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, 2003
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, 2003..................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]
TABLE OF CONTENTS
Page No.
--------
PART I.........................................................................1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS..............1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE............................1
ITEM 3. KEY INFORMATION....................................................1
A. Selected Financial Data.........................................1
B. Capitalization and Indebtedness.................................4
C. Reasons for the Offer and Use of Proceeds.......................4
D. Risk Factors....................................................4
ITEM 4. INFORMATION ON THE COMPANY........................................20
A. History and Development of the Company.........................20
B. Business Overview..............................................22
C. Organizational Structure.......................................39
D. Property, Plants and Equipment.................................40
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS......................41
A. Operating Results..............................................41
B. Liquidity and Capital Resources................................56
C. Research and Development, Patents and Licenses.................58
D. Trend Information..............................................58
E. Off-Balance Sheet Arrangements.................................61
F. Tabular Disclosure of Contractual Obligations..................61
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES........................61
A. Directors and Senior Management................................61
B. Compensation...................................................64
C. Board Practices................................................65
D. Employees......................................................71
E. Share Ownership................................................72
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS................74
A. Major Shareholders.............................................74
B. Related Party Transactions.....................................75
C. Interests of Experts and Counsel...............................77
ITEM 8. FINANCIAL INFORMATION.............................................77
A. Consolidated Statements and Other Financial Information........77
B. Significant Changes............................................77
ITEM 9. THE OFFER AND LISTING.............................................78
A. Offer and Listing Details......................................78
B. Plan of Distribution...........................................78
C. Markets........................................................79
D. Selling Shareholders...........................................79
i
E. Dilution.......................................................79
F. Expense of the Issue...........................................79
ITEM 10. ADDITIONAL INFORMATION............................................79
A. Share Capital..................................................79
B. Memorandum and Articles of Association.........................79
C. Material Contracts.............................................82
D. Exchange Controls..............................................83
E. Taxation.......................................................83
F. Dividend and Paying Agents.....................................92
G. Statement by Experts...........................................92
H. Documents on Display...........................................92
I. Subsidiary Information.........................................93
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISKS..........................................................93
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...........94
PART II.......................................................................94
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...................94
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS............................................94
E. Use of Proceeds................................................94
ITEM 15. CONTROLS AND PROCEDURES...........................................96
ITEM 16. RESERVED..........................................................96
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT..................................96
ITEM 16B. CODE OF ETHICS....................................................97
ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES............................97
ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS
FOR AUDIT COMMITTEE............................................98
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATES AND PURCHASERS......................................98
PART III......................................................................98
ITEM 17. FINANCIAL STATEMENTS..............................................98
ITEM 18. FINANCIAL STATEMENTS..............................................98
ITEM 19. EXHIBITS.........................................................100
S I G N A T U R E S..........................................................102
ii
This Annual Report on Form 20-F contains various "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
within the Private Securities Litigation Reform Act of 1995, as amended. Such
forward-looking statements reflect our current view with respect to future
events and financial results. Forward-looking statements usually include the
verbs "anticipates," "believes," "estimates," "expects," "intends," "plans,"
"projects," "understands" and other verbs suggesting uncertainty. 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. We undertake no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
We have attempted to identify additional significant uncertainties and
other factors affecting forward-looking statements in the Risk Factors section
which appears in Item 3 "Key Information."
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 financial data presented in the table below has
been derived from our audited consolidated financial statements as of and for
each of the five years in the period ended December 31, 2003. The selected
financial data should be read in conjunction with our consolidated financial
statements, and the related notes, which are included elsewhere in this FORM
20-F.
The translation of New Israel Shekel, or NIS, amounts into U.S.
dollars has been made solely for the convenience of the reader at the
representative rate of exchange at December 31, 2003 (NIS 4.379= $1.00).
1
Year Ended December 31,
-------------------------------------------------------------
1999 2000 2001 2002 2003 2003
------- ------- ------- ------- ------- -----------
Convenience
Translation
NIS NIS NIS NIS NIS Dollars *
-------------------------------------------------------------
(In thousands, except per share data)
Israeli GAAP information
Consolidated Statement of Operations Data:
Revenues
Access revenues 96,836 119,848 139,850 156,335 146,007 33,343
Other revenues 14,744 19,684 48,473 27,983 33,635 7,681
------- ------- ------- ------- ------- ------
Total revenues 111,580 139,532 188,323 184,318 179,642 41,024
Cost and expenses:
Cost of revenues 58,711 95,335 116,135 99,564 92,871 21,208
Selling and marketing expenses 41,981 73,014 51,299 37,125 41,393 9,453
General and administrative expenses 23,539 46,844 38,884 21,209 21,908 5,003
------- ------- ------- ------- ------- ------
Total cost and expenses 124,231 215,193 206,318 157,898 156,172 35,664
Income (loss) from operations (12,651) (75,661) (17,995) 26,420 23,470 5,360
Financing (expenses) income, net 699 3,842 7,308 2,151 (3,235) (739)
Other income (expenses), net (6) (21) (2,332) (3) (2,592) (592)
------- ------- ------- ------- ------- ------
Income (loss) from continuing operations (11,958) (71,840) (13,019) 28,568 17,643 4,029
Income tax benefits -- -- -- -- 1,935 442
------- ------- ------- ------- ------- ------
Net income (loss) after income tax benefits (11,958) (71,840) (13,019) 28,568 19,578 4,471
Company's share in net loss of investees -- (2,193) (682) (2,187) (5,275) (1,205)
Minority interest in loss of a subsidiary 864 1 963 -- -- --
Loss of a subsidiary which the Company
does not intend to bear -- -- 383 -- -- --
------- ------- ------- ------- ------- ------
Net income (loss) from continued operations (11,094) (74,032) (12,355) 26,381 14,303 3,266
Loss from discontinued operations -- (7,355) (8,843) -- -- --
Company's share in loss of a subsidiary
from discontinued operations -- -- -- (6,423) -- --
------- ------- ------- ------- ------- ------
Net income (loss) (11,094) (81,387) (21,198) 19,958 14,303 3,266
======= ======= ======= ======= ======= ======
======= ======= ======= ======= ======= ======
Income (loss) per share, basic and diluted
Net income (loss) per NIS 0.01 per value of
shares (in NIS) from continued operations (0.69) (4.02) (0.67) 1.43 0.78 0.18
Net income (loss) per NIS 0.01 per value of
shares (in NIS) from discontinued operations -- (0.40) (0.48) (0.35) -- --
------- ------- ------- ------- ------- ------
(0.69) (4.42) (1.15) 1.08 0.78 0.18
------- ------- ------- ------- ------- ------
Weighted average number of shares outstanding
(in thousands) 16,068 18,432 18,432 18,432 18,432 18,432
======= ======= ======= ======= ======= ======
-2-
As at December 31,
-------------------------------------------------------------
1999 2000 2001 2002 2003 2003
------- ------- ------- ------- ------- -----------
Convenience
Translation
NIS NIS NIS NIS NIS Dollars *
-------------------------------------------------------------
(In thousands, except per share data)
Consolidated Balance Sheets Data:
Total assets 241,563 251,765 228,322 169,052 214,004 48,871
Working capital 154,239 41,743 48,615 80,904 76,256 17,414
Total debt 55,171 146,760 144,510 65,284 95,933 21,908
Total shareholders' equity 186,392 105,005 83,811 103,768 118,071 26,963
US GAAP information
Consolidated Statement of operations data:
Net income (loss) from continued operations (12,454) (76,527) (10,603) 23,140 14,960 3,416
Net Loss - discontinued operations -- (7,355) (8,843) (6,423) -- --
Net income (loss) (12,454) (83,882) (19,446) 16,717 14,960 3,416
Consolidates Balance sheets date:
Total assets 243,370 255,102 231,394 173,053 218,952 49,918
Total shareholders equity 186,391 105,004 83,810 101,057 115,908 26,469
* The translation of New Israel Shekel, or NIS, amounts into U.S. dollars has
been made solely for the convenience of the reader at the representative rate of
exchange at December 31, 2003 (NIS 4.379= $1.00).
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 U.S. 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.
-3-
At Period
Period Average (1) High Low End
------ ----------- --------- --------- ---------
Year ended December 31, 1999 ......... NIS 4.414 NIS 4.288 NIS 4.013 NIS 4.153
Year ended December 31, 2000 ......... 4.078 4.198 3.967 4.041
Year ended December 31, 2001 ......... 4.203 4.416 4.067 4.437
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
----------
(1) The average of the representative rates on the last business day of each
month during the relevant period.
High Low
2003 NIS NIS
---- ----- -----
December ....................................................... 4.441 4.352
2004
----
January ........................................................ 4.483 4.371
February ....................................................... 4.493 4.437
March .......................................................... 4.535 4.483
April .......................................................... 4.599 4.515
May ............................................................ 4.634 4.555
On June 17, 2004, the representative rate was NIS 4.499 = $1.00.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
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.
-4-
Risks Relating to Internet Gold
We have experienced operating losses in the past and may incur losses in the
future.
Although we 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 access fees, and
specifically, access fees for broadband services, advertising on our portals and
from e-commerce activities conducted through our affiliated e-commerce company,
Gold-Trade (Electronic Commerce) Ltd., or Gold Trade. These activities are
expected to involve substantial sales and marketing expenses, and other costs.
On June 2, 2004 the Israeli Ministry of Communications granted us a license to
provide international telephony services. In connection with this new activity
we will be required to make investments, which will impair our profitability and
no assurance can be given that the international telephony services to be
provided under the license will be profitable in the future.
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 ordinary shares 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.
Regulatory and legal uncertainties could adversely affect the terms of our
license to provide Internet access services 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 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
-5-
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 the 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.
We may be exposed to substantial liabilities arising out of our
business, especially those liabilities that are related to Internet activities.
Currently, we do not have any insurance policy covering 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 have low barriers to
entry; accordingly, we may be unable to compete successfully.
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, provide free hours, gifts 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.
In March 2000, the Israeli Ministry of Communications acted to
eliminate pricing differentiations within area codes in Israel. This action
eliminated a competitive advantage that we and other large Internet service
providers, ISPs, obtained by having a significant number of points of presence
throughout Israel. Additionally, Bezeq, Israel's domestic telecommunications
monopoly, eliminated another competitive advantage by offering unlimited calling
plans.
ISP market. 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
-6-
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. However, we cannot predict whether the
cable television network providers 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, including the
portal of our subsidiary, MSN Israel Ltd., or MSN Israel. 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 2003 there was extensive activity in the e-commerce
market in Israel. The market is principally comprised of large retailers,
financial institutions 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 will be successful, or that we will be able to compete
effectively and succeed in this market.
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 portal and our e-commerce business. In
addition, we may be required to make capital contributions and possibly share
some of our resources with MSN Israel and Gold Trade.
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.
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 2002. We have continued this policy in 2004. Although this
strategy has been successful to date, we cannot
-7-
assure you that this strategy will be successful in the future. Due to the price
reductions, caused by the aggressive competition in the broadband market as well
as the expenses associated with our marketing efforts to attract customers, our
profitability may be negatively impacted.
We may also face difficulties in increasing online advertising because
full acceptance of the Internet as an advertising medium has yet to occur in
Israel. Since we only have a 50.1% equity interest in MSN Israel and a 48.27%
interest in Gold Trade we will only have the benefit of a proportionate share of
the profits, if any, from their operations.
If we do not successfully develop the Internet Gold brand we may be unable to
attract sufficient traffic to our portals to become successful.
We must establish and strengthen awareness of the Internet Gold brand.
If we fail to create and maintain brand awareness, we are unlikely to attract
sufficient traffic to our portal 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:
. the success of our joint marketing programs, advertising and
promotional efforts; and
. 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, financial
institutions, retailers and other suppliers of products and services that we may
sell. These relationships include our relationship with Eurocom Communications
Ltd. and its affiliates, our partners in Gold Trade and the various parties to
our joint marketing programs. Our business depends on these relationships for
its success. 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.
-8-
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
in Israel. To date, we have entered into various cooperation agreements,
including our establishment of the MSN Israel portal with Microsoft Corporation
and the establishment of Gold Trade. 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 649 full-time and
part-time employees as of December 31, 2003, 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.
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 March 15, 2004 our international bandwidth infrastructure
had grown by 1200% from the time we started to provide broadband services. In
order to preserve the current service level to an increasing number of
-9-
broadband customers, we may be required to extend our bandwidth by additional
25% by the end of 2004. Since most of our international capacity from Israel is
controlled by one company (a de facto monopoly), the prices for bandwidth
infrastructure may rise.
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 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.
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, UUNET,
Worldcom PCCW 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 and a leased satellite transponder.
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
-10-
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 leasing or 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.
If we require additional capital, we may be unable to raise it on favorable
terms or at all.
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, Gold Trade may require in the future additional
substantial funding to develop and expand its business. As one of the two major
shareholders of Gold Trade, we have contributed capital and provided other
resources to the e-commerce company and may be required to do so in the future.
These costs could be substantial, and may not result in significant returns in
the near future, or at all. 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,
our interest in Gold Trade may be diluted.
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 Internet-related 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 and other services in response to competitive service and
product offerings and the evolving demands of the marketplace.
-11-
Our future success depends on the continued growth in the use of the Internet,
VOIP (Voice Over IP) and other related services in Israel.
We rely on revenues generated from the sale of Internet-access and
related services, and, to a limited extent, portal advertising and e-commerce.
To date, revenues generated from e-commerce and online advertising in Israel
have been relatively insignificant and we cannot assure you that revenues from
these services will grow. 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 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 is involved in the sale, by way of electronic tenders, of
products and services by third parties. If these products or services were
defective or were manufactured or supplied in breach of others' intellectual
property rights, Gold Trade could be liable to customers who purchase these
products or services or to the owners of the intellectual property.
-12-
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 portal 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 currently hold the Internet domain names:
"zahav.net.il," "inter.net.il," "internet-zahav.net.il," "zahav.msn.co.il,"
"igld.com," "gold.net.il," "access.net.il," "smile.net.il," "Vgames.co.il"
"hicareer.co.il" and various other related names. MSN Israel holds the Internet
domain names: "msn.co.il," "start.msn.co.il," "start.co.il," "smsn.co.il,"
"mediacenter.co.il," "igold.net.il," "msn.net.il", "msnone.net.il,"
"msnnews2.co.il," "msnmobile.co.il," "hero.co.il," "ilovemessenger.co.il" and
"zahav.ru" and has the right to use the domain name "hotmail.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 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.
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., holds 68.81%
of our ordinary shares. Euronet Communications is a wholly owned subsidiary of
Eurocom Communications Ltd., which is a 50.3% owned subsidiary of Eurocom
Holdings Ltd. (an additional 0.7% interest is
-13-
owned by Mr. Shaul Elovitch, our chairman, and the chairman of the board of
directors of Eurocom Holdings Ltd.). 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, including:
. the composition of our board of directors including the appointment
and removal of officers;
. mergers or other business combinations involving us;
. acquisitions or dispositions of our assets;
. future issuances of our ordinary shares or other securities;
. our incurrence of debt;
. various amendments, waivers and modifications to the agreements
between Eurocom Communications and its affiliates and us; and
. 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.
We also obtain various strategic advantages from our affiliation with
Eurocom Communications. We expect these relationships to continue and for us to
enter into additional contractual relationships with Eurocom Communications or
its affiliates in the future. However, there can be no guarantee that our
existing relationships will continue or that additional relationships will
develop. Specifically, if Eurocom Communications were to dispose of all or a
significant proportion of its shares in our company or decided to pursue its
Israeli Internet business through another entity, it may be less willing to
enter into or continue contractual and strategic relationships with us. The
termination of some or all of our relationships with Eurocom Communications
could impede the growth of our business and increase our training and network
costs and other costs of operations.
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.
-14-
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. See also Item 7A "Major Shareholders" and Item 7B
"Related Party Transactions."
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 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.
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 up to 36 days, depending on rank and position, of military reserve
duty annually and are subject to being called for active duty under emergency
circumstances. 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.
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
continue to deteriorate. In addition, due to significant economic measures
proposed by the Israeli Government, there have been several
-15-
general strikes and work stoppages in 2003 and 2004, affecting all banks,
airports and ports. These strikes have had an adverse effect on the Israeli
economy and on business, including our ability to deliver products to our
customers. Following the passage by the Israeli Parliament of laws to implement
the economic measures, the Israeli trade unions have threatened further strikes
or work-stoppages, and these may have a material adverse effect on the Israeli
economy and on us.
Our business may be impacted by NIS exchange rate fluctuations.
Most of our communications and advertising costs are quoted in U.S.
dollars. As of June 13, 2002 we are required by law to state our prices in NIS
to our residential and SOHO (small office and home office) customers.
Furthermore, if we expand our business into other countries, we may earn
additional revenue and incur additional expenses in other currencies. We do not
currently hedge against foreign currency transaction risks. We have U.S. dollar
denominated liabilities (rights of use leasing obligations for the international
lines). In future periods our dollar assets (deposits) and our dollar
denominated liabilities might cross hedge 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.
Service and enforcement of legal process on us and our directors and officers
may be difficult to obtain.
Service of process upon our directors and officers and the Israeli
experts named herein, all of whom reside outside the United States, may be
difficult to obtain within the United States. Furthermore, since substantially
all of our assets, all of our directors and officers and the Israeli experts
named in this report are located outside the United States, any judgment
obtained in the United States against us or these individuals or entities may
not be collectible within the United States.
There is doubt as to the enforceability of civil liabilities under the
Securities Act and the Securities Exchange Act in original actions instituted in
Israel. However, subject to certain time limitations and other conditions,
Israeli courts may enforce final judgments of United States courts for
liquidated amounts in civil matters, including judgments based upon the civil
liability provisions of those Acts.
Provisions of Israeli law may delay, prevent or make difficult an acquisition of
us, 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
-16-
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,
our 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, a shareholder of an
Israeli company has a duty to act in good faith 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.
Risk Related to Our Ordinary Shares
Our share price has been very volatile, and may decline.
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:
. quarterly variations in our operating results;
. operating results that vary from the expectations of securities
analysts and investors;
. changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
. changes in market valuations of other Internet or online service
companies;
. announcements of technological innovations or new services by us or
our competitors;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. changes in the status of our intellectual property rights;
. announcements by third parties of significant claims or proceedings
against us;
. additions or departures of key personnel;
. future sales of our ordinary shares; and
. stock market price and volume fluctuations.
-17-
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.
Since the latter part of 2000, many Internet companies have suffered
from a substantial decrease in their market value. Our share price plunged from
a high of $30.00 in March 2000 to below $1.00 in April 2001 and closed at $4.62
on June 23, 2004.
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 Securities Act with respect to their shares, giving them rights
to:
. 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
. 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. See Item 6.A. "Directors and Senior Management."
-18-
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:
. discourage potential acquisition proposals;
. delay or prevent a change in control over us; and
. limit the price that investors might be willing to pay in the future
for our ordinary shares.
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 majority of 75% 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 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 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 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 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 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 his or her shares in us for shares in a foreign
corporation to immediate taxation.
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.
-19-
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 972-3-939-9999. 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.
We began our Internet access business in January 1996 under the brand
name "Internet Gold." We provide a wide array of Internet services tailored to
meet the needs of our residential, SOHO and business subscribers, including
Internet access and related value-added services, as well as content and
e-commerce activities through portals. Our Internet access packages include
basic access accounts, ISDN dial-up accounts, leased and frame relay lines,
dial-up networking, ADSL and cable services. We also provide hosting and
value-added solutions. In July 2003 we won a government tender to provide IT
services to Israeli government ministries.
From December 31, 2002 to December 31, 2003, our business subscriber
base grew from 3,505 business subscribers to 4,144 business subscribers and our
residential and SOHO subscriber base remained at the same level with 312,256
subscribers.
In July 2003, we entered into a long-term agreement with Barak I.T.C.
(1995) Ltd., one of Israel's long distance carriers, to purchase rights of use,
for 14 international fiber optic lines until 2017, with the option to extend the
agreement for an additional five year period. Until August 2003 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 in the next three years. As of April 2004, we
had connected eight of these lines. The total capacity of the lines is 2.2
Gigabits. This increased capacity was required to meet the demand of our rapidly
growing broadband customer base.
In April 2004 we entered into a long-term agreement with Bezeq
International Ltd, one of Israel's long distance carriers, to purchase rights of
use in one international fiber optic line for at least 13 years beginning on 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.
In June 2004, in accordance with the trends of liberalization of the
communication market in Israel and opening the international telephony market to
competition, the Israeli Ministry of Communications granted us a license to
provide international telephony services with an international prefix code of
015. We expect to commence provision of the services during the third quarter of
2004. We will use professional and support staff, as well as our substantive
VOIP experience and infrastructure to ensure provision of first-quality
international telephony at competitive prices to Israeli individual consumers
and enterprises.
-20-
In January 2000, we established Gold Mind Ltd., or Gold Mind, as a
wholly owned Israeli subsidiary. Initially, Gold Mind had two major activities:
developing Internet-content ventures and constructing sites. Currently, Gold
Mind is engaged in the marketing and sale of Internet contents and technologies,
such as an anti-virus service, value added services and virtual magazines and
develops selected Internet content ventures. In May 2003, Gold Mind entered into
an exclusive agreement with Play-TV, Playboy's official representative in
Israel, for the distribution of Playboy's content on the Internet. In addition
Gold Mind develops Internet interactive games and maintains an interactive
Internet games website, Vgames. In March 2004, Gold Mind entered into a
web-games collaboration with Partner Communications Ltd., an Israeli cellular
operator, regarding the launch of a WAP version of Vgames for Partner's
customers.
In January 2000, we established another wholly owned Israeli
subsidiary, Internet Gold International Ltd., or IGI. IGI was formed with the
goal of becoming a regional Internet group through the acquisition of, and
establishment of partnerships with, local Internet service providers, IT
companies and media groups in emerging markets. We withdrew from this activity
in late 2000 except, with respect to a small investment in a Greek ISP in which
we have a 15.2% interest. Since the beginning of 2002, IGI has 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.
In June 2000, we established MSN Israel Ltd., a 50.1% owned Israeli
subsidiary, together with Microsoft Corporation (49.9%). MSN Israel launched its
portal in April 2000, offering Hebrew-reading Internet users state-of-the-art
MSN features such as personalized services, "Hotmail," "Messenger," "Passport,"
instant messaging, news, an Internet search engine, business services and
e-commerce services. We agreed to invest in MSN Israel and be responsible for up
to $10 million of its operating losses and capital expenditures. Microsoft and
us will be proportionately responsible for any losses and capital expenditures
exceeding $10 million. As of December 31, 2003, MSN Israel had incurred
consolidated losses of NIS 33.8 million ($7.7 million) and we had recorded NIS
0.05 million ($0.01 million) of capital investment in MSN Israel in compliance
with the agreement.
In November 2001, MSN Israel entered into an agreement with Zeevi
Computers & Technology Ltd. and Start Net Ltd. pursuant to which MSN Israel
undertook to operate, at its expense, the Israeli portal "Start.co.il" for a
period of 36 months and to provide it with certain services. MSN Israel has the
right to cease operating the portal under certain circumstances and it will not
be responsible for any liabilities incurred prior to the date of the agreement.
In November 2002, MSN Israel exercised the option granted to it under the
agreement, to acquire 50% of Start Net Ltd., and as a result now holds 50% of
Start Net Ltd. Zeevi Computers & Technology Ltd. is currently under a
dissolution process, and MSN Israel is currently negotiating the purchase the
remaining 50% interest in Start Net Ltd. In July 2002, MSN Israel was granted an
ISP license, which was extended until the end of May 2004. MSN Israel has
decided not to apply for the extension of the license. In 2003, MSN Israel
reached operating profitability as it developed new revenue channels such as
Hosted Exchange, Hotmail's successful mail platform, and Messenger, which more
than doubled its instant-messaging user base during the year. These new services
provide unique added value for MSN's customers and provide new revenue sources
for us.
-21-
In January 2000, we, along with Bank Hapoalim, Isracard, Superpharm
and Eurocom Marketing, established Gold Trade to provide e-commerce services. In
accordance with Gold Trade's primary intended activity, Gold Trade launched the
"P1000" mega-mall in June 2000. In May 2000, Gold Trade acquired the business of
Best Deal Ltd., an Israeli company engaged in mail order catalogue sales. Since
the end of 2001, Gold Trade's main activity is the sale of products and services
by means of electronic tenders and outgoing telemarketing. In May 2002 Gold
Trade ceased producing and mailing catalogues, which was a separate line of
business from Gold Trade's other activities, and ceased importing products in
relation to such activity. Since then, Gold Trade has focused on its e-commerce
activity, continuing telemarketing sales to its large customer database, and
operating a call center for certain third parties and for the sale of products
offered by Gold Trade. Since January 1, 2002 we ceased to consolidate the
operations of Gold Trade in our financial statements and account for it on an
equity basis. In April 2003, Gold Trade published a rights offering. In
September 2003 we invested under the rights offering $2.4 million in cash and by
means of waiver of debt, and raised our ownership interest in Gold Trade to
48.27%.
We made capital expenditures of NIS 11.9 million ($2.7 million) in the
year ended December 31, 2003, NIS 12.6 million ($2.9 million) in the year ended
December 31, 2002 and NIS 18 million ($4.1 million) in the year ended December
31, 2001.
In the year ended December 31, 2003, we invested NIS 8.7 million ($2
million) in new network equipment and computers, NIS 2.9 million ($0.7 million)
in furniture and office equipment and NIS 0.2 million ($0.06 million) in
leasehold improvements.
During 2004, we expect to incur capital expenditures of approximately
NIS 14 million ($3.2 million), mostly for network equipment and computers. As of
June 1, 2004, we are bound by contractual undertakings for $0.6 million of such
amount, mostly for network equipment and computers.
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. In April 2004, there were over 750 million
Internet users worldwide, compared to approximately 360 million in 2000.
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 and
e-commerce solutions. 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
-22-
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 high education qualifications). Israel has a population of more than 6.4
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 2003 Israel had a cellular penetration rate of
94% (compared to a penetration rate of approximately 91% in 2002) and a
multi-channel television (cables and satellite) penetration of approximately 70%
(compared to a penetration rate of approximately 65% in 2002).
Today, Internet services in Israel consist primarily of Internet
access, web hosting, co-location services, content services 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. The Ministry of Communications reported that
the broadband access penetration rate for households had risen
-23-
from 11% in 2002 to 30% in 2003, 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. Market surveys estimate that in the end of 2003 more than
60% of Israeli Internet subscribers had broadband access.
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, is equally divided between
the three companies. On June 2, 2004, we received a license to provide
international telephony services. We believe that Netvision Ltd. as well as
Xphone, a British company, will also be granted licenses.
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 decided to continue this policy
during 2004. Due to the price reductions, caused by the aggressive competition
in the broadband market and our marketing efforts to attract customers, our
profitability may be impaired.
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.
-24-
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:
----------------------------------------------------------------------------------------------------------------
Access Summary
Services Description Target Customers Current Pricing Information
----------------------------------------------------------------------------------------------------------------
ADSL Accounts Broadband services using Small business Average monthly fee of NIS 39 to NIS 89,
ADSL technology. subscribers and depending on the services provided.
residential users.
----------------------------------------------------------------------------------------------------------------
Cable Accounts Broadband services using Small business Monthly fee of NIS 39 to NIS 89,
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 55 to NIS 69 (subject to period of
Standard Plan residential users. contract).
Hour Based Package - fee of NIS 12.49 to
NIS 59.9 for four to twenty five hours
per month. Additional hours cost NIS
2.5 each.
----------------------------------------------------------------------------------------------------------------
ISDN Dial-up Basic Account with digital Small business Monthly fee of NIS 55 to NIS 69
Accounts service, which provides subscribers and (subject to period of contract).
faster access, also known as residential users.
ISDN access.
----------------------------------------------------------------------------------------------------------------
64Kbps and up Twenty-four hour high speed Business subscribers. Monthly fee of $99 to $1300, depending
leased Frame dedicated Internet access to on the services provided.
Relay Line carry data traffic at a
speed of 64Kbps and up.
----------------------------------------------------------------------------------------------------------------
Dial-Up Enterprises can connect Business subscribers. Monthly fee of $ 29 to $349, depending
Network (ISDN, their entire PC network to on the number of network stations in an
ADSL & Cables) 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:
-25-
---------------------------------------------------------------------------------------------------
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 access subscribers.
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 in approximately 150
countries. iPass contracts with over 200 global
tier-one network providers to deliver on-demand
local connectivity.
---------------------------------------------------------------------------------------------------
Integrated Expert Installing and maintaining LAN & WAN Business subscribers.
services infrastructures with full technical support.
---------------------------------------------------------------------------------------------------
Security services Penetration tests for networks and applications, Business subscribers.
and products security assessments, internet fraud investigations
and security maintenance, content filtering
service. Installing and maintaining of firewall
machines.
---------------------------------------------------------------------------------------------------
Unified Message 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.).
---------------------------------------------------------------------------------------------------
Gold Mail This service allows a subscriber to gain access to Business and residential
his e-mail from any computer. subscribers.
---------------------------------------------------------------------------------------------------
Call Me This service enables a subscriber to receive Business and residential
telephone messages while surfing the net, using subscribers.
only one telephone line.
---------------------------------------------------------------------------------------------------
-26-
---------------------------------------------------------------------------------------------------
Business Service Summary Description Target Customers
---------------------------------------------------------------------------------------------------
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
the proliferation of "junk mail" (spam), saves
time, prevents waste of storage space and
prevents exposure by children to inappropriate
content.
---------------------------------------------------------------------------------------------------
Web Sites Variety of paid portals and websites in varied Residential subscribers.
topics (sports, children, leisure & life style).
---------------------------------------------------------------------------------------------------
On Line Backup This service enables the users to automatically Business and residential
backup files and save them for long periods with subscribers.
the ability to retrieve them immediately
---------------------------------------------------------------------------------------------------
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 research and development 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 are those customers
to whom we provide dial-up, broadband or dedicated Internet access, and include
customers paying full rates as well as those with special introductory packages.
From December 31, 2002 to December 31, 2003, our business subscriber base grew
from 3,505 business subscribers to 4,144 and our residential and SOHO subscriber
base remained at the same level with 312,256 subscribers, representing a 18%
-27-
growth rate in our business subscribers. Our broadband subscriber base grew from
32,977 broadband subscribers to 106,573, representing a 242% growth rate. Our
monthly churn rate decreased from 1.7% in 2002 to an average of approximately
1.4% in 2003. Churn rate represents the number of subscribers canceling during a
month as a percentage of the number of subscribers at the beginning of the
month. There has been an increase in our residential and SOHO subscriber base in
the first quarter of 2004 and in our business subscriber base, and as of March
31 2004 we had 318,448 residential and SOHO subscribers (126,095 are broadband
users) and approximately 4,150 business subscribers (most of them are broadband
users).
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 jointly owned by us 50.1% and
Microsoft Corporation 49.9%. 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.
Eurocom Group. Our principal beneficial shareholder, Eurocom Holdings
Ltd., is an Israeli company, which holds interests in various telecommunications
and satellite communications companies. One of our principal strategic
relationships is with companies affiliated with Eurocom Holdings:
In September 1999 we established Gold Trade, an e-commerce affiliated
company, in which we own a 48.27% interest, together with Eurocom
Communications, a subsidiary of Eurocom Holdings, by its fully owned subsidiary
Eurocom Marketing (which holds 48.36% in Gold Trade) and three additional
minority shareholders.
International Operations. In March 2000, IGI acquired a 19.9% equity
interest in Compulink Network S.A., an ISP in Greece. To date, IGI has invested
$950,000 in Compulink Network and currently holds a 15.2% interest in that
company. In the third quarter of 2003, IGI recorded an impairment charge of NIS
2.6 million ($0.6 million). In the first quarter of 2004 IGI recorded an
additional impairment charge of NIS 0.7 million ($0.16 million). As of June 1,
2004 the value of IGI's investment in Compulink is estimated to be NIS 0.9
million ($0.2 million). We are constantly evaluating the value of our interest
in Compulink. Currently we do not expect any improvement in Compulink's
financial situation. Accordingly, we will probably be required to make
additional impairment charges in the foreseeable future.
Since the beginning of 2002, IGI has 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.
-28-
Marketing and Sales
Our marketing and sales strategy combines brand building and demand
increasing advertising with multi-channel marketing. We use multiple
distribution channels: authorized dealers and networks, cooperation with
business partners and mass distribution. We continually evaluate the
effectiveness of our sales and marketing programs, primarily by analyzing sales
statistics such as call volumes, sales volumes, and incentive offer response, in
order to refine our marketing campaigns. We currently employ 157 sales
representatives, 126 who focus on the residential subscriber market and 31 who
focus on the business subscriber market.
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.
In addition, 8% of our new subscribers in 2003 came from referrals by
existing customers. Accordingly, 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. To attract additional
subscribers and encourage existing subscribers to subscribe for additional
services, we also make special offers and offer promotional discounts on
one-time registration fees for dial-up subscribers. 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 to broadband access and offering
them a variety of value added services and products. Our marketing and sales
staff is using our customer database in order to approach relevant segments and
offer them incentives to upgrade their packages to broadband access. 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.
We recently renewed our logo and changed our slogan to "Surf with a
smile." We strongly believe that as a leading ISP we should focus on enriching
customers' experience. As such, our TV campaigns feature a popular stand-up
comedian who mentions our Internet activities such as the downloading files,
chatting and upgrading into broadband access. We have a new channel under the
MSN portal (www.smile.net.il) to promote the very same points and publish, by
mail, a colorful and informative monthly newsletter named "Home Page" to our
subscribers.
-29-
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 2003.
These joint marketing programs provide us with distinct advantages, including:
. ability to gain leverage from the marketing partner's brand through
joint advertising and promotions; and
. 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 literature and 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:
. 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.
. 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; and
. many dozens of stand-alone PC stores that promote our Internet service
for a success fee.
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:
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 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. 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.
-30-
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 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 and utilizes a series of
specially designed "retention tools" to help the representatives convince
customers to stay connected.
Marketing of International Telephony Services.
We plan to leverage our customer base as well as our partners and
Internet channels in order to 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.
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.
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 193 technical support personnel for residential subscribers and 22
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,
-31-
we have 147 service personnel for residential subscribers and 20 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 is 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. Subscribers access our services by connecting
to a network with their PCs or other terminal devices using local telephone
service or cable infrastructure. Network connections are made through
communications hardware, such as telephone lines, as well as routers, switches
and modems, which we own and which serve to direct data and enable communication
among a variety of computer operating systems. The network infrastructure which
is utilized, consists of three primary tiers: local points of presence; a middle
tier, which connects the points of presence to regional network operations
centers; and an international bandwidth tier, which connects the network
operations centers to the Internet backbone. The network currently includes six
points of presence and has the capability to provide dial-up access, with local
telephone calls, to the entire Israeli population. We lease the land on which
the points of presence are located from various landowners. The network
operations centers are currently connected to the Internet through the following
links:
Bandwidth: Incoming and outgoing - Total of (1,395 MB/sec)
Current Service:
. 7 X 155 MB/sec (STM-1) leased fiber-optic line from Petach Tikva to
London.
. 2 X 155 MB/sec (STM-1) leased fiber-optic line from Petach Tikva to
New York.
We use only digital incoming lines. We provide 56Kbps (V.90 and V92)
surfing capabilities at all ports, and use the leading RAS -(remote access
server) technology from 3Com, as well as Cisco routers at all of our points of
presence. We are the first Israeli Internet service provider to use ATM wide-
area-network technology in its connection centers. 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
-32-
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.
Network Design. Each of our points of presence includes hardware along
with routing equipment and associated leased-telephone line interface devices.
Modems are interconnected to switched telephone networks serving the local area
and high-speed telephone lines connect the point of presence router to other
sites within our network. The hardware and software deployed at each physical
facility allow us to analyze the performance of the network and perform limited
maintenance remotely. Based on subscriber growth and demands, we lease new
high-speed telephone lines and install hardware into our network. This allows
additional traffic to travel over the network in a more efficient fashion.
Network Centers. We currently operate through fully redundant network
centers in Israel. In order to ensure reliable service, our network centers
monitor network traffic, quality of service and security issues, as well as the
performance of the equipment located at each of our physical locations. These
facilities also serve as the primary site for our delivery of business services
and communications between our physical locations and external service
providers. We monitor our network centers on a 24 X 7 basis. Our monitoring
systems are connected to a paging system that automatically warns the
appropriate technical support staff of potential network faults, overcapacity or
other problems. We intend to continue to enhance the capabilities of our network
centers as our subscriber base grows.
We acquired an advanced international switching system (soft switch)
in order to provide international telephony services. The soft switch will be
connected to the local Bezeq (PSTN) network and to all the cellular operators in
Israel. We will connect to international communication operators for the purpose
of receiving and sending voice traffic, via our existing IP network, using our
network support in MPLS protocol to guarantee quality of service (QOS) for voice
traffic on the Internet. We intend to use our two existing points of presence in
New York and London in order to activate efficient and quality links to
international communication operators.
In addition, we purchased an anti-fraud system, which continuously
monitors all voice traffic on the net and are establishing a network operation
center designated for fraud prevention. This center will be manned 24 hours a
day by anti-fraud experts who will frequently monitor the voice traffic in order
to prevent fraud.
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:
. pricing;
-33-
. a reputation for reliability and high-quality service;
. effective customer support;
. access speed;
. effective marketing techniques for customer acquisitions; and
. ease of use.
We believe that, to date, we have competed favorably, based on these
factors, particularly due to:
. our strong brand recognition, achieved principally through innovative
marketing programs; and
. our emphasis on providing fast and reliable, high quality services and
superior customer service and support.
Access Services
Our current principle competitors are 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 Ltd.,
is affiliated with IDB, one of the largest holding companies in Israel; (iii)
012 Golden Lines, an affiliate of an Israeli cable company; and (iv) Barak ITC
Ltd. Except for NetVision Ltd., the other three competitors are 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 Ltd., applied to the Ministry of Communications
for a license to provide international telephony services. On June 2, 2004, we
received our license. We believe that Netvision, as well as Xphone, a British
company, will also be granted licenses.
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 extent the entrance of
such new competitors will affect our business.
Moreover, we expect to face competition in the future from companies
that provide connections to consumers' homes, such as telecommunications
providers, DBS and cable companies. For example, advances in technology have
enabled cable television operators to offer Internet access through their cable
facilities at significantly faster speeds than existing analog modem speeds.
These companies could exploit their current high rate of penetration of
households and potentially include Internet access in their basic bundle of
services or offer access for a nominal additional charge.
-34-
Portals
MSN Israel, currently competes with three other major portals in
Israel: Walla, which is its principal competitor, affiliated with Bezeq
International Ltd. (a subsidiary of Bezeq, Israel's domestic phone monopoly);
Ynet, which is affiliated with the largest media group in Israel - Yedioth
Ahronoth; and Nana, which is affiliated with NetVision Ltd.
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 private company; and
(iii) Walla Shops, which is affiliated with Walla and Bezeq International. There
are additional small companies that are active in this area as well. In
addition, Israelis are able to purchase products and services (including on-line
brokerage services) on international e-commerce websites, such as E-Bay and
Amazon.
Currently, most revenues from e-commerce in Israel are derived from
auctions and group sales. We believe this trend will continue in 2004 as well.
Advertising on Portals
Israel's other domestic portals include Walla, Nana, Ynet and
TheMarker. 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 TheMarker 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
ITC) have provided international telephony services in Israel. The market,
estimated to be two billion minutes and $440 million per year, is equally
divided between the three companies. We plan to leverage our customer base as
well as our partners and Internet channels in order to 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.
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.
Increased competition could result in:
. limited subscriber growth, increased subscriber cancellations and loss
of market share;
-35-
. lower pricing for subscriber access and portal advertising and the
need to offer more free access packages;
. the need to increase sales and marketing expenses;
. difficulty in attracting online advertisers resulting in lower
advertising revenues;
. loss of visitors to our portals, including MSN Israel, and fewer page
views; and
. 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.
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. Domain Names. We currently hold the Internet domain
names: "zahav.net.il," "inter.net.il," "internet-zahav.net.il,"
"zahav.msn.co.il," "igld.com," "gold.net.il," "access.net.il," "smile.net.il,"
"Vgames.co.il" "hicareer.co.il" and various other related names. MSN Israel
holds the Internet domain names: "msn.co.il," "start.msn.co.il," "start.co.il,"
"smsn.co.il," "mediacenter.co.il," "igold.net.il," "msn.net.il",
"msnone.net.il," "msnnews2.co.il," "msnmobile.co.il," "hero.co.il,"
"ilovemessenger.co.il" and "zahav.ru" and has the right to use the domain name
"hotmail.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
-36-
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
10, 2004, the Ministry of Communications had issued 71 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.
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:
. we request that the license be cancelled;
. we violate a material condition of our license;
. we violate or prevent the execution of an instruction of the Minister
given under sections 11(b) or 13 of the Communications Law;
. we cease providing a service under the license;
. we go into liquidation;
. we do not maintain a satisfactory level of telecommunications
services; or
. the Ministry of Communications decides, based upon consideration of
public interest, that such action is required.
-37-
In addition, under the terms of our license, the Ministry of
Communications may revoke our license if:
. we do not provide required or accurate disclosures to the Ministry of
Communications; or
. 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:
. a change in our suitability to perform the actions required to be
taken under the license or provide the services contemplated under the
license;
. the change is required in order to ensure competition in the
telecommunication field;
. the change is required in order to ensure the level of the services
provided under the license; or
. 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 a license that was extended until May 31, 2004.
MSN has 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:
. we do not comply with the law;
-38-
. we refuse to disclose information which we were obligated to
disclose under law to the Ministry of Communications;
. we do not duly pay royalties or other payments, which we were
required to pay under our license;
. we fail to provide the required bank guarantee;
. there is a change of the control in our company; or
. we violate material conditions of our license, such as:
. we do not provide the services within the required time
frame;
. we cease to provide the services;
. we do not maintain a satisfactory level of
telecommunication services;
. we do not supply the services to the extent required
under our license; or
. 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 Ltd. Group, one of Israel's
largest privately owned communications group with a presence both in Israel and
outside of Israel. Eurocom Holdings Ltd. is 100% owned by Messrs. Shaul
Elovitch, chairman of our board of directors, and his brother, Yossef Elovitch,
one of our directors. Eurocom Holdings owns a 50.3% interest (and an additional
0.7% interest is owned by Shaul Elovitch) 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. Eurocom Communications' main controlled holdings are: Eurocom
Cellular Communications Ltd., the representative of Nokia mobile phones in
Israel; Eurocom Industries (1986) Ltd., a
-39-
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 owns 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 wholly owned by Eurocom Media Holdings EU
Ltd., which is owned 50.3% by Eurocom Holdings Ltd., 49% by Arison Investments
Ltd. and 0.7% by Shaul Elovitch) owns approximately 30% in DBS Satellite
Services Ltd.
Set forth below is the legal name, location and country of
incorporation, percentage ownership and description of business of each of our
subsidiaries.
Gold Mind, a wholly owned subsidiary established in Israel. Initially,
Gold Mind had two major activities: developing Internet-content ventures and
constructing sites. Gold Mind currently markets and sells Internet contents and
technologies, such as an anti-virus service, value added services and virtual
magazines and develops selected Internet content ventures. In May 2003 Gold Mind
entered into an exclusive agreement with Play-TV, Playboy's official
representative in Israel, for the distribution of Playboy's content on the
Internet. In addition Gold Mind develops Internet interactive games and
maintains an interactive Internet games website - Vgames. In March 2004, Gold
Mind entered into a web-games collaboration with Partner Communications Ltd., an
Israeli cellular operator, regarding the launch of a WAP version of Vgames for
Partner's customers.
Internet Gold International Ltd., is a wholly owned subsidiary
incorporated in Israel. Since the beginning of 2002, IGI has 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.
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. MSN Israel operates a portal, offering Hebrew-reading Internet users
state-of-the-art MSN features such as personalized services, "Hotmail,"
"Messenger," "Passport," instant messaging, news, an Internet search engine,
business services and e-commerce services. As of December 31, 2003, MSN Israel
(excluding Start) had an average of 3,703,097 page views a day and 306,677
unique users.
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 additional
ten years.
The annual rent for the premises is approximately NIS 2.1 million ($
0.48 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, 2005. See Item 7.B. "Related Party Transactions."
-40-
In addition, we have six leases for our points of presence aggregating
approximately 100 square meters in Haifa, Jerusalem, Kfar Shmaryahu, Ramat Gan,
Rishon LeZion and Rehovot. The average lease term for our points of presence is
two years.
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). Since January 1, 2004, MSN Israel is using 700 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 $57,000. In the year ended December 31, 2003, we paid an
aggregate of $681,000 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, 2003, we invested NIS 8.7 million ($2
million) in new network equipment and computers, NIS 2.9 million ($0.7 million)
in furniture and office equipment and NIS 0.2 million ($0.06 million) in
leasehold improvements.
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 Item 3A. "Selected Financial Data" as well as our
consolidated financial statements, including the related notes, and the other
financial information included in this annual 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 registration statement.
Overview
We are a leading Israeli Internet service provider serving as of
December 31, 2003, approximately 312,256 residential subscribers and 4,144
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, webhosting, 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 webfaxing, 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
MSN Israel and in the e-commerce market through Gold Trade.
-41-
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 reductions
of services 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 224% increase in the number of broadband customers in 2003.
We have decided to continue this policy during 2004. 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 June 2, 2004 we received a license to provide international
telephony services.
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 22 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
are adjusted each time we publish the new financial statements in order to
reflect changes in the Israeli consumer price index, and so all information is
presented in current NIS real terms. All financial information in this annual
report, including financial information with respect to previous years, is
presented in adjusted NIS as of December 31, 2003. This presentation 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, 2003 of NIS 4.379 = $1.00.
Beginning January 1, 2004, the adjustment of financial statements for
changes in the Israeli Consumer Index are discontinued pursuant to Accounting
Standard No. 12 published by the Israel Accounting Standards Board.
The significant accounting policies listed in Note 2 of our
consolidated financial statements that we believe are most critical to aid in
fully understanding and evaluating our financial condition and results of
operation under generally accepted accounting principles are discussed below.
-42-
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 website hosting, electronic commerce and
advertising revenues. 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.
We evaluate our revenue recognition policy every quarter with respect to
existing and new accounting principles. 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 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.
Rights of Use of international fiber optic lines. We signed a
long-term rights of use agreement which is presented in our financial statements
as a capital lease. Amortization is computed by the straight-line method over
the term of the agreement. 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 rather than investing activities from the
acquisition of the fixed assets - financed by the lease. Under U.S. GAAP, such
items are reflected as non-cash financing activities.
Accounting Standard No. 15 - "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. 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. 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. Since we began to apply this Standard on January 1, 2003, we
have not had sufficient experience to ensure that our estimates were
appropriate.
-43-
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.
The law requires items to be included in our tax returns at different
dates than the items are reflected in the financial statements. As a result, our
annual tax rate reflected in our financial statements is different than that
reported in our tax returns. Some of these differences are permanent, such as
expenses that are not deductible in our tax returns, and some differences change
over time. These timing differences create deferred tax assets and liabilities.
Deferred tax assets generally represent items that can be used as a tax
deduction or credit in our tax returns in future years. In the reporting period,
we have reported profits and utilized a portion of the tax loss carryforward
but, due to the uncertainty inherent in the intense competition in our market,
we cannot be certain as to our ability to further utilize the tax asset in the
foreseeable future. Therefore, we have established a valuation allowance in the
full amount of these losses.
Since we believe that Gold Mind will utilize its carryforward tax
losses we recorded a deferred tax asset in Gold Mind.
The Effect of New Israeli Accounting Standards in the Pre-Application Period
Accounting Standard No. 12 on "Discontinuance of Adjustment of
Financial Statements." Pursuant to this Standard, commencing January 1, 2004,
the adjustment of financial statements will be discontinued. Consequently, up to
December 31, 2003, we have 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, will constitute the starting point for the nominal financial
report as of January 1, 2004.
Accounting Standard No. 13 on "Effect of Changes in Exchange Rate of
Foreign Currency." The standard discusses the translation of transactions in
foreign currency and the translation of financial statements of foreign
operations for the purpose of including them in the financial statements of the
reporting entity and replaces the instructions in Clarifications 8 and 9 to
Opinion No. 36 which will be annulled upon Accounting Standard No. 12 coming
into effect. This Standard applies to financial statements for periods beginning
after December 31, 2003. The adoption of Accounting Standard No. 13 should have
no effect on our consolidated financial statements.
Business Background
We earn revenues from Internet access services and value-added
Internet services, advertising on our portals and e-commerce. To date, we have
generated most of our revenues from our Internet access services to residential,
SOHO and business subscribers. Internet access revenues primarily consist of
monthly subscription for broadband and dial-up access to the Internet. As a
result, our revenues are directly affected by the total number of our paying
-44-
residential, SOHO and business subscribers and the average price for our
Internet access service per subscriber. At December 31, 2003 the number of our
residential and SOHO subscribers remained at the same level as in December 31,
2002, and the number of our business subscribers increased by 18% for the same
year. The following table indicates for each of the years indicated, the number
of our residential (including SOHO) and business subscribers (in thousands):
2001 2002 2003
----- ----- -----
Broad Band ............................................. -- 33 107
Dial-Up ................................................ 173 133 63
Occasional ............................................. 161 146 143
Total residential subsidiaries ......................... 334 312 313
Business subsidiaries .................................. 2,764 3,505 4,144
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.
We bill for Internet access for a service month, which generally runs
from the 20th day of the calendar month to the 19th day of the following
calendar month. Revenues for 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 including
satellite communications. We believe that a high level of subscriber
satisfaction with the speed and
-45-
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 our
Internet access service to our subscribers. Most of our technical staff are
full-time salaried employees and most of our technical support staff are
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.
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, 2003, we (not
including our subsidiaries) employed 218 full-time salaried employees and 431
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 Expenses/Income Net. Net financing expenses/income include
financing costs, and interest income on our cash reserve and exchange rate
differentials in real terms as well as devaluation of monetary assets and
monetary liabilities up to December 31, 2003.
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 of NIS 2.6 million ($ 0.6 million) according to Accounting Principles
Board Opinion No. 25 ("APB 25") (income of NIS 0.11 million ($ 0.03 million)) in
the aggregate in 2003 for imputed compensation expense with respect to the
issuance of employee options to purchase ordinary shares issued under our stock
option plan prior to our August 1999 initial public offering. If in the future,
we issue additional options under our stock option plan below the 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, 2001, 2002 and 2003, including the percentage from revenues
data in the following table, is based upon our statements of operations
contained in our financial statements for those periods, and the related notes,
included in this form 20-F:
-46-
Year ended December 31,
-----------------------
2001 2002 2003
---- ---- ----
Revenues:
Access revenues.................................... 74% 85% 81%
Other revenues..................................... 26 15 19
---- ---- ----
Total revenues.................................. 100 100 100
Cost and expenses:
Cost of revenues................................... 62 54 52
Selling and marketing expenses..................... 27 20 23
General and administrative expenses................ 21 12 12
---- ---- ----
Total cost and expenses......................... 110 86 87
Income (loss) from operations......................... (10) 14 13
Financing income (expenses), net...................... 4 2 (2)
Other expenses, net................................... (1) -- (1)
---- ---- ----
Net income (loss) after financing expenses ........... (7) 16 10
Income tax benefit.................................... -- -- 1
---- ---- ----
Net income (Loss) after income tax benefit............ (7) 16 11
Company's share in net loss of affiliates............. -- (1) (3)
Minority interest in loss of a subsidiary............. 1 -- --
Loss of a subsidiary which the company does not
intend to bear..................................... -- -- --
---- ---- ----
Net income (loss) from continued operations........... (6) 15 8
Net income (loss) from discontinued operations........ (5) -- --
Company's share in loss of a subsidiary from
discontinued operations............................ -- (4) --
---- ---- ----
Net income (loss) .................................... (11) 11 8
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 ($42.1
million) for the year ended December 31, 2002 to NIS 179.6 million ($41 million)
for the year ended December 31, 2003. The decrease is 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 81% of our total
revenues for 2003, decreased by 7% from NIS 156.3 million ($35.7 million) for
2002 to NIS 146 million ($33.3 million) for 2003. The decrease is primarily due
to the sharp competition in the market. We expect that in 2004 our access
revenues will remain at the same level, based on our forecasts regarding the
development of the access services market in Israel.
Other Revenues. Other revenues, which represented 19% of our total
revenues for 2003, increased by 20% from NIS 28 million ($6.4 million) for 2002
to NIS 33.6 million ($7.7 million) for 2003. The increase is 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. We expect
that our other revenues will increase in 2004, based on our market research
findings that the interactive advertising market should increase in Israel in
2004 and due to our activity as an international telephony services provider.
-47-
Cost of Revenues. Cost of revenues decreased by 7% from NIS 99.6
million ($22.7 million) for 2002 to NIS 92.9 million ($21.2 million) for 2003.
The decrease is primarily due to our efforts in reducing costs of international
lines. Cost of revenues as a percentage of revenues decreased from 54% for 2002
to 52% for 2003. We anticipate that our cost of revenues as a percentage of
sales will remain at the same level in 2004, based on our forecasts and
estimates regarding our international telephony activity.
Selling and Marketing Expenses. Selling and marketing expenses
increased by 11% from NIS 37.1 million ($8.5 million) for 2002 to NIS 41.4
million ($9.5 million) for 2003. The increase is primarily 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 2004 due to our preparations for the provision of international
telephony services, which will require intensive marketing activities.
General and Administrative Expenses. General and administrative
expenses are similar to the expenses in the year 2002, NIS 21.2 million ($4.8
million) for 2002 to NIS 21.9 million ($5 million) for 2003. We expect that our
general and administrative expenses will increase in 2004, due to our
preparations for the provision of international telephony services.
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 are attributed
to the exchange rate differentials on the U.S. dollar cash deposits that
remained from our initial public offering.
Other Expenses, Net. IGI 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 holds 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 ($18.6 million). We
cannot evaluate our ability to utilize our tax loss carry forward in the
foreseeable future, except Gold Mind's tax loss carry forward of which we
recorded deferred tax assets of NIS 1.9 million ($0.4 million) since we
anticipate its utilization in the foreseeable future.
Company's Share in Net Loss of Affiliates. In 2003 we recorded NIS 5.3
million ($ 1.2 million) of our share in net loss of affiliates compared to NIS
8.6 million ($ 2 million) in 2002. The decrease is due to a decrease in Gold
Trade losses in 2003 compared to 2002.
Net Income. We reported net income of NIS 14.3 million ($3.3 million),
for the year ended December 31, 2003 as compared to a net income from continuing
operations of NIS 26.4 million ($6 million) for the year ended December 31, 2002
and a net loss from discontinued operations of NIS 6.4 million ($1.5 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
-48-
General and Administrative Expenses. General and administrative
expenses were similar to both years, NIS 21.7 million ($5 million) for 2002 and
NIS 21.8 million ($5 million) for 2003. The differences between Israeli GAAP and
U.S. GAAP relating to our general and administrative expenses are due to the
recording of compensation expenses under U.S. GAAP in accordance to our employee
stock option plan required under APB No. 25.
Company's Share in Net Loss of Affiliates. In 2003, we recorded NIS
4.7 million ($ 1.1 million) of our share in the net loss of affiliates compared
to NIS 11.3 million ($ 2.6 million) in 2003. The decrease is due to our share of
a write-off in 2002 of Gold Trade's client list (previously included as
"goodwill") as required under FAS 142 and EITF D-100 in 2002 (also see note
22A(3) in our financial statements).
Net Income. We reported net income of NIS 15 million ($3.4 million),
for the year ended December 31, 2003 as compared to a net income of NIS 16.7
million ($3.8 million) for the year ended December 31, 2002. The differences
between Israeli GAAP and U.S. GAAP concerning net income are due to the
recording under U.S. GAAP of compensation expenses in accordance with our
employee stock option plan required under APB No. 25 and to the write-off of
Gold Trade's client list (previously included as "goodwill") as required under
FAS 142 and EITF D-100 as mentioned above.
Year ended December 31, 2002 Compared to Year Ended December 31, 2001
Under Israeli GAAP
Revenues. Revenues decreased by 2% from NIS 188.3 million ($43
million) for the year ended December 31, 2001 to NIS 184.3 million ($42.1
million) for the year ended December 31, 2002. The decrease is primarily due to
the deconsolidation of the operations of Gold Trade out of our financial
statements since January 1, 2002.
Access Revenues. Revenues from Internet access services provided to
residential and business subscribers, which represented 85% of our total
revenues for 2002, increased by 12% from NIS 139.9 million ($31.9 million) for
2001 to NIS 156.3 million ($35.7 million) for 2002. The increase is primarily
due to the increase in the exchange rate of the U.S. dollar in comparison to the
NIS.
Other Revenues. Other revenues, which represented 15% of our total
revenues for 2002, decreased by 42% from NIS 48.5 million ($11.1 million) for
2001 to NIS 28 million ($6.4 million) for 2002. The decrease is primarily due to
the deconsolidation of the operations of Gold Trade out of our financial
statements since January 1, 2002.
Cost of Revenues. Cost of revenues decreased by 14% from NIS 116.1
million ($26.5 million) for 2001 to NIS 99.6 million ($22.7 million) for 2002.
The decrease is primarily due to the deconsolidation of the operations of Gold
Trade out of our financial statements since January 1, 2002. Cost of revenues as
a percentage of revenues decreased from 62% for 2001 to 54% for 2002.
Selling and Marketing Expenses. Selling and marketing expenses
decreased by 28% from NIS 51.3 million ($11.7 million) for 2001 to NIS 37.1
million ($8.5 million) for 2002. Selling
-49-
and marketing expenses decreased primarily due to the cessation of our
consolidating the operations of Gold Trade into our financial statements since
January 1, 2002 and due to a decrease in our advertising campaigns and other
promotions.
General and Administrative Expenses. General and administrative
expenses decreased by 45% from NIS 38.9 million ($8.9 million) for 2001 to NIS
21.2 million ($4.8 million) for 2002. The decrease in general and administrative
expenses was primarily due to the cessation of consolidation of the operations
of Gold Trade into our financial statements since January 1, 2002 and due to
efficiency measures we took, which included dispositions of managerial positions
and centralizing the management of the entire group.
Financing Income (Expenses), Net. In 2002 we had net financing income
of NIS 2.2 million ($0.5 million) compared to net financing income of NIS 7.3
million ($1.7 million) for 2001. Our financing income is attributable to
interest earned on the proceeds of our initial public offering plus exchange
rate differentials on these proceeds.
Income Taxes. As of December 31, 2002, we had a tax loss carry forward
of approximately NIS 88 million ($20.1 million). We no longer include Gold
Trade's tax loss carry forward since we ceased to consolidate of the operations
of Gold Trade into our financial statements since January 1, 2002. We cannot
evaluate our ability to utilize our tax loss carry forward in the foreseeable
future.
Company's Share in Net Loss of Affiliates. In 2002 we recorded NIS 8.6
million ($ 2 million) of our share in net loss of affiliates compared to NIS 9.5
million ($ 2.2 million) in 2001. The decrease is due to a decrease in Gold Trade
losses in 2002 compared to 2001.
Net Income (Loss). We reported net income from continuing operations
of NIS 26.4 million ($6 million) for the year ended December 31, 2002 as
compared to a net loss from continued operations of NIS 12.4 million ($2.8
million) for the year ended December 31, 2001. We also reported a net loss from
discontinued operations of NIS 6.4 million ($1.5 million) for the year ended
December 31, 2002 as compared to a net loss from discontinued operations of NIS
8.8 million ($2 million) for the year ended December 31, 2001.
Under US GAAP
Unless otherwise explained, there are no significant differences between Israeli
GAAP and U.S. GAAP
General and Administrative Expenses. General and administrative
expenses decreased by 41.5% from NIS 37.1 million ($8.5 million) in 2001 to NIS
21.7 million ($5 million) in 2002. The decrease in general and administrative
expenses under U.S. GAAP was primarily due to the cessation of our consolidating
the operations of Gold Trade into our financial statements beginning January 1,
2002 and due to efficiency measures we took, which included reductions in
managerial positions and our centralizing the management of the entire group.
Company's Share in Net Loss of Affiliates. In 2001 we consolidated
Gold Trade into our financial statements. On January 1, 2002 we ceased
consolidating Gold Trade operations, therefore, in 2002 under U.S. GAAP we
recorded NIS 11.3 million ($ 2.6 million) of our share in
-50-
net loss of affiliates which included our share of a write-off of Gold Trade's
client list (previously included as "goodwill") as required under FAS 142 and
EITF D-100 in year 2002 (also see note 22A(3) in our financial statements).
Net Income (Loss). We reported net income of NIS 16.7 million ($3.8
million), for the year ended December 31, 2002 as compared to a net loss of NIS
19.5 million ($4.5 million) for the year ended December 31, 2001. The
differences between Israeli GAAP and U.S. GAAP concerning net income (loss) are
due to the recording under U.S. GAAP of compensation expenses in accordance to
our employee stock option plan required under APB No. 25 and to the write-off of
Gold Trade's client list (previously included as "goodwill") as required under
FAS 142 and EITF D-100 mentioned above.
Quarterly Results of Operations
The following table sets forth our results of operations for our last
eight quarters. The data has been derived from our quarterly earnings releases
for those periods which, in the opinion of our management, have been prepared on
substantially the same basis as the audited financial statements included in
this annual report, subject to normal year-end adjustments. 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.
Three Months Ended
---------------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
2002 2002 2002 2002 2003 2003 2003 2003
-------- -------- --------- -------- -------- -------- --------- --------
Adjusted NIS (thousands) as of December 2003
Revenues:
Access revenues ............... 38,260 38,662 38,938 40,475 37,032 36,201 35,876 36,898
Other revenues ................ 6,228 6,823 7,881 7,051 6,873 7,754 8,456 10,552
------ ------ ------ ------ ------ ------ ------ ------
Total revenues ............. 44,488 45,485 46,819 47,526 43,905 43,955 44,332 47,450
Cost and expenses:
Cost of revenues .............. 25,921 23,696 23,846 26,101 24,267 23,468 22,797 22,339
Selling and marketing
expenses ................... 8,846 9,679 9,329 9,271 9,624 9,917 9,843 12,009
General and administrative
expenses ................... 6,827 4,451 5,805 4,126 5,144 5,408 5,478 5,878
------ ------ ------ ------ ------ ------ ------ ------
Total costs and expenses.......... 41,594 37,826 38,980 39,498 39,035 38,793 38,118 40,226
------ ------ ------ ------ ------ ------ ------ ------
Operating income ................. 2,894 7,659 7,839 8,028 4,870 5,162 6,214 7,224
Financing income
(expenses), net ............... 3,513 (1,182) 1,462 (1,642) (1,058) (5,721) 3,695 (151)
Other income (expenses),
net ........................... (19) 18 (29) 27 (4) (12) (2,587) 11
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) after
financing expenses ............ 6,388 6,495 9,272 6,413 3,808 (571) 7,322 7,084
Income tax (expenses) benefit..... -- -- -- -- -- 2,465 (354) (176)
====== ====== ====== ====== ====== ====== ====== ======
Net income after income tax ...... 6,388 6,495 9,272 6,413 3,808 1,894 6,968 6,908
Company's share in net loss of
investees ..................... (356) (2,312) (2,175) (1,968) (692) (1,844) (926) (1,813)
------ ------ ------ ------ ------ ------ ------ ------
-51-
Three Months Ended
---------------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
2002 2002 2002 2002 2003 2003 2003 2003
-------- -------- --------- -------- -------- -------- --------- --------
Adjusted NIS (thousands) as of December 2003
Net income from continued
operations ...................... 6,032 8,807 7,097 4,445 3,116 50 6,042 5,095
Net loss from discontinued
operations ...................... -- -- -- -- -- -- -- --
Company's share in net loss of
investees from discontinued
operations ...................... (835) (5,588) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income ......................... 5,197 3,219 7,097 4,445 3,116 50 6,042 5,095
======= ======= ======= ======= ======= ======= ======= =======
Number of subscribers (at the end
of the period):
Residential subscribers ......... 330,120 329,921 321,708 312,190 307,136 305,314 305,261 312,256
Business subscribers ............ 2,295 3,081 3,232 3,505 3,692 3,869 4,025 4,144
Three Months Ended
---------------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
2002 2002 2002 2002 2003 2003 2003 2003
-------- -------- --------- -------- -------- -------- --------- --------
(As percentage of total revenues)
Revenues: 100% 100% 100% 100% 100% 100% 100% 100%
--- --- --- --- --- --- --- ---
Access revenues................ 86 85 83 85 84 82 81 78
Other revenues................. 14 15 17 15 16 18 19 22
--- --- --- --- --- --- --- ---
Total revenues.............. 100 100 100 100 100 100 100 100
Costs and expenses:
Cost of revenues............... 58 52 51 55 55 53 51 47
Selling and marketing
expenses.................... 20 21 20 20 22 23 22 25
General and administrative
expenses.................... 15 10 12 9 12 12 12 12
--- --- --- --- --- --- --- ---
Total costs and expenses 93 83 83 84 89 88 85 84
Operating income.................. 7 17 17 16 11 12 15 16
Financing income
(expenses), net................ 8 (3) 3 (3) (1) (13) 8 --
Other income (expenses),
net............................ -- -- -- -- -- -- (6) --
--- --- --- --- --- --- --- ---
Net income (loss) after
financing expenses............. 15 14 20 13 10 (1) 17 16
Income tax (expenses) benefit..... -- -- -- -- -- 6 (1) --
=== === === === === === === ===
Net income after income tax....... 15 14 20 13 10 5 16 16
-52-
Company's share in net loss
of investees................... (1) 5 (5) (4) (2) (4) (2) (4)
--- --- --- --- --- --- --- ---
Net income from continued
operations..................... 14 19 15 9 8 1 14 12
Net loss from discontinued
operations..................... -- -- -- -- -- -- -- --
Company's share in net loss
of investees from
discontinued operations........ (2) (12) -- -- -- -- -- --
--- --- --- --- --- --- --- ---
Net income........................ 12 7 15 9 8 1 14 12
=== === === === === === === ===
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
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 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.
In addition, some of our employees in Israel are subject to being
called upon to perform military service in Israel, and their absence may have an
adverse effect upon our operations. Generally, unless exempt, male adult
citizens and permanent residents of Israel under the age of 45 are obligated to
perform up to 36 days of military reserve duty annually and all such residents
are subject to being called to active duty at any time under emergency
circumstances. While we have operated effectively under these requirements since
we began operations, we cannot assess the full impact of these requirements on
our workforce or business if conditions should change, and we cannot predict the
effect on us of any expansion or reduction of these obligations.
To date, no executive officer or key employee was recruited for
military service for any significant time period. Any further expansion of the
hostilities between Israel and the Palestinian Authority into a full-scale
conflict might require more significant military reserve service by some of our
employees, which may have a material adverse effect on our business.
-53-
Economic Conditions
In recent years Israel has been 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 2003 and 2004, affecting all banks, airports and ports. These
strikes have had an adverse effect on the Israeli economy and on business,
including our ability to deliver products to our customers. Following the
passage by the Israeli Parliament of laws to implement the economic measures,
the Israeli trade unions have threatened further strikes or work-stoppages, and
these may have a material adverse effect on the Israeli economy and on us.
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.
Impact of Inflation and Devaluation on Results of Operations, Liabilities and
Assets
The dollar cost of our operations in Israel is influenced by the
extent to which any increase in the rate of inflation in Israel is not offset,
or is offset on a lagging basis, by a devaluation of the NIS in relation to the
dollar. When the rate of inflation in Israel exceeds the rate of devaluation of
the NIS against the dollar, companies experience increases in the dollar cost of
their operations in Israel.
In addition, since most of our services are quoted in NIS, and a
portion of our expenses are incurred in NIS, our results may be adversely
affected by a change in the rate of inflation in Israel
-54-
if the amount of our revenues in NIS decreases and is less than the amount of
our expenses in NIS (or if such decrease is offset on a lagging basis) or if
such change in the rate of inflation is not offset, or is offset on a lagging
basis, by a corresponding devaluation of the NIS against the dollar and other
foreign currencies.
The following table presents information about the rate of inflation
in Israel, the rate of devaluation of the NIS against the dollar, and the rate
of inflation in Israel adjusted for the devaluation:
Israeli inflation
Year ended Israeli inflation NIS devaluation adjusted for
December 31, rate % rate % devaluation %
------------ ----------------- --------------- -----------------
1999 1.3 (0.2) 1.5
2000 0 (2.7) 2.7
2001 1.4 9.3 (7.9)
2002 6.5 7.3 (0.8)
2003 (1.9) (7.6) 5.7
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.
During 2003, foreign currency fluctuations had a material adverse impact on our
results of operations. As a result of the devaluation of the dollar in 2003, we
recorded exchange rate expenses on our U.S. deposits of NIS 6.3 million ($1.4
million).
We have U.S. dollar denominated liabilities (rights of use leasing
obligations for our international lines). In future periods, our dollar assets
(deposits) and our dollar denominated liabilities might commercially serve as an
economic hedge against future exchange rate fluctuations.
According to a new accounting standard, Accounting Standard No. 12, on
"Discontinuance of Adjustment of Financial Statements", commencing January 1,
2004, the adjustment of financial statements will be discontinued. Consequently,
up to December 31, 2003, we prepared adjusted financial statements in accordance
with Opinion No. 36 of the Institute of Certified Public Accountants in Israel.
The adjusted amounts included in the financial statements as at December 31,
2003, will constitute the starting point for the nominal financial report as of
January 1, 2004. We are still evaluating the impact Accounting Standard No. 12
may have on our future consolidated financial statements.
-55-
Effective Corporate Tax Rate
Israeli companies are generally subject to income tax at the rate of
36% of taxable income. For tax purposes, results of operations are measured in
real terms. From 1992 through December 31, 2002 we incurred net operating
losses. As of December 31, 2003, we had consolidated net operating loss carry
forwards of approximately NIS 81.3 million ($ 18.6 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.
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. The following table summarizes our cash flows for the
indicated years:
Year Ended December 31,
----------------------------------
2001 2002 2003
------- ------- -------
(Adjusted NIS as of December 2003)
(in thousand)
Net Income (loss) ................................................ (21,198) 19,958 14,303
Other adjustments for non-cash items.............................. 30,136 30,034 22,957
Net changes in assets and liabilities............................. 749 (2,366) (8,088)
------- ------- -------
Net cash provided by (used in) continued operating activities .... 9,687 47,626 29,172
Net cash provided by (used in) discontinued operating activities.. (11,303) (6,423) --
------- ------- -------
Net cash provided by (used in) operating activities............... (1,616) 41,203 29,172
Net cash provided by (used in) continued investing activities..... 40,719 (12,147) (70,706)
Net cash provided by (used in) discontinued investing activities.. (4,693) (1) --
------- ------- -------
Net cash provided by (used in) investing activities............... 36,026 (12,148) (70,706)
Net cash provided by (used in) continued financing activities..... 5,975 (31,528) 38,280
Net cash provided by (used in) discontinued financing activities.. 6,431 -- --
------- ------- -------
Net cash provided by (used in) financing activities............... 12,406 (31,528) 38,280
Net increase (decrease) in cash and cash equivalents.............. 46,816 (2,473) (3,254)
Net cash provided by operating activities was NIS 29.2 million ($6.7
million) in 2003, net cash provided by operating activities was NIS 41.2 million
($9.4 million) in 2002 and net cash used in operating activities was NIS 1.6
million ($0.4 million) in 2001. The decrease in the net cash provided by
operating activities in 2003 compared to 2002 is due to decrease in
profitability in 2003 compared to 2002. Our positive operating cash flow was
principally due to our continuing efforts to implement our profitability
strategy.
Net cash used in investing activities was NIS 70.7 million ($16.1
million) in 2003 and NIS 12.1 million ($2.8 million) in 2002 and net cash
provided by investing activities was NIS 36 million ($8.2 million) in 2001. Our
investing activities have primarily involved purchases of rights of use for
international communication lines presented at capital lease, network
components, expansion of our network and computer hardware and software costs.
-56-
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 38.3 million ($8.7
million) in 2003, net cash used in financing activities was NIS 31.5 million
($7.2 million) in 2002 and net cash provided by financing activities was NIS
12.4 million ($2.8 million) in 2001. Our financing activities in 2003 included
receipt of long-term loans with respect to the purchase of rights of use in
international communication lines presented as capital leases as described in
note 15I to our financial statements.
Financing Arrangements. We have a credit line equal to the deposits
that we hold with the First International Bank of Israel Ltd. in the Cayman
Islands. As of December 31, 2003, our Cayman deposits totaled NIS 78.9 million
($18 million). The credit line is repayable on demand. As of December 31, 2003,
NIS 4.3 million ($0.98 million) was outstanding under the credit line. Long-term
obligations 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, 2003, there was NIS 27.4 million ($6.3 million)
outstanding under our long-term leasing arrangements.
The following table summarizes our bank debt as of December 31, 2001,
2002 and 2003:
At December 31,
--------------------------------------
2001 2002 2003
------ ------ -----
(Adjusted NIS as of December 31, 2002)
(In thousand)
Short-term:
Credit ................................................... 40,563 8,996 4,279
Current maturities of long-term loans under lease
arrangements .......................................... 1,493 1,461 980
------ ------ -----
Total short-term debt .................................... 42,056 10,457 5,259
------ ------ -----
Long-term:
Long-term loans maturities ............................... 2,801 1,330 273
Loans from interested parties in a consolidated company .. -- -- --
------ ------ -----
Total long-term debt ..................................... 2,801 1,330 273
------ ------ -----
Liabilities attributed to discontinued operations ........... 41,903 -- --
------ ------ -----
Total debt ............................................... 86,760 11,787 5,532
====== ====== =====
Working Capital. Our working capital as of December 31, 2003 was NIS
76.3 million ($17.4 million) as compared to working capital of NIS 80.9 million
($18.5 million) as of December 31, 2002. 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.
Capital Expenditures. In 2003, we invested NIS 11.9 million ($2.7
million) in fixed assets, which included purchases of network components,
expansion of our network and computer
-57-
hardware and software costs. During 2004, we expect to incur capital
expenditures of approximately NIS 14 million ($3.2 million) (not including the
purchase of rights of use for the international lines), $0.6 million of which is
already subject to contractual obligations. We anticipate that these
expenditures will be funded from cash flow from our 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.
In April 2003, Gold Trade issued a rights offering to its shareholders
and in September 2003 we invested approximately $2.4 million, of which $1.5
million was cash and $0.9 million was by means of our waiver of debt owed to us,
raising our ownership interest in Gold Trade to 48.27%.
Long Term Loans under Lease Arrangements. Our lease obligations as of
December 31, 2003 were NIS 27.4 million ($6.3 million), compared to NIS 2.8
million ($0.6 million) for December 31, 2002. Such leasing obligations relate to
68 motor vehicles that are under financial lease arrangements and rights of use
of five international lines under financial lease arrangements as well. In
December 2003, the monthly rental costs for such vehicles amounted to NIS
100,317 ($22,909), monthly costs for the rights of use of international lines
amounted to NIS 1.4 million ($0.3 million)
Based on our current operating plan, we believe that these sources
will be sufficient to fund our operating activities, capital expenditures and
other obligations through at least until June 2005. 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
Recent Accounting Pronouncements Not Yet Fully Adopted
Israeli GAAP:
Accounting Standard No. 12 on "Discontinuance of Adjustment of Financial
Statements".
Pursuant to this standard, commencing January 1, 2004, the adjustment
of financial statements will be discontinued. Consequently, up to December 31,
2003, we 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,
will constitute the starting point for the nominal financial report as of
-58-
January 1, 2004. The extent of the effect of implementation of the Standard
depends on the rate of inflation and the financing sources of the company. We
are evaluating the impact Accounting Standard No. 12 may have on our future
consolidated financial statements.
Accounting Standard No. 13 on "Effect of Changes in Exchange Rate of Foreign
Currency".
The standard discusses the translation of transactions in foreign
currency and the translation of financial statements of foreign operations for
the purpose of including them in the financial statements of the reporting
entity and replaces the instructions in Clarifications 8 and 9 to Opinion No. 36
which will be annulled upon Accounting Standard No. 12 coming into effect. This
standard will apply to financial statements for periods beginning after December
31, 2003. The adoption of Accounting Standard No. 13 will not have an effect on
our consolidated financial statements.
US GAAP:
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
On May 15, 2003, the FASB issued FASB Statement No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement established standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. For certain financial instruments the
statement will be effective for us beginning January 1, 2005. The effective date
has been deferred indefinitely for certain other types of mandatory redeemable
instruments. It is to be implemented by reporting the cumulative effect of a
change in an accounting principle for financial instruments created before the
issuance date of the Statement and still existing at the beginning of the
interim period of adoption. Restatement is not permitted. We do not have any
instruments that are within the scope of this statement.
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
-59-
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.
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.
In June 2000, we established MSN Israel Ltd., a 50.1% owned Israeli
subsidiary, together with Microsoft Corporation (49.9%). MSN Israel launched its
portal in April 2000, offering Hebrew-reading Internet users state-of-the-art
MSN features such as personalized services, "Hotmail," "Messenger," "Passport,"
instant messaging, news, an Internet search engine, business services and
e-commerce services. We agreed to invest in MSN Israel and be responsible for up
to $10 million of its operating losses and capital expenditures. Microsoft and
us will be proportionately responsible for any losses and capital expenditures
exceeding $10 million. As of December 31, 2003, MSN Israel had incurred
consolidated losses of NIS 33.8 million ($7.7 million) and we had recorded NIS
0.05 million ($0.01 million) of capital investment in MSN Israel in compliance
with the agreement.
In January 2000, we, along with Bank Hapoalim, Isracard, Superpharm
and Eurocom Marketing, established Gold Trade to provide e-commerce services. In
accordance with Gold Trade's primary intended activity, Gold Trade launched the
"P1000" mega-mall in June 2000. In May 2000, Gold Trade acquired the business of
Best Deal Ltd., an Israeli company engaged in mail order catalogue sales. Since
the end of 2001, Gold Trade's main activity is the sale of products and services
by means of electronic tenders and outgoing telemarketing. In May 2002 Gold
Trade ceased producing and mailing catalogues, which was a separate line of
business from Gold Trade's other activities, and ceased importing products in
relation to such activity. Since then, Gold Trade has focused on its e-commerce
activity, continuing telemarketing sales to its large customer database, and
operating a call center for certain third parties and for the sale of products
offered by Gold Trade. Since January 1, 2002 we ceased to consolidate the
operations of Gold Trade in our financial statements and account for it on an
equity basis. In April 2003, Gold Trade published a rights offering. In
September 2003 we invested, under the rights offering, $2.4 million, in cash and
by means of waiver of debt, and raised our ownership interest in Gold Trade to
48.27%. As of December 31, 2003, Gold Trade had incurred losses of NIS 62.9
million ($14.4 million). Most of Gold Trade losses were covered by capital
infusions made in two stages during the years 2002 and 2003. In 2002 Gold Trade
converted shareholders' loans of NIS 24.2 million ($5.5 million) into shares and
in September 2003 issued 100,000 shares in a rights offering to Eurocom
Marketing Ltd. and to us for the amount of NIS 21.9 million ($5 million), of
which NIS 17.6 million ($4 million) was paid in 2003. Our share in Gold Trade
losses for the year ended December 31, 2003 was NIS 5.3 million ($1.2 million).
We are evaluating the impact of FIN-46(R) on our consolidated
financial statements as it relates to the possibility of consolidating Gold
Trade in the financial statements for the year ended December 31, 2004 in the
reconciliation note.
-60-
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, 2003 and the effect we expect them to have on our liquidity and
cash flow in future periods.
---------------------------------------------------------------------------------------------------------
Payments due by Period
Contractual Obligations Adjusted NIS (December 2003) (in thousands)
---------------------------------------------------------------------------------------------------------
less than more than
Total 1 year 1-3 Years 3-5 Years 5 years
---------------------------------------------------------------------------------------------------------
Long-term debt obligations .................... -- -- -- -- --
---------------------------------------------------------------------------------------------------------
Capital (finance) lease obligations ........... 155,400 31,314 117,723 6,362 --
---------------------------------------------------------------------------------------------------------
Operating lease obligations ................... 15,979 3,413 7,948 4,618 --
---------------------------------------------------------------------------------------------------------
Purchase obligations .......................... 1,212 1,212 -- -- --
---------------------------------------------------------------------------------------------------------
Other long-term liabilities reflected on the
company's balance sheet under Israeli
GAAP ....................................... -- -- -- -- --
---------------------------------------------------------------------------------------------------------
Total ......................................... 172,590 35,939 125,671 10,980 --
---------------------------------------------------------------------------------------------------------
Not all items were recorded in our balance sheet at December 31, 2003.
See Notes 13 and 15 of our Consolidated Financial Statements.
We believe that we will be able to meet these obligations.
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.
-61-
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 ............... 57 Chairman of the board of directors
Yossef Elovitch .............. 53 Director
Anat Winner .................. 46 Director
Moddi Keret................... 47 Director
Itzhack Ish-Hurvitz .......... 73 Outside director
Tommy Stramer ............... 57 Outside director
Eli Holtzman.................. 56 Chief executive officer and director
Arik Alster................... 33 Vice president technology
Doron Turgeman................ 37 Vice president finance
Eli Batzon.................... 38 Vice president business development and
economics
Naty Drutin................... 39 Vice president sales and marketing
Tali Basson Mizrahi........... 34 Vice President Human resources
Mr. Shaul Elovitch will serve as director until our 2006 general
meeting of shareholders. Mrs. Anat Winner and Mr. Moddi Keret will serve as
directors until our 2005 general annual meeting of shareholders. Messrs. Eli
Holtzman and Yossef Elovitch will serve as directors until our 2004 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 serves as an officer and/or director of various other
companies in the Eurocom group. 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. Mr.
Elovitch 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 CEO and CFO 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 DBS television systems. Previously, and since 1995, Ms. Winner served
as chief financial officer of Eurocom Cellular Communications Ltd., an Israeli
company that is engaged in the importing and marketing of cellular phones as
well as supplying cellular service. Since 1996, Mrs. Winner has also served as
corporate secretary of Eurocom Cellular Communications Ltd. Mrs. Winner holds a
B.A. degree in Accounting and Economics from Haifa University and has been a
certified public accountant for more than 15 years.
-62-
Moddi Keret was appointed to serve as a director in 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 our 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 our director since January 2000. Mr.
Stramer has served as vice president shipping of Zim - The Israeli Navigation
Company since May 1997 and is in charge of all the shipping activity of Zim.
From January 1996 until May 1997, he served as president of Astral Maritime.
From 1988 until January 1996, Mr. Stramer served as general manager of the
European and Mediterranean lines 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 director
and vice-chairman in MSN Israel and as a director in Gold Trade. From April 2000
to January 2004, Mr. Holtzman served as CEO of Gold Trade. From 1988 to 1992,
Mr. Holtzman provided independent marketing consulting services to numerous
enterprises. From 1986 to 1988, Mr. Holtzman served as chief executive officer
of the Israeli franchisee of the American fast food chain, Wendy's. From 1984 to
1986, Mr. Holtzman was the general manager of Arieli Advertising Ltd., a leading
Israeli advertising company. From 1977 to 1984, Mr. Holtzman was the general
manager of SuperPharm, Israel's largest pharmacy chain. Mr. Holtzman holds a
B.Sc. degree in Chemistry and Pharmaceutical from Illinois University.
Arik Alster has served as our vice president of technology since
February 2001. 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 was the manager of our network and
infrastructures from 1998 until 1999. From 1997 to 1998, Mr. Alster was shift
supervisor and network manager. From 1996 to 1997, Mr. Alster was the technical
manager of Sharit Technologies Ltd., a company that specializes in repairing and
restoring damaged electronic equipment. Mr. Alster holds a B.A. degree in
Economics and Management from the College of Management in Tel Aviv.
-63-
Doron Turgeman joined us in April 2001 as financial manager and now
serves as Vice President of Finance. Mr. Turgeman has served as chief financial
officer of our subsidiaries MSN Israel Ltd. and Gold Mind Ltd. since January
2000, of Start Net Ltd., a company operated by MSN Israel, since November 2001
and of Gold Trade since August 2002. As of January 2002, Mr. Turgeman has served
as director of Start Net. From 1999 to 2000, he served as controller of
Bezeq-call Ltd., a subsidiary of Bezeq Ltd. From 1997 to 1999, Mr. Turgeman
served as controller of the Post Office Bank. Mr. Turgeman holds a B.A. degree
in Economics and Accounting from the Hebrew University and he is a certified
accountant.
Eli Batzon has served as our vice president business development and
economics since May 2001. Mr. Batzon also provides consultancy services to IGI
and Gold Mind. Mr. Batzon has served as head of our economic department since
1999. Prior to joining us and since 1993, he served as the budget manager of
Pelephone Communications Ltd., the first cellular communications provider in
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.
Tali Basson Mizrahi has served as our vice president of human
resources and administration since April 2001. Prior to that and since June
1996, Ms. Basson co-founded and served as head of our collections department.
From 1989 to May 1996, Ms. Basson was an officer in the Israeli Army, and
retired as a captain.
Naty Drutin has served as our vice president of sales and marketing
since January 2003. Prior to that and since 1999, Mr. Drutin served as vice
president of marketing of Com-Match Ltd., a subsidiary of Telrad Networks Ltd.
Mr. Drutin was a key member and served as the business sales manager of Barak
ITC Ltd. from 1997 until 1999 and as a senior sales manager of Netcom Systems
since 1994 until 1997. Mr. Drutin holds a B.Sc. degree in computer engineering
from the Technion Israel Institute of Technology in Haifa and an M.B.A. degree
in business administration from Tel-Aviv University.
In January 2003, Mr. Amir Kess, the vice chairman of our board of
directors since 1998, resigned from the board.
B. Compensation
The following table sets forth all compensation we paid with respect
to all of our directors and executive officers as a group for the year ended
December 31, 2003:
Salaries, fees,
commissions and
bonuses/(1)/
---------------
All directors and executive officers as a group
(13 persons)............................................... $ 1.1 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
-64-
expenses reimbursed to officers and other fringe benefits commonly
reimbursed or paid by companies in Israel.
As of December 31, 2003 we accrued $ 350,000 for retirement,
recreation payments and vacation for our directors and executive officers.
During the year ended December 31, 2003 we paid to each of our outside
directors as well as to Mrs. Winner, who was paid as an Outside Director since
she was considered to be an Independent Director under U.S. law, an annual fee
of NIS 31,000 ($ 7,080), and a per meeting attendance fee of NIS 1,631 ($372).
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, 2003, our directors and executive officers as a
group, consisting of thirteen persons, held options to purchase an aggregate of
166,743 ordinary shares, at an average exercise price of $8.4 per share, with
vesting over five years. All such options expire in October 2004. All options
were issued under our Employee Stock Option Plan. See- "Share Ownership-Stock
Option Plan."
In May 2004, our board of directors approved a bonus plan for our
senior management in 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 operation will be distributed to our senior management.
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, they may only act in an emergency or
to fill in vacancies on the board of directors up to six
-65-
directors or in order to call a general meeting of shareholders for the purpose
of electing directors to fill vacancies, so that following such meeting there
will be at least six directors in office.
Messrs. Yossef Elovitch and Eli Holtzman, are Class B directors and
will hold office for one year until the Annual General Meeting of Shareholders
to be held in 2004, 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.
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 we will not be able to renewed their term.
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.
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 are present at the meeting. 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.
-66-
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 Companies Law and is otherwise prohibited from receiving any
other compensation, directly or indirectly, in connection with such service.
In addition, the Nasdaq Stock Market currently requires us to have
three independent directors on our board of directors and to establish an audit
committee. Messrs. Ish-Hurvitz and Stramer qualify both as independent directors
under the Nasdaq Stock Market requirements and as outside directors under the
Israeli Companies Law requirements, and Ms. Anat Winner qualifies as an
independent director under the Nasdaq Stock Market requirements.
Approval of Related Party Transactions Under Israeli Law
The Companies Law codifies the fiduciary duties that "office holders,"
including directors and executive officers, owe to a company. 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.
The duty of loyalty requires that an office holder act in good faith and for the
benefit of the company, and 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 listed
as a director or executive officer in the table under " -- Directors and Senior
Management" above is an office holder. Under the Companies Law, all arrangements
as to compensation of office holders who are not directors require approval of
our board of directors, and the compensation of office holders who are directors
must be approved by our audit committee, board of directors and shareholders.
The 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 possession, 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 the
case of extraordinary transactions). An office holder 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
-67-
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 Companies Law also provides that an extraordinary transaction with
a controlling shareholder 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 and are present at the meeting. 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 Companies Law and amended in
January 2002, certain transactions between a company and its controlling
shareholder(s) do not require shareholder approval.
In addition, pursuant to the recent amendment to these regulations,
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 solely for the benefit of the company. The employment
and compensation arrangements of a director or office holder do not require the
approval of the shareholders provided that certain criteria are met.
The above exemptions will not apply if one or more shareholders,
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.
The Companies Law provides that an acquisition of shares of 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% shareholder of the company. This
rule does not apply if there is already another 25% shareholder of the company.
Similarly, the Companies Law provides that an acquisition of shares in a public
company must be made by means of a special tender offer if as a result of the
acquisition the purchaser would become a 45% shareholder of the company, unless
there is a 50% shareholder of the company. Regulations under the Companies Law
provide that the Companies Law's tender offer rules do not apply to a company
whose shares are publicly traded outside of Israel, if pursuant to the
applicable foreign securities laws and stock exchange rules there is a
restriction on the acquisition of any level of control of the company, or if the
acquisition of any level of control of the company requires the purchaser to
make a tender offer to the public shareholders.
-68-
Indemnification of Directors and Officers
The 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 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. Our articles
of association provide that, subject to any restrictions imposed by the
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, in respect of:
. a breach of his duty of care to us or to another person;
. 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
. a financial liability imposed upon him in favor of another
person.
In addition, we may indemnify an office holder in respect of an act performed in
his capacity as an office holder, 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; and
. reasonable litigation expenses, including attorneys' fees, expended by
such office holder or charged to him by a court, in proceedings we
institute 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 culpable mental state.
These provisions are specifically limited in their scope by the
Companies Law, which provides that a company may not indemnify an office holder,
nor enter into an insurance contract, which would provide coverage for any
monetary liability incurred as a result of certain improper actions.
Pursuant to the Companies Law, indemnification of, and procurement of
insurance coverage for our office holders must be approved by our audit
committee and our board of directors and, , in specified circumstances, by our
shareholders.
Our articles of association provide that subject to any restrictions
imposed by the Companies Law, we may procure insurance for, or indemnify any
officer holder, to the fullest extent permitted, provided that the procurement
of any such insurance or provision of any such indemnification, as the case may
be, is approved by the audit committee and otherwise as required by law.
We currently maintain a directors and officers liability insurance
policy providing coverage of not more than $5,000,000 for any one case and in
the aggregate. Our current directors and officers liability insurance policy
expires on July 31, 2004 and we are currently negotiating coverage under a new
policy.
-69-
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.
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 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, was 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 consist of three board members who satisfy the
"independence" requirements of the Securities Exchange Commission, Nasdaq and
Israeli Law for audit committee members. Our audit committee is currently
composed of Ms. Winner and Messrs. Ish-Hurvitz and Stramer each of whom
satisfies these requirements. The audit committee meets at least once each
quarter.
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.
-70-
Internal Audit
The Israeli Companies Law also requires the board of directors of a
public company to appoint an internal auditor proposed 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.
D. Employees
At December 31, 2003, we and our two wholly owned subsidiaries
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
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.
At December 31, 2001, we and our two wholly owned subsidiaries
employed 215 full-time employees and 333 part-time employees, all of which were
based in Israel. Of these 548 employees, 161 employees were employed in
marketing and sales, 53 employees were employed in finance, operations, human
resources and administration, 179 employees were employed in technical support
and training, 102 employees were employed in customer service and 53 employees
were employed in technical administration.
In addition, at December 31, 2003 our 50.1% owned subsidiary MSN
Israel Ltd. employed 40 full-time employees. Of these 40 employees, 34 employees
were employed in marketing, sales and business development, 3 employees were
employed in finance, operations, human resources and administration and 3
employees were employed in the technical division.
In addition, at December 31, 2002 our 50.1% owned subsidiary MSN
Israel Ltd. employed 32 full-time employees. Of these 32 employees, 28 employees
were employed in marketing, sales and business development, 2 employees were
employed in finance, operations, human resources and administration and 2
employees were employed in the technical division.
In addition, at December 31, 2001 our 50.1% owned subsidiary MSN
Israel Ltd. employed 20 full-time employees. Of these 20 employees, 18 employees
were employed in marketing, sales and business development, 1 employee was
employed in finance, and administration and 1 employee was employed in the
technical division.
-71-
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.
E. Share Ownership
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information as of June 1, 2004
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)(4)................. 286,336 1.5%
Tali Basson Mizrahi (4)(6).......... 19,100 *
Eli Batzon (4)(6)................... 19,100 *
Tommy Stramer (4)................... 15,000 *
Shaul Elovitch (4)(5)............... -- --
-72-
Yossef Elovitch (4)(5) ............. -- --
Itzhack Ish-Hurvitz (4)............. -- --
Moddi Keret (4)..................... -- --
Anat Winner (4)..................... -- --
Doron Turgeman (4).................. -- --
Arik Alster (4)..................... -- --
Naty Drutin(4)...................... -- --
----------
* Less than 1%
(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 1, 2004.
(3) Includes 114,218 ordinary shares issuable upon the exercise of currently
exercisable options granted under our stock option plan and options to be
exercisable within 60 days, at an average exercise price of $8.40 per
share. Such options expire in October 2004.
(4) The business addresses of Ms. Basson Mizrahi and of Messrs. S. Elovitch, Y.
Elovitch, Holtzman, Ish-Hurvitz, Keret, Stramer, Alster, Turgeman, Batzon
and Drutin is c/o Internet Gold - Golden Lines Ltd., 1 Alexander Yanai
Street, Petach Tikva, Israel.
(5) Messrs. Shaul Elovitch, chairman of our board of directors, and his
brother, Yossef Elovitch, a director of our company, own 100% of Eurocom
Holdings Ltd., an Israeli holding company that holds a controlling interest
50.3% in Eurocom Communications Ltd. (Mr. Shaul Elovitch holds an
additional 0.7% interest in Eurocom Communications). Eurocom
Communications, an Israeli company, owns a 100% interest in Euronet
Communication Ltd., an Israeli company that directly owns 12,683,135 of our
ordinary shares. Due to their ownership of Eurocom Holdings and their
positions as directors of Eurocom Holdings and Eurocom Communications, they
may be deemed to beneficially own the ordinary shares directly held by
Euronet Communications. Messrs. Shaul Elovitch and Yossef Elovitch disclaim
beneficial ownership of such ordinary shares.
(6) Such 19,100 ordinary shares are issuable upon the exercise of currently
exercisable options granted under our stock option plan and options to be
exercisable within 60 days, at an average exercise price of $8.40 per
share. Such options expire in October 2004.
-73-
Stock Option Plan
We established a stock option plan 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, options for the purchase of an aggregate of
166,743 ordinary shares were held by 4 employees (of which options for the
purchase of 152,418 ordinary shares were held by directors and officers) under
our Section 102 plan, at an average exercise price of $8.40 per share. The
exercise price for all of the options was the fair market value on the date of
grant. Such options vest ratably over a five-year period beginning July 12,
1999. Options for the purchase of 1,346,207 ordinary shares are available for
future grant under the Section 102 plan. The options terminate 63 months
following the date of grant. None of the options have been exercised.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth certain information as of June 1, 2004,
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 68.8%
-74-
(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.
(2) The percentages shown are based on 18,431,500 ordinary shares outstanding
as of June 1, 2004
(3) Such ordinary shares are held directly by Euronet Communications Ltd., an
Israeli company that is 100% owned by Eurocom Communications Ltd. Eurocom
Communications is a 50.3% owned Israeli subsidiary of Eurocom Holdings Ltd.
(Mr. Shaul Elovitch holds an additional 0.7% interest in Eurocom
Communications) an Israeli holding company. Messrs. Shaul Elovitch,
chairman of our board of directors, and his brother, Yossef Elovitch, a
director of our company, own 100% of Eurocom Holdings. Due to their
ownership of Eurocom Holdings and their positions as directors of Eurocom
Holdings and Eurocom Communications, they may be deemed to beneficially own
the ordinary shares directly held by Euronet Communications. Messrs. Shaul
Elovitch and Yossef Elovitch disclaim beneficial ownership of such ordinary
shares. Accordingly, Eurocom Holdings may be deemed to be the beneficial
owner of the 12,683,135 ordinary shares held directly by Euronet
Communications. The address of Eurocom Holdings is 2 Dov Friedman Street,
Ramat Gan, Israel.
Eurocom Holdings Ltd., our ultimate parent company, does not have different
voting rights attached to its ordinary shares. As of June 3, 2004, there
were 50 holders of record of our ordinary shares. Based on a review of the
information provided to us by our transfer agent, 47 record holders holding
approximately 30.25% of our ordinary shares had registered addresses in the
United States. On June 1, 2004 we had approximately 2,894 beneficial
holders of our ordinary shares. We do not believe this number has
materially changed.
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 Ltd. 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.
-75-
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.
Communication Services Agreements
From August 2002 to August 2003, we leased from IP Planet Network
Ltd., an affiliate of Eurocom Communications, transmission services and an IP
port of a 155MB/sec. from third parties via IP Planet. Under this agreement we
paid IP Planet a fee of NIS 3,895,505 in 2003.
Gold Trade - Affiliated E-Commerce Company
In September 1999, we established Gold Trade, an e-commerce affiliated
company, in which we own a 48.27% interest, with a subsidiary of Eurocom
Holdings, who owns 48.36% and three additional minority shareholders.
Other Arrangements
We currently lease 250 square meters of office space in Ramat-Gan,
Israel from Eurocom Holdings. In 2003 we paid Eurocom Holdings NIS 155,000 ($
35,000) for such facilities as well as an additional NIS 85,000 ($19,400) for
related services. We also paid NIS 72,000 ($16,000) to Eurocom Communications
for the lease of our communication facilities in Ramat-Gan for the year 2003.
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 2003, we purchased NIS 965,400 ($220,460) of advertising time from
Radius Broadcasting Ltd., at market terms and prices. Radius Broadcasting is a
subsidiary of Media Holdings EU Ltd., which is 50.3% held by Eurocom Holdings
Ltd. Mr. Shaul Elovitch holds an additional 0.7% interest in Eurocom
Communications and 49% by Arison Holdings.
In 2003, we purchased of NIS 153,925 ($35,150) peripheral equipment
from Eurocom Digital Systems Ltd. (formerly Telbit Ltd.) at market terms and
prices.
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
-76-
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, and the exhibits listed in Item 19 hereof and incorporated herein by
this reference.
Legal Proceedings
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 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.
B. Significant Changes
Since the date of the annual consolidated financial statements
included in this annual report, no significant change has occurred in our
financial position.
-77-
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Stock Information
The following table sets forth, for each of the periods indicated, the
range of high and low closing prices of our ordinary shares on 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 1.20
2002
----
First Quarter.................................. $1.800 $0.960
Second Quarter................................. 1.250 1.010
Third Quarter.................................. 1.090 0.950
Fourth Quarter................................. 1.290 0.870
2003
----
First Quarter.................................. $4.060 $1.190
Second Quarter................................. 6.050 2.840
Third Quarter.................................. 6.960 3.850
Fourth Quarter................................. 4.480 3.340
2004
----
First Quarter.................................. $5.230 $3.780
2003
----
December....................................... 3.920 3.340
2004
----
January........................................ $4.750 $3.780
February....................................... 4.950 4.059
March.......................................... 5.230 4.070
April.......................................... 6.060 4.900
May............................................ 5.050 4.580
B. Plan of Distribution
Not applicable.
-78-
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.
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.
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
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 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 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
-79-
without the approval of our audit committee and our shareholders at a general
meeting. See "Item 6A. 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.
Under our articles of association, retirement of directors from office
is not subject to any age limitation 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 8A. 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.
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, 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) or articles of
association, approving any change in capitalization, winding-up, authorization
of a class of shares
-80-
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 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 above-mentioned
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. See "Item
6A. Directors, Senior Management and Employees - Election of Directors." Eurocom
Holdings Ltd., which beneficially owns 71.3% of our ordinary shares, 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 7A. 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.
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
6A. "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
-81-
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 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 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 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."
Disclosure of Shareholders Ownership
The Israeli Securities Law and regulations promulgated thereunder do
not require a company whose shares are publicly traded solely on a stock
exchange outside of Israel, as in the case of our company, to disclose its share
ownership.
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 ($ 0.48 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 I.T.C. (1995) Ltd, one of Israel's
three long distance carriers, to purchase rights of use for 14 international
fiber optic lines (presented at 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 the 14 international lines in the next
-82-
three years. 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.
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 law and regulations do not impose any material foreign
exchange restrictions on non-Israeli holders of our ordinary shares. 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
General Tax Structure
In general Israeli resident companies are subject to "Company Tax" at
the rate of 36% of taxable income, with the exception of dividends received from
another Israeli company which 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 50%. 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, as amended, or the U.S.-Israel Tax Treaty.
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
-83-
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. Dealers in securities are subject to the regular tax rules applicable to
business income in Israel.
Tax Reform in Israel
On January 1, 2003, the Law for Amendment of the Income Tax Ordinance (Amendment
No. 132), 5762-2002, as amended, known as the tax reform, came into effect.
The tax reform, aimed at broadening the categories of taxable income
and reducing the tax rates imposed on employment income, introduced the
following, among other things:
. reduction of the tax rate levied on capital gains (other than
gains deriving from the sale of listed securities) derived after
January 1, 2003, to a general rate of 25% for both individuals
and corporations. Regarding assets acquired prior to January 1,
2003, the reduced tax rate will apply to a proportionate part of
the gain, in accordance with the holding periods of the asset,
before or after January 1, 2003, on a linear basis;
. imposition of Israeli tax on all income of Israeli residents,
individuals and corporations, regardless of the territorial
source of income, including income derived from passive sources
such as interest, dividends and royalties;
. introduction of controlled foreign corporation (CFC) rules into
the Israeli tax structure. Generally, under such rules, an
Israeli resident who holds, directly or indirectly, 10% or more
of the rights in a foreign corporation whose shares are not
publicly traded (or which offered less than 30% of its shares to
the public), in which more than 50% of the rights are held
directly or indirectly by Israeli residents, and a majority of
whose income in a tax year is considered passive income, will be
liable for tax on the portion
-84-
of such income attributed to his holdings in such corporation, as
if such income were distributed to him as a dividend; and
. imposition of capital gains tax on capital gains realized by
individuals as of January 1, 2003, from the sale of shares of
publicly traded companies (such gain was previously exempt from
capital gains tax in Israel). For information with respect to the
applicability of Israeli capital gains taxes on the sale of
ordinary shares, see "Capital Gains Tax on Sales of Our Ordinary
Shares" below;
. introduction of a new regime for the taxation of shares and
options issued to employees and officers (including directors);
and
. introduction of tax at rate of 25% on dividends paid by one
Israeli company to another (which are generally not subject to
tax), if the source of such dividend income is derived outside of
Israel.
Taxation of Shareholders
Capital Gains Tax on Sales of Our Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of
capital assets located in Israel, including shares in Israeli companies, by both
residents and non-residents of Israel, unless a specific exemption is available
or unless a tax treaty between Israel and the shareholder's country of residence
provides otherwise. The law distinguishes between real gain and inflationary
surplus. The inflationary surplus is equal to the increase in the purchase price
of the relevant asset attributable solely to the increase in the Israeli
consumer price index between the date of purchase and the date of sale. The real
gain is the excess of the total capital gain over the inflationary surplus.
Prior to the tax reform, sales of our ordinary shares by individuals
were generally exempt from Israeli capital gains tax so long as (i) our ordinary
shares were quoted on Nasdaq or listed on a stock exchange in a country
appearing on a list approved by the Controller of Foreign Currency and (ii) we
qualified as an Industrial Company.
Pursuant to the tax reform, Payers of Israeli tax who are not subject
to the Inflationary Adjustments Law or are not entitled to maintain books in
foreign currency, will be subject to 15% tax on the real capital gain in the
event the shares were purchased after December 31, 2002, and in the event the
shares were purchased before that date the sale will be subject to a blended tax
in which the portion of the gain accrued until December 31, 2002 will be exempt
from Israeli capital gains tax and the portion of the real gain accrued from
January 1, 2003 until the date of sale will be subject to 15% tax. The taxable
real gain will be based on the difference between the adjusted average value of
the shares during the last three trading days before January 1, 2003 (or the
adjusted original cost if it is higher than the adjusted average value) and the
value of the shares at the date of sale. In the event the above calculation
create a loss; such loss can only be offset against capital gain from other
traded securities according to the provisions of the Israeli law. The amount of
the loss is limited to the difference between the adjusted average value and the
value of the shares at the date of sale. However, such payers of Israeli tax
shall be subject to 25% tax on the real capital gain in the case that they
deduct interest expenses and linkage differences.
-85-
Non-Israeli residents are exempt from Israeli capital gains tax on any gains
derived from the sale of shares publicly traded on the TASE, and are exempt from
Israeli capital gains tax on any gains derived from the sale of shares of
Israeli companies publicly traded on a recognized stock exchange outside of
Israel, provided such shareholders did not acquire their shares prior to an
initial public offering. However, non-Israeli corporations will not be entitled
to such exemption if an Israeli resident (i) has a controlling interest of 25%
or more in such non-Israeli corporation, or (ii) is the beneficiary or is
entitled to 25% or more of the revenues or profits of such non-Israeli
corporation, whether directly or indirectly.
In any event, the provisions of the tax reform will not affect the
exemption from capital gains tax for gains accrued before January 1, 2003, as
described above.
In some instances where our shareholders may be liable to Israeli tax
on the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at the source.
U.S.-Israel Tax Treaty
Pursuant to the Convention between the Government of the United States
of America and the Government of Israel with Respect to Taxes on Income, as
amended (the "the U.S.- Israel Tax Treaty"), the sale, exchange or disposition
of ordinary shares by a person who (i) holds the ordinary shares as a capital
asset, (ii) qualifies as a resident of the United States within the meaning of
the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded
to such resident by the U.S.-Israel Tax Treaty generally will not be subject to
Israeli capital gains tax unless either such resident holds, directly or
indirectly, shares representing 10% or more of the voting power of a company
during any part of the 12-month period preceding such sale, exchange or
disposition, subject to certain conditions, or the capital gains from such sale,
exchange or disposition can be allocated to a permanent establishment in Israel.
In the event that the exemption shall not be available, the sale, exchange or
disposition of ordinary shares would be subject to such Israeli capital gains
tax to the extent applicable; however, under the U.S.-Israel Tax Treaty, such
residents would be permitted to claim a credit for such taxes against U.S.
federal income tax imposed with respect to such sale, exchange or disposition,
subject to the limitations in U.S. laws applicable to foreign tax credits. The
U.S.-Israel Tax Treaty does not relate to state or local taxes.
Taxation of Non-Residents
Non-residents of Israel are subject to income tax on income accrued or
derived from sources in Israel. Such sources of income include passive income
such as dividends, royalties and interest, as well as non-passive income from
services rendered in Israel. On distributions of dividends other than bonus
shares or stock dividends, income tax at the rate of 25% is withheld at source,
unless a different rate is provided in a treaty between Israel and the
shareholder's country of residence. Under the U.S.-Israel Tax Treaty, the
maximum tax on dividends paid to a holder of ordinary shares who is a U.S.
resident will be 25%; provided, however, that under the Investment Law,
dividends generated by an Approved Enterprise are taxed at the rate of 15%.
Furthermore, dividends not generated by an Approved Enterprise paid to a U.S.
company holding 10% or more
-86-
of our ordinary shares in the 12 month period preceding the distribution of such
dividends, are taxed at a rate of 12.5%.
Under an amendment to the Inflationary Adjustments Law, non-Israeli
corporations may be subject to Israeli taxes on the sale of securities of an
Israeli company, subject to the provisions of any applicable taxation treaty or
unless a specific exemption is available.
For information with respect to the applicability of Israeli capital
gains taxes on the sale of ordinary shares by United States residents, see
"Capital Gains Tax on Sales of Our Ordinary Shares" above.
Foreign Exchange Regulations
Dividends (if any) paid to the holders of our ordinary shares, any
amounts payable upon our dissolution, liquidation or winding up, and as the
proceeds of any sale of our ordinary shares in Israel may be paid in non-Israeli
currency or, if paid in Israeli currency, may be converted into freely
repatriable dollars at the rate of exchange prevailing at the time of
conversion.
Capital Gains and Dividends
Real gains on sales of the ordinary shares are generally taxable in
Israel. Nevertheless, taxation of capital gains made by non-Israeli residents
may be affected by tax treaties between Israel and their country of tax
residence.
For example, pursuant to the U.S.-Israel Tax Treaty, the sale,
exchange or disposition of ordinary shares by a person who qualifies as a
resident of the United States within the meaning of the U.S.-Israel Tax Treaty
and who is entitled to claim the benefits afforded to such resident by the
U.S.-Israel Tax Treaty -- a Treaty U.S. Resident -- generally will not be
subject to the Israeli capital gains tax unless such Treaty U.S. Resident holds,
directly or indirectly, shares representing 10% or more of the voting power of
our company during any part of the 12-month period preceding the sale, exchange
or disposition.
A sale, exchange or disposition of ordinary shares by a Treaty U.S.
Resident who holds, directly or indirectly, shares representing 10% or more of
the voting power of our company at any time during the preceding 12-month period
would be subject to such Israeli tax, to the extent applicable; however, under
the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to
claim a credit for these taxes against the U.S. federal income tax imposed with
respect to the sale, exchange or disposition, subject to the limitations in U.S.
laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not
relate to U.S. state or local taxes.
Income accrued or derived from the ordinary shares, such as dividends,
are subject to Israeli taxation. On distributions to individuals or non-Israeli
companies of dividends other than bonus shares (stock dividends), income tax at
the rate of 25% is withheld. Nevertheless, as in the case of Israel-source
capital gains, taxation of dividends and other Israeli-source income received by
residents of other countries may be affected by tax treaties between Israel and
their country of tax residence. For example, under the U.S.-Israel Tax Treaty,
the maximum tax on dividends paid to a holder of ordinary shares who is a Treaty
U.S. Resident will be 25%, but may be
-87-
reduced to 12.5% for dividends, if the non-resident is a U.S. corporation which
holds 10% or more of our voting power.
United States Federal Income Tax Consequences
The following is a summary of certain material U.S. federal income tax
consequences that apply to U.S. Holders who hold ordinary shares as capital
assets. This summary is based on the United States Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations promulgated thereunder,
judicial and administrative interpretations thereof, and the U.S.-Israel Tax
Treaty, all as in effect on the date hereof and all of which are subject to
change either prospectively or retroactively. This summary does not address all
tax considerations that may be relevant with respect to an investment in
ordinary shares. This summary does not discuss all the tax consequences that may
be relevant to a U.S. Holder in light of such holder's particular circumstances
or to U.S. Holders subject to special rules, including persons that are non-U.S.
Holders, broker-dealers, financial institutions, certain insurance companies,
investors liable for alternative minimum tax, tax-exempt organizations,
regulated investment companies, non-resident aliens of the U.S. or taxpayers
whose functional currency is not the U.S. dollar, persons who hold the ordinary
shares through partnerships or other pass-through entities, persons who acquired
their ordinary shares through the exercise or cancellation of employee stock
options or otherwise as compensation for services, investors that actually or
constructively own 10 percent or more of our voting shares, and investors
holding ordinary shares as part of a straddle or appreciated financial position
or as part of a hedging or conversion transaction.
This summary does not address the effect of any U.S. federal taxation
other than U.S. federal income taxation. In addition, this summary does not
include any discussion of state, local or foreign taxation.
You are urged to consult your tax advisors regarding the foreign and
United States federal, state and local tax considerations of an investment in
ordinary shares.
For purposes of this summary, the term "U.S. Holder" means an
individual who is a citizen or, for U.S. federal income tax purposes, a resident
of the United States, a corporation or other entity taxable as a corporation
created or organized in or under the laws of the United States or any political
subdivision thereof, an estate whose income is subject to U.S. federal income
tax regardless of its source, or a trust that (a) is subject to the primary
supervision of a court within the United States and the control of one or more
U.S. persons or (b) has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a U.S. person.
Taxation of Dividends
The gross amount of any distributions received with respect to
ordinary shares, including the amount of any Israeli taxes withheld therefrom,
will constitute dividends for U.S. federal income tax purposes, to the extent of
our current and accumulated earnings and profits as determined for U.S. federal
income tax principles. You will be required to include this amount of dividends
in gross income as ordinary income (see "-New Tax Law Applicable to Dividends
and Long-Term Capital Gain," below). Distributions in excess of our earnings and
profits will be treated as a non-taxable return of capital to the extent of your
tax basis in the ordinary shares and any amount in excess of your tax basis,
will be treated as gain from the sale of ordinary shares.
-88-
See "-Disposition of Ordinary Shares" below for the discussion on the taxation
of capital gains. Dividends will not qualify for the dividends-received
deduction generally available to corporations under Section 243 of the Code.
Dividends that we pay in NIS, including the amount of any Israeli
taxes withheld therefrom, will be included in your income in a U.S. dollar
amount calculated by reference to the exchange rate in effect on the day such
dividends are received. A U.S. Holder who receives payment in NIS and converts
NIS into U.S. dollars at an exchange rate other than the rate in effect on such
day may have a foreign currency exchange gain or loss that would be treated as
ordinary income or loss. U.S. Holders should consult their own tax advisors
concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
Any Israeli withholding tax imposed on such dividends will be a
foreign income tax eligible for credit against a U.S. Holder's U.S. federal
income tax liability, subject to certain limitations set out in the Code (or,
alternatively, for deduction against income in determining such tax liability).
The limitations set out in the Code include computational rules under which
foreign tax credits allowable with respect to specific classes of income cannot
exceed the U.S. federal income taxes otherwise payable with respect to each such
class of income (see "-New Tax Law Applicable to Dividends and Long-Term Capital
Gain," below). Dividends generally will be treated as foreign-source passive
income or financial services income for United States foreign tax credit
purposes. Foreign income taxes exceeding the credit limitation for the year of
payment or accrual may be carried back for two taxable years and forward for
five taxable years in order to reduce U.S. federal income taxes, subject to the
credit limitation applicable in each of such years. Other restrictions on the
foreign tax credit include a prohibition on the use of the credit to reduce
liability for the U.S. individual and corporation alternative minimum taxes by
more than 90%. A U.S. Holder will be denied a foreign tax credit with respect to
Israeli income tax withheld from dividends received on the ordinary shares to
the extent such U.S. Holder has not held the ordinary shares for at least 16
days of the 30-day period beginning on the date which is 15 days before the
ex-dividend date or to the extent such U.S. Holder is under an obligation to
make related payments with respect to substantially similar or related property.
Any days during which a U.S. Holder has substantially diminished its risk of
loss on the ordinary shares are not counted toward meeting the 16-day holding
period required by the statute. The rules relating to the determination of the
foreign tax credit are complex, and you should consult with your personal tax
advisors to determine whether and to what extent you would be entitled to this
credit.
-89-
Disposition of Ordinary Shares
If you sell or otherwise dispose of ordinary shares, you will
recognize gain or loss for U.S. federal income tax purposes in an amount equal
to the difference between the amount realized on the sale or other disposition
and your adjusted tax basis in the ordinary shares. Subject to the discussion
below under the heading "Passive Foreign Investment Companies," such gain or
loss generally will be capital gain or loss and will be long-term capital gain
or loss if you have held the ordinary shares for more than one year at the time
of the sale or other disposition. In general, any gain that you recognize on the
sale or other disposition of ordinary shares will be U.S.-source for purposes of
the foreign tax credit limitation; losses, will generally be allocated against
U.S. source income. Deduction of capital losses is subject to certain
limitations under the Code.
In the case of a cash basis U.S. Holder who receives NIS in connection
with the sale or disposition of ordinary shares, the amount realized will be
based on the U.S. dollar value of the NIS received with respect to the ordinary
shares as determined on the settlement date of such exchange. A U.S. Holder who
receives payment in NIS and converts NIS into United States dollars at a
conversion rate other than the rate in effect on the settlement date may have a
foreign currency exchange gain or loss that would be treated as ordinary income
or loss.
An accrual basis U.S. Holder may elect the same treatment required of
cash basis taxpayers with respect to a sale or disposition of ordinary shares,
provided that the election is applied consistently from year to year. Such
election may not be changed without the consent of the Internal Revenue Service
(the "IRS"). In the event that an accrual basis U.S. Holder does not elect to be
treated as a cash basis taxpayer (pursuant to the Treasury regulations
applicable to foreign currency transactions), such U.S. Holder may have a
foreign currency gain or loss for U.S. federal income tax purposes because of
differences between the U.S. dollar value of the currency received prevailing on
the trade date and the settlement date. Any such currency gain or loss would be
treated as ordinary income or loss and would be in addition to gain or loss, if
any, recognized by such U.S. Holder on the sale or disposition of such ordinary
shares.
New Tax Law Applicable to Dividends and Long-Term Capital Gain
Under recently enacted amendments to the Code, dividends received by
noncorporate U.S. Holders from certain foreign corporations, and long-term
capital gain realized by noncorporate U.S. Holders, generally are subject to
U.S. federal income tax at a reduced maximum tax rate of 15 percent through
December 31, 2008. Dividends received with respect to ordinary shares should
qualify for the 15 percent rate. The rate reduction does not apply to dividends
received from PFICs, see discussion below, or in respect of certain short-term
or hedged positions in common stock or in certain other situations. The
legislation enacting the reduced tax rate contains special rules for computing
the foreign tax credit limitation of a taxpayer who receives dividends subject
to the rate reduction. U.S. Holders of ordinary shares should consult their own
tax advisors regarding the implications of these rules in light of their
particular circumstances.
Passive Foreign Investment Companies
For U.S. federal income tax purposes, we will be considered a passive
foreign investment company ("PFIC") for any taxable year in which either (i) 75%
or more of our gross income is passive income, or (ii) at least 50% of the
average value of all of our assets for the taxable year
-90-
produce or are held for the production of passive income. For this purpose,
passive income includes dividends, interest, royalties, rents, annuities and the
excess of gains over losses from the disposition of assets which produce passive
income. If we were determined to be a PFIC for U.S. federal income tax purposes,
highly complex rules would apply to U.S. Holders owning ordinary shares.
Accordingly, you are urged to consult your tax advisors regarding the
application of such rules.
Based on our current and projected income, assets and activities, we
believe that we are not currently a PFIC nor do we expect to become a PFIC in
the foreseeable future. However, because the determination of whether we are a
PFIC is based upon the composition of our income and assets from time to time,
there can be no assurances that we will not become a PFIC for any future taxable
year.
If we are treated as a PFIC for any taxable year, then, unless you
elect either to treat your investment in ordinary shares as an investment in a
"qualified electing fund" (a "QEF election") or to "mark-to-market" your
ordinary shares, as described below, dividends would not qualify for the reduced
maximum tax rate, discussed above, and
. you would be required to allocate income recognized upon receiving
certain dividends or gain recognized upon the disposition of ordinary
shares ratably over the holding period for such ordinary shares,
. the amount allocated to each year during which we are considered a
PFIC other than the year of the dividend payment or disposition would
be subject to tax at the highest individual or corporate tax rate, as
the case may be, in effect for that year and an interest charge would
be imposed with respect to the resulting tax liability allocated to
each such year,
. gain recognized upon the disposition of ordinary shares would be
taxable as ordinary income, and
. you would be required to make an annual return on IRS Form 8621
regarding distributions received with respect to ordinary shares and
any gain realized on your ordinary shares.
If you make either a timely QEF election or a timely mark-to-market
election in respect of your ordinary shares, you would not be subject to the
rules described above. If you make a timely QEF election, you would be required
to include in your income for each taxable year your pro rata share of our
ordinary earnings as ordinary income and your pro rata share of our net capital
gain as long-term capital gain, whether or not such amounts are actually
distributed to you. You would not be eligible to make a QEF election unless we
comply with certain applicable information reporting requirements.
Alternatively, if the ordinary shares are considered "marketable
stock" and if you elect to "mark-to-market" your ordinary shares, you will
generally include in income any excess of the fair market value of the ordinary
shares at the close of each tax year over your adjusted basis in the ordinary
shares. If the fair market value of the ordinary shares had depreciated below
your adjusted basis at the close of the tax year, you may generally deduct the
excess of the adjusted basis of the ordinary shares over its fair market value
at that time. However, such deductions generally would be limited to the net
mark-to-market gains, if any, that you included in income
-91-
with respect to such ordinary shares in prior years. Income recognized and
deductions allowed under the mark-to-market provisions, as well as any gain or
loss on the disposition of ordinary shares with respect to which the
mark-to-market election is made, is treated as ordinary income or loss.
Backup Withholding and Information Reporting
Payments in respect of ordinary shares may be subject to information
reporting to the U.S. Internal Revenue Service and to U.S. backup withholding
tax at a rate equal to the third highest income tax rate applicable to
individuals (which, under current law, is 28%). Backup withholding will not
apply, however, if you (i) are a corporation or come within certain exempt
categories, and demonstrate the fact when so required, or (ii) furnish a correct
taxpayer identification number and make any other required certification.
Backup withholding is not an additional tax. Amounts withheld under
the backup withholding rules may be credited against a U.S. Holder's U.S. tax
liability, and a U.S. Holder may obtain a refund of any excess amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.
Any U.S. holder who holds 10% or more in vote or value of our ordinary
shares will be subject to certain additional United States information reporting
requirements.
U.S. Gift and Estate Tax
An individual U.S. Holder of ordinary shares will be subject to U.S.
gift and estate taxes with respect to ordinary shares in the same manner and to
the same extent as with respect to other types of personal property.
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.
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
-92-
companies whose securities are registered under the Exchange Act. However, we
distribute annually to our shareholders an annual report containing financial
statements that have been examined and reported on, with an opinion expressed
by, an independent public accounting firm, and 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 rooms: 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.zahav.net.il. 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.
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.
Most of our cash and cash equivalents as of December 31, 2003,
amounting to $18.7 million, are invested in U.S. dollar deposits earning annual
interest of approximately 0.7% to 1.4%. Since we report our financial statements
in NIS, we are subject to risks caused by the exchange rate between the U.S.
dollar and the Israeli currency.
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 U.S. dollar) against the NIS, with all other
variables held constant, would result in an increase in our expected 2004 sales
-93-
of NIS 5.2 million ($1.2 million) and an increase in our 2004 net profit of NIS
2.9 million ($ 0.66 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.
Impact of Inflation. Some of our revenues and some of our costs are
dollar-related. As a result, to the extent that the rates or timing of inflation
in Israel and the devaluation of the NIS in relation to the dollar are
different, our results of operations may be affected. A devaluation of the
inflation-adjusted NIS in relation to the dollar would have the effect of
increasing the NIS amount of our revenues, increasing the NIS amount of certain
expenses that are dollar-linked (rental of premises and advertising) and
increasing our financing income deriving from our dollar bank deposits. It would
also have the effect of increasing the NIS value of any asset or liability that
we may have that are payable in dollars, relative to the NIS value. On the other
hand, a devaluation of the dollar in relation to the NIS would have the opposite
effect. It is not possible to forecast the net effect of the difference between
the currency devaluation rate and the inflation rate. In recent years, except
for 1997 and 1998, the inflation rate in Israel has exceeded the rate of
devaluation of the NIS against the dollar and certain European currencies. In
1999 and 2000, the rate of inflation exceeded the rate of devaluation of the NIS
against the dollar. In 2001 and 2002 the rate of inflation was lower than the
rate of devaluation of the NIS against the dollar. In 2003 the rate of inflation
was negative and the NIS was revaluated vis-a-vis the dollar.
According to a new accounting standard, Accounting Standard No. 12
"Discontinuance of Adjustment of Financial Statements", commencing January 1,
2004, the adjustment of financial statements to changes in the Israeli Consumer
Index has been discontinued. Consequently, up to December 31, 2003, we 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, will constitute
the starting point for the nominal financial report as of January 1, 2004. We
are evaluating the impact Accounting Standard No. 12 may have on our future
consolidated financial statements.
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
E. Use of Proceeds
-94-
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.
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
-95-
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 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 ..................................... $ 3,514,000
Temporary investments:
Acquisitions of marketable securities.............
Other purposes:
Provision of a long-term loan to lessor........... $ 632,000
Total................................................ $29,309,000
-----------
ITEM 15. CONTROLS AND PROCEDURES
During the year 2003, we carried out an evaluation, under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our company's disclosure controls and procedures
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that
evaluation, our chief executive officer and chief financial officer concluded
that our company's disclosure controls and procedures are effective in timely
alerting them to material information relating to our company required to be
included in our company's periodic SEC filings.
There have been no significant changes in our internal controls or
other factors which could significantly affect internal controls subsequent to
the date we carried out the evaluation.
ITEM 16. RESERVED.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Ms. Winner meets the
definition of an audit committee financial expert, as defined in Item 401 of
Regulation S-K.
-96-
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.
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,
-----------------------------------------------
2002 2003
---------------------- ----------------------
Services Rendered Fees Percentages Fees Percentages
------------------------------ -------- ----------- -------- -----------
Audit (1)..................... $131,300 87.3% $124,000 91%
Audit-related (2)............. -- -- -- --
Tax (3)....................... 19,000 12.7% 12,000 9%
Other (4)..................... -- -- -- --
-------- ---- -------- ---
Total......................... 150,300 100% 136,000 100%
----------
(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.
-97-
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.
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
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Auditors
Balance Sheets as of December 31, 2003 and 2002 F-3
Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 F-5
-98-
Statement of Changes in Shareholders' Equity for the years ended
December 31, 2003, 2002 and 2001 F-6
Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 F-7
Notes to the Financial Statements F-10
Appendix to the financial statements F-58
-99-
Internet Gold - Golden Lines Ltd.
Financial Statements as at December 31, 2003
--------------------------------------------------------------------------------
Page
----
Report of Independent Auditors F-2
Annual Financial Statements Adjusted for the Effect of Inflation
on the Basis of the CPI for December 2003
Balance Sheets as of December 31, 2003 and 2002 F-3
Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 F-5
Statement of Changes in Shareholders' Equity for the years ended
December 31, 2003, 2002 and 2001 F-6
Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 F-7
Notes to the Financial Statements F-10
Appendix to the financial statements F-58
F-1
Report of Independent 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, 2003 and 2002, and the related consolidated and company statements of
operations, changes in shareholders' equity and cash flows, for each of the
three years in the period ended December 31, 2003. 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 audits in accordance with 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 audits provide 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, 2003 and 2002 and the results of its operations, the
changes in shareholders' equity and its cash flows for each of the three years
in the period ended December 31, 2003, in conformity with generally accepted
accounting principles (GAAP) in Israel.
As explained in Note 2C, the above-mentioned financial statements are stated in
values adjusted for 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 22 to the consolidated financial statements.
Somekh Chaikin
Certified Public Accountants (Isr.)
A member firm of KPMG International
February 17, 2004
F-2
Balance Sheets - Consolidated and Company
--------------------------------------------------------------------------------
Adjusted to NIS of December 2003
Convenience
translation
into
US Dollars
(Note 2D)
-------------
Consolidated Company Consolidated
----------------------------- ----------------------------- -------------
As at As at As at As at As at
December 31 December 31 December 31 December 31 December 31
2003 2002 2003 2002 2003
------------- ------------- ------------- ------------- -------------
Note NIS thousands NIS thousands NIS thousands NIS thousands US$ thousands
---- ------------- ------------- ------------- ------------- -------------
Current assets
Cash and cash equivalents 3 81,891 85,145 81,660 85,042 18,701
Trade receivables, net 4 35,569 31,207 26,601 *25,683 8,123
Other receivables 5 12,769 11,450 10,539 10,542 2,916
Deferred taxes 17 1,914 -- -- -- 437
------- ------- ------- ------- ------
Total current assets 132,143 127,802 118,800 121,267 30,177
------- ------- ------- ------- ------
Investments
Investments in
investee companies 6 1,550 4,159 8,287 *434 354
Long-term loans 7 -- 4,863 -- 4,863 --
Deferred taxes 17 21 -- -- -- 5
------- ------- ------- ------- ------
1,571 9,022 8,287 5,297 359
------- ------- ------- ------- ------
Property and
equipment, net 8 29,160 30,997 26,796 27,493 6,659
------- ------- ------- ------- ------
Other assets and
deferred charges 9 51,130 1,231 49,895 331 11,676
------- ------- ------- ------- ------
Total assets 214,004 169,052 203,778 154,388 48,871
======= ======= ======= ======= ======
---------------------------------------- -------------------------------------
Eli Holtzman Doron Turgeman
Chief Executive Officer and Director Chief Financial Officer
Date of signature: February 17, 2004
* Reclassified
The accompanying notes are an integral part of the financial statements.
F-3
Internet Gold - Golden Lines Ltd.
--------------------------------------------------------------------------------
Adjusted to NIS of December 2003
Convenience
Translation
Into
US Dollars
(Note 2D)
-------------
Consolidated Company Consolidated
----------------------------- ----------------------------- -------------
As at As at As at As at As at
December 31 December 31 December 31 December 31 December 31
2003 2002 2003 2002 2003
------------- ------------- ------------- ------------- -------------
Note NIS thousands NIS thousands NIS thousands NIS thousands US$ thousands
-------------------------------------- ------------- ------------- ------------- ------------- -------------
Liabilities
Current liabilities
Short-term bank loans 10 5,259 10,457 2,459 2,959 1,201
Accounts payable 11 38,021 24,909 34,415 20,017 8,683
Other payables 12 12,607 11,532 9,388 10,090 2,879
------- -------- ------- -------- -------
Total current liabilities 55,887 46,898 46,262 33,066 12,763
------- -------- ------- -------- -------
Long-term liabilities
Excess of liabilities over
assets in investees 6 7,706 13,157 7,706 13,157 1,760
Long-term loans and other
long-term obligations 13 27,389 1,330 27,193 816 6,255
Deferred revenues 23 118 23 118 5
Liability for severance
pay, net 14 4,928 3,781 4,523 3,463 1,125
------- -------- ------- -------- -------
Total long-term liabilities 40,046 18,386 39,445 17,554 9,145
------- -------- ------- -------- -------
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, 2003) 197 197 197 197 45
Additional paid in capital 215,040 215,040 215,040 215,040 49,107
Accumulated deficit (97,166) (111,469) (97,166) (111,469) (22,189)
------- -------- ------- -------- -------
Total shareholders' equity 118,071 103,768 118,071 103,768 26,963
------- -------- ------- -------- -------
214,004 169,052 203,778 154,388 48,871
======= ======== ======= ======== =======
The accompanying notes are an integral part of the financial statements.
F-4
Internet Gold - Golden Lines Ltd.
Statements of Operations - Consolidated and Company
--------------------------------------------------------------------------------
Adjusted to NIS of December 2003
Consolidated
-----------------------------------------
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
------------ ----------- ------------
Note NIS thousands (except for per share data)
---- -----------------------------------------
Revenues 16A 179,642 184,318 188,323
------- ------- -------
Costs and expenses:
Cost of revenues 16B 92,871 99,564 116,135
Selling and marketing expenses 16C 41,393 37,125 51,299
General and administrative expenses 16D 21,908 21,209 38,884
------- ------- -------
Total costs and expenses 156,172 157,898 206,318
------- ------- -------
Income (loss) from operations 23,470 26,420 (17,995)
Financing income (expenses), net 16E (3,235) 2,151 7,308
Other (expenses) income, net (2,592) (3) (2,332)
------- ------- -------
Net income (loss) after financing
expenses 17,643 28,568 (13,019)
Income tax 17 1,935 -- --
------- ------- -------
Net income (loss) after income tax 19,578 28,568 (13,019)
Company's share in net loss of investees (5,275) (2,187) (682)
Minority interest in loss of a subsidiary -- -- 963
Loss of a subsidiary which the Company
does not intend to bear -- -- 383
------- ------- -------
Net income (loss) from continued operations 14,303 26,381 (12,355)
Net loss from discontinued operations 21 -- (8,843)
Company's share in loss of a subsidiary
from discontinued operations -- (6,423) --
------- ------- -------
Net income (loss) 14,303 19,958 (21,198)
======= ======= =======
Income (loss) per share, basic and diluted
Net income (loss) per NIS 0.01 par value of
shares (in NIS) from continuing operations 0.78 1.43 (0.67)
======= ======= =======
Net income (loss) per NIS 0.01 par value of
shares (in NIS) from discontinued
operations 0.00 (0.35) (0.48)
======= ======= =======
Net income (loss) per NIS 0.01 par value of
shares (in NIS) 0.78 1.08 (1.15)
======= ======= =======
Weighted average number of shares
outstanding (in thousands) 18,432 18,432 18,432
======= ======= =======
Convenience
translation
into US Dollars
(Note 2D)
Company Consolidated
----------------------------------------- ---------------
Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31
2003 2002 2001 2003
------------ ----------- ------------ ---------------
NIS thousands (except for per share data) US$ thousands
----------------------------------------- ---------------
Revenues 157,394 169,052 158,172 41,024
------- ------- ------- ------
Costs and expenses:
Cost of revenues 78,008 85,798 86,030 21,208
Selling and marketing expenses 42,538 37,981 41,690 9,453
General and administrative expenses 18,959 18,712 29,442 5,003
------- ------- ------- ------
Total costs and expenses 139,505 142,491 157,162 35,664
------- ------- ------- ------
Income (loss) from operations 17,889 26,561 1,010 5,360
Financing income (expenses), net 587 3,701 8,671 (739)
Other (expenses) income, net 17 (110) (2,548) (592)
------- ------- ------- ------
Net income (loss) after financing
expenses 18,493 30,152 7,133 4,029
Income tax -- -- -- 442
------- ------- ------- ------
Net income (loss) after income tax 18,493 30,152 7,133 4,471
Company's share in net loss of investees (4,190) (3,771) (28,331) (1,205)
Minority interest in loss of a subsidiary -- -- -- --
Loss of a subsidiary which the Company
does not intend to bear -- -- -- --
------- ------- ------- ------
Net income (loss) from continued operations 14,303 26,381 (21,198) 3,266
Net loss from discontinued operations -- --
Company's share in loss of a subsidiary
from discontinued operations -- (6,423) -- --
------- ------- ------- ------
Net income (loss) 14,303 19,958 (21,198) 3,266
======= ======= ======= ======
Income (loss) per share, basic and diluted
Net income (loss) per NIS 0.01 par value of
shares (in NIS) from continuing operations 0.78 1.43 (0.67) 0.18
======= ======= ======= ======
Net income (loss) per NIS 0.01 par value of
shares (in NIS) from discontinued
operations 0.00 (0.35) (0.48) 0.00
======= ======= ======= ======
Net income (loss) per NIS 0.01 par value of
shares (in NIS) 0.78 1.08 (1.15) 0.18
======= ======= ======= ======
Weighted average number of shares
outstanding (in thousands) 18,432 18,432 18,432 18,432
======= ======= ======= ======
The accompanying notes are an integral part of the financial statements.
F-5
Internet Gold - Golden Lines Ltd.
Statement of Changes in Shareholders' Equity
--------------------------------------------------------------------------------
Adjusted to NIS of December 2003
Share capital *
-------------------
Number of Additional Accumulated
shares Amount paid-in capital Deficit Total
---------- ------ --------------- ----------- -------
NIS 0.01 par value NIS thousands
------------------- ---------------------------------------
Balance as of
January 1, 2001 18,431,500 197 215,040 (110,229) 105,008
---------- --- ------- -------- -------
Changes during 2001:
Net loss for the year -- -- -- (21,198) (21,198)
---------- --- ------- -------- -------
Balance as of
December 31, 2001 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
========== === ======= ======== =======
* Number of authorized shares - 501,000,000.
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
--------------------------------------------------------------------------------
Adjusted to NIS of December 2003
Consolidated
---------------------------------------
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
----------- ----------- -----------
NIS thousands
---------------------------------------
Cash flows from operating activities:
Net income (loss) 14,303 19,958 (21,198)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Net loss from discontinued operations -- 6,423 8,843
Depreciation and amortization 16,219 15,333 19,681
Increase in liability for termination of
employer - employee relations, net 1,147 202 671
Minority interest in loss of a subsidiary -- -- (963)
Loss of a subsidiary which the Company does not
intend to bear -- -- (383)
Company's share in net loss of investees 5,275 8,610 682
Interest on long -term loans (374) (644) (181)
(Gain) loss on sale of property and equipment 16 110 (93)
Impairment of investments 2,609 -- 1,879
Deferred taxes (1,935) -- --
Changes in assets and liabilities:
Decrease (increase) in trade receivables (4,362) (2,939) (650)
Decrease (increase) in other receivables (2,548) 1,987 4,648
Increase (decrease) in accounts payable (2,158) (359) 2,373
Increase (decrease) in other payables 980 (1,055) (5,622)
------ ------ -------
Net cash provided by continued operating activities 29,172 47,626 9,687
Net cash provided by (used in) discontinued
operating activities -- (6,423) (11,303)
------ ------ -------
Net cash provided by (used in) operating activities 29,172 41,203 (1,616)
------ ------ -------
Convenience
translation
into US
Dollars
(Note 2D)
-------------
Company Consolidated
--------------------------------------- -------------
Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31
2003 2002 2001 2003
----------- ----------- ----------- -------------
NIS thousands US$ thousands
--------------------------------------- -------------
Cash flows from operating activities:
Net income (loss) 14,303 19,958 (21,198) 3,266
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Net loss from discontinued operations -- 6,423 -- --
Depreciation and amortization 13,621 13,753 15,100 3,704
Increase in liability for termination of
employer - employee relations, net 1,060 2 598 262
Minority interest in loss of a subsidiary -- -- -- --
Loss of a subsidiary which the Company does not
intend to bear -- -- -- --
Company's share in net loss of investees 4,190 10,194 28,331 1,206
Interest on long -term loans (4,012) (1,043) (1,485) (86)
(Gain) loss on sale of property and equipment 16 110 (115) 4
Impairment of investments -- -- 1,843 596
Deferred taxes -- -- -- (442)
Changes in assets and liabilities:
Decrease (increase) in trade receivables (918) (675) 1,616 (997)
Decrease (increase) in other receivables (1,189) 3,815 3,765 (583)
Increase (decrease) in accounts payable (775) (675) 2,788 (493)
Increase (decrease) in other payables (797) (5,066) (7,453) 224
------ ------ ------- -----
Net cash provided by continued operating activities 25,499 46,796 23,790 6,661
Net cash provided by (used in) discontinued
operating activities -- (6,423) -- --
------ ------ ------- -----
Net cash provided by (used in) operating activities 25,499 40,373 23,790 6,661
------ ------ ------- -----
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
--------------------------------------------------------------------------------
Adjusted to NIS of December 2003
Consolidated
---------------------------------------
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
----------- ----------- -----------
NIS thousands
---------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (13,450) (11,153) (12,469)
Proceeds from sales of property and equipment 65 248 1,228
Grant of long-term loans -- (1,266) --
Repayment of long-term loans 1,079 956 892
Investment in investee companies (6,474) -- (682)
Investment in other assets (51,926) (1,048) (1,062)
Proceeds from sales of marketable securities -- -- 52,812
Acquisition of a subsidiary consolidated for the
first time (Appendix A) -- 116 --
Exit from consolidation of a previously consolidated
subsidiary (Appendix B) -- -- --
------- ------- -------
Net cash provided by (used in) continued investment activities (70,706) (12,147) 40,719
------- ------- -------
Net cash used in discontinued operations
investment activities -- (1) (4,693)
------- ------- -------
Net cash provided by (used in) investment activities (70,706) (12,148) 36,026
------- ------- -------
Cash flows from financing activities:
Changes in short-term bank loans (4,717) (29,983) 7,893
Receipt of long-term loans under lease agreement 60,181 -- --
Repayment of long-term loans under lease agreement (17,184) (1,545) (1,918)
------- ------- -------
Net cash provided by (used in) continued financing
activities 38,280 (31,528) 5,975
------- ------- -------
Net cash provided by discontinued operations
financing activities -- -- 6,431
------- ------- -------
Net cash provided by (used in) financing activities 38,280 (31,528) 12,406
------- ------- -------
Convenience
translation
into US
Dollars
(Note 2D)
-------------
Company Consolidated
--------------------------------------- -------------
Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31
2003 2002 2001 2003
----------- ----------- ----------- -------------
NIS thousands US$ thousands
--------------------------------------- -------------
Cash flows from investing activities:
Acquisition of property and equipment (13,119) (10,202) (8,483) (3,071)
Proceeds from sales of property and equipment 65 248 455 15
Grant of long-term loans -- (1,266) -- --
Repayment of long-term loans 1,079 956 892 246
Investment in investee companies (9,624) (16,364) (11,844) (1,478)
Investment in other assets (50,598) -- (219) (11,858)
Proceeds from sales of marketable securities -- -- 52,812 --
Acquisition of a subsidiary consolidated for the
first time (Appendix A) -- -- -- --
Exit from consolidation of a previously consolidated
subsidiary (Appendix B) -- -- -- --
------- ------- ------- -------
Net cash provided by (used in) continued investment activities (72,197) (26,628) 33,613 (16,146)
------- ------- ------- -------
Net cash used in discontinued operations
investment activities -- -- -- --
------- ------- ------- -------
Net cash provided by (used in) investment activities (72,197) (26,628) 33,613 (16,146)
------- ------- ------- -------
Cash flows from financing activities:
Changes in short-term bank loans 4 (15,095) (4,766) (1,077)
Receipt of long-term loans under lease agreement 60,181 -- -- 13,743
Repayment of long-term loans under lease agreement (16,869) (1,226) (1,489) (3,924)
------- ------- ------- -------
Net cash provided by (used in) continued financing
activities 43,316 (16,321) (6,255) 8,742
------- ------- ------- -------
Net cash provided by discontinued operations
financing activities -- -- -- --
------- ------- ------- -------
Net cash provided by (used in) financing activities 43,316 (16,321) (6,255) 8,742
------- ------- ------- -------
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
--------------------------------------------------------------------------------
Adjusted to NIS of December 2003
Consolidated
---------------------------------------
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
----------- ----------- -----------
NIS thousands
---------------------------------------
Changes in cash and cash equivalents (3,254) (2,473) 46,816
Cash and cash equivalents at beginning of year 85,145 87,618 40,802
------ ------- ------
Cash and cash equivalents at end of year 81,891 85,145 87,618
====== ======= ======
Non-cash investing activities:
Accounts payable in respect of fixed assets 2,352 3,952 2,919
====== ======= ======
Investment in subsidiary (4,252) -- --
====== ======= ======
Cash paid for interest, net 553 1,592 5,865
====== ======= ======
Appendix A
Acquisition of subsidiary consolidated for the
first time
Operating capital, net of cash -- 181 --
Property and equipment, net -- (173) --
Long-term liabilities -- 4 --
Customer list -- 104 --
------ ------- ------
-- 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 -- 4,825 --
assets in investees
------ ------- ------
-- (1) --
====== ======= ======
Convenience
translation
into US
Dollars
(Note 2D)
-------------
Company Consolidated
--------------------------------------- -------------
Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31
2003 2002 2001 2003
----------- ----------- ----------- -------------
NIS thousands US$ thousands
--------------------------------------- -------------
Changes in cash and cash equivalents (3,382) (2,576) 51,148 (743)
Cash and cash equivalents at beginning of year 85,042 87,618 36,470 19,444
------ ------ ------ ------
Cash and cash equivalents at end of year 81,660 85,042 87,618 18,701
====== ====== ====== ======
Non-cash investing activities:
Accounts payable in respect of fixed assets 2,255 3,952 2,557 537
====== ====== ====== ======
Investment in subsidiary -- -- -- (971)
====== ====== ====== ======
Cash paid for interest, net 323 1,592 1,679 126
====== ====== ====== ======
Appendix A
Acquisition of subsidiary consolidated for the
first time
Operating capital, net of cash -- -- -- --
Property and equipment, net -- -- -- --
Long-term liabilities -- -- -- --
Customer list -- -- -- --
------ ------ ------ ------
-- -- -- --
====== ====== ====== ======
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
------ ------ ------ ------
-- -- -- --
====== ====== ====== ======
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 adjusted 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.
Internet Gold is a public company and its ordinary shares currently trade
on the Nasdaq small cap market.
Note 2 - Significant 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 22 for a reconciliation
to generally accepted accounting principles in the United States.
B. 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 may differ from those estimates.
C. Financial statements in adjusted New Israeli Shekels (NIS)
1. The financial statements have been prepared on the basis of historical
cost adjusted for changes in the general purchasing power of the New
Israeli Shekel. The adjustment, in accordance with Opinions No. 36 and
50 of the Institute of Certified Public Accountants in Israel (ICPAI),
expresses the financial data in adjusted NIS of identical purchasing
power.
The adjusted value of non-monetary assets represents their historical
cost adjusted for changes in the general purchasing power of the
Israel currency and does not necessarily represent their fair value to
the Company.
In these financial statements the term "cost" refers to the adjusted
cost, unless otherwise indicated. Comparative data for the previous
periods have been adjusted to NIS of December 2003.
F-10
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 2 - Significant Accounting Policies (cont'd)
C. Financial statements in adjusted New Israeli Shekels (NIS) (cont'd)
2. Balance sheet:
Non-monetary items (property and equipment, prepaid expenses, deferred
revenue) have been adjusted for the changes in the Israeli Consumer
Price Index (hereinafter - "the Index") as known at the date of the
transaction, to the Index published for the balance sheet date.
Monetary items are stated at their monetary value.
3. Statement of operations:
Income and expenses arising from non-monetary items (depreciation,
changes in prepaid expenses and deferred revenue) have been adjusted
based on specific indices corresponding to the appropriate balance
sheet items.
Other income and expense items, except for financing expenses, have
been adjusted on the basis of the change in the Index from the
transaction date until the balance sheet date.
Net financial expenses are expressed in real terms and include the
devaluation of monetary balances, as well as adjustment differentials
which result from the aforementioned adjustment of the financial
statements.
D. Convenience translation
For the convenience of the reader, the adjusted NIS figures of December 31,
2003 have been presented in U.S. Dollars thousands, translated at the
representative rate of exchange as of December 31, 2003 (NIS 4.379 = 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.
E. Principles of consolidation
The consolidated financial statements include those of the Company and all
its subsidiary companies, in which the Company has control. All material
intercompany transactions and balances have been eliminated.
F-11
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 2 - Significant Accounting Policies (cont'd)
F. Exchange rate and Consumer Price Index data
1. Assets and liabilities which are linked to foreign currency are
presented on the basis of the representative rate of exchange of the
currency prevailing at the balance sheet date.
Balances which are linked to the Index are presented on the basis of
the last Index published prior to the balance sheet date or on the
basis of the first Index published subsequent to the balance sheet
date, based on the terms of the applicable transactions.
Income and expenses denominated in foreign currency are recorded
according to the representative rate of exchange prevailing at the
time the transactions were effected.
Exchange gains and losses are included in the statement of operations.
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, 2001 4.416 170.91 points
As of December 31, 2002 4.737 182.01 points
As of December 31, 2003 4.379 178.58 points
Changes during the:
Year ended December 31, 2001 9.28% 1.41%
Year ended December 31, 2002 7.27% 6.49%
Year ended December 31, 2003 (7.56%) (1.88%)
G. 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.
H. Allowance for doubtful accounts
The allowance for doubtful accounts represents management's estimate of the
aged receivable balance considered uncollectible, based on past experience.
F-12
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 2 - Significant Accounting Policies (cont'd)
I. Investments
Investee companies
Investments in investee companies, in which the Company has significant
influence (affiliated companies) are stated by the equity method, that is,
at cost plus the Company's share of the post-acquisition gains or losses.
J. Property and equipment
Property and equipment are stated at cost.
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.
K. 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 one of its suppliers
(see Note 15I). 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 (14 years).
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 PCs, fax machines, etc. 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.
F-13
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 2 - Significant Accounting Policies (cont'd)
L. Revenue recognition
Most of the Company's revenues are derived from Internet access. These
revenues are recognized ratably over the period that services are provided.
Other revenues include website hosting, electronic commerce and advertising
revenues. Revenues from website hosting are recognized as the services are
performed. Electronic commerce and "After sale" activity 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.
M. 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 one of its subsidiaries will utilize its
carryforward tax losses and therefore recorded a deferred tax asset in that
subsidiary (See Note 17F).
N. Financial instruments
The financial statements include disclosure 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.
F-14
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 2 - Significant Accounting Policies (cont'd)
O. 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.
P. 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 impaired its investment in an Internet group
in Greece to the sum of US$ 350 thousand (see Note 6A(3)). The impairment
of NIS 2,609 is presented in other expenses.
In September 2003 the IASB published Clarification No. 1 regarding the
accounting treatment of an impairment of an investment in an investee
company that is not a subsidiary (hereinafter - the clarification). The
clarification provides that in the periods following the period in which a
provision was created for the first time in respect of the impairment of an
investee company that is not a subsidiary, the investment in the investee
company should be presented at the lower of the recoverable value and the
amount of the investment based on the equity method, with the recoverable
amount being calculated in each reporting period in which there are
indicators that there has been a change in the recoverable value. Losses
from an impairment of an investee company that is not a subsidiary, which
were recognized or cancelled in the period, are to be included in the item
of the company's equity in the earnings (losses) of affiliated companies.
The adoption of the Standard had no impact on the operations of the
affiliated company as the client list was partially impaired prior to the
release of the standard.
Q. Segment reporting
Segment reporting is represented according to Accounting Standard No. 11 of
the IASB.
F-15
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 2 - Significant Accounting Policies (cont'd)
R. Disclosure of the effect of new accounting standards in the
pre-application period
1. Accounting Standard No. 12 on "Discontinuance of Adjustment of
Financial Statements". Pursuant to this standard, commencing January
1, 2004, the adjustment of financial statements will be discontinued.
Consequently, up to December 31, 2003, the Company will continue 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, will constitute the starting point for the nominal financial
report as of January 1, 2004. The extent of the effect of
implementation of the Standard depends on the rate of inflation and
the financing sources of the company. The Company is evaluating the
impact Accounting Standard No. 12 may have on its future consolidated
financial statements.
2. Accounting Standard No. 13 on "Effect of Changes in Exchange Rate of
Foreign Currency". The standard discusses the translation of
transactions in foreign currency and the translation of financial
statements of foreign operations for the purpose of including them in
the financial statements of the reporting entity and replaces the
instructions in Clarifications 8 and 9 to Opinion No. 36 which will be
annulled upon Accounting Standard No. 12 coming into effect. This
standard will apply to financial statements for periods beginning
after December 31, 2003. The adoption of Accounting Standard No. 13
will not have an effect on the consolidated financial statements.
Note 3 - Cash and Cash Equivalents
The Company holds its available funds in US$ dollar short-term deposits
bearing interest rates ranging from 0.7% to 1.4%.
F-16
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
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
2003 2002 2003 2002
----------- ----------- ----------- -----------
Open accounts and accrued revenues 29,050 26,466 19,165 19,841
Checks, debit orders and credit
cards receivable 13,134 11,982 12,526 11,761
------ ------ ------ ------
42,184 38,448 31,691 31,602
Allowance for doubtful accounts (6,615) (7,241) (5,090) (5,919)
------ ------ ------ ------
35,569 31,207 26,601 25,683
====== ====== ====== ======
Changes in the allowance for doubtful accounts were as follows:
Consolidated Company
------------ -------
Balance as of December 31, 2001 6,323 5,421
Additions charged to bad debt expenses 2,340 1,889
Write-downs charged against the allowance (773) (773)
Recoveries of amounts previously charged off (649) (618)
------ ------
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 charged off (1,301) (1,341)
------ ------
Balance as of December 31, 2003 6,615 5,090
====== ======
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
2003 2002 2003 2002
----------- ----------- ----------- -----------
Prepaid expenses 5,121 5,471 4,906 5,350
Related parties (see Note 18) 2,554 4,324 560 3,617
Other (see Note 7 and Note 15H) 5,094 1,655 5,073 1,575
------ ------ ------ ------
12,769 11,450 10,539 10,542
====== ====== ====== ======
F-17
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
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 is an independent company jointly owned by Internet Gold (48.27%)
and Eurocom Marketing (48.27%) (related party). GT provides a variety
of online shopping and transactional opportunities directly to the
consumers. GT's primary e-commerce activity, the P1000 Mega-Mall, was
launched on June 30, 2000. At the end of 2001, 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.
In February 2002, GT shareholders signed a supplemental appendix to
the shareholders' agreement, according to which the composition of the
board of directors has changed, therefore, the Company ceased
thereafter to consolidate GT in its financial statements.
According to the Board resolutions of GT dated March 4, 2003, GT has
decided to call upon an equity infusion by way of rights allocations
to its shareholders for a maximum amount to be issued of US$ 5
million. The issuance of shares was made in a ratio of 10 shares vs.
each existing one. The Company invested an amount that increased its
share up to 48.27%. Eurocom Marketing, a related party, has
co-participated and increased its share from 9.2% up to 48.36%. All
other shareholders were diluted.
As of December 31, 2003, Gold Trade had incurred losses of NIS 62.9
million ($14.4 million). Most of Gold Trade losses were covered by
capital infusions made in two stages during the years 2003 and 2002.
In year 2002 Gold Trade converted shareholders' loans into shares of
NIS 24.2 million ($5.5 million), and in September 2003 issued 100,000
shares in a rights offering to Eurocom Marketing Ltd. and to the
company for the amount of NIS 21.9 million ($5 million) of which NIS
17.6 million ($4 million) were paid in 2003.
The investment in GT is presented by the equity method. The Company
recorded its share of GT's losses amounting to NIS 5.28 million in
2003 (NIS 8.6 million in 2002).
(2) MSN Israel Ltd. (MSN)
MSN Israel was established in April 2000, and is an independent
company jointly owned by Internet Gold (50.1%) and The Microsoft
Corporation (49.9%). This portal, with the same look and feel as MSN
Worldwide, uniquely combines leading Israeli content and e-commerce
providers and integrates with Microsoft's leading network services
such as Messenger, Hotmail (in Hebrew), Passport and Web Communities
offering local users access to the most advanced online Internet
services in the world. This portal constitutes the first step toward
realizing the vision of an "everyday web" in Israel.
F-18
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 6 - Investments in Investee Companies (cont'd)
(2) MSN Israel Ltd. (MSN) (cont'd)
The consolidated financial statements include those of MSN. The
Company recorded its share of MSN's losses amounting to NIS 2.4
million in 2003 (NIS 5.8 million in 2002).
The Company has an obligation to finance losses of MSN Israel up to
US$ 10 million, therefore, the Company is recording 100% of MSN's
losses. The Company has already financed approximately $ 8.2 million
as of balance sheet date (including $7.7 million accumulated deficit).
In November 2001, MSN has exercised an option to obtain 50% of the
portal "Start" for no immediate consideration but is 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 payment per
month is $8 thousand. MSN paid in 2003 the sum of NIS 444.
(3) Internet Gold International Ltd. (IGI)
Established in January 2000, as a wholly owned subsidiary of Internet
Gold, with a goal of becoming a regional Internet Group. IGI's
strategy included acquiring and partnering with local Internet Service
Providers, IT companies and Media Groups in emerging markets.
Currently, IGI holds 15.2% in shares of an Internet Group in Greece
(the investment, of US$ 1 million, has been written down to the sum of
US$ 350 thousand). The impairment charge of NIS 2,609 is 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 1.6
million in 2003 most of which was derived from the impairment (profits
of NIS 1.2 million in 2002). The Company's investment in IGI is in the
form of a nominal non-interest bearing capital note plus loans
amounting to NIS 10.5 million.
(4) Gold Mind Ltd. (GM)
Established in January 2000, as a wholly owned subsidiary, the company
had two major activities: developing Internet content ventures, and
site construction utilizing a variety of technologies, ranging from
sites drawing upon the most widespread technologies to databases
updated online. The site construction activity has been discontinued.
Gold Mind is currently engaged in virtual magazine sales. The Company
recorded its share of GM's profits amounting to NIS 5 million in 2003
(profits of NIS 2.9 million in 2002).
F-19
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted 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
2003 2002 2003 2002
----------- ----------- ----------- -----------
B. Excess of liabilities over
assets in subsidiaries
Consists of the following:
Cost of shares -- -- 55 55
Accumulated losses -- -- (45,550) (46,562)
--- --- ------- -------
-- -- (45,495) (46,507)
Loans -- -- 53,782 46,941
--- --- ------- -------
-- -- 8,287 434
=== === ======= =======
Consolidated Company
------------------------- -------------------------
As at As at As at As at
December 31 December 31 December 31 December 31
2003 2002 2003 2002
----------- ----------- ----------- -----------
C. Investments in
investee companies:
Cost of shares 24,418 16,299 22,868 12,140
Accumulated losses (30,574) (25,297) (30,574) (25,297)
------- ------- ------- -------
(6,156) (8,998) (7,706) (13,157)
======= ======= ======= =======
Presented as investments in
investee companies 1,550 4,159 8,287 434
======= ======= ======= =======
Presented as part of long-
term liabilities 7,706 13,157 7,706 13,157
======= ======= ======= =======
Note 7 - Long-Term Loan
The loan is in U.S. dollars, with interest calculated at LIBOR + 2.25% p.a.
(See Note 5 and Note 15H).
F-20
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 8 - 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, 2002 65,863 15,474 7,651 9,440 98,428
Additions 8,719 2,886 -- 245 11,850
Disposals (64) (1) (225) (4) (294)
------ ------ ----- ----- -------
As at
December 31, 2003 74,518 18,359 7,426 9,681 109,984
====== ====== ===== ===== =======
Depreciation:
As at
December 31, 2002 49,741 6,889 3,977 6,824 67,431
Depreciation for
the year 8,504 3,019 1,112 971 13,606
Disposals (64) (1) (145) (3) (213)
------ ------ ----- ----- -------
As at
December 31, 2003 58,181 9,907 4,944 7,792 80,824
====== ====== ===== ===== =======
Property and
equipment, net
As at
December 31, 2003 16,337 8,452 2,482 1,889 29,160
====== ====== ===== ===== =======
As at
December 31, 2002 16,122 8,585 3,674 2,616 30,997
====== ====== ===== ===== =======
/(1)/ Includes cost of motor vehicles under financial lease agreements
totaling NIS 7,391 as of December 31, 2003 (NIS 7,574 as of December
31, 2002). Liens have been placed on such vehicles, in favor of the
lessor, (see also Note 15(J)).
F-21
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 8 - 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, 2002 61,160 15,298 6,172 9,293 91,923
Additions 8,320 2,887 -- 215 11,422
Disposals (64) (1) (225) (4) (294)
------ ------ ----- ----- -------
As at
December 31, 2003 69,416 18,184 5,947 9,504 103,051
====== ====== ===== ===== =======
Depreciation:
As at
December 31, 2002 47,449 6,861 3,389 6,731 64,430
Depreciation for
the year 7,178 3,006 889 965 12,038
Disposals (64) (1) (145) (3) (213)
------ ------ ----- ----- -------
As at
December 31, 2003 54,563 9,866 4,133 7,693 76,255
====== ====== ===== ===== =======
Property and
equipment, net
As at
December 31, 2003 14,853 8,318 1,814 1,811 26,796
------ ------ ----- ----- -------
As at
December 31, 2002 13,711 8,437 2,783 2,562 27,493
====== ====== ===== ===== =======
/(1)/ Includes cost of motor vehicles under financial lease agreements
totaling NIS 5,938 as of December 31, 2003 (NIS 6,162 as of December
31, 2002). Liens have been placed on such vehicles, in favor of the
lessor.
F-22
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 9 - 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
2003 2002 2003 2002
----------- ----------- ----------- -----------
Web site construction for self use
(see Note 2K (1)) 5,888 4,560 219 219
Amortization of web sites (4,707) (3,667) (219) (209)
------ ------ ------ ----
1,181 893 -- 10
------ ------ ------ ----
Right of use in an International
Communication Lines
(see Note 2K (2)) 50,598 -- 50,598 --
Less: amortization (1,573) -- (1,573) --
------ ------ ------ ----
49,025 -- 49,025 --
------ ------ ------ ----
Deferred charges (see Note 2K (3)) 924 338 870 321
------ ------ ------ ----
51,130 1,231 49,895 331
====== ====== ====== ====
Note 10 - 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
2003 2002 2003 2002
----------- ----------- ----------- -----------
Short-term loans at Prime* 4,279 8,996 1,754 1,750
Current maturities of long-term loans 980 1,461 705 1,209
----- ------ ----- -----
5,259 10,457 2,459 2,959
===== ====== ===== =====
* The Prime rate as of December 31, 2003 was 6.3% (December 31, 2002 -
10.4%).
See Note 15F with regard to bank guarantees.
F-23
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 11 - Accounts Payable
Consolidated Company
------------------------- -------------------------
As at As at As at As at
December 31 December 31 December 31 December 31
2003 2002 2003 2002
----------- ----------- ----------- -----------
Trade payables - open account 27,993 14,088 26,359 11,366
Trade payables abroad 758 1,886 758 1,886
Checks payable 2,444 3,412 2,023 1,959
Accrued expenses 6,826 5,523 5,275 4,806
------ ------ ------ ------
38,021 24,909 34,415 20,017
====== ====== ====== ======
Note 12 - Other Payables
Other payables consist of:
Consolidated Company
------------------------- -------------------------
As at As at As at As at
December 31 December 31 December 31 December 31
2003 2002 2003 2002
----------- ----------- ----------- -----------
Employees and payroll accruals 4,965 4,265 4,078 3,718
Related parties (see Note 18) 3,577 1,451 2,718 1,495
Liability for vacation and
recreation pay 1,707 1,351 1,514 1,169
Deferred income 1,489 1,669 206 942
Other 869 2,796 872 2,766
------ ------ ----- ------
12,607 11,532 9,388 10,090
====== ====== ===== ======
F-24
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 13 - Long-Term Loans and Other Long-Term obligations
Long-term loans and other long-term obligations under capital leases are as
follows:
Consolidated Company
------------------------- -------------------------
As at As at As at As at
December 31 December 31 December 31 December 31
Interest rate 2003 2002 2003 2002
------------- ----------- ----------- ----------- -----------
Capital lease
obligations:
Vehicles (linked to
the Israeli
Consumer
Price Index) 5%-7% 1,253 2,791 782 2,025
Less: current
maturities (980) (1,461) (705) (1,209)
-------- ------ ------- ------
273 1,330 77 816
-------- ------ ------- ------
International
Communication
Lines (linked
to the US$
exchange rate) *LIBOR +0.5% 43,911 - 43,911 -
Less: current
maturities
(presented as
accounts payable) (16,795) - (16,795) -
-------- ------ ------- ------
27,116 - 27,116 -
-------- ------ ------- ------
27,389 1,330 27,193 816
======== ====== ======= ======
* The LIBOR rates ranging 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
2003
-----------
2004 17,775
======
2005 17,026
2006 10,363
------
27,389
======
F-25
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 14 - 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 represent 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
2003 2002 2003 2002
----------- ----------- ----------- -----------
Liability for severance pay 9,876 7,782 8,959 7,084
Less: amounts funded (4,948) (4,001) (4,436) (3,621)
------ ------ ------ ------
4,928 3,781 4,523 3,463
====== ====== ====== ======
The expenses in respect to severance pay for the years ended December 31,
2003, 2002 and 2001 are NIS 2,372 (Company - NIS 2,162) NIS 1,796 (Company
- NIS 1,673) and NIS 965 (Company - NIS 548), respectively.
Note 15 - Guarantees, Commitments and Contingent Liabilities
A. License and regulations
1. The Company has received a license from the Ministry of Communications
in Israel, (hereinafter "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-26
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 15 - Guarantees, Commitments and Contingent Liabilities (cont'd)
A. License and regulations (cont'd)
2. 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. A lawsuit has been filed against the Company by one of its suppliers
concerning data communication services, claiming that the Company has
breached the contracts between them by their unilateral early
termination. The lawsuit seeks damages of NIS 3.5 million of which
about NIS 1.4 million relates to loss of revenues and profits during
the year 2001 and the rest to services rendered and revenues and
profits according to the claim in 2000. Some amounts of the claim are
not in dispute and the Company accounted for them in the course of
business. The Company's management, after consulting with its legal
consultants, has provided for NIS 560.
C. In March 2003, a lawsuit was filed against the Company by an Israeli
company engaged in the sale of computers and peripheral equipment. The
plaintiff claimed that the Company had failed to pay for computer
equipment, which had allegedly been provided. The Company submitted a
request for leave to defend with regard to an amount of NIS 206 which
the Company set off from amounts owed to it by the plaintiff and
companies related to it, and for failure by the plaintiff to supply to
the Company computer parts in the required quality. Currently, the
disputed amount has been reduced to NIS 141. The Company provided an
amount of NIS 100 in the first quarter of 2003.
D. In February 2003, a lawsuit was filed against the Company by an
Israeli company. The plaintiff claims that the Company failed to
comply with the agreement and the service received was inadequate. The
claim has been forwarded to the handling of the Company's insurance
company. The Company, after consulting with its legal consultants,
provided an amount of NIS 100.
E. 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.
F-27
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 15 - Guarantees, Commitments and Contingent Liabilities (cont'd)
F. The Company has granted bank performance guarantees which amount to
approximately NIS 597 (Company - NIS 597) as of December 31, 2003.
This amount represents the maximum undiscounted exposure to the
Company. The carrying value of these guarantees is zero.
G. Subsequent to the balance sheet date, the Company entered a commitment
to purchase network equipment amounting to approximately NIS 1,212.
H. 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 2,109
linked to the rate of exchange of the U.S. Dollar.
In connection with the lease agreement, the Company has provided the
lessor with a loan of up to US$ 1,599 (approximately NIS 7,002) for
completion of the building construction. The loan is repaid by means
of an offset from the Company's monthly lease payments. A secondary
lien on the building has been registered in the Company's name to
secure the loan. The lessor has recently sold the building and will
repay the loans during 2004. (See Note 5).
The Company's support department, rented from a related party, is
located in a 250 square meters office in Ramat-Gan, Israel. The
facilities are leased from Eurocom Holdings until June 30, 2005 (see
Note 18A).
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) and since January 1,
2004, for the lease of 700 sq. m.. This is a sub-lease from GT, the
Company's affiliated. Future monthly rent for all the facilities
leased by MSN is NIS 17 (US$ 4). Since January 1, 2004, MSN uses the
premises on a monthly basis without renewing the lease agreement (this
action is consistent to GT's lease agreement).
The Company has also entered into lease agreements for several sites
at which part of the communications equipment is located.
Future minimum lease payments are as follows (assuming renewal options
will not be exercised):
As of
December 31
2003
-----------
2004 2,678
2005 2,309
2006 2,309
2007 2,309
Rental expenses were NIS 2,984 (Company - NIS 2,754), NIS 2,516
(Company - NIS 2,283) and NIS 3,730 (Company - NIS 2,239), for the
years ended December 31, 2003, 2002 and 2001, respectively.
F-28
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 15 - Guarantees, Commitments and Contingent Liabilities (cont'd)
I. The Company has signed a long-term agreement with Barak I.T.C. (1995)
Ltd, one of Israel's three International operators, 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 5 lines. Subsequent to
balance sheet date, another two lines have been connected.
The Company presents the ROU purchase in its financial statements as a
capital lease as part of other assets at the gross sum of NIS 50,598.
Future installments-
2004 16,795
2005 16,753
2006 10,363
------
43,911
======
J. The amount of liabilities which are secured by liens is:
Consolidated Company
------------ -----------
As of As of
December 31 December 31
2003 2003
------------ -----------
Long-term loans 1,253 782
----- ---
1,253 782
===== ===
A lien has been placed on motor vehicles to secure the said
liabilities, (see also Note 8).
K. 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.
F-29
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 15 - Guarantees, Commitments and Contingent Liabilities (cont'd)
L. 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
22A(6)).
M. 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.
N. 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, 2003 is NIS 33.7
million (US$ 7.7 million).
Note 16 - 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
2003 2002 2001 2003 2002 2001
------------ ------------ ----------- ----------- ----------- -----------
Access
revenues 146,007 156,335 139,850 136,523 153,973 139,850
Other revenues 33,635 27,983 48,473 20,871 15,079 18,322
------- ------- ------- ------- ------- -------
179,642 184,318 188,323 157,394 169,052 158,172
======= ======= ======= ======= ======= =======
F-30
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 16 - Additional Statement of Operations Data (cont'd)
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
2003 2002 2001 2003 2002 2001
----------- ----------- ----------- ----------- ----------- -----------
Communication
services 32,920 41,635 41,558 32,882 41,645 41,886
Cost of
goods sold 6,035 5,622 19,255 4,951 5,622 5,696
------ ------ ------- ------ ------ ------
38,955 47,257 60,813 37,833 47,267 47,582
Salaries and
related expenses 28,358 25,167 26,342 24,292 21,923 22,683
Depreciation 10,421 11,367 14,968 7,941 9,672 10,864
Other 15,137 15,773 14,012 7,942 6,936 4,901
------ ------ ------- ------ ------ ------
92,871 99,564 116,135 78,008 85,798 86,030
====== ====== ======= ====== ====== ======
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
2003 2002 2001 2003 2002 2001
----------- ----------- ----------- ----------- ----------- -----------
Advertising and
marketing
expenses 17,512 13,702 19,327 21,680 16,261 16,431
Salaries and
related expenses 21,177 20,777 25,785 18,460 19,355 19,453
Other 2,704 2,646 6,187 2,398 2,365 5,806
------ ------ ------ ------ ------ ------
41,393 37,125 51,299 42,538 37,981 41,690
====== ====== ====== ====== ====== ======
F-31
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 16 - Additional Statement of Operations Data (cont'd)
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
2003 2002 2001 2003 2002 2001
----------- ------------ ----------- ----------- ----------- -----------
NIS thousands
----------------------------------------------------------------------------------
Professional fees 3,750 2,776 2,273 3,249 2,377 1,724
Salaries and
related expenses 10,259 7,940 21,854 8,801 7,017 15,771
Postal and
communication
expenses 2,188 2,227 3,016 2,155 2,302 2,716
Provision for
doubtful debts 80 1,942 3,514 (93) 1,612 2,651
Legal reserve 309 (604) 240 -- (604) 326
Depreciation 1,676 1,622 1,899 1,576 1,539 1,664
Office
maintenance and
rent 2,599 3,925 4,453 2,312 3,518 3,940
Other 1,047 1,381 1,635 959 951 650
------ ------ ------ ------ ------ ------
21,908 21,209 38,884 18,959 18,712 29,442
====== ====== ====== ====== ====== ======
F-32
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 16 - Additional Statement of Operations Data (cont'd)
E. Financing income, 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
2003 2002 2001 2003 2002 2001
----------- ----------- ----------- ----------- ----------- -----------
Interest
(expense) income
on short-term
loans from banks
and others (187) (343) (10,848) 25 (492) (841)
Exchange rate
differentials
net of interest
on short-term
Bank deposits (4,822) 1,852 17,352 (4,822) 1,913 9,443
Exchange rate
differentials
net of interest
on long-term
loans 537 (376) 719 537 (269) 557
Other, mainly
derived from
devaluation of
Trade
receivables and
trade payables 1,237 1,018 85 4,847 2,549 (488)
------ ----- ------- ------ ----- -----
(3,235) 2,151 7,308 587 3,701 8,671
====== ===== ======= ====== ===== =====
F-33
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 17 - Income Taxes
A. Israel tax reform
As of January 1, 2003, tax reform legislation was enacted, which
significantly changed the taxation basis of corporate and individual
taxpayers from a territorial basis to a worldwide basis. From such date an
Israeli resident taxpayer will be taxed on income produced and derived both
in and out of Israel. The main provisions of the tax reform that may affect
the Company are as follows:
1. Transfer pricing of international transactions with related parties.
The Income Tax Ordinance was amended to include provisions concerning
transfer pricing between related parties, where one of the parties is
situated abroad. Detailed provisions are to be included in Income Tax
Regulations that have yet to be issued. Although the Company considers
that the transfer pricing policy adopted with foreign affiliates is
economically fair, an adjustment may be required following the issue
of the said Regulations.
2. Employee stock incentive plans
The tax reform codified past practice and determined three alternative
tracks for taxing employee stock option plans. Where a trustee
arrangement is in place, the employer can either claim a deduction for
tax purposes while the employee will be fully taxed up to the maximum
marginal tax rate of 50% or the Company can waive the tax expense and
the employee will pay a reduced tax rate of 25%. Where there is no
trustee arrangement, the employee is fully taxable and no expense is
allowed to the Company. There are detailed provisions for implementing
these tracks. The Company is considering the alternatives.
3. Controlled foreign company (CFC)
The amendment to the law introduced Controlled Foreign Company (CFC)
provisions, which, in certain circumstances, will lead to the Israeli
company being charged tax on passive income of foreign affiliates as
if it had received a dividend from such companies.
4. Capital gains tax is reduced to 25% from 36%, except with respect to
capital gains from marketable securities, with transitional provisions
for assets acquired prior to January 1, 2003.
5. The seven year limit for carrying forward of capital losses has been
removed with respect to capital losses arising from 1996 and
thereafter.
F-34
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 17 - Income Taxes (cont'd)
B. Income (loss) before income taxes is attributable to the following
geographic locations for the years ended December 31, 2003, 2002 and
2001.
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
2003 2002 2001 2003 2002 2001
----------- ----------- ----------- ----------- ----------- -----------
Israel 17,643 28,568 (13,019) 18,493 30,152 7,133
Foreign -- -- -- -- -- --
------ ------ ------- ------ ------ -----
17,643 28,568 (13,019) 18,493 30,152 7,133
====== ====== ======= ====== ====== =====
C. The Company has received final tax assessments up to and including the
1999 tax year.
D. 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 - 36%.
Income tax benefit for the years ended December 31, 2003, 2002 and
2001 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
2003 2002 2001 2003 2002 2001
----------- ----------- ----------- ----------- ----------- -----------
Current tax: -- -- -- -- -- --
----- --- --- --- --- ---
Deferred taxes:
Israel 1,935 -- -- -- -- --
foreign -- -- -- -- -- --
----- --- --- --- --- ---
1,935 -- -- -- -- --
----- --- --- --- --- ---
Income tax Benefit 1,935 -- -- -- -- --
===== === === === === ===
F-35
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 17 - Income Taxes (cont'd)
E. Reconciliation of income tax expense:
A reconciliation of the theoretical tax expense computed on the pre-tax
income (loss) 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
2003 2002 2001 2003 2002 2001
----------- ----------- ----------- ----------- ----------- -----------
Income (loss)
before income
taxes as per
income
statements 17,643 28,568 (13,019) 18,493 30,152 7,133
Loss from
discontinued
operations
Gross -- -- (17,650) -- -- --
------ ------ ------- ------ ------ -----
17,643 28,568 (30,669) 18,493 30,152 7,133
====== ====== ======= ====== ====== =====
Theoretical tax
Computed
at the statutory
tax rate 6,351 10,284 (11,041) 6,657 10,855 2,568
------ ------ ------- ------ ------ -----
Increase in tax
resulting from:
Non-deductible
expenses 451 587 1,387 420 530 871
Non taxable
income
Recalculated -- -- -- -- -- (5,867)
Change in
valuation
allowance in
respect of
deferred taxes (9,343) (10,001) 9,263 (6,602) (10,715) 2,245
Other difference 606 (870) 391 (475) (670) 183
------ ------ ------- ------ ------ -----
(8,286) (10,284) 11,041 (6,657) (10,855) (2,568)
------ ------ ------- ------ ------ -----
(1,935) -- -- -- -- --
====== ====== ======= ====== ====== =====
F-36
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 17 - Income Taxes (cont'd)
F. Deferred taxes comprise:
Consolidated Company
------------------------- -------------------------
As at As at As at As at
December 31 December 31 December 31 December 31
2003 2002 2003 2002
----------- ----------- ----------- -----------
Tax loss carryforward 27,330 35,122 10,671 17,479
Accrued employee rights 2,389 1,841 2,173 1,668
Allowance for doubtful accounts 2,381 2,545 1,832 2,131
------- ------- ------- -------
Deferred tax asset 32,100 39,508 14,676 21,278
Valuation allowance (30,165) (39,508) (14,676) (21,278)
------- ------- ------- -------
Net deferred tax asset 1,935 -- -- --
======= ======= ======= =======
Deferred tax assets for future benefits are included where their
realization is more likely than not.
The Company has an operating loss carryforward for tax purposes, as of
December 31, 2003 of approximately NIS 81.3 million consolidated (Company -
NIS 29.6 million). The operating loss carryforward is linked to the Index
and has no expiry date.
Note 18 - 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.
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
2003 2002 2003 2002
----------- ----------- ----------- -----------
Debit balance (Note 5) 2,554 4,324 560 3,617
Credit balance (Note 12) 3,577 1,451 2,718 1,495
F-37
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 18 - Related Parties (cont'd)
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
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues 1,973 2,174 3,621 2,613
Cost of revenues -
communications expenses 4,873 3,266 4,873 3,266
Participation in compensation and
other expenses 503 -- 579 81
Rental expenses 281 455 281 455
Selling and marketing expenses -
advertising expenses 1,113 813 6,245 4,261
General and
administrative expenses -
Participation in compensation and
other expenses 677 2,403 520 2,185
Interest (income) expense (60) (149) (2,859) (3,306)
Note 19 - 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 78,882, 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 15(H).
F-38
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 20 - Segment Reporting
The Company has identified four reportable segments in 2003, i.e. the
provision of Internet 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 after sale activity as a
reportable segment. Therefore, the Company has restated the corresponding
items of segment information for earlier periods.
Year ended December 31, 2003
------------------------------------------------------------------------------------------------
Portal/(2)/ Web site/(3)/ After sale/(4)/ Commerce/(5)/ Adjustments Consolidated
ISP /(1)/ operating content and others
--------- ----------- ------------- --------------- ------------- ----------- ------------
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
======= ====== ===== ====== ====== ======= =======
Operating income (loss) 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 -- (5,275) (5,275)
Company's share in loss of a
subsidiary from
discontinued operations --
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
======= ====== ===== ====== ====== ======= =======
/(1)/ ISP-Internet Service Provider - Offering a wide range of Internet access
and Internet services.
/(2)/ Portal MSN Israel - The portal offers an electronic advertising media.
/(3)/ Selling Internet content such as electronic newspaper, radio, anti virus
and other related products.
/(4)/ Selling products to the subscribers through a variety of on-line shopping
and transactional opportunities.
F-39
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
/(5)/ 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 20 - 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
======= ====== ===== ====== ====== ======= =======
Operating income (loss) 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 (2,187) (2,187)
Company's share in loss of a subsidiary from
discontinued operations (6,423) (6,423)
-------
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 -- 13,157 (40,296) 65,284
======= ====== ===== ====== ====== ======= =======
Capital expenditure 10,874 2,692 19 -- -- -- 13,585
======= ====== ===== ====== ====== ======= =======
Depreciation and amortization 13,450 1,828 157 -- -- (102) 15,333
======= ====== ===== ====== ====== ======= =======
* Reclassified
F-41
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 20 - Segment Reporting (cont'd)
Year ended December 31, 2001
-----------------------------------------------------------------------------------
Portal Web site After sale
ISP operating content and others Commerce Adjustments Consolidated
------- --------- -------- ---------- -------- ----------- ------------
External revenues for the segment 139,852 7,596 1,128 18,320 21,427 -- 188,323
Internal revenues for the segment -- 1,953 -- -- 717 (2,670) --
------- ------- ------ ------ ------ ------ -------
Total revenues for the segment 139,852 9,549 1,128 18,320 22,144 (2,670) 188,323
======= ======= ====== ====== ====== ====== =======
Operating income (loss) (13,448) (10,919) (1,729) 10,788 (2,577) (110) (17,995)
Financial expenses (7,823)
Financial income 15,131
Other expenses, net (2,332)
Company's share in net loss of investees (682) (682)
Minority interest in loss of a subsidiary 963
Loss of subsidiary which the Company does
not intend to bear 383
Net loss from discontinued operations (8,843)
-------
Net loss (21,198)
=======
F-42
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 21 - Discontinued Operation
The Company's former subsidiary - 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 revenues and expenses to discontinued operations
has been implemented as a specific basis with the exception of the
financing expenses which were reclassified according to the ratio of
liabilities attributed to discontinued operations.
The results of the discontinued operation are as follows:
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
Revenues -- -- 42,700
--- ------ -------
Cost of revenues -- -- (33,253)
Selling and marketing expenses -- -- (15,500)
General and administrative expenses -- -- (8,336)
--- ------ -------
-- -- (57,089)
--- ------ -------
Loss from operations -- -- (14,389)
Financing expenses, net -- -- (3,261)
--- ------ -------
Net loss after financing expenses -- -- (17,650)
Minority share in loss of subsidiary from discontinued
operations -- -- 8,807
--- ------ -------
Net loss from discontinued operation -- -- (8,843)
=== ====== =======
Company's share in net loss of investees -- (6,423) --
=== ====== =======
Note 22 - 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 measures the effect of price level
changes in the Israeli economy.
F-43
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
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.
F-44
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 22 - Significant Differences Between Israeli GAAP and U.S. GAAP and their
Effect on the Financial Statements (cont'd)
A. (cont'd)
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, 2003 and 2002, such
funded amounts were NIS 4,948 (Company - NIS 4,436), and NIS 4,001
(Company - NIS 3,621) respectively.
3. Affiliate equity amendment deriving from application of U.S. GAAP as
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 1,170 thousand. Under US GAAP this asset was fully written off
last year. (the Company's share of this amortization is NIS 548
thousand). The amortization described above is reversed in the
reconciliation note.
4. Changes in exchange rate
According to Israeli GAAP, the effect 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 22B.3).
F-45
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 22 - Significant Differences Between Israeli GAAP and U.S. GAAP and their
Effect on the Financial Statements (cont'd)
A. (cont'd)
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 22B.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
F-46
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 22 - 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, 2001 195,393 36.8
Granted -- --
Forfeited -- --
------- ----
Balance at December 31, 2002 195,393 36.8
Granted -- --
Forfeited (28,650) --
------- ----
Balance at December 31, 2003 166,743 36.8
======= ====
As applicable according to Israeli GAAP, employee stock compensation
expenses are not recorded as long as there are not exercised options.
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 2,524 (income of NIS 109 for
the year ended December 31, 2003, and expenses of NIS 530 for the year
ended December 31, 2002, and income of NIS 1,752 for the year ended
December 2001).
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 22C).
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.
F-47
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 22 - 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 statement.
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. Statement of Operations
Consolidated
---------------------------------------
December 31 December 31 December 31
2003 2002 2001
----------- ----------- -----------
Net income (loss) Israeli GAAP 14,303 19,958 (21,198)
Adjustments to conform with US GAAP:
Affiliate equity (A3) 548 (2,711) --
Employee stock options (A6) 109 (530) 1,752
------ ------ -------
Total US GAAP adjustments 657 (3,241) 1,752
------ ------ -------
Net income (loss) US GAAP - continuing
operations 14,960 23,140 (10,603)
------ ------ -------
Net income (loss) US GAAP - discontinuing
operations -- (6,423) (8,843)
------ ------ -------
Net income (loss) US GAAP 14,960 16,717 (19,446)
====== ====== =======
Basic and diluted net income (loss) per share
(in NIS) in accordance with US GAAP -
- continuing operations 0.81 1.26 (0.57)
Basic and diluted net (loss) per share
- discontinuing operations - US GAAP -- (0.35) (0.48)
------ ------ -------
Basic and diluted net income (loss) per share
(in NIS) in accordance with US GAAP 0.81 0.91 (1.05)
====== ====== =======
F-48
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 22 - 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 statement (cont'd)
2. Shareholders' equity
Consolidated
-------------------------
December 31 December 31
2003 2002
----------- -----------
Shareholders' funds - equity - Israeli GAAP 118,071 103,768
Adjustment to conform with US GAAP:
Affiliated equity - previous years (2,711) --
Affiliated equity (A3) 548 (2,711)
------- -------
Shareholders' equity in accordance with US GAAP* 115,908 101,057
======= =======
* For each of the years ended December 31, 2003, 2002 and 2001, net income
equals comprehensive income since the company did not have any items of
other comprehensive income.
3. Statements of cash flows
Consolidated
---------------------------------------
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
----------- ----------- -----------
NIS thousands
---------------------------------------
Net cash flows from operating activities - Israeli GAAP 29,172 41,203 (1,616)
Changes in exchange rate (A4) 6,299 (6,394) (7,660)
------- ------- ------
Net cash flows from operating activities - US GAAP 35,471 34,809 (9,276)
------- ------- ------
Net cash flows from investing activities - Israeli GAAP (70,706) (12,148) 36,026
Loans in respect of capital leases (A5) 50,598 -- --
------- ------- ------
Net cash flows from investing activities - US GAAP (20,108) (12,148) 36,026
======= ======= ======
Net cash flows from financing activities - Israeli GAAP 38,280 (31,528) 12,406
Loans in respect of capital leases (A5) (50,598) -- --
------- ------- ------
Net cash flows from financing activities - US GAAP (12,318) (31,528) 12,406
======= ======= ======
Exchange rate differences (6,299) 6,394 7,660
======= ======= ======
Changes in cash and cash equivalents
-Israeli GAAP and US GAAP (3,254) (2,473) 46,816
======= ======= ======
F-49
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
F-50
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 22 - Significant Differences Between Israeli GAAP and U.S. GAAP and their
Effect on the Financial Statements (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, 2003 -
NIS 222 income, and for the year ended December 31, 2002 - NIS 678 expenses
and for the year ended December 31, 2001 - NIS 2,810 income).
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
2003 2002 2001
----------- ----------- -----------
NIS thousands
---------------------------------------
Net income (loss) for the year - US GAAP 14,960 16,717 (19,446)
Deduction of compensation expenses
according to APB 25 (A6) (109) 530 (1,752)
Application of compensation expenses
according to FASB 123 (see above) 222 (678) 2,810
------ ------ -------
15,073 16,039 (16,636)
====== ====== =======
Basic and diluted net income (loss) per share
in accordance with U.S. GAAP -
As reported APB 25 0.81 0.91 (1.05)
====== ====== =======
Pro forma 0.82 0.87 (0.9)
====== ====== =======
F-51
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 22 - Significant Differences Between Israeli GAAP and U.S. GAAP and Their
Effect on the Financial Statements (cont'd)
D. Impact of recently adopted accounting standards
1. SFAS 143 - Accounting for Asset Retirement Obligations
In June 2001, The FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations" (hereinafter SFAS 143). SFAS 143 requires the
Company to record fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal
use of the assets. The Company also records a corresponding asset,
which is depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the obligation
will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the
obligation. SFAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. Earlier application is
permitted. The adoption of SFAS 143 had no impact on the Company's
consolidated financial statements.
2. SFAS 145 - Rescission of FASB Statements 4, 44 and 64, Amendment of
FASB Statement No. 13 and Technical Corrections
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statement
4, 44 and 64, Amendment of FASB No. 13 and Technical Corrections"
(hereinafter SFAS 145). SFAS 145 rescinds FASB Statement No. 4,
"Reporting Gains and Losses from Extinguishments of Debt", and an
amendment of that Statement, FASB Statement No. 64, "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements". FASB 145 also
rescinds FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13,
"Accounting for Leases", to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. SFAS 145 also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions.
The provisions of this Statement related to the rescission of
Statement 4 are applicable in fiscal years beginning after May 15,
2002. Early adoption is encouraged. A calendar-year entity may early
adopt the Statement 4 rescission in the fourth quarter of 2002. The
provisions of this Statement related to Statement 13 are effective for
transactions occurring after May 15, 2002, with early application
encouraged. All other provisions of this Statement are effective for
financial statements issued on or after May 15, 2002, with early
application encouraged. The adoption of SFAS 145 had no effect on the
Company's consolidated financial statements.
F-52
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 22 - Significant Differences Between Israeli GAAP and U.S. GAAP and Their
Effect on the Financial Statements (cont'd)
D. Impact of recently adopted accounting standards (cont'd)
3. SFAS 146 - Accounting for Costs Associated with Exit or Disposal
Activities
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (hereinafter SFAS 146).
SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullified EITF 94-3
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity". SFAS 146 is effective for exit and
disposal activities that are initiated after December 31, 2002.
Earlier application is encouraged. The adoption of SFAS 146 did not
have an impact on the Company's consolidated financial statements.
4. FIN 45 - Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (hereinafter the Interpretation), which
addresses, among other things, the disclosure to be made by a
guarantor in its interim and annual financial statements about its
obligations under guarantees. These disclosure requirements are
included in Note 15E to the consolidated financial statements. The
Interpretation also requires the recognition of a liability by a
guarantor at the inception of certain guarantees.
The Interpretation requires the guarantor to recognize a liability for
the non-contingent component of the guarantee, this is the obligation
to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability
is the fair value of the guarantee at inception. The Company applies
the recognition and measurement provisions for all guarantees entered
into or modified after December 31, 2002.
F-53
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 22 - Significant Differences Between Israeli GAAP and U.S. GAAP and Their
Effect on the Financial Statements (cont'd)
D. Impact of recently adopted accounting standards (cont'd)
5. SFAS 148 - Accounting for Stock Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123
In December 2002, the FASB issued SFAS 148, "Accounting for Stock
Based Compensation - Transition and Disclosure - an amendment of FASB
statement No. 123" ("SFAS 148"). SFAS 148 permits two additional
transition methods for entities that adopt the fair value based method
of accounting for stock-based employee compensation. The Statement
also requires new disclosures about the ramp-up effect of stock-based
employee compensation on reported results. The Statement also requires
that those effects be disclosed more prominently by specifying the
form, content, and location of those disclosures. The transition
guidance and annual disclosure provisions of SFAS 148 are effective
for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The Company has
adopted the disclosure provisions of SFAS 148 in its year-end
financial statements (see Note 22C).
6. FASB Statement No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities - SAB 74 Disclosure
On April 30, 2003, the FASB issued FASB Statement No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities",
which amends FASB Statement No. 133, "Accounting for Derivative
instruments and Hedging Activities", to address (1) decisions reached
by the Derivatives Implementation Group, (2) developments in other
Board projects that address financial instruments, and (3)
implementation issues related to the definition of a derivative.
Statement 149 had multiple effective date provisions depending on the
nature of the amendment to Statement 133. The adoption of SFAS 149 had
no effect on the Company's financial statements.
7. 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
F-54
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
more of the delivered items. In those cases, the residual method
should be used to allocate the arrangement consideration.
F-55
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 22 - Significant Differences Between Israeli GAAP and U.S. GAAP and Their
Effect on the Financial Statements (cont'd)
D. Impact of recently adopted accounting standards (cont'd)
7. EITF 00-21 - Revenue Arrangements with Multiple Deliverables (cont'd)
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 adoption of EITF 00-21 did not have an impact on the
Company's consolidated financial statements.
E. Impact of recently issued accounting standards
1. FASB Statement No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity
On May 15, 2003, the FASB issued FASB Statement No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This Statement established standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of nonpublic entities. For certain
financial instruments the statement will be effective for the Company
on January 1, 2005. The effective date has been deferred indefinitely
for certain other types of mandatorily redeemable instruments. It is
to be implemented by reporting the cumulative effect of a change in an
accounting principle for financial instruments created before the
issuance date of the Statement and still existing at the beginning of
the interim period of adoption. Restatement is not permitted. The
Company does not have any instruments that are within the scope of
this statement.
F-56
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 22 - Significant Differences Between Israeli GAAP and U.S. GAAP and Their
Effect on the Financial Statements (cont'd)
E. Impact of recently issued accounting standards (cont'd)
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.
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)).
F-57
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 23 - Condensed Financial Statements of the Company in Nominal (Historical)
NIS
A. Balance sheets
As at As at
December 31 December 31
2003 2002
----------- -----------
Current assets
Cash and cash equivalents 81,660 86,675
Trade receivables, net 26,601 *25,683
Other receivables 10,539 10,743
------- -------
Total current assets 118,800 123,101
------- -------
Investments
Long-term loans -- 4,957
------- -------
Property and equipment, net 26,277 26,449
------- -------
Other assets and deferred charges 50,238 278
------- -------
Total assets 195,315 154,785
======= =======
* Reclassified
F-58
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 23 - Condensed Financial Statements of the Company in Nominal (Historical)
NIS (cont'd)
A. Balance sheets (cont'd)
As at As at
December 31 December 31
2003 2002
----------- -----------
Liabilities
Current liabilities
Short-term bank loans 2,459 3,016
Accounts payable 34,415 20,400
Other payables 9,388 10,283
------- -------
Total current liabilities 46,262 33,699
------- -------
Long-term liabilities
Excess of liabilities over assets in
subsidiaries 2,118 *13,907
Long-term loans 27,193 831
Deferred revenues 23 120
Liability for severance pay, net 4,523 3,530
------- -------
Total long-term liabilities 33,857 18,388
------- -------
Shareholders' equity (deficit)
Ordinary shares 184 184
Additional paid-in capital 200,983 200,983
Accumulated deficit (85,971) (98,469)
------- -------
Total shareholders' equity 115,196 102,698
------- -------
195,315 154,785
======= =======
* Reclassified
F-59
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 23 - Condensed Financial Statements of the Company in Nominal (Historical)
NIS (cont'd)
B. Statement of operations
Year ended Year ended
December 31 December 31
2003 2002
----------- -----------
Revenues 159,472 170,174
------- -------
Costs and expenses:
Cost of revenues 78,702 85,754
Selling and marketing expenses 42,971 37,819
General and administrative expenses 19,076 19,537
------- -------
Total costs and expenses 140,749 143,110
------- -------
Income from operations 18,723 27,064
Financing income (expenses), net (1,848) 11,292
Other expenses, net (9) (44)
------- -------
Net income after financing expenses 16,866 38,312
Company's share in net loss of investees (4,368) (14,916)
------- -------
Net income 12,498 23,396
======= =======
F-60
Internet Gold - Golden Lines Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands of adjusted NIS, except where otherwise stated)
Note 23 - Condensed Financial Statements of the Company in Nominal (Historical)
NIS (cont'd)
C. Statement of changes in shareholders equity
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, 2001 18,431,500 184 200,983 (121,865) 79,302
Changes during 2002:
Net loss income for
the year -- -- -- 23,396 23,396
---------- --- ------- -------- -------
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
========== === ======= ======== =======
F-61
List of principal investees and other companies
Equity Control
------ -------
Subsidiaries
MSN Israel Ltd. 50.1% 50.1%
Internet Gold International Ltd. 100% 100%
Gold Mind Ltd. 100% 100%
Start-Net Ltd. 50% 66.67%
Affiliated companies
Gold Trade Ltd. 48.27% 48.27%
F-62
Gold Trade Ltd.
Financial Statements as at December 31, 2003
--------------------------------------------------------------------------------
Page
----
Report of Independent Auditors 2
Balance Sheets as of December 31, 2003 and 2002 3
Statement of Operations for the years ended
December 31, 2003, 2002 and 2001 4
Statement of Changes in Shareholders' Equity for the years ended
December 31, 2003, 2002 and 2001 5
Statement of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 6
Notes to the Financial Statements 8
Report of Independent Public Accounting Firm
The Board of Directors and Shareholders of
Gold Trade Ltd.
We have audited the accompanying balance sheets of Gold Trade Ltd. (hereinafter
- the "Company") as of December 31, 2003 and 2002, and the related statements of
operations, changes in shareholders' equity (deficit) and cash flows, for each
of the three years in the period ended December 31, 2003. 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 audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2003 and 2002 and the results of its operations, the changes in shareholders'
equity (deficit) and its cash flows for each of the three years in the period
ended December 31, 2003, in conformity with generally accepted accounting
principles (GAAP) in Israel.
As explained in Note 2C, the above-mentioned financial statements are stated in
values adjusted for 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 20 to the consolidated financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Somekh Chaikin
Certified Public Accountants (Isr.)
A member firm of KPMG International
February 17, 2004
Gold Trade Ltd.
Balance Sheet
--------------------------------------------------------------------------------
Adjusted to NIS OF December 2003
Convenience
translation into
US Dollars
(Note 2D)
----------------
December 31 December 31 December 31
2003 2002 2003
------------- ------------- ----------------
Note NIS thousands NIS thousands US$ thousands
---- ------------- ------------- ----------------
Current assets
Cash and cash equivalents 10 21 2
Trade receivables, net 3 13,323 5,657 3,042
Other receivables 4 581 58 132
Inventory 5 1,702 3,190 389
------- ------- ------
15,616 8,926 3,565
------- ------- ------
Property and equipment, net 6 5,635 8,080 1,287
------- ------- ------
Other assets and deferred charges 7 4,680 5,850 1,069
------- ------- ------
Assets attributed to discontinued operations 19 -- 2,866 --
------- ------- ------
25,931 25,722 5,921
======= ======= ======
Current liabilities
Short-term bank loans 8 37,012 17,622 8,451
Accounts payable 9 6,662 4,877 1,521
Other payables 10 1,199 391 274
Related parties 1,649 1,977 377
------- ------- ------
46,522 24,867 10,623
------- ------- ------
Long-term liabilities
Liability for severance pay, net 11 385 644 88
Long-term loans 12 38 285 9
------- ------- ------
423 929 97
------- ------- ------
Commitments and contingent liabilities 13
Liabilities attributed to discontinued
operations 19 -- 27,631 --
------- ------- ------
Shareholders' deficit (21,014) (27,705) (4,799)
------- ------- ------
25,931 25,722 5,921
======= ======= ======
---------------------------------------- -------------------------------------
Eli Holtzman Doron Turgeman
Chief Executive Officer and Chairman Chief Financial Officer
of the board of Directors
Date of Signature: February 17, 2004
The accompanying notes are an integral part of the financial statements.
3
Gold Trade Ltd.
Statement of Operations
--------------------------------------------------------------------------------
Adjusted to NIS of December 2003
Convenience
translation into
US Dollars
(Note 2D)
----------------
Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31
2003 2002 2001 2003
------------- ------------- ------------- ----------------
Note NIS thousands NIS thousands NIS thousands US$ thousands
---- ------------- ------------- ------------- ----------------
Revenue 14 30,261 29,994 21,761 6,910
Cost of revenues 15 20,213 21,048 14,128 4,616
------- ------- ------- ------
Gross profit 10,048 8,946 7,633 2,294
Selling and marketing
Expenses 16 10,819 8,810 6,093 2,471
General and
administrative expenses 17 6,413 3,623 2,900 1,464
------- ------- ------- ------
Loss from operations (7,184) (3,487) (1,360) (1,641)
Financing expenses 18 3,800 187 155 868
Other expenses
(income), net -- 42 (5) --
------- ------- ------- ------
Net loss from continuing
Operations (10,984) (3,716) (1,510) (2,509)
Net loss from discontinued
Operations 19 -- (14,861) (17,652) --
------- ------- ------- ------
Net loss (10,984) (18,577) (19,162) (2,509)
======= ======= ======= ======
Basic net loss
per share (in NIS) from
continuing operations (292) (370) (151) (66.7)
======= ======= ======= ======
Basic net loss
per share (in NIS) from
discontinuing operations -- (1,486) (1,765) --
======= ======= ======= ======
Basic net loss
per share (in NIS) (292) (1,856) (1,916) (66.7)
======= ======= ======= ======
Weighted average
number of shares
outstanding (in
thousands) 37.6 10 10 37.6
======= ======= ======= ======
The accompanying notes are an integral part of the financial statements.
4
Gold Trade Ltd.
Statement of Changes in Shareholders' Equity (deficit)
--------------------------------------------------------------------------------
Adjusted to NIS of December 2003
Number of Share Premium on Accumulated
Shares capital* shares deficit Total
----------- ------------- ------------- ------------- -------------
(Par value) NIS thousands NIS thousands NIS thousands NIS thousands
----------- ------------- ------------- ------------- -------------
Balance as at
January 1, 2001 1,000 1 -- (14,153) (14,152)
Net loss for the year -- -- -- (19,162) (19,162)
------- --- ------ ------- -------
Balance as at
December 31, 2001 1,000 1 -- (33,315) (33,314)
Conversion of shareholder's
loans into shares 9,000 9 24,177 -- 24,186
Net loss for the year -- -- -- (18,577) (18,577)
------- --- ------ ------- -------
Balance as at
December 31, 2002 10,000 10 24,177 (51,892) (27,705)
Issuance of rights, net** 100,000 100 17,575 -- 17,675
Net loss for the year -- -- -- (10,984) (10,984)
------- --- ------ ------- -------
Balance as at
December 31, 2003 110,000 110 41,752 (62,876) (21,014)
======= === ====== ======= =======
* Number of authorized shares - 138,000.
** According to Board of Directors decision dated February 4, 2003, the
Company issued 100,000 shares as a rights issue to Eurocom Marketing Ltd.
and Internet Gold Ltd.
The accompanying notes are an integral part of the financial statements.
5
Gold Trade Ltd.
Statement of Cash Flows
--------------------------------------------------------------------------------
Adjusted to NIS of December 2003
Convenience
translation into
US Dollars
(Note 2D)
----------------
Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31
2003 2002 2001 2003
------------- ------------- ------------- ----------------
NIS thousands NIS thousands NIS thousands US$ thousands
------------- ------------- ------------- ----------------
Cash flows from operating activities
Net loss (10,984) (18,577) (19,162) (2,509)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Net loss from discontinued operations -- 14,861 17,652 --
Depreciation and amortization 2,848 4,082 269 651
Amortization or impairment of customer list 1,170 3,785 -- 267
Increase (decrease) in liability for termination
of employer-employee relations, net (259) 511 296 (59)
(Gain) loss from sale of property and
Equipment -- 76 (4) --
Interest on long-term loans -- -- 1,211 --
Changes in assets and liabilities
Increase in other receivables (563) (5) (55) (129)
Increase in trade receivables (7,666) (4,052) (1,607) (1,751)
Decrease in inventory 1,488 -- -- 340
Increase in other payables 258 766 3,348 59
Increase in accounts payable 1,785 3,985 1,422 408
------- ------- ------- ------
Net cash provided by (used in)
continuing operating activities (11,923) 5,432 3,370 (2,723)
Net cash provided by (used in)
discontinued operating activities 272 (11,339) (11,306) 62
------- ------- ------- ------
Net cash used in operating activities (11,651) (5,907) (7,936) (2,661)
======= ======= ======= ======
The accompanying notes are an integral part of the financial statements.
6
Gold Trade Ltd.
Statement of Cash Flows (cont'd)
--------------------------------------------------------------------------------
Adjusted to NIS of December 2003
Convenience
translation into
US Dollars
(Note 2D)
----------------
Year ended Year ended Year ended Year ended
December 31 December 31 December 31 December 31
2003 2002 2001 2003
------------- ------------- ------------- ----------------
NIS thousands NIS thousands NIS thousands US$ thousands
------------- ------------- ------------- ----------------
Cash flows from investment activities
Acquisition of property and equipment (403) (731) (3,569) (92)
Proceeds from sale of property and equipment -- 300 55 --
------- ------ ------ ------
Net cash used in continuing
investment activities (403) (431) (3,514) (92)
Net cash used in discontinued
investment activities -- (1,015) (4,692) --
------- ------ ------ ------
Net cash used in investment activities (403) (1,446) (8,206) (92)
======= ====== ====== ======
Cash flows from financing activities
Change in short term bank loans* 12,254 15,058 2,000 2,798
Issuance of rights 10,466 -- -- 2,390
Lease agreement (211) (196) (78) (48)
------- ------ ------ ------
Net cash provided by continuing
Financing activities 22,509 14,862 1,922 5,140
Net cash provided by (used in) discontinued
Financing activities (10,466) (7,488) 14,220 (2,390)
------- ------ ------ ------
Net cash provided by financing activities 12,043 7,374 16,142 2,750
======= ====== ====== ======
Changes in cash and cash equivalents (11) 21 -- (3)
Cash and cash equivalents at
Beginning of year 21 -- -- 5
------- ------ ------ ------
Cash and cash equivalents at end of year 10 21 -- 2
======= ====== ====== ======
Non-cash activities
Shareholders' loans capitalized -- 24,186 -- --
------- ------ ------ ------
Account payable in respect of fixed assets -- -- 350 --
------- ------ ------ ------
Account payable capitalized 7,431 -- -- 1,696
------- ------ ------ ------
* Included interest paid to bank totaling NIS 3,542 as of December 31, 2003
(NIS 2,796 as of December 31, 2002).
The accompanying notes are an integral part of the financial statements.
7
Gold Trade Ltd.
Notes to the Financial Statements as at December 31, 2003
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 1 - General
Gold Trade Ltd. (the "Company"), was incorporated in Israel at the end of
1999 and commenced operating in January 2000. The Company manages and
operates the Internet Electronic Trade and tender site P-1000 in Israel.
During 2000, the Company acquired the activity of "Best Deal", a mail order
catalog company that dealt with the import of inexpensive merchandise from
the Far East to be sold through a self produced catalog. During 2002, due
to losses, the Company decided to discontinue these operations. According
to Accounting Standard No. 8, this activity was classified as a
discontinued operation (see Note 2).
The Company has an accumulated equity deficit of NIS 21,014 after issuance
of rights this year (out of which NIS 4,282 has not yet been paid) and
after capitalizations of shareholders' loans at the end of last year. The
Company has negative working capital including liabilities and assets
attributed to discontinued operations of NIS 30,906.
The Company has bank credit (on its own account) in the amount of US$ 8
million which has been completely utilized up to the date of the financial
statements.
Furthermore, the Company has a negative cash flow of NIS 11,651 from
operating activities for the year ended December 31, 2003.
The abovementioned raise substantial doubt about the company's ability to
continue operating as a going concern. The Company's management has
considered the situation and adopted a new work plan for 2004 that supposed
to put the company on the positive track, to manage cost effectively its
operations. According to this the Company hired a new management in 2004
and expects to minimize operating expenses and improved performance. The
management anticipates, on the basis of the plan for 2004, that it will
have positive operating cash flows.
The continuation of the operations of the Company as a "going concern" is
dependent upon the banks consenting to maintain the credit line and/or
financing from shareholders and upon achieving the goals set forth in the
work plan.
Note 2 - Significant 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 20 for reconciliation to
generally accepted accounting principles in the United States.
B. 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
8
statements and accompanying notes. Actual results could differ from those
estimates.
9
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 2 - Significant Accounting Policies (cont'd)
C. Financial statements in adjusted New Israeli Shekels (NIS)
1. The financial statements have been prepared on the basis of historical
cost adjusted for changes in the general purchasing power of the New
Israeli Shekel. The adjustment, in accordance with Opinions No. 36 and
50 of the Institute of Certified Public Accountants in Israel (ICPAI),
expresses the financial data in adjusted NIS of identical purchasing
power. See Note 21 for condensed financial statements of the Company
in nominal (historical) values.
The adjusted value of non-monetary assets represents their historical
cost adjusted for changes in the general purchasing power of the
Israel currency and does not necessarily represent their market value
to the Company.
In these financial statements the term "cost" refers to the adjusted
cost. Comparative data for the previous periods have been adjusted to
NIS of December 2003.
2. Balance sheet:
Non-monetary items (property and equipment, prepaid expenses, deferred
revenue) have been adjusted for the changes in the Israeli Consumer
Price Index (hereinafter - "CPI") as known at the date of the
transaction, to the CPI published for the balance sheet date.
Monetary items are stated at their nominal value.
3. Statement of operations:
Income and expenses arising from non-monetary items (depreciation,
changes in prepaid expenses and prepaid revenue) have been adjusted
based on specific indices corresponding to the appropriate balance
sheet items.
Other income and expense items, except for financing expenses, have
been adjusted on the basis of the change in the CPI from the
transaction date until the balance sheet date.
Net financial expenses are expressed in real terms and include the
devaluation of monetary balances, as well as adjustment differentials,
which result from the aforementioned adjustment of the financial
statements.
D. Convenience translation
For the convenience of the reader, the adjusted NIS figures of December 31,
2003 have been presented in U.S. Dollars thousands, translated at the
representative rate of exchange as of December 31, 2003 (NIS 4.379 = 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.
10
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 2 - Significant Accounting Policies (cont'd)
E. Customer list
During 2000, the Company purchased the activity of "Best Deal", a mail
order catalog company. All of the consideration was attributed to the
customer list, and amortized, initially, in equal amounts over ten years
commencing on the acquisition date, and according to the management
estimates.
According to Israeli GAAP as prescribed in Accounting Standard 15, the
Company wrote down the value of the customer list in 2002 to its carrying
value using the discounted projected cash flows derived from the activity
incorporating the customer list over its useful life term. Since this
impairment, the customer list is being amortized over five years.
F. Exchange rate and consumer price index data
1. Assets and liabilities linked to foreign currency are stated on the
basis of the representative rate of exchange of the currency
prevailing at the balance sheet date.
Balances which are linked to the CPI are presented on the basis of the
last Index published prior to the balance sheet date or on the basis
of the first Index published subsequent to the balance sheet date,
based on the terms of the applicable transactions.
Income and expenses denominated in foreign currency are recorded
according to the representative rate of exchange prevailing at the
time the transactions were effected.
Exchange gains and losses are included in the statement of operations.
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
rate of the $ CPI
------------- -------------
As of December 31, 2002 4.737 182.01 points
As of December 31, 2003 4.37 178.58 points
Changes during the:
Year ended December 31, 2002 7.27% 6.49%
Year ended December 31, 2003 (7.56%) (1.88%)
11
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 2 - Significant Accounting Policies (cont'd)
G. 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.
H. Allowance for doubtful accounts
The allowance for doubtful accounts represents management's estimate of the
aged receivable balance considered uncollectible, based on past experience.
I. Property and equipment
Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method, over the assets
estimated useful lives.
Annual depreciation rates are as follows:
%
-------
Computers and software 15 - 33
Motor vehicles 15
Furniture and office equipment 6
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 fixed asset.
J. Inventory
Inventories, which consist of merchandise, are stated at the lower of cost
or fair market value. Inventory cost is determined according to the moving
average method.
12
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 2 - Significant Accounting Policies (cont'd)
K. Revenue recognition
Most of the Company's revenues are derived from sales of merchandise. These
revenues are recognized on delivery to the customer. Other revenues include
commissions, which are recognized at the time of product sale.
L. Disclosure of the effect of new accounting standards in the
pre-application period
1. Accounting Standard No. 12 on "Discontinuance of Adjustment of
Financial Statements".
Pursuant to this standard, commencing January 1, 2004, the adjustment of
financial statements will cease.
Up to December 31, 2003, the Company will continue 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, will constitute the
starting point for the nominal financial report as of January 1, 2004. The
extent of the effect depends on the rate of inflation and the financing
sources of the company. The Company is evaluating the impact Accounting
Standard No. 12 may have on its future financial statements.
2. Accounting Standard No. 13 on "Effect of Changes in Exchange Rate of
Foreign Currency".
The standard discusses the translation of transactions in foreign currency
and the translation of financial statements of foreign operations for the
purpose of including them in the financial statements of the reporting
entity and replaces the instructions in Clarifications 8 and 9 to Opinion
No. 36 which will be annulled upon Accounting Standard No. 12 coming into
effect. This standard will apply to financial statements for periods
beginning after December 31, 2003. The adoption of Accounting Standard No.
13 will not effect financial statements.
13
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 3 - Trade Receivables, Net
A. Consists of:
As at As at
December 31 December 31
2003 2002
------------- -------------
NIS thousands NIS thousands
------------- -------------
Open accounts and accrued revenues 2,526 2,212
Checks, standing orders and credit cards receivable 11,167 3,654
------ -----
13,693 5,866
Allowance for doubtful accounts (370) (209)
------ -----
13,323 5,657
====== =====
B. Regarding liens, see Note 13.
C. Changes in the allowance for doubtful accounts were as follows:
NIS thousands
-------------
Balance as of December 31, 2002
in respect of continued operations 209
Balance as of December 31, 2002
in respect of discontinued operations 108
---
Balance as of December 31, 2002 317
Net increase during 2003 53
---
Balance as of December 31, 2003 370
===
Note 4 - Other Receivables
A. Consists of:
As at As at
December 31 December 31
2003 2002
------------- -------------
NIS thousands NIS thousands
------------- -------------
Prepaid expenses 57 13
Government institutions - Income Tax 12 5
Government institutions - Value-Added Tax 9 5
Other 59 32
Related parties 444 3
--- ---
581 58
=== ===
14
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
B. Regarding liens, see note 13.
15
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 5 - Inventory
A. Consists of:
As at As at
December 31 December 31
2003 2002
------------- -------------
NIS thousands NIS thousands
------------- -------------
Stock in warehouse /(1)/ 1,702 3,190
----- -----
1,702 3,190
===== =====
B. Regarding liens , see note 13.
/(1)/ Including provision for the decline in value in the amount of NIS 572
(December 31, 2002 - NIS 933).
Note 6 - Property and Equipment, Net
A. Consists of:
Computers Furniture and *Motor Leasehold
and software office equipment vehicles Improvements Total
------------- ---------------- ------------- ------------- -------------
NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
------------- ---------------- ------------- ------------- -------------
Cost
As at
January 1, 2003 8,878 566 546 2,262 12,252
Additions 282 22 -- 99 403
----- --- --- ----- ------
As at
December 31, 2003 9,160 588 546 2,361 12,655
----- --- --- ----- ------
Depreciation
As at
January 1, 2003 3,650 52 58 412 4,172
Depreciation 2,078 80 114 576 2,848
----- --- --- ----- ------
As at
December 31, 2003 5,728 132 172 988 7,020
----- --- --- ----- ------
Property and
equipment, net
As at
December 31, 2003 3,432 456 374 1,373 5,635
===== === === ===== ======
As at
December 31, 2002 5,228 514 488 1,850 8,080
===== === === ===== ======
* Includes motor vehicles under financial lease agreements. Liens have
been placed on such vehicles, in favor of the lessor.
16
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
B. Regarding liens, see note 13.
17
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 7 - Other Assets and Deferred Charges
A. Consists of:
As at As at
December 31 December 31
2003 2002
------------- -------------
NIS thousands NIS thousands
------------- -------------
Customers list 11,450 11,450
Amortization and impairment in value of customers list (6,770) (5,600)
------ ------
4,680 5,850
====== ======
B. Regarding liens, see Note 13.
Note 8 - Short-Term Bank Loans
Consists of:
As at As at
December 31 December 31
2003 2002
------------- -------------
NIS thousands NIS thousands
------------- -------------
Credit from banks - Prime* 3,010 17,424
Short term loans - Prime -0.25% - prime* 33,767 --
Current maturities of long term loans 235 198
------ ------
37,012 17,622
====== ======
* The prime rate as of December 31, 2003 was 6.7% (December 31, 2002 -
10.4%).
See Note 13 with regard to bank guarantees.
18
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 9 - Accounts Payable
Consists of:
As at As at
December 31 December 31
2003 2002
------------- -------------
NIS thousands NIS thousands
------------- -------------
Trade payables - open accounts 5,493 4,421
Checks payable 894 23
Trade payables abroad -- 1
Accrued expenses 275 432
----- -----
6,662 4,877
===== =====
Note 10 - Other Payables
As at As at
December 31 December 31
2003 2002
------------- -------------
NIS thousands NIS thousands
------------- -------------
Employees and payroll accruals 785 230
Liability for vacation and recreation pay 192 110
Other 222 51
----- ---
1,199 391
===== ===
19
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 11 - 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 represent the
balance of the liability not funded as above:
As at As at
December 31 December 31
2003 2002
------------- -------------
NIS thousands NIS thousands
------------- -------------
Liability for severance pay 716 976
Less: amounts funded 331 332
--- ---
385 644
=== ===
Note 12 - Long-Term Loans
Long-term loans are as follows:
As at As at
December 31 December 31
2003 2002
------------- -------------
Interest rate NIS thousands NIS thousands
------------- ------------- -------------
Capital lease obligations (linked to the CPI) 5%-7% 273 483
Less: Current maturities (235) (198)
---- ----
38 285
==== ====
Note 13 - Guarantees, Commitments and Contingent Liabilities
1. A floating lien has been placed on all the assets of the Company and
all trade receivables as well as other receivables, to secure
liabilities to the bank. The amount of liabilities, which are secured
in the above mentioned lien is NIS 36,777 as of December 31, 2003.
2. The Company leases premises for an annual amount of NIS 321. The
Company's lease agreement expired on December 31, 2003. As of January
1, 2004, the Company uses the premises on a monthly basis without a
lease agreement.
20
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 14 - Revenues
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
Sales 23,989 23,992 20,814
Other 6,272 6,002 947
------ ------ ------
30,261 29,994 21,761
====== ====== ======
Note 15 - Cost of Revenues
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
Cost of goods 15,413 15,576 12,288
Salaries and related expenses 711 728 1,026
Depreciation 2,014 3,378 160
Other 2,075 1,366 654
------ ------ ------
20,213 21,048 14,128
====== ====== ======
Note 16 - Selling and Marketing Expenses
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
Salaries and related expenses 5,359 4,096 4,683
Advertising and Marketing expenses 5,017 4,482 1,074
Distribution fees 443 232 304
Other -- -- 32
------ ----- -----
10,819 8,810 6,093
====== ===== =====
21
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
22
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 17 - General and Administrative Expenses
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
Salaries and related expenses 1,752 1,163 2,085
Depreciation and amortization 2,080 475 --
Professional fees 187 151 52
Car maintenance 290 151 31
Postal and communication 697 473 148
Office maintenance 1,122 698 338
Provision for doubtful debts 66 268 44
Other 219 244 202
----- ----- -----
6,413 3,623 2,900
===== ===== =====
Note 18 - Financing Expenses
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
Interest expense on short-term loans
from banks 4,228 91 155
Other, mainly derived from erosion of trade
receivables and trade payables (428) 96 --
----- --- ---
3,800 187 155
===== === ===
23
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 19 - Discontinued Operation
The Company reached the decision in June 2002 to close down its operation
in the line of business of imported merchandise sold through its self
produced mail order catalog. The reclassification of the assets and certain
liabilities attributed to discontinued operations were effected based on
specific allocations. Other liabilities including shareholders' loan and
bank credit were attributed according to a ratio between the deficit
derived from the continuing and discontinuing operations.
The reclassification of the revenues and expenses to discontinued
operations was allocated on a specific basis, other than in respect of
financing expenses which were reclassified according to the ratio of
liabilities attributed to the discontinued operation.
As at As at
December 31 December 31
2003 2002
------------- -------------
NIS thousands NIS thousands
------------- -------------
Assets attributable to discontinued operations
Trade receivables, net -- 2,786
Other receivables -- 80
--- ------
-- 2,866
=== ======
Liabilities attributable to discontinued operations
Short-term bank loans -- 21,765
Accounts payable -- 2,131
Other payables -- 3,566
Long-term liabilities -- 169
--- ------
-- 27,631
=== ======
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
------------- ------------- -------------
NIS thousands NIS thousands NIS thousands
------------- ------------- -------------
Revenues -- 8,223 42,699
--- ------- -------
Cost of revenues -- (10,008) (34,927)
Selling and marketing expenses -- (5,060) (15,500)
General and administrative expenses -- (6,554) (6,664)
--- ------- -------
-- (21,622) (57,091)
--- ------- -------
Loss from operations -- (13,399) (14,392)
Financing expenses, net -- (1,462) (3,260)
--- ------- -------
Net loss -- (14,861) (17,652)
=== ======= =======
24
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 20 - 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, 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 measures the effect of price level
changes in the Israeli economy.
U.S. GAAP does not provide for recognition of the effects of such
price level changes. Such effects have not been included in
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, 2003 and 2002, such
funded amounts were NIS 34 thousand and NIS 127 thousand respectively.
3. Customer list
According to Israeli GAAP as prescribed in Accounting Standard 15, the
Company 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, the Company termed this asset as goodwill since there was
no distinction between the titles. Under U.S. GAAP, the Company 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 the
Company identified that the reporting unit to which the goodwill is
attributed was impaired. When the Company applied the second step of
the impairment test the Company determined that the implied fair value
of the goodwill is zero since the Company had to attribute fair value
to the customer list that was not previously recorded. This year, in
its Israeli GAAP figures, the Company continued to amortize this
client list (previously titled "goodwill") amounting to NIS 1,170
thousand. Under US GAAP this asset was fully written off last year.
The amortization described above is reversed in the reconciliation
note.
25
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 20 - Significant Differences Between Israeli GAAP and U.S. GAAP and their
effect on the Financial Statements (cont'd)
B. The effect of the significant differences between Israeli GAAP and
U.S. GAAP on the financial statement.
The following is the 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. Statement of operations
December 31 December 31 December 31
2003 2002 2001
----------- ----------- -----------
Adjusted NIS (thousands)
---------------------------------------
Net loss Israeli GAAP (10,984) (18,577) (19,162)
Adjustments to conform with US GAAP:
Customer list write off (A3) 1,170 (5,850) --
------- ------- -------
Net loss from continued operations US GAAP (9,814) (9,566) (1,510)
------- ------- -------
Net loss from discontinued operations -- (14,861) (17,652)
------- ------- -------
Net loss US GAAP (9,814) (24,427) (19,162)
------- ------- -------
Basic net loss per share (in NIS) from
continued operations in accordance
with US GAAP (261) (956) (151)
Basic net loss per share (in NIS) from
discontinued operations - US GAAP -- (1,486) (1,765)
------- ------- -------
Basic net loss per share (in NIS) US GAAP (261) (2,442) (1,916)
======= ======= =======
26
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 20 - Significant Differences Between Israeli GAAP and U.S. GAAP and their
effect on the Financial Statements (cont'd)
2. Balance sheets:
December 31 December 31
2003 2002
----------- -----------
Adjusted NIS (thousands)
-------------------------
Shareholders' funds - equity - Israeli GAAP (21,014) (27,705)
Adjustment to conform with US GAAP:
Customer list write off (A3) (4,680) (5,850)
------- -------
Shareholders' equity in accordance with US GAAP (25,694) (33,555)
======= =======
B. The effect of the significant differences between Israeli GAAP and
U.S. GAAP on the financial statement (cont'd)
3. Impact of recently adopted accounting standards (cont'd)
a. In July 2001, Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("Statement 141") was issued. Statement 141
eliminates the pooling of interests method of accounting for business
combinations initiated after June 30, 2001 and requires all business
combinations initiated after this date to be accounted for using the
purchase method. Statement 141 also specifies criteria that intangible
assets acquired in a purchase method business combination must meet to
be recognized and reported apart from goodwill. The Company adopted
the provisions of Statement 141 as of July 1, 2001. The adoption of
Statement 141 has effect on the consolidated statements of the Company
(see A3).
b. In July 2001, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("Statement 142") was issued.
Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested
for impairment at least annually in accordance with the provision of
Statement 142. Statement 142 will also require that intangible assets
with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Dispose of".
27
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 20 - Significant Differences Between Israeli GAAP and U.S. GAAP and Their
Effect on the Financial Statements (cont'd)
B. The effect of the significant differences between Israeli GAAP and
U.S. GAAP on the financial statement (cont'd)
3. Impact of recently adopted accounting standards (cont'd)
Statement 142 sets forth certain transition provisions which will
require, amongst other things, that Company perform an assessment of
whether there is an indication that goodwill (and equity-method
goodwill) is impaired as of the date of adoption. To accomplish this,
the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to
those reporting units as of the date of adoption. The Company will
then have up to six months from the date of adoption to determine the
fair value of each reporting unit and compare it to the reporting
unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the
second step of the transitional impairment test. In the second step,
the Company must compare the implied fair value of the reporting
unit's goodwill, determined by allocating the reporting unit's fair
value to all of its assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in
accordance with Statement 141, to its carrying amount, both of which
would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the
end of the year of adoption. Any transitional impairment loss will be
recognized as the cumulative effect of a change in accounting
principle in the Company's statement of operations. The adoption of
Statement 142 has effect on the consolidated statements of the Company
(see A3).
c. SFAS 143 - Accounting for Asset Retirement Obligations
In June 2001, The FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations" (hereinafter SFAS 143). SFAS 143 requires the
Company to record fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal
use of the assets. The Company also records a corresponding asset,
which is depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the obligation
will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the
obligation. SFAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. Earlier application is
permitted. The adoption of SFAS 143 had no significant impact on the
Company's financial statements.
28
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 20 - Significant Differences Between Israeli GAAP and U.S. GAAP and Their
Effect on the Financial Statements (cont'd)
B. The effect of the significant differences between Israeli GAAP and
U.S. GAAP on the financial statement (cont'd)
3. Impact of recently issued accounting standards (cont'd)
d. SFAS 145 - Rescission of FASB Statements 4, 44 and 64, Amendment of
FASB Statement No. 13 and Technical Corrections
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statement
4, 44 and 64, Amendment of FASB No. 13 and Technical Corrections"
(hereinafter SFAS 145). SFAS 145 rescinds FASB Statement No. 4,
"Reporting Gains and Losses from Extinguishments of Debt", and an
amendment of that Statement, FASB Statement No. 64, "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements". FASB 145 also
rescinds FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13,
"Accounting for Leases", to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. SFAS 145 also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions.
The provisions of this Statement related to the rescission of
Statement 4 are applicable in fiscal years beginning after May 15,
2002. Early adoption is encouraged. A calendar-year entity may early
adopt the Statement 4 rescission in the fourth quarter of 2002. The
provisions of this Statement related to Statement 13 are effective for
transactions occurring after May 15, 2002, with early application
encouraged. All other provisions of this Statement are effective for
financial statements issued on or after May 15, 2002, with early
application encouraged. The adoption of SFAS 145 had no significant
impact on its financial statements.
e. SFAS 146 - Accounting for Costs Associated with Exit or Disposal
Activities
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (hereinafter SFAS 146).
SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullified EITF 94-3
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to exit an activity. SFAS 146 is effective for exit and
disposal activities that are initiated after December 31, 2002.
Earlier application is encouraged. The adoption of SFAS 146 did not
have a significant impact on the company's financial statements.
29
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 20 - Significant Differences Between Israeli GAAP and U.S. GAAP and Their
Effect on the Financial Statements (cont'd)
B. The effect of the significant differences between Israeli GAAP and
U.S. GAAP on the financial statement (cont'd)
3. Impact of recently adopted accounting standards (cont'd)
f. FIN 45 - Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (hereinafter the Interpretation), which
addresses, among other things, the disclosure to be made by a
guarantor in its interim and annual financial statements about its
obligations under guarantees. These disclosure requirements are
included in Note 15E to the consolidated financial statements. The
Interpretation also requires the recognition of a liability by a
guarantor at the inception of certain guarantees.
The Interpretation requires the guarantor to recognize a liability for
the non-contingent component of the guarantee, this is the obligation
to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability
is the fair value of the guarantee at inception. The Company applies
the recognition and measurement provisions for all guarantees entered
into or modified after December 31, 2002.
g. SFAS 148 - Accounting for Stock Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123
In December 2002, the FASB issued SFAS 148, "Accounting for Stock
Based Compensation - Transition and Disclosure - an amendment of FASB
statement No. 123" ("SFAS 148"). SAFS 148 permits two additional
transition methods for entities that adopt the fair value based method
of accounting for stock-based employee compensation. The Statement
also requires new disclosures about the ramp-up effect of stock-based
employee compensation on reported results. The Statement also requires
that those effects be disclosed more prominently by specifying the
form, content, and location of those disclosures. The transition
guidance and annual disclosure provisions of SFAS 148 are effective
for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The Company has
adopted the disclosure provisions of SFAS 148 in its year-end
financial statements (see Note 22C).
h. FASB Statement No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities - SAB 74 Disclosure
On April 30, 2003, the FASB issued FASB Statement No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities,
which amends FASB Statement No. 133, "Accounting for Derivative
instruments and Hedging Activities", to address (1) decisions reached
30
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
by the Derivatives Implementation Group, (2) developments in other
Board projects that address
31
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 20 - Significant Differences Between Israeli GAAP and U.S. GAAP and Their
Effect on the Financial Statements (cont'd)
B. The effect of the significant differences between Israeli GAAP and
U.S. GAAP on the financial statement (cont'd)
3. Impact of recently adopted accounting standards (cont'd)
financial instruments, and (3) implementation issues related to the
definition of a derivative. Statement 149 had multiple effective date
provisions depending on the nature of the amendment to Statement 133.
The adoption of SFAS 149 has no effect on the Company's financial
statements.
i. 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 adoption of EITF 00-21 did not have an impact on the
Company's financial statements.
j. FASB Statement No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity
On May 15, 2003, the FASB issued FASB Statement No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This Statement established standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the
32
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
beginning of the first interim period beginning after June 15, 2003,
except for mandatory
33
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 20 - Significant Differences Between Israeli GAAP and U.S. GAAP and Their
Effect on the Financial Statements (cont'd)
B. The effect of the significant differences between Israeli GAAP and
U.S. GAAP on the financial statement (cont'd)
3. Impact of recently issued accounting standards (cont'd)
FASB Statement No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (cont'd)
redeemable financial instruments of nonpublic entities. For certain
financial instruments the statement will be effective for the Company
on January 1, 2005. The effective date has been deferred indefinitely
for certain other types of mandatorily redeemable instruments. It is
to be implemented by reporting the cumulative effect of a change in an
accounting principle for financial instruments created before the
issuance date of the Statement and still existing at the beginning of
the interim period of adoption. Restatement is not permitted. The
Company does not have any instruments that are within the scope of
this statement.
k. 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.
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.
The adoption of FIN-46(R) will not have a significant impact on the
Company's financial
34
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
statements.
35
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 21 - Income Taxes
A. Israel tax reform
As of January 1, 2003, tax reform legislation was enacted, which
significantly changed the taxation basis of corporate and individual
taxpayers from a territorial basis to a worldwide basis. From such date an
Israeli resident taxpayer will be taxed on income produced and derived both
in and out of Israel. The main provisions of the tax reform that may affect
the Company are as follows:
1. Transfer pricing of international transactions with related parties.
The Income Tax Ordinance was amended to include provisions concerning
transfer pricing between related parties, where one of the parties is
situated abroad. Detailed provisions are to be included in Income Tax
Regulations that have yet to be issued.
Although the Company considers that the transfer pricing policy
adopted with foreign affiliates is economically fair, an adjustment
may be required following the issue of the said Regulations.
2. Employee stock incentive plans
The tax reform codified past practice and determined three alternative
tracks for taxing employee stock option plans. Where a trustee
arrangement is in place, the employer can either claim a deduction for
tax purposes while the employee will be fully taxed up to the maximum
marginal tax rate of 50% or the Company can waive the tax expense and
the employee will pay a reduced tax rate of 25%. Where there is no
trustee arrangement, the employee is fully taxable and no expense is
allowed to the Company. There are detailed provisions for implementing
these tracks. The Company is considering the alternatives.
3. Controlled foreign company (CFC)
The amendment to the law introduced Controlled Foreign Company (CFC)
provisions, which, in certain circumstances, will lead to the Israeli
company being charged tax on passive income of foreign affiliates as
if it had received a dividend from such companies.
4. Capital gains tax is reduced to 25% from 36%, except with respect to
capital gains from marketable securities, with transitional provisions
for assets acquired prior to January 1, 2003.
5. The seven year limit for carrying forward of capital losses has been
removed with respect to capital losses arising from 1996 and
thereafter.
B. 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 - 36%.
C. The Company has received final tax assessments up to and including the
1999 tax year.
36
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 21 - Income Taxes (cont'd)
D. The Company has an operating loss carryforward for tax purposes, as of
December 31, 2003 of approximately NIS 48 million. The operating loss
carryforward is linked to the Index and has no expiry date.
E. Reconciliation of income tax expense:
A reconciliation of the theoretical tax expense computed on the pre-tax
income (loss) at the statutory tax rate and the actual income tax provision
is as follows:
Year ended Year ended Year ended
December 31 December 31 December 31
2003 2002 2001
----------- ----------- -----------
Loss before income taxes as per income
Statements 10,984 18,577 19,162
------ ------ ------
Theoretical tax computed at the statutory
tax rate (3,954) (6,687) (6,898)
------ ------ ------
Increase in tax resulting from:
Non-deductible expenses 30 35 43
Change in valuation allowance in respect of
deferred taxes 3,913 6,648 6,847
Other difference 11 4 8
------ ------ ------
3,954 6,687 6,898
------ ------ ------
-- -- --
====== ====== ======
37
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 22 - Condensed Financial Statements of the Company in Nominal (Historical)
NIS
A. Balance sheets
As at As at
December 31 December 31
2003 2002*
------------- -------------
NIS thousands NIS thousands
------------- -------------
Current assets
Cash and cash equivalents 10 22
Trade receivables, net 13,323 5,767
Other receivables 581 60
Inventory 1,664 3,062
------- -------
15,578 8,911
------- -------
Property and equipment, net 5,355 7,651
------- -------
Other assets and deferred changes 4,770 5,963
------- -------
Assets attributed to discontinued
operations -- 2,920
------- -------
25,703 25,445
======= =======
Current liabilities
Short-term bank loans 37,012 17,960
Accounts payable 6,662 4,971
Other payables 1,199 399
Related parties 1,649 2,015
------- -------
46,522 25,345
------- -------
Long-term liabilities
Liability for severance pay, net 385 656
Long-term loans 38 291
------- -------
423 947
------- -------
Liabilities attributed to discontinued
operations -- 28,161
------- -------
Shareholders' deficit (21,242) (29,008)
------- -------
25,703 25,445
======= =======
* Reclassified due to discontinued operations.
38
Gold Trade Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
All amounts in thousands adjusted to NIS, except where otherwise stated.
Note 22 - Condensed Financial Statements of the Company in Nominal (Historical)
NIS (cont'd)
B. Statement of operations
Year ended Year ended
December 31 December 31
2003 2002
------------- -------------
NIS thousands NIS thousands
------------- -------------
Revenues 30,628 30,112
Costs and revenues 20,251 21,129
------- -------
Gross profit 10,377 8,983
Selling and marketing expenses 10,924 8,830
General and administrative expenses 4,938 3,478
------- -------
Loss from operations (5,431) (3,325)
------- -------
Financing expenses, net 3,438 526
Other expenses (income), net 1,193 42
------- -------
Net loss after financing expenses (10,116) (3,893)
Minority interest in loss of a subsidiary -- 61
------- -------
Net loss from continuing operations (10,116) 3,832
Net loss from discontinued operations -- (17,737)
------- -------
Net loss (10,116) (21,569)
======= =======
C. Statement of changes in shareholders equity
Premium Accumulated
Share capital on shares Deficit Total
------------- ------------- ------------- -------------
NIS thousands NIS thousands NIS thousands NIS thousands
------------- ------------- ------------- -------------
Balance as of January 1, 2003 10 24,642 (53,660) (29,008)
Issuance of rights, net 100 17,782 -- 17,882
Net loss for the year -- -- (10,116) (10,116)
--- ------ ------- -------
Balance as of December 31, 2003 110 42,424 (63,776) (21,242)
=== ====== ======= =======
39
ITEM 19. EXHIBITS
Index to Exhibits
Exhibit Description
------- -----------
*3.1 Memorandum of Association of the Registrant.
*3.2 Articles of Association of the Registrant.
*4.1 Specimen of Share Certificate.
*4.2 Registration Rights Agreement, dated July 30, 1999, among the
Registrant, Euronet Communications Ltd., Shaul Elovitch and Eli
Holtzman.
*10.1 Employee Stock Option Plan dated June 1999 of the Registrant.
*10.2 Agreement between Poalim Properties the Registrant (Shares) Ltd.,
Isracard Ltd., Euronet Communications Ltd. and the Registrant dated
June 1999.
*10.3 Managed Telecommunications Network Services Agreement between the
Registrant and Euronet Digital Communications Ltd. dated August 18,
1998.
*10.4 Amendment to the Managed Telecommunications Network Services Agreement
between the Registrant and Euronet Digital Communications Ltd. dated
May 4, 1999.
*10.5 Agreement between The Ministry of Education for the State of Israel
and Tadiran Information Systems effective December 1, 1997.
*10.6 Agreement between Tadiran Information Systems, Bynet Computer
Communications Ltd. and the Registrant dated December 24, 1996.
**10.7 Hebrew version and an English summary of Lease Agreement between Rivka
and Avraham Veron and the Registrant dated March 1999.
21 List of Subsidiaries of the Registrant
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended.
-1-
32.1 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.
32.2 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.
-2-
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
Dated: June 28, 2004