there is objective and persuasive evidence of the
contract and of our ability to allocate the consideration between the elements
of the contract.
We evaluate our revenue recognition policy every quarter with respect to
existing and new accounting principles and new lines of business. In addition,
every quarter we examine the different parameters that may affect our revenues
and their recognition, such as customer credits, accrued revenues and revenues
from cooperation with third parties. According to these examinations we decide
on the required changes, if any, in our revenue recognition policies. Based on
our past experience, our policy was appropriate and did not require complex
estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The allowance for doubtful accounts
represents management's estimate of the aged receivable balance considered
uncollectible, based on past experience. All accounts aged over 150 days and
accounts which have been forwarded to our lawyers are considered as doubtful
accounts and are recorded as such. We evaluate our guidelines every quarter and
examine the material parameters that might affect the assessment of our doubtful
accounts, such as the population tendency to make timely payments, rate of
checks returned for insufficient payment and blocked bank accounts. Our policy
has been consistent and has proven itself over the years. Therefore, based on
our past experience we believe this policy is appropriate
IMPAIRMENT OF ASSETS. In February 2003, the Israel Accounting Standards
Board published Accounting Standard No. 15 - "Impairment of Assets." The
Standard provides procedures which a company must apply in order to ensure that
its assets in the consolidated balance sheet are not presented in an amount
which is in excess of their recoverable value, which is the higher of the net
selling price or the present value of the estimated future cash flows expected
to be derived from use and disposal of the asset. With respect to the
implementation of this standard, subjective estimates are involved in the
process of decision making. In addition, the Standard provides rules for
presentation and disclosure with respect to assets whose value has declined.
48
The Standard applied to financial statements for periods beginning January
1, 2003. The Standard provides that in most cases the transition will be
effected by means of the "from hereon" method. As required under the Standard,
we evaluate its impact every quarter, review cash flow analysis, the market
prices of our assets and other relevant estimates to ensure an adequate
implementation of the Standard.
THE EFFECT OF NEW ISRAELI ACCOUNTING STANDARDS IN THE PRE-APPLICATION PERIOD
In July 2004, the Israeli Accounting Standards Board published Accounting
Standard No. 19, "Taxes on Income." The Standard provides that a liability for
deferred taxes is to be recorded for all temporary differences subject to tax,
except for a limited number of exceptions. In addition, a deferred tax asset is
to be recorded for all temporary differences that may be deducted, losses for
tax purposes and tax benefits not yet utilized, if it is anticipated that there
will be taxable income against which they can be offset, except for a limited
number of exceptions. The new Standard applies to financial statements for
periods beginning on January 1, 2005. The Standard provides that it is to be
implemented by means of a cumulative effect of a change in accounting method. In
our estimation, the impact of the Standard on our results of operations,
financial position and cash flows will not be material.
BUSINESS BACKGROUND
We earn revenues from Internet access services and value-added Internet
services, advertising on our portals, e-commerce and international telephony
services. To date, we have generated most of our revenues from our Internet
access services to residential, SOHO (small office and home office) and business
subscribers. Internet access revenues primarily consist of monthly subscriptions
for broadband and dial-up access to the Internet. As a result, our revenues are
directly affected by the total number of our paying residential, SOHO and
business subscribers and the average price for our Internet access service per
subscriber. At December 31, 2004 the number of our residential and SOHO
subscribers was 339,146, a 9% growth rate in our residential and SOHO
subscribers compared to December 31, 2003. The number of our business
subscribers increased by 35% in 2004. The following table indicates the number
of our residential (including SOHO) and business subscribers in 2003 and 2004
(in thousands):
2003 2004
---- ----
Broadband.............................................. 107 164
Dial-Up................................................ 63 31
Occasional ............................................ 143 144
Total residential subscribers.......................... 313 339
Business subscribers................................... 2.6 3.5
Most of our subscribers may cancel their subscriptions at any time. Some
of our subscribers, who enter into annual, bi-annual or tri-annual contracts
under special packages, are subject to certain penalty payments if they cancel
during the contract period, including payments for the free benefits they
received as part of the special package. Cash received from subscribers is
applied to working capital when received.
We also earn revenues from value-added Internet services, such as global
roaming, web hosting, web faxing, virtual magazines, anti-virus, anti-spam and
online e-commerce site implementation. We earn revenues for these services based
either on our fixed prices for the service or a negotiated fee. In addition, we
earn revenues from portal advertising at negotiated fees.
49
In August 2004, we began to earn revenues from international telephony
services. These revenues are generated from payments for the minutes used by
subscribers. We offer monthly packages and offer discounts to subscribers. Our
customers for these services include both monthly subscribers and occasional
users.
We bill for Internet access and for international telephony on a monthly
basis, which generally runs from the 20th day of the calendar month to the 19th
day of the following calendar month. Revenues for such services are accrued
until the last day of the reporting period. Revenues for other services are
recognized as the services are provided, including virtual magazines, anti-virus
and website hosting and as products are delivered, including e-commerce
activities. In cases where we assume responsibility for the goods sold in
e-commerce transactions, we recognize the gross revenues. In cases where we act
as a middleman, we recognize the net commission as our revenues.
For both Internet access services and other services, we generally bill
our residential subscribers on a monthly basis. Most of our residential
subscribers pay us by credit card or a bank debit order. Business customers are
billed on a monthly (or quarterly) basis, and we generally receive payment in
full within 10 to 70 days of invoice.
SIGNIFICANT COSTS AND EXPENSES
COST OF REVENUES. Our cost of revenues consists primarily of costs of
communication services, salaries and related expenses, facilities costs and
depreciation expenses. The communication services costs include costs for
providing local telephone lines into our points of presence, the use of third
party networks and leased lines to connect each of our points of presence to our
regional network operations centers, the connection between our regional network
operations centers, points of presence and the Internet backbone. We also
include in the cost of revenues telecommunication services expenses related to
international telephony services. Since the launch of our international
telephony service in August 2004 we have entered into agreements with several
international carriers for the purchase of long distance voice services to about
240 destinations around the world.
We believe that a high level of subscriber satisfaction with the speed and
reliability of our network is not only essential for retaining subscribers, but
also essential for attracting new subscribers through personal referrals.
Accordingly, we have spent significant sums on trans-Atlantic leased lines to
ensure adequate bandwidth to the United States.
We include salary costs for our technical and technical support staff in
our cost of revenues. These employees are directly involved in providing
Internet access and international telephony services to our subscribers. Most of
our technical staff is full-time salaried employees and most of our technical
support staff is part-time salaried employees.
Our cost of revenues also includes the costs of facilities used to provide
technical services and depreciation, principally in respect of our network
equipment.
50
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist
primarily of media advertisement and sales promotion costs as well as salaries,
commissions and related costs for our sales representatives, facilities costs
related to sales and marketing and credit card commissions. Credit card
commissions are merchant fees based on the percentage of our revenue earned
through credit cards.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salary and related costs associated with our executive and
administrative functions, lease payments for our administrative facilities and
other miscellaneous expenses. As of December 31, 2004, we (excluding our
subsidiaries) employed 293 full-time salaried employees and 542 part-time
employees who are paid on an hourly basis. Staff costs include direct salary
costs and related costs such as severance pay, social security and retirement
fund contributions, vacation and recreation pay.
FINANCING INCOME (EXPENSES) NET. Net financing income (expenses) includes
financing costs, interest income on our cash reserves and exchange rate
differentials in real terms as well as devaluation of monetary assets and
monetary liabilities. Beginning January 1, 2004, all of these items are stated
in nominal values.
INCOME TAX. We provided assessment of our deferred tax assets and the need
for a valuation allowance. Such an assessment considers whether it is more
likely than not that some portion or all of the deferred tax assets may not be
realized. The assessment requires considerable judgment on the part of
management, with respect to, among other things, benefits that could be realized
from available tax strategies and future taxable income, as well as other
positive and negative factors. The ultimate realization of deferred tax assets
is dependent upon our ability to generate the appropriate character of future
taxable income sufficient to utilize loss carry forwards before their
expiration.
NON-CASH CHARGES. Under U.S. GAAP, but not under Israeli GAAP, we would
recognize for the years ended December 31, 1999 through 2004, non-cash charges
aggregating NIS 2.7 million ($ 0.6 million) according to Accounting Principles
Board Opinion No. 25 ("APB 25") on account of our 1999 Stock Option Plan
(expenses of NIS 102 thousands for the year ended December 31, 2004, income of
NIS 109 thousands for the year ended December 31, 2003, and expenses of NIS 530
thousands for the year ended December 2002).
If we issue options in the future under a stock option plan with exercise
prices below fair market value at the time of issuance, U.S. GAAP, but not
Israeli GAAP, would require us to recognize an additional non-cash charge with
respect to such issuance.
RESULTS OF OPERATIONS
The following discussion of our results of operations for the years ended
December 31, 2002, 2003 and 2004, including the percentage from revenues data in
the following table, is based upon our consolidated statements of operations
contained in our consolidated audited financial statements for those periods,
and the related notes, included elsewhere in this Report:
51
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
----- ---- ----
Revenues:
Access revenues ................................... 85% 82% 71%
International telephony services .................. - - 4
Other revenues .................................... 15 18 25
----- ---- ----
Total revenues ................................. 100 100 100
Cost and expenses:
Cost of revenues .................................. 54 52 44
Selling and marketing expenses .................... 20 23 33
General and administrative expenses ............... 12 12 11
----- ---- ----
Total cost and expenses ........................ 86 87 88
Income from operations .................................. 14 13 12
Financing income (expenses), net ........................ 1 (2) -
Other expenses, net ..................................... - (1) -
----- ---- ----
Net income after financing expenses ..................... 15 10 12
Income tax benefit ...................................... - 1 -
----- ---- ----
Income after income tax benefit ......................... 15 11 12
Company's share in net loss of investees ............. (1) (1) -
Minority interest in loss of a subsidiary ............ - - -
----- ---- ----
Net income from continued operations ................. 14 10 12
Company's share in loss of investees from discontinued
operations ........................................ (4) (2) (2)
----- ---- ----
Net income ........................................... 10 8 10
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
UNDER ISRAELI GAAP
REVENUES. Revenues increased by 22% from NIS 179.6 million ($ 41.7
million) for the year ended December 31, 2003 to NIS 219.6 million ($ 51
million) for the year ended December 31, 2004. The increase is primarily due to
revenues from the new 015 international telephony service that was launched on
August 7, 2004 and due to the substantial growth of our interactive advertising
and content-based value added services as well as our intense efforts in
after-sale activities. We believe the growth rate of our revenues will improve
in 2005, driven primarily by the continued expansion of our telephony and
e-Advertising businesses, and due to the full year consolidation of our
e-commerce P-1000 site's revenues in 2005.
ACCESS REVENUES. Revenues from Internet access services provided to
residential and business subscribers, which represented 71% of our total
revenues for 2004, increased by 6% from NIS 146.9 million ($34.1 million) for
2003 to NIS 156.4 million ($36.3 million) for 2004. The increase is primarily
due to our major efforts to keep our market share regardless of the sharp
competition in the market. We expect that in 2005 our access revenues will
remain at the same level, based on our forecasts regarding the development of
the access services market in Israel.
INTERNATIONAL TELEPHONY SERVICES. Since the successful launch of our 015
international telephony service on August 7, 2004, we gained revenues of NIS 9.4
million ($2.2 million) which represents 4% of our total revenues. We believe the
growth rate of our revenues from this activity will improve substantially in
2005, driven primarily by the continued expansion of this activity by entering
into supplemental activities in the market such as pre-paid, post-paid, calling
card services and other related activities.
OTHER REVENUES. Other revenues, which represented 25% of our total
revenues for 2004, increased by 64% from NIS 32.7 million ($7.6 million) for
2003 to NIS 53.8 million ($12.5 million) for 2004. The increase is primarily due
to the substantial growth of our interactive advertising and content-based value
added services as well as our intense efforts in after-sale activities. We
expect that our other revenues will increase in 2005, based on our market
research findings that the interactive advertising market should increase in
Israel in 2005 and due to the full year consolidation of our e-commerce P1000
site's revenues in 2005.
52
COST OF REVENUES. Cost of revenues increased by 4% from NIS 92.9 million
($21.6 million) for 2003 to NIS 96.8 million ($22.5 million) for 2004. The
increase is primarily due to costs of telecommunication services expenses
related to the international telephony services. Since the launch of the
international telephony service in August 2004, we entered into agreements with
several international carriers all over the world for the purchase of
international long distance voice services to about 240 destinations around the
world. We anticipate that our cost of revenues will increase in 2005, based on
our forecasts and estimates of the growth of all of our major activities and due
to the full year consolidation of our e-commerce P1000 site activity in 2005.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
by 77% from NIS 41.4 million ($9.6 million) for 2003 to NIS 73.2 million ($17
million) for 2004. The increase is primarily due to the initial intensive
marketing campaign and other marketing activities for the launch of the new 015
international telephony service, and due to our market share strategy to extend
our share of the broadband market, including our advertising campaigns. We
expect that our selling and marketing expenses will increase in 2005 due to our
continued implementation of our strategy to increase our market share in all of
our activities and their related markets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 11% from NIS 21.9 million ($5.1 million) for 2003 to NIS 24.3
million ($5.6 million) for 2004. The increase was primarily due to general
expenses related to our new international telephony services and as a result of
our initial and intensive preparations for this activity. We expect that our
general and administrative expenses will increase in 2005, primarily due to the
expected increase in our revenues.
FINANCING INCOME (EXPENSES), NET. In 2004 we had net financing income of
NIS 0.12 million ($0.03 million) compared to net financing expenses of NIS 3.2
million ($0.8 million) for 2003. Our financing income (expenses) are attributed
to the exchange rate differentials on the U.S. dollar cash deposits that
remained from our initial public offering. We also have U.S. dollar denominated
liabilities (rights of use leasing obligations for our international lines).
OTHER EXPENSES, NET. In 2004 we had net other expenses of NIS 1.1 million
($0.26 million) compared with NIS 2.6 million ($0.6 million) in 2003. Our other
expenses are primarily attributable to Internet Gold International Ltd.'s
recording of an additional impairment charge of NIS 1.6 million ($0.4 million)
with respect to its investment in Compulink, a Greek ISP, in which it holds a
15.2% interest. With this impairment charge, Internet Gold International has
written off its entire investment in Compulink and its operations can no longer
influence our results.
INCOME TAXES. As of December 31, 2004, we had a tax loss carry forward on
a consolidated basis of approximately NIS 113 million ($26.2 million) -
including a tax loss carry forward for our reconsolidated subsidiary Gold Trade,
of approximately NIS 60 million. We assessed our deferred tax assets and the
need for a valuation allowance. Such an assessment considers whether it is more
likely than not that some portion or all of the deferred tax assets may not be
realized. The assessment requires considerable judgment on the part of
management, with respect to, among other things, benefits that could be realized
from available tax strategies and future taxable income, as well as other
positive and negative factors. We cannot be reasonably assured of our ability to
further utilize the tax asset in the foreseeable future, except that we
anticipate that we will be able to utilize Start-Net's tax loss carry forward
for which we recorded a deferred tax asset of NIS 2.3 million ($0.5 million). In
2003 we recorded deferred tax assets of Gold Mind's tax loss carry forward of
NIS 1.9 million ($0.4 million). During 2004, we utilized most of Gold Mind's tax
loss carry forward.
53
COMPANY'S SHARE IN NET LOSS OF INVESTEES. In 2004 we recorded NIS 0.4
million ($0.09 million) as our share in the net loss of investees from continued
operations of our investees compared to NIS 1.5 million ($0.35 million) in 2003.
In 2004, we recorded NIS 4.8 million ($1.1 million) as our share in the net loss
of investees from discontinued operations of our investees compared to NIS 3.7
million ($0.9 million) in 2003. At the end of 2004, Gold Trade's board of
directors reached the decision to close down all of its operations except the
e-commerce activity P-1000 site.
NET INCOME. We reported net income of NIS 19.5 million ($4.5 million) for
the year ended December 31, 2004 as compared to a net income of NIS 14.3 million
($3.3 million) for the year ended December 31, 2003.
UNDER U.S. GAAP
UNLESS OTHERWISE EXPLAINED, THERE ARE NO SIGNIFICANT DIFFERENCES BETWEEN
ISRAELI GAAP AND U.S. GAAP
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities, or VIEs, when the equity investors do not have the
characteristics of a controlling financial interest (as defined in the
Interpretation). In December 2003, the FASB issued Interpretation No. 46R,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
The FASB deferred the effective date for implementation of this Interpretation
until fiscal years ending after March 15, 2004.
According to Israeli GAAP as prescribed in Opinion No. 57 of the Institute
of Certified Public Accountants in Israel, we treated the investment in our
affiliated company Gold Trade as a subsidiary of our company until December 31,
2001. For the years ended December 31, 2002 and December 31, 2003, we accounted
for our investment under the equity method. During December 2004, we acquired
all of the shares of Gold Trade from a related party and from others, therefore
we once again consolidated Gold Trade as a subsidiary as of December 31, 2004.
Under the provisions of FIN 46R, we were required to consolidate Gold
Trade, which met the definition of a VIE for all years presented, due to a
number of factors which indicate that we are the primary beneficiary of Gold
Trade.
We applied FIN 46R by retroactively restating previously issued financial
statements, and recorded a cumulative effect of accounting change as of January
1, 2002 in the amount of NIS 4.4 million ($1 million).
54
REVENUES. Revenues increased by 23% from NIS 185.6 million ($43 million)
for the year ended December 31, 2003 to NIS 228.8 million ($53.1 million) for
the year ended December 31, 2004. The increase was primarily due to revenues
from our new 015 international telephony service that was launched on August 7,
2004 and due to the substantial growth of our interactive advertising and
content-based value added services as well as our intense efforts in after-sale
activities.
OTHER REVENUES. Other revenues, which represented 28% of our total
revenues for 2004, increased by 63% from NIS 38.7 million ($8.9 million) for
2003 to NIS 63 million ($14.6 million) for 2004. The increase was primarily due
to the substantial growth of our interactive advertising and content-based value
added services as well as intense efforts in after-sale activities.
COST OF REVENUES. Cost of revenues increased by 4.5% from NIS 93.9 million
($21.8 million) for 2003 to NIS 98.1 million ($22.8 million) for 2004. The
increase was primarily due to costs of telecommunication services expenses
related to our new international telephony service. Since the launch of our
international telephony service in August 2004, we have entered into agreements
with several international carriers all over the world for the purchase of
international long distance voice services to about 240 destinations around the
world. The differences between Israeli GAAP and U.S. GAAP relating to our cost
of revenues expenses was due to the consolidation of Gold Trade under U.S. GAAP
as required by FIN 46R.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
by 70% from NIS 46.4 million ($10.8 million) for 2003 to NIS 78.7 million ($18.3
million) for 2004. The increase was primarily due to the initial intensive
marketing campaign and other marketing activities associated with our launch of
the new 015 service, and due to the implementation of our market share strategy
to extend our share of the broadband market, including the costs of our
advertising campaigns. The differences between Israeli GAAP and U.S. GAAP
relating to our selling and marketing expenses was due to the consolidation of
Gold Trade under U.S. GAAP as required by FIN 46R.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 12% from NIS 24.3 million ($5.6 million) for 2003 to NIS 27.3
million ($6.3 million) for 2004. The differences between Israeli GAAP and U.S.
GAAP relating to our general and administrative expenses ware due to the
consolidation of Gold Trade under U.S. GAAP as required by FIN 46R, the
amortization of Gold Trade's customer list of NIS 3.3 million compared to NIS
1.2 million in 2003 and the recording of compensation expenses under U.S. GAAP
with respect to grants under our employee stock option plan as required under
APB No. 25 - an expense of NIS 0.1 million in 2004 compared to income of NIS
0.11 million in 2003.
FINANCING INCOME (EXPENSES), NET. In 2004 we had net financing expenses of
NIS 0.08 million ($0.02 million) compared to NIS 3.6 million ($0.84 million) for
2003. Our financing expenses were primarily attributable to the exchange rate
differentials on the U.S. dollar cash deposits that remained from our initial
public offering. We also have U.S. dollar denominated liabilities (rights of use
leasing obligations for our international lines). The differences between
Israeli GAAP and U.S. GAAP relating to our financing expenses are due to the
consolidation of Gold Trade under U.S. GAAP as required by FIN 46R.
NET LOSS FROM DISCONTINUED OPERATIONS. At the end of 2004, Gold Trade's
board of directors reached the decision to close down all its operations except
the e-commerce activity P-1000 site. In 2004 we recorded a net loss of NIS 6.6
million ($1.5 million) net loss from discontinued operations compared to a net
loss of NIS 6.8 million ($1.6 million) in 2003.
55
NET INCOME. We reported net income of NIS 20.6 million ($4.8 million) for
the year ended December 31, 2004 as compared to net income of NIS 12.1 million
($2.8 million) for the year ended December 31, 2003. The differences between
Israeli GAAP and U.S. GAAP relating to our net income are due to the
consolidation of Gold Trade under U.S. GAAP as required by FIN 46R.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
UNDER ISRAELI GAAP
REVENUES. Revenues decreased by 3% from NIS 184.3 million ($42.8 million)
for the year ended December 31, 2002 to NIS 179.6 million ($41.7 million) for
the year ended December 31, 2003. The decrease was primarily due to the sharp
competition in the market which resulted in lower access fees.
ACCESS REVENUES. Revenues from Internet access services provided to
residential and business subscribers, which represented 82% of our total
revenues for 2003, decreased by 6% from NIS 156.3 million ($36.3 million) for
2002 to NIS 146.9 million ($34.1 million) for 2003. The decrease was primarily
due to the sharp competition in the market.
OTHER REVENUES. Other revenues, which represented 18% of our total
revenues for 2003, increased by 17% from NIS 28 million ($6.5 million) for 2002
to NIS 32.7 million ($7.6 million) for 2003. The increase was primarily due to
the substantial growth of our interactive advertising and content-based value
added services as well as our intense efforts in after-sale activities.
COST OF REVENUES. Cost of revenues decreased by 7% from NIS 99.6 million
($23.1 million) for 2002 to NIS 92.9 million ($21.6 million) for 2003. The
decrease was primarily due to our efforts in reducing the costs of international
lines. Cost of revenues as a percentage of revenues decreased from 54% for 2002
to 52% for 2003.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
by 12% from NIS 37.1 million ($8.6 million) for 2002 to NIS 41.4 million ($9.6
million) for 2003. The increase was primarily due to costs incurred in
implementing our market share strategy to extend our share of the broadband
market, including our advertising campaigns.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were similar to the expenses in the year 2002, NIS 21.2 million ($4.9 million)
for 2002 to NIS 21.9 million ($5.1 million) for 2003.
FINANCING INCOME (EXPENSES), NET. In 2003 we had net financing expenses of
NIS 3.2 million ($0.7 million) compared to net financing income of NIS 2.2
million ($0.5 million) for 2002. Our financing expenses were attributable to the
exchange rate differentials on the U.S. dollar cash deposits that remained from
our initial public offering.
OTHER EXPENSES, NET. Internet Gold International recorded an impairment
charge of NIS 2.6 million ($0.6 million) with respect to its investment in
Compulink, a Greek ISP, in which it held a 15.2% interest.
INCOME TAXES. As of December 31, 2003, we had a tax loss carry forward on
a consolidated basis of approximately NIS 81.3 million ($18.9 million).
56
COMPANY'S SHARE IN NET LOSS OF AFFILIATES. In 2003 we recorded NIS 1.5
million ($0.3 million) of our share in the net loss of our affiliates from
continued operations compared to NIS 1.5 million ($0.3 million) in 2002. We also
recorded NIS 3.7 million ($0.9 million) of our share in net loss of our
affiliates from discontinued operations compared to NIS 7.1 million ($1.6
million) in 2002.
NET INCOME. We reported net income from continued operations of NIS 18
million ($4.2 million), for the year ended December 31, 2003 as compared to a
net income from continued operations of NIS 27 million ($6.3 million) for the
year ended December 31, 2002. We reported a net loss from discontinued
operations of NIS 3.7 million ($0.9 million), for the year ended December 31,
2003 as compared to a net loss from discontinued operations of NIS 7.1 million
($1.6 million) for the year ended December 31, 2002. We also reported net income
of NIS 14.3 million ($3.3 million) for the year ended December 31, 2003 as
compared to net income of NIS 20 million ($4.6 million) for the year ended
December 31, 2002.
UNDER U.S. GAAP
Unless otherwise explained, there are no significant differences between
Israeli GAAP and U.S. GAAP.
Under the provisions of FIN 46R, we were required to consolidate the
financials of Gold Trade which met the definition of a VIE for all years
presented, due to a number of factors which indicated that we were the primary
beneficiary of Gold Trade. We applied FIN 46R by retroactively restating
previously issued financial statements.
REVENUES. Revenues decreased by 5% from NIS 194.6 million ($45.2 million)
for the year ended December 31, 2002 to NIS 185.6 million ($43.1 million) for
the year ended December 31, 2003. The decrease was primarily due to the sharp
competition in the market which resulted in lower access fees.
OTHER REVENUES. Other revenues were similar in both years, increasing from
NIS 38.3 million ($8.9 million) for 2002 to NIS 38.7 million ($8.9 million) for
2003
COST OF REVENUES. Cost of revenues decreased by 10% from NIS 103.4 million
($24 million) for 2002 to NIS 93.9 million ($21.8 million) for 2003. The
decrease was primarily due to our efforts in reducing costs of our international
lines. The differences between Israeli GAAP and U.S. GAAP relating to our net
income was due to the consolidation of Gold Trade under U.S. GAAP as required by
FIN 46R.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
by 4% from NIS 44.8 million ($10.4 million) for 2002 to NIS 46.4 million ($10.8
million) for 2003. The increase was primarily due to the costs associated with
the implementation of our market share strategy to extend our share of the
broadband market, including the costs of our advertising campaigns. The
differences between Israeli GAAP and U.S. GAAP relating to our net income was
due to the consolidation of Gold Trade under U.S. GAAP as required by FIN 46R.
57
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were similar in both years, increasing from NIS 23.8 million ($5.5 million) in
2002 compared to NIS 24.4 million ($5.7 million) in 2003. The differences
between Israeli GAAP and U.S. GAAP relating to our net income was due to the
consolidation of Gold Trade under U.S. GAAP as required by FIN 46R.
FINANCING INCOME (EXPENSES), NET. In 2003 we had net financing expenses of
NIS 3.6 million ($0.8 million) compared to net financing income of NIS 2.1
million ($0.5 million) for 2002. Our financing expenses were attributable to the
exchange rate differentials on the U.S. dollar cash deposits that remained from
our initial public offering. The differences between Israeli GAAP and U.S. GAAP
relating to our net income were due to the consolidation of Gold Trade under
U.S. GAAP as required by FIN 46R.
NET LOSS FROM DISCONTINUED OPERATIONS. We reported a net loss from
discontinued operations of NIS 6.8 million ($1.6 million) for the year ended
December 31, 2003 as compared to a net loss from discontinued operations of NIS
21.1 million ($4.9 million) for the year ended December 31, 2002.
NET INCOME. We reported net income of NIS 12.1 million ($2.8 million) for
the year ended December 31, 2003 as compared to net income of NIS 1.5 million
($0.3 million) for the year ended December 31, 2002 (including a cumulative
effect of an accounting change as of January 1, 2002 in the amount of NIS 4.4
million ($1 million)). The differences between Israeli GAAP and U.S. GAAP
relating to our net income was due to the consolidation of Gold Trade under U.S.
GAAP as required by FIN 46R.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our results of operations for our last
eight quarters, under Israeli GAAP. The data has been derived from our quarterly
earnings releases for those periods which, in the opinion of our management,
were prepared on substantially the same basis as the audited financial
statements included in this report. The data for any quarter is not necessarily
indicative of the revenues that may be expected for any future period. The
percentage data shows revenues and expenses as a percentage of total revenues.
58
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31,
2003 2003 2003 2003 2004 2004 2004 2004
-------- -------- --------- --------- --------- -------- --------- --------
ADJUSTED AMOUNTS** REPORTED AMOUNTS*
------------------------------------------- ---------------------------------------------
UNAUDITED (IN THOUSANDS OF NIS)
-------------------------------------------------------------------------------------------
Revenues:
Access revenues ............. 37,180 36,424 36,151 37,151 39,124 40,537 38,571 38,153
International telephony
services .................... - - 2,092 7,289
Other revenues .............. 6,725 7,531 8,181 10,299 11,852 12,662 13,629 15,668
-------- -------- --------- --------- --------- -------- --------- --------
Total revenues ............ 43,905 43,955 44,332 47,450 50,976 53,199 54,292 61,110
Costs and expenses:
Cost of revenues ............ 24,267 23,468 22,797 22,339 22,566 21,625 25,344 27,285
Selling and marketing
expenses ................. 9,624 9,917 9,843 12,009 14,915 17,370 20,462 20,408
General and administrative
expenses ................. 5,144 5,408 5,478 5,878 5,830 5,481 6,572 6,375
Total costs and expenses ....... 39,035 38,793 38,118 40,226 43,311 44,476 52,378 54,068
-------- -------- --------- --------- --------- -------- --------- --------
Operating income ............... 4,870 5,162 6,214 7,224 7,665 8,723 1,914 7,042
Financing income (expenses),
net ......................... (1,058) (5,721) 3,695 (151) 460 (549) 342 (131)
Other income (expenses), net ... (4) (12) (2,587) 11 (642) (856) 54 367
-------- -------- --------- --------- --------- -------- --------- --------
Net income (loss) after
financing expenses .......... 3,808 (571) 7,322 7,084 7,483 7,318 2,310 7,278
Income tax (expense) benefit ... - 2,465 (354) (176) (519) (782) (240) 1,842
-------- -------- --------- --------- --------- -------- --------- --------
Net income after income tax .... 3,808 1,894 6,968 6,908 6,964 6,536 2,070 9,120
Company's share in net (loss)
income of investees ......... (278) (459) (48) (753) (398) (210) 105 107
-------- -------- --------- --------- --------- -------- --------- --------
Net income from continued
operations .................. 3,530 1,435 6,920 6,155 6,566 6,326 2,175 9,227
Company's share in net loss of
investees from discontinued
operations ............... (414) (1,385) (878) (1,060) (576) (675) (695) (2,817)
-------- -------- --------- --------- --------- -------- --------- --------
Net income ..................... 3,116 50 6,042 5,095 5,990 5,651 1,480 6,410
======== ======== ========= ========= ========= ======== ========= ========
Number of subscribers (at the
end of the period):
Residential subscribers ..... 307,136 305,314 305,261 312,256 318,889 322,863 324,035 339,146
Business subscribers ........ 1,946 2,128 2,333 2,600 2,879 3,016 3,142 3,510
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003.
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
59
Three Months Ended
--------------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31,
2003 2003 2003 2003 2004 2004 2004 2004
-------- -------- --------- -------- -------- -------- --------- --------
(As a percentage of total revenues)
Revenues: .................... 100% 100% 100% 100% 100% 100% 100% 100%
Access revenues ........... 85 83 82 78 77 76 71 62
International telephony
services .................. - - - - - - 4 12
Other revenues ............ 15 17 18 22 23 24 25 26
-------- -------- --------- -------- -------- -------- --------- --------
Total revenues ......... 100 100 100 100 100 100 100 100
Costs and expenses:
Cost of revenues .......... 55 53 51 47 44 41 47 45
Selling and marketing
expenses ............... 22 23 22 25 29 33 38 33
General and administrative
expenses ............... 12 12 12 12 11 10 12 10
-------- -------- --------- -------- -------- -------- --------- --------
Total costs and expenses ..... 89 88 85 84 84 84 97 88
Operating income ............. 11 12 15 16 16 16 3 12
Financing income
(expenses), net ........... (2) (13) 8 - 1 (1) 1 -
Other income (expenses),
net ....................... - - (6) - (1) (2) - 1
-------- -------- --------- -------- -------- -------- --------- --------
Net income (loss) after
financing expenses ........ 9 (1) 17 16 16 13 4 13
Income tax (expense)
benefit ................... - 6 (1) - (1) (1) - 3
-------- -------- --------- -------- -------- -------- --------- --------
Net income after income tax .. 9 5 16 16 15 12 4 16
Company's share in net loss
of investees .............. (1) (1) - (2) (1) - - -
-------- -------- --------- -------- -------- -------- --------- --------
Net income from continued
operations ................ 8 4 16 14 14 12 4 16
Company's share in net loss
of investees from
discontinued operations ... (1) (3) (2) (2) (1) (1) (1) (5)
-------- -------- --------- -------- -------- -------- --------- --------
Net income ................... 7 1 14 12 13 11 3 11
======== ======== ========= ======== ======== ======== ========= ========
CONDITIONS IN ISRAEL
We are incorporated under the laws of, and our principal executive offices
are located in, the State of Israel. Accordingly, we are directly affected by
political, economic and military conditions in Israel.
POLITICAL CONDITIONS
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Since September 2000, there has been
a marked increase in violence, civil unrest and hostility, including armed
clashes, between the State of Israel and the Palestinians, and acts of terror
has been committed inside Israel and against Israeli targets in the West Bank
and Gaza. There is no indication as to how long the current hostilities will
last or whether there will be any further escalation. Any further escalation in
these hostilities or any future armed conflict, political instability or
violence in the region may have a negative effect on our business condition,
harm our results of operations and adversely affect our share price.
Furthermore, there are a number of countries that restrict business with Israel
or Israeli companies. Restrictive laws or policies of those countries directed
towards Israel or Israeli businesses may have an adverse impact on our
operations, our financial results or the expansion of our business. No
predictions can be made as to whether or when a final resolution of the area's
problems will be achieved or the nature thereof and to what extent the situation
will impact Israel's economic development or our operations.
60
In addition, some of our executive officers and employees in Israel are
obligated to perform annual reserve duty in the Israeli Defense Forces and may
be called for active duty under emergency circumstances at any time. If a
military conflict or war arises, these individuals could be required to serve in
the military for extended periods of time. Our operations could be disrupted by
the absence for a significant period of one or more of our executive officers or
key employees or a significant number of other employees due to military
service. Any disruption in our operations could adversely affect our business.
ECONOMIC CONDITIONS
In recent years Israel has gone through a period of recession in economic
activity, resulting in low growth rates and growing unemployment. Our operations
could be adversely affected if the economic conditions in Israel continue to
deteriorate. In addition, due to significant economic measures proposed by the
Israeli Government, there have been several general strikes and work stoppages
in 2004, affecting all banks, airports and ports. These strikes have had an
adverse effect on the Israeli economy and on business.
TRADE AGREEMENTS
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is a signatory to the General Agreement on Tariffs
and Trade, which provides for reciprocal lowering of trade barriers among its
members. In addition, Israel has been granted preferences under the Generalized
System of Preferences from the U.S., Australia, and Canada. These preferences
allow Israel to export products covered by such programs either duty-free or at
reduced tariffs.
Israel and the European Union Community concluded a Free Trade Agreement
in July 1975 which confers certain advantages on Israeli exports to most
European countries and obligates Israel to lower its tariffs on imports from
these countries over a number of years. In 1985, Israel and the U.S. entered
into an agreement to establish a free trade area. The free trade area has
eliminated all tariff and specified non-tariff barriers on most trade between
the two countries. On January 1, 1993, an agreement between Israel and the
European Free Trade Association, known as EFTA, which includes Austria, Finland,
Iceland, Liechtenstein, Norway, Sweden and Switzerland, established a free-trade
zone between Israel and the EFTA nations. In November 1995, Israel entered into
a new agreement with the European Union, which includes redefinition of rules of
origin and other improvements, including providing for Israel to become a member
of the research and technology programs of the European Union. In recent years,
Israel has established commercial and trade relations with a number of other
nations, including China, India, Russia, Turkey and other nations in Eastern
Europe and Asia.
61
IMPACT OF DEVALUATION ON THE NIS VS. DOLLAR ON RESULTS OF OPERATIONS,
LIABILITIES AND ASSETS
The dollar cost of our operations in Israel is influenced by the exchange
rate of the dollar. Devaluation or an increase in valuation of the NIS against
the dollar might reflect on our results of operations.
The following table presents information about the devaluation of the NIS
against the dollar:
YEAR ENDED NIS DEVALUATION
DECEMBER 31, RATE %
------------ ---------------
2000 (2.7)
2001 9.3
2002 7.3
2003 (7.6)
2004 (1.6)
A devaluation of the NIS in relation to the dollar has the effect of
reducing the dollar amount of any of our expenses or liabilities which are
payable in NIS, unless those expenses or payables are linked to the dollar. This
devaluation also has the effect of decreasing the dollar value of any asset
which consists of NIS or receivables payable in NIS, unless the receivables are
linked to the dollar. Conversely, any increase in the value of the NIS in
relation to the dollar has the effect of increasing the dollar value of any
unlinked NIS assets and the dollar amounts of any unlinked NIS liabilities and
expenses. We cannot assure you that in the future our results of operations may
not be materially adversely affected by currency fluctuations.
Because exchange rates between the NIS and the dollar fluctuate
continuously, with a historically declining trend in the value of the NIS,
exchange rate fluctuations, particularly larger periodic devaluations, may have
an impact on our profitability and period-to-period comparisons of our results.
As a result of the devaluation of the dollar in 2004, we recorded exchange
rate expenses on our U.S. deposits of NIS 1.3 million ($0.3 million).
We have dollar denominated liabilities (rights of use leasing obligations
for our international lines).
According to a new accounting standard, Accounting Standard No. 12, on
"Discontinuance of Adjustment of Financial Statements," commencing January 1,
2004, the adjustment of financial statements was discontinued. Consequently,
through December 31, 2003, we prepared adjusted financial statements in
accordance with Opinion No. 36 of the Institute of Certified Public Accountants
in Israel. The adjusted amounts included in the financial statements as at
December 31, 2003 constituted the starting point for the nominal financial
report as of January 1, 2004.
62
EFFECTIVE CORPORATE TAX RATE
Israeli companies are generally subject to income tax at the rate of 35%
of taxable income. For tax purposes, results of operations are measured in real
terms. From 1992 through December 31, 2002, we incurred net operating losses. As
of December 31, 2004, we had consolidated net operating loss carry forwards of
approximately NIS 113 million ($26.2 million) - including those of the
reconsolidated subsidiary Gold Trade with approximately NIS 60 million ($13.9
million). Under current Israeli tax laws, operating loss carry forwards do not
expire, are linked to the Israeli inflation rate and may be offset against
future taxable income. Corporate tax rates are declining gradually, in 2005 to
34%, in 2006 to 32% and in 2007 and onwards to 30%.
B. LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. We have required substantial capital resources to finance the
construction of our network and to fund our operations. Historically we financed
the construction of our network and funded our operations principally from cash
flow from operations, short-term bank credit, revolving short-term bank loans
and the proceeds of the initial public offering of our ordinary shares in August
1999.
WORKING CAPITAL. Our working capital as of December 31, 2004 was NIS 41.7
million ($9.7 million) as compared to working capital of NIS 76.3 million ($17.7
million) as of December 31, 2003. The decrease in our working capital is
primarily due to the increase in current maturities of long-term obligations
arising from our purchase of rights of use of international lines. This ratio
shall further drop as we continue to lease additional lines.
In April 2005, we completed an offering of debentures and options that was
made exclusively in Israel, to Israeli residents. We raised a total of NIS 220
million (approximately $51.1 million). The interest rate set for the debentures
was 4%. The debentures and the options are traded on the TASE. The proceeds are
available for general corporate purposes including working capital.
The following table summarizes our cash flows for the indicated years:
YEAR ENDED DECEMBER 31,
----------------------------------
2002 2003 2004
--------- --------- --------
ADJUSTED ADJUSTED REPORTED
AMOUNTS** AMOUNTS** AMOUNTS*
--------- --------- --------
(NIS in thousands)
Net income ..................................................... 19,958 14,303 19,531
Other adjustments for non-cash items............................ 23,611 22,957 27,006
Net changes in assets and liabilities........................... (2,366) (8,088) (8,352)
--------- --------- --------
Net cash provided by operating activities....................... 41,203 29,172 38,185
Net cash used in continued investing activities................. (12,147) (70,706) (117,665)
Net cash used in discontinued investing activities.............. (1) - -
--------- --------- --------
Net cash used in investing activities........................... (12,148) (70,706) (117,665)
Net cash provided by (used in) continued financing activities... (31,528) 38,280 73,226
Net cash provided by (used in) financing activities............. (31,528) 38,280 73,226
Net decrease in cash and cash equivalents....................... (2,473) (3,254) (6,254)
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003.
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
63
Net cash provided by operating activities was NIS 38.2 million ($8.9
million) in 2004, net cash provided by operating activities was NIS 29.2 million
($6.8 million) in 2003 and net cash provided by operating activities was NIS
41.2 million ($9.6 million) in 2002. The increase in the net cash provided by
operating activities in 2004 compared to 2003 is due to our continuing efforts
to implement our profitability strategy.
Net cash used in investing activities was NIS 117.7 million ($27.3
million) in 2004 and NIS 70.7 million ($16.4 million) in 2003. Our investing
activities have primarily involved purchases of rights of use for international
communication lines presented as capital leases, network components, expansion
of our network and computer hardware and software costs. The increase in our
investing activities was primarily related to the purchase of seven
international communication lines during 2004 in the total amount of NIS 69.2
million ($16.1 million) which are presented as capital leases, and also due to
the purchase of network components, expansion of our network and computer
hardware and software costs in connection with our intensive preparations to
provide international telephony services. In December 2004 we obtained long term
loans of NIS 30.5 million ($7.1 million) from banks (presented as cash provided
by financing activities) and granted a loan in the same amount to Gold Trade to
cover its obligations to its banks.
According to Israeli GAAP, receipt of loans in respect of capital leases
are reflected in the statements of cash flows as cash flows from financing
activities rather than investing activities from the acquisition of assets
financed by the lease. Under U.S. GAAP, this should be reflected as a non-cash
financing activity.
Net cash provided by financing activities was NIS 73.2 million ($17
million) in 2004 and NIS 38.3 million ($8.9 million) in 2003. Our financing
activities in 2004 included receipt of long-term loans from banks as mentioned
above and long term loans with respect to the purchase of rights of use in
international communication lines presented as capital leases.
FINANCING ARRANGEMENTS. We have a credit line equal to the deposits that
we hold with the First International Bank of Israel Ltd. As of December 31,
2004, our deposits totaled NIS 75.3 million ($17.5 million). The credit line is
repayable on demand. As of December 31, 2004, NIS 10.8 million ($2.5 million)
was outstanding under the credit line. Long-term obligations to suppliers for
the right of use of international lines are linked to the U.S. dollar exchange
rate, and our long-term leasing agreements for cars are linked to the consumer
price index and bear interest at annual rates ranging from 5% to 7%. As of
December 31, 2004, there was NIS 41.6 million ($9.7 million) outstanding under
our long-term leasing arrangements.
The following table summarizes our bank debt as of December 31, 2002, 2003
and 2004:
AT DECEMBER 31,
----------------------------------
2002 2003 2004
--------- --------- --------
ADJUSTED ADJUSTED REPORTED
AMOUNTS** AMOUNTS** AMOUNTS*
--------- --------- --------
(NIS in thousands)
----------------------------------
SHORT-TERM:
Credit .......................................... 8,996 4,279 10,817
Current maturities of long-term loans under lease
arrangements ................................. 1,461 980 133
--------- --------- --------
Total short-term debt ........................... 10,457 5,259 10,950
--------- --------- --------
LONG-TERM:
Long-term loans maturities ...................... 1,330 273 30,506
--------- --------- --------
Total long-term debt ............................ 1,330 273 30,506
--------- --------- --------
LIABILITIES ATTRIBUTED TO DISCONTINUED OPERATIONS .. - 1,653
--------- --------- --------
Total debt ...................................... 11,787 5,532 43,109
========= ========= ========
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003.
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
64
CAPITAL EXPENDITURES. In 2004, we invested NIS 23.8 million ($5.5 million)
in fixed assets, which included purchases of network components, expansion of
our network and computer hardware and software costs. During 2005, we expect to
incur capital expenditures of approximately NIS 13 million ($3 million) (not
including the purchase of rights of use of the international lines), $0.28
million of which is (as of June 1, 2005) already subject to contractual
obligations. We anticipate that these expenditures will be funded from our cash
flow from operations and borrowings under credit facilities which we may
negotiate. Where feasible, we may also finance certain of these expenditures
through capital leases or installment purchases if these financing alternatives
are available on terms acceptable to us.
LONG TERM LOANS UNDER LEASE ARRANGEMENTS. Our lease obligations as of
December 31, 2004 were NIS 41.6 million ($9.7 million), compared to NIS 27.4
million ($6.4 million) for December 31, 2003. Such leasing obligations relate to
rights of use of twelve international lines under financial lease arrangements
and 24 motor vehicles that are under financial lease arrangements as well.
In December 2004, the monthly costs for the rights of use of international
lines amounted to NIS 3 million ($0.7 million) and the monthly rental costs for
such vehicles amounted to NIS 90 thousand ($20.9 thousand).
Based on our current operating plan, we believe that our current financial
resources will be sufficient to fund our operating activities, capital
expenditures and other obligations through at least until December 2006.
However, if during that period or thereafter we are not successful in generating
sufficient cash flows from operations or in raising additional capital, whether
debt or equity, when required, in sufficient amounts and on terms acceptable to
us, our business, results of operations and financial condition could suffer. In
addition, if additional funds are raised through the issuance of equity
securities, the percentage ownership of our then-current shareholders would be
diluted.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
We have not sponsored any material research and development activities in
the last three fiscal years.
D. TREND INFORMATION
None.
65
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET FULLY ADOPTED
ISRAELI GAAP:
ACCOUNTING STANDARD NO. 19 ON "TAXES ON INCOME"
In July 2004, the Israeli Accounting Standards Board published Accounting
Standard No. 19, "Taxes on Income." The Standard provides that a liability for
deferred taxes is to be recorded for all temporary differences subject to tax,
except for a limited number of exceptions. In addition, a deferred tax asset is
to be recorded for all temporary differences that may be deducted, losses for
tax purposes and tax benefits not yet utilized, if it is anticipated that there
will be taxable income against which they can be offset, except for a limited
number of exceptions. The new Standard applies to financial statements for
periods beginning on January 1, 2005. The Standard provides that it is to be
implemented by means of a cumulative effect of a change in accounting method. In
our estimation, the impact of the Standard on its results of operations,
financial position and cash flows will not be material.
U.S. GAAP:
FASB STATEMENT NO. 123 (REVISION 2004), SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123 (Revision 2004),
"Share-Based Payment," (SFAS 123R) that addresses the accounting for share-based
payment transactions in which employee services are received in exchange for
either our equity instruments, liabilities that are based on the fair value our
equity instruments or that may be settled by the issuance of such equity
instruments. SFAS 123R eliminates the ability to account for share-based
compensation transactions using the intrinsic value method as prescribed in APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Instead, SFAS 123R
requires that such transactions be accounted for using a fair-value-based method
and that compensation expense be recognized in the statement of operations
rather than disclosing the pro forma impact of the stock based compensation.
SFAS 123R provides two alternative adoption methods. The first method is a
modified prospective transition method whereby a company would recognize
share-based employee costs from the beginning of the fiscal period in which the
recognition provisions are first applied as if the fair-value-based accounting
method had been used to account for all employee awards granted, modified, or
settled after the effective date and to any awards that were not fully vested as
of the effective date. Measurement and attribution of compensation cost for
awards that are unvested as of the effective date of SFAS 123R would be based on
the same estimate of the grant-date fair value and the same attribution method
used previously under SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The second adoption method is a modified retrospective transition
method whereby a company would recognize employee compensation cost for periods
presented prior to the adoption of SFAS 123R in accordance with the original
provisions of SFAS 123; that is, an entity would recognize employee compensation
costs in the amounts reported in the pro forma disclosures provided in
accordance with SFAS 123. A company would not be permitted to make any changes
to those amounts upon adoption of SFAS 123R unless those changes represent a
correction of an error. The provisions of SFAS 123R are effective for periods
beginning after June 15, 2005. This standard will be effective for us as of
January 1, 2006. As of December 31, 2004, we did not have any outstanding
options that were granted to employees and have no assumptions as to the amount
of options that may be granted in the future. Accordingly, there is no expected
impact of FAS 123R on our future results of operations.
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E. OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any material off-balance sheet arrangements. In
addition, we have no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligations.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our minimum contractual obligations and
commercial commitments, including obligations of discontinued operations, as of
December 31, 2004 and the effect we expect them to have on our liquidity and
cash flow in future periods:
Payments due by Period
(In thousands)
--------------------------------------------------------------------------------
less than 1 more than 5
Contractual Obligations Total year 1-3 Years 3-5 Years years
---------------------------------------- ----------- ----------- ----------- ----------- -----------
Long-term debt obligations ............. - - - - -
-------------------------------------------------------------------------------------------------------------------------------
Capital (finance) lease obligations .... NIS 122,558 NIS 43,337 NIS 78,936 NIS 285 -
-------------------------------------------------------------------------------------------------------------------------------
Operating lease obligations ............ 18,332 5,262 10,834 2,236 -
-------------------------------------------------------------------------------------------------------------------------------
Purchase obligations ................... 3,700 3,700 - - -
-------------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities reflected on
the company's balance sheet under
Israeli GAAP ...................... - - - - -
-------------------------------------------------------------------------------------------------------------------------------
Total................................... NIS 144,590 NIS 52,300 NIS 89,770 NIS 2,521 -
-------------------------------------------------------------------------------------------------------------------------------
Not all items were recorded in our balance sheet at December 31, 2004. See
Notes 12 and 14 of our Consolidated Financial Statements found elsewhere in this
Report. We believe that we will be able to meet these obligations as they become
due.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Our articles of association provide for a board of directors consisting of
no less than six and no more than nine members or such other number as may be
determined from time to time at a general meeting of shareholders. Our board of
directors is currently composed of seven directors.
Our executive officers are responsible for our day-to-day management. The
executive officers have individual responsibilities established by our chief
executive officer and by the board of directors. Executive officers are
appointed by and serve at the discretion of the board of directors, subject to
any applicable agreements.
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Set forth below are the name, age, principal position and a biographical
description of each of our directors and executive officers:
NAME AGE POSITION
---- --- --------
Shaul Elovitch ........................ 58 Chairman of the Board of Directors
Yossef Elovitch ....................... 54 Director
Anat Winner ........................... 47 Director
Moddi Keret............................ 48 Director
Itzhack Ish-Hurvitz ................... 74 Outside Director
Tommy Stramer.......................... 58 Outside Director
Eli Holtzman........................... 57 Chief Executive Officer and Director
Arik Alster............................ 34 Deputy Chief Executive Officer
Doron Turgeman......................... 37 Deputy Chief Executive Officer and Vice President Finance
Eli Batzon............................. 39 Vice President Business Development and Economics
Mrs. Anat Winner and Mr. Moddi Keret will serve as directors until our
2005 general annual meeting of shareholders. Mr. Shaul Elovitch will serve as
director until our 2006 general meeting of shareholders. Messrs. Eli Holtzman
and Yossef Elovitch will serve as directors until our 2007 general meeting of
shareholders.
Messrs. Itzhack Ish-Hurvitz and Tommy Stramer will serve as outside
directors pursuant to the provisions of the Israeli Companies Law for three-year
terms until July 2005 and January 2006, respectively. Thereafter, under the
Israeli Companies Law, their terms of service may not be renewed.
SHAUL ELOVITCH has served as Chairman of our Board of Directors since our
inception in 1992. Mr. Elovitch acquired Eurocom Communications and its
affiliated companies, one of Israel's largest private communications groups. Mr.
Elovitch has served as Chairman of the Board of Directors and Chief Executive
Officer of Eurocom Holdings and Eurocom Communications, our parent company,
since 1985. Mr. Elovitch is the brother of Mr. Yossef Elovitch.
YOSSEF ELOVITCH has served as our director since 1993. Mr. Elovitch has
been an officer and director of Eurocom Communications since 1985. He serves as
an officer and/or director of various other companies in the Eurocom group. Mr.
Elovitch is the brother of Mr. Shaul Elovitch.
ANAT WINNER has served as our director since August 2001. Mrs. Winner has
served as a business advisor since July 2003. From October 2001 to July 2003,
Mrs. Winner served as Chief Executive Officer and Chief Financial Officer of
Israel News Ltd. From 1999 to October 2001, Mrs. Winner served as Chief
Financial Officer of DBS Satellite Services (1998) Ltd. (YES), an Israeli
company that is engaged in setting up and operating direct broadcasting
satellite television systems. Mrs. Winner holds a B.A. degree in Accounting and
Economics from Haifa University and has been a certified public accountant (CPA)
since 1986.
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MODDI KERET has served as our director since February 2003. Mr. Keret has
been an Executive Vice President at Arison Holdings (1998) Ltd., an Israeli
investment company, since 1993. Mr. Keret currently serves as a director at a
number of companies in which Arison Holdings or its affiliates are a
shareholder, including Partner Communications Ltd., Housing and Construction
Holdings Ltd., Eurocom Communications, Eurocom Cellular Communications Ltd.,
Gaon Holdings Ltd., Hamlet Ltd., Priortech Ltd., DBS Satellite Services (1998)
Ltd., Keret Holdings and Management Ltd., MSN Israel, Gold Trade and other
companies in the Arison Group. Mr. Keret is an Israeli CPA and holds a B.A.
degree in accounting and economics from Tel-Aviv University.
ITZHACK ISH-HURVITZ has served as an outside director since July 1999. Mr.
Ish-Hurvitz has been a senior research fellow at I.C.T.A.F. - Interdisciplinary
Center for Technological Analysis and Forecasting at Tel Aviv University since
1990. Mr. Ish-Hurvitz was a member of the advisory board of W&S - Transition and
Interim Management of the Netherlands and its branch in Israel since May 2000
until September 2002. From 1998 to 2000, Mr. Ish-Hurvitz was a member of the
Board of Directors of Voltaire Advanced Security Ltd. Mr. Ish-Hurvitz was the
executive director of the Israel Consortium for Research and Development of
Generic Technology of Satellite Communications from 1992 to 1998. From 1991 to
1992, Mr. Ish-Hurvitz was a special adviser to the Israeli Minister of
Telecommunications for telecommunications policy. From 1988 to 1990, Mr.
Ish-Hurvitz was the director general of the Israeli Ministry of
Telecommunications.
TOMMY STRAMER has served as an outside director since January 2000. Since
October 2004 Mr. Stramer has served as President and chief executive officer of
Zim American Integrated Shipping Co. Inc. From May 1997 to October 2004 Mr.
Stramer served as Vice President Shipping of ZIM - The Israeli Navigation
Company and was in charge of all the shipping activity of Zim.
ELI HOLTZMAN co-founded our company and has been our Chief Executive
Officer since 1992 and director since July 1999. Mr. Holtzman serves as Chairman
of the board of directors of MSN Israel and Start Net and as a director in Gold
Trade. From November 2002 to January 2004, Mr. Holtzman served as Chief
Executive Officer of Gold Trade and has served in that role again since January
2005. Mr. Holtzman holds a B.Sc. degree in Chemistry and Pharmaceutical from
Illinois University.
ARIK ALSTER has served as our Deputy Chief Executive Officer since October
2004. From February 2001 to October 2004, Mr. Alster served as our Vice
President of Technology. In the last four years, Mr. Alster held various
positions within our company and its subsidiaries. Prior to February 2001 and
since October 1999, Mr. Alster was Chief Technology Officer of our wholly owned
subsidiary Internet Gold International. Mr. Alster holds a B.A. degree in
Economics and Management from the College of Management in Tel Aviv.
DORON TURGEMAN has served as our Deputy Chief Executive Officer since
October 2004 and as Vice President of Finance since May 2001. Since March 2005,
Mr. Turgeman serves as director of Nirshamim. Mr. Turgeman has served as Chief
Financial Officer of our subsidiaries MSN Israel Ltd. and Gold Mind Ltd. since
January 2000 and of Gold Trade since August 2002. Since November 2004, Mr.
Turgeman has also served Chief Executive Officer of Start Net. From 1999 to
2000, he served as controller of Bezeq-call Ltd., a subsidiary of Bezeq Ltd. Mr.
Turgeman holds a B.A. degree in Economics and Accounting from the Hebrew
University and he is a certified accountant.
69
ELI BATZON has served as our Vice President Business Development and
Economics since May 2001. Mr. Batzon has served as Head of our Economic
Department since 1999. From April 2002 to February 2003, Mr. Batzon served as a
director of MSN Israel. Mr. Batzon holds a B.A. degree in Business
Administration and Geography and an M.B.A. degree, with majors in finance and
accounting, both from the Hebrew University, Jerusalem.
B. COMPENSATION
The following table sets forth all compensation we paid with respect to
all of our directors and executive officers (including two officers whose
employment was terminated during 2004) as a group for the year ended December
31, 2004:
Salaries, fees,
commissions and
bonuses(1)
---------------
All directors and executive officers as a
group (12 persons)......................... $1.2 million
(1) Also includes expenses incurred for cars made available to officers and
expenses related to salaries, but does not include expenses such as business
travel, professional and business association dues and expenses reimbursed
to officers and other fringe benefits commonly reimbursed or paid by
companies in Israel.
As of December 31, 2004, we accrued $332,000 for retirement, recreation
payments and vacation for our directors and executive officers.
During the year ended December 31, 2004, we paid to each of our outside
directors as well as to Mrs. Winner, who was considered to be an Independent
Director under U.S. law, an annual fee of NIS 30,986 ($7,193), and a per meeting
attendance fee of NIS 1,631 ($379). Those fees are paid based on the fees
detailed in regulations promulgated under the Israeli Companies Law. Our other
non-employee directors do not receive compensation for their services on the
board of directors or any committee thereof. All of our non-employee directors
are reimbursed for their expenses for each board of directors' meeting attended.
As of December 31, 2004, our directors and executive officers as a group,
consisting of twelve persons, did not hold any options to purchase ordinary
shares.
In May 2004, our board of directors approved a bonus plan for our senior
management for 2004. According to this plan, and subject to several parameters,
such as growth in revenues, market share and profitability, up to 10% of our
income from operations will be distributed to our senior management.
In May 2005, our board of directors approved a bonus plan for our senior
management for 2005. This plan has the same parameters as the 2004 bonus plan,
according to which under certain parameters up to 10% of our income from
operations will be distributed to our senior management.
70
C. BOARD PRACTICES
POTENTIAL CONFLICTS OF INTEREST
Some of our directors also serve in various capacities for entities
affiliated with Arison Investments Ltd. (the owner of 49.0% of Eurocom
Communications) or with Eurocom Communications and its affiliates. These
relationships may give rise to conflicts of interest from time to time relating
to (1) contracts, (2) corporate opportunities, and (3) use of directors' time
and expertise. We have not adopted any formal plan or procedures to address such
conflicts of interest and intend to review all related party transactions on a
case-by-case basis. Israeli law requires that certain rules (as described below)
be followed in approving related parties transactions, which we intend to
continue to follow.
ELECTION OF DIRECTORS
Pursuant to our articles of association, the board of directors is divided
into three classes. Generally, at each annual meeting of shareholders one class
of directors is elected for a term of three years by a vote of the holders of a
majority of the voting power represented and voting at such meeting. All the
members of our board of directors (except the outside directors as detailed
below) may be reelected upon completion of their term of office. The directors
may appoint additional directors to temporarily fill any vacancies in the board
of directors; provided, however that the total number of directors will not
exceed nine, and that if the total number of directors decreases below six, the
board of directors may only act in emergency situations, or to fill the minimum
number of vacancies, or to call a general meeting of shareholders, so that
following such meeting there will be at least six directors in office.
Mr. Moddi Keret and Ms. Anat Winner are Class C directors and will hold
office until the Annual General Meeting of Shareholders to be held in 2005. Mr.
Shaul Elovitch is a Class A director and will hold office until the Annual
General Meeting of Shareholders to be held in 2006, and Messrs. Yossef Elovitch
and Eli Holtzman are Class B directors and will hold office for three years
until the Annual General Meeting of Shareholders to be held in 2007.
Messrs. Itzhack Ish-Hurvitz and Tommy Stramer are outside directors and
will hold office until July 2005 and January 2006, respectively. Under the
Israeli Companies Law, their terms of office may not be renewed.
ALTERNATE DIRECTORS
Our articles of association provide that any director may appoint (or
remove), by written notice to us, another person to serve as an alternate
director. Pursuant to the Israeli Companies Law, any person, who is qualified to
be appointed director and is not already acting as director or alternate
director in a company may act as an alternate director at such company,
provided, however, that the same person may not act as an alternate for several
directors. To our knowledge, no director currently intends to appoint any other
person as an alternate director.
INDEPENDENT AND OUTSIDE DIRECTORS
The Israeli Companies Law requires Israeli companies with shares that have
been offered to the public in or outside of Israel to appoint at least two
outside directors. No person may be appointed as an outside director if the
person or the person's relative, partner, employer or any entity under the
person's control has or had, on or within the two years preceding the date of
the person's appointment to serve as outside director, any affiliation with the
company or any entity controlling, controlled by the company. The term
affiliation includes an employment relationship, a business or professional
relationship maintained on a regular basis, control and service as an officer
holder, excluding service as an outside director of a company that is offering
its shares to the public for the first time.
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No person may serve as an outside director if the person's position or
other activities create, or may create, a conflict of interest with the person's
responsibilities as an outside director or may otherwise interfere with the
person's ability to serve as an outside director. If, at the time outside
directors are to be appointed, all current members of the board of directors are
of the same gender, then at least one outside director must be of the other
gender.
Outside directors are elected by shareholders. The shareholders voting in
favor of their election must include at least one-third of the shares of the
non-controlling shareholders of the company who voted on the matter. This
minority approval requirement need not be met if the total shareholdings of
those non-controlling shareholders who vote against their election represent 1%
or less of all of the voting rights in the company. Outside directors serve for
a three-year term, which may be renewed for only one additional three-year term.
Outside directors can be removed from office only by the same special percentage
of shareholders as can elect them, or by a court, and then only if the outside
directors cease to meet the statutory qualifications with respect to their
appointment or if they violate their duty of loyalty to the company.
Any committee of the board of directors must include at least one outside
director and the audit committee must include all the outside directors. An
outside director is entitled to compensation as provided in regulations adopted
under the Israeli Companies Law and is otherwise prohibited from receiving any
other compensation, directly or indirectly, in connection with such service.
In addition, the NASDAQ Marketplace Rules currently require us to have at
least two independent directors on our board of directors and to establish an
audit committee. As of July 31, 2005, under NASDAQ Marketplace Rules promulgated
pursuant to the Sarbanes-Oxley Act of 2002, effective, our audit committee must
have at least three members and be comprised only of independent directors each
of whom satisfies the "independence" requirements of the Securities and Exchange
Commission and NASDAQ. Our board of director has determined that Messrs.
Ish-Hurvitz and Stramer qualify both as independent directors under the
Securities and Exchange Commission and NASDAQ requirements and as outside
directors under the Israeli Companies Law requirements. Our board of director
has further determined that Ms. Anat Winner qualifies as an independent director
under the Securities and Exchange Commission and NASDAQ requirements.
As a controlled company within the meaning of NASDAQ Marketplace Rule
4350(c)(5), we are exempted from the NASDAQ Marketplace Rules promulgated
pursuant to the Sarbanes-Oxley Act of 2002, effective as of July 31, 2005,
according to which a majority of our board of directors must qualify as
independent directors within the meaning of the NASDAQ Marketplace Rules see
Item 6.C." Directors Senior Management and Employees - Board Practices - NASDAQ
Exemptions for a Controlled Company."
72
NASDAQ EXEMPTIONS FOR A CONTROLLED COMPANY
As a controlled company within the meaning of NASDAQ Marketplace Rule
4350(c)(5), or Rule 4350(c)(5), we are exempt, and are relying on such
exemption, from the following requirements of NASDAQ Marketplace Rule 4350(c):
o that the majority of the company's board of directors must qualify
as independent directors, as defined under NASDAQ Marketplace Rules.
o that the compensation of the chief financial officer and all other
executive officers must be determined, or recommended to the board
of directors for determination, either by (i) a majority of the
independent directors or (ii) a compensation committee comprised
solely of independent directors.
o that director nominees must either be selected or recommended for
the board of directors' selection, either by (a) a majority of
independent directors or (b) a nominations committee comprised
solely of independent directors.
NASDAQ EXEMPTIONS AND HOME COUNTRY PRACTICES
NASDAQ Marketplace Rule 4350, or Rule 4350, was recently amended to permit
foreign private issuers to follow certain home country corporate governance
practices without the need to seek an individual exemption from NASDAQ. Instead,
a foreign private issuer must provide NASDAQ with a letter from outside counsel
in its home country certifying that the issuer's corporate governance practices
are not prohibited by home country law.
On June 27, 2005 we provided NASDAQ with a notice of non-compliance with
Rule 4350. We do not comply with the requirements of Rule 4350, that our
independent directors will have regularly scheduled meetings at which only
independent directors are present, and that we distribute to shareholders, and
file with NASDAQ, copies of an annual report containing audited financial
statements of our company and its subsidiaries within a reasonable period of
time prior to our annual meeting of shareholders. Instead, we will follow
Israeli Companies Law and practice.
APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW
The Israeli Companies Law codifies the fiduciary duties that "office
holders," including directors and executive officers, owe to a company. An
"office holder" is defined in the Israeli Companies Law as a director, general
manager, chief business manager, deputy general manager, vice general manager,
other manager directly subordinate to the managing director or any other person
assuming the responsibilities of any of the foregoing positions without regard
to such person's title. An office holder's fiduciary duties consist of a duty of
care and a duty of loyalty. The duty of care requires an office holder to act at
a level of care that a reasonable office holder in the same position would
employ under the same circumstances. This includes the duty to utilize
reasonable means to obtain (i) information regarding the appropriateness of a
given action brought for his approval or performed by him by virtue of his
position and (ii) all other information of importance pertaining to the
foregoing actions. The duty of loyalty includes avoiding any conflict of
interest between the office holder's position in the company and any other
position he holds or his personal affairs, avoiding any competition with the
company's business, avoiding exploiting any business opportunity of the company
in order to receive personal gain for the office holder or others, and
disclosing to the company any information or documents relating to the company's
affairs which the office holder has received due to his position as an office
holder. Each person identified as a director or executive officer in the table
Item 6.A. "Directors and Senior Management" is an office holder. Under the
Israeli Companies Law, all arrangements as to compensation of office holders who
are not directors require approval of our audit committee and board of
directors, and the compensation of office holders who are directors must be
approved by our audit committee, board of directors and shareholders.
73
The Israeli Companies Law requires that an office holder promptly disclose
any personal interest that he or she may have and all related material
information known to him or her and any documents in their position, in
connection with any existing or proposed transaction by us. In addition, if the
transaction is an extraordinary transaction, that is, a transaction other than
in the ordinary course of business, other than on market terms, or likely to
have a material impact on the company's profitability, assets or liabilities,
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 the foregoing, or by any corporation in
which the office holder or a relative is a 5% or greater shareholder, director
or general manager or in which he or she has the right to appoint at least one
director or the general manager. Some transactions, actions and arrangements
involving an office holder (or a third party in which an office holder has an
interest) must be approved by the board of directors or as otherwise provided
for in a company's articles of association, as not being adverse to the
company's interest. In some cases, such a transaction must be approved by the
audit committee and by the board of directors itself (with further shareholder
approval required in certain cases). 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, may not be present during the board of directors or audit committee
discussions and may not vote on this matter, unless the matter which is
considered is in the ordinary course of business of the company or the majority
of the members of the board or the audit committee have a personal interest, as
the case may be. In the event the majority of the members of the board or the
audit committee have a personal interest, then the approval of the general
meeting of shareholders is also required.
The Israeli Companies Law also provides that an extraordinary transaction
with a controlling shareholder or an extraordinary transaction with another
person in whom the controlling shareholder has a personal interest or the terms
of compensation of a controlling shareholder, must be approved by the audit
committee, the board of directors and shareholders. The shareholder approval for
an extraordinary transaction must include at least one-third of the shareholders
who have no personal interest in the transaction who voted on the matter. The
transaction can be approved by shareholders without this one-third approval, if
the total shareholdings of those shareholders who have no personal interest and
voted against the transaction do not represent more than one percent of the
voting rights in the company.
However, under the Companies Regulations (Relief from Related Party
Transactions), 5760-2000, promulgated under the Israeli Companies Law, certain
transactions between a company and its controlling shareholder(s) do not require
shareholder approval.
74
In addition, directors' compensation and employment arrangements do not
require the approval of the shareholders if both the audit committee and the
board of directors agree that such arrangements are nothing but for the benefit
of the company. If the director or the office holder is a controlling
shareholder of the company then, the employment and compensation arrangements of
such director or office holder do not require the approval of the shareholders
providing certain criteria is met.
The above relief will not apply if one or more shareholder holding at
least 1% of the issued and outstanding share capital of the company or of the
company's voting rights, objects to the grant of such relief, provided that such
objection is submitted to the company in writing not later than seven (7) days
from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli Securities
Law. If such objection is duly and timely submitted, then the compensation
arrangement of the directors will require shareholders' approval as detailed
above.
In addition, a private placement of securities that will (i) cause a
person to become a controlling shareholder or (ii) increase the relative
holdings of a shareholder that holds 5% or more of the company's outstanding
share capital or that will cause any person to become, as a result of the
issuance, a holder of more than five percent of the company's outstanding share
capital in a private placement in which twenty percent or more of the company's
outstanding share capital prior to the placement are offered, the payment for
which (in whole or in part) is not in cash or not under market terms - requires
approval by the board of directors and the shareholders of the company.
The Israeli Companies Law provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% or greater shareholder of the
company. This rule does not apply if there is already another 25% or greater
shareholder of the company. Similarly, the Israeli Companies Law provides that
an acquisition of shares in a public company must be made by means of a tender
offer if as a result of the acquisition the purchaser would hold greater than a
45% interest in the company, unless there is another shareholder holding more
than a 45% interest in the company. These requirements do not apply if, in
general, if the acquisition (1) was made in a private placement that received
shareholder approval, (2) was from a 25% or greater shareholder of the company
which resulted in the acquiror becoming a 25% or greater shareholder of the
company, or (3) was from a shareholder holding more than a 45% interest in the
company which resulted in the acquiror becoming a holder of more than a 45%
interest in the company.
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 the acquirer. The
Israeli Companies Law provides for appraisal rights if any shareholder files a
request in court within three months following the consummation of a full tender
offer. If more than 5% of the outstanding shares are not tendered in the tender
offer, then the acquiror may not acquire shares in the tender offer that will
cause his shareholding to exceed 90% of the outstanding shares.
Regulations under the Israeli Companies Law provide that the Israeli
Companies Law's tender offer rules may not apply to a company as to which
another law also applies, if in the opinion of the chairperson of the Israeli
Securities Authority, the application of such regulations will impair the
application of the foreign law or the lack of application of the Israeli
regulations will not harm a reasonable investor.
75
INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS
The Israeli Companies Law provides that an Israeli company cannot
exculpate an office holder from liability with respect to a breach of his duty
of loyalty, but may, if permitted by its articles of association, exculpate in
advance an office holder from his liability to the company, in whole or in part,
with respect to a breach of his duty of care. However, a company may not
exculpate in advance a director from his liability to the company with respect
to a breach of his duty of care in the event of distributions.
In accordance with the Israeli Companies Law, our Articles of Association
provide that, subject to any restrictions imposed by the Israeli Companies Law,
we may enter into a contract for the insurance of the liability of any of our
office holders. The Companies Law provides that a company may enter into such a
contract in respect of an act performed by an office holder in his capacity as
such, with respect to:
o a breach of his duty of care to us or to another person;
o a breach of his duty of loyalty to us, provided that the office
holder acted in good faith and had reasonable cause to assume that
his act would not prejudice our interests; or
o a financial liability imposed upon him in favor of another person.
In addition, in accordance with the Israeli Companies Law, we may
indemnify an office holder with respect to an act performed in his capacity as
an office holder against:
o a financial liability imposed on him in favor of another person by
any judgment, including a settlement or an arbitrator's award
approved by a court;
o reasonable litigation expenses, including attorney's fees, incurred
by the office holder as a result of an investigation or proceeding
instituted against him by a competent authority, provided that such
investigation or proceeding concluded without the filing of an
indictment against him or the imposition of any financial liability
in lieu of criminal proceedings, or concluded without the filing of
an indictment against him and a financial liability was imposed on
him in lieu of criminal proceedings with respect to a criminal
offense that does not require proof of criminal intent; and
o reasonable litigation expenses, including attorneys' fees, incurred
by such office holder or which were imposed on him by a court, in
proceedings we instituted against him or instituted on our behalf or
by another person, or in a criminal charge from which he was
acquitted, or in a criminal charge in which he was convicted,
provided such charge does not require proof of a culpable mental
state.
76
In accordance with the Israeli Companies Law, our Articles of Association
may permit us to:
o Undertake to indemnify in advance an office holder of our company,
against a financial liability imposed on him in favor of another
person by any judgment, including a settlement or an arbitrator's
award approved by a court in respect of an act performed in his
capacity as an office holder, provided that the undertaking is
limited to types of events which our board of directors deems to be
anticipated due to our company's activities and limited to an amount
or standard determined by the board of directors to be reasonable
under the circumstances; and
o Retroactively indemnify an office holder of our company;
These provisions are specifically limited in their scope by the Israeli
Companies Law, which provides that a company may not indemnify an office holder,
nor exculpate an office holder, nor enter into an insurance contract that would
provide coverage for any monetary liability incurred as a result of any of the
following:
o a breach by the office holder of his 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;
o a breach by the office holder of his duty of care if such breach was
committed intentionally or recklessly, unless the breach was
committed only negligently;
o any act or omission done with the intent to unlawfully yield a
personal benefit; or
o any fine imposed on the office holder.
In addition, pursuant to the Israeli Companies Law, exculpation of an
undertaking to indemnify or indemnification of, and procurement of insurance
coverage for, our office holders must be approved by our audit committee and our
board of directors and, if such office holder is a director, also by our
shareholders.
We currently maintain a directors' and officers' liability insurance
policy providing coverage of not more than $5,000,000 for any one matter and in
the aggregate. Our current directors `and officers' liability insurance policy
expires on July 31, 2005 and we are currently negotiating coverage under a new
policy.
In October 2003, we undertook to indemnify our directors and officers to
the extent permitted by law, in an aggregate amount not to exceed $5,000,000, to
the extent that their liability is not covered under our directors' and
officers' liability insurance policy. Our indemnification undertaking will
automatically expire in the event we increase coverage under the directors' and
officers' liability insurance policy to $10,000,000 or more. In the event that
coverage under the policy is increased, the indemnification amount will decrease
by the same amount, until expiration.
77
Insofar as indemnification for liabilities arising under the U.S.
Securities Act of 1933 may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, we have been informed that
in the opinion of the SEC such indemnification is against public policy as
expressed in the U.S. Securities Act of 1933 and is therefore unenforceable.
EMPLOYMENT AGREEMENTS
On June 15, 2000, we entered into an employment agreement with Mr. Eli
Holtzman, our chief executive officer and a member of our board of directors,
which was terminated in July 2002 and replaced by a new agreement. The agreement
provided for a base salary and a package of benefits including options (which
expired in November 2004) and contained certain non-competition and
confidentiality provisions. According to the agreement, in the event we
terminate the employment of Mr. Holtzman with us, he will be entitled to an
amount equal to four months salary, amounts accumulated in an education fund due
to our monthly contribution to this fund on his behalf and benefits to which Mr.
Holtzman is entitled under Israeli law. Such benefits include severance pay,
compensatory payments and loss of earning capacity payments. Under the
agreement, the term of Mr. Holtzman's employment will continue until such time
it is terminated by us, subject to providing Mr. Holtzman with a three-month
prior notice and immediately in the event of termination for cause. Mr. Holtzman
may terminate the agreement on a 30-day prior notice.
As of July 2002, Mr. Holtzman's employment with us was terminated and we
entered into an agreement with a company wholly owned by Mr. Eli Holtzman,
pursuant to which such company will provide us with the services of Mr.
Holtzman. The agreement provides for the same economic terms as the previous
agreement with Mr. Holtzman.
AUDIT COMMITTEE
Our audit committee, established in accordance with Section 114 of the
Israeli Companies Law and Section 3(a)(58)(A) of the Securities Exchange Act of
1934, assists our board of directors in overseeing the accounting and financial
reporting processes of our company and audits of our financial statements,
including the integrity of our financial statements, compliance with legal and
regulatory requirements, our independent public accountants' qualifications and
independence, the performance of our internal audit function and independent
public accountants, finding any defects in the business management of our
company for which purpose the audit committee may consult with our independent
auditors and internal auditor, proposing to the board of directors ways to
correct such defects, approving related-party transactions as required by
Israeli law, and such other duties as may be directed by our board of directors.
Our audit committee is currently composed of Messrs. Ish-Hurvitz and
Stramer and Mrs. Winner, each of whom satisfies the respective "independence"
requirements of the Securities and Exchange Commission, NASDAQ. We also comply
with Israeli Law requirements for audit committee members. Mr. Tommy Stramer has
been elected as the chairperson of the audit committee. Our Board of Directors
has determined that Ms. Winner qualifies as a financial expert. The audit
committee meets at least once each quarter. Our audit committee charter is
available on our website at www.igld.com.
78
Our audit committee also has the responsibility of approving related-party
transactions as required by law. Under Israeli law, an audit committee may not
approve an action or a transaction with a controlling shareholder, or with an
office holder, unless at the time of approval two outside directors are serving
as members of the audit committee and at least one of the outside directors was
present at the meeting in which an approval was granted.
Our audit committee is authorized generally to investigate any matter
within the scope of its responsibilities and has the power to obtain from our
internal auditing unit, our independent auditors or any other officer or
employee any information that is relevant to such investigations.
OTHER CORPORATE GOVERNANCE MATTERS
We have adopted a Code of Business Conduct and Ethics applicable to all of
our principal officers and all employees. The Code of Ethics which is
distributed to all officers and employees, may be viewed at our website.
Our audit committee approves all audit and non-audit services rendered by
our independent registered public accountants. All member of our audit committee
are considered financially literate in accordance with the NASDAQ definition.
INTERNAL AUDITOR
The Israeli Companies Law also requires the board of directors of a public
company to appoint an internal auditor nominated by the audit committee. A
person who does not satisfy the Companies Law's independence requirements may
not be appointed as an internal auditor. The role of the internal auditor is to
examine, among other things, the compliance of the company's conduct with
applicable law and orderly business practice. Our internal auditor complies with
the requirements of the Companies Law. Our Internal Auditor is currently Mr.
Eliyahu Rejwan.
D. EMPLOYEES
At December 31, 2004, we and our four wholly owned subsidiaries employed
357 full-time employees and 541 part-time employees, all of which were based in
Israel. Of these 898 employees, 271 employees were employed in marketing and
sales, 88 employees were employed in finance, operations, human resources and
administration, 227 employees were employed in technical support and training,
232 employees were employed in customer service and 80 employees were employed
in technical administration.
At December 31, 2003, we and our two wholly owned subsidiaries (including
Gold Mind and IGI) employed 225 full-time employees and 428 part-time employees,
all of which were based in Israel. Of these 653 employees, 172 employees were
employed in marketing and sales, 63 employees were employed in finance,
operations, human resources and administration, 179 employees were employed in
technical support and training, 179 employees were employed in customer service
and 60 employees were employed in technical administration.
At December 31, 2002, we and our two wholly owned subsidiaries (including
Gold Mind and IGI) employed 218 full-time employees and 341 part-time employees,
all of which were based in Israel. Of these 559 employees, 164 employees were
employed in marketing and sales, 55 employees were employed in finance,
operations, human resources and administration, 182 employees were employed in
technical support and training, 104 employees were employed in customer service
and 54 employees were employed in technical administration.
79
In addition, at December 31, 2004, our 50.1% owned subsidiary MSN Israel
Ltd. employed 48 full-time employees. Of these 48 employees, 42 employees were
employed in marketing, sales and business development, three employees were
employed in finance, operations, human resources and administration and three
employees were employed in the technical division.
In addition, at December 31, 2003, MSN Israel Ltd. employed 40 full-time
employees. Of these 40 employees, 34 employees were employed in marketing, sales
and business development, three employees were employed in finance, operations,
human resources and administration and three employees were employed in the
technical division.
In addition, at December 31, 2002, MSN Israel Ltd. employed 32 full-time
employees. Of these 32 employees, 28 employees were employed in marketing, sales
and business development, two employees were employed in finance, operations,
human resources and administration and two employees were employed in the
technical division.
Our relationships with our employees are governed by Israeli labor
legislation and regulations, extension orders of the Ministry of Labor, labor
courts judgments implementation and interpretation of such legislation and
regulations and personal employment agreements. Israeli labor laws and
regulations are applicable to all of our employees. The laws concern various
matters, including severance pay rights at termination, retirement or death,
length of the workday and workweek, minimum wages, overtime payments and
insurance for work-related accidents. We currently fund most of our ongoing
legal severance pay obligations by paying monthly premiums for our employees'
insurance policies.
In addition, Israeli law requires Israeli employees and employers to pay
specified sums to the National Insurance Institute, which is similar to the
United States Social Security Administration. Since January 1, 1995, such
amounts also include payments for national health insurance. The payments to the
National Insurance Institute are approximately 14.5% of wages, up to a specified
amount, of which the employee contributes approximately 66.0% and the employer
contributes approximately 34.0%. The majority of our permanent employees are
covered by life and pension insurance policies providing customary benefits to
employees, including retirement and severance benefits. We contribute 13.3% to
15.8%, depending on the employee, of base wages to such plans and the employee
contributes 5.0%.
We and our employees are not parties to any collective bargaining
agreements. However, certain provisions of the collective bargaining agreements
between the Histadrut, the General Federation of Labor in Israel, and the
Coordination Bureau of Economic Organizations, including the Manufacturers'
Association of Israel, are applicable to our employees by "extension orders" of
the Israeli Ministry of Labor and Welfare. These provisions principally concern
periodic cost of living adjustments, procedures for dismissing employees, travel
allowances, recuperation pay and other conditions of employment.
Most of our permanent employees are employed under personal employment
agreements with varying terms that include confidentiality and non-competition
provisions. We believe that our relations with our employees are good.
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E. SHARE OWNERSHIP
BENEFICIAL OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of June 22, 2005
regarding the beneficial ownership by each of our directors and executive
officers:
Number of Ordinary Shares Percentage of
Name Beneficially Owned(1) Ownership (2)
---- ------------------------- -------------
Eli Holtzman (3)........................... 172,118 0.93%
Tali Basson Mizrahi (3).................... -- --
Eli Batzon (3)............................. -- --
Tommy Stramer (3).......................... -- --
Shaul Elovitch (3)(4)...................... -- --
Yossef Elovitch (3)(4)(5) ................. -- --
Itzhack Ish-Hurvitz (3).................... -- --
Moddi Keret (3)............................ -- --
Anat Winner (3)............................ -- --
Doron Turgeman (3)......................... -- --
Arik Alster (3)............................ -- --
Naty Drutin(3)............................. -- --
All directors and executive officers as a
group (12) persons)...................... 172,118 0.93%
----------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Ordinary shares relating to
options and warrants currently exercisable or exercisable within 60 days
of the date of this table are deemed outstanding for computing the
percentage of the person holding such securities but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares shown as beneficially owned by
them.
(2) The percentages shown are based on 18,431,500 ordinary shares issued and
outstanding as of June 22, 2005.
(3) The business addresses of Messrs. S. Elovitch, Y. Elovitch, Holtzman,
Ish-Hurvitz, Keret, Stramer, Alster, Turgeman and Batzon is c/o Internet
Gold - Golden Lines Ltd., 1 Alexander Yanai Street, Petach Tikva, Israel.
(4) Mr. Shaul Elovitch, chairman of our board of directors, owns 80% of
Eurocom Holdings, an Israeli holding company that holds a controlling
interest 50.33% in Eurocom Communications Mr. Shaul Elovitch holds an
additional 0.67% interest in Eurocom Communications. Eurocom
Communications, an Israeli company, owns a 100% of Euronet Communication,
an Israeli company that directly owns 68.81% of our ordinary shares. On
June 8, 2005, Eurocom Management Holdings Ltd. or Eurocom Management, an
Israeli holding company 80% owned by Mr. Shaul Elovitch, entered into an
agreement with Arison Investments Ltd. for the purchase of Arison
Investments Ltd.'s 49% interest in Eurocom Communications, subject to
certain closing conditions, including the approval of the Israeli
Antitrust Authority. If this transaction closes, due to his ownership of
Eurocom Holdings and Eurocom Management and his positions as director of
Eurocom Holdings, Eurocom Management and Eurocom Communications, Mr. Shaul
Elovitch will be deemed to beneficially own the ordinary shares directly
held by Euronet Communications.
(5) Mr. Yossef Elovitch is the brother of Mr. Shaul Elovitch and the owner of
20% of Eurocom Holdings and Eurocom Management.
81
STOCK OPTION PLAN
We established a stock option plan in 1999 to provide for the issuance of
options to our directors, officers and employees. Under the plan, options to
purchase an aggregate of 2,000,000 ordinary shares may be granted from time to
time at exercise prices and on other terms and conditions as determined by our
board of directors. Pursuant to Section 102 of the Israeli Income Tax Ordinance
and the rules promulgated thereunder (including the requirement that options
and/or the resulting shares be deposited with a trustee for at least two years),
the tax on the benefit arising to an employee from the grant and exercise of
options as well as from the issuance of ordinary shares under these options is
deferred until the transfer of the options and/or ordinary shares to the
employee's name or upon sale of those options and/or ordinary shares. The tax
authorities approved the general plan but reports regarding the option grants to
employees were not submitted to the tax authorities. Therefore, there is a risk
that the tax authorities will not allow us to claim as an expense for tax
purposes the amounts credited to the employees who were granted options under
the uninformed grants as a benefit upon sale of the shares issued under the
Section 102 plan at a price exceeding the exercise price, at such time as the
related capital gains tax is payable by the employee.
The exercise prices of options granted under our Section 102 plan are
determined by our board of directors at the time of the grant. Generally, the
term of the options expire no later than ten years from the date of grant.
As of June 1, 2004, there were no options held by our employees. Options
for the purchase of 1,346,207 ordinary shares are available for future grant
under the Section 102 plan. The options will terminate 63 months following the
date of grant.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
Eurocom Holdings is the beneficial holder of 68.81% of our outstanding
shares. Accordingly, Eurocom Holdings controls our company. The following table
sets forth certain information as of June 22, 2005, regarding the beneficial
ownership by all shareholders known to us to own beneficially 5% or more of our
ordinary shares:
Number of
Ordinary Shares Percentage of
Name Beneficially Owned (1) Ownership (2)
---- ---------------------- -------------
Eurocom Holdings Ltd. (3)........................ 12,683,135 68.81%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Ordinary shares relating to
options currently exercisable or exercisable within 60 days of the date of
this table, are deemed outstanding for computing the percentage of the
person holding such securities but are not deemed outstanding for
computing the percentage of any other person. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power
with respect to all shares shown as beneficially owned by them.
82
(2) The percentages shown are based on 18,431,500 ordinary shares outstanding
as of June 22, 2005
(3) Such ordinary shares are held directly by Euronet Communications, an
Israeli company that is 100% owned by Eurocom Communications. Eurocom
Communications is a 50.33% owned Israeli subsidiary of Eurocom Holdings an
Israeli holding company. Mr. Shaul Elovitch holds an additional 0.67%
interest in Eurocom Communications. Mr. Shaul Elovitch, chairman of our
board of directors, owns 80% of Eurocom Holdings. On June 8, 2005, Eurocom
Management entered into an agreement with Arison Investments Ltd. for the
purchase of Arison Investments Ltd.'s 49% interest in Eurocom
Communications, subject to certain closing conditions, including the
approval of the Israeli Antitrust Authority. If this transaction closes,
due to his ownership of Eurocom Holdings. and Eurocom Management and his
positions as director of Eurocom Holdings, Eurocom Management and Eurocom
Communications, Mr. Shaul Elovitch will be deemed to beneficially own the
ordinary shares directly held by Euronet Communications.
Significant Changes in the Ownership of Major Shareholders
Mr. Shaul Elovitch, chairman of our board of directors, owns 80% of
Eurocom Holdings, holds a 50.33% controlling interest in Eurocom Communications.
Mr. Shaul Elovitch holds an additional 0.67% interest in Eurocom Communications.
Eurocom Communications, an Israeli company, owns 100% of Euronet Communication,
an Israeli company that directly owns 68.81% of our ordinary shares. On June 8,
2005, Eurocom Management, an Israeli holding company 80% owned by Mr. Shaul
Elovitch, entered into a agreement with Arison Investments Ltd. for the purchase
of Arison Investments Ltd.'s 49% interest in Eurocom Communications, subject to
certain closing conditions, including the approval of the Israeli Antitrust
Authority. If this transaction closes, due to his ownership of Eurocom Holdings.
and Eurocom Management and his positions as director of Eurocom Holdings,
Eurocom Management and Eurocom Communications, Mr. Shaul Elovitch will be deemed
to beneficially own the ordinary shares directly held by Euronet Communications.
MAJOR SHAREHOLDERS VOTING RIGHTS
Our major shareholders do not have different voting rights.
RECORD HOLDERS
Based on a review of the information provided to us by our transfer agent,
as of June 10, 2005, there were 50 holders of record of our ordinary shares, of
which 47 record holders holding approximately 30.2% of our ordinary shares had
registered addresses in the United States. These numbers are not representative
of the number of beneficial holders of our shares nor is it representative of
where such beneficial holders reside since many of these ordinary shares were
held of record by brokers or other nominees.
B. RELATED PARTY TRANSACTIONS
Messrs. Shaul Elovitch, chairman of our board of directors, and his
brother Yossef Elovitch, a director of our company, also serve as directors of
Eurocom Holdings and various of its affiliates, including Euronet Communications
Ltd. and together indirectly hold a majority of the outstanding shares of
Eurocom Communications and Euronet Communications. During the past three years,
we have entered into transactions with Eurocom Communications, Euronet
Communications and several of their affiliates. In addition, Mr. Moddi Keret,
our director, also serves as CFO of Arison Investments Ltd. and several of its
affiliates. Arison Investments owns 49.0% of Eurocom Communications. We believe
that the transactions with Eurocom Communications and its affiliates described
below could have been entered into on comparable terms with unrelated parties
and on an arm's length basis.
83
REGISTRATION RIGHTS AGREEMENT
In July 1999 we entered into a registration rights agreement with Eurocom
Communications and our other then existing shareholders granting them the right
to register their ordinary shares under the Securities Act. These registration
rights include unlimited rights to request that their shares be included in any
underwritten public offering of our ordinary shares, excluding any registration
of employees' shares on Form S-8, or a similar form. Additionally, as of
February 4, 2000, the holders of a majority of such shares are entitled to
demand, up to three times in aggregate, that we register their shares. As of
August 4, 2000, the holders of a majority of these shares are also entitled to
request that we effect a registration of their shares on a shelf registration
statement once in any twelve-month period up to three times in aggregate. All
expenses incurred in connection with these registrations, other than
underwriters' and brokers' discounts and commissions, will be payable by us.
OTHER ARRANGEMENTS
In September 1999, we established Gold Trade, an e-commerce company with a
subsidiary of Eurocom Holdings and three additional minority shareholders. In
December 2004 we purchased 100% of Goldtrade for NIS 1.1 million ($0.3 million),
of which NIS 1 million ($0.23 million) was paid to Eurocom Holdings' subsidiary.
We currently lease 250 square meters of office space in Ramat-Gan, Israel
from Eurocom Holdings. In 2004 we paid Eurocom Holdings NIS 214,000 ($49,700)
for such facilities as well as an additional NIS 103,000 ($23,900) for related
services. We also paid NIS 62,000 ($14,400) to Eurocom Communications for the
lease of our communication facilities in Ramat-Gan for the year 2004.
In addition, we and Eurocom Communications have in the past entered into,
and expect to enter into in the future, joint marketing, advertising and other
promotional programs.
In 2004, we purchased NIS 997,700 ($231,600) of advertising time from
Radius Broadcasting Ltd., at market terms and prices. Radius Broadcasting is a
subsidiary of Media Holdings EU Ltd., which is 85% indirectly held by Eurocom
Holdings (on a fully diluted basis).
In 2004, we purchased NIS 934,470 ($216,915) of peripheral equipment from
Eurocom Digital Systems Ltd. (formerly Telbit Ltd.) at market terms and prices.
Since September 2003, Mr. Dani Elovitch, Mr. Yossef Elovitch's son, is
employed as a vice president of Gold Trade.
84
We provide Internet access services and other Internet-related services to
related parties at market terms and prices. In addition we receive and render
various services and products, including advertising on our MSN Israel portal,
to and from related parties at market rates and in the ordinary course of
business. None of these transactions are material to us or to our related
parties. If a related party wishes to supply products or services to us, we
generally obtain a bid from a third party to enable us to determine whether the
related party's bid is on arm's-length terms. In addition, generally we will not
purchase a particular type of product or service solely from related parties,
but will also have non-related vendors. Prices offered by non-related vendors
are compared to those offered by related parties to ensure that the related
parties are offering arm's length terms.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See the consolidated financial statements, including the notes thereto,
beginning of page F-1 and the exhibits listed in Item 19 hereof and incorporated
herein by this reference.
LEGAL PROCEEDINGS
In March 2005, a petition was filed against us in the Magistrates Court in
Hertzeliya by an Israeli company for the approval of a provisional attachment in
the amount of NIS 360,383, claiming that we failed to respond to a garnishment
decree that was provided to us with regard to a debt of a third party to that
Israeli company. We filed a statement of defense, and a pre-trial hearing was
set for July 2005. At this preliminary stage, we are unable to predict the
outcome of this petition.
From time to time, claims arising in the ordinary course of our business
are brought against us. In the opinion of our management, no currently existing
claims which are not reserved in our financial statements will have a material
adverse effect on our financial position, liquidity or results of operations.
DIVIDEND DISTRIBUTION
We have never paid cash dividends to our shareholders. Any future dividend
policy will be determined by the board of directors, subject to the applicable
law, and will be based upon conditions then existing, including our results of
operations, financial condition, current and anticipated cash needs, contractual
restrictions and other conditions as the board of directors may deem relevant.
According to the Israeli Companies Law, a company may distribute dividends
out of its profits, so long as the company reasonably believes that such
dividend distribution will not prevent the company from paying all its current
and future debts. Profits, for purposes of the Israeli Companies Law, means the
greater of retained earnings or earnings accumulated during the preceding two
years. In the event cash dividends are declared, such dividends will be paid in
NIS.
85
B. SIGNIFICANT CHANGES
Except as otherwise disclosed in this annual report, there has been no
material change in our financial position since December 31, 2004.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
ANNUAL STOCK INFORMATION
The following table sets forth, for each of the years indicated, the range
of high asks and low bid prices of our ordinary shares on the NASDAQ National
Market or the NASDAQ SmallCap Market:
YEAR HIGH LOW
---- ------ ------
2000............................................... $30.00 $ 1.28
2001............................................... 2.94 0.54
2002............................................... 1.80 0.87
2003............................................... 6.96 1.19
2004............................................... 6.44 3.78
QUARTERLY STOCK INFORMATION
The following table sets forth, for each of the full financial quarters in
the years indicated, the range of high and low closing prices of our ordinary
shares on the NASDAQ SmallCap Market:
2003 HIGH LOW
---- ------ ------
First Quarter...................................... $ 4.06 $ 1.19
Second Quarter..................................... 6.05 2.84
Third Quarter...................................... 6.96 3.85
Fourth Quarter..................................... 4.48 3.34
2004 HIGH LOW
---- ------ ------
First Quarter...................................... $ 5.23 $ 3.78
Second Quarter..................................... 6.06 4.56
Third Quarter...................................... 4.91 4.07
Fourth Quarter..................................... 6.44 4.10
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MONTHLY STOCK INFORMATION
The following table sets forth, for the most recent six months, the range
of high and low closing prices of our ordinary shares on the NASDAQ SmallCap
Market or the NASDAQ National Market and the TASE:
NASDAQ TASE
HIGH LOW HIGH LOW
------ ------ ------ ------
2004
----
December............................. $ 6.44 $ 4.98 - -
2005
----
January.............................. $ 5.71 $ 4.96 - -
February............................. 7.79 5.27 - -
March................................ 8.00 6.50 $ 8.13 $ 6.43
April................................ 7.13 5.83 7.14 6.10
May.................................. 6.32 5.65 6.44 5.65
----------
* The U.S. dollar price of shares on the TASE is determined by dividing the
price of an ordinary share in New Israeli Shekels by the representative exchange
rate of the New Israeli Shekel against the U.S. dollar on the same date.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Our ordinary shares were listed on the NASDAQ National Market under the
symbol IGLD, until July 21, 2001, at which date the listing of our ordinary
shares was transferred to the NASDAQ SmallCap Market. Since February 4, 2005,
our shares once again have been listed on the NASDAQ National Market. Since
March 1, 2005, our ordinary shares have also been traded on the TASE.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSE OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
87
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
PURPOSES AND OBJECTS OF THE COMPANY
We are a public company registered under the Israel Companies Law as
Internet Gold - Golden Lines Ltd., registration number 52-004426-4. Pursuant to
our memorandum of association, we were formed for the purpose of providing
various services in the telecommunication industry and performing various
corporate activities permissible under Israeli law.
On February 1, 2000, the Israeli Companies Law, 1999-5759, or the Israeli
Companies Law, came into effect and superseded most of the provisions of the
Israeli Companies Ordinance (New Version), 5743-1983, except for certain
provisions which relate to bankruptcy, dissolution and liquidation of companies.
Under the Israeli Companies Law, various provisions, some of which are detailed
below, overrule the current provisions of our articles of association.
THE POWERS OF THE DIRECTORS
Under the provisions of the Israeli Companies Law and our articles of
association, a director cannot participate in a meeting nor vote on a proposal,
arrangement or contract in which he or she is personally interested, unless such
proposal, arrangement or contract is in the ordinary course of business or the
majority of directors are personally interested in such proposal, arrangement or
contract. In the event the majority of the members of the board of directors
have a personal interest in the proposed transaction, approval of our
shareholders at a general meeting is required. In addition, our directors cannot
vote compensation to themselves or any members of their body without the
approval of our audit committee and our shareholders at a general meeting. See
"Item 6.A. Directors, Senior Management and Employees - Approval of Related
Party Transactions Under Israeli Law."
The authority of our directors to enter into borrowing arrangements on our
behalf is not limited, except in the same manner as any other transaction by us.
Our articles of association do not impose any mandatory retirement or
age-limit requirements on our directors and our directors are not required to
own shares in our company in order to qualify to serve as directors.
RIGHTS ATTACHED TO SHARES
Our authorized share capital consists of 501,000,000 ordinary shares of a
nominal value of NIS 0.01 each. All outstanding ordinary shares are validly
issued, fully paid and non-assessable. The rights attached to the ordinary
shares are as follows:
DIVIDEND RIGHTS. Holders of our ordinary shares are entitled to the full
amount of any cash or share dividend subsequently declared. The board of
directors may declare interim dividends and propose the final dividend with
respect to any fiscal year only out of the retained earnings, in accordance with
the provisions of the Israeli Companies Law. Our articles of association provide
that the declaration of a dividend requires approval by an ordinary resolution
of the shareholders, which may decrease but not increase the amount proposed by
the board of directors or affect the amount already distributed as an interim
dividend. See "Item 8.A. Financial Information - Consolidated and Other
Financial Information - Dividend Distribution." The board of directors is
entitled to invest or otherwise make use of all unclaimed dividends or other
moneys payable in respect of a share, for our benefit until claimed. We are not
obligated to pay interest or linkage differentials on an unclaimed dividend.
88
VOTING RIGHTS. Holders of ordinary shares have one vote for each ordinary
share held on all matters submitted to a vote of shareholders. Such voting
rights may be affected by the grant of any special voting rights to the holders
of a class of shares with preferential rights that may be authorized in the
future.
The quorum required for an ordinary meeting of shareholders consists of at
least two shareholders present in person or represented by proxy who hold or
represent, in the aggregate, more than one third of the voting rights of the
issued share capital. A meeting adjourned for lack of a quorum generally is
adjourned to the same day in the following week at the same time and place or
any time and place as the chairman of the board of directors determines with the
consent of the holders of a majority of the shares present in person or
represented by proxy and voting on the matter of adjournment. At the reconvened
meeting, the required quorum consists of any two members present in person or by
proxy.
An ordinary resolution, such as a resolution for the declaration of
dividends or amendment to our articles of association, requires approval by the
holders of a majority of the voting rights represented at the meeting, in
person, by proxy or by written ballot and voting thereon. Under our articles of
association, a special resolution, such as amending our memorandum of
association (when permitted), approving any change in capitalization,
winding-up, authorization of a class of shares with special rights, or other
changes as specified in our articles of association, requires approval of a
special majority, representing the holders of no less than 75% of the voting
rights represented at the meeting in person, by proxy or by written ballot, and
voting thereon. Under the Israeli Companies Law, we may change our articles of
association by the aforementioned majority, in order to cancel the special
majority requirement in most of the events.
Pursuant to our articles of association, our directors are elected at our
annual general meeting of shareholders by a vote of the holders of a majority of
the voting power represented and voting at such meeting for the term determined
in the relevant category. See "Item 6.A. Directors, Senior Management and
Employees - Election of Directors." Eurocom Holdings, which is our controlling
shareholder, is able to elect all our directors, except our outside directors,
whose election requires the affirmative vote of at least one third of the
shareholders who are non-controlling shareholders, or no more than 1% of said
shareholders opposing the election of the outside directors. See "Item 7.A.
Major Shareholders and Related Party Transactions - Major Shareholders."
RIGHTS TO SHARE IN THE COMPANY'S PROFITS. Our shareholders have the right
to share in our profits distributed as a dividend and any other permitted
distribution. See "- Rights Attached to Shares - Dividend Rights."
RIGHTS TO SHARE IN SURPLUS IN THE EVENT OF LIQUIDATION. In the event of
our liquidation, after satisfaction of liabilities to creditors, our assets will
be distributed to the holders of ordinary shares in proportion to the nominal
value of their holdings. This right may be affected by the grant of preferential
dividend or distribution rights to the holders of a class of shares with
preferential rights that may be authorized in the future.
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LIABILITY TO CAPITAL CALLS BY THE COMPANY. Under our memorandum of
association, the liability of our shareholders to provide us funds is limited to
the par value of the shares held by them.
LIMITATIONS ON ANY EXISTING OR PROSPECTIVE MAJOR SHAREHOLDER. See Item
6.A. "Directors and Senior Management - Approval of Related Party Transactions
Under Israeli Law."
CHANGING RIGHTS ATTACHED TO SHARES
According to our articles of association, in order to change the rights
attached to any class of shares, unless otherwise provided by the terms of the
class, such change must be adopted by a general meeting of the shareholders and
by a separate general meeting of the holders of the affected class with a
majority of 75% of the voting power participating in such meeting.
ANNUAL AND EXTRAORDINARY MEETINGS
The board of directors must convene an annual meeting of shareholders at
least once every calendar year, within fifteen months of the last annual
meeting. Notice of at least twenty-one days prior to the date of the meeting is
required. An extraordinary meeting may be convened by (i) the board of
directors, as it decides or upon a demand of any two directors or 25.0% of the
directors, whichever is lower, or (ii) one or more shareholders holding in the
aggregate at least 5.0% of our issued capital and 1.0% of our voting rights or
one or more shareholders holding in the aggregate at least 10.0% of our voting
rights. An extraordinary meeting must be held not more than thirty-five days
from the publication date of the announcement of the meeting. See "- Rights
Attached to Shares-Voting Rights."
LIMITATIONS ON THE RIGHTS TO OWN SECURITIES IN OUR COMPANY
Neither our memorandum of association or our articles of association nor
the laws of the State of Israel restrict in any way the ownership or voting of
shares by non-residents, except with respect to subjects of countries which are
in a state of war with Israel.
PROVISIONS RESTRICTING CHANGE IN CONTROL OF OUR COMPANY
The Israeli Companies Law requires that mergers between Israeli companies
be approved by the board of directors and general meeting of shareholders of
both parties to the transaction. The approval of the boards' of both companies
is subject to such boards' confirmation that there is no reasonable doubt that
after the merger the surviving company will be able to fulfill its obligations
towards its creditors. Each company must notify its creditors about the
contemplated merger. Under the Israeli Companies Law, our articles of
association are deemed to include a requirement that such merger be approved by
an extraordinary resolution of the shareholders, as explained above. The
approval of the merger by the general meetings of shareholders of the companies
is also subject to additional approval requirements as specified in the Israeli
Companies Law and regulations promulgated thereunder. See also "Item 6A.
Directors, Senior Management and Employees - Directors and Senior Management -
Approval of Related Party Transactions Under Israeli Law."
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CHANGES IN OUR CAPITAL
Changes in our capital are subject to the approval of the shareholders at
a general meeting by a special majority of 75% of the votes of shareholders
participating and voting in the general meeting.
C. MATERIAL CONTRACTS
In March 1999 we entered into a ten-year lease ending in September 2009
for an office building in Petach Tikva, that is subject to a ten-year renewal
option. The annual rent for the 4,250 square meter premises is approximately NIS
2.1 million ($ 0.5 million), linked to the rate of exchange of the U.S. dollar.
In connection with this lease agreement, we provided the lessor a loan for
completion of the building's construction, which was fully repaid in March 2004,
when the lessor sold the premises.
In July 2003, we entered into a long-term agreement with Barak, one of
Israel's three long distance carriers, to purchase rights of use for 14
international fiber optic lines (presented in our financial statements as a
capital lease) until 2017, with the option to extend the agreement for an
additional five year period. Until then, we leased international lines on a
monthly basis at higher rates from various long-distance carriers. According to
the agreement, we are obliged to connect all of the 14 international lines by
June 30, 2006. The total capacity of the lines is 2.2 GB. This increased
capacity is required to meet the demand of our rapidly growing broad band
customer base.
In April 2004, we entered into a long-term agreement with Bezeq
International Ltd, one of Israel's three long distance carriers, to purchase
rights of use for one international fiber optic line for at least 13 years
beginning in May 2004. In May 2004, we entered into an additional agreement with
Bezeq International Ltd for an additional fiber optic line on the same terms.
This increased capacity is required to meet the demand of our rapidly growing
broadband customer base.
During 2004, we entered into collaboration with Mirapoint for the
provision of anti-virus and anti-spam software licenses to our clients. Since
2000, Mirapoint has provided us with maintenance services for our mail server.
Due to the increase in the demand for Gold Mind's value-add services in the past
year, such as anti-virus and anti-spam services, and its rich Internet content,
such as customized on-line magazines and newsletters, which are provided through
our mail server, the collaboration with Mirapoint has become more important to
us.
Since the launch of the international telephony service in August 2004, we
have entered into agreements with several international carriers for the
purchase of international long distance voice services to about 240 destinations
around the world.
We have entered into several agreements with networks providers, including
local and long distance telecommunications companies for leased lines, on market
terms.
D. EXCHANGE CONTROLS
Israeli laws and regulations do not impose any material foreign exchange
restrictions on non-Israeli holders of our ordinary shares.
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In May 1998, a new "general permit" was issued under the Israeli Currency
Control Law, 1978, which removed most of the restrictions that previously
existed under such law, and enabled Israeli citizens to freely invest outside of
Israel and freely convert Israeli currency into non-Israeli currencies.
Non-residents of Israel who purchase our ordinary shares will be able to
convert dividends, if any, thereon, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in
Israel of our ordinary shares to an Israeli resident, into freely repatriable
dollars, at the exchange rate prevailing at the time of conversion, provided
that the Israeli income tax has been withheld (or paid) with respect to such
amounts or an exemption has been obtained.
E. TAXATION
MATERIAL INCOME TAX CONSIDERATIONS
GENERAL TAX STRUCTURE
The following is a summary of the current tax structure applicable to
companies incorporated in Israel, with special reference to its effect on us.
The following also contains a discussion of the material Israeli consequences to
purchasers of our ordinary shares and Israeli government programs benefiting us.
To the extent that the discussion is based on new tax legislation which has not
been subject to judicial or administrative interpretation, we cannot assure you
that the views expressed in the discussion will be accepted by the appropriate
tax authorities or the courts. The discussion is not intended, and should not be
construed, as legal or professional tax advice and is not exhaustive of all
possible tax considerations
The Israeli Government recently announced an additional new tax reform
pursuant to which corporate tax rate is expected to be reduced gradually during
the following years up to 25% in 2010, however this tax reform has not yet been
enacted. Such tax reform might be modified prior to enactment or might not be
enacted at all. Accordingly, we cannot predict the consequences of such expected
new tax reform applicable to us.
GENERAL CORPORATE TAX STRUCTURE. In 2004, Israeli companies were subject
to corporate tax at the rate of 35% of taxable income. This tax rate is expected
to decrease gradually to 34% in 2005, 32% in 2006 and 30% from 2007. The Israeli
government recently announced a new tax reform, pursuant to which the corporate
tax rate is expected to be reduced gradually during the following years up to
25% in 2010, but such tax reform has not yet been enacted.
Dividends received from another Israeli company are exempt (except for
dividends derived from income earned outside of Israel). Furthermore, in Israel,
individuals must pay income tax at graduated marginal rates from 10% to 49%.
Nevertheless, a company or individual, i.e., a non-resident of Israel, may
benefit from exemptions or reductions in respect of all or a portion of such
Israeli taxes, under the provisions of an international tax treaty, such as the
Convention Between the Government of the United States of America and the
Government of Israel with Respect to Taxes on Income.
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TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax Law (Inflationary Adjustments) (1985), or the Inflationary
Adjustments Law, affects the taxation of earnings of Israeli companies and
individuals, under certain circumstances. This statute attempts to overcome some
of the problems presented to a traditional tax system by an economy undergoing
rapid inflation, which was the case in Israel at the time the law was enacted.
Israel's inflation rate has been materially reduced in recent years.
The Inflationary Adjustments Law is characterized by a high degree of
complexity. Its main features can be described generally as follows:
(a) A special tax adjustment for the preservation of equity whereby
certain corporate assets are classified broadly into Fixed (inflation resistant)
Assets and Non-Fixed (soft) Assets. Where a company's equity, as defined in the
law, exceeds the depreciated cost of Fixed Assets, a deduction from taxable
income that takes into account the effect of the applicable annual rate of
inflation on the excess is allowed, up to a ceiling of 70% of taxable income in
any single tax year, with the unused portion permitted to be carried forward on
a linked basis. If the depreciated cost of Fixed Assets exceeds a company's
equity, then the excess multiplied by the applicable annual rate of inflation is
added to taxable income.
(b) Subject to certain limitations, depreciation deductions on Fixed
Assets and losses carried forward are adjusted for inflation based on the
increase in the consumer price index.
(c) Gains on the sale of certain traded securities are taxable in certain
circumstances, subject to detailed rules which were modified as of January 1,
1999. Today, all Israeli companies, except certain companies in certain cases,
are subject to reporting and taxation requirements under this law.
The Israeli government recently announced an additional new tax reform to
encourage investments in Israel. Pursuant to such reform interest, dividends and
capital gain, including capital gain from the sale of securities listed on a
stock exchange, will be taxed at an equable tax rate of 20% for individuals and
25% for corporations. In addition, the marginal tax rate on ordinary income of
individuals shall be reduced gradually during the following years from 49% to
44% in 2010. Non-Israeli residents will be exempt from tax on capital gain
derived from investment in Israeli companies, commencing on July 1, 2005 through
December 31, 2007, even if the capital gain was derived after such period and
without derogating from any other capital gain tax exemption applying to
non-Israeli resident under Israeli law or under any applicable tax treaty. The
new tax reform might be modified prior to enactment or might not be enacted at
all. Accordingly, we cannot predict the consequences of such expected tax reform
applicable to us. TAXATION OF OUR SHAREHOLDERS
CAPITAL GAINS ON SALES OF OUR ORDINARY SHARES. Israeli law imposes a
capital gains tax on the sale of capital assets. The law distinguishes between
real gain and inflationary surplus. The inflationary surplus is the portion of
the total capital gain that is equivalent to the increase of the relevant
asset's purchase price which is attributable to the increase in the Israeli
consumer price index between the date of purchase and the date of sale. Foreign
residents who purchased an asset in foreign currency may request that the
inflationary surplus be computed on the basis of the devaluation of the shekel
against such foreign currency. The real gain is the excess of the total capital
gain over the inflationary surplus. The inflationary surplus accumulated from
and after December 31, 1993, is exempt from any capital gains tax in Israel
while the real gain is taxed at the applicable rate discussed below.
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Dealers in securities in Israel are taxed at regular tax rates applicable
to business income.
Under the convention between the United States and Israel concerning taxes
on income, Israeli capital gains tax will not apply to the sale, exchange or
disposition of ordinary shares by a person:
o who qualifies as a resident of the United States within the meaning
of the U.S.-Israel tax treaty; and
o who is entitled to claim the benefits available to the person by the
U.S.-Israel tax treaty.
However, this exemption does not apply, among other cases, if the gain is
attributable to a permanent establishment of such person in Israel, or if the
holder is a resident of the United States within the meaning of the U.S.-Israeli
tax treaty who holds, directly or indirectly, shares representing 10% or more of
our voting power during any part of the 12-month period preceding the sale,
exchange or disposition, subject to specified conditions. Under these
circumstances, the sale, exchange or disposition would be subject to Israeli
tax, to the extent applicable. However, under the U.S.-Israel tax treaty, a U.S.
resident generally would be permitted to claim a credit for the Israeli taxes
paid against the U.S. federal income tax imposed on the sale, exchange or
disposition, subject to the limitations under U.S. law applicable to foreign tax
credits. The U.S.-Israel tax treaty does not relate to U.S. state or local
taxes.
For residents of other countries, the purchaser of shares may be required
to withhold 25% capital gains tax on all amounts received for the sale of our
ordinary shares, for so long as the capital gain from such a sale is not exempt
from Israeli capital gains tax, and unless a different rate is provided in a
treaty between Israel and the seller's country of residence.
Under legislation which became effective on January 1, 2003, the capital
gain from the sale of shares by non Israeli residents would be tax exempt in
Israel as long as our shares are listed on the NASDAQ National Market or any
other stock exchange recognized by the Israeli Ministry of Finance, and provided
certain other conditions are met, the most relevant of which are: (A) the
capital gain is not attributed to the foreign resident's permanent establishment
in Israel, and (B) the shares were acquired by the foreign resident after the
company's shares had been listed for trading on the foreign Exchange. If the
shares were sold by Israeli residents, then (A) for the period ending December
31, 2002 their sale would be subject to 35% so long as the shares are listed on
a stock exchange, such as the NASDAQ National Market, which is recognized by the
Israeli Ministry of Finance, and (B) for the period commencing January 1, 2003,
the sale of the shares would be subject to a 15% tax if the shares are listed on
a stock exchange recognized by the Israeli Ministry of Finance. If we are
delisted, gains from the sale of our ordinary shares will be subject to capital
gains tax at a rate of 25% unless an exemption or other tax rate applies in
accordance with a tax treaty between Israel and the shareholder's country of
residence.
Non-residents of Israel are subject to tax on income accrued or derived
from sources in Israel. These sources of income include passive income such as
dividends, royalties and interest, as well as non-passive income, such as income
received for services rendered in Israel. We are required to withhold income tax
at the rate of 25% with respect to passive income, unless a different rate or an
exemption is provided in a tax treaty between Israel and the shareholder's
country of residence.
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Under an amendment to the Inflationary Adjustments Law, non-Israeli
corporations might be subject to Israeli taxes on the sale of shares in an
Israeli company which are traded on certain stock markets, including the NASDAQ
Stock Market, subject to the provisions of any applicable double taxation
treaty.
STAMP DUTY
Stamp duty applies in Israel to various types of documents at various
rates, depending primarily on the type of the document and the amount specified,
or not, therein. In June 2003, the Israeli statute imposing the stamp duty was
amended in a manner believed by many to significantly expand the tax basis.
Following this amendment, the Israeli Tax Authority has increased enforcement of
this statute. The amendment to the statue and the enforcement actions taken by
the Israeli Tax Authority are in legal dispute before the Israeli Supreme Court,
which has not yet ruled on this matter. In addition, under current legislation
the stamp duty statute is expected to be gradually phased out until its complete
cancellation in 2008. To date, we have not received a demand for payment of
stamp duty following this amendment. We currently do not believe that any stamp
duty that may be imposed on us as a result of this amendment would materially
adversely affect our financial condition.
UNITED STATES FEDERAL INCOME TAXATION
The following is a description of the material United States federal
income tax consequences of the ownership of our ordinary shares. This summary
does not purport to address all of the tax considerations that may be relevant
to a decision to purchase, own or dispose of our ordinary shares. This
description assumes that holders of our ordinary shares will hold the ordinary
shares as capital assets. This summary does not address tax considerations
applicable to holders who may be subject to special tax rules, including:
o dealers or traders in securities or currencies;
o tax-exempt entities;
o banks, financial institutions or insurance companies;
o real estate investment trusts, regulated investment companies or
grantor trusts;
o persons who received ordinary shares as compensation for the
performance of services;
o holders who own, or are deemed to own, at least 10% or more, by
voting power or value, of our shares;
o investors whose functional currency is not the United States dollar;
or
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o holders who hold our ordinary shares as part of a position in a
straddle or as part of a hedging or conversion transaction for
United States federal income tax purposes.
Further, this description does not address any United States federal
estate and gift or alternative minimum tax consequences, nor any state, local,
or foreign tax consequences relating to the ownership and disposition of our
ordinary shares.
This description is based on the Internal Revenue Code of 1986, as
amended, United States Treasury Regulations and judicial and administrative
interpretations thereof, in each case as in effect and available on the date of
this annual report. The United States tax laws and the interpretation thereof
are subject to change, which change could apply retroactively and could affect
the tax consequences described below.
Unless specifically noted below, the following description applies only to
owners of our ordinary shares that are United States holders for United States
federal income tax purposes. For purposes of this description, a United States
holder is a beneficial owner of ordinary shares that, for United States federal
income tax purposes, is:
o citizen or resident of the United States;
o a corporation or partnership created or organized in or under the
laws of the United States or any state, including the District of
Columbia;
o an estate if its income is subject to United States federal income
taxation regardless of its source; or
o a trust if such trust validly has elected to be treated as a United
States person for United States federal income tax purposes or if a
United States court can exercise primary supervision over its
administration and one or more United States persons have the
authority to control all of its substantial decisions.
A non-United States holder is a beneficial owner of ordinary shares that
is not a United States holder.
Shareholders should consult their own tax advisors with respect to the
United States federal, state, local and foreign tax consequences of acquiring,
owning or disposing of our ordinary shares.
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DISTRIBUTIONS
Subject to the discussion below under "Passive Foreign Investment Company
Considerations," the entire amount of any distribution made to you with respect
to ordinary shares, other than any distributions of our ordinary shares made to
all our shareholders, will constitute dividends to the extent of our current or
accumulated earnings and profits as determined under United States federal
income tax principles. For these purposes, the amount of the distribution will
not be reduced by the amount of any Israeli tax withheld from the distribution.
Non-corporate U.S. Holders may be taxed on the dividend distributions made in
taxable years beginning before December 31, 2008 at the lower rates applicable
to long-term capital gains (i.e., gains with respect to capital assets held for
more than one year). However, non-corporate U.S. Holders that do not meet a
minimum holding period requirement during which they are not protected from the
risk of loss, that elect to treat the dividend income as "investment income"
pursuant to Section 163(d)(4) of the Code or that receive dividends with respect
to which they are obligated to make related payments, will not be eligible for
the reduced rates of taxation. In addition, the dividends will be included in
your gross income as ordinary income and will not be eligible for the dividends
received deduction generally allowed to corporate United States holders. We do
not maintain calculations of our earnings and profits under United States
federal income tax principles.
If distributions with respect to our ordinary shares exceed our current
and accumulated earnings and profits, the excess distributed with respect to any
ordinary share would be treated first as a tax-free return of capital to the
extent of your adjusted basis in that ordinary share. Subject to the discussion
below under "Passive Foreign Investment Company Considerations", any amount in
excess of the amount of the dividend and the return of capital would be treated
as capital gain, subject to the rules described under "Sale or Exchange of our
Ordinary Shares."
If we pay a dividend or distribution in NIS, you will be required to take
the dividend or distribution into account at its dollar amount based on the spot
rate of exchange in effect on the distribution date. You will have a tax basis
for United States federal income tax purposes in the NIS received equal to that
dollar value, and any subsequent gain or loss in respect of the NIS arising from
exchange rate fluctuations will generally be taxable as U.S. source ordinary
income or loss.
You may generally elect to claim the Israeli income tax withheld from
dividends and distributions you receive with respect to ordinary shares as a
foreign tax credit against your United States federal income tax liability,
subject to a number of limitations. Among the limitations, the foreign tax
credits allowable with respect to specific classes of income cannot exceed the
U.S. federal income tax payable with respect to each such class. Dividends we
pay generally will be included in the "passive income" class for these purposes,
or, in the case of certain financial services entity holders, "financial
services income." U.S. Holders should note, however, that recently enacted
legislation eliminates the "financial services income" category for taxable
years beginning after December 31, 2006. Under the recently enacted legislation,
the foreign tax credit limitation categories are limited to "passive category
income" and "general category income." In lieu of claiming a foreign tax credit,
you may claim a deduction for the withholding taxes if you itemize your
deductions. Dividends received by you with respect to ordinary shares generally
will be treated as foreign source income, which may be relevant in calculating
your foreign tax credit limitation.
Subject to the discussion below under "Backup Withholding and Information
Reporting," if you are a non-United States holder of our ordinary shares, you
will not be subject to United States federal income or withholding tax on
dividends you receive on ordinary shares, unless the dividends are effectively
connected with the conduct by such non-United States holder of a trade or
business in the United States.
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SALE OR EXCHANGE OF OUR ORDINARY SHARES
Subject to the discussion below under "Passive Foreign Investment Company
Considerations," you will recognize capital gain or loss for United States
federal income tax purposes when you sell or exchange our ordinary shares. The
amount of gain or loss will be equal to the difference between your adjusted tax
basis in the ordinary shares and the amount realized on their disposition. If
you are a noncorporate United States holder, the maximum marginal United States
federal income tax rate applicable to such gain will be lower than the maximum
marginal United States federal income tax rate applicable to ordinary income
(other than certain dividends) if your holding period for our ordinary shares
exceeds one year. Any gain or loss recognized by you generally will be treated
as United States source income or loss for United States foreign tax credit
purposes. Capital losses may only be used to offset capital gains, except that
non-corporate U.S. holders are entitled to deduct capital losses in excess of
capital gains not to exceed $3,000 per taxable year.
Subject to the discussion below under "Backup Withholding and Information
Reporting," if you are a non-United States holder of our ordinary shares, we
expect that you will not be subject to United States federal income or
withholding tax on gain realized on the sale or exchange of such ordinary shares
unless (1) such gain is effectively connected with the conduct by you of a trade
or business in the United States, (2) in the case of gain realized by an
individual non-United States holder, you are present in the United States for
183 days or more in the taxable year of the sale or exchange and certain other
conditions are met, or (3) you are subject to the rules applicable to certain
United States expatriates.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
A non-United States corporation will be classified as a "passive foreign
investment company" (a "PFIC") for United States federal income tax purposes in
any taxable year in which, after applying applicable look-through rules with
respect to a 25% or more owned subsidiary, either (1) at least 75% of its gross
income is "passive income," or (2) at least 50% of the gross value of its assets
is attributable to assets that produce passive income or are held for the
production of passive income. Passive income for this purpose includes items
such as dividends, interest, royalties, rents and gains from commodities and
securities transactions.
Based on our estimated gross income, the average value of our gross assets
(determined by reference to the market value of our shares and valuing our
intangible assets using the methods prescribed for publicly traded corporations)
and the nature of our business, we believe that we will not be classified as a
PFIC for the taxable year ended December 31, 2004. Our status in future years
will depend on our assets and activities in those years, although you will be
treated as continuing to own an interest in a PFIC if we are a PFIC in any year
while you own your shares unless you make certain elections. We have no reason
to believe that our assets or activities will change in a manner that would
cause us to be classified as a PFIC, but because the market price of our
ordinary shares is likely to fluctuate, we cannot assure you that we will not be
considered a PFIC for any taxable year. If we were a PFIC, you generally would
be subject to imputed interest charges and other disadvantageous tax treatment
(including the denial of the taxation of such dividends at the lower rates
applicable to long-term capital gains, as discussed above under "Distributions")
with respect to any gain from the sale or exchange of, and excess distributions
with respect to, the ordinary shares.
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If we were a PFIC, you could make a variety of elections that may
alleviate the tax consequences referred to above, and one of these elections may
be made retroactively. However, it is expected that the conditions necessary for
making certain of such elections will not apply in the case of our ordinary
shares. You should consult your own tax advisor regarding our potential status
as a PFIC and the tax consequences that would arise if we were treated as a
PFIC.
BACKUP WITHHOLDING AND INFORMATION REPORTING
United States backup withholding taxes and information reporting
requirements apply to certain payments to noncorporate holders of stock.
Information reporting requirements will, and a backup withholding tax may, apply
to payments of dividends on, and to proceeds from the sale, exchange or
redemption of, our ordinary shares made within the United States, or by a U.S.
payor or U.S. middleman, to a holder of our ordinary shares, other than an
exempt recipient, including a corporation, a payee that is a non-United States
person that provides an appropriate certification and certain other persons.
Backup withholding is not an additional tax and may be claimed as a credit
against your U.S. federal income tax liability, and you may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing an
appropriate claim for refund with the IRS and furnishing any required
information. The backup withholding tax rate is 28% for years 2003 through 2010.
In the case of such payments by a payor within the United States, or by a
U.S. payor or U.S. middleman, to a foreign simple trust, foreign grantor trust
or foreign partnership, other than payments to a foreign simple trust, foreign
grantor trust or foreign partnership that qualifies as a withholding foreign
trust or a withholding foreign partnership within the meaning of such income tax
regulations and payments to a foreign simple trust, foreign grantor trust or
foreign partnership that are effectively connected with the conduct of a trade
or business in the United States, the beneficiaries of the foreign simple trust,
the person treated as the owner of the foreign grantor trust or the partners of
the foreign partnership, as the case may be, will be required to provide the
certification discussed above in order to establish an exemption from backup
withholding tax and information reporting requirements.
The above description is not intended to constitute a complete analysis of
all tax consequences relating to the ownership or disposition of our ordinary
shares. Shareholders should consult their own tax advisors concerning the tax
consequences of your particular situation, as well as any tax consequences that
may arise under the laws of any state, local, foreign or other taxing
jurisdiction.
F. DIVIDEND AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the reporting requirements of the United States
Securities Exchange Act of 1934, as amended, as applicable to "foreign private
issuers" as defined in Rule 3b-4 under the Exchange Act, and in accordance
therewith, we file annual and interim reports and other information with the
Securities and Exchange Commission.
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As a foreign private issuer, we are exempt from certain provisions of the
Exchange Act. Accordingly, our proxy solicitations are not subject to the
disclosure and procedural requirements of Regulation 14A under the Exchange Act,
transactions in our equity securities by our officers and directors are exempt
from reporting and the "short-swing" profit recovery provisions contained in
Section 16 of the Exchange Act. In addition, we are not required under the
Exchange Act to file periodic reports and financial statements as frequently or
as promptly as United States companies whose securities are registered under the
Exchange Act. We intend to file reports with the Securities and Exchange
Commission on Form 6-K containing unaudited financial information for the first
three quarters of each fiscal year.
This annual report and the exhibits thereto and any other document we file
pursuant to the Exchange Act may be inspected without charge and copied at
prescribed rates at the following Securities and Exchange Commission public
reference room: 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington,
D.C. 20549; and on the Securities and Exchange Commission Internet site
(http://www.sec.gov) and on our website www.igld.com. You may obtain
information on the operation of the Securities and Exchange Commission's public
reference room in Washington, D.C. by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Exchange Act file number for our Securities
and Exchange Commission filings is 0-30198.
The documents concerning our company which are referred to in this annual
report may also be inspected at our offices located at 1 Alexander Yanai Street,
Petach Tikva, Israel. We will provide a copy of this annual report containing
our financial statements upon shareholders' request.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We regularly assess currency and interest rate risks to minimize any
adverse effects on our business as a result of currency fluctuations and changes
in interest rates.
EFFECTS OF CURRENCY FLUCTUATIONS. Most of our communications and
advertising costs are quoted in dollars. Furthermore, if we expand our business
into other countries, we may earn additional revenue and incur additional
expenses in other currencies. Since June 2002, we are required by law to state
our prices in NIS to our residential and SOHO customers. Since the NIS is the
primary currency of the economic environment in which we and our subsidiaries
operate, the NIS is our functional currency, and accordingly, monetary accounts
maintained in currencies other than the NIS are remeasured using the foreign
exchange rate at the balance sheet date. Operational accounts and non-monetary
balance sheet accounts are measured and recorded at the rate in effect at the
date of the transaction. The effects of foreign currency remeasurement are
reported in current operations.
100
Most of our cash and cash equivalents as of December 31, 2004, amounting
to NIS 75.6 ($17.6 million), are invested in dollar deposits earning annual
interest of approximately 1% to 2%. Since we report our financial statements in
NIS, we are subject to risks caused by fluctuations in the exchange rate between
the dollar and Israeli currency.
We also have a dollar denominated liabilities (rights of use-leasing
obligations for our international lines). In future periods, our dollar assets
(deposits) and our dollar denominated liabilities might commercially serve as
partial economic hedge against future exchange rate fluctuations.
We do not currently hedge against foreign currency exchange translation
risks but may in the future commence such hedging against specific foreign
currency transaction risks. A hypothetical 10% depreciation in our major foreign
currency rate (the dollar) against the NIS, with all other variables held
constant, would result in an increase in our expected 2005 sales of NIS 6.6
million ($1.5 million) and an increase in our 2005 net profit of NIS 3 million
($0.7 million).
EFFECTS OF CHANGES IN INTEREST RATES. We pay interest on our short-term
loan facility and credit line based on Israeli Prime. As a result, changes in
the general level of interest rates directly affect the amount of interest
payable by us under these facilities.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
The registration statement on Form F-1 (Commission File No. 333-10576)
which we filed with the Securities and Exchange Commission in connection with
our initial public offering became effective on August 5, 1999, the offering
date. Our initial public offering commenced on August 11, 1999 and terminated
upon completion of the sale of the registered ordinary shares. The lead
underwriters in our initial public offering were Lehman Brothers, Inc., CIBC
World Markets Corp., C.E. Unterberg, Towbin and Poalim Capital Market &
Investments Ltd.
The following table sets forth the number of ordinary shares registered,
the aggregate offering price of ordinary shares registered, the number of
ordinary shares sold and the aggregate offering price of ordinary shares sold,
for the account of our company.
101
For the account of the
company
----------------------
Number of ordinary shares registered .......................... 4,500,000
Aggregate offering price of ordinary shares
registered ................................................ $54,000,000
Number of ordinary shares sold ................................ 4,500,000
Aggregate offering price of ordinary shares sold .............. $54,000,000
Of the total of 4,500,000 ordinary shares, 3,150,000 ordinary shares were
offered and sold by our U.S. underwriters in the United States and Canada and
1,350,000 ordinary shares were offered and sold by the international
underwriters outside the United States and Canada.
The following table sets forth the expenses incurred by us in connection
with the initial public offering during the period commencing the effective date
of the registration statement and ending upon completion of the sale of the
registered shares. None of such expenses have been paid directly or indirectly
to directors, officers or persons owning 10% or more of any class of our equity
securities or to our affiliates.
Direct or indirect payments to
persons other than affiliated
persons
------------------------------
Underwriting discounts and commissions ...................... $3,780,000
Finders' fees ............................................... --
Expenses paid to or for underwriters ........................ --
Other expenses .............................................. 2,210,000
Total expenses .............................................. $5,990,000
==========
The net initial public offering proceeds to us, after deducting the total
expenses (set forth in the table above), was $48,010,000.
The following table sets forth the amount of net initial public offering
proceeds used by us for each of the purposes listed below. None of such payments
was paid directly or indirectly to directors, officers or persons owning 10% or
more of any class of our equity securities or to our affiliates.
102
Direct or indirect
payments to persons
other than to affiliated
Purpose persons
------------------------------------------------------------- ------------------------
Acquisition of other companies and
business(es) and financing subsidiaries.................. $ 10,481,000
Construction of plant, building and facilities .............. --
Purchase and installation of equipment ...................... 9,047,000
Purchase of real estate ..................................... --
Repayment of indebtedness ................................... 5,635,000
Working capital ............................................. 4,735,000
Temporary investments:
Acquisitions of marketable securities....................
Other purposes:
Provision of a long-term loan to lessor.................. 632,000
Total....................................................... $ 30,530,000
-------------
ITEM 15. CONTROLS AND PROCEDURES
Our management, including our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered
by this annual report on Form 20-F. Based upon that evaluation, our chief
executive officer and chief financial officer have concluded that, as of such
date, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by our company in reports that we file or
submit under the U.S. Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
was made known to them by others within the company, as appropriate to allow
timely decisions regarding required disclosure.
There were no changes to our internal control over financial reporting
that occurred during the period covered by this annual report on Form 20-F that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective may not
prevent or detect misstatements and can provide only reasonable assurance with
respect to financial statement preparation and presentation. 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.
ITEM 16. RESERVED.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Ms. Winner, one of our
independent directors, meets the definition of an audit committee financial
expert, as defined in Item 401 of Regulation S-K.
ITEM 16B. CODE OF ETHICS
We have adopted a Code of Ethics for Executive and Financial Officers, a
code of ethics that applies to our chief executive officer, chief financial
officer, corporate controller and other finance organization employees, and a
Code of Conduct, which applies to all of our employees. The Code of Ethics and
the Code of Conduct are publicly available on our website at www.igld.com.
Written copies are available upon request. If we make any substantive amendments
to the Code of Ethics or the Code of Conduct or grant any waivers, including any
implicit waiver, from a provision of these codes to our chief executive officer,
chief financial officer or corporate controller, we will disclose the nature of
such amendment or waiver on our website.
103
ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES
FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS
The following table sets forth, for each of the years indicated, the fees
paid to our independent public accountants and the percentage of each of the
fees out of the total amount paid to the accountants.
Year Ended December 31,
---------------------------------------------------------
2003 2004
------------------------- -----------------------
Services Rendered Fees Percentages Fees Percentages
-------------------------- --------- ------------ --------- -----------
Audit (1)................. $ 124,000 91% $ 141,200 93%
Audit-related (2)......... - - - -
Tax (3)................... 12,000 9% 11,800 7%
Other (4)................. - - - -
--------- ------------ --------- -----------
Total .................... 136,000 100% 153,000 100%
-----------------------
(1) Audit fees consist of services that would normally be provided in
connection with statutory and regulatory filings or engagements, including
services that generally only the independent accountant can reasonably
provide.
(2) Audit-related fees relate to assurance and associated services that
traditionally are performed by the independent accountant, including:
attest services that are not required by statute or regulation; accounting
consultation and audits in connection with mergers, acquisitions and
divestitures; employee benefit plans audits; and consultation concerning
financial accounting and reporting standards.
(3) Tax fees relate to services performed by the tax division for tax
compliance, planning, and advice.
(4) Other fees include related services.
Our audit committee approved the provision of the services specified in
the above table.
PRE-APPROVAL POLICIES AND PROCEDURES
Our audit committee and our board of directors have adopted a policy and
procedures for the pre-approval of audit and non-audit services rendered by our
independent public accountants, Somekh Chaikin, a member firm of KPMG
International. The policy generally pre-approves certain specific services in
the categories of audit services, audit-related services, and tax services up to
specified amounts, and sets requirements for specific case-by-case pre-approval
of discrete projects, those which may have a material effect on our operations
or services over certain amounts. Pre-approval may be given as part of the audit
committee's approval of the scope of the engagement of our independent auditor
or on an individual basis. The pre-approval of services may be delegated to one
or more of the audit committee's members, but the decision must be presented to
the full audit committee at its next scheduled meeting. The policy prohibits
retention of the independent public accountants to perform the prohibited
non-audit functions defined in Section 201 of the Sarbanes-Oxley Act or the
rules of the SEC, and also considers whether proposed services are compatible
with the independence of the public accountants.
104
ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT
COMMITTEE
Not applicable.
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND
PURCHASERS
ISSUER PURCHASE OF EQUITY SECURITIES
Neither we, nor any "affiliated purchaser" of our company, purchased any
of our securities during 2004.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
Consolidated Financial Statements F-1
Report of Independent Auditors F-2
Balance Sheets as of December 31, 2004 and 2003 F-3
Statements of Operations for the years ended December 31, 2004, 2003 and 2002 F-5
Statement of Changes in Shareholders' Equity for the years ended December 31, 2004, 2003 and 2002 F-6
Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 F-7
Notes to the Financial Statements F-10
105
ITEM 19. EXHIBITS
INDEX TO EXHIBITS
Exhibit Description
------- -----------
1.1 Memorandum of Association of the Registrant.*
1.2 Articles of Association of the Registrant.*
2.1 Specimen of Share Certificate.*
2.2 Terms of Convertible Debentures Traded on Tel Aviv Stock Exchange***
2.3 Terms of Options Traded on Tel Aviv Stock Exchange***
4.1 Registration Rights Agreement, dated July 30, 1999, among the Registrant, Euronet Communications
Ltd., Shaul Elovitch and Eli Holtzman.*
4.2 Employee Stock Option Plan dated June 1999 of the Registrant.*
4.3 Hebrew version and an English summary of Lease Agreement between Rivka and Avraham Veron and the
Registrant dated March 1999.**
8 List of Subsidiaries of the Registrant
12.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended.
12.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended.
13.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
13.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
----------
*Previously filed as exhibit to the Registrant's Registration Statement on Form
F-1, Registration No. 333-10576, and incorporated herein by reference.
** Previously filed as an exhibit to the Registrant Annual Report on Form 20-F
for the year ended December 31, 2000, Commission File No. 0-30198, and
incorporated herein by reference.
***Previously filed as exhibit to the Registrant's Registration Statement on
Form 6-K, dated April 11, 2005, and incorporated herein by reference.
106
Internet Gold - Golden Lines Ltd.
FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004
--------------------------------------------------------------------------------
PAGE
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets as of December 31, 2004 and 2003 F-3
Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 F-5
Statements of Changes in Shareholders' Equity for the years ended
December 31, 2004, 2003 and 2002 F-6
Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 F-7
Notes to the Financial Statements F-10
Annex A to the Financial Statements F-58
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
INTERNET GOLD - GOLDEN LINES LTD.
We have audited the accompanying consolidated and company balance sheets of
Internet Gold - Golden Lines Ltd. (hereinafter - the "Company") as of December
31, 2004 and 2003, and the related consolidated and company statements of
operations, changes in shareholders' equity and cash flows, for each of the
years in the three year period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated and company financial statements referred to
above present fairly, in all material respects, the financial position of the
Company as of December 31, 2004 and 2003 and the results of its operations, the
changes in shareholders' equity and its cash flows for each of the years in the
three year period ended December 31, 2004, in conformity with generally accepted
accounting principles in Israel.
As explained in Note 2C the financial statements for dates and reporting periods
subsequent to December 31, 2003 are stated in reported amounts, in accordance
with the accounting standards of the Israel Accounting Standards Board. The
financial statements for dates and reporting periods that ended up to the
aforementioned date are stated in values that were adjusted to that date
according to the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 21 to the consolidated financial statements.
As discussed in Note 21 to the consolidated financial statements, the Company
adopted Financial Standards Board Interpretation No. 46(R) "Consolidation of
Variable Interest Entities" in 2004 by restating the consolidated financial
statements of 2003 and 2002 with a cumulative effect adjustment as of the
beginning of 2002 in the amount of NIS 4,382 thousand.
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International
Tel Aviv, Israel
February 17, 2005
F-2
BALANCE SHEETS - CONSOLIDATED AND COMPANY
--------------------------------------------------------------------------------
CONVENIENCE
TRANSLATION
INTO
US DOLLARS
(NOTE 2E)
-------------
CONSOLIDATED COMPANY CONSOLIDATED
----------------------------- ---------------------------- -------------
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003 2004
----------- ----------- ----------- ----------- -------------
REPORTED ADJUSTED REPORTED ADJUSTED
AMOUNTS* AMOUNTS** AMOUNTS* AMOUNTS**
----------- ----------- ----------- -----------
NOTE NIS THOUSANDS US$ THOUSANDS
------ ---------------------------------------------------------------- -------------
CURRENT ASSETS
Cash and cash equivalents 3 75,637 81,891 75,323 81,660 17,557
Trade receivables, net 4 52,682 35,569 37,723 26,601 12,231
Other receivables 5 8,948 12,769 7,408 10,539 2,077
Deferred taxes 16 2,564 1,914 - - 595
----------- ----------- ----------- ----------- -------------
Total current assets 139,831 132,143 120,454 118,800 32,460
----------- ----------- ----------- ----------- -------------
INVESTMENTS
Investments in
investee companies 6 - 1,550 16,821 8,287 -
Deferred taxes 16 22 21 - - 5
----------- ----------- ----------- ----------- -------------
22 1,571 16,821 8,287 5
----------- ----------- ----------- ----------- -------------
PROPERTY AND EQUIPMENT, NET 7 40,583 29,160 36,075 26,796 9,420
----------- ----------- ----------- ----------- -------------
OTHER ASSETS AND
DEFERRED CHARGES 8 114,956 51,130 112,253 49,895 26,684
----------- ----------- ----------- ----------- -------------
ASSETS ALLOCATED TO
DISCONTINUED OPERATION 20 4,631 - - - 1,075
----------- ----------- ----------- ----------- -------------
TOTAL ASSETS 300,023 214,004 285,603 203,778 69,644
=========== =========== =========== =========== =============
/s/ Eli Holtzman /s/ Doron Turgeman
------------------------------------ -----------------------
Eli Holtzman Doron Turgeman
Chief Executive Officer and Director Chief Financial Officer
Date of signature: February 17, 2005
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003 (see Note 2C).
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
The accompanying notes are an integral part of the financial statements.
F-3
Internet Gold - Golden Lines Ltd.
--------------------------------------------------------------------------------
CONVENIENCE
TRANSLATION
INTO
US DOLLARS
(NOTE 2E)
------------
CONSOLIDATED COMPANY CONSOLIDATED
----------------------------- ---------------------------- ------------
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003 2004
----------- ----------- ----------- ----------- ------------
REPORTED ADJUSTED REPORTED ADJUSTED
AMOUNTS* AMOUNTS** AMOUNTS* AMOUNTS**
----------- ----------- ----------- -----------
NOTE NIS THOUSANDS US$ THOUSANDS
------ ---------------------------------------------------------------- -------------
LIABILITIES
CURRENT LIABILITIES
Short-term bank loans 9 10,950 5,259 7,668 2,459 2,542
Accounts payable 10 73,383 36,591*** 69,414 33,915*** 17,034
Other payables 11 13,784 14,037*** 8,742 9,888*** 3,200
----------- ----------- ----------- ----------- -------------
Total current liabilities 98,117 55,887 85,824 46,262 22,776
----------- ----------- ----------- ----------- -------------
LONG-TERM LIABILITIES
Excess of liabilities over
assets in investees 6 - 7,706 - 7,706 -
Long-term loans and other
long-term obligations 12 72,117 27,389 72,111 27,193 16,740
Deferred revenues 3 23 3 23 1
Liability for severance
pay, net 13 6,240 4,928 5,772 4,523 1,448
----------- ----------- ----------- ----------- -------------
Total long-term liabilities 78,360 40,046 77,886 39,445 18,189
----------- ----------- ----------- ----------- -------------
LIABILITIES ALLOCATED TO
DISCONTINUED OPERATION 20 1,653 - - - 384
----------- ----------- ----------- ----------- -------------
SHAREHOLDERS' EQUITY
Ordinary shares,
NIS 0.01 par value
(501,000,000 shares
authorized; 18,431,500
shares issued and fully paid
as at December 31, 2004) 197 197 197 197 46
Additional paid in capital 215,040 215,040 215,040 215,040 49,916
Accumulated deficit (93,344) (97,166) (93,344) (97,166) (21,667)
----------- ----------- ----------- ----------- -------------
Total shareholders' equity 121,893 118,071 121,893 118,071 28,295
----------- ----------- ----------- ----------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 300,023 214,004 285,603 203,778 69,644
=========== =========== =========== =========== =============
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003 (see Note 2C).
** Amounts adjusted to reflect inflation in terms of NIS of December 31, 2003.
*** Reclassified
The accompanying notes are an integral part of the financial statements.
F-4
Internet Gold - Golden Lines Ltd.
STATEMENTS OF OPERATIONS - CONSOLIDATED AND COMPANY
--------------------------------------------------------------------------------
CONSOLIDATED
-------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002
----------- ----------- -----------
REPORTED ADJUSTED ADJUSTED
MOUNTS* AMOUNTS** AMOUNTS**
----------- ----------- -----------
NOTE NIS THOUSANDS (EXCEPT FOR PER SHARE DATA)
---- -------------------------------------------
Revenues 15A 219,577 179,642 184,318
----------- ----------- -----------
Costs and expenses:
Cost of revenues 15B 96,820 92,871 99,564
Selling and marketing expenses 15C 73,155 41,393 37,125
General and administrative expenses 15D 24,258 21,908 21,209
----------- ----------- -----------
Total costs and expenses 194,233 156,172 157,898
----------- ----------- -----------
Income from operations 25,344 23,470 26,420
Financing income (expenses), net 15E 122 (3,235) 2,151
Other (expenses) income, net (1,077) (2,592) (3)
----------- ----------- -----------
Income from continued operations before income taxes 24,389 17,643 28,568
Income tax benefit 16 301 1,935 -
----------- ----------- -----------
Income after income tax 24,690 19,578 28,568
Company's share in net income (loss) of investees (396) (1,538) (1,530)
----------- ----------- -----------
Income from continued operations 24,294 18,040 27,038
Company's share in loss of a subsidiary
from discontinued operations 20 (4,763) (3,737) (7,080)
----------- ----------- -----------
NET INCOME 19,531 14,303 19,958
=========== =========== ===========
INCOME (LOSS) PER SHARE, BASIC AND DILUTED
Net income per NIS 0.01 par value of
shares (in NIS) from continuing operations 1.32 0. 98 1. 47
=========== =========== ===========
Net loss per NIS 0.01 par value of shares (in NIS)
from discontinued operation (0.26) (0.20) (0.39)
=========== =========== ===========
Net income per NIS 0.01 par value of shares (in NIS) 1.06 0.78 1.08
=========== =========== ===========
Weighted average number of shares outstanding (in thousands) 18,432 18,432 18,432
=========== =========== ===========
CONVENIENCE
TRANSLATION
INTO US DOLLARS
(NOTE 2E)
COMPANY CONSOLIDATED
-------------------------------------------- ---------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002 2004
----------- ----------- ----------- ---------------
REPORTED ADJUSTED ADJUSTED
AMOUNTS* AMOUNTS** AMOUNTS**
----------- ----------- -----------
NIS THOUSANDS (EXCEPT FOR PER SHARE DATA) US$ THOUSANDS
-------------------------------------------- ---------------
Revenues 180,343 157,394 169,052 50,970
---------- ----------- ----------- --------------
Costs and expenses:
Cost of revenues 80,819 78,008 85,798 22,474
Selling and marketing expenses 65,842 42,538 37,981 16,981
General and administrative expenses 19,810 18,959 18,712 5,631
---------- ----------- ----------- --------------
Total costs and expenses 166,471 139,505 142,491 45,086
---------- ----------- ----------- --------------
Income from operations 13,872 17,889 26,561 5,884
Financing income (expenses), net 2,452 587 3,701 28
Other (expenses) income, net 503 17 (110) (250)
---------- ----------- ----------- --------------
Income from continued operations before income taxes 16,827 18,493 30,152 5,662
Income tax benefit - - - 70
---------- ----------- ----------- --------------
Income after income tax 16,827 18,493 30,152 5,732
Company's share in net income (loss) of investees 7,467 (453) (3,114) (92)
---------- ----------- ----------- --------------
Income from continued operations 24,294 18,040 27,038 5,640
Company's share in loss of a subsidiary
from discontinued operations (4,763) (3,737) (7,080) (1,106)
---------- ----------- ----------- --------------
NET INCOME 19,531 14,303 19,958 4,534
========== =========== =========== ==============
INCOME (LOSS) PER SHARE, BASIC AND DILUTED
Net income per NIS 0.01 par value of
shares (in NIS) from continuing operations 1.32 0.98 1.47 0.31
========== =========== =========== ==============
Net loss per NIS 0.01 par value of shares (in NIS)
from discontinued operation (0.26) (0.20) (0.39) (0.06)
========== =========== =========== ==============
Net income per NIS 0.01 par value of shares (in NIS) 1.06 0.78 1.08 0.25
========== =========== =========== ==============
Weighted average number of shares outstanding (in thousands) 18,432 18,432 18,432 18,432
========== =========== =========== ==============
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003 (see Note 2C).
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
The accompanying notes are an integral part of the financial statements.
F-5
Internet Gold - Golden Lines Ltd.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
SHARE CAPITAL *
----------------------------
NUMBER OF ADDITIONAL ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
---------- -------- --------------- ------------- --------
AMOUNTS ADJUSTED TO THE EFFECT OF INFLATION IN TERMS OF NIS OF DECEMBER 2003
-------------------------------------------------------------------------------------------
NIS 0.01 PAR VALUE NIS THOUSANDS
---------------------------- ------------------------------------------------------
BALANCE AS OF
JANUARY 1, 2002 18,431,500 197 215,040 (131,427) 83,810
Changes during 2002
Net income for the year - - - 19,958 19,958
---------- -------- --------------- ------------- --------
BALANCE AS OF
DECEMBER 31, 2002 18,431,500 197 215,040 (111,469) 103,768
Changes during 2003:
Net income for the year - - - 14,303 14,303
---------- -------- --------------- ------------- --------
BALANCE AS OF
DECEMBER 31, 2003 18,431,500 197 215,040 (97,166) 118,071
========== ======== =============== ============= ========
SHARE CAPITAL (*)
---------------------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ----------- ----------- --------
REPORTED AMOUNTS**
-------------------------------------------------------------------------------------------
NIS 0.01 PAR VALUE NIS THOUSANDS
---------------------------- ------------------------------------------------------
BALANCE AS OF
DECEMBER 31, 2003 18,431,500 197 215,040 (97,166) 118,071
Changes during 2003:
Capital reserve
from purchase of
investee company - - - (15,709) (15,709)
Net income for the year - - - 19,531 19,531
---------- ------- ---------- ----------- --------
BALANCE AS OF
DECEMBER 31, 2004 18,431,500 197 215,040 (93,344) 121,893
========== ======= ========== =========== ========
* Number of authorized shares - 501,000,000
** With respect to discontinuance of adjustment to the effect of inflation as
from the CPI at December 31, 2003 (see Note 2C).
The accompanying notes are an integral part of the financial statements.
F-6
Internet Gold - Golden Lines Ltd.
STATEMENTS OF CASH FLOWS - CONSOLIDATED AND COMPANY
--------------------------------------------------------------------------------
CONSOLIDATED
-------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002
----------- ----------- -----------
REPORTED ADJUSTED ADJUSTED
MOUNTS* AMOUNTS** AMOUNTS**
----------- ----------- -----------
NIS THOUSANDS
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 19,531 14,303 19,958
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss from discontinued operations 4,763 3,737 7,080
Depreciation and amortization 21,856 16,219 15,333
Increase in liability for termination of
employer - employee relations, net 1,284 1,147 202
Company's share in net loss (income) of investees 396 1,538 1,530
Interest on long -term loans (2,161) (374) (644)
(Gain) loss on sale of property and equipment (382) 16 110
Impairment of investments 1,551 2,609 -
Deferred taxes (301) (1,935) -
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECT OF ACQUIRED
COMPANIES AND DISCONTINUED OPERATIONS:
Increase in trade receivables (15,041) (4,362) (2,939)
(Increase) decrease in other receivables (2,158) (2,548) 1,987
(Decrease) increase in accounts payable 11,774 (3,290)*** (656)***
(Decrease) increase in other payables (2,927) 2,112*** (758)***
----------- ----------- -----------
NET CASH PROVIDED BY CONTINUED OPERATING ACTIVITIES 38,185 29,172 41,203
NET CASH USED IN DISCONTINUED OPERATING ACTIVITIES - - -
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 38,185 29,172 41,203
----------- ----------- -----------
CONVENIENCE
TRANSLATION
INTO US DOLLARS
(NOTE 2E)
COMPANY CONSOLIDATED
-------------------------------------------- ---------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002 2004
----------- ----------- ----------- ---------------
REPORTED ADJUSTED ADJUSTED
AMOUNTS* AMOUNTS** AMOUNTS**
----------- ----------- -----------
NIS THOUSANDS US$ THOUSANDS
-------------------------------------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 19,531 14,303 19,958 4,534
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss from discontinued operations 4,763 3,737 7,080 1,106
Depreciation and amortization 19,445 13,621 13,754 5,072
Increase in liability for termination of
employer - employee relations, net 1,249 1,060 2 298
Company's share in net loss (income) of investees (7,467) 453 3,114 92
Interest on long -term loans 1,196 (4,012) (1,043) (502)
(Gain) loss on sale of property and equipment (413) 16 110 (89)
Impairment of investments - - - 360
Deferred taxes - - - (70)
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECT OF ACQUIRED
COMPANIES AND DISCONTINUED OPERATIONS:
Increase in trade receivables (11,122) (918) (675) (3,491)
(Increase) decrease in other receivables (2,962) (1,189) 3,815 (501)
(Decrease) increase in accounts payable 12,610 (775) (675) 2,733
(Decrease) increase in other payables (1,166) (797) (5,067) (679)
----------- ----------- ----------- ---------------
NET CASH PROVIDED BY CONTINUED OPERATING ACTIVITIES 35,664 25,499 40,373 8,863
NET CASH USED IN DISCONTINUED OPERATING ACTIVITIES - - - -
----------- ----------- ----------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 35,664 25,499 40,373 8,863
----------- ----------- ----------- ---------------
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003 (see Note 2C).
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
*** Reclassified
The accompanying notes are an integral part of the financial statements.
F-7
Internet Gold - Golden Lines Ltd.
STATEMENTS OF CASH FLOWS - CONSOLIDATED AND COMPANY (CONT'D)
--------------------------------------------------------------------------------
CONSOLIDATED
-----------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002
----------- ----------- -----------
REPORTED ADJUSTED ADJUSTED
AMOUNTS* AMOUNTS** AMOUNTS**
----------- ----------- -----------
NIS THOUSANDS
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (22,830) (13,450) (11,153)
Proceeds from sales of property and equipment 1,266 65 248
Grant of long-term loans to investee company (30,500) - -
Grant of long-term loans - - (1,266)
Repayment of long-term loans 4,741 1,079 956
Investment in investee companies - (6,474) -
Investment in other assets (69,220) (51,926) (1,048)
Acquisition of formerly investee company (Appendix A) (1,122) - 116
----------- ----------- -----------
NET CASH USED IN CONTINUED INVESTMENT ACTIVITIES (117,665) (70,706) (12,147)
NET CASH USED IN DISCONTINUED OPERATIONS
INVESTMENT ACTIVITIES - - (1)
----------- ----------- -----------
NET CASH USED IN INVESTMENT ACTIVITIES (117,665) (70,706) (12,148)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term bank loans 3,549 (4,717) (29,983)
Receipt of long-term loans under lease agreement 81,039 60,181 -
Receipt of long-term loans from bank 30,500 - -
Repayment of long-term loans under lease agreement (41,862) (17,184) (1,545)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) CONTINUED FINANCING ACTIVITIES 73,226 38,280 (31,528)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS
FINANCING ACTIVITIES - - -
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 73,226 38,280 (31,528)
----------- ----------- -----------
CONVENIENCE
TRANSLATION
INTO US DOLLARS
(NOTE 2E)
COMPANY CONSOLIDATED
----------------------------------------- --------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002 2004
----------- ----------- ----------- ---------------
REPORTED ADJUSTED ADJUSTED
AMOUNTS* AMOUNTS** AMOUNTS**
----------- ----------- -----------
NIS THOUSANDS US$ THOUSANDS
----------------------------------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (23,210) (13,119) (10,202) (5,299)
Proceeds from sales of property and equipment 1,046 65 248 294
Grant of long-term loans to investee company - - - (7,080)
Grant of long-term loans - - (1,266) -
Repayment of long-term loans 4,741 1,079 956 1,101
Investment in investee companies (32,540) (9,624) (16,364) -
Investment in other assets (67,898) (50,598) - (16,068)
Acquisition of formerly investee company (Appendix A) - - - (261)
----------- ----------- ----------- ---------------
NET CASH USED IN CONTINUED INVESTMENT ACTIVITIES (117,861) (72,197) (26,628) (27,313)
NET CASH USED IN DISCONTINUED OPERATIONS
INVESTMENT ACTIVITIES - - - -
----------- ----------- ----------- ---------------
NET CASH USED IN INVESTMENT ACTIVITIES (117,861) (72,197) (26,628) (27,313)
----------- ----------- ----------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term bank loans 5,844 4 (15,095) 824
Receipt of long-term loans under lease agreement 81,039 60,181 - 18,811
Receipt of long-term loans from bank 30,500 - - 7,080
Repayment of long-term loans under lease agreement (41,523) (16,869) (1,226) (9,717)
----------- ----------- ----------- ---------------
NET CASH PROVIDED BY (USED IN) CONTINUED FINANCING ACTIVITIES 75,860 43,316 (16,321) 16,998
NET CASH PROVIDED BY DISCONTINUED OPERATIONS
FINANCING ACTIVITIES - - - -
----------- ----------- ----------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 75,860 43,316 (16,321) 16,998
----------- ----------- ----------- ---------------
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003 (see Note 2C).
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
The accompanying-- notes are an integral part of the financial statements.
F-8
Internet Gold - Golden Lines Ltd.
STATEMENTS OF CASH FLOWS - CONSOLIDATED AND COMPANY (CONT'D)
--------------------------------------------------------------------------------
CONSOLIDATED
-----------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002
----------- ----------- -----------
REPORTED ADJUSTED ADJUSTED
AMOUNTS* AMOUNTS** AMOUNTS**
----------- ----------- -----------
NIS THOUSANDS (EXCEPT FOR PER SHARE DATA)
-----------------------------------------
CHANGES IN CASH AND CASH EQUIVALENTS (6,254) (3,254) (2,473)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 81,891 85,145 87,618
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR 75,637 81,891 85,145
=========== =========== ===========
NON-CASH INVESTING ACTIVITIES:
Accounts payable in respect of fixed assets 3,337 2,352 3,952
=========== =========== ===========
Investment in subsidiary - (4,252) -
=========== =========== ===========
Cash reserve from purchase of investee company from a related party 15,709 - -
=========== =========== ===========
CASH PAID FOR INTEREST, NET 323 553 1,592
=========== =========== ===========
CASH PAID FOR TAXES 208 191 162
=========== =========== ===========
APPENDIX A
CONSOLIDATION OF FORMERLY INVESTEE COMPANY
Operating capital, net of cash 3,878 - 181
Property and equipment, net (2,125) - (173)
Other assets (700) - 104
Assets allocated to discontinued operations (4,631) - -
Liabilities allocated to discontinued operations 1,653 -
Long-term liabilities 28 - 4
Capital reserve from purchase of investee company from a related
party (15,709) - -
Investment in investee 16,484 - -
----------- ----------- -----------
(1,122) - 116
=========== =========== ===========
APPENDIX B-
EXIT FROM CONSOLIDATION OF A PREVIOUSLY CONSOLIDATED SUBSIDIARY
Working capital, net of cash - - (31,735)
Property and equipment, net - - 13,248
Long-term liabilities - - (12,598)
Customer list, net - - 9,638
Minority interest - - 16,621
Company's share in excess of liabilities over assets in investees - - 4,825
----------- ----------- -----------
- - (1)
CONVENIENCE
TRANSLATION
INTO US
DOLLARS
(NOTE 2E)
COMPANY CONSOLIDATED
----------------------------------------- -------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002 2004
----------- ----------- ----------- -------------
REPORTED ADJUSTED ADJUSTED
AMOUNTS* AMOUNTS** AMOUNTS**
----------- ----------- ----------- -------------
NIS THOUSANDS (EXCEPT FOR PER SHARE DATA) US$ THOUSANDS
----------------------------------------- -------------
CHANGES IN CASH AND CASH EQUIVALENTS (6,337) (3,382) (2,576) (1,452)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 81,660 85,042 87,618 19,009
----------- ----------- ----------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 75,323 81,660 85,042 17,557
=========== =========== =========== =============
NON-CASH INVESTING ACTIVITIES:
Accounts payable in respect of fixed assets 3,283 2,255 3,952 775
=========== =========== =========== =============
Investment in subsidiary - - - -
=========== =========== =========== =============
Cash reserve from purchase of investee company from a related party 15,709 - - -
=========== =========== =========== =============
CASH PAID FOR INTEREST, NET 247 323 1,592 75
=========== =========== =========== =============
CASH PAID FOR TAXES 175 161 105 48
=========== =========== =========== =============
APPENDIX A
CONSOLIDATION OF FORMERLY INVESTEE COMPANY
Operating capital, net of cash - - - 900
Property and equipment, net - - - (493)
Other assets - - - (162)
Assets allocated to discontinued operations - - - (1,075)
Liabilities allocated to discontinued operations - - - 384
Long-term liabilities - - - 6
Capital reserve from purchase of investee company from a related
party - - - (3,646)
Investment in investee - - - 3,825
----------- ----------- ----------- -------------
- - - (261)
=========== =========== =========== =============
APPENDIX B -
EXIT FROM CONSOLIDATION OF A PREVIOUSLY CONSOLIDATED SUBSIDIARY
Working capital, net of cash
APPENDIX B -
EXIT FROM CONSOLIDATION OF A PREVIOUSLY CONSOLIDATED SUBSIDIARY
Working capital, net of cash - - - -
Property and equipment, net - - - -
Long-term liabilities - - - -
Customer list, net - - - -
Minority interest - - - -
Company's share in excess of liabilities over assets in investees - - - -
- - - -
----------- ----------- ----------- -------------
- - - -
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003 (see Note 2C).
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
The accompanying notes are an integral part of the financial statements.
F-9
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 1 - GENERAL
Internet Gold - Golden Lines Ltd. (hereinafter "the Company") was
incorporated in Israel in 1992. From 1996, the Company has operated as a
provider of internet services, tailored to meet the needs of residential
and business subscribers, including internet access and related value-added
services, as well as content through portals. The Company launched its
international Telephone Service (ITS) under the brand "015" in august 2004.
The license to provide ITS was granted for 20 years.
Internet Gold is a public company and its ordinary shares currently trade
on the NASDAQ national market.
NOTE 2 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES
A. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
These financial statements are prepared in accordance with generally
accepted accounting principles in Israel. See Note 21 for a reconciliation
to generally accepted accounting principles in the United States.
B. DEFINITIONS
In these financial statements -
(1) THE COMPANY Internet Gold - Golden Lines Ltd.
(2) THE GROUP - Internet Gold - Golden Lines Ltd. and its investee
companies as specified in Annex A list of Group Companies.
(3) SUBSIDIARY - A company, including a partnership or joint venture, the
financial statements of which are fully consolidated, directly or
indirectly, with the financial statements of the Company.
(4) AFFILIATED COMPANY - A company, other than a subsidiary and including
a partnership or joint venture, the Company's investment in which is
stated, directly or indirectly, under the equity basis.
(5) INVESTEE COMPANY - A subsidiary or affiliated company
(6) RELATED PARTY - As defined in Opinion No. 29 of the Institute of
Certified Public Accountants in Israel (hereinafter - the ICPAI).
(7) INTERESTED PARTY as defined in Paragraph (1) of the definition of an
"interest party" in Section 1 of the Securities Law - 1968.
F-10
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 2 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES
B. DEFINITIONS (CONT'D)
(8) CONTROLLING SHAREHOLDER - As defined in the Securities Regulations
(Financial Statement Presentation of Transactions between a company
and its controlling shareholder) - 1996.
(9) CPI - The Consumer Price Index as published by the Central Bureau of
Statistics.
(10) ADJUSTED AMOUNT - the nominal historical amount adjusted in accordance
with the provisions of Opinions 23 and 34 and Opinions 36 and 37.
(11) REPORTED AMOUNT - The adjusted amount as at the transition date
(December 31, 2003), with the addition of amounts in nominal values
that were added after the transition date and less amounts eliminated
after the transition date.
(12) ADJUSTED FINANCIAL REPORTING - Financial reporting based on the
provisions of Opinions 23, 34, 36, 37 and 50.
(13) NOMINAL FINANCIAL REPORTING - Financial reporting based on reported
amounts.
C. FINANCIAL STATEMENTS IN REPORTED NEW ISRAELI SHEKELS (NIS)
In October 2001, the Israel Accounting Standards Board published Accounting
Standard No. 12, "Discontinuance of Adjustment of Financial Statements".
Pursuant to this standard and in accordance with Accounting Standard No. 17
that was published in December 2002, the adjustment of financial statements
was discontinued as of January 1, 2004. Up to December 31, 2003, the
Company continued to prepare adjusted financial statements in accordance
with Opinion No. 36 of the Institute of Certified Public Accountants in
Israel. The adjusted amounts included in the financial statements as at
December 31, 2003 constitute the starting point for the nominal financial
report as of January 1, 2004. The Company has implemented the provisions of
the standard and has accordingly discontinued the adjustments as of January
1, 2004.
1. In the past the Company prepared its financial statements on the basis
of historical cost adjusted for the changes in the Consumer Price
Index. The adjusted amounts that are included in the financial
statements as at December 31, 2003 constitute the starting point for
the nominal financial report as of January 1, 2004. Any additions made
during the period are included according to their nominal values.
2. Amounts of non-monetary assets do not necessarily reflect their
realizable value or updated economic value, but only the reported
amounts of such assets.
3. The term "cost" in these financial statements means the reported
amount of cost.
4. All the comparative data for prior periods is stated adjusted to the
index at December 31, 2003.
F-11
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 2 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES
C. FINANCIAL STATEMENTS IN REPORTED NEW ISRAELI SHEKELS (NIS) (CONT'D)
Balance sheets:
a. Non-monetary items are stated at reported amounts.
b. Monetary items are stated in the balance sheet at their nominal
historical values as at balance sheet date.
Statement of operations:
A. Income and expenses deriving from non-monetary items from provisions
included in the balance sheet are derived from the difference between
the reported amounts of the opening balance and the reported amounts
of the closing balance.
B. The other income and expense items (such as: sales, purchases, current
manufacturing costs, etc.) are presented at their nominal values.
D. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
E. CONVENIENCE TRANSLATION
For the convenience of the reader, the reported NIS figures of December 31,
2004 have been presented in U.S. Dollars thousands, translated at the
representative rate of exchange as of December 31, 2004 (NIS 4.308 = U.S.
Dollar 1.00). The U.S. Dollar (hereinafter - $) amounts presented in these
financial statements should not be construed as representing amounts
receivable or payable in U.S. Dollars or convertible into U.S. Dollars,
unless otherwise indicated.
F. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include those of the Company and all
its subsidiary companies. All material intercompany transactions and
balances have been eliminated in the consolidated financial statements.
F-12
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
G. EXCHANGE RATE AND CONSUMER PRICE INDEX DATA
1. TRANSACTIONS IN FOREIGN CURRENCY
Transactions denominated in foreign currency are recorded upon their
initial recognition according to the exchange rate in effect on the
date of the transaction. Exchange rate differences arising upon the
settlement of monetary items or upon reporting the Company's monetary
items at exchange rates that are different than those by which they
were initially recorded during the period, or reported in previous
financial statements, are charged to income or expenses.
2. Representative rates of exchange (as published by the Bank of Israel)
and Consumer Price Indices (as published by the Israeli Central Bureau
of Statistics) are as follows:
EXCHANGE CONSUMER
RATE PRICE
OF THE $ INDEX
-------- -------------
As of December 31, 2002 4.737 182.01 points
As of December 31, 2003 4.379 178.58 points
As of December 31, 2004 4.308 180.74 points
Changes during the:
Year ended December 31, 2002 7.27% 6.49%
Year ended December 31, 2003 (7.56)% (1.88)%
Year ended December 31, 2004 (1.625)% 1.21%
H. CASH AND CASH EQUIVALENTS
The Company considers as cash equivalents all highly-liquid investments,
including short-term bank deposits with an original maturity of three
months or less, which are not encumbered by a lien.
I. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts represents management's estimate of the
aged receivable balance considered uncollectible, based on past experience.
J. INVESTMENTS
Investee companies
Investments in investee companies, in which the Company has significant
influence (affiliated companies) are stated under the equity method, that
is, at cost plus the Company's share of the post-acquisition gains or
losses.
F-13
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
K. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less depreciation.
Depreciation is calculated using the straight-line method, over the assets
estimated useful lives.
Annual depreciation rates are as follows:
%
-------
Network equipment and computers 25 - 33
Motor vehicles 15
Furniture and office equipment 6 - 15
Leasehold improvements 10
The cost of maintenance and repairs is charged to expenses as incurred. The
cost of significant renewals and improvements is added to the carrying
amount of the respective asset.
L. OTHER ASSETS
1. Special content web sites
Certain costs relating to self construction of special content
web-sites have been capitalized according to EITF-00-02 and amortized
over a period of 18 months from completion of construction. Such
capitalized costs are presented as part of other assets.
2. Rights of Use (ROU) of international fiber optic lines
The Company signed a long-term agreement with two of its suppliers
(see Note 14F). The ROU purchase is presented in the financial
statements as a capital lease. Amortization is computed by the
straight-line method over the term of the agreement (15 years) subject
to technological obsolescence effects.
3. Deferred charges
The Company defers costs incurred relating to the expansion of
customer base by long-term contracts granting the customers incentives
such as Routers, firewall, etc. The consideration in such long-term
contracts is refundable. The Company amortizes such costs over the
term of the agreement. The Company reflects long-term deferred charges
net of current maturities that are presented as prepaid expenses.
In addition, the company granted the Ministry of Communication in
Israel a guarantee related to the International telephoning services
license. The commission regarding this guarantee is amortized over the
term of the guarantee.
F-14
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
M. DEFERRED INCOME
The deferred income in the consolidated financial statements is derived
from Post Contract Customer Support ("PCS") and from advertising services.
Those revenues are recognized ratably over the period that services are
provided (see also Note 2N).
N. REVENUE RECOGNITION
(1) SALES OF PRODUCTS
Revenues from sales of products are recognized upon the delivery to
the customer and the transfer of the principal risks and rewards
arising from ownership over the sold products.
Revenues from the electronic commerce and "after sale" activity are
recognized as the services are performed or when the goods are
delivered, as applicable.
(2) REVENUES FROM SERVICES
Revenues from services are recognized proportionately over the period
of the agreement or upon the performance of the service if it is
certain that the economic benefits attributed to the performance of
the service will be received.
Most of the Company's revenues from services are derived from Internet
access. These revenues are recognized ratably over the period that
services are provided. Other revenues include website hosting,
advertising revenues and recently international telephony services.
Revenues from website hosting are recognized as the services are
performed. Advertising revenues are recognized on a straight-line over
the term of the contract. Revenues from international carrier services
are recognized according to minutes of traffic.
(3) MULTIPLE ELEMENT SALE AGREEMENTS
Revenues from sale agreements which do not include a general right of
return and which include a number of elements such as: hardware,
software and support agreements, are split into separate accounting
units and are recognized separately with respect to each accounting
unit. An element constitutes a separate accounting unit if, and only
if, it has a separate value to the customer and there is reliable and
objective evidence regarding the fair value of all the elements of the
agreement/the fair value of undelivered elements. Elements that not
split into an accounting unit due to non-fulfillment of the conditions
specified above are grouped together under one accounting unit.
Revenues from the various accounting units are recognized when the
conditions for recognizing the revenues from the elements included in
that same accounting unit according to their type have been fulfilled,
and only up to the amount of the consideration that is not contingent
upon the completion/execution of the other elements of the contract.
F-15
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
N. REVENUE RECOGNITION (CONT'D)
(4) REVENUES FROM THE SALE OF SOFTWARE
Revenues from the sale of software are recognized in accordance with
American Statement of Position SOP 97-2 "Software Revenue Recognition"
(as amended by SOP 98-9). According to the standard, revenues from the
sale of software licenses are recognized when all the following
conditions have been met: the software has been delivered to the
customer, collection of the payment is probable, the amount of the
contract has been or can be determined and there is objective and
persuasive evidence of the contract and of the Company's ability to
allocate the consideration between the elements of the contract.
O. INCOME TAXES
Income taxes are provided on the basis of the liability method of
accounting. Under the liability method, deferred tax assets and liabilities
are recognized for the future tax consequences of differences between the
carrying amounts of existing assets and liabilities and their respective
tax bases, as well as tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years when these temporary differences are expected
to be recovered or settled.
In the reporting period, the Company has reported profits and utilized a
portion of the tax loss carryforward but, due to the uncertainty inherent
in the intense competition in the market which has developed in recent
months, the Company's management cannot be reasonably assured as to the
Company's ability to further utilize the tax asset in the foreseeable
future. Therefore, a valuation allowance has been provided to the full
amount of these losses.
The Company believes that two of its subsidiaries will utilize their
carryforward tax losses and therefore a deferred tax asset has been
recorded in those subsidiaries (See Note 16B).
P. FINANCIAL INSTRUMENTS
The financial statements include disclosures relating to the fair value of
financial instruments.
With regard to current financial assets and liabilities and long-term
liabilities, there is no material difference between the value recorded in
the Company's books of account and their fair value.
Q. INCOME (LOSS) PER SHARE
Income (loss) per share is computed based on the weighted average number of
shares outstanding during each period not including share options granted,
in accordance with Opinion No. 55 of the ICPAI.
F-16
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
R. IMPAIRMENT OF ASSETS
In February 2003, the Israel Accounting Standards Board (hereinafter -
IASB) published ACCOUNTING STANDARD NO. 15 - "IMPAIRMENT OF ASSETS". The
Standard provides procedures which a company must apply in order to ensure
that its assets in the consolidated balance sheet, are not presented at an
amount which is in excess of their recoverable value, which is the higher
of the net selling price or the present value of the estimated future cash
flows expected to be derived from use and disposal of the asset. In
addition, the Standard provides rules for presentation and disclosure with
respect to assets whose value has declined.
The Standard applies to financial statements for periods beginning January
1, 2003. The Standard provides that in most cases the transition will be
effected by means of the "from hereon" method.
According to the Standard, Internet Gold International Ltd., a wholly-owned
subsidiary of the Company, has fully written off its investment in an
Internet group in Greece (see Note 6A(3)). The impairment charges of NIS
2,609 in 2003 and NIS 1,555 in 2004 are presented as other expenses.
The adoption of the Standard had no impact on the operations of the former
affiliated company as the client list was partially impaired prior to the
release of the standard.
S. SEGMENT REPORTING
Segment reporting is represented according to Accounting Standard No. 11 of
the IASB.
T. DISCONTINUED OPERATION
Discontinued operations are presented in accordance with Accounting
Standard No. 8 and are separated from the information regarding continuing
operations.
U. DISCLOSURE OF EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD PRIOR
TO THEIR IMPLEMENTATION
In July 2004, the Israeli Accounting Standards Board published Accounting
Standard No. 19, "Taxes on Income". The Standard provides that a liability
for deferred taxes is to be recorded for all temporary differences subject
to tax, except for a limited number of exceptions. In addition, a deferred
tax asset is to be recorded for all temporary differences that may be
deducted, losses for tax purposes and tax benefits not yet utilized, if it
is anticipated that there will be taxable income against which they can be
offset, except for a limited number of exceptions. The new Standard applies
to financial statements for periods beginning on January 1, 2005. The
Standard provides that it is to be implemented by means of a cumulative
effect of a change in accounting method. In the Company's estimation, the
impact of the Standard on its results of operations, financial position and
cash flows will not be material.
F-17
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 3 - CASH AND CASH EQUIVALENTS
The Company holds its available funds in US$ dollar short-term deposits
bearing interest rates ranging from 1% to 2%.
NOTE 4 - TRADE RECEIVABLES, NET
Trade receivables consist of:
CONSOLIDATED COMPANY
-------------------------- -------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- -----------
Open accounts and accrued revenues 43,750 29,050 29,102 19,165
Checks, debit orders and credit
cards receivable 15,775 13,134 13,506 12,526
----------- ----------- ------------ -----------
59,525 42,184 42,608 31,691
Allowance for doubtful accounts (6,843) (6,615) (4,885) (5,090)
----------- ----------- ------------ -----------
52,682 35,569 37,723 26,601
=========== =========== ============ ===========
Changes in the allowance for doubtful accounts were as follows:
CONSOLIDATED COMPANY
------------ -----------
Balance as of December 31, 2002 7,241 5,919
Additions charged to bad debt expenses 1,538 1,358
Write-downs charged against the allowance (863) (846)
Recoveries of amounts previously written off (1,301) (1,341)
------------ -----------
Balance as of December 31, 2003 6,615 5,090
Additions charged to bad debt expenses 2,118 679
Write-downs charged against the allowance (1,212) (572)
Recoveries of amounts previously written off (678) (312)
------------ -----------
Balance as of December 31, 2004 6,843 4,885
============ ===========
F-18
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 5 - OTHER RECEIVABLES
Other receivables consist of:
CONSOLIDATED COMPANY
------------------------- --------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- -----------
Prepaid expenses 6,762 5,121 6,230 4,906
Related parties (see Note 17) 1,213 2,554 429 560
Other 973 5,094 749 5,073
----------- ----------- ------------ -----------
8,948 12,769 7,408 10,539
=========== =========== ============ ===========
NOTE 6 - INVESTMENTS IN INVESTEE COMPANIES
A. Data in respect of the Company's subsidiaries and affiliated is as
follows:
(1) Gold Trade Ltd. (GT)
GT, a wholly owned subsidiary, owns e-commerce activity, the P-1000
Mega-Mall, which was launched on June 30, 2000. At the end of 2002, GT
has shifted its e-commerce activity to a tender site. As such, this
activity is based on commission of about 7% of sales. The revenue is
recorded on a net basis.
During December 2004, the Company acquired all of the shares of GT
from a related party and from others.
The excess of consideration over the GT's value in the related party
financial statement recorded as a capital reserve.
The excess of consideration over Gold Trade's value in Eurocom books
was recorded as capital reserve.
As of December 31, 2004, Gold Trade had incurred losses of NIS 73.5
million ($ 17.1 million). Most of Gold Trade losses were covered by
capital infusions.
The Company recorded its share of GT's losses amounting to NIS 5.16
million in 2004 (NIS 5.28 million in 2003).
Regarding discontinuance of operations in 2004, see Note 20.
(2) MSN Israel Ltd. (MSN)
MSN Israel was established in April 2000, and is an independent
company jointly owned by Internet Gold (50.1%) and The Microsoft
Corporation (49.9%). This portal, with the same look and feel as MSN
Worldwide, uniquely combines leading Israeli content and e-commerce
providers and integrates with Microsoft's leading network services
such as Messenger, Hotmail (in Hebrew), Passport and Web Communities
offering local users access to the most advanced online Internet
services in the world. This portal constitutes the first step toward
realizing the vision of an "everyday web" in Israel.
F-19
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 6 - INVESTMENTS IN INVESTEE COMPANIES (CONT'D)
A. (cont'd)
(2) MSN Israel Ltd. (MSN) (cont'd)
The consolidated financial statements include those of MSN. The
Company recorded its share of MSN's net income amounting to NIS 2.2
million in 2004 (net losses of NIS 2.4 million in 2003).
The Company has an obligation to finance losses of MSN Israel up to
US$ 10 million, therefore, the Company is recording 100% of MSN's
losses and the recovery of the losses. The Company has already
financed approximately $ 8.8 million as of balance sheet date
(including $7.3 million accumulated deficit).
In November 2002, MSN exercised an option to obtain 50% of the portal
"Start" for no immediate consideration but was obligated to pay
royalties to the other shareholder at the amount of 20% of the
revenues of "Start" for a period of 36 months. Minimum payments per
month was of $8 thousand. MSN sold its 50% share of Start to Gold Mind
at the end of 2004 for no consideration.
(3) Internet Gold International Ltd. (IGI)
Established in January 2000 as a wholly owned subsidiary of Internet
Gold, with a goal of becoming a regional Internet Group. IGI's
strategy included acquiring and partnering with local Internet Service
Providers, IT companies and Media Groups in emerging markets.
Currently, IGI holds 15.2% in shares of an Internet Group in Greece
(the investment, of US$ 1 million, has been fully written off). The
impairment charges of NIS 2,609 and NIS 1,550 for 2003 and 2004,
respectively, are presented as other expenses. IGI operates an
international ISP services to customers outside Israel. The investment
is presented on a cost basis. The Company recorded its share of IGI's
losses amounting to NIS 0.5 million in 2004 most of which was derived
from the impairment (loss of NIS 1.6 million in 2003). The Company's
investment in IGI is in the form of a nominal non-interest bearing
capital note plus loans amounting to NIS 5.6 million.
(4) Gold Mind Ltd. (GM)
Established in January 2000 as a wholly owned subsidiary, the company
is currently engaged in virtual magazine sales and sale of value-added
services such as anti Virus and anti Spam.
At the end of 2004 GM acquired 50% of the portal Start from the former
shareholder (including a loan) and the remaining 50% from MSN. As of
December 31, 2004, GM holds 100% from Start shares. The Company
recorded its share of GM's profits amounting to NIS 6.2 million in
2004 (profits of NIS 5 million in 2003).
(5) Start Net Ltd. (Start)
Start is a wholly owned subsidiary, it owns portal content-web
communities offering local users access to the most advanced online
internet services in the world.
At the end of 2004 GM acquired 50% of the portal Start from the former
shareholder (including a loan) and the remaining 50% from MSN.
F-20
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 6 - INVESTMENTS IN INVESTEE COMPANIES (CONT'D)
CONSOLIDATED COMPANY
-------------------------- ---------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- ------------
B. Investments in subsidiaries Consists of the following:
Cost of shares - - 24,046 55
Accumulated losses - - (73,421) (45,550)
Capital reserve from purchase of investee company - - (15,709) -
----------- ----------- ----------- ------------
- - (65,084) (45,495)
Loans - - 81,905 53,782
----------- ----------- ----------- ------------
- - 16,821 8,287
=========== =========== =========== ============
CONSOLIDATED COMPANY
-------------------------- ---------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- ------------
C. Investments in investee companies:
Cost of shares - 24,418 - 22,868
Accumulated losses - (30,574) - (30,574)
----------- ----------- ----------- ------------
- (6,156) - (7,706)
=========== =========== =========== ============
Presented as investments in
investee companies - 1,550 16,821 8,287
=========== =========== =========== ============
Presented as part of long-
term liabilities - 7,706 - 7,706
=========== =========== =========== ============
F-21
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 7 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of:
A. CONSOLIDATED
NETWORK
EQUIPMENT AND FURNITURE AND MOTOR LEASEHOLD
COMPUTERS OFFICE EQUIPMENT VEHICLES (1) IMPROVEMENTS TOTAL
------------- ---------------- ------------ -------------- ------------
COST:
As at December 31, 2003 74,518 18,359 7,426 9,681 109,984
Additions 18,346 4,170 - 1,299 23,815
Acquisition of Gold Trade 8,472 595 240 2,063 11,370
Disposals (511) (15) (4,091) (38) (4,655)
------------- --------------- ------------ -------------- ------------
As at December 31, 2004 100,825 23,109 3,575 13,005 140,514
============= =============== ============ ============== ============
DEPRECIATION:
As at December 31, 2003 58,181 9,907 4,944 7,792 80,824
Depreciation for the year 8,455 3,382 902 894 13,633
Acquisition of Gold Trade 6,772 533 188 1,752 9,245
Disposals (500) (15) (3,218) (38) (3,771)
------------- --------------- ------------ -------------- ------------
As at December 31, 2004 72,908 13,807 2,816 10,400 99,931
============= =============== ============ ============== ============
PROPERTY AND EQUIPMENT, NET
As at December 31, 2004 27,917 9,302 759 2,605 40,583
============= =============== ============ ============== ============
As at December 31, 2003 16,337 8,452 2,482 1,889 29,160
============= =============== ============ ============== ============
(1) Includes cost of motor vehicles under financial lease agreements
totaling NIS 3,536 as of December 31, 2004 (NIS 7,391 as of December
31, 2003). Liens have been placed on such vehicles, in favor of the
lessor, (see also Note 14(E)).
F-22
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 7 - PROPERTY AND EQUIPMENT, NET (CONT'D)
B. COMPANY
NETWORK
EQUIPMENT AND FURNITURE AND MOTOR LEASEHOLD
COMPUTERS OFFICE EQUIPMENT VEHICLES(1) IMPROVEMENTS TOTAL
------------- --------------- ------------ -------------- ------------
COST:
As at December 31, 2003 69,416 18,184 5,947 9,504 103,051
Additions 17,517 4,088 - 860 22,465
Disposals (511) (15) (3,356) (38) (3,920)
------------- --------------- ------------ -------------- ------------
As at December 31, 2004 86,422 22,257 2,591 10,326 121,596
============= =============== ============ ============== ============
DEPRECIATION:
As at December 31, 2003 54,563 9,866 4,133 7,693 76,255
Depreciation for the year 7,590 3,369 709 885 12,553
Disposals (500) (15) (2,734) (38) (3,287)
------------- --------------- ------------ -------------- ------------
As at December 31, 2004 61,653 13,220 2,108 8,540 85,521
============= =============== ============ ============== ============
PROPERTY AND EQUIPMENT, NET
As at December 31, 2004 24,769 9,037 483 1,786 36,075
============= =============== ============ ============== ============
As at December 31, 2003 14,853 8,318 1,814 1,811 26,796
============= =============== ============ ============== ============
(1) Includes cost of motor vehicles under financial lease agreements
totaling NIS 2,581 as of December 31, 2004 (NIS 5,938 as of December
31, 2003). Liens have been placed on such vehicles, in favor of the
lessor.
F-23
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 8 - OTHER ASSETS AND DEFERRED CHARGES
Consists of:
CONSOLIDATED COMPANY
-------------------------- ---------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- ------------
Web site construction for self use (see Note 2L (1)) 7,029 5,888 219 219
Amortization of web sites (5,925) (4,707) (219) (219)
----------- ----------- ----------- ------------
1,104 1,181 - -
----------- ----------- ----------- ------------
Right of use of International Communication
Lines (see Note 2L (2)) 117,797 50,598 117,797 50,598
Less: amortization (8,423) (1,573) (8,423) (1,573)
----------- ----------- ----------- ------------
109,374 49,025 109,374 49,025
----------- ----------- ----------- ------------
Portal start 868 - - -
Less: amortization - - - -
----------- ----------- ----------- ------------
868 - - -
----------- ----------- ----------- ------------
Deferred charges and other (see Note 2L (3)) 3,610 924 2,879 870
----------- ----------- ----------- ------------
114,956 51,130 112,253 49,895
=========== =========== =========== ============
NOTE 9 - SHORT-TERM BANK LOANS
Short-term loans and credit from banks consist of:
CONSOLIDATED COMPANY
-------------------------- ---------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- ------------
Short-term loans at Prime* 10,817 4,279 7,598 1,754
Current maturities of long-term loans 133 980 70 705
----------- ----------- ----------- ------------
10,950 5,259 7,668 2,459
=========== =========== =========== ============
* The Prime rate as of December 31, 2004 was 5.2% (December 31, 2003-
6.7%).
See Note 14C with regard to bank guarantees.
F-24
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 10 - ACCOUNTS PAYABLE
CONSOLIDATED COMPANY
------------------------- -------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- -----------
Trade payables - open account 60,736 27,992 58,855 26,358
Trade payables abroad 1,195 758 1,195 758
Checks payable 4,258 2,444 3,201 2,023
Accrued expenses 7,194 5,397* 6,163 4,776*
----------- ----------- ----------- -----------
73,383 36,591 69,414 33,915
=========== =========== =========== ===========
NOTE 11 - OTHER PAYABLES
Other payables consist of:
CONSOLIDATED COMPANY
------------------------- -------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- -----------
Employees and payroll accruals 7,197 5,465 5,399 4,578
Related parties (see Note 17) 2,211 4,507* 1,399 2,718*
Liability for vacation and
recreation pay 1,905 1,707 1,682 1,514
Deferred income 2,205 1,489 107 206
Other 266 869 155 872
----------- ----------- ----------- -----------
13,784 14,037 8,742 9,888
=========== =========== =========== ===========
* Reclassified
F-25
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 12 - LONG-TERM LOANS AND OTHER LONG-TERM OBLIGATIONS
Long-term loans and other long-term obligations under capital and operating
leases are as follows:
CONSOLIDATED COMPANY
------------------------ ------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
INTEREST RATE 2004 2003 2004 2003
------------- ----------- ----------- ----------- -----------
Capital lease
obligations:
Vehicles (linked
to C.P.I.) 5%-7% 139 1,253 70 782
Less: current
maturities (133) (980) (70) (705)
----------- ----------- ----------- -----------
6 273 - 77
----------- ----------- ----------- -----------
International
Communication
Lines (linked
to the US$
exchange rate) LIBOR +0.5%* 82,040 43,911 82,040 43,911
Less: current
maturities
(presented as
accounts payable) (40,429) (16,795) (40,429) (16,795)
----------- ----------- ----------- -----------
41,611 27,116 41,611 27,116
----------- ----------- ----------- -----------
Other long-term
loans PRIME + 0.2% 30,500 - 30,500 -
----------- ----------- ----------- -----------
72,117 27,389 72,111 27,193
=========== =========== =========== ===========
* The LIBOR rates ranges from 1.10% to 1.12%.
Amortization of assets held under capital leases is included as part of
depreciation expenses.
Aggregate maturities are as follows:
AS AT
DECEMBER 31
2004
-----------
2005 40,562
===========
2006 39,481
2007 16,488
2008 7,176
2009 8,443
2010 529
-----------
72,117
===========
F-26
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 13 - LIABILITY FOR SEVERANCE PAY, NET
The Company's liability for termination of employer-employee relations is
computed according to Israeli Labor Law on the basis of the latest salary
paid to each employee multiplied by the number of years of employment. The
liability is partially covered by deposits in executive insurance policies
at insurance companies.
The Company's net liabilities disclosed in the balance sheet represents the
balance of the liability not funded as above:
CONSOLIDATED COMPANY
------------------------- -------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- -----------
Liability for severance pay 12,471 9,876 11,298 8,959
Less: amounts funded (6,231) (4,948) (5,526) (4,436)
----------- ----------- ----------- -----------
6,240 4,928 5,772 4,523
=========== =========== =========== ===========
The expenses in respect to severance pay for the years ended December 31,
2004, 2003 and 2002 are NIS 1,631 (Company - NIS 1,395) NIS 2,372 (Company
- NIS 2,162) and NIS 1,796 (Company - NIS 1,673), respectively.
NOTE 14 - GUARANTEES, COMMITMENTS AND CONTINGENT LIABILITIES
A. LICENSE AND REGULATIONS
1. The Company received a license from the Ministry of Communications in
Israel (hereinafter "MOC") on June 2, 2004 for a period of 20 years.
The license grants the Company the right to provide international
telephone services, subject to several conditions mentioned in the
license.
Under the Telecommunications Law, the MOC is entitled to amend the
conditions of the license based upon various considerations such as
government policy and public interest. The MOC is also entitled to
cancel the license if the Company fails to comply with the terms of
the license.
2. The Company has received a license from the MOC which was renewed on
January 24, 2002 for a period of five years. The license grants the
Company the right to provide Internet and related services, subject to
several conditions mentioned in the license.
Under the Telecommunications Law, the MOC is entitled to amend the
conditions of the license based upon various considerations such as
government policy and public interest. The MOC is also entitled to
cancel the license if the Company fails to comply with the terms of
the license.
F-27
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 14 - GUARANTEES, COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)
A. LICENSE AND REGULATIONS (CONT'D)
3. The Company expects to face competition in the future from companies
that provide connections to consumers' homes, such as
telecommunications providers, digital broadcast satellite (hereinafter
- "DBS") providers and cable television companies as well as wireless
communication companies.
During 2003, the significant increase in demand for broadband was
coupled with intense competition between all ISPs, which resulted in
price reductions by all ISPs. Due to this market environment, the
Company adopted a more aggressive marketing policy in order to attract
a greater number of broadband customers while continuing to keep tight
control over expenses.
The Company expects that the competition in the Internet industry will
intensify, which, along with possible regulatory changes, may have an
adverse effect on revenues and profitability.
In addition, during 2002, the cable television companies received a
license to operate as an ISP.
B LEGAL CLAIMS
1. In July 2003 a lawsuit was filed against the Company by an Israeli
company claiming for an alleged breach of agreement. The lawsuit seeks
damages of NIS 300. In the Company's management view, after consulting
with its legal consultants, the Company's position is fairly well
established. A provision of NIS 100 has been recorded.
2. From time to time, claims arising from the normal course of business
are brought against the Company. In the opinion of management, based
on the advice of legal counsel, the ultimate disposition of these
matters will not have a material adverse effect on the financial
position, liquidity or results of operations of the Company.
C. GUARANTEES AND ASSIGNED NOTES RECEIVABLE
DECEMBER 31 DECEMBER 31
2004 2003
----------- -----------
Guarantees in favor of:
Others* 10,892 547
----------- -----------
10,892 547
=========== ===========
* The amounts stated above represent the maximum undiscounted exposure
to the Company, including a guarantee in the sum of NIS 10,111 in
favor of the MOC related to the International telephony services
license.
F-28
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 14 - GUARANTEES, COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)
D. Subsequent to the balance sheet date, the Company entered a commitment
to purchase network equipment amounting to approximately NIS 3,700.
E. LEASING AND RENTAL AGREEMENTS
1. The Company leases office premises of 4,250 sq. m. for periods of up
to ten years with a renewal option for an additional ten years. Future
annual rental expenses under the agreement are approximately NIS 2,140
linked to the rate of exchange of the U.S. Dollar.
The Company's support department rented from a related party 250
square meters of office space in Ramat Gan, Israel. The facilities are
leased from Eurocom Holdings until June 30, 2005 (see Note 17A).
In addition, MSN, the Company's subsidiary, was engaged in agreements
for the lease of office premises of 325 sq. m. until December 31, 2003
(the termination of the first option period) for the year ended
December 31, 2004 for the lease of 700 sq. m., and since January 1,
2005, for the lease of 800 sq. m. This is a sub-lease from GT, the
Company's subsidiary. Future monthly rent for all the facilities
leased by MSN is NIS 21 (US$ 4.9). Since January 1, 2004, MSN uses the
premises on a monthly basis without renewing the lease agreement (this
action is consistent with GT's lease agreement).
The Company has also entered into lease agreements for several sites
at which part of the communications equipment is located.
Rental expenses were NIS 2,670 (Company - NIS 2,310), NIS 2,984
(Company - NIS 2,754) and NIS 2,516 (company - NIS 2,283), for the
years ended December 31, 2004, 2003 and 2002, respectively.
2. The Group has entered into motor vehicle operating lease agreements
for the lease of 110 motor vehicles (Company - 87 motor vehicles) for
a period of three years. The Group deposited NIS 598 (Company - NIS
454) pursuant to the terms of the operating lease agreements.
Future minimum lease payments are as follows (assuming renewal options
will not be exercised):
CONSOLIDATED
-----------------------------------
AS OF DECEMBER 31, 2004
-----------------------------------
VEHICLE LEASES OFFICE LEASES
-------------- -------------
2005 3,026 2,236
2006 2,565 2,236
2007 1,537 2,236
2008 24 2,236
2009 and thereafter - 2,236
-------------- -------------
7,152 11,180
============== =============
F-29
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 14 - GUARANTEES, COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)
F. SPECIAL AGREEMENTS
The Company has signed a long-term agreements with Barak I.T.C. (1995) Ltd.
and Bezeq International Ltd., two of Israel's long distance carriers, to
purchase Rights Of Use (ROU) for international fiber optic lines until the
year 2017, with the option to extend the agreement for an additional five
year period.
According to the agreement, the Company is obligated to pay ROU charges for
each new leased international line ordered in respect of each circuit in
thirty-six (36) monthly installments.
As of the balance sheet date, the Company has operated 10 lines with Barak
and an additional 2 lines with Bezeq International.
The Company presents the ROU purchase in its financial statements as a
capital lease as part of other assets at the net sum of NIS 109,374.
Future installments -
2005 40,429
2006 32,299
2007 9,312
------
82,040
======
G. The amount of liabilities which are secured by liens is:
CONSOLIDATED COMPANY
------------ -----------
AS OF AS OF
DECEMBER 31 DECEMBER 31
2004 2004
------------ -----------
Short-term loans (current maturities of long term loans) 133 70
Long-term loans 6 -
------------ -----------
139 70
============ ===========
A lien has been placed on motor vehicles to secure the said
liabilities, (see also Note 7).
H. The Board of Directors has adopted a plan for the issuance of
2,000,000 options to purchase the Company's Ordinary Shares
(hereinafter - "options") to the Company's directors, officers and
employees (hereinafter - "the 1999 Plan"). The exercise price of the
options was determined at the issuance of the options (see Note
21A(6)).
The plan expired in August 2004 and no plan has replaced it yet.
F-30
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 14 - GUARANTEES, COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)
I. The Board of Directors has resolved to indemnify the directors and
officers of the Company in respect of damages that they may incur in
connection with the Company being a public company, to the extent that
these damages are not covered by the directors' and officers'
liability insurance.
J. The Company established with Microsoft an Israeli subsidiary: MSN
Israel. The Company holds 50.1% of MSN Israel shares. The Company has
an obligation to finance losses of MSN Israel up to US$ 10 million,
therefore, the Company is recording 100% of MSN's losses. The
accumulated deficit of MSN Israel as at December 31, 2004 is NIS 31.5
million (US$ 7.3 million).
K. ROYALTIES COMMITMENT
The Company is obligated to pay royalties to the MOC in respect of revenues
from its international telephone services pursuant to the Bezeq Regulations
(Royalties), 2001.
The royalties are primarily calculated at the rate of 3.5%. As at December
31, 2004, the maximum amount of the Company's liability in respect of such
royalties is estimated to be NIS 150 (US$ 35).
L. STAMP DUTY
Stamp duty applies in Israel to various types of documents at various
rates, depending primarily on the type of the document and the amount
specified, or not, therein. In June 2003, the statute imposing stamp duty
was amended. Following this amendment, the Israeli Tax Authority has
increased enforcement of this statute. The amendment to the statute and the
enforcement actions taken by the Israeli Tax Authority are in legal dispute
before the Israeli Supreme Court, which has not yet ruled on this matter.
In addition, under current legislation the stamp duty statute is expected
to be gradually abolished until its complete cancellation in 2008. To date,
the Company has not received a demand for payment of stamp duty following
this amendment. The Company does not believe that any stamp duty that may
be imposed on it as a result of this amendment will be material to the
Company's financial position or results of operations.
F-31
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 15 - ADDITIONAL STATEMENT OF OPERATIONS DATA
A. REVENUES
Revenues consist of:
CONSOLIDATED COMPANY
---------------------------------------- ---------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002 2004 2003 2002
----------- ------------ ----------- ----------- ----------- -----------
Access
revenues 156,385 146,906 156,336 153,755 136,523 153,973
International
telephone
services 9,381 - - 9,381 -
Other revenues 53,811 32,736 27,982 17,207 20,871 15,079
----------- ------------ ----------- ----------- ----------- -----------
219,577 179,642 184,318 180,343 157,394 169,052
=========== ============ =========== =========== =========== ===========
B. COST OF REVENUES
Cost of revenues consists of:
CONSOLIDATED COMPANY
---------------------------------------- ---------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002 2004 2003 2002
----------- ------------ ----------- ----------- ----------- -----------
Communication
services 29,985 32,920 41,635 27,950 32,882 41,645
Cost of
goods sold 6,744 6,035 5,622 6,744 4,951 5,622
----------- ------------ ----------- ----------- ----------- -----------
36,729 38,955 47,257 34,694 37,833 47,267
Salaries and
related
expenses 32,440 28,358 25,167 27,233 24,292 21,923
Depreciation 10,683 10,421 11,367 8,571 7,941 9,672
Other 16,968 15,137 15,773 10,321 7,942 6,936
----------- ------------ ----------- ----------- ----------- -----------
96,820 92,871 99,564 80,819 78,008 85,798
=========== ============ =========== =========== =========== ===========
F-32
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 15 - ADDITIONAL STATEMENT OF OPERATIONS DATA (CONT'D)
C. SELLING AND MARKETING EXPENSES
CONSOLIDATED COMPANY
---------------------------------------- ---------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002 2004 2003 2002
----------- ------------ ----------- ----------- ----------- -----------
Advertising and
marketing
expenses 40,751 17,512 13,702 39,844 21,680 16,261
Salaries and
related expenses 29,200 21,177 20,777 23,907 18,460 19,355
Depreciation 2,091 2,398 2,365 2,091 2,398 2,365
Other 1,113 306 281 - - -
----------- ------------ ----------- ----------- ----------- -----------
73,155 41,393 37,125 65,842 42,538 37,981
=========== ============ =========== =========== =========== ===========
D. GENERAL AND ADMINISTRATIVE EXPENSES
CONSOLIDATED COMPANY
---------------------------------------- ---------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002 2004 2003 2002
----------- ------------ ----------- ----------- ----------- -----------
NIS THOUSANDS
----------------------------------------------------------------------------------
Professional
fees 3,198 3,750 2,776 2,519 3,249 2,377
Salaries and
related
expenses 13,086 10,259 7,940 9,818 8,801 7,017
Postal and
communication
expenses 897 2,188 2,227 918 2,155 2,302
Provision for
doubtful debts 828 80 1,942 367 (93) 1,612
Legal reserve,
net (672) 309 (604) (672) - (604)
Depreciation 1,593 1,676 1,622 1,593 1,576 1,539
Office
maintenance
and rent 3,610 2,599 3,925 3,329 2,312 3,518
Management
fee to related
party* - - - 904 - -
Other 1,718 1,047 1,381 1,034 959 951
----------- ------------ ----------- ----------- ----------- -----------
24,258 21,908 21,209 19,810 18,959 18,712
=========== ============ =========== =========== =========== ===========
* See also Note 17(B)
F-33
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 15 - ADDITIONAL STATEMENT OF OPERATIONS DATA (CONT'D)
E. FINANCING (INCOME) EXPENSES, NET
Financing income, net, consists of:
CONSOLIDATED COMPANY
---------------------------------------- ---------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002 2004 2003 2002
----------- ------------ ----------- ----------- ----------- -----------
Interest
(expenses)
income on
short-term
loans from
banks and
others (171) (187) (343) (137) 25 (492)
Exchange rate
differentials
net of interest
on short-term
Bank deposits 79 (4,822) 1,852 79 (4,822) 1,913
Exchange rate
differentials
net of interest
on long-term
loans 133 537 (376) 200 537 (269)
Other, mainly
derived from
devaluation of
Trade
receivables and
trade payables 81 1,237 1,018 2,310 4,847 2,549
----------- ------------ ----------- ----------- ----------- -----------
122 (3,235) 2,151 2,452 587 3,701
=========== ============ =========== =========== =========== ===========
F-34
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 16 - INCOME TAXES
A. ADJUSTMENTS FOR INFLATION
The Income Tax Law (Inflationary Adjustments) - 1985 (hereinafter - the
Law) is effective as from the 1985 tax year. The Law introduced the concept
of measurement of results for tax purposes on a real (net of inflation)
basis. The various adjustments required by the aforesaid Law are designed
to achieve taxation of income on a real basis. However, adjustment of the
historical income pursuant to the provisions of the tax laws is not always
identical with such adjustment for financial reporting purposes based on
opinions published by the Institute of Certified Public Accountants in
Israel. As a result, differences arise between the inflation adjusted
income appearing in the financial statements and the inflation adjusted
income reported for tax purposes.
B. AMENDMENTS TO THE INCOME TAX ORDINANCE
On June 29, 2004, the Knesset passed the "Law for the Amendment of the
Income Tax Ordinance (Amendment No. 140 and Temporary Order) - 2004"
(hereinafter - the Amendment). The Amendment provides for a gradual
reduction in the company tax rate from 36% to 30% in the following manner:
in 2004 the tax rate will be 35%, in 2005 the tax rate will be 34%, in 2006
the tax rate will be 32% and from 2007 onward the tax rate will be 30%.
The current taxes and the deferred taxes balances as at December 31, 2004
are calculated in accordance with the new tax rates specified in the
Amendment. The effect of the change on the consolidated financial
statements as at the beginning of 2004 is immaterial.
C. The Company has received final tax assessments up to and including the
1999 tax year.
D. Income before income taxes for the years ended December 31, 2004, 2003
and 2002 is attributable only in Israel.
F-35
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 16 - INCOME TAXES (CONT'D)
E. Results of operations of the Company for tax purposes are computed in
accordance with the Income Tax Law (Inflationary Adjustments), 1985,
in real terms, in order to calculate taxation on inflationary earnings
after taking into account the changes in the Index.
Income is taxed at the regular corporate tax rate - 35% for 2004.
Income tax benefit for the years ended December 31, 2004, 2003 and
2002 is as follows:
CONSOLIDATED
----------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002
----------- ------------ -----------
Current tax: - - -
----------- ------------ -----------
Deferred taxes in
Israel 651 1,935 -
----------- ------------ -----------
Amortization of excess of
consideration over acquired
equity attributed to tax (350) - -
----------- ------------ -----------
Income tax
benefit 301 1,935 -
=========== ============ ===========
F-36
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 16 - INCOME TAXES (CONT'D)
F. RECONCILIATION OF INCOME TAX EXPENSE:
A reconciliation of the theoretical tax expense computed on the pre-tax
income at the statutory tax rate and the actual income tax provision is as
follows:
CONSOLIDATED COMPANY
---------------------------------------- ---------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002 2004 2003 2002
----------- ------------ ----------- ----------- ----------- -----------
Income before
income tax as
per income
statements 24,389 17,643 28,568 16,827 18,493 30,152
=========== ============ =========== =========== =========== ===========
Primary tax rate 35% 36% 36% 35% 36% 36%
Tax calculated
according to
primary tax
rate 8,536 6,351 10,284 5,889 6,657 10,855
----------- ------------ ----------- ----------- ----------- -----------
Increase in tax
resulting from:
Non-deductible
expenses 1,053 451 587 420 420 530
Change in
valuation
allowance in
respect of
deferred taxes (9,371) (9,343) (10,001) (6,378) (6,602) (10,715)
Other difference (519) 606 (870) 69 (475) (670)
----------- ------------ ----------- ----------- ----------- -----------
(8,837) (8,286) (10,284) (5,889) (6,657) (10,855)
----------- ------------ ----------- ----------- ----------- -----------
(301) (1,935) - - - -
=========== ============ =========== =========== =========== ===========
F-37
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 16 - INCOME TAXES (CONT'D)
G. DEFERRED TAXES COMPRISE:
CONSOLIDATED COMPANY
-------------------------- --------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- -----------
Tax loss carryforward 39,545 27,330 4,401 10,671
Accrued employee rights 2,495 2,389 2,236 2,173
Allowance for doubtful accounts 2,362 2,381 1,661 1,832
----------- ----------- ----------- -----------
Deferred tax asset 44,402 32,100 8,298 14,676
Valuation allowance (41,816)* (30,165) (8,298) (14,676)
----------- ----------- ----------- -----------
Net deferred tax asset 2,586 1,935 - -
=========== =========== =========== ===========
* The valuation allowance for December 31, 2004 includes NIS 21,022
regarding carryforward losses of GT that was consolidated as of
December 31, 2004.
Deferred tax assets for future benefits are included where their
realization is more likely than not.
The Group has an operating loss carryforward for tax purposes, as of
December 31, 2004 of approximately NIS 112,985 thousand consolidated -
including the reconsolidated subsidiary Gold Trade with NIS 60 million
(Company - NIS 11,377 thousand). The operating loss carryforward is linked
to the Index and has no expiry date.
The Company's management has assessed its deferred tax asset and the need
for a valuation allowance. Such as assessment considers whether it is more
likely than not that some portion or all of the deferred tax assets may not
be realized. The assessment requires considerable judgment on the part of
management, with respect to, amongst others, benefits that could be
realized from available tax strategies and future taxable income, as well
as other positive and negative factors. The ultimate realization of
deferred tax assets is dependent upon the Company's ability to generate the
appropriate character of future taxable income sufficient to utilize loss
carryforwards or tax credits before their expiration.
In determining the potential requirement to establish a valuation
allowance, the Company has evaluated all positive and negative evidence,
including the work plans of the Group's management and the analysis of
scenarios for achieving the work plans. The underlying assumptions utilized
in forecasting its future forecasted taxable income require judgment and
may be subject to revision based on future business developments. As a
result of this assessment, the Company has recorded a valuation allowance
on its deferred tax assets, except for two of its subsidiaries.
NOTE 17 - RELATED PARTIES
A. RELATED PARTY BALANCES ARISE FROM THE ORDINARY COURSE OF BUSINESS AND
ARE AS FOLLOWS:
Related parties are comprised of principal shareholders (10% and over of
the Company's share capital) the Company's management, immediate family
members of the aforementioned and subsidiary and affiliated companies of
the aforementioned.
F-38
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 17 - RELATED PARTIES (CONT'D)
A. RELATED PARTY BALANCES ARISE FROM THE ORDINARY COURSE OF BUSINESS AND
ARE AS FOLLOWS: (CONT'D)
The Company conducts transactions with related parties as detailed below.
Transactions with related parties are mainly as follows:
(a) Communication services, inter alia via satellite, are conducted
through a related party.
(b) Purchase of office equipment for both self use and promotion and
cellular mobile phones from related parties.
(c) Reimbursement for actual expenses (certain employee compensation
expenses, including in respect of the CEO and overhead) to the
ultimate parent company.
(d) Rental of certain office premises from a related party.
(e) Advertising through a related party radio station.
Related parties' balances are presented as follows:
CONSOLIDATED COMPANY
-------------------------- --------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- -----------
Debit balance (Note 5) 1,213 2,554 429 560
Credit balance (Note 11) 2,211 4,507 1,399 2,718
B. RELATED PARTY TRANSACTIONS WERE REFLECTED IN THE STATEMENTS OF
OPERATIONS AS FOLLOWS:
CONSOLIDATED COMPANY
------------------------- -------------------------
AS AT AS AT AS AT AS AT
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues 3,290 1,973 1,870 3,621
Cost of revenues -
communications expenses 19 4,873 19 4,873
Participation in compensation and
other expenses 110 503 (407) 579
Rental expenses 275 281 275 281
Selling and marketing expenses -
advertising expenses 3,365 1,113 4,614 6,245
General and
administrative expenses -
Participation in compensation and
other expenses 972 677 417 520
Interest (income) expense - (60) (2,013) (2,859)
NOTE 18 - FINANCIAL INSTRUMENTS
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of bank deposits
deposited in one bank account in the sum of NIS 75,304, trade receivables,
other receivables and long-term loans. With respect to trade receivables
the Company believes that there is limited credit risk exposure due to the
relatively small amount owed to the Company by each customer and the large
size of the Company's customer base.
With respect to long-term loans, see Note 14(G).
F-39
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 19 - SEGMENT REPORTING
The Company has identified five reportable segments in 2004, i.e. the
provision of Internet services, International telephony services, website
content provision, portal operating and after sale activity, and operates
in one geographic area, i.e. Israel.
The Company reported for the first time the International telephony
services activity as a reportable segment
YEAR ENDED DECEMBER 31, 2004
---------------------------------------------------
INTERNATIONAL
TELEPHONY PORTAL(3) WEBSITE(4)
ISP (1) SERVICES(2) OPERATING CONTENT
------- ------------- ---------- ------------
External revenues for the segment 156,385 9,381 23,886 12,718
Internal revenues for the segment - - 4,924 -
------- ------------- ---------- ------------
Total revenues for the segment 156,385 9,381 28,810 12,718
======= ============= ========== ============
Income (loss) from operations 18,315 (10,471) 4,351 5,973
Financial expenses
Financial income
Other expenses, net
Company's share in net loss of investees
From continued operations
Company's share in loss of a
subsidiary from discontinued operations
Tax benefit
Net income
Total assets for the segment 257,767 11,629 14,324 9,344
======= ============= ========== ============
Total liabilities for the segment 166,719 2,696 45,817 6,585
Excess liabilities over assets in
investee companies for the segment - - - -
------- ------------- ---------- ------------
Total liabilities 166,719 2,696 45,817 6,585
======= ============= ========== ============
Capital expenditure 78,734 11,629 2,316 170
======= ============= ========== ============
Depreciation and amortization 18,569 950 2,016 321
======= ============= ========== ============
YEAR ENDED DECEMBER 31, 2004
----------------------------------------------------------
AFTER SALE(5)
AND OTHERS COMMERCE(6) ADJUSTMENTS CONSOLIDATED
------------- ---------- ----------- ------------
External revenues for the segment 17,207 - - 219,577
Internal revenues for the segment - - (4,924) -
------------- ---------- ----------- ------------
Total revenues for the segment 17,207 - (4,924) 219,577
============= ========== =========== ============
Income (loss) from operations 7,178 - (2) 25,344
Financial expenses (5,194)
Financial income 5,316
Other expenses, net (1,077)
Company's share in net loss of investees
From continued operations (396) (396)
Company's share in loss of a
subsidiary from discontinued operations (4,763) (4,763)
Tax benefit 301
------------
Net income 19,531
============
Total assets for the segment - 9,620 (2,661) 300,023
============= ========== =========== ============
Total liabilities for the segment - 37,166 (80,853) 178,130
Excess liabilities over assets in
investee companies for the segment - - - -
------------- ---------- ----------- ------------
Total liabilities - 37,166 (80,853) 178,130
============= ========== =========== ============
Capital expenditure - - - 92,849
============= ========== =========== ============
Depreciation and amortization - - - 21,856
============= ========== =========== ============
(1) ISP-Internet Service Provider - Offering a wide range of Internet
access and Internet services.
(2) International telephony services - Offering a wide range of
International telephony services.
(3) Portal MSN Israel - The portal offers an electronic advertising media.
(4) Selling Internet content such as electronic newspaper, radio, anti
virus and other related products.
(5) Selling products to the subscribers through a variety of on-line
shopping and transactional opportunities.
(6) An e-commerce activity which enables the user to make transactions
through the Internet.
F-40
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
----------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF ADJUSTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 19 - SEGMENT REPORTING (CONT'D)
YEAR ENDED DECEMBER 31, 2003
------------------------------------------------------------------------------------
PORTAL WEB SITE AFTER SALE
ISP OPERATING CONTENT AND OTHERS COMMERCE ADJUSTMENTS CONSOLIDATED
------- --------- -------- ----------- -------- ----------- ------------
External revenues for the segment 146,007 15,460 5,155 13,020 - - 179,642
Internal revenues for the segment 899 6,257 82 - - (7,238) -
------- --------- -------- ----------- -------- ----------- ------------
Total revenues for the segment 146,906 21,717 5,237 13,020 - (7,238) 179,642
======= ========= ======== =========== ======== =========== ============
Income from operations 13,363 1,419 3,149 5,534 - 5 23,470
Financial expenses (10,831)
Financial income 7,596
Other expenses, net (2,592)
Company's share in net loss of investees (1,538) (1,538)
Company's share in loss of a
subsidiary from discontinued operations (3,737) (3,737)
Tax benefit 1,935
------------
Net income 14,303
============
Total assets for the segment 197,869 11,960 4,693 - - (518) 214,004
======= ========= ======== =========== ======== =========== ============
Total liabilities for the segment 84,983 45,600 8,131 - - (50,487) 88,227
Excess liabilities over assets in
investee companies for the segment - - - - 7,706 - 7,706
------- --------- -------- ----------- -------- ----------- ------------
Total liabilities 84,983 45,600 8,131 - 7,706 (50,487) 95,933
======= ========= ======== =========== ======== =========== ============
Capital expenditure 62,020 1,688 68 - - - 63,776
======= ========= ======== =========== ======== =========== ============
Depreciation and amortization 13,705 2,363 158 - - (7) 16,219
======= ========= ======== =========== ======== =========== ============
F-41
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF ADJUSTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 19 - SEGMENT REPORTING (CONT'D)
YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------------------------------
PORTAL WEB SITE AFTER SALE
ISP OPERATING CONTENT AND OTHERS COMMERCE ADJUSTMENTS CONSOLIDATED
------- --------- -------- ---------- -------- ----------- ------------
External revenues for the segment 155,403 8,900 4,935 15,080 - - 184,318
Internal revenues for the segment 933 4,769 40 - - (5,742) -
------- --------- -------- ---------- -------- ----------- ------------
Total revenues for the segment 156,336 13,669 4,975 15,080 - (5,742) 184,318
======= ========= ======== ========== ======== =========== ============
Income (loss) from operations 20,584 (4,396) 2,956 7,174 - 102 26,420
Financial expenses (13,857)
Financial income 16,008
Other expenses, net ` (3)
Company's share in net loss of investees (1,530) (1,530)
Company's share in loss of a subsidiary
from discontinued operations (7,080) (7,080)
------------
Net income 19,958
============
Total assets for the segment 159,489 9,025 815 - - (277) 169,052
======= ========= ======== ========== ======== =========== ============
Total liabilities for the segment 41,838 41,247 9,338 - - (40,296) 52,127
Excess liabilities over assets in investee
companies for the segment - - - - 13,157 - 13,157
======= ========= ======== ========== ======== =========== ============
Total liabilities 41,838 41,247 9,338 - - (40,296) 62,584
======= ========= ======== ========== ======== =========== ============
Capital expenditure 10,874 2,692 19 - - - 13,585
======= ========= ======== ========== ======== =========== ============
Depreciation and amortization 13,450 1,828 157 - - (102) 15,333
======= ========= ======== ========== ======== =========== ============
F-42
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 20 - DISCONTINUED OPERATION
In the end of 2004, Gold Trade's board of directors reached the decision to
close down all its operations except the e-commerce activity P-1000 site.
In addition, Gold Trade reached the decision in June 2002 to close down its
operation in the line of business of imported merchandise sold through self
produced mail order catalog.
The reclassification of the assets and certain liabilities was implemented
based on specific allocations. Other liabilities were attributed according
to a ration between the deficit derived from the continuing and
discontinuing operations.
The reclassification of revenues and expenses to discontinued operations
has been implemented on a specific basis with the exception of the
financing expenses which were reclassified according to the ratio of
liabilities attributed to discontinued operations.
THE ASSETS AND LIABILITIES OF THE DISCONTINUED OPERATION ARE AS FOLLOWS:
AS AT AS AT
DECEMBER 31 DECEMBER 31
2004 2003
----------- -----------
ASSETS ATTRIBUTABLE TO DISCONTINUED OPERATIONS
Trade receivables, net 4,463 -
Other receivables 168 -
Intangible asset - client list* - -
---------- -----------
4,631 -
========== ===========
* The intangible asset - client list was attributed to
the ongoing operations.
LIABILITIES ATTRIBUTABLE TO DISCONTINUED OPERATIONS
Short-term bank loans 41 -
Account payable 944 -
Other payables 668 -
---------- -----------
1,653 -
========== ===========
THE RESULTS OF THE DISCONTINUED OPERATION ARE AS FOLLOWS:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002
----------- ----------- -----------
Revenues - - -
----------- ----------- -----------
Cost of revenues - - -
Selling and marketing expenses - - -
General and administrative expenses - - -
----------- ----------- -----------
- - -
----------- ----------- -----------
Loss from operations - - -
Financing expenses, net - - -
----------- ----------- -----------
Net loss after financing expenses - - -
Minority share in loss of subsidiary from discontinued
operations - - -
----------- ----------- -----------
Net loss from discontinued operation - - -
=========== =========== ===========
Company's share in net loss of investees (4,763) (3,737) (7,080)
=========== =========== ===========
F-43
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 21 - SIGNIFICANT DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND THEIR
EFFECT ON THE FINANCIAL STATEMENTS
A. The Company's financial statements are prepared in accordance with
generally accepted accounting principles in Israel (Israeli GAAP),
which differ in certain respects from generally accepted accounting
principles in the United States (U.S. GAAP). Differences which have a
significant effect on the net assets, income, shareholders' equity or
cash flows of the Company and Consolidated, are set out below.
1. EFFECT OF INFLATION:
The Company, in accordance with Israeli GAAP, comprehensively includes
the effect of price level changes in the accompanying financial
statements, as described in Note 2C. According to such Israeli
accounting principles, the Company has discontinued the adjustment of
the financial statements as of January 1, 2004.
U.S. GAAP does not provide for recognition of the effects of such
price level changes. Such effects have not been included in a
reconciliation to U.S. GAAP.
2. LIABILITY FOR SEVERANCE PAY
Under Israeli GAAP, amounts funded by purchase of insurance policies
are deducted from the related severance pay liability.
Under U.S. GAAP, the cash surrender value of such insurance policies
should be presented in the balance sheet as long-term investments and
the full severance pay liability should be presented in the balance
sheet as a long-term liability. As at December 31, 2004 and 2003, such
funded amounts were NIS 6,231 (Company - NIS 5,526), and NIS 4,948
(Company - NIS 4,436) respectively.
3. AFFILIATE EQUITY AMENDMENT DERIVING FROM APPLICATION OF U.S. GAAP AS A
CORRECTION TO THE FINANCIAL STATEMENTS UNDER ISRAELI GAAP
According to Israeli GAAP as prescribed in Accounting Standard 15, the
affiliated company - Gold Trade ("GT") wrote down the customer list to
its carrying value using the discounted projected cash flows derived
from the activity incorporating the customer list over its useful life
term.
In the past, GT termed this asset as goodwill since there was no
distinction between the titles. Under U.S. GAAP, GT cannot reclassify
intangible assets derived from acquisitions unless it meets certain
criteria stipulated in EITF D-100. Since this asset is considered to
be goodwill under U.S. GAAP it was fully written off, after applying
the impairment test that is prescribed in FAS142. In accordance with
the said test that was applied on June 30, 2002 GT identified that the
reporting unit to which the goodwill is attributed was impaired. When
GT applied the second step of the impairment test GT determined that
the implied fair value of the goodwill is zero since GT had to
attribute fair value to the customer list that was not previously
recorded. This year, in its Israeli GAAP figures, GT continued to
amortize this client list (previously titled "goodwill") amounting to
NIS 3,980. Under US GAAP this asset was fully written off in 2002.
(the Company's share of this amortization is NIS 1,921). The
amortization described above is reversed in the reconciliation note.
F-44
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 21 - SIGNIFICANT DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND THEIR
EFFECT ON THE FINANCIAL STATEMENTS (CONT'D)
A. (CONT'D)
4. CHANGES IN EXCHANGE RATE
According to Israeli GAAP, the effects of changes in exchange rates in
cash are reflected as cash flows from operating activities in the
statement of cash flows.
Under U.S. GAAP, the effect of changes in exchange rates on cash are
presented separately in the statement of cash flows (see Note 21B.4).
5. LOANS IN RESPECT OF CAPITAL LEASES
According to Israeli GAAP, receipt of loans in respect of capital
leases are reflected in the statement of cash flows as cash flows from
financing activities as against investing activities from the
acquisition of the fixed assets - financed by the lease.
Under U.S. GAAP, as prescribed by SFAS 95, the above mentioned items
are reflected as non-cash financing activities (see Note 21B.3).
6. EMPLOYEE STOCK OPTION PLAN
The Board of Directors has adopted a plan for the issuance of
2,000,000 options to purchase the Company's Ordinary Shares
(hereinafter - "options") to the Company's directors, officers and
employees (hereinafter - "the 1999 Plan"). The exercise price of the
options was determined at the issuance of the options.
During 1999, the Board of Directors approved the grant of 653,793
options to the Company's officers. According to the 1999 Plan, each
employee shall receive equal numbers of options from each of the
groups detailed below, without consideration, to be held in trust in
accordance with the Israeli Income Tax Ordinance - Section 102.
Options (from all groups) which would not be exercised within the
period of 63 months following the allotment date will expire. The
following table summarizes the terms of the option groups:
GROUP VESTING (IN MONTHS) EXERCISE PRICE(IN $)
----- ------------------- --------------------
A 12 10.8
B 24 9.6
C 36 8.4
D 48 7.2
E 60 6
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NOTES TO THE FINANCIAL STATEMENTS
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(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 21 - SIGNIFICANT DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND THEIR
EFFECT ON THE FINANCIAL STATEMENTS (CONT'D)
A. (CONT'D)
6. EMPLOYEE STOCK OPTION PLAN (CONT'D)
Stock option activity during the period indicated is as follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
NIS NIS
--------- --------------
Balance at December 31, 2002 195,393 36.8
Granted - -
Forfeited (28,650) -
-------- ----
Balance at December 31, 2003 166,743 36.8
Granted - -
Expired* (166,743) -
-------- ----
Balance at December 31, 2004 - -
======== ====
* As of December 31, 2004, the options expired according to the
1999 Plan provisions.
As applicable according to Israeli GAAP, employee stock compensation
expenses are not recorded as long as options are not exercised.
Under U.S. GAAP, in accordance with the Accounting Principles Board
(hereinafter - "APB") No. 25, recording of compensation expense is
required over the vesting period. Under the provisions of APB-25,
based on the initial public offering price of $12 per share, aggregate
compensation expense is approximately NIS 2,666 (expenses of NIS 102
for the year ended December 31, 2004, and income of NIS 109 for the
year ended December 31, 2003, and expenses of NIS 530 for the year
ended December 2002).
In October 1995, the FASB issued Statement No. 123 "Accounting for
Stock Based Compensation" ("SFAS-123"), which established financial
accounting and reporting standards for stock based compensation plans.
The statement defines a fair value based method of accounting for
employee stock options. SFAS-123 allows for measurement of the
compensation expense in accordance with APB25, as long as the
financial statements include pro forma information on measurement in
accordance with SFAS-123 (See Note 21C).
The fair value of these options was estimated using the Black-Scholes
options pricing model with the following assumptions: risk free
interest rate of 6% dividend yield of 0% volatility of 50%, and a
weighted average expected life of three years.
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NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 21 - SIGNIFICANT DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND THEIR
EFFECT ON THE FINANCIAL STATEMENTS (CONT'D)
A. (CONT'D)
7. CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of
variable interest entities when the equity investors do not have the
characteristics of a controlling financial interest (as defined in the
Interpretation). In December 2003, the FASB issued Interpretation No.
46R, "Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51." The FASB deferred the effective date for
implementation of this Interpretation until fiscal years ending after
March 15, 2004.
The Company, according to Israeli GAAP as prescribed in Opinion No. 57
of the Institute of Certified Public Accountants in Israel, treated
the investment in its affiliated company GT, a subsidiary of the
Company until December 31, 2001. For the years ended December 31, 2002
through December 31, 2003, the Company accounted for its investment
under the equity method. The Company has consolidated GT as of
December 31, 2004.
Under the provisions of FIN 46R, the Company is required to
consolidate GT for all years presented, due to a number of factors
which indicate that the Company is the primary beneficiary of GT.
The Company has applied FIN 46R by retroactively restating previously
issued financial statements, and recorded a cumulative effect of
accounting change as of January 1, 2002 in the amount of NIS 4,382.
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(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 21 - SIGNIFICANT DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND THEIR
EFFECT ON THE FINANCIAL STATEMENTS (CONT'D)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S.
GAAP ON THE FINANCIAL STATEMENTS.
The following is summary of the material adjustments to net income and
shareholders' equity which would have been required if US GAAP had been
applied instead of Israeli GAAP.
1. CONSOLIDATED BALANCE SHEETS
CONSOLIDATED CONSOLIDATED
-------------------------------- -------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
-------------------------------- -------------------------------------
GAAP U.S. GAAP U.S.
ISRAELI -------------- ------- ISRAELI -------------- ------------
GAAP RECONCILIATION GAAP GAAP RECONCILIATION GAAP
------- -------------- ------- ------- -------------- ------------
NOTE **** REPORTED AMOUNTS* ADJUSTED AMOUNTS**
--------- -------------------------------- -------------------------------------
RESTATED***
-----------
Current assets
Cash and cash equivalents 75,637 - 75,637 81,891 10 81,901
Trade receivables, net 52,682 - 52,682 35,569 2,085 37,654
Other receivables 8,948 - 8,948 12,769 4,331 17,100
Deferred taxes 2,564 - 2,564 1,914 - 1,914
------- ----- ------- ------- ------ -------
Total current assets 139,831 - 139,831 132,143 6,426 138,569
------- ----- ------- ------- ------ -------
INVESTMENTS
Investments in
investee companies - - - 1,550 - 1,550
Deferred taxes 22 - 22 21 - 21
------- ----- ------- ------- ------ -------
22 - 22 1,571 - 1,571
------- ----- ------- ------- ------ -------
RESTRICTED ASSETS FOR
EMPLOYEE TERMINATION
BENEFITS A2 - 6,231 6,231 - 5,139 5,139
------- ----- ------- ------- ------ -------
PROPERTY AND
EQUIPMENT, NET 40,583 - 40,583 29,160 3,133 32,293
------- ----- ------- ------- ------ -------
OTHER ASSETS AND
DEFERRED CHARGES A3 114,956 (700) 114,256 51,130 - 51,130
------- ----- ------- ------- ------ -------
ASSETS ALLOCATED TO
DISCONTINUED OPERATION 4,631 - 4,631 - 15,980 15,980
------- ----- ------- ------- ------ -------
TOTAL ASSETS 300,023 5,531 305,554 214,004 30,678 244,682
======= ===== ======= ======= ====== =======
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003 (see Note 2C).
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
*** See Note 21A(7).
**** GAAP reconciliation is derived from application of FIN 46R, except where,
in addition, otherwise stated.
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NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 21 - SIGNIFICANT DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND THEIR
EFFECT ON THE FINANCIAL STATEMENTS (CONT'D)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S.
GAAP ON THE FINANCIAL STATEMENTS (CONT'D)
1. CONSOLIDATED BALANCE SHEETS (CONT'D)
CONSOLIDATED CONSOLIDATED
------------------------------------- ---------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------------------- ---------------------------------------
GAAP U.S. GAAP U.S.
ISRAELI -------------- ------ ISRAELI -------------- -----------
GAAP RECONCILIATION GAAP GAAP RECONCILIATION GAAP
------- -------------- ------ ------- -------------- -----------
NOTE **** REPORTED AMOUNTS* ADJUSTED AMOUNTS**
--------- ------------------------------------- ----------------------------------------
RESTATED***
-----------
LIABILITIES
CURRENT LIABILITIES
Short-term bank loans 10,950 - 10,950 5,259 3,010 8,269
Accounts payable 73,383 - 73,383 36,591 677 37,268
Other payables 13,784 - 13,784 14,037 1,551 15,588
------- ------- ------- ------- ------- -------
Total current liabilities 98,117 - 98,117 55,887 5,238 61,125
------- ------- ------- ------- ------- -------
LONG-TERM LIABILITIES
Excess of liabilities over
assets in investees - - - 7,706 (7,706) -
Long-term loans and other
long-term obligations 72,117 - 72,117 27,389 - 27,389
Deferred revenues 3 - 3 23 - 23
Liability for severance
pay A2 6,240 6,231 12,471 4,928 5,177 10,105
------- ------- ------- ------- ------- -------
Total long-term liabilities 78,360 6,231 84,591 40,046 (2,529) 37,517
------- ------- ------- ------- ------- -------
LIABILITIES ALLOCATED TO
DISCONTINUED OPERATION 1,653 - 1,653 - 41,610 41,610
------- ------- ------- ------- ------- -------
SHAREHOLDERS' EQUITY
Ordinary shares,
NIS 0.01 par value
(501,000,000 shares
authorized;18,431,500
shares issued and fully paid
as at December 31, 2004) 197 - 197 197 - 197
Additional paid in capital 215,040 - 215,040 215,040 - 215,040
Capital reserve from
purchase of investee
company from a
related party (15,709) 18,379 2,670 - 6,585 6,585
Capital reserve from
employee compensation
plan A6 - 2,666 2,666 - 2,564 2,564
Accumulated deficit A3 (77,635) (21,745) (99,380) (97,166) (22,790) (119,956)
------- ------- ------- ------- ------- -------
Total shareholders' equity 121,893 (700) 121,193 118,071 (13,641) 104,430
------- ------- ------- ------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 300,023 5,531 305,554 214,004 30,678 244,682
======= ======= ======= ======= ======= =======
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003 (see Note 2C).
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
*** See Note 21A(7).
**** GAAP reconciliation is derived from application of FIN 46R, except where,
in addition, otherwise stated.
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NOTES TO THE FINANCIAL STATEMENTS
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(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 21 - SIGNIFICANT DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND THEIR
EFFECT ON THE FINANCIAL STATEMENTS (CONT'D)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S.
GAAP ON THE FINANCIAL STATEMENTS (CONT'D)
2. STATEMENT OF OPERATIONS
CONSOLIDATED CONSOLIDATED
------------------------------- ---------------------------------
YEAR ENDED DECEMBER 31, 2004 YEAR ENDED DECEMBER 31, 2003
------------------------------- ---------------------------------
ISRAELI GAAP U.S. ISRAELI GAAP U.S.
GAAP RECONCILIATION GAAP GAAP RECONCILIATION GAAP
NOTE **** REPORTED AMOUNTS* ADJUSTED AMOUNTS**
--------- ------------------------------- ---------------------------------
RESTATED***
-----------
Revenues 219,577 9,261 228,838 179,642 5,965 185,607
------- ------ ------- ------- ------ -------
Costs and expenses:
Cost of revenues 96,820 1,271 98,091 92,871 1,014 93,885
Selling and marketing
expenses 73,155 5,548 78,703 41,393 5,037 46,430
General and
administrative expenses A6 24,258 3,083 27,341 21,908 2,442 24,350
------- ------ ------- ------- ------ -------
Total costs and expenses 194,233 9,902 204,135 156,172 8,493 164,665
------- ------ ------- ------- ------ -------
Income from operations 25,344 (641) 24,703 23,470 (2,528) 20,942
Financing income
(expenses), net 122 (197) (75) (3,235) (380) (3,615)
Other (expenses)
income, net (1,077) - (1,077) (2,592) - (2,592)
------- ------ ------- ------- ------ -------
Income from continued
operations before
income taxes 24,389 (838) 23,551 17,643 (2,908) 14,735
Income tax benefit 301 - 301 1,935 - 1,935
------- ------ ------- ------- ------ -------
Income after
income tax 24,690 (838) 23,852 19,578 (2,908) 16,670
Company's share in
net income (loss)
of investees (396) 396 - (1,538) 1,538 -
Minority interest
in loss of a subsidiary - 3,312 3,312 - 2,204 2,204
------- ------ ------- ------- ------ -------
Income from continued
operations 24,294 2,870 27,164 18,040 834 18,874
Company's share in loss
of a subsidiary from
discontinued operations A3 (4,763) (1,825) (6,588) (3,737) (3,066) (6,803)
Cumulative effect of
change in accounting
principle - - - - - -
------- ------ ------- ------- ------ -------
NET INCOME 19,531 1,045 20,576 14,303 (2,232) 12,071
======= ====== ======= ======= ====== ======
Basic and diluted net
income from continued
operations per share (IN NIS) 1.32 0.15 1.47 0.98 0.04 1.02
======= ====== ======= ======= ====== ======
Basic and diluted net loss
from discontinued operations
per share (in NIS) (0.26) (0.10) (0.36) (0.2) (0.17) (0.37)
======= ====== ======= ======= ====== ======
Basic and diluted cumulative
effect of change in
accounting principle
per share (in NIS) - - - - - -
======= ====== ======= ======= ====== ======
Basic and diluted net
income (loss) per share
(in NIS) 1.06 0.05 1.11 0.78 (0.13) 0.65
======= ====== ======= ======= ====== ======
CONSOLIDATED
---------------------------------
YEAR ENDED DECEMBER 31, 2002
---------------------------------
ISRAELI GAAP U.S.
GAAP RECONCILIATION GAAP
ADJUSTED AMOUNTS**
---------------------------------
RESTATED***
-----------
Revenues 184,318 10,272 194,590
------- ------- -------
Costs and expenses:
Cost of revenues 99,564 3,835 103,399
Selling and marketing
expenses 37,125 7,714 44,839
General and
administrative expenses 21,209 2,640 23,849
------- ------- -------
Total costs and expenses 157,898 14,189 172,087
------- ------- -------
Income from operations 26,420 (3,917) 22,503
Financing income
(expenses), net 2,151 (18) 2,133
Other (expenses)
income, net (3) - (3)
------- ------- -------
Income from continued
operations before
income taxes 28,568 (3,935) 24,633
Income tax benefit - - -
------- ------- -------
Income after
income tax 28,568 (3,935) 24,633
Company's share in
net income (loss)
of investees (1,530) 1,530 -
Minority interest
in loss of a subsidiary - 2,418 2,418
------- ------- -------
Income from continued
operations 27,038 13 27,051
Company's share in loss
of a subsidiary from
discontinued operations (7,080) (14,048) (21,128)
Cumulative effect of
change in accounting
principle - (4,382) (4,382)
------- ------- -------
NET INCOME 19,958 (18,417) 1,541
======= ======= =======
Basic and diluted net
income from continued
operations per share (IN NIS) 1.47 - 1.47
======= ======= =======
Basic and diluted net loss
from discontinued operations
per share (in NIS) (0.39) (0.76) (1.15)
======= ======= =======
Basic and diluted cumulative
effect of change in
accounting principle
per share (in NIS) - (0.24) (0.24)
======= ======= =======
Basic and diluted net
income (loss) per share
(in NIS) 1.08 (1.00) 0.08
======= ======= =======
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003 (see Note 2C).
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
*** See Note 21A(7).
**** GAAP reconciliation is derived from application of FIN 46R, except where,
in addition, otherwise stated.
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NOTES TO THE FINANCIAL STATEMENTS
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(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 21 - SIGNIFICANT DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND THEIR
EFFECT ON THE FINANCIAL STATEMENTS (CONT'D)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S.
GAAP ON THE FINANCIAL STATEMENTS (CONT'D)
3. CONDENSED CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002
----------- ----------- -----------
REPORTED
AMOUNTS* ADJUSTED AMOUNTS**
----------- -------------------------
RESTATED***
-------------------------
Net cash provided by continuing operating
Activities 38,185 29,172 41,203
Applying FIN 46R (A7) 24,580 55 10,388
Changes in exchange rates (A4) 1,270 6,299 (6,394)
-------- ------- -------
Net cash provided by continuing operating activities
according to U.S. GAAP 64,035 35,526 45,147
======== ======= =======
Net cash used in continued investment activities (117,665) (70,706) (12,147)
Capital lease (A5) 39,177 42,997 -
Applying FIN 46R (A7) 10,627 24,280 (18,693)
-------- ------- -------
Net cash used in continued investment activities
according to U.S. GAAP (67,861) (3,429) (30,840)
======== ======= =======
Net cash provided by (used in) continued
financing activities 73,226 38,280 (31,528)
Capital lease (A5) (39,177) (42,997) -
Applying FIN 46R (A7) (30,521) (9,488) 1,398
-------- ------- -------
Net cash provided by continued financing activities
according to U.S. GAAP 3,528 (14,205) (30,130)
======== ======= =======
Discontinued operations
Net cash provided by (used in) discontinued
operations according to U.S. GAAP (4,696) (14,860) 6,978
-------- ------- -------
Changes in exchange rates (1,270) (6,299) 6,394
======== ======= =======
Changes in cash and cash equivalents (6,254) (3,254) (2,472)
======== ======= =======
Changes in cash and cash equivalents
according to U.S. GAAP (6,264) (3,267) (2,451)
======== ======= =======
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003 (see Note 2C).
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
*** See Note 21A(7).
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NOTES TO THE FINANCIAL STATEMENTS
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(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 21 - CONDENSED FINANCIAL STATEMENTS OF THE COMPANY IN NOMINAL NIS (FOR TAX
PURPOSES) (CONT'D)
C. EMPLOYEE STOCK OPTION PLAN
Under the provisions of SFAS-123, based on the initial public offering
price of $12 per share, the Company should have recorded an aggregate
expense of approximately NIS 3,733 (for the year ended December 31, 2004 -
NIS 122 expenses, and for the year ended December 31, 2003 - NIS 222 income
and for the year ended December 31, 2002 - NIS 678 expenses).
The weighted average fair value of options granted since July 1999 was NIS
20.18 per share.
Had the Company determined compensation cost based on their fair value at
the grant date for its stock options under SFAS 123, the Company's net
income would have been reduced to the pro forma amounts indicated below:
CONSOLIDATED AND COMPANY
--------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
2004 2003 2002
----------- ----------- -----------
REPORTED
AMOUNTS* ADJUSTED AMOUNTS**
----------- -------------------------
NIS THOUSANDS
--------------------------------------
Net income for the year - US GAAP 20,576 12,071*** 1,541***
Deduction of compensation expenses
according to APB 25 (A6) 102 (109) 530
Application of compensation expenses
according to FASB 123 (see above) (122) 222 (678)
------ --------- --------
20,556 12,184 1,393
====== ========= ========
Basic and diluted net income (loss) per share
in accordance with U.S. GAAP -
As reported APB 25 1.11 0.65 0.08
====== ========= ========
Pro forma 1.11 0.66 0.08
====== ========= ========
* With respect to discontinuance of adjustment to the effect of inflation as
from the CPI of December 2003 (see Note 2C).
** Amounts adjusted to reflect inflation in terms of NIS at December 31, 2003.
*** See Note 21A(7).
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(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 21 - CONDENSED FINANCIAL STATEMENTS OF THE COMPANY IN NOMINAL NIS (FOR TAX
PURPOSES) (CONT'D)
D. IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
1. EITF 00-21 - REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES
In November 2002, the Emerging Task-Force issued its consensus on EITF
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") on
an approach to determine whether an entity should divide an arrangement
with multiple deliverables into separate units of accounting. According to
the EITF in an arrangement with multiple deliverables, the delivered
item(s) should be considered a separate unit of accounting if all of the
following criteria are met: (1) The delivered item(s) has value to the
customer on a standalone basis, (2) There is objective and reliable
evidence of the fair value of the undelivered item(s), (3) If the
arrangement includes a general right of return, delivery or performance of
the undelivered item(s) is considered probable and substantially in the
control of the vendor. If all the conditions above are met and there is
objective and reliable evidence of fair value for all units of accounting
in an arrangement, the arrangement consideration should be allocated to the
separate units of accounting based on their relative fair values. However,
there may be cases in which there is objective and reliable evidence of the
fair value(s) of the undelivered item(s) in an arrangement but no such
evidence for one or more of the delivered items. In those cases, the
residual method should be used to allocate the arrangement consideration.
The guidance in this Issue is effective for revenue arrangements entered
into in fiscal beginning after June 15, 2003. Alternatively, entities may
elect to report the change in accounting as a cumulative-effect adjustment
in accordance with Opinion 20. If so elected, disclosure should be made in
periods subsequent to the date of initial application of this consensus of
the amount of recognized revenue that was previously included in the
cumulative effect adjustment. The Company has adopted the recognition and
measurement provisions of EITF 00-21 in its year-end financial statements
(see Note 2N(3)).
2. FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST
ENTITIES
In January 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), "Consolidation of Variable Interest Entities" ("FIN 46"),
which interprets the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements ("ARB 51"), to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties. ARB 51 requires that an enterprise's consolidated financial
statements include subsidiaries in which the enterprise has a controlling
financial interest. That requirement usually has been applied to
subsidiaries in which an enterprise has a majority voting interest. The
voting interest approach is not effective in identifying controlling
financial interests in entities that are not controllable through voting
interest or in which the equity investors do not bear the residual economic
risk. FIN 46(R) explains how to identify variable interest entities and how
an enterprise assesses its interests in a variable interest entity to
decide whether it is its primary beneficiary and therefore is required to
consolidate that entity. FIN 46(R) also addresses the initial valuation of
the assets and liabilities to be consolidated, the treatment of any gain or
loss resulting from the initial measurement and disclosures requirements
for the primary beneficiary.
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NOTES TO THE FINANCIAL STATEMENTS
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(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 21 - CONDENSED FINANCIAL STATEMENTS OF THE COMPANY IN NOMINAL NIS (FOR TAX
PURPOSES) (CONT'D)
D. IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
2. FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST
ENTITIES (CONT'D)
All entities with variable interest in variable interest entities created
after January 31, 2003 shall apply the provisions of FIN 46(R) immediately.
Public entities with a variable interest in variable interest entities
created before February 1, 2003 shall apply the provisions of this
Interpretation no later than the first interim or annual reporting period
beginning after December 15, 2003.
Up on the adoption of FIN-46(R) the Company determined that it is
reasonably possible that Gold Trade may be a variable interest (see
analysis and additional disclosures in note 6(A)(1)).
The Company has adopted the recognition and measurement provisions of FIN
46(R) in its year-end financial statements (see Note 21A.7.).
E. IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
FASB STATEMENT NO.123 (REVISION 2004), SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123 (Revision 2004),
"Share-Based Payment", (SFAS 123R), that addressed the accounting for
share-based payment transactions in which employee services are received in
exchange for either equity instruments of the Company, liabilities that are
based on the fair value of the Company's equity instruments that may be
settled by the issuance of such equity instruments. SFAS 123R eliminates
the ability to account for share-based compensation transactions using the
intrinsic value method as prescribed in APB Opinion No.25, "Accounting for
Stock Issued to Employees". Instead, SFAS 123R requires that such
transactions be accounted for using a fair-value-based method and that
compensation expense be recognized in the statement of operations rather
than disclosing the pro forma impact of the stock based compensation. SFAS
123R provides two alternative adoption methods. The first method is a
modified prospective transition method whereby a company would recognize
share-based employee costs from the beginning of the fiscal period in which
the recognition provisions are first applied as if the fair-value-based
accounting method had been used to account for all employee awards granted,
modified, or settled after the effective date and to any awards that were
not fully vested as of the effective date. Measurement and attribution of
compensation cost for awards that are unvested as of the effective date of
SFAS 123R would be based on the same estimate of the grant-date fair value
and the same attribution method used previously under SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). The second adoption
method is a modified retrospective transition method whereby a company
would recognize employee compensation cost for periods presented prior to
the adoption of SFAS 123R in accordance with the original provisions of
SFAS 123; that is, an entity would recognize employee compensation costs in
the amounts reported in the pro forma disclosures provided in accordance
with SFAS 123. A company would not be permitted to make any changes to
those amounts upon adoption of SFAS 123R unless those changes represent a
correction of an error. The provisions of SFAS 123r are effective for
periods beginning after June 15, 2005. Since the Company does not have at
the moment any outstanding granted options to employees and has no
assumption as to the amount of options that might be granted in the future,
the Company cannot evaluate the expected impact of FAS 123R on its future
results of operations.
F-54
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 22 - SUBSEQUENT EVENTS - UNAUDITED
In April 2005, the company completed an offering of convertible debentures and
options through the Tel Aviv Stock Exchange (TASE). The offering was made
exclusively in Israel, to Israeli residents. The company raised a total of NIS
220 million ($51.1 million). The interest rate set for the convertible
debentures was 4%. The convertible debentures and the options trade on the TASE.
NOTE 23 - CONDENSED FINANCIAL STATEMENTS OF THE COMPANY IN NOMINAL NIS (FOR TAX
PURPOSES)
A. BALANCE SHEETS
AS AT AS AT
DECEMBER 31 DECEMBER 31
2004 2003
----------- -----------
CURRENT ASSETS
Cash and cash equivalents 75,323 81,660
Trade receivables, net 37,723 26,601
Other receivables 7,408 10,539
------- -------
Total current assets 120,454 118,800
------- -------
INVESTMENTS 8,675 -
------- -------
PROPERTY AND EQUIPMENT, NET 35,793 26,277
------- -------
OTHER ASSETS AND DEFERRED CHARGES 112,559 50,238
------- -------
Total assets 277,481 195,315
======= =======
LIABILITIES
CURRENT LIABILITIES
Short-term bank loans 7,668 2,459
Accounts payable 69,414 33,915*
Other payables 8,742 9,888*
------- -------
Total current liabilities 85,824 46,262
------- -------
LONG-TERM LIABILITIES
Excess of liabilities over assets in subsidiaries - 2,118
Long-term loans 72,111 27,193
Deferred revenues 3 23
Liability for severance pay, net 5,772 4,523
------- -------
Total long-term liabilities 77,886 33,857
------- -------
SHAREHOLDERS' EQUITY (DEFICIT)
Ordinary shares 184 184
Additional paid-in capital 200,983 200,983
Accumulated deficit (87,396) (85,971)
------- -------
Total shareholders' equity 113,771 115,196
------- -------
277,481 195,315
======= =======
* Reclassified
F-55
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 23 - CONDENSED FINANCIAL STATEMENTS OF THE COMPANY IN NOMINAL NIS (FOR TAX
PURPOSES) (CONT'D)
B. STATEMENT OF OPERATIONS
YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31
2004 2003
----------- -----------
Revenues 180,343 159,472
------- -------
Costs and expenses:
Cost of revenues 80,762 78,702
Selling and marketing expenses 65,779 42,971
General and administrative expenses 19,765 19,076
------- -------
Total costs and expenses 166,306 140,749
------- -------
Income from operations 14,037 18,723
Financing income (expenses), net 2,443 (1,848)
Other expenses, net 549 (9)
------- -------
Income after taxes on income 17,029 16,866
Company's share in net loss of investee (2,745) (4,368)
------- -------
Net income 14,284 12,498
======= =======
F-56
Internet Gold - Golden Lines Ltd.
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(ALL AMOUNTS IN THOUSANDS OF REPORTED NIS, EXCEPT WHERE OTHERWISE STATED)
NOTE 23 - CONDENSED FINANCIAL STATEMENTS OF THE COMPANY IN NOMINAL NIS (FOR TAX
PURPOSES) (CONT'D)
SHARE CAPITAL
-------------------------
NUMBER OF ADDITIONAL ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
---------- ---------- --------------- ----------- -----------
NIS 0.01 PAR VALUE NIS THOUSANDS
------------------------- --------------------------------------------
BALANCE AS OF
DECEMBER 31,
2002 18,431,500 184 200,983 (98,469) 102,698
Changes
during 2003:
Net income
for the year - - - 12,498 12,498
---------- --- ------- ------- -------
BALANCE AS OF
DECEMBER 31,
2003 18,431,500 184 200,983 (85,971) 115,196
Changes
during 2004:
Capital reserve
from purchase of
investee company - - - (15,709) (15,709)
Net income
for the year - - - 14,284 14,284
---------- --- ------- ------- -------
BALANCE AS OF
DECEMBER 31,
2004 18,431,500 184 200,983 (87,396) 113,771
========== === ======= ======= =======
F-57
Internet Gold - Golden Lines Ltd.
APPENDIX TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2004
--------------------------------------------------------------------------------
LIST OF PRINCIPAL INVESTEES AND OTHER COMPANIES
ANNEX A
EQUITY CONTROL
-------- -------
AS AT DECEMBER 31, 2004
-----------------------
SUBSIDIARIES
MSN Israel Ltd. 50.1% 50.1%
Internet Gold International Ltd. 100% 100%
Gold Mind Ltd. 100% 100%
Start-Net Ltd. 100% 100%
Gold Trade Ltd. 100% 100%
F-58
S I G N A T U R E S
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
INTERNET GOLD - GOLDEN LINES LTD.
By: /s/ Eli Holtzman
--------------------------------
Eli Holtzman
Chief Executive Officer
By: /s/ Doron Turgeman
--------------------------------
Doron Turgeman
Vice President Finances (Chief Accounting and
Financial Officer)
Dated: June 28, 2005
107