INTERNET
GOLD - GOLDEN LINES LTD.
(the
"Company")
PROSPECTUS
Offer to
the public of
220,000,000
registered debentures (Series A) of NIS 1 par value each, repayable in eight
equal annual installments on April 1 of each of the years 2008 to 2011, bearing
interest at a rate to be determined in the tender and which shall not be lower
than 4% and shall not exceed 5%, with principal and interest linked to the CPI
for February 2005. The interest on the balance of the debentures (Series A)
which has not been repaid shall be paid once every twelve months, on April first
of each of the years 2006 to 2015. The debentures (Series A) may be converted
into ordinary shares on any trading day beginning on the date they are
registered for trade on the stock market and through March 31, 20015
(inclusive), with the exception of March 19 through April 1 of each of the years
2008 to 2014, such that by March 31, 2008 (inclusive) each NIS 40 par value
debentures (Series A) which were not redeemed shall be convertible into one
ordinary share of NIS 0.01 par value each. (Subject to the adjustments as
stipulated in Section 9.14 below.)
Debentures (Series A) which are not converted by March 18, 2015 shall not grant
holders the right to convert them into Company shares.
and
of
1,500,000
registered share purchase warrants (Series 1) that can be converted into
ordinary shares in the Company on any trading day as of June 1
2005 and
through August
15, 2005,
such that each option warrant (Series 1) shall be convertible into one ordinary
share of the Company of NIS 0.01 par value each against cash payment of exercise
price of NIS 32 (subject to the adjustments stipulated in Section 10.11 of the
Prospectus). An option warrant (Series 1) which has not been exercised
by
August 15, 2005
shall expire and be nullified, and shall not grant its holder any rights
whatsoever in the Company.
and
of
2,500,000
registered share purchase warrants (Series 2) that can be converted into
ordinary shares in the Company on any trading day as of June 1
2005 and
through 15
October 2007, with
the exception of the 12th through
the 16th of every
month, such that each option warrant (Series 2) can be converted into an
ordinary share of the Company of NIS 0.01 par value each against cash payment of
the exercise price of NIS 40 linked to the CPI published for February 2005 (as
subject to the adjustments stipulated in Section 10.11 of the Prospectus). An
option warrant (Series 2) which has not been exercised by 15
October, 2007
shall expire and be nullified, and shall not grant its holder any rights
whatsoever in the Company.
Public
offering:
220,000,000
debentures (Series A) along with 1,500,000 share purchase warrants (Series 1),
along with 2,500,000 share purchase warrants (Series 2) are offered to the
public in 100,000 units by way of a tender on the interest rate for the
debentures (Series A).The composition of each unit is as set forth
below:
NIS
2,200 par value each debentures (Series A) |
|
|
NIS
2,200 |
|
|
|
|
|
|
15
share purchase warrants (Series 1) without consideration |
|
|
|
|
|
|
|
|
|
25
share purchase warrants (Series 2) without consideration |
|
|
|
|
|
|
|
|
|
Total
price per unit |
|
|
NIS
2,200 |
|
The list
of signatures for purchase of the units offered to the public shall be opened on
April
7 2005 at 8:00
AM and shall be closed on the same day at 3:00 PM.
Prior
commitments have been received by institutional investors according to which
they shall submit applications for their purchase of units, constituting
approximately 80% of the
units offered to the public. For more information, see Section 5.10 of the
Prospectus.
The
debentures (Series A) are not secured by any collateral whatsoever. The
debentures may only be redeemed immediately in the cases set forth in
Section 9.17 of the Prospectus. The Company reserves the right to put
pledges on its assets at any level whatsoever without having to receive
the approval of the trustee or of the debenture
holders. |
This
Prospectus has been drafted in accordance with an exemption from the Securities
Regulations (Details, structure and form of a Prospectus), 5729-1969, granted to
the Company by the Israel Securities Authority, by virtue of Section 35(XXIX) of
the Securities Law, 5728-1968. With respect to the exemption received by the
Company regarding this Prospectus, see page 1 of the Prospectus.
The
Company’s regular reports are in accordance with US law and are in
English, in accordance with the dual listing guidelines stipulated in
Chapter E3 of the Securities Law, 5728-1968 and the resulting
regulations.
The
offer to the public under this Prospectus is made in Israel, solely to
residents of Israel and is not intended for US residents. Any person
purchasing securities according to this prospectus shall be deemed to have
declared that he was not in the US at the time of submitting his request
for the securities. No person is entitled to make a solicitation for sale
with respect to the securities offered under this Prospectus in the United
States. The laws of the State of Israel alone shall apply to this
Prospectus, the securities offered under it, the securities and the
purchase of securities and anything that stems from or is related to the
Prospectus, the offer of securities under it, the securities and their
purchase. Sole and exclusive jurisdiction in all matters stemming from
them and/or with respect to them is with the authorized courts in Israel
and with them alone. |
This
Prospectus was not submitted to the US Securities and Exchange Commission. The
securities offered under this Prospectus are not registered in accordance with
the US Securities Act, and it is prohibited to offer and/or sell them in the
United States or to US Persons, unless they are registered in accordance with
the US Securities Act, or if there is an exemption to the listing requirements
under the US Securities Act. With respect to the shares deriving from conversion
of debentures (Series A) and the shares from exercise of share purchase warrants
(Series 1) and share purchase warrants (Series 2) such an exemption exists,
subject to the caveats stipulated in American law regarding interested parties
and officers.
The
following are the main risk factors which may impact on the
Company:
Factors
related to the Company:
(1) In the past, the Company had an operating loss, and it is possible
that it may also incur a loss in the future. (2) The results of the
Company’s activity may fluctuate significantly, and thus lead to
fluctuations in share prices. (3) Legislative and regulatory uncertainty
may significantly and negatively impact on the Company’s licenses and may
also have a negative effect on other aspects of the Company’s business.
(4) The markets in which the Company operates are highly competitive, and
it is possible that the Company may not compete successfully. (5) A
failure by the Company in effective management of the growth of its
business may hurt its business. (6) The Company’s strategy may not be
successful in the future. (7) If the Company is not successful in
developing its brands, it may not attract a sufficient number of customers
for its services or enough traffic to its portals to enable it them to be
successful. (8) A failure in establishing and retaining strategic and
marketing relationships, as well as other relationships with third parties
may limit the Company’s ability to attract and retain users.
(9) There is no guarantee the Company’s investments in partnership
agreements will prove successful. (10) Should the Company lose key figures
or not be able to recruit additional employees, its business may be hurt.
(11) Limitations on the Company’s network capacity may prevent it from
delivering service to its customers and may force it to expand the
capacity of its network and systems. (12) Failures in our systems may
disrupt services to our customers and may cause them to leave. (13) The
Company is dependent on third-party systems and services to provide
services to its customers. (14) The Company’s international telephony
services are subject to numerous additional risks, including risks with
respect to its communications network. (15) Should the Company require
additional capital, it may not be able to raise it under good conditions
or at all. (16) The industry in which the Company operates is marked by
rapid changes in technology and frequent launches of new products and
services; the Company may not be able to keep up with the rapid pace of
technological advancement or other changes. (17) Our success in the future
is dependent on continued growth in Internet use, international telephony
services and other related services in Israel. (18) The Company may not be
able to secure wide market distribution of its services due to concerns
regarding the reliability and security of Internet-based communication.
(19) The Company may be held responsible for information secured through
its services or through products and services sold on its portals. (20)
Insufficient protection of the Company’s intellectual property may prevent
it from protecting its intellectual property or enforcing its rights in
this respect.
Factors
related to the Company’s relationships with the Eurocom Group
(organizations related to the controlling shareholder in the
Company):
(21) Subject to the law, a controlling shareholder in the Company, by
virtue of his/her holdings of shares, may significantly impact on its
business, including in ways which may go against the best interest of
public shareholders.
Factors
related to the Company’s shares:
(22) The value of the Company’s shares is subject to much fluctuation and
may decline. (23) The price of a share in the Company may be significantly
and negatively impacted from the sale or assumption that certain
shareholders will demand that Company sells their shares. (24) Provisions
against takeovers may negatively affect the Company’s
shareholders.
Factors
related to debentures (Series A):
(25) The Company may not be able to meet payments to its creditors in the
future. |
Factors
related to the Company’s activity in Israel:
(26) Management of the Company’s business in Israel leads to a number of
special risks. (27) The results of its activity may be negatively or
positively impacted by the obligation its employees have to serve in the
military. (28) The economic condition in Israel in recent years was
not stable. (29) The Company’s business may be affected by fluctuations in
the exchange rate of the Israeli shekel. (30) The provisions of Israeli
law may reject, prevent or make acquisition of the Company difficult,
which may prevent a change in control of the Company and thus lead to a
drop in the price of its stock. (31) The rights of the shareholders in the
Company are regulated by the provisions of Israeli law, which in some
respects is different from the rights and obligations on shareholders
under US law.
For
a full description of the risk factors affecting the Company, see Chapter
3 of the Prospectus. |
The
bylaws of the Company contain provisions with respect to Sections 50(A), 85,
87(A)(4) and 259 of the Companies Law, 5759-1999. See Chapter 10 of the
Prospectus.
With
respect to transactions between the Company and a company related to the
controlling shareholder, see the Section regard Gold Trade (Electronics-Trade)
Ltd. in the About
Us section
on page 6 of the Prospectus.
The
offer of securities to the public under this Prospectus is underwritten (see
Chapter 17 of the Prospectus). Total underwriting, management, distribution and
other expenses related to this offer, including commissions to institutional
investors are estimated at approximately 3.6%
of the gross immediate consideration. With respect to obligation to indemnify
the Company against the underwriters, see Section 17.4 of the
Prospectus.
A court
case has been filed against the trustee for the debentures (Series A). For
detailed information, see Section 9.22.1 below.
Consortium
managers and underwriters:
Poalim
IBI Apax
Underwriting Ltd.
Trustee
for debentures (Series A): Investec Trust Company (Israel)
Ltd.
Date
of Prospectus: March
31, 2005
Permits
The
Company has received all the permits, authorizations and licenses required by
law governing the offer and issue of securities, and publication of this
Prospectus.
A permit
from the Securities Authority to publish this Prospectus does not constitute
verification of its details or confirmation of their reliability or integrity,
nor does it express an opinion as to the quality of the offered
securities.
The Tel
Aviv Stock Exchange Ltd. (hereinafter, the “Stock Exchange”) has approved the
listing of the debentures (Series A) under this Prospectus, and the shares
derived from their conversion, the options (Series 1) and the shares derived
from their exercise, the options (Series 2) and the shares derived from their
exercise.
The
approval from the Tel Aviv Stock Exchange does not constitute approval of the
details contained in the Prospectus, or of their reliability or integrity, nor
does it constitute an opinion of the Company or of the quality of the securities
offered or of the price at which they are offered.
The
listing of the securities offered under this Prospectus is contingent upon
minimal distribution of the debentures (Series A), as set forth in Section
5.5.2.1 of the Prospectus.
The offer
to the public under this Prospectus is made in Israel, solely to residents of
Israel and is not intended for US residents. Any person purchasing securities
according to this prospectus shall be deemed to have declared that he was not in
the US at the time of submitting his request for the securities. No person is
entitled to make any solicitation with respect to the securities offered under
this Prospectus in the United States. The laws of the State of Israel alone
shall apply to this Prospectus, the securities offered under it, the securities
and the purchase of securities and anything that stems from or is related to the
Prospectus, the offer of securities under it, the securities and their purchase.
Sole and exclusive jurisdiction in all matters stemming from them and/or with
respect to them is with the authorized courts in Israel and with them
alone.
This
Prospectus was not submitted to the US Securities and Exchange Commission. The
securities offered under this Prospectus are not registered in accordance with
the US Securities Act of 1933 (“US Securities Act”) in the United States, and it
is prohibited to offer and/or sell them in the United States or to US Persons,
unless they are registered in accordance with the US Securities Act, or if there
is an exemption to the listing requirements under the US Securities Act. With
respect to the shares from conversion of debentures (Series A) and the shares
deriving from exercise of share purchase warrants (Series 1) and share purchase
warrants (Series 2) such an exemption exists, subject to the caveats stipulated
in American law regarding interested parties and officers.
The
decision to purchase the securities offered under this Prospectus should be made
based solely on the information provided in it. The Company has not allowed any
person and/or organization to provide information other than what is set forth
in this Prospectus. The Prospectus is not an offer for securities in any country
other than the State of Israel.
Exemption
by the Israel Securities Authority
Section
35(XXIX) of the Securities Law, 5728-1968, (hereinafter, “Securities Law”)
stipulates, inter
alia, that
the Israel Securities Authority is entitled to issue exemptions to the
provisions regarding information in the details, structure and form of a
Prospectus, in whole or in part, to a corporation incorporated in Israel which
is offering securities to the public if its securities are listed for trade on a
foreign stock exchange.
The
Israel Securities Authority exempted the Company from application of the
Securities Provisions (Details, Structure and Form of a Prospectus), 5729-1969,
with respect to this Prospectus (hereinafter, “Prospectus Details Regulations”
and “Authority Exemption”, respectively). The Authority Exemption was
conditioned upon the Company preparing the Prospectus in the same manner it
would if it were issuing securities of the type offered to the public under this
Prospectus in the US in accordance with the provisions of the US Securities Act
of 1933.
In
accordance with the Authority Exemption, the Company has prepared this
Prospectus based on the requirements of the US Securities Act of 1933 and the
regulations of the US Securities and Exchange Commission (SEC), on form F-2
(hereinafter, “Form F-2”).
Accordingly,
this Prospectus (including the documents it includes by way of reference), in
all material respects, meets the requirements of Form F-2, with the exception of
the following: Cover Page, Licenses, Public Offering chapter, Debenture Terms
chapter, certain appendices and obligations that are not included in this
Prospectus and which are not significant with respect to the public offer of
securities to the Israeli public. It should be emphasized that this Prospectus
was not submitted to the SEC and was not examined by it.
The
following sections: “Permits”, the Cover Page, “Public Offering” chapter,
“Debenture Terms” chapter, “Share Purchase Warrants” chapter, “Underwriting”
chapter, Legal Opinion in the Opinion Chapter and the prospectus signatures were
prepared in Hebrew in accordance with the provisions of the Prospectus Details
regulations.
The
remaining prospectus chapters were prepared in the same manner the Company would
have prepared it if it were issuing securities of the type offered here to the
public in the US as aforementioned.
The
Company’s regular reports are in accordance with US law and in English, in
accordance with the guidelines for dual listing defined in Chapter E3 of the
Securities Law and the regulations enacted by virtue of it. Furthermore, under
the Authority Exemption, the Company shall continue to report in accordance with
said guidelines for dual listing as stated above.
TABLE OF
CONTENTS
|
|
Page |
|
|
|
1. |
Special
Note Regarding Forward-Looking Statements |
7 |
2. |
Prospectus
Summary |
8 |
3. |
Risk
Factors |
14 |
4. |
Ratio
of Earnings to Fixed Charges |
29 |
5. |
Information
about the Offering |
31 |
6. |
Additional
Information |
56 |
7. |
Selected
financial Data |
56 |
8. |
Share
Capital |
76 |
9. |
Description
of Securities Other Than Equity Securities - Debentures |
78 |
10. |
Description
of Securities Other Than Equity Securities - Share Purchase
Warrants |
94 |
11. |
Memorandum
and Articles of Association |
103 |
12. |
Material
Contracts |
105 |
13. |
Exchange
Controls |
106 |
14. |
Taxation |
106 |
15. |
Documents
on Display |
112 |
16. |
Shares
Eligible For Future Sale |
113 |
17. |
Underwriting |
114 |
18. |
Dividend
Policy and Distribution |
121 |
19. |
Material
Changes |
121 |
20. |
Legal
Matters |
121 |
21. |
Experts |
121 |
22. |
Where
You Can Find More Information; Incorporation of Certain Information By
Reference |
121 |
23. |
Significant
Differences Between Israeli GAAP and U.S. GAAP and Their Effect on the
Financial Statements |
126 |
24. |
Opinions |
138 |
25. |
Signatures |
140 |
1. SPECIAL
NOTE ON FORWARD-LOOKING STATEMENTS
The
statements incorporated by reference or contained in this prospectus discuss our
future expectations, contain projections of our results of operations or
financial condition, include other forward-looking information and
contains various "forward-looking statements" within the meaning of Section 27A
of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S.
Securities Exchange Act of 1934, as amended, and within the U.S. Private
Securities Litigation Reform Act of 1995, as amended. Such forward-looking
statements (whether such statements actually declare themselves as such or not)
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
trends, 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.
Various
factors discussed in this prospectus, including, but not limited to, all the
risks discussed in “Risk Factors” and in our other Securities Exchange
Commission, or SEC and Israeli Securities Authority, or ISA filings may cause
actual results or outcomes to differ materially from those expressed in
forward-looking statements. You should read and interpret any forward-looking
statements together with these documents.
Any
forward-looking statement speaks only as of the date on which that statement is
made. We will not update any forward-looking statement to reflect events or
circumstances that occur after the date on which such statement is
made.
You
should carefully read this entire prospectus, including our prior filings with
the SEC and the ISA, which accompany this prospectus. Unless otherwise
indicated, all monetary amounts or financial figures in this prospectus are in
New
Israeli Shekels, or NIS.
2. PROSPECTUS
SUMMARY
This
section answers in summary form some questions you may have about us and the
offerings under this Prospectus. Because it is a summary, it may not include all
of the information that is important to you. You should read the entire
prospectus carefully, especially the "Risk Factors" Chapter (Chapter 3) and the
financial data contained elsewhere in this Prospectus or incorporated herein.
About
Us
We were
incorporated under the laws of the State of Israel in April 1992 under the name
Euronet Golden Lines (1992) Ltd. In June 1999 we changed our name to Internet
Gold - Golden Lines Ltd. We are a public limited liability company under the
Israeli Companies Law 1999 and operate under this law and associated
legislation. Our registered offices and principal place of business are located
at 1 Alexander Yanai Street, Petach Tikva, Israel, and our telephone number is
972-3-939-9848. Our address on the Internet is www.zahav.net.il or
www.zahav.msn.co.il. We also
have an investor information site, at www.igld.com. The
information on our websites is not incorporated by reference into this
Prospectus.
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, small office and home office, or SOHO, and business
subscribers, including Internet access and related value-added services, content
and e-commerce activities through portals, as well as international telephony
services. Our Internet access packages include basic access accounts,
asymmetrical digital subscriber lines, or ADSL and cable services, virtual
private networks, or VPN, ISDN dial-up accounts, leased and frame relay lines
and dial-up networking. We also provide hosting, integration, technological
services and value-added solutions.
In June
2004, the Israeli Ministry of Communications granted us a license to provide
international telephony services with
an
international prefix code of 015, sometimes referred to as international
telephony services, 015 international telephony services, or 015 Services. In
August 2004, we launched the 015 international telephony services.
In
November 2004, we received a license for the marketing experiment for the
provision of internal telephony services. The license expires on November 30,
2005. Due to disagreements between the Ministry of Communications and Bezeq, we
have not been able to act under the license.
The
Internet Gold Group consists of us and several subsidiaries:
MSN
Israel Ltd., or MSN Israel - our 50.1% owned joint venture with Microsoft
Corporation (49.9% owned). MSN Israel manages the MSN Israel portal, offering
Hebrew-reading Internet users MSN features such as personalized services, varied
Internet content, e-commerce services (MSN Shops), four of Microsoft Internet
leading platforms - “Hotmail,” “Messenger,” “Passport,” and "MSN Search" an
Internet search engine as well as news. We agreed with Microsoft that we would
invest in MSN Israel and be responsible for its operating losses and capital
expenditures. We and Microsoft each has the right to terminate the agreement in
case the cumulative losses of MSN Israel reach or exceed $10 million. In 2003,
MSN Israel reached operating profitability as it developed new revenue channels
such as Hosted Exchange, Hotmail's mail platform, and Messenger.In 2004 MSN
Israel increased its revenues and profitability.
Gold Mind
Ltd., or Gold Mind - a wholly owned subsidiary. Gold Mind is engaged in the
marketing and sale of Internet contents and technologies, such as anti-virus
and anti-spam services, value added services and virtual magazines and develop
selected Internet content ventures. In addition, Gold Mind is the owner of one
of Israel popular Internet interactive games website - Vgames (www.vgames.co.il) and of
a leading Russian-language portal - www.zahav.ru.
Start Net
Ltd., or Start - In November 2004, Gold Mind acquired 50% of the shares in Start
from Ze'evi Computers & Technology Ltd., under a dissolution process. In
December 2004 Gold Mind acquired the remaining 50% of Start's shares from MSN
Israel. As per an agreement between Start and MSN Israel, MSN Israel manages the
Start portal for Start. In March 2005, Start entered into an exclusive agreement
with GOOP, one of Israel’s most popular youth-oriented portals. Under this
agreement, Start purchased all of GOOP’s advertising properties until February
2007 (a period which will be automatically extended, unless otherwise notified
by either party to the other), with an option for Start to discontinue the
agreement after six months.
Nirshamim
Lalimudim Ltd., or Nirshamim - In March 2005, Gold Mind acquired 50% of the
shares of the Nirshamim, a company operating the Israeli portal "Nirshamim"
(www.nirshamim.co.il). The remainder of the shares will continue to be held by
Nirshamim’s founders. Nirshamim is a leading academic portal in Israel,
servicing the university and post-university sector. Nirshamim's revenues derive
from advertising educational institutions.
Internet
Gold International Ltd., or IGI - IGI
engages 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.
Gold
Trade (Electronic Commerce) Ltd., or Gold Trade - In December 2004, we purchased
all the outstanding shares in Gold-Trade from the founders of Gold Trade,
including from Eurocom Marketing (an affiliated company). Gold Trade provides
e-commerce services on its “P1000” mega-mall. In November 2004, Gold Trade's
board of directors resolved to cease all its operations except for its
e-commerce activity on the P-1000 website. Gold Trade also holds 50% of the
rights in one of Israel most popular interactive book shop sites - www.dbook.co.il.
Our
Strategy
In the
fourth quarter of 2002, we adopted a more aggressive marketing policy in order
to attract a greater number of broadband customers and have continued to
implement this policy while continuing to keep tight control on our expenses.
This strategy yielded a 54% increase in the number of broadband customers in
2004 as compared to 2003. We decided to continue this policy during 2005. In
order to penetrate the international telephony market and retain customers,
during the second half of 2004 we adopted an aggressive approach which included
launching an advertising campaign in all media while offering customers fair
prices, which were lower than the prices offered by the then current providers.
Ratio
of Earnings to Fixed Charges
Under
IS-GAAP |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31 |
|
|
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
|
|
(in
thousands) |
|
Pre-tax
earnings (loss) from continuing operations |
|
|
(71,840 |
) |
|
(13,019 |
) |
|
28,568
|
|
|
17,643
|
|
|
24,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
charges |
|
|
13,797
|
|
|
10,857
|
|
|
1,535
|
|
|
878
|
|
|
1,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company’s
share in net loss of investees |
|
|
|
|
|
|
|
|
(1,530 |
) |
|
(1,538 |
) |
|
(396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in loss of a subsidiary |
|
|
1
|
|
|
963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
pre-tax earnings (loss) from continuing operations
|
|
|
(58,042 |
) |
|
(1,199 |
) |
|
28,573
|
|
|
16,983
|
|
|
25,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
charges (1) |
|
|
13,274
|
|
|
10,129
|
|
|
719
|
|
|
(350 |
) |
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
interest factor (2) |
|
|
523
|
|
|
728
|
|
|
808
|
|
|
1,053
|
|
|
1,447
|
|
Interest
expense for equity companies whose debt is guaranteed |
|
|
-
|
|
|
-
|
|
|
8
|
|
|
175
|
|
|
95
|
|
Total |
|
|
13,797
|
|
|
10,857
|
|
|
1,535
|
|
|
878
|
|
|
1,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of earning to fixed charges (3) |
|
|
-
|
|
|
-
|
|
|
18.61
|
|
|
19.34
|
|
|
16.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Interest expenses and adjustment of long-term loan and leases - in 2003 we
recorded earnings from long-term loans, which were adjusted to the US$/NIS
exchange rate. |
|
(2)
Rental interest factor is calculated as one third of the total rent
expenses. |
|
(3)
Earnings were insufficient to cover fixed charges requirements for the
years ended December 31, 2000, 2001, by NIS 71.84 million and NIS 12.06
million, respectively. |
Under
US-GAAP |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31 |
|
|
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
|
|
(in
thousands) |
|
Pre-tax
earnings (loss) from continuing operations |
|
|
(77,391 |
) |
|
(11,879 |
) |
|
24,633
|
|
|
14,735
|
|
|
23,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
charges |
|
|
13,797
|
|
|
10,857
|
|
|
1,545
|
|
|
1,081
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company’s
share in net loss of investees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in loss of a subsidiary |
|
|
6,482
|
|
|
5,647
|
|
|
2,418
|
|
|
2,204
|
|
|
3,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
pre-tax earnings (loss) from continuing operations
|
|
|
(57,112 |
) |
|
4,625
|
|
|
28,596
|
|
|
18,020
|
|
|
28,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
charges (1) |
|
|
13,274
|
|
|
10,129
|
|
|
737
|
|
|
28
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
interest factor (2) |
|
|
523
|
|
|
728
|
|
|
808
|
|
|
1,053
|
|
|
1,447
|
|
Interest
expense for equity companies whose debt is guaranteed |
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
13,797
|
|
|
10,857
|
|
|
1,545
|
|
|
1,081
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of earnings to fixed charges (3) |
|
|
-
|
|
|
-
|
|
|
18.51
|
|
|
16.67
|
|
|
16.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Interest expenses and adjustment of long-term loan and leases - in 2003 we
recorded earnings from long-term loans, which were adjusted to the US$/NIS
exchange rate. |
|
(2)
Rental interest factor is calculated as one third of the total rent
expenses. |
|
(3)
Earnings were insufficient to cover fixed charges requirements for the
years ended December 31, 2000, 2001, by NIS 70.9 million and NIS 6.2
million, respectively. |
Summary
of the Terms of the Offering
The
following is not intended to be complete. For a detailed description of the
offering, please see Chapter 5 of the prospectus.
The
securities we are offering under this Prospectus are as follows:
220,000,000
Debentures (Series A) of NIS 1 par value, repayable (principal) in 8 equal
annual installments on April 1 of each of the years 2008 to 2015 (inclusive),
bearing interest per year as shall be determined in the tender for the
Debentures' interest and linked (principal and interest) to the Israeli consumer
price index published on March 15, 2005 for February 2005. The interest will be
paid every twelve months, on April 1 of each of the years 2006 to 2015
(inclusive). The Debentures are convertible to our ordinary shares on each trade
day, as of the day they are registered until March 16, 2015 (inclusive, except
for March 17 to April 1 of each of the years 2008 to 2014. The conversion price
will be NIS 40 of Debentures per one of our ordinary shares until March 31,
2008, and NIS 50 of Debentures per one of our ordinary shares since April 1,
2008 until March 31, 2015 (all subject to adjustments as specified in section
9.14). Debentures (Series A) which will not be converted into ordinary shares
until March 16, 2015 (inclusive) will not grant their holder a right to
conversion.
1,500,000
Stock Purchase Warrants (Series 1), registered in the name of their owner,
exercised into our ordinary shares of NIS 0.01 par value each, on each trade day
as of June 1, 2005 until August 15, 2005 (inclusive). The exercise price will be
NIS 32 per one of our ordinary shares, subject to adjustments as specified in
section 10.11. Stock Purchase Warrants (Series 1) which will not be exercised
into ordinary shares until August 15, 2005 (inclusive) will expire and become
void and will not grant their holder any rights.
2,500,000
Stock Purchase Warrants (Series 2), registered in the name of their owner,
exercised into our ordinary shares of NIS 0.01 par value each, on each trade day
as of June 1, 2005 until October 15, 2007 (inclusive), except for the
12th to the
16th day of
each month. The exercise price will be NIS 40 per one of our ordinary shares,
linked to the consumer price index, and subject to adjustments as specified in
section 10.11. Stock Purchase Warrants (Series 2) which will not be exercised
into ordinary shares until October 15, 2007 (inclusive) will expire and become
void and will not grant their holder any rights.
The
Offering consists of 220,000,000 Debentures (Series A) together with 1,500,000
Stock Purchase Warrants (Series 1) together with 2,500,000 Stock Purchase
Warrants (Series 2) offered to the public in 100,000 units (the “Units”) by way
of tender over the percentage of the Debentures' interest. The interest for the
Debentures will not be higher than 5% (the “Maximal
Interest ”) and
will not be lower than 4% (the “Minimal
Interest”)
The
composition of every Unit is as follows:
2,200
Debentures (Series A) |
|
|
NIS
2,200 |
|
|
|
|
|
|
15
Share Purchase Warrants (Series 1) |
|
|
at
no cost |
|
|
|
|
|
|
25
Share Purchase Warrants (Series 2) |
|
|
at
no cost |
|
|
|
|
|
|
Total
Price Per Unit |
|
|
NIS
2,200 |
|
THIS
OFFERING IS BEING MADE EXCLUSIVELY IN ISRAEL TO RESIDENTS OF ISRAEL. NO PERSON
IS AUTHORIZED TO MAKE ANY SELLING EFFORTS IN CONNECTION WITH THIS OFFERING IN
THE UNITED STATES.
Use
of Proceeds
The net
proceeds that we will receive from this offering are estimated to be NIS 212.2
million (US $ 48.6 million) after deduction of the underwriters’ fees and
commissions and the estimated expenses of the offering.
We intend
to use the net proceeds from the offering for general corporate purposes, as
shall be from time to time determined by our board of directors.
We have
explored and will continue to explore business opportunities and potential
investments in the communication field. We believe that the proceeds from the
offering will enable us to take advantage of structural changes in Israel’s
communications marketplace, giving rise to opportunities for us to increase our
share in the markets in which we are currently active and to enter new markets.
However, we cannot be sure whether any of these opportunities will become
actual.
3. RISK
FACTORS
An
investment in our securities is speculative and involves a high degree of risk
and uncertainty. Therefore, you should not invest in our securities unless you
are able to bear a loss of your entire investment. You should carefully consider
the following factors as well as the other information contained in this
prospectus before deciding to invest in our securities. Factors that could cause
actual results to differ from our expectations, statements or projections
include the risks and uncertainties relating to our business described below.
This Prospectus and statements that we may make from time to time may contain
forward-looking information. There can be no assurance that actual results will
not differ materially from our expectations, statements or projections. The
information in this prospectus is complete and accurate as of this date, but the
information may change after the date of this
Prospectus.
Risks
Relating to Internet Gold
We
have experienced operating losses in the past and may incur losses in the
future.
Although
we have operated profitably since the
third quarter of 2001, we cannot assure you that we will continue to be
profitable. Most of our revenues have been derived from Internet access fees. As
contemplated by our business plan, we intend to increase revenues derived from
our various activities, and specifically, access fees for broadband services,
provision of international telephony services, advertising on our portals and
from e-commerce activities. These activities are expected to involve substantial
sales and marketing expenses, and other costs.
We may be
required to make additional investments in order to maintain or to improve the
level of our services, which will impair our profitability and no assurance can
be given that the services or any of them will be profitable.
We cannot
assure you that we will be able to continue to successfully implement our
business plan in the future.
Our
operating results are likely to fluctuate significantly and may cause our share
price to be volatile.
Our
revenues and operating results may vary significantly from quarter to quarter.
As a result, you should not rely on quarter-to-quarter comparisons of our
revenues and operating results as an indication of our future performance. In
addition, due to the volatility in our market we cannot predict our future
revenues or results of operations accurately. It is possible that in one or more
future quarters our operating results will fall below the expectations of
securities analysts and investors. If this happens, the trading price of our
securities is likely to fall.
We expect
to be heavily dependent on revenues from subscribers using our Internet access
services for the foreseeable future. As a result, our revenues will be affected
by our ability to retain current subscribers and attract new profitable
subscribers. Our residential subscribers have the option of discontinuing their
subscriptions for any reason at any given month and our leased line subscribers
have the option of discontinuing their subscriptions for any reason upon
30-days’ written notice. As a result, revenues can fluctuate from month to month
without much advance notice. Some of our expense levels, such as selling and
marketing expenses, are based, in part, on our expectations as to future
revenues. To the extent our actual revenues are below expected revenues, we may
be unable to adjust spending quickly enough to offset the shortfall in revenue,
which may cause our business and financial results to suffer.
Regulatory
and legal uncertainties could adversely affect the terms of our licenses and
could harm other aspects of our business.
There
have been various regulations and lawsuits, mainly in the United States,
relating to the liability of Internet service providers for information carried
on or through their services. The law in this area is unsettled and there may be
new legislation and court decisions that expose companies such as ours to
liabilities or affect their services. Additional laws and regulations may be
adopted with respect to the Internet, covering issues such as content, user
privacy, pricing, commerce, export and other controls. Regulatory developments
could harm our business. Our Internet access business is subject to a license
granted by the Israeli Ministry of Communications, which was renewed in January
2002 for an additional period of five years. The license grants us the right to
provide Internet and related services, subject to several conditions mentioned
in the license. The tendency of the Ministry of Communications not to limit the
number of Internet service licenses is likely to increase competition, and may
lead to a reduction in fees charged to subscribers. In April 2002 the Ministry
of Communications granted 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 for a
period of twenty years, commencing on the date of receipt of the license, which
may be extended by the Ministry of Communications for additional 10-year
periods. The license grants us the right to provide international
telecommunication voice services and other related services, subject to several
conditions mentioned in the license. We cannot be sure how the launch of the new
international telephony services by Netvision
Ltd. and Xfone Communication Ltd. or how the grant of additional licenses by the
Ministry of Communications will affect us. In addition, we cannot assure you
that unfavorable regulations would not adversely affect our
business.
We may be
exposed to substantial liabilities arising out of our business, especially those
liabilities that are related to Internet activities. Currently, we have a
professional liability insurance policy which may not cover all such exposure.
In the event that we are found to be responsible for any such liability and/or
required to pay for any damages resulting from any such responsibility, our
business may be adversely affected.
The
markets in which we operate are highly competitive and we may be unable to
compete successfully.
ISP
market. We
operate in the Internet access services markets, which by their nature have low
barriers to entry and are extremely competitive. We expect intense competition
in our markets to continue in the future. Increased competition could require us
to lower our prices, grant incentives to subscribers and increase our selling
and marketing expenses and related subscriber acquisition costs, and could also
result in increased subscriber cancellations, loss of visitors to our portals
and lower advertising revenues. We may not be able to offset the effect of these
increased costs through an increase in the number of our subscribers, subscriber
revenues or revenues from other sources.
The ISP
market in Israel is characterized by many participants. We also expect to face
competition from telephone and cellular phone companies, cable television and
DBS providers, wireless voice and data service providers and others. These
companies could exploit their current established network infrastructure, high
rate of penetration of households, and their ability to provide Internet access
at significantly faster speeds and potentially include Internet access in their
basic bundle of services or offer access for a nominal additional charge. In
April 2002, the Ministry of Communications granted the cable television network
providers licenses permitting supply of infrastructure for the provision of
Internet access through the current ISPs, in addition to Bezeq's license.
However, we cannot predict whether the cable television network providers or
Bezeq will become ISPs and consequently our competitors in the future or how
these licenses may be amended in the future and how this will affect
us. Additional
international ISPs may also enter the Israeli market.
Portal
advertising. In order
to attract advertisers, we need to continue to increase the amount of user
traffic on our portals. Currently, there are other popular portals in Israel and
many Israeli Internet users also use international portals, such as Yahoo! and
MSN.com. We compete with these other portals, as well as other media, such as
television, radio and print, for advertisers.
E-commerce. In 2004
there was extensive activity in the e-commerce market in Israel. The market is
principally comprised of large retailers, importers of commercial products and
manufacturers offering their own products and services over the Internet through
their websites. There currently are very few companies that engage solely in
e-commerce. Competition in e-commerce is intense and is likely to grow
significantly as the e-commerce market evolves. We cannot guarantee that Gold
Trade or MSN Israel will be successful, or that we will be able to compete
effectively and succeed in this market.
International
Telephony. The
international telephony activity is highly competitive. The intense competition
and the fact that the customers are generally sophisticated customers with
little loyalty, require us to lower the prices for our international telephony
services in order to remain competitive. We cannot be sure if this will enable
us to remain profitable or how the intense competition will affect us.
Currently,
the cellular telephony providers are restricted from providing international
telephony services. The Ministry of Communications may grant them or other
providers with additional licenses for the operation of international telephony
services. We do not know how this will influence the competition in this market
or how it will affect our ability to compete.
In
addition, as per our license, we have to pay royalties to the Ministry of
Communications for our use of frequencies, for operation and registration. The
requirement to make royalties payments make it more difficult for us to offer
competitive prices to our customers in comparison to unlicensed VOIP
operators.
We expect
the financial scope of the VoIP market in Israel will decrease in the coming
years, as a result of the entrance of new competitors to the market, the cheap
prices for the use of VoIP technology in comparison to the analog technology
used in the past and because of various Internet software which allow free
international communication on the Internet. We cannot evaluate the impact of
these expected market changes and their affect on our ability to compete
successfully.
Our
failure to manage growth effectively could impair our business.
Our
growth has placed, and is likely to continue to place, a significant strain on
our operational, administrative and financial resources, including our system of
internal controls that we have modified or are in the process of modifying to
accommodate the expansion of our business. The demand on our network
infrastructure, technical and customer support staff and other resources has
grown with our expanding subscriber base and is expected to continue to grow as
we expand our Internet, international telephony, our portals and our e-commerce
business.
We cannot
guarantee that our infrastructure, technical and customer support staff,
operational and billing systems and other resources will adequately accommodate
or facilitate the growth of our business. While we believe we have made adequate
allowances for the costs and risks associated with our growth and activities,
there is no guarantee that these allowances will be adequate, that our systems,
procedures or controls will be sufficient to support our operations or that our
management will be able to successfully offer and expand our services in Israel
or internationally.
Our
strategy may not succeed in the future.
Since the
fourth quarter of 2002, the significant increase in demand for broadband was
coupled with intense competition between all of the ISPs in Israel, 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 54% increase in the number of
broadband customers in 2004 as compared to 2003. In order to penetrate the
international telephony market and retain customers, we adopted an aggressive
approach which included advertising in all media while offering the customers
fair prices, which were lower than the prices offered by the then current
providers. Although this strategy has been successful to date, we cannot assure
you that this strategy will be successful in the future. Due to the price
reductions, caused by the aggressive competition as well as the expenses
associated with our marketing efforts to attract customers, our profitability
may be negatively impacted.
If
we do not successfully develop our brands we may be unable to attract enough
customers to our services or sufficient traffic to our portals to become
successful.
We must
establish and strengthen awareness our brands and those of our subsidiaries. If
we fail to create and maintain brand awareness, we are unlikely to attract
enough customers to our Internet, international telephony and value added
services or attract sufficient traffic to our portals to become attractive to
advertisers and suppliers of products and services. Brand recognition may become
even more important in the future with the growing number of Internet sites and
Internet-based communications providers.
We intend
to continue to pursue a brand-enhancement strategy, which may include joint
marketing programs and mass market and multimedia advertising, promotional
programs and public relations activities. These initiatives will involve
significant expenses. If our brand enhancement strategy is unsuccessful, our
sales and marketing expenses may never be recovered and we may be unable to
increase future revenues. Successful positioning of our brand and the other
brands associated with each of our services will largely depend on:
· |
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, importers of commercial products, retailers and other
suppliers of products and services that we may sell. Because our agreements with
third parties are generally short-term and non-exclusive, our competitors may
seek to use the same partners that we do or attempt to adversely impact our
relationships with our partners. In addition, some of our joint marketing
agreements are based on oral understandings and not written agreements and so
may be terminated at any time. We may not be able to maintain our third-party
relationships or replace them on favorable terms. If our relationship partners
fail to perform their obligations, reduce their business with us, choose to
compete with us or provide their services to a competitor, we may have more
difficulty building our subscriber base and attracting and maintaining visitors
to our portals, and as a result our business and financial results may suffer.
Also, our efforts to establish new relationships in the future may not be
successful, which could affect the growth of our business.
There
can be no assurance that our investments in cooperation agreements will be
successful.
A key
element of our strategy is to enter into cooperation agreements. To date, we
have entered into various cooperation agreements, including our establishment of
MSN Israel with Microsoft Corporation. Our future success depends in part on the
ultimate success of these cooperation agreements. The failure of one or more of
our key joint venture investments could have a material adverse effect on our
business, financial condition and results of operation.
Although
we view our joint venture investments as key factors in our overall business
strategy, there can be no assurance that the other parties to these agreements
view their relationships with us as significant to their ongoing business or
that they will not reassess their commitment to us at any time in the future.
Our results of operations could be materially adversely affected by changes in
the financial condition of a key joint venture participant.
If
we lose our key personnel or cannot recruit additional personnel, our business
may suffer.
Our
success depends, to a significant extent, upon the continuing performance and
services of our executive officers and other key employees. Specifically, Eli
Holtzman, our chief executive officer, has been with us since our inception and
has considerable experience in managing our business. Since we launched our
Internet business in 1996, we (excluding our subsidiaries) have expanded from 99
employees as of December 31, 1996 to 835
full-time and part-time employees as of December 31, 2004, including a number of
key managerial, marketing, planning, financial, technical and operations
personnel. Most of these individuals have not previously worked together and
need to be integrated as management and technology teams. As a result, our
senior managers and technical personnel may not work together effectively as a
team to successfully manage our growth. Our performance is substantially
dependent on our ability to retain, motivate and successfully integrate our
senior management and other key employees. We do not have “key person” life
insurance policies on any of our key personnel.
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,
2005 our international bandwidth infrastructure had grown by 400% from the time
we started to provide broadband services. In order to preserve the current
service level to an increasing number of broadband customers, we may be required
to extend our bandwidth by additional 30% by the end of 2005.
A
system failure could interrupt service to our subscribers and may result in
subscriber cancellations.
Our
business depends on the efficient and uninterrupted operation of our computer
and hardware and software systems. In addition, sophisticated information
systems are vital to our growth and our ability to monitor costs, bill and
receive payments from customers, reduce credit exposure and achieve operating
efficiencies. Any system failure that causes an interruption in service or
decreases the responsiveness of our network, could impair our reputation, damage
our brand name, lead to subscriber dissatisfaction and cancellations and reduce
our revenues. Our systems and equipment are subject to hardware defects,
software bugs and network failures that may be beyond our control. At times, for
example, our systems and equipment have experienced failures, which temporarily
prevented customers from using our services or accessing the Internet. We are
currently in the process of replacing our billing and CRM systems and may incur
problems in the transition period.
Our
operations depend on our ability to successfully expand our network and
integrate new technologies and equipment into our network. Accordingly, we face
an increased risk of system failure and difficulty in making new features
available.
We use
network components located both in Israel and abroad, which must interact
successfully without delay or interruption to provide service to subscribers.
Our systems and operations are vulnerable to damage or interruption from human
error, natural disasters, power loss, telecommunications failures, break-ins,
sabotage, computer viruses, intentional acts of web vandalism and similar
events. Any of these events could expose us to a material risk of loss or
litigation. In addition, if a computer virus, sabotage or other failure
affecting our system is highly publicized, our reputation could be damaged and
subscriber growth and portal visits could decrease. While we currently have
partially redundant systems, we do not have full redundancy, a formal disaster
recovery plan or alternative providers of hosting services. In addition, we do
not carry sufficient natural disaster or business interruption insurance to
compensate for losses that could occur.
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, MCI, PCCW-BTN and Med1 for leased lines.
All Internet access by our customers is, and will continue to be, connected
through leased lines from local and long distance telecommunications carriers.
Internet
access by our customers is dependent on the telecommunications infrastructure
owned and maintained by Bezeq and the local cable companies. Bezeq has suffered
work stoppages on several occasions in recent years as a result of conflicts
with its unionized employees. These work stoppages resulted in several days of
interruption to the services we provide. In addition, at times Bezeq and the
local cable companies have suffered technical network failures. If our
subscribers’ access to Israel’s fixed-line telecommunications infrastructure was
disrupted, it would significantly impact the services that we provide to our
subscribers and could result in a substantial reduction in Internet access
volume and revenue. An increase in our cost of access to Israel’s fixed-line
telecommunications infrastructure could also adversely impact our results of
operations. We also depend on third parties for physical repair and maintenance
of leased lines. If an interruption or deterioration in performance in these
third-party services occurs, our services may be disrupted or become less
profitable.
Many of
our relationships with third party providers are terminable upon short notice.
In addition, many of our third party suppliers and telecommunications carriers
sell or lease products and services to our competitors and may be, or in the
future may become, competitors themselves. Subject to various government
regulations, our third party suppliers and telecommunications carriers could
enter into exclusive arrangements with our competitors or stop selling products
and services to us. If any of our arrangements with third parties is terminated,
we may not be able to replace them, on commercially reasonable terms, or at
all.
Our
international telephony services are subject to numerous additional risks,
including risks relating to our network.
Our soft
switch system is a highly complex computer system. Although it has been built
with redundancy in mind, it is built to handle only one fault at a time. Two
faults occurring at the same time may severely affect our service.
Also, as
the world of voice over IP continues to evolve, we are faced with the risks
associated with the use of new software.
Our
international telephony service is based upon the operation of our soft switch
system. This system is developed and supported by Veraz Networks. Although our
engineering staff is highly trained to support the system, there are numerous
functions that they are unable to perform by themselves. If the level of service
we get from Veraz will decrease, it might adversely impact our ability to
properly maintain our system and therefore have direct affect on our
service.
We do not
have a direct connection to all the destinations around the world, we depend on
business partners to connect calls generated from our services by our customers
to their final destination worldwide. Our level of service is totally dependent
on the level of service we get from our international partners, both from the
call completion perspective as well as from call quality perspective. Although
we make extensive efforts in order to assure the quality of the calls as well as
the world spread of our services, we cannot be sure that our partners will
provide adequate level of service, that in such case we will be able to
successfully replace the partner or that we will be able to maintain and
increase the world spread of our services.
We are
neither a local telephone service provider nor a cellular provider, and are
dependent on those providers in order to enable our customers to access our
service. Therefore we are exposed to any change in their services and in the
service level we get from those providers.
If
we require additional capital, we may be unable to raise it on favorable terms
or at all.
In the
future, we may need to raise additional funds in order to fund expansion,
develop new or enhanced services, or respond to competitive pressures. The
availability of funds for future expansion and the development of new or
enhanced services will depend upon a number of factors including our operating
performance, investor interest and marketing conditions. If we raise additional
funds by issuing equity or convertible debt securities, the holdings of our
shareholders will be diluted and their ownership percentage will be reduced.
Furthermore, any new securities could have rights, preferences and privileges
senior to those of the ordinary shares.
In
addition, we may require additional substantial funding in the future to develop
and expand the business of MSN Israel. We agreed
to invest in MSN Israel and be responsible for its operating losses and capital
expenditures. We and Microsoft each has the right to terminate the agreement in
case the cumulative losses of MSN Israel reach or exceed $10 million. Although
MSN Israel is currently profitable, we cannot predict what these cost could be.
We cannot be certain that additional financing will be available when and to the
extent required or that, if available, it will be on acceptable terms. If we do
not invest additional funds, if and when required, we shall be in breach of our
agreement with Microsoft Corp.
The
industry in which we operate is characterized by rapid technological changes and
frequent new product and service introductions; we may not be able to keep up
with these rapid technological and other changes.
The
markets in which we compete are characterized by rapidly changing technology,
evolving industry standards, frequent new product and service announcements,
introductions and enhancements and changing consumer demands. These new
products, services and technologies may be superior to the services and
technologies that we use, and may render our services and technologies obsolete
or require us to incur substantial expenditures to modify or adapt our products,
services or technologies. Our future success will depend on our ability to
continually improve the performance, features and reliability of our Internet,
international telephony and other services in response to competitive service
and product offerings and the evolving demands of the marketplace.
Our
future success depends on the continued growth in the use of the Internet,
international telephony services and other related services in Israel.
We rely
on revenues generated from the sale of Internet-access, international telephony,
portal advertising and related services, and, to a limited extent, e-commerce.
If acceptance and growth of Internet use and services do not occur or Internet
use declines, our business and financial results will suffer. Alternatively, if
Internet usage grows, the Internet infrastructure may not be able to support the
demands placed on it by such growth or its performance or reliability may
decline.
We
may not achieve broad market acceptance of our services due to concerns about
the reliability and security of Internet
communications.
The
secure transmission of confidential information, such as credit card numbers,
over the Internet is essential in maintaining users’ confidence in our services.
We rely on licensed encryption and authentication technology to securely
transmit confidential information, including credit card numbers. It is possible
that advances in computer capabilities, new discoveries or other developments
could result in a compromise or breach of the technology used by us to protect
user transaction data. We incur substantial expenses to protect against and
remedy security breaches and their consequences. A party that is able to bypass
our security systems could steal proprietary information or cause interruptions
in our operations. Security breaches also could damage our reputation and expose
us to a risk of loss or litigation and possible liability. Our insurance
policies have coverage limits, which may not be adequate to reimburse us for
losses caused by security breaches. We cannot guarantee that our security
measures will prevent security breaches.
We also
face risks associated with security breaches affecting third parties conducting
business over the Internet. Users generally are concerned with security and
privacy on the Internet and any publicized security problems could inhibit the
growth of the Internet and therefore our services, as a means of conducting
commercial business transactions.
We
face potential liability for information accessed and products and services sold
through our portals.
We could
become liable for false or misleading information accessed through our portals
and for defective products and services sold as part of our business. The
potential liability of ISPs and portals such as ours for information accessed
through their portals is uncertain. It is possible that claims may be filed
against us based on defamation, obscenity, negligence, copyright or trademark
infringement or other theories. These types of claims have been brought,
sometimes successfully, against providers of Internet services in the
past.
Gold
Trade and MSN Israel are involved in the sale of products and services by third
parties over the Internet (e-commerce). If these products or services were
defective or were manufactured or supplied in breach of others’ intellectual
property rights, Gold Trade and MSN Israel could be liable to customers who
purchase these products or services or to the owners of the intellectual
property.
Although
we attempt to reduce our liability through contractual indemnification from our
suppliers and disclaimers, there is no guarantee that we would be successful in
protecting ourselves against this type of liability. Even if we ultimately
succeeded, legal action against us would divert management time and resources,
could be costly and is likely to generate negative publicity for our portals and
our business generally. We may also be forced to implement expensive measures to
alter the way our services are provided to avoid any further liability.
Inadequate
intellectual property protection could prevent us from enforcing or defending
our intellectual property.
We have
various trademark applications, trade secrets and copyrightable materials, as
well as domain names and licenses to use third party software. If we are not
successful in protecting our intellectual property, our business and financial
results could suffer.
Trademarks. In order
to refresh our image, as well as part of our preparations for the provision of
international telephony services, we changed our logos and applied for their
registration as trademarks in Israel. There is no guarantee that these
trademarks will be registered or that we will obtain registration of other
trademarks for which we may seek protection in the future.
Domain
Names. We
currently hold numerous Internet domain names, including the following:
“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.”
Goldtrade holds the
Internet domain names: “p1000.co.il,” and "p2000.co.il" and Start holds the
Internet Domain name of "msnshops.co.il." Domain
names generally are regulated by Internet regulatory bodies. The regulation of
domain names in Israel and other countries is subject to change. Regulatory
bodies could establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names.
Licenses. We have
obtained licenses to bundle various third party software products in our
front-end configuration software product. We 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 50.33% owned subsidiary of Eurocom
Holdings Ltd. (an additional 0.67% interest is 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,
although their holding in us may be diluted following this Offering,
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
agreements, amendments, waivers and modifications to the agreements
between us and Eurocom Communications, Eurocom Holdings and their
affiliates; 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.
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.
Because
we have interlocking directors with Eurocom Communications, there also may be
inherent conflicts of interest when such directors make decisions related to
transactions between Eurocom Communications or its affiliates and us. We could
lose valuable management input from such conflicted directors and officers.
Risk
Related to Our Ordinary Shares
Our
share price has been very volatile, and may decline.
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. |
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.
Our
share price could be adversely affected by the sale or the perception that
certain shareholders could require us to sell their
shares.
Prior to
our IPO we granted Euronet Communications and other shareholders, who together
hold 69.7% of our ordinary shares, registration rights under the U.S. Securities
Act 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.
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.
Risks
Related to Our Debentures (Series A)
We
may not be able to make our debt payments in the
future.
Our
ability to meet our debt obligations will depend on whether we can successfully
implement our strategy, as well as on financial, competitive, legal, regulatory
and technical factors, including some factors that are beyond our control.
In
addition, if we are unable to generate sufficient cash flow from operations to
meet principal and interest payments on our debt, we may have to refinance all
or part of our indebtedness. Furthermore, cash flows from our operations may be
insufficient to repay in full at maturity the Debentures (Series A). Our ability
to refinance our indebtedness, including the Notes, will depend on, among other
things:
§ |
Our
financial condition at the time, |
§ |
Restrictions
in agreements governing our debt and |
§ |
Other
factors, including market conditions. |
We cannot
ensure you that any such refinancing would be possible on terms that we could
accept or that we could obtain additional financing. If refinancing will not be
possible or if additional financing will not be available, we may have to sell
our assets under circumstances that might not yield the highest prices, or
default on our debt obligations, including the Debentures (Series A), which
would permit the holders of our Debentures (Series A) to accelerate their
maturity dates.
Risks
Related to Our Operation in Israel
Conducting
business in Israel entails special risks.
We are
incorporated and based in, and currently derive all our revenues from markets
within the State of Israel. Accordingly, we are directly influenced by the
political, economic and military conditions affecting Israel. Specifically, we
could be adversely affected by any major hostilities involving Israel, a full or
partial mobilization of the reserve forces of the Israeli army, the interruption
or curtailment of trade between Israel and its present trading partners, or a
significant downturn in the economic or financial condition of Israel.
Since the
establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors, and a state of hostility,
varying from time to time in intensity and degree, has led to security and
economic problems for Israel. Since September 2000, there has been a marked
increase in violence, civil unrest and hostility, including armed clashes,
between the State of Israel and the Palestinians, and acts of terror have been
committed inside Israel and against Israeli targets in the West Bank and Gaza.
There is no indication as to how long the current hostilities will last or
whether there will be any further escalation. Any 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 general strikes and work stoppages in 2004,
affecting all banks, airports and ports. These strikes have had an adverse
effect on the Israeli economy and on business, 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 customers. Furthermore, if we expand our business into other countries,
we may earn additional revenue and incur additional expenses in other
currencies. We also have U.S. dollar denominated liabilities (rights of use
leasing obligations for our international lines). In future periods, our dollar
assets (deposits) and our dollar denominated liabilities might commercially
serve as partial economic 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.
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 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.
4. RATIO
OF EARNINGS TO FIXED CHARGES
Under
IS-GAAP |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31 |
|
|
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
|
|
(in
thousands) |
|
Pre-tax
earnings (loss) from continuing operations |
|
|
(71,840 |
) |
|
(13,019 |
) |
|
28,568
|
|
|
17,643
|
|
|
24,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
charges |
|
|
13,797
|
|
|
10,857
|
|
|
1,535
|
|
|
878
|
|
|
1,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company’s
share in net loss of investees |
|
|
|
|
|
|
|
|
(1,530 |
) |
|
(1,538 |
) |
|
(396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in loss of a subsidiary |
|
|
1
|
|
|
963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
pre-tax earnings (loss) from continuing operations
|
|
|
(58,042 |
) |
|
(1,199 |
) |
|
28,573
|
|
|
16,983
|
|
|
25,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
charges (1) |
|
|
13,274
|
|
|
10,129
|
|
|
719
|
|
|
(350 |
) |
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
interest factor (2) |
|
|
523
|
|
|
728
|
|
|
808
|
|
|
1,053
|
|
|
1,447
|
|
Interest
expense for equity companies whose debt is guaranteed |
|
|
-
|
|
|
-
|
|
|
8
|
|
|
175
|
|
|
95
|
|
Total |
|
|
13,797
|
|
|
10,857
|
|
|
1,535
|
|
|
878
|
|
|
1,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of earnings to fixed charges (3) |
|
|
-
|
|
|
-
|
|
|
18.61
|
|
|
19.34
|
|
|
16.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Interest expenses and adjustment of long-term loan and leases - in 2003 we
recorded earnings from long-term loans, which were adjusted to the US$/NIS
exchange rate. |
|
(2)
Rental interest factor is calculated as one third of the total rent
expenses. |
|
(3)
Earnings were insufficient to cover fixed charges requirements for the
years ended December 31, 2000, 2001, by NIS 71.84 million and NIS 12.06
million, respectively. |
Under
US-GAAP |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31 |
|
|
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
|
|
(in
thousands) |
|
Pre-tax
earnings (loss) from continuing operations |
|
|
(77,391 |
) |
|
(11,879 |
) |
|
24,633
|
|
|
14,735
|
|
|
23,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
charges |
|
|
13,797
|
|
|
10,857
|
|
|
1,545
|
|
|
1,081
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company’s
share in net loss of investees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in loss of a subsidiary |
|
|
6,482
|
|
|
5,647
|
|
|
2,418
|
|
|
2,204
|
|
|
3,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
pre-tax earnings (loss) from continuing operations
|
|
|
(57,112 |
) |
|
4,625
|
|
|
28,596
|
|
|
18,020
|
|
|
28,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
charges (1) |
|
|
13,274
|
|
|
10,129
|
|
|
737
|
|
|
28
|
|
|
234
|
|
Rental
interest factor (2) |
|
|
523
|
|
|
728
|
|
|
808
|
|
|
1,053
|
|
|
1,447
|
|
Interest
expense for equity companies whose debt is guaranteed |
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
13,797
|
|
|
10,857
|
|
|
1,545
|
|
|
1,081
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of earning to fixed charges (3) |
|
|
-
|
|
|
-
|
|
|
18.51
|
|
|
16.67
|
|
|
16.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Interest expenses and adjustment of long-term loan and leases - in 2003 we
recorded earnings from long-term loans, which were adjusted to the US$/NIS
exchange rate. |
|
(2)
Rental interest factor is calculated as one third of the total rent
expenses. |
|
(3)
Earnings were insufficient to cover fixed charges requirements for the
years ended December 31, 2000, 2001, by NIS 70.9 million and NIS 6.2
million, respectively. |
5. INFORMATION
ABOUT THE OFFERING
The
securities we are offering under this Prospectus are as follows:
1. 220,000,000
Debentures (Series A) of NIS 1 par value, repayable (principal) in 8 equal
annual installments on April 1 of each of the years 2008 to 2015 (inclusive),
bearing interest per year as shall be determined in the tender for the
Debentures' interest and linked (principal and interest) to the Israeli consumer
price index published on March 15, 2005 for February 2005. The interest will be
paid every twelve months, on April 1 of each of the years 2006 to 2015
(inclusive). The Debentures are convertible to our ordinary shares on each trade
day, as of the day they are registered until March 16, 2015 (inclusive, except
for March 17 to April 1 of each of the years 2008 to 2014. The
conversion price will be NIS 40 of Debentures per one of our ordinary shares
until March 31, 2008, and NIS 50 of Debentures per one of our ordinary shares
since April 1, 2008 until March 31, 2015 (all subject to adjustments as
specified in section 9.14). Debentures (Series A) which will not be converted
into ordinary shares until March 16, 2015 (inclusive) will not grant their
holder a right to conversion.
2. 1,500,000
Stock Purchase Warrants (Series 1), registered in the name of their owner,
exercised into our ordinary shares of NIS 0.01 par value each, on each trade day
as of June 1, 2005 until August 15, 2005 (inclusive). The exercise price will be
NIS 32 per one of our ordinary shares, subject to adjustments as specified in
section 10.11. Stock Purchase Warrants (Series 1) which will not be exercised
into ordinary shares until August 15, 2005 (inclusive) will expire and become
void and will not grant their holder any rights.
3. 2,500,000
Stock Purchase Warrants (Series 2), registered in the name of their owner,
exercised into our ordinary shares of NIS 0.01 par value each, on each trade day
as of June 1, 2005 until October 15, 2007 (inclusive), except for the
12th to the
16th day of
each month. The exercise price will be NIS 40 per one of our ordinary shares,
linked to the consumer price index, and subject to adjustments as specified in
section 10.11. Stock Purchase Warrants (Series 2) which will not be exercised
into ordinary shares until October 15, 2007 (inclusive) will expire and become
void and will not grant their holder any rights.
The
Offering consists of 220,000,000 Debentures (Series A) together with 1,500,000
Stock Purchase Warrants (Series 1) together with 2,500,000 Stock Purchase
Warrants (Series 2) offered to the public in 100,000 units (the “Units”) by way
of tender over the percentage of the Debentures' interest. The interest for the
Debentures will not be higher than 5% (the “Maximal
Interest ”) and
will not be lower than 4% (the “Minimal
Interest”)
The
composition of every Unit is as follows: |
|
|
|
|
|
|
|
2,200
Debentures (Series A) |
|
|
NIS
2,200 |
|
|
|
|
|
|
15
Share Purchase Warrants (Series 1) |
|
|
at
no cost |
|
|
|
|
|
|
25
Share Purchase Warrants (Series 2) |
|
|
at
no cost |
|
|
|
|
|
|
Total
Price Per Unit |
|
|
NIS
2,200 |
|
THIS
OFFERING IS BEING MADE EXCLUSIVELY IN ISRAEL TO RESIDENTS OF ISRAEL. NO PERSON
IS AUTHORIZED TO MAKE ANY SELLING EFFORTS IN CONNECTION WITH THIS OFFERING IN
THE UNITED STATES.
The
complete details of the offering appear in pages 33 to 54.
CAPITALIZATION
AND INDEBTNESS
The
following table sets forth our consolidated capitalization and indebtness as of
December 31, 2004. You should read this table together with our audited
consolidated financial statements and related notes incorporated by reference in
this Prospectus. There has been no material change in our shareholders’ equity
and total capitalization since December 31, 2004.
|
|
As
of |
|
Convenience |
|
|
|
December
31 |
|
translation |
|
|
|
2004 |
|
into
US Dollars |
|
|
|
Consolidated |
|
|
|
(in
thousands) |
|
|
|
|
|
|
|
Shareholders’
equity
Ordinary shares, NIS 0.01 par value (501,000,000
shares authorized; 18,431,500 shares issued and fully paid
as at December 31,
2004) |
|
|
197
|
|
|
46
|
|
Additional
paid in capital |
|
|
215,040
|
|
|
49,916
|
|
Accumulated
deficit* |
|
|
(93,344 |
) |
|
(21,667 |
) |
|
|
|
|
|
|
|
|
Total
shareholders’ equity |
|
|
121,893
|
|
|
28,295
|
|
*
includes capital reserve of NIS 15.7 million (US$ 3.6 million) from the purchase
of investee company from a related party.
USE
OF PROCEEDS
The net
proceeds that we will receive from this offering are estimated to be NIS 212.2
million (US $ 48.6 million) after deduction of the underwriters’ fees and
commissions and the estimated expenses of the offering.
We intend
to use the net proceeds from the offering for general corporate purposes, as
shall be from time to time determined by our board of directors.
We have
explored and will continue to explore business opportunities and potential
investments in the communication field. We believe that, the proceeds from the
offering will enable us to take advantage of structural changes in Israel’s
communications marketplace, giving rise to opportunities for us to increase our
share in the markets in which we are currently active and to enter new markets.
However, we cannot be sure whether any of these opportunities will become
actual.
THE
OFFER AND LISTING
Offer
and Listing Details
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, and
since February 2005 - on the Nasdaq National Market:
Year |
|
High |
|
Low |
|
2004 |
|
$ |
6.44 |
|
$ |
3.78 |
|
2003 |
|
|
6.96 |
|
|
1.19
|
|
2002 |
|
|
1.80 |
|
|
0.87 |
|
2001 |
|
|
2.94 |
|
|
0.54 |
|
2000 |
|
|
30.00 |
|
|
1.28 |
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
First
Quarter |
|
$ |
5.23 |
|
$ |
3.78 |
|
Second
Quarter |
|
|
6.06 |
|
|
4.56 |
|
Third
Quarter. |
|
|
4.91 |
|
|
4.07 |
|
Fourth
Quarter |
|
|
6.44 |
|
|
4.10 |
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
First
Quarter |
|
$ |
4.06 |
|
$ |
1.19 |
|
Second
Quarter |
|
|
6.05 |
|
|
2.84 |
|
Third
Quarter |
|
|
6.96 |
|
|
3.85 |
|
Fourth
Quarter |
|
|
4.48 |
|
|
3.34 |
|
|
|
|
|
|
|
|
|
2002 |
|
|
|
|
|
|
|
First
Quarter. |
|
$ |
1.80 |
|
$ |
0.96 |
|
Second
Quarter |
|
|
1.25 |
|
|
1.01 |
|
Third
Quarter |
|
|
1.09 |
|
|
0.95 |
|
Fourth
Quarter |
|
|
1.29 |
|
|
0.87 |
|
|
|
|
|
|
|
|
|
Each
Month Since May 2004 |
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
February
2005 |
|
$ |
7.79 |
|
$ |
5.27 |
|
January
2005 |
|
|
5.71 |
|
|
4.96 |
|
2004 |
|
|
|
|
|
|
|
December
2004 |
|
$ |
6.44 |
|
$ |
4.98 |
|
November
2004 |
|
|
6.43 |
|
|
4.10 |
|
October
2004 |
|
|
4.77 |
|
|
4.20 |
|
September
2004 |
|
|
4.81 |
|
|
4.30 |
|
August
2004 |
|
|
4.45 |
|
|
4.07 |
|
July
2004 |
|
|
4.91 |
|
|
4.18 |
|
June
2004 |
|
|
5.28 |
|
|
4.56 |
|
Plan
of Distribution
This
offering is being underwritten by the following leading underwriters:
Name
of Underwriter |
Address |
Poalim
I.B.I - Managing & Underwriting Ltd. |
Shalom
Tower, 9 Ehad Ha'Am Street, Tel-Aviv
65251 |
Apex
Underwriting Ltd. |
2
Kaufman Street, Tel Aviv 68012 |
In
addition to the leading underwriters, there are additional 27 underwriters who
are participating as members of the underwriters group. For details see Chapter
17.
To the
extent known to us, major shareholders, directors or members of our management
do not intend to subscribe in the offering at all or for more than 5% of the
Offering. Our "Interested Parties" (as such term is defined in the Israeli
Companies Law) undertook not to purchase any of the Units offered to the public
in this Prospectus.
Institutional
Investors undertook to purchase 80% of the Units offered in this Prospectus. For
further information please see section 5.10.
The terms
of the Underwriting Agreement are specified in Chapter 17. Each of the leading
underwriters undertakes to guarantee the purchase of Units, severally, as
follows:
Name
of Underwriter |
No.
of Units |
Poalim
I.B.I - Managing & Underwriting Ltd. |
5,000 |
Apex
Underwriting Ltd. |
5,000 |
|
|
The other
underwriters also undertake to guarantee the purchase of Units, severally - for
details see chapter 17.
The
underwriters are committed to take and pay for any securities not purchased by
the public under the Offering, except for securities that the institutional
investors undertook to purchase.
Markets
Our
ordinary shares trade on the Nasdaq National Market under the symbol IGLD and,
since March 1, 2005, also on the Tel Aviv Stock Exchange, or TASE, under the
symbol "אנזהב"
Dilution
The
following table set forth the direct holdings of our shares by our 5% or more
shareholders and of our directors, as of the date of the offering:
Name
of Holder
|
Holdings
prior to the offering
|
Holdings
following the offering
|
No.
of shares
|
Percentage
|
Following
exercise of Share Purchase Warrants (Series 1)
|
Following
exercise of Share Purchase Warrants (Series 2)
|
Following
conversion of the Debentures (Series A)1
|
On
a fully diluted basis2
|
Euronet Communications
Ltd.3
|
12,683,135
|
68.81%
|
63.63%
|
60.59%
|
53%
|
45.41%
|
Eli
Holtzman
|
172,118
|
0.93%
|
0.86%
|
0.82%
|
0.72%
|
0.62%
|
Expense
of the Offering
The
amount of all the underwriting, management and distribution commissions as well
as other expenses related to the offering, including commissions to
institutional investors, are estimated to be approximately 3.6% of the immediate
gross proceeds of the offering. (approximately NIS 0.036 per Debenture (Series
A)).
________________________
1
Assuming that all the Debentures (Series A) are converted into shares at the
price of NIS_40 per share.
2
Assuming that the offered Stock Purchase Warrants are exercised and that all the
Debentures (Series A) are converted into shares at the price of NIS 40 per
share.
3
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 50.33% in Eurocom
Communications Ltd. (Mr. Shaul Elovitch holds an additional
0.67% 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.
CHAPTER
5: THE
PUBLIC OFFERING
5.1. |
The
securities to be offered |
5.1.1. |
220,000,000
registered debentures (series A) of NIS 1 par value each, repayable in 8
equal annual installments on April 1st of
each of the years 2208 to 2015, bearing annual interest at a rate to be
determined in the Tender, which shall not exceed 5% and not be less than
4%. Principal and interest shall be linked to the consumer price index
published in respect of February 2005. Interest on the debentures (series
A) will be paid in annual installments on April 1st of
each of the years 2006 to 2015. |
The
debentures (series A) are convertible into ordinary shares on any trading day
commencing on the date of their registration on the TASE, until March 16, 2005
(inclusive), with the exception of March 17th to April
1st of each
of the years 2008 to 2014, so that by March 31st 2008,
every NIS 40 par value of debentures (series A) not repaid can be converted to
one ordinary share of NIS 0.01 par value of the Company, and from April
1st 2008
every NIS 50 par value of debentures (series A) not repaid can be converted to
one ordinary share of NIS 0.01 par value of the Company (subject to adjustments
as set out in Section 9.14 below). For debentures (series A) not converted by
March 16th 2015, no
right will be granted to their holders to convert them to shares of the
Company.
5.1.2. |
1,500,000
registered warrants (series 1) exercisable into ordinary shares of the
Company on any trading day commencing June 1st
2005 until August 15th
2005. Each warrant (series 1) can be converted into one ordinary share of
NIS 1 par value of the Company against payment in cash of an exercise
price of NIS 32 (subject to adjustments as set out in Section 10.11 of the
Prospectus). A warrant (series 1) that has not been exercised by August
15th
2005 will expire and be void, and shall not grant its holder any right in
respect to the Company. |
5.1.3. |
2,500,000
registered warrants (series 2) exercisable into ordinary shares of the
Company on any trading day commencing June 1st
2005 until August 15th
2007, except from the 12th to
the 16th of
each month. Each warrant (series 2) can be converted into one ordinary
share of NIS 0.01 par value of the Company against payment in cash of an
exercise price of NIS 40 linked to the consumer price index published in
respect of February 2005 (subject to adjustments as set out in Section
10.11 of the Prospectus). A warrant (series 2) that has not been exercised
by August 15th
2007 will expire and will be void, and shall not grant its holder any
right in respect to the Company. |
5.2.
|
The
principal rights conferred by the securities offered to the
public |
The terms
of the debentures (series A) payable and convertible into ordinary shares of NIS
0.01 par value of the Company are described in Chapter 9
hereinafter.
The terms
of the warrants (series 1) and the warrants (series 2) are described in Chapter
10 hereinafter.
Concerning
the rights associated with the shares of the Company, see Chapter 12
hereinafter.
5.3.
|
Details
of the public offering |
220,000,000
debentures (series A) together with 1,500,000 warrants (series 1) and 2,500,000
warrants (series 2) are being offered to the public in 100,000 units
(hereinafter "the Units") by way of a Tender on the interest rate in respect of
the debentures (series A). The interest in respect of the debentures (series A)
shall not exceed 5% (hereinafter - "the Maximum Interest Rate") and shall not be
less than 4% (hereinafter - "the Minimum Interest Rate").
The
composition of a Unit is as follows:
|
2,200
debentures (series A)
|
|
|
NIS
2,200
|
|
|
15
warrants (series 1)
|
|
|
Free
of charge
|
|
|
25
warrants (series 2)
|
|
|
Free
of charge
|
|
|
Total
Unit price |
|
|
NIS
2,200 |
|
|
The
Tender will be held on April 7, 2005. |
|
5.3.1. |
Provisions
relating to the Tender |
5.3.1.1. |
List
of subscriptions |
The list
of subscriptions for the Units offered to the public will open on April 7, 2005
at 08:30 (hereinafter - "the Date of the Tender ") and will close on the same
day at 15:00 (hereinafter: "the Subscription List Closing Time").
5.3.1.2. |
Applying
to purchase Units |
Applications
to purchase the Units offered to the public in the Tender shall be submitted to
the Company on forms that can be obtained from members of the TASE through the
Offering Coordinator, Poalim I.B.I. Underwriting & Issuances Ltd.
(hereinafter - "the Offering Coordinator") or from any bank branch or other
members of the TASE (hereinafter - "the Official Application recipients"), no
later than at 15:00 on the Date of the Tender. The Company will not accept any
application reaching the Official Application Recipients after 15:00 on the Date
of the Tender: it will be considered not to have been submitted.
Applications
shall be submitted in closed envelopes to the Offering Coordinator by the
Official Application Recipients no later than at 16:30 on the Date of the
Tender. The Offering Coordinator shall put them (including applications
submitted through the Offering Coordinator) in a closed box by 16:30 as
aforesaid. The Company will not accept any application arriving to the Offering
Coordinator after 16:30 on the Date of the Tender. It will be considered not to
have been submitted.
The
applications will be submitted on the following terms:
(1) |
In
the application the applicant will state the number of Units he wishes to
purchase and the interest rate he proposes, which shall not exceed the
Maximum Interest Rate and shall not be less than the Minimum Interest
Rate. An application in which the proposed interest rate is higher than
the Maximum Interest rate will not be accepted. An application in which
the proposed interest rate is less than the Minimum Interest Rate will be
deemed to have been submitted at the Minimum Interest Rate. |
(2) |
Applications
will be for whole Units only, and cannot be for less than one Unit. Any
application which is not a whole Unit shall be rounded down to the nearest
whole Unit, and the fraction of a Unit will be included in the application
will be deemed not included therein from the outset. Any application
stating a number of Units that is less than one shall not be
accepted. |
(3) |
Each
applicant may submit up to three applications in the Tender at different
interest rates. |
(4) |
The
interest rates proposed in the Tender shall be stated at intervals of 0.1%
or multiples of that rate, hence the first rate at which Units can be
ordered above the Minimum Interest Rate is 4.1%. Thereafter Units can be
ordered at 4.2%, 4.3%, 4.4% and so on up to 5% interest, which is the
Maximum Interest Rate. A proposal not cited in intervals of 0.1% shall be
rounded down to the nearest interval. |
(5) |
No
single applicant may order more than 25% of the total number of Units
offered, i.e. 25,000 Units, in all the applications submitted - up to
three as aforesaid. If an applicant applies for more than 25% of the total
Units offered, the total applications shall be deemed as being for 25,000
Units only (hereinafter - "the Maximum Number of Units"), as
follows: |
(a) |
First the Units stated in the application at the lowest interest rate
per Unit shall be taken into account, up to the Maximum Number of Units
(hereinafter - "the First Application"); |
(b) |
If
the number of Units stated in the First Application is less than the
maximum Number of Units, additional Units from the application stating the
lowest interest rate per Unit from among the remaining applications will
be taken into account (hereinafter - "the Second Application"), up to
25,000 Units, cumulative. |
(c) |
If
the number of Units stated in the First Application and the Second
Application is less than the Maximum Number of Units, additional Units
from the third, remaining, application will be taken into account, up to
the Maximum Number of Units, cumulative. |
(6) |
The
applications to purchase are irrevocable. Every applicant shall be
considered to have undertaken to accept the securities that will be
allotted as a result of complete or partial response to his application,
in accordance with the terms of this Prospectus, and to have undertaken to
pay through the Offering Coordinator the full price, in accordance with
the terms of this Prospectus, of the Units to be allotted to him in
response to his application. |
(7) |
The
Official Application Recipients are responsible and obligated towards the
Company, towards the Offering Coordinator and towards the Underwriters, as
the case may be, for full payment of the consideration payable to the
Company under the terms of the Prospectus in respect of applications
submitted through them and which are accepted, in whole or in part.
|
(8) |
"Applicant"
in this Prospectus - together with a relative residing with him,
encompasses an institutional investor with which the Company has made an
agreement to purchase Units under this Prospectus, as provided in Section
5.10 below. |
(9) |
Parties
related to the Company may not apply to purchase the Units offered to the
public in the Tender. |
5.3.2.
|
Setting
the price of the offering in the Tender and allotments to the
applicants |
All the
Units for which applications to purchase are accepted will be issued at a
uniform Unit price, to be determined as follows:
5.3.2.1. |
All
the Units offered to the public for which applications are accepted, shall
be issued to their applicants at a uniform interest rate (hereinafter -
"the Uniform Interest Rate"). The Uniform Interest Rate will be determined
by Tender in the following manner: |
If the
total number of Units stated in the applications accepted in the Tender,
including the Units in applications received from institutional investors, is
less than the total number of Units offered to the public pursuant to this
Prospectus, then all the applications will be accepted in full, subject to
minimum distribution as described in Section 5.5.2.1 below. In this case, the
Uniform Interest Rate will be the Maximum Interest Rate and the balance of the
Units not purchased in the Tender, net of the Units for which prior undertakings
to purchase are received from institutional investors, will be purchased by the
Underwriters at the Maximum Interest Rate.
5.3.2.2. |
If
the total number of Units stated in the applications accepted in the
Tender, including the Units included in purchase applications received
from institutional investors, is equal to or more than the total number of
Units offered to the public under this Prospectus, all the offered Units
will be issued at the Uniform Interest Rate, which will be the lowest
interest rate at which and/or a lower interest rate, applications were
submitted in the Tender to purchase all the Units offered, and the
allotment of the Units offered in the Tender will be effected as
follows: |
(1) |
Applications
stating an interest rate that is higher than the Uniform Interest Rate -
will not be accepted. |
(2) |
Applications
stating an interest rate that is lower than the Uniform Interest Rate -
will be accepted in full. |
(3) |
Applications
stating a Unit price equal to the Uniform Interest Rate will be accepted
proportionally, so that each applicant will receive, out of the Units
remaining for distribution, if any remain, after the allotment in respect
of applications stating an interest rate lower than the Uniform Interest
Rate and net of the part of the institutional investors as provided in
Section 5.10 below, a part equal to the ratio of the number of Units he
ordered in the application in which he stated the Uniform Interest Rate,
to the total number of Units in all the applications stating the Uniform
Interest Rate, net of the Units which were allotted to institutional
investors. |
(4) |
Notwithstanding
the aforesaid, if allotment of the Units as described above means that
minimum distribution of the debentures (series A) will not be achieved, as
set forth in Section 5.5.2.1 below, then allotment of the Units will be
effected as described in sub-sections (1) - (3) above but the Units to the
institutional investors who submitted applications at the Uniform Interest
Rate shall be allotted in the same manner as the allotment to the public.
|
(5) |
Notwithstanding
the provisions of sub-section (4) above, should it transpire after
processing and arriving at the results as aforesaid, that minimum
distribution of the debentures (series 1) set forth in Section 5.5.2.1
below is not achieved, the Company will allot to every applicant at the
Uniform Interest Rate, including the institutional investors and those who
ordered at an interest rate lower than the Uniform Interest Rate, a
proportional part of his order equal to the product of the total units
offered to the public at the ratio of the number of Units he ordered to
the total number of Units order by applicants, including institutional
investors, at the Uniform Interest Rate as aforesaid and/or at a lower
interest rate. Applications ordering at an interest rate higher than the
Uniform Interest Rate will not be accepted. |
(6) |
Notwithstanding
the aforesaid, if the allotment as provided in sub-section (5) also does
not achieve minimum distribution of the debentures (series A) as provided
in Section 5.5.2.1 below, then the distribution of the Units will be
effected as follows: |
|
A
new allotment will be made, including to the institutional investors, for
determining a new Uniform Interest Rate that shall not be less than the
Minimum Interest Rate and that shall be the lowest interest rate at which
all the securities offered under this Prospectus can be allotted in a way
that will achieve minimum distribution of the debentures (series A) as set
forth in Section 5.5.2.1 below, provided that the number of Units allotted
to an applicant will not be more than ordered or at a lower interest rate
that stated in the application ("the new Uniform Interest
Rate"). |
|
The
allotment at the New Uniform Interest Rate will be effected as provided in
sub-section (5) above, where the "New Uniform Interest Rate" will serve,
for this matter, as the "Uniform Interest Rate". Applications that
proposed an interest rate higher than the New Uniform Interest Rate will
not be accepted. |
(7) |
If
after re-processing the results as described in sub-section (6) above,
minimum distribution of the debentures (series A) offered under this
Prospectus as set forth in Section 5.5.2.1 below is not achieved, the
offered securities will not be registered for trading. In this case, the
offered securities will not be allotted to the public, the consideration
will not be collected from the applicants and the offering pursuant to
this Prospectus will be cancelled. |
(8) |
In
any case where the implementation of any of the allotment methods
described above necessitates the allotment of fractions of Units,
adjustment will be made in the manner of allotment so that the number of
Units allotted to each applicant will be rounded to the nearest whole
number. The balance that is created as a result of this rounding will be
allotted to the Offering Coordinator at the Uniform Interest Rate or the
New Uniform Interest Rate, as the case may be. |
(9) |
In
the event of over-subscription, the Company may determine how fractions
will be treated by purchase of the remainder by the Offering Coordinator,
so as to remain with the smallest possible number of fractions.
|
5.3.3.1. |
A
short time prior to the Date of the Tender, the Offering Coordinator will
open a special interest-bearing trust in the name of the Company, at its
own company or at another banking corporation ("the Special Account"). The
Special Account will be managed by the Offering Coordinator in the name of
and on behalf of the Company, in accordance with the Securities Law,
5728-1968. |
5.3.3.2. |
The
monies received in respect of the Units for which purchase applications
were accepted in whole or in part and for which the purchase applications
were submitted by means of the Official Application Recipients, will be
transferred to the Special Account, in accordance with the provisions of
the Prospectus. |
5.3.3.3. |
On
the first trading day after the Date of the Tender, the Official
Application Recipients through whom the submitted applications were
accepted in whole or in part will deposit in the Special Account, by
12:30, the full consideration payable from them for the Units for which
applications were accepted as provided in Section 5.3.2 above.
|
5.3.3.4. |
After
the subscription list for the securities offered under this Prospectus in
the Tender is closed, if it transpires that all the Units offered by the
Company in the Tender have been purchased and the minimum distribution
requirements as set forth in Section 5.5.2.1 below have been met, the
Offering Coordinator will transfer to the Company, no later than the end
of the second trading day after the Date of the Tender, after receipt of
the letters of allotment referred to in Section 5.4 below, all the amounts
received in the Special Account plus the yields on the investment accrued
in respect thereof, if accrued, and net of the amounts payable under the
underwriting agreement, which will be paid to the parties entitled to them
under the underwriting agreement. |
5.3.3.5. |
If
it transpires that the minimum distribution requirements for the
debentures (series A) as provided in Section 5.5.2.1 below have not been
met, then the offering under this Prospectus will be cancelled, the
offered securities will not be registered for trade and the consideration
will not be collected from the applicants. |
5.3.4. |
The
Tender process |
Applications
for the Tender shall be delivered to the Offering Coordinator by the Official
Application Recipients by 16:30 on the Date of the Tender, in closed envelopes,
which shall remain closed until the deadline for receipt of applications. The
Offering Coordinator will put them in a closed box together with the
applications that it received directly.
After
16:30 on the Date of the Tender, the closed box will be opened and the envelopes
will be opened in the presence of the Company's auditor, who will oversee the
proper implementation of the Tender proceedings, and the results of the Tender
will be collated and processed.
5.3.5. |
The
results of the Tender |
5.3.5.1. |
By
10:00 on the first trading day after the Date of the Tender, the Offering
Coordinator will deliver, through the Official Application Recipients who
submitted applications in the Tender, notices to the applicants whose
applications were accepted in whole or in part. The notice shall state the
interest rate determined in the Tender, the number of Units to be allotted
to the applicant and the consideration owed for the Units. Upon receipt of
the notice, by 12:30 on the same day, the applicants will transfer the
full consideration payable by them in respect of the Units for which they
submitted their order to the Offering Coordinator, through the Official
Application Recipients. |
5.3.5.2. |
On
the first trading day after the Date of the Tender the Company will advise
the Tel Aviv Stock Exchange, in an immediate report, of the results of the
Tender, and within two additional trading days thereafter, notice thereof
will be published in two daily newspapers of wide circulation published in
Hebrew in Israel. |
5.3.5.3. |
No
later than on the second trading day after the Date of the Tender, subject
to fulfillment of the terms of the minimum distribution enabling the
securities to be listed on the TASE as provided in Section 5.5.2.1 below,
and after the Offering Coordinator has received for the Nominees Company
of Bank Hapoalim B.M. ("the Nominees Company") letters of allotment in
respect of the securities purchased by the public, the Offering
Coordinator will pay the Underwriters, from the Special Account, the
amounts due to them according to the underwriting agreement, as set forth
in Chapter 17 below, subject to fulfillment of their undertakings pursuant
to the underwriting agreement. |
5.4.
|
Letters
of allotment |
If an
application is accepted, the Company will allot the securities for which the
application was accepted and for which the consideration has been paid in full
to the Nominees Company. Letters of allotment in respect of these securities
will be sent to the Nominees Company no later than the second trading day after
the Date of the Tender, provided that the allotment is not made before the
Offering Coordinator has ascertained that the minimum distribution requirements
as provided in Section 5.5.2.1 below have been met.
The
letters of allotment can be transferred, split or waived in favor of others,
subject to filling out a deed of transfer or split or waiver and its delivery,
together with the letter of allotment, to the Company and subject to payment by
the applicant of the expenses, taxes and levies involved therein, including
stamp tax and other levies, if any.
Written
on the letter of allotment of the warrants will be that they and the shares
underlying their exercise are not registered in accordance with the U.S.
Securities Act and that a warrant cannot be exercised by or for "U.S. Persons"
unless they are registered in accordance with the U.S. Securities Act or unless
an exemption from the registration requirements of the U.S. Securities Act
exists. The letter of allotment will also note that upon submitting the
application to exercise the warrants, each applicant will declare, in writing,
that he is not a U.S. person and that he is not exercising the options for a
U.S. person. On this matter, see page 1 of the Prospectus.
5.5.1. |
All
the debentures (series A) and the shares underlying conversion of the
debentures (series A), the warrants (series 1) and the warrants (series 2)
and the shares underlying exercise of the warrants, are to be registered
on the TASE, and this has been approved by the TASE. Within three business
days of the Date of the Tender, the Company will contact the TASE to
request the registration of the above securities for trading.
|
5.5.2. |
Registration
of the securities on the TASE is contingent upon minimum distribution of
the debentures (series A), as this term is defined in the TASE Guidelines,
as set forth in Section 5.2.2.1 below. |
5.5.2.1. |
According
to the TASE Guidelines, minimum distribution is achieved upon fulfillment
of the following conditions: |
Type
of security |
Minimum number
of holders
|
Minimum
holding value per holder |
Debentures
(series A)
|
100 |
NIS
16,000 |
"Holder"
is defined as a single holder, the value of whose holdings exceeds the value of
the minimum holding per holder as set out above, or a holder together with
others whose joint holdings exceed the value of the minimum holding per holder
as aforesaid.
5.5.2.2. |
If
when the Tender results are final it becomes apparent that the terms of
Section 5.5.2.1 above have not been met, then the Offering will be
cancelled. In such event the Company shall give notice thereof in an
immediate report to the Securities Authority, and will publish notice of
the cancellation of the offering the following day in two daily newspapers
of wide circulation in Israel in Hebrew. |
5.6.
|
No
arrangements not written in the Prospectus may be
made |
5.6.1. |
By
signing this Prospectus, the Company, the directors and the Underwriters
undertake to refrain from making arrangements which are not written in the
Prospectus in connection with the offer of securities or their
distribution to the public, and undertake to refrain from extending any
right to the buyers of the securities under this Prospectus to sell the
securities they purchased except as set out in the Prospectus.
|
5.6.2. |
By
signing this Prospectus, the Company, the directors and the Underwriters
undertake to notify the Securities Authority of any arrangement known to
them with any third party that contradicts the undertaking described in
Section 5.6.1. above. |
5.6.3. |
By
signing this Prospectus, the Company, the directors and the Underwriters
undertake to refrain from entering into an agreement with any third party
which, to the best of their knowledge, has made arrangements contravening
the provision of Section 5.6.1 above. |
5.6.4. |
On
the date of publication of this Prospectus, the Company submitted to the
Securities Authority an undertaking signed by the interested parties in
the Company by virtue of their holdings, whereunder said interested
parties have undertaken to act as provided in Sections 5.6.1 to 5.6.3
above. |
5.6.5. |
The
Company, the directors and the Underwriters will not accept orders for
securities from this offering from a distributor who does not undertake,
in writing, to act in accordance with the provisions of this Section 5.6.
The Company and the Underwriters will submit to the Securities Authority
copies of the letters of undertaking from the Official Application
Recipients as aforesaid. |
5.7.
|
No
dilution of equity |
In the
period commencing on the date of publication of the Prospectus and until the
allotment of the securities under this Prospectus, the Company will not take any
action which constitutes dilution of equity as defined in the Securities
Regulations (Details of the prospectus, its structure and form),
5729-1969.
5.8.
|
Debentures
(series A) certificates and letters of allotment for the
warrants |
The
certificates in respect of the debentures (series A) offered under this
Prospectus will be ready for delivery to those entitled to them at the
registered office of the Company, no later than at the end of three months from
the date of the listing of the securities of the Company on the TASE, and they
will be delivered against the return of the letters of allotment to the
Company.
The
Company will not issue warrant certificates. Possession of warrants shall be by
means of allotment letters.
5.9.
|
Taxation
on the securities |
5.9.1. |
Capital
gain tax from selling the securities offered in this Prospectus
(hereinafter - "Securities Offered in the
Prospectus"). |
Real
capital gain from the sale of securities traded on the TASE, including
Securities Offered in the Prospectus, by any individual or group for whom the
income from the sale of the securities is not interest from a business, and to
whom the provisions of Section 6 of the Adjustments for Inflation Law
(hereinafter - "the Adjustments Law") or the provisions of Section 130A of the
Income Tax Ordinance (New Version), 5721-1961 (hereinafter - "the Income Tax
Ordinance" or "the Ordinance") do not apply, shall be liable for 15% tax,
provided that the holder of the securities has not claimed interest and linkage
differential expenses for the securities and the sale of the securities was not
made to a relative, as defined in Section 105K of the Income Tax Ordinance.
A
taxpayer to whom Section 6 of the Adjustments Law or the provisions of Section
130A of the Income Tax Ordinance do not apply in determining income, and whose
income does not constitute income from a business, but who sold to a relative
and/or who claimed deduction of financing expenses for Securities Offered in the
Prospectus, will be liable for 25% tax on his real capital gain.
A group
of persons exempt from tax pursuant to Section 9(2), including provident funds,
of the Income Tax Ordinance, will be exempt from tax in respect of the real
capital gain from sale of Securities Offered in the Prospectus.
An exempt
mutual fund will be fully exempt from on capital gains generated from the sale
of Securities Offered in the Prospectus.
As a
rule, the tax that would be applicable to such profits or income if received by
an individual whose income does not originate from a business or from his
profession, will apply to the income of a taxable mutual fund.
A foreign
resident, as defined in the Ordinance and its Regulations (hereinafter -
"Foreign Resident") is exempt from tax on capital gains in the sale of
securities traded on the TASE, if the capital gain does not originate from
permanent work in Israel.
A Foreign
Resident group of persons will not be entitled to this exemption if residents of
Israel are the controlling interest in it or are entitled to 25% or more of the
income or profits of a Foreign Resident, directly or indirectly.
For the
purpose of computing the capital gain from the sale of a share, the source of
which is a warrant (series 1 and series 2) that was converted to a share, the
original price of the warrant will be considered "the original price" and the
exercise addition paid for the exercise to a share will be considered
"enhancement expenses" (as defined in Section 88 of the Income Tax Ordinance)
and the date of purchase of the options warrant will be considered the "date of
purchase" of the shares.
In the
event of conversion of the debentures to shares, the original price of the
debentures will be seen as the original price and the payment made for its
conversion to a share will be seen as the enhancement expenses.
Until the
end of 2006, 15% of the amount of capital loss caused by selling the offered
securities, if any, by an individual or a group of persons to which the
provisions of Section 6 of the Adjustments Law or the provisions of Section 130A
of the Ordinance do not apply in determining their income and of which the
income from sale of the securities does not constitute income from a business,
can be offset against the tax applicable to real gains from securities (as
defined in Section 105K of the Ordinance) which are not foreign securities and
from special transactions in mutual funds that are traded on the Stock Exchange
in Israel.
Starting
in the 2007 tax year, taxpayers may offset the loss from sale of the offered
securities as aforesaid, against the tax applicable to capital gains from the
sale of securities, futures transactions and units in mutual funds - whether
traded on the stock exchange in Israel or traded outside Israel, and may offset
the loss against the tax applicable to interest income and dividend arising from
the securities as aforesaid.
As noted,
the aforementioned reduced tax rates will not apply to taxpayers whose income
from the sale of securities constitutes income from a "business" pursuant to the
provisions of Section 2(1) of the Income Tax Ordinance, or to taxpayers to whom
the computation of their taxable income the provisions of the Income Tax
Regulations (Rules concerning the management of books of account of companies in
overseas investments and of certain partnerships, and determination of their
taxable income), 5744-1984 (hereinafter - "the Dollar Regulations") apply.
With
respect to companies to which the provisions of Chapter B of the Adjustments Law
or the Dollar Regulations apply in determining their taxable income, capital
gains from the sale of the securities offered under this Prospectus will be
taxed at the rate applicable to companies, in accordance with the provisions
laid down in Section 126 of the Income Tax Ordinance (2005 - 34%, 2006 - 32%,
2007 - 30%). With respect to individuals to whom the provisions of Chapter B of
the Adjustments Law apply, or whose income is income from a business - the
capital gain will be taxed according to brackets in accordance with Section 121
of the Ordinance (today - up to 49%).
Under the
provisions of Section 6 of the Adjustments Law, a real loss from the sale of
traded securities will be offset against a real capital gain from traded
securities only. Nevertheless, for a financial institution as defined in Section
22 of the Adjustments Law, whose income from the sale of securities would have
been income from a business according to the Income Tax Ordinance if not for
that section, the real loss from the sale of the securities will be deemed to be
loss from a business.
5.9.1.1. |
Taxation
of income from a dividend on shares originating from the conversion of
debentures or options |
The tax
on a dividend originating from the offered securities will be 25% for an
individual resident of Israel, 0% for a company residing in Israel, and 25% for
a foreign resident, or in accordance with the provisions of a treaty preventing
double taxation between the State of Israel and the country of residence of that
Foreign Resident (subject to receipt of approval from the tax
authorities).
A group
of persons including provident funds that is exempt from tax under Section 9(2)
of the Income Tax Ordinance, will be exempt from tax for the
dividend.
An exempt
mutual fund will be exempt from tax on dividends it receives from a
shareholding.
As a
rule, the tax that would be applicable to such profits or income if they were
received by an individual whose income is not income from a business or from his
profession, will apply to the income of a taxable mutual fund.
Notwithstanding
the above, tax on a dividend originating from an approved enterprise sharing
income, as defined in the Capital Investment Encouragement Law, will be 15% for
an individual, a company resident of Israel, a taxable mutual fund and a Foreign
Resident (subject to the tax treaty referred to above). A mixed mutual find and
a mutual fund will be exempt from tax on dividends originating from the income
of an approved enterprise.
5.9.2. |
Taxation
of income from interest and debenture discount
fees |
5.9.2.1. |
Taxation
of interest income from debentures (series
A) |
Income
from interest, including discount fees, paid on debentures (series A) offered
under the Prospectus, to an individual, will be taxed at 15%, provided that the
individual is not the controlling interest in the company paying the interest,
that the individual does not claim interest expenses and linkage differentials
in respect of the debentures and provided that the interest income of the
individual is not classified as income from a business according to Section 2(1)
of the Income Tax Ordinance, is not recorded in his books, and is not required
to be so recorded. In any case where one of the above conditions does not
obtain, Section 125(c)A of the Income Tax Ordinance provides that the interest
income and discount fees will be taxed at the rates set in Section 121 of the
Income Tax Ordinance and that such income will be sees as the highest level on
the scale of the individual's taxable income.
A taxable
mutual fund will be liable for 15% tax on interest income and discount fees
originating from the debentures.
A mixed
mutual fund and an exempt mutual fund, as well as entities to which the
provisions of Section 9(2) of the Income Tax Ordinance apply, will be exempt
from tax on interest income and discount fees, the source of which is the
debentures, subject to the provisions of Section 3(h) of the Income Tax
Ordinance.
Corporate
tax (34% in 2005, 32% in 2006 and 30% in 2007 onwards) will be imposed on
interest income and discount fees generated by a group of persons.
For a
Foreign Resident who is not entitled to the reduced tax rates applicable to the
interest income as aforesaid, interest income will be taxed in Israel at
25%.
An
individual or group of persons who are Foreign Residents might be eligible for
lower tax than the rates described above, by virtue of a treaty for the
prevention of double taxation signed between the State of Israel and his/its
country of residence (subject to receipt of approval from the tax authorities in
Israel).
When
redeeming a debenture that includes payment of discount fees, as determined on
the date of issue of the debentures, the discount fees will be deemed interest
income received by the holder of the debenture on the date of redemption.
However,
pursuant to Article 3 of the Income Tax Regulations (Calculation of capital gain
in the sale of a security traded on the stock exchange or a unit in a mutual
fund), 5763-2002, redemption of a debenture, state loan or short-term loan (in
this Article - the Debentures) in which discount fees are also paid, the
consideration plus the discount fees will be deemed to be consideration of the
redemption if all of these exist:
(1) |
The
capital gain from selling the Debenture is not exempt from tax at the date
of the redemption on which the capital loss was
generated |
(2) |
The
redemption is not by a controlling interest or by whoever has held the
Debenture since the date of its allotment or
issue |
(3) |
Discount
fees seen as consideration according to the provisions of the
aforementioned Article 3 will not be deemed to be income originating from
interest, provided that it does not exceed the capital
loss. |
The
Company intends to book the consideration from the offering in its balance sheet
under securities offered according to their relative value, which will be
determined according to the average value of each of the offered securities in
the first three days of trading, and the Company will notify the TASE on the
fourth day of trading of the discount rate. The discount generated in respect of
the debentures offered under this Prospectus, which is required in order to
determine the discount on the date of the offering as aforesaid, will be
determined according to the difference between the liability value of the
debentures and the portion of the proceeds from the offering that is attributed
to the securities, as aforesaid.
(1) |
Interest
and discount fees |
|
Article
5 of the Income Tax Regulations (Deduction from interest), 5763-2002
(hereinafter - "the Withholding from Interest Regulations"), provide that
an obligor who pays interest to an individual who does not hold control,
including discount fees, on debentures traded on the Stock Exchange in
Israel, will withhold 15% tax from the payment, and that an obligor who
pays interest to an individual who has control as aforesaid, will withhold
50% tax from the payment.
Article
6 of the Withholding from Interest Regulations provides that an obligor
who pays interest to a group of persons that is not a Foreign Resident
will withhold 35% tax from the payment.
Article
8 of the Withholding from Interest Regulations provides that an obligor
who pays interest to a Foreign Resident who is not an individual, will
withhold 25% tax from the payment. |
|
Article
2 of the Income Tax Regulations (Withholding from proceeds, from payment
or from capital gain from the sale of a security or from a futures
transaction), 5763-2002 (hereinafter - "the Withholding from Capital Gain
Regulations"), provides that an obligor who pays the seller consideration
when selling securities will withhold 15% of the real capital gain.
Article
5 of the Withholding from Capital Gain Regulations provides that the
provisions of Article 2 will not apply to an obligor which is a financial
institution, that is paying consideration based on tax-exempt capital
gains, if the Foreign Resident submitted to the financial institution,
within 14 days from the date of opening the account and once every three
years, if he or his legal representative was in Israel, a Form 2402
declaration of being a Foreign Resident. |
|
The
Withholding from Interest Regulations and the Withholding from Capital
gain Regulations provide that tax will not be withheld from interest
income and capital gain for various entities that are listed in the
Addendum to the Interest Regulations, such as provident funds and mutual
funds. |
|
The
above on taxing does not constitute an opinion. It is a general and
incomplete review of the legal situation on the date of the Prospectus.
Naturally, the information above does not purport to be professional and
authoritative advice, and every buyer of securities under the Prospectus
is advised consult with a tax adviser.
|
5.10. |
Institutional
investors |
5.10.1. |
From
the Units offered to the public and subject to the following provisions,
80,000 Units (80% of the Units) are being offered to the institutional
investors listed in the table in Section 5.10.13 below (in this section:
"the Institutional Investors"), under a prior commitment made to the
Institutional Investors (hereinafter - "the Prior Commitment"). The Prior
Commitments to Institutional Investors prior to publication of this
Prospectus, and their acceptance, complied with the principles laid down
in Section 3C of TASE Guidelines, Chapter
C. |
An
"Institutional Investor", by the TASE Guidelines, is whoever undertakes to
purchase at least NIS 800,000 worth of securities in an offering to the public,
provided that it is among the entities listed in the Addendum as referred to in
Section 14(a)(b)(1) of the Securities Law, 5728-1968 or is a corporation, as
provided in Section 15(a)(b)(2) of that Law.
5.10.2. |
Each
Institutional Investor undertook, as part of the Prior Commitment, to
submit in the Tender, through the Offering Coordinator, applications to
purchase Units in quantities and at interest rates that will not exceed
those appearing in the table in Section 5.10.13 below, and to pay the
consideration in respect of purchase of the
Units. |
5.10.3. |
Applications
of the Institutional Investors will be submitted as part of the Tender
through the Offering Coordinator, and will be considered as applications
submitted by the public for determining the interest rate and for
allotment of the Units, subject to the provisions of Section 5.10.7
below. |
5.10.4. |
The
allotment to the Institutional Investors will be at the Uniform Interest
Rate to be determined in the Tender. |
5.10.5. |
The
Institution Investors will transfer the full consideration payable by them
to the Offering Coordinator through the Official Application Recipients,
on the first trading day after the Date of the Tender, by 12:30, and the
Offering Coordinator will deposit that consideration in the Special
Account. |
5.10.6. |
The
Institutional Investors will be entitled to commissions in exchange for
the Prior Commitment, amounting to 1.25% of the total immediate proceeds
from the Units that will be allotted to the institutional Investors,
computed at the Unit price, and to a distribution commission of 0.1% of
the immediate proceeds actually received in respect of all the Units for
which orders were included in the Prior Commitment of the Institutional
Investors and were accepted by the Company.
|
The
commissions will be divided among the Institutional Investors pro rata to the
number of Units to the Institutional Investors that were actually purchased by
each Institutional Investor.
5.10.7. |
The
following provisions will apply to the allotment of the Units to the
Institutional Investors: |
Under the
TASE Guidelines, in the event of over-subscription (for this purpose,
"over-subscription" means - the ratio of the number of Units ordered at the
Uniform Interest Rate to be determined in the Tender to the number of Units
offered to the public (after deduction of the number of Units ordered at an
interest rate lower than the Uniform Interest Rate to be determined in the
Tender), allotment to the institutional Investors will be as
follows:
|
(1) |
Where
the over-subscription is up to five times, 100% of the quantity it
undertook to purchase will be allotted to each Institutional
Investor. |
|
|
|
|
(2) |
Where
the over-subscription is more than five times, about 50% of the quantity
it undertook to purchase will be allotted to each Institutional
Investor. |
|
|
|
|
(3) |
If
the quantity of securities remaining for distribution is insufficient for
allotment as aforesaid in sub-sections (1) and (2) above, then the
quantity that will be allotted to an Institutional Investor will be on the
basis of a proportion equal to the applications of the institutional
Investors. |
5.10.8. |
If
there is no over-subscription, the applications of the Institutional
Investors in the Tender will be deemed to be applications made by the
public for the purpose of distribution of securities to the applicants.
|
5.10.9. |
Notwithstanding
the aforesaid, if according to the allotment provided in Sections 5.3.2.2
(1) - (3) above, minimum distribution is not attained as required in the
TASE Guidelines, then the offered Units will be allotted proportionally,
as provided in Sections 5.3.2.2 (4) - (6). |
5.10.10. |
The
Institutional Investors may order additional Units as part of the offering
to the public, and in this case all the provisions applicable to orders of
the rest of the public will apply to them and they will not be entitled to
any commission in respect of the additional Units they order. The
Institutional Investors may lower the interest rate stated in their Prior
Commitments. |
5.10.11. |
The
institutional Investors may sell the securities included in the Units
allotted to them, commencing on the date of their registration on the
stock exchange: lock-up provisions will not apply to
them. |
5.10.12. |
The
Units offered to the Institutional Investors constitute 80% of all the
Units offered to the public in this offering.
|
5.10.13. |
Hereunder
is the list of the Institutional Investors that have entered into a Prior
Commitment as aforesaid, and the number of Units they have undertaken to
purchase as part of the Prior Commitment, at an interest rate not
exceeding the interest rate appearing in the
table: |
Name
of Institutional Investor |
Number
of Units it has undertaken to purchase |
Interest rate |
Yuvalim
- Study Fund* |
262 |
4.00% |
Yuvalim
- Fund Disease* |
262 |
4.00% |
Haal
- Pension Fund * |
262 |
4.00% |
Yuvalim
- Pension Fund * |
842 |
4.00% |
Providents
and Funds of the Histadrut Labor Federation* |
1,685 |
4.00% |
Apex
Study Fund* |
492 |
4.00% |
Apex
Provident & Payments Fund* |
191 |
4.00% |
Apex
Provident Fund* |
158 |
4.00% |
Apex
Flexible* |
136 |
4.00% |
Apex
Foreign Equity* |
136 |
4.00% |
Apex
CPIlinked* |
272 |
4.00% |
Apex
Yield* |
272 |
4.00% |
Revavot
Underwriting Ltd. |
68 |
4.00% |
DS
Provident Fund* |
680 |
4.00% |
Y.A.Z.
Investments & Assets Ltd. |
374 |
4.00% |
I.B.I.
Guy |
68 |
4.00% |
P.K.N
(L) Corporate Bonds |
243 |
4.00% |
P.K.N
(M) 30-70 |
94 |
4.00% |
P.K.N
(M) Convertible and Corporate Bonds |
94 |
4.00% |
P.K.N
(M) 20-80 |
94 |
4.00% |
Hahsharat
Hayesov Hevra Lebitoah Ltd. - Nostro |
213 |
4.00% |
Hahsharat
Hayesov Hevra Lebitoah Ltd. - Mishtatfot |
213 |
4.00% |
Meitav
Yeter - Bond |
68 |
4.00% |
D.I.M.
Nihol Sikonim Ltd. |
589 |
4.00% |
Artrade
Financial Engineering Ltd. |
4,677 |
4.00% |
Emda
Option LMakam |
935 |
4.00% |
Emda
Agach + Strategies |
1,871 |
4.00% |
Synergetica
Ltd. |
4,677 |
4.00% |
Migdal
Alumim Agach Companies |
380 |
4.00% |
Migdal
Alumim Solidi |
84 |
4.00% |
D.B.M
Potential |
75 |
4.00% |
Migdal
Bond & Equity |
187 |
4.00% |
Migdal
Bond & Equity 2 |
206 |
4.00% |
Migdal
Dollar |
68 |
4.00% |
Migdal
Ksafim |
68 |
4.00% |
Migdal
Gemel Platinum |
69 |
4.00% |
Name
of Institutional Investor |
Number
of Units it has undertaken to purchase |
Interest rate |
Shibolet
Providence Fund |
86 |
4.00% |
Yaniv
Provident Fund |
86 |
4.00% |
Lahak
Agach Companies |
505 |
4.00% |
Altshuler
Shaham Underwriting Ltd. |
4,677 |
4.00% |
Altshuler
Shaham Provident Fund Management Ltd. |
4,677 |
4.00% |
Altshuler
Shaham Ltd. |
4,677 |
4.00% |
Altshuler
Shaham Mutual Fund Management Ltd. |
4,677 |
4.00% |
Altshuler
Shaham Paragon |
449 |
4.00% |
Altshuler
Shaham Central Provident Fund |
449 |
4.00% |
Altshuler
Shaham Yahalom |
2,900 |
4.00% |
Altshuler
Shaham Study Funds |
1,272 |
4.00% |
Tsuot
Sofa |
4,677 |
4.00% |
Tsuot
Chen |
4,677 |
4.00% |
Tsuot
Shkalim |
4,677 |
4.00% |
Tefahot
Gemel Provident Fund Ltd. |
331 |
4.00% |
Tefahot
Hishtalmut Ltd. |
122 |
4.00% |
Partnership
Isramco Negev 2 Limited |
168 |
4.00% |
Analyst
Convertibles - Mutual Fund |
748 |
4.00% |
Analyst
Composite Bonds - Mutual Fund |
187 |
4.00% |
Analyst
Corporate Bonds - Mutual Fund |
374 |
4.00% |
Analyst
Diversified - Mutual Fund |
1,497 |
4.00% |
Analyst
Properties - Mutual Fund |
281 |
4.00% |
Analyst
Investments - Mutual Fund |
374 |
4.00% |
Analyst
Select General Securities B' Fund |
561 |
4.00% |
Analyst
Select General Securities B' Training Fund |
112 |
4.00% |
Analyst
Provident Funds Ltd. |
1,871 |
4.00% |
Pia
(M) Dynamic Best Invest Mutual Fund |
187 |
4.00% |
Pia
(M) Conversion and Corporate Mutual Fund |
505 |
4.00% |
Pia
80/20 Mutual Fund |
430 |
4.00% |
Pia
(M) Corporate Bonds Mutual Fund |
673 |
4.00% |
Pia
(M) Solid Best Invest Mutual Fund |
253 |
4.00% |
Name
of Institutional Investor |
Number
of Units it has undertaken to purchase |
Interest rate |
Pia
(M) Dynamic CPI Mutual Fund |
168 |
4.00% |
Pia
(L) Convertible Bonds 50 Mutual Fund |
337 |
4.00% |
Bank
of Jerusalem Ltd. |
243 |
4.00% |
Rosario
Capital Ltd. |
2,713 |
4.00% |
Leumi
Nostro |
861 |
4.00% |
Harel
Zmodey Madad (M) |
68 |
4.00% |
Harel
(M) Shiklit Veyoter |
68 |
4.00% |
Harel
Investment House |
535 |
4.00% |
Harel
Hishtalmot |
68 |
4.00% |
Harel
Kupat Gemel |
68 |
4.00% |
Harel
Kupa Merkazet Lepizzoim |
68 |
4.00% |
Rothschild
Dynamic Bonds |
94 |
4.00% |
Rothschild
Madad |
68 |
4.00% |
Rothschild
Stocks |
68 |
4.00% |
Ilanot
(M) New York Mutual Fund |
68 |
4.00% |
Ilanot
(L) Tidhar Mutual Fund Accumulated |
85 |
4.00% |
Ilanot
(M) Potential Mutual Fund |
68 |
4.00% |
Ilanot
(m) Dekel Menayot Mutual Fund |
213 |
4.00% |
Ilanot
(M) Tick Agach debentures 20+ Mutual Fund |
255 |
4.00% |
Ilanot
(M) Tick Agach debentures 35+ Mutual Fund |
170 |
4.00% |
Ilanot
(M) Tick Agach debentures 50+ Mutual Fund |
85 |
4.00% |
Ilanot
(M) Corporate Bonds and Convertibles Mutual Fund |
213 |
4.00% |
Afikim
Agach Activit |
187 |
4.00% |
Afikim
Agach Tsuaa Colelet |
140 |
4.00% |
Afikim
Debentures |
561 |
4.00% |
Clal
Finance Shkula (M) |
1,122 |
4.00% |
Batucha
Maslul 20 (M) |
468 |
4.00% |
Clal
Finance Agah (M) |
655 |
4.00% |
Clal
Finance Estrategya Shiklit (M) |
561 |
4.00% |
Ramco
Bonds |
655 |
4.00% |
Ramco
Israel |
187 |
4.00% |
Ramco
Real Estate |
374 |
4.00% |
Invest
Pro Yesom Vekidom Hanpakot (1993) Ltd. |
94 |
4.00% |
Millennium
Stocks |
187 |
4.00% |
|
80,000 |
|
*
Affiliated with the Underwriters.
On the
Date of the Tender, the Institutional Investors may lower the interest rate at
which they made their undertaking as part of the Prior Commitment referred to
above.
6. ADDITIONAL
INFORMATION
Beginning
February 4, 2005 our shares have traded on the NASDAQ National
Market.
Registration
Statement
On
February 21, 2005, we filed with the TASE and the Israeli Securities Authority a
registration statement for the dual registration of our ordinary shares on the
TASE, in addition to the NASDAQ National Market, and thereby registered
18,431,500 ordinary shares of 0.01 NIS par value each in the TASE.
7. 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, 2004. The selected financial data
should be read in conjunction with our consolidated financial statements, and
the related notes, which are included elsewhere in this prospectus.
For
further information regarding significant
differences between Israeli GAAP and U.S. GAAP and their effect on the Financial
Statements, see
Chapter 23 to the prospectus.
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, 2004 (NIS 4.308 = $1.00).
|
|
Year
Ended December 31, |
|
|
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
2004 |
|
|
|
NIS |
|
NIS |
|
NIS |
|
NIS |
|
NIS |
|
Convenience
Translation Dollars * |
|
|
|
(In
thousands, except per share data) |
|
Israeli
GAAP information |
|
|
|
Consolidated
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
Access
revenues |
|
|
119,848 |
|
|
139,850 |
|
|
156,336 |
|
|
146,906 |
|
|
156,385 |
|
|
36,301 |
|
International
telephony service |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,381 |
|
|
2,178 |
|
Other
revenues |
|
|
19,684 |
|
|
48,473 |
|
|
27,982 |
|
|
32,736 |
|
|
53,811 |
|
|
12,491 |
|
Total
revenues |
|
|
139,532 |
|
|
188,323 |
|
|
184,318 |
|
|
179,642 |
|
|
219,577 |
|
|
50,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues |
|
|
95,335 |
|
|
116,135 |
|
|
99,564 |
|
|
92,871 |
|
|
96,820 |
|
|
22,474 |
|
Selling
and marketing expenses |
|
|
73,014 |
|
|
51,299 |
|
|
37,125 |
|
|
41,393 |
|
|
73,155 |
|
|
16,981 |
|
General
and administrative expenses |
|
|
46,844 |
|
|
38,884 |
|
|
21,209 |
|
|
21,908 |
|
|
24,258 |
|
|
5,631 |
|
Total
cost and expenses |
|
|
215,193 |
|
|
206,318 |
|
|
157,898 |
|
|
156,172 |
|
|
194,233 |
|
|
45,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations |
|
|
(75,661 |
) |
|
(17,995 |
) |
|
26,420 |
|
|
23,470 |
|
|
25,344 |
|
|
5,884 |
|
Financing
(expenses) income, net |
|
|
3,842 |
|
|
7,308 |
|
|
2,151 |
|
|
(3,235 |
) |
|
122 |
|
|
28 |
|
Other
income (expenses), net |
|
|
(21 |
) |
|
(2,332 |
) |
|
(3 |
) |
|
(2,592 |
) |
|
(1,077 |
) |
|
(250 |
) |
Income
(loss) from continuing operations |
|
|
(71,840 |
) |
|
(13,019 |
) |
|
28,568 |
|
|
17,643 |
|
|
24,389 |
|
|
5,662 |
|
Income
tax benefits |
|
|
- |
|
|
- |
|
|
- |
|
|
1,935 |
|
|
301 |
|
|
70 |
|
Net
income (loss) after income tax benefits |
|
|
(71,840 |
) |
|
(13,019 |
) |
|
28,568 |
|
|
19,578 |
|
|
24,690 |
|
|
5,732 |
|
Company's
share in net loss of investees |
|
|
(2,193 |
) |
|
(682 |
) |
|
(1,530 |
) |
|
(1,538 |
) |
|
(396 |
) |
|
(92 |
) |
Minority
interest in loss of a subsidiary |
|
|
1 |
|
|
963 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Loss
of a subsidiary which the Company does not intend to
bear |
|
|
- |
|
|
383 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Net
income (loss) from continued operations |
|
|
(74,032 |
) |
|
(12,355 |
) |
|
27,038 |
|
|
18,040 |
|
|
24,294 |
|
|
5,640 |
|
Loss
from discontinued operations |
|
|
(7,355 |
) |
|
(8,843 |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Company's
share in loss of investees from
discontinued operations |
|
|
- |
|
|
- |
|
|
(7,080 |
) |
|
(3,737 |
) |
|
(4,763 |
) |
|
(1,106 |
) |
Net
income (loss) |
|
|
(81,387 |
) |
|
(21,198 |
) |
|
19,958 |
|
|
14,303 |
|
|
19,531 |
|
|
4,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share, basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per NIS 0.01 per value of shares (in NIS) from continued
operations |
|
|
(4.02 |
) |
|
(0.67 |
) |
|
1.47 |
|
|
0.98 |
|
|
1.32 |
|
|
0.31 |
|
Net
income (loss) per NIS 0.01 per value of shares (in NIS) from discontinued
operations |
|
|
(0.40 |
) |
|
(0.48 |
) |
|
(0.38 |
) |
|
(0.20 |
) |
|
(0.26 |
) |
|
0.06 |
|
|
|
|
(4.42 |
) |
|
(1.15 |
) |
|
1.08 |
|
|
0.78 |
|
|
1.06 |
|
|
0.25 |
|
Weighted
average number of shares outstanding (in thousands) |
|
|
18,432 |
|
|
18,432 |
|
|
18,432 |
|
|
18,432 |
|
|
18,432 |
|
|
18,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
at December 31, |
|
|
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
2004 |
|
|
|
NIS |
|
NIS |
|
NIS |
|
NIS |
|
NIS |
|
Convenience
Translation Dollars * |
|
|
|
(In
thousands, except per share data) |
|
Consolidated
Balance Sheets Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets |
|
|
251,765 |
|
|
228,322 |
|
|
169,052 |
|
|
214,004 |
|
|
300,023 |
|
|
69,644 |
|
Working
capital |
|
|
41,743 |
|
|
48,615 |
|
|
80,904 |
|
|
76,256 |
|
|
41,714 |
|
|
9,683 |
|
Total
debt |
|
|
146,760 |
|
|
144,510 |
|
|
65,284 |
|
|
95,933 |
|
|
176,477 |
|
|
40,965 |
|
Total
shareholders' equity |
|
|
105,005 |
|
|
83,811 |
|
|
103,768 |
|
|
118,071 |
|
|
121,893 |
|
|
28,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
GAAP information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continued operations |
|
|
(70,909 |
) |
|
(6,232 |
) |
|
27,051 |
|
|
18,874 |
|
|
27,164 |
|
|
6,305 |
|
Net
Loss - discontinued operations |
|
|
(12,960 |
) |
|
(17,649 |
) |
|
(21,128 |
) |
|
(6,803 |
) |
|
(6,588 |
) |
|
(1,529 |
) |
Net
income (loss) |
|
|
(83,869 |
) |
|
(23,881 |
) |
|
5,923 |
|
|
12,071 |
|
|
20,576 |
|
|
4,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidates
Balance sheets date: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets |
|
|
248,249 |
|
|
219,738 |
|
|
199,101 |
|
|
244,682 |
|
|
305,554 |
|
|
70,927 |
|
Total
shareholders equity |
|
|
105,024 |
|
|
79,429 |
|
|
85,881 |
|
|
104,430 |
|
|
121,193 |
|
|
28,132 |
|
*
The translation of 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, 2004 (NIS 4.308= $1.00).
MANAGEMENT
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Operating
Results
The
following discussion and analysis is based on and should be read in conjunction
with our consolidated financial statements, including the related notes, and the
other financial information included in this Prospectus or incorporated by
reference. 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 below and elsewhere in this
Prospectus.
Overview
We are a
leading Israeli Internet service provider serving as of December 31, 2004,
339,146
residential subscribers and 3,510 business subscribers. We provide a wide array
of Internet services tailored to meet the needs of our subscribers, including
Internet access and other value-added services, e-commerce and content services.
We
currently provide Internet services through a nationwide network providing
dial-up, broadband, web hosting, web security and integration services. We offer
a wide range of Internet access packages to meet the needs of our residential
and business subscribers. We also offer related value-added Internet services,
such as web faxing, virtual magazines, anti-virus, anti-spam and hosting, to
attract and retain subscribers, increase usage and create additional revenue
streams. By offering high-quality, price-competitive Internet access and related
services at a varied range, we seek to develop both our residential and business
subscriber base. In addition to providing Internet access and related services,
we are a major operator in the portals and advertising market through our
subsidiary MSN Israel (a joint venture with Microsoft Corp.) and Start and in
the e-commerce market through MSN Israel and our e-commerce P1000 site.
From the
end of 2000 until the fourth quarter of 2002, we concentrated on a strategy
focused on profitability rather than market share. During the fourth quarter of
2002, the significant increase in demand for broadband was coupled with intense
competition between all local ISPs, which resulted in reductions of service
prices by all Internet service providers, or ISPs. Due to this market
environment, we adopted a more aggressive marketing policy in order to attract a
greater number of broadband customers while continuing to keep tight control on
our expenses. This strategy yielded a 54%
increase in the number of broadband customers in 2004 as compared to 2003. We
have decided to continue this policy during 2005. Due to the price reductions
caused by the aggressive competition in the broadband market and the expenses
associated with our marketing efforts to attract customers, our profitability
may be negatively impacted in the future.
On June
2, 2004 we received a license to provide international telephony services. We
launched these services on August 7, 2004. The first service we offered was
direct calls from Israel to the rest of the world (approximately 240 countries).
We intend to offer supplemental services in the near future, such as pre-paid
services, post-paid services and 1-800 services. We offer our services to
residential and business subscribers. As of December 31, 2004 we had
approximately 86,300 subscribers for these services.
The
international telephony market, as well as the internet market, is a very
competitive market. Due to the conditions of the market and the entrance of two
new competitors (Netvision Ltd and Xfone), we have adopted an aggressive
penetration strategy in order to gain subscribers and market share. At this time
we are continuing to keep tight control on our expenses but it could be that
this strategy could impact negatively on our profitability.
Critical
Accounting Policies
We have
identified the policies below as critical to the understanding of our financial
statements. The application of these policies requires management to make
estimates and assumptions that affect the valuation of assets and expenses
during the reporting period. There can be no assurance that actual results will
not differ from these estimates.
We
prepare our financial statements in accordance with Israeli GAAP. As such, we
are required to make certain estimates, judgments, and assumptions that
management believes are reasonable based upon the information available. These
estimates, judgments and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. Differences between Israeli
GAAP and U.S. GAAP as they relate to our financial statements are described in
Note 21 to our financial statements.
In
accordance with applicable Israeli accounting principles, we maintain our
accounts and present our financial statements in NIS, adjusted for changes in
the Israeli consumer price index through December 31, 2003. Consequently, all
previously published NIS amounts in our financial statements were adjusted each
time we published new financial statements in order to reflect changes in the
Israeli consumer price index, and so all information is presented in NIS
adjusted to December 2003 and constitute the starting point for our nominal
financial reports as of January1, 2004. See Note 2C to the financial statements.
Any additions made during 2004 are included according to their nominal values.
This presentation of the comparative figures permits the financial information
to be presented in NIS with identical purchasing power. The translation of NIS
amounts into dollars has been made solely for the convenience of the reader at
the representative rate of exchange (as published by the Bank of Israel) at
December 31, 2004 of NIS 4.308 = $1.00.
The
significant accounting policies that we believe are most critical to aid a
reader in fully understanding and evaluating our financial condition and results
of operation under Israeli generally accepted accounting principles are
discussed below.
Revenue
recognition.
Most of
our revenues are derived from Internet access. These revenues are
recognized ratably over the period that services are provided. Other
revenues include international telephony services, website hosting, electronic
commerce and advertising revenues. Revenues
from international carrier services are recognized according to minutes of
traffic, Website
hosting revenues are recognized as the services are performed. Electronic
commerce revenues are recognized as the services are performed or when the goods
are delivered, as applicable. Advertising revenues are recognized on a
straight-line basis over the term of the contract. We
consider revenue
recognition to be critical since we have many revenue engines which involve
subjective estimates by our management.
Revenues
from sale agreements which do not include a general right of return and which
include a number of elements such as: hardware, software and support agreements
are split into separate accounting units and are recognized separately with
respect to each accounting unit. An element constitutes a separate accounting
unit if, and only if, it has a separate value to the customer and there is
reliable and objective evidence regarding the fair value of all the elements of
the agreement/the fair value of undelivered elements. Elements that are not
split into an accounting unit due to non-fulfillment of the conditions specified
above are grouped together under one accounting unit. Revenues from the various
accounting units are recognized when the conditions for recognizing the revenues
from the elements included in that same accounting unit according to their type
have been fulfilled, and only up to the amount of the consideration that is not
contingent upon the completion/execution of the other elements of the
contract.
Revenues
from the sale of software licenses are recognized when all the following
conditions have been met: the software has been delivered to the customer,
collection of the payment is probable, the amount of the contract has been or
can be determined and there is objective and persuasive evidence of the contract
and of our ability to allocate the consideration between the elements of the
contract.
We
evaluate our revenue recognition policy every quarter with respect to existing
and new accounting principles. In addition, every quarter we examine the
different parameters that may affect our revenues and their recognition, such as
customer credits, accrued revenues and revenues from cooperation with third
parties. According to these examinations we decide on the required changes, if
any, in our revenue recognition policies. Based on
our past experience, our
policy was appropriate and did not require complex estimates.
Allowance
for doubtful accounts. The
allowance for doubtful accounts represents management's estimate of the aged
receivable balance considered uncollectible, based on past experience. All
accounts aged over 150 days and
accounts which have been forwarded to our lawyers are considered as doubtful
accounts and are
recorded as such. We
evaluate our guidelines every quarter and examine
the material parameters that might affect the assessment of our doubtful
accounts, such as the population tendency to make timely payments, rate of
checks returned for insufficient payment and blocked bank accounts. Our policy
has been consistent and has proven itself over the years. Therefore, based on
our past experience we believe this policy is appropriate.
"Impairment
of Assets." In
February 2003, the Israel Accounting Standards Board published Accounting
Standard No. 15 - "Impairment of Assets." The Standard provides procedures which
a company must apply in order to ensure that its assets in the consolidated
balance sheet are not presented in an amount which is in excess of their
recoverable value, which is the higher of the net selling price or the present
value of the estimated future cash flows expected to be derived from use and
disposal of the asset. With respect to the implementation of this standard,
subjective
estimates are involved in the process of decision making. In
addition, the Standard provides rules for presentation and disclosure with
respect to assets whose value has declined.
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.
The
Effect of New Israeli Accounting Standards in the Pre-Application
Period
In July
2004, the Israeli Accounting Standards Board published Accounting Standard No.
19, "Taxes on Income". The Standard provides that a liability for deferred taxes
is to be recorded for all temporary differences subject to tax, except for a
limited number of exceptions. In addition, a deferred tax asset is to be
recorded for all temporary differences that may be deducted, losses for tax
purposes and tax benefits not yet utilized, if it is anticipated that there will
be taxable income against which they can be offset, except for a limited number
of exceptions. The new Standard applies to financial statements for periods
beginning on January 1, 2005. The Standard provides that it is to be implemented
by means of a cumulative effect of a change in accounting method. In our
estimation, the impact of the Standard on our results of operations, financial
position and cash flows will not be material.
Business
Background
We earn
revenues from Internet access services and value-added Internet services,
advertising on our portals, e-commerce and international telephony services. To
date, we have generated most of our revenues from our Internet access services
to residential, SOHO (small office and home office) and business subscribers.
Internet access revenues primarily consist of monthly 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 residential, SOHO and business
subscribers and the average price for our Internet access service per
subscriber. At December 31, 2004 the number of our residential and SOHO
subscribers was 339,146 a 9% growth rate in our residential and SOHO subscribers
compared to December 31, 2003. The number of our business subscribers increased
by 35% in 2004. The following table includes the number of our residential
(including SOHO) and business subscribers in 2003 and 2004 (in thousandsas of 31
December:
|
|
|
|
|
|
Broadband
|
|
|
|
|
|
164 |
|
Dial-Up
|
|
|
|
|
|
31 |
|
Occasional
|
|
|
|
|
|
144 |
|
Total
residential subscribers
|
|
|
|
|
|
339 |
|
Business
subscribers
|
|
|
|
|
|
3.5 |
|
Most of
our subscribers may cancel their subscriptions at any time. Some of our
subscribers, who enter into annual, bi-annual or tri-annual contracts under
special packages, are subject to certain penalty payments if they cancel during
the contract period, including payments for the free benefits they received as
part of the special package. Cash received from subscribers is applied to
working capital when received.
We also
earn revenues from value-added Internet services, such as global roaming, web
hosting, web faxing, virtual magazines, anti-virus, anti-spam and online
e-commerce site implementation. We earn revenues for these services based either
on our fixed prices for the service or a negotiated fee. In addition, we earn
revenues from portal advertising at negotiated fees.
In August
2004 we began to earn revenues from international telephony services. These
revenues are generated from payments we receive from international carriers
using our services for termination of calls and payments for the minutes used by
subscribers. We offer monthly packages and offer discounts to subscribers. Our
customers for these services include monthly subscribers and occasional
users.
We bill
for Internet access and for the international telephony on a monthly basis,
which generally runs from the 20th day of the calendar month to the 19th day of
the following calendar month. Revenues for services are accrued until the last
day of the reporting period. Revenues for other services are recognized as the
services are provided, including virtual magazines, anti-virus and website
hosting and as products are delivered, including e-commerce activities. In cases
where we assume responsibility for the goods sold in e-commerce transactions, we
recognize the gross revenues. In cases where we act as a middleman we recognize
the net commission as our revenues.
For both
Internet access services and other services, we generally bill our residential
subscribers on a monthly basis. Most of our residential subscribers pay us by
credit card or a bank debit order. Business customers are billed on a monthly
(or quarterly) basis, and we generally receive payment in full within 10 to 70
days of invoice.
Significant
Costs and Expenses
Cost
of Revenues.
Our cost
of revenues consists primarily of costs of communication services, salaries and
related expenses, facilities costs and depreciation expenses. The communication
services costs include costs for providing local telephone lines into our points
of presence, the use of third party networks and leased lines to connect each of
our points of presence to our regional network operations centers, the
connection between our regional network operations centers, points of presence
and the Internet backbone. We also include in the cost of revenues
telecommunication services expenses related to the international telephony
services. Since the launch of the international telephony service in August 2004
we have entered into agreements with several international carriers for the
purchase of international long distance voice services to about 240 destinations
around the world.
We
believe that a high level of subscriber satisfaction with the speed and
reliability of our network is not only essential for retaining subscribers, but
also essential for attracting new subscribers through personal referrals.
Accordingly, we have spent significant sums on trans-Atlantic leased lines, to
ensure adequate bandwidth to the United States.
We
include salary costs for our technical and technical support staff in our cost
of revenues. These employees are directly involved in providing our Internet
access service and our international telephony services to our subscribers. Most
of our technical staff is full-time salaried employees and most of our technical
support staff is part-time salaried employees.
Our cost
of revenues also includes the costs of facilities used to provide technical
services and depreciation, principally in respect of our network
equipment.
Selling
and Marketing Expenses.
Selling
and marketing expenses consist primarily of media advertisement and sales
promotion costs as well as salaries, commissions and related costs for our sales
representatives, facilities costs related to sales and marketing and credit card
commissions. Credit card commissions are merchant fees based on the percentage
of our revenue earned through credit cards.
General
and Administrative Expenses.
General
and administrative expenses consist primarily of salary and related costs
associated with our executive and administrative functions, lease payments for
our administrative facilities and other miscellaneous expenses. As of December
31, 2004, we (excluding our subsidiaries) employed 293 full-time salaried
employees and 542 part-time employees who are paid on an hourly basis. Staff
costs include direct salary costs and related costs such as severance pay,
social security and retirement fund contributions, vacation and recreation pay.
Financing
Income (Expenses) Net.
Net
financing income (expenses) includes financing costs, interest income on our
cash reserves and exchange rate differentials in real terms as well as
devaluation of monetary assets and monetary liabilities. Beginning January 1,
2004 all of these items are stated in nominal values.
Income
tax. We
assessed our deferred tax assets and the need for a valuation allowance. Such an
assessment considers whether it is more likely than not that some portion or all
of the deferred tax assets may not be realized. The assessment requires
considerable judgment on the part of management, with respect to, among other
things, benefits that could be realized from available tax strategies and future
taxable income, as well as other positive and negative factors. The ultimate
realization of deferred tax assets is dependent upon our ability to generate the
appropriate character of future taxable income sufficient to utilize loss carry
forwards before their expiration.
Non-Cash
Charges. Under
U.S. GAAP, but not under Israeli GAAP, we would recognize for the years ended
December 31, 1999 through 2004, non-cash charges aggregating NIS 2.7 million ($
0.6 million) according to Accounting Principles Board Opinion No. 25 (“APB 25”)
on account of our Stock Option plan from 1999 (expenses of NIS 102 thousands for
the year ended December 31, 2004, and income of NIS 109 thousands for the year
ended December 31, 2003, and expenses of NIS 530 thousands for the year ended
December 2002).
If in the
future, we issue options under a stock option plan with exercise prices below
fair market value at the time of issuance, U.S. GAAP, but not Israeli GAAP,
would require us to recognize an additional non-cash charge with respect to such
issuance.
Results
of Operations
The
following discussion of our results of operations for the years ended December
31, 2002, 2003 and 2004, including the percentage from revenues data in the
following table, is based upon our consolidated statements of operations
contained in our consolidated audited financial statements for those periods,
and the related notes, included elsewhere in this Report:
|
|
Year
ended December 31, |
|
|
|
2002 |
|
2003 |
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
Access
revenues |
|
|
85 |
% |
|
82 |
% |
|
71 |
% |
International
telephony services |
|
|
- |
|
|
- |
|
|
4 |
|
Other
revenues |
|
|
15 |
|
|
18 |
|
|
25 |
|
Total
revenues |
|
|
100 |
|
|
100 |
|
|
100 |
|
Cost
and expenses: |
|
|
|
|
|
|
|
|
|
|
Cost
of revenues |
|
|
54 |
|
|
52 |
|
|
44 |
|
Selling
and marketing expenses |
|
|
20 |
|
|
23 |
|
|
33 |
|
General
and administrative expenses |
|
|
12 |
|
|
12 |
|
|
11 |
|
Total
cost and expenses |
|
|
86 |
|
|
87 |
|
|
88 |
|
Income
from operations |
|
|
14 |
|
|
13 |
|
|
12 |
|
Financing
income (expenses), net |
|
|
1 |
|
|
(2 |
) |
|
- |
|
Other
expenses, net |
|
|
- |
|
|
(1 |
) |
|
- |
|
Net
income after financing expenses |
|
|
15 |
|
|
10 |
|
|
12 |
|
Income
tax benefit |
|
|
- |
|
|
1 |
|
|
- |
|
Net
income after income tax benefit |
|
|
15 |
|
|
11 |
|
|
12 |
|
Company’s
share in net loss of investees |
|
|
(1 |
) |
|
(1 |
) |
|
- |
|
Minority
interest in loss of a subsidiary |
|
|
- |
|
|
- |
|
|
- |
|
Net
income from continued operations |
|
|
14 |
|
|
10 |
|
|
12 |
|
Company's
share in loss of investees from discontinued operations |
|
|
(4 |
) |
|
(2 |
) |
|
(2 |
) |
Net
income |
|
|
10 |
|
|
8 |
|
|
10 |
|
Year
Ended December 31, 2004 Compared to Year Ended December 31,
2003
Under
Israeli GAAP
Revenues.
Revenues increased by 22% from NIS 179.6 million (US$ 41.7 million) for the year
ended December 31, 2003 to NIS 219.6 million (US$ 51 million) for the year ended
December 31, 2004. The increase is primarily due to revenues from the new 015
international telephony services that was launched on August 7, 2004 and due to
the substantial growth of our interactive advertising and content-based value
added services as well as our intense efforts in after-sale activities. We
believe*
the
growth rate of our revenues will improve in 2005, driven primarily by the
continued expansion of our telephony and e-Advertising businesses, and due to
the full year consolidation of our e-commerce P1000 site's revenues in 2005.
Access
Revenues. Revenues
from Internet access services provided to residential and business subscribers,
which represented 71% of our total revenues for 2004, increased by 6% from NIS
146.9 million (US$ 34.1 million)
for 2003 to NIS 156.4 million (US$ 36.3 million) for 2004. The increase is
primarily due to our major efforts to keep our market share regardless of the
sharp competition in the market. We
expect*
that in
2005 our access revenues will remain at the same level, based on our forecasts
regarding the development of the access services market in Israel.
*
|
This
paragraph includes forward-looking statements (see page 4 herein) that may
be materially different from our actual future results/ performance as
forward-looking statements are subject to uncertainties and other factors
and involve known and unknown risks (for known risks see Risk Factors on
page 11). |
International Telephony Services. Since
the successful launch of our 015 international telephony service on August 7,
2004 we gained revenues of NIS 9.4 million (US$ 2.2 million) which represents 4%
of our total revenues. We believe*
the
growth rate of our revenues from this activity will improve in 2005, driven
primarily by the continued expansion of this activity by entering into
supplemental activities in the market such as pre-paid, post-paid, calling card
services and other related activities.
Other
Revenues. Other
revenues, which represented 25% of our total revenues for 2004, increased by 64%
from NIS 32.7 million (US$ 7.6 million)
for 2003 to NIS 53.8 million (US$ 12.5 million) for 2004. The increase is
primarily due to the substantial growth of our interactive advertising and
content-based value added services as well as our intense efforts in after-sale
activities. We expect*
that our
other revenues will increase in 2005, based on our market research findings that
the interactive advertising market should increase in Israel in 2005 and due to
the full year consolidation of our e-commerce P1000 site's revenues in
2005.
Cost
of Revenues. Cost of
revenues increased by 4% from NIS 92.9 million (US$ 21.6 million)
for 2003 to NIS 96.8 million
(US$ 22.5 million) for 2004. The increase is primarily due to costs of
telecommunication services expenses related to the international telephony
services. Since the launch of the international telephony service in August 2004
we entered into agreements with several international carriers all over the
world for the purchase of international long distance voice services to about
240 destinations around the world. We anticipate that our cost of revenues will
increase in 2005, based on our forecasts and estimates of the growth of all of
our major activities and due to the full year consolidation of our e-commerce
P1000 site activity in 2005.
Selling
and Marketing Expenses. Selling
and marketing expenses increased by 77% from NIS 41.4 million (US$ 9.6 million)
for 2003 to NIS 73.2 million (US$ 17 million) for 2004. The increase is
primarily due to the initial intensive marketing campaign and other marketing
activities for the launch of the new 015 international telephony service, and
due to our market share strategy to extend our share of the broadband market,
including our advertising campaigns. We expect that our selling and marketing
expenses will increase in 2005 due to our continued implementation of our
strategy to increase our market share in all of our activities and their related
markets.
General
and Administrative Expenses. General
and administrative expenses increased by 11% from NIS 21.9 million (US$ 5.1
million) for 2003 to NIS 24.3 million (US$ 5.6 million) for 2004. The increase
was primarily due to general expenses related to our new international telephony
services and as a result of our initial and intensive preparations for this
activity. We expect that our general and administrative expenses will increase
in 2005, primarily due to expected increase in our revenues.
Financing
Income (Expenses), Net. In 2004
we had net financing income of NIS 0.12 million
(US$0.03 million)
compared to net financing expenses of NIS 3.2 million (US$0.8 million) for 2003.
Our
financing income
(expenses) are
attributed to the exchange rate differentials on the U.S. dollar cash deposits
that remained from our initial public offering. We also
have U.S. dollar denominated liabilities (rights of use leasing obligations for
our international lines).
Other
Expenses, Net. In 2004
we had net other expenses of NIS 1.1 million (US$ 0.26 million) compared with
NIS 2.6 million (US$ 0.6 million) in 2003. Our other expenses are primarily
attributable to Internet Gold International Ltd's recording of an additional
impairment charge of NIS 1.6 million (US$0.4 million) with respect to its
investment in Compulink, a Greek ISP, in which it holds a 15.2% interest. With
this impairment charge Internet Gold International has written off its entire
investment in Compulink and its operations can no longer adversely influence our
results.
*
|
This
paragraph includes forward-looking statements (see page 4 herein) that may
be materially different from our actual future results/ performance as
forward-looking statements are subject to uncertainties and other factors
and involve known and unknown risks (for known risks see Risk Factors on
page 11). |
Income
Taxes. As of
December 31, 2004, we had a tax loss carry forward on a consolidated basis of
approximately NIS 113 million (US$ 26.2 million) - including our
reconsolidated subsidiary Gold Trade with a tax loss carry forward of NIS 60
million. We assessed our deferred tax assets and the need for a valuation
allowance. Such an assessment considers whether it is more likely than not that
some portion or all of the deferred tax assets may not be realized. The
assessment requires considerable judgment on the part of management, with
respect to, among other things, benefits that could be realized from available
tax strategies and future taxable income, as well as other positive and negative
factors. We cannot be reasonably assured of our ability to further utilize the
tax asset in the foreseeable future, except that we anticipate that we will be
able to utilize Start-Net's tax loss carry forward for which we recorded a
deferred tax asset of NIS 2.3 million (US$ 0.5 million). In 2003 we recorded
deferred tax assets of Gold Mind's tax loss carry forward of NIS 1.9 million
($0.4 million). During 2004, we utilized most of Gold Mind's tax loss carry
forward.
Company’s
Share in Net Loss of Investees. In 2004
we recorded NIS 0.4 million (US$ 0.09 million) as our share in the net loss of
investees from continued operations of our investees compared to NIS 1.5 million
(US$ 0.35 million) in 2003. In 2004, we recorded NIS 4.8 million (US$ 1.1
million) as our share in the net loss of investees from discontinued operations
of our investees compared to NIS 3.7 million (US$ 0.9 million) in 2003. At the
end of 2004, Gold Trade's board of directors reached the decision to close down
all of its operations except the e-commerce activity P-1000 site.
Net
Income. We
reported net income of NIS 19.5 million (US$ 4.5 million), for the year ended
December 31, 2004 as compared to a net income of NIS 14.3 million (US$ 3.3
million) for the year ended December 31, 2003.
Under
U.S. GAAP
Unless
otherwise explained, there are no significant differences between Israeli GAAP
and U.S. GAAP
In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." This Interpretation
addresses the consolidation by business enterprises of variable interest
entities when the equity investors do not have the characteristics of a
controlling financial interest (as defined in the Interpretation). In December
2003, the FASB issued Interpretation No. 46R, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." The FASB deferred the
effective date for implementation of this Interpretation until fiscal years
ending after March 15, 2004.
According
to Israeli GAAP as prescribed in Opinion No. 57 of the Institute of Certified
Public Accountants in Israel, we treated the investment in our affiliated
company Gold Trade, as a subsidiary of our company until December 31, 2001. For
the years ended December 31, 2002 and December 31, 2003, we accounted for our
investment under the equity method. During December 2004, we acquired all of the
shares of Gold Trade from a related party and from others therefore we once
again consolidated Gold Trade as a subsidiary as of December 31,
2004.
Under the
provisions of FIN 46R, we were required to consolidate Gold Trade which met the
definition of a VIE for all years presented, due to a number of factors which
indicate that we are the primary beneficiary of Gold Trade.
We
applied FIN 46R by retroactively restating previously issued financial
statements, and recorded a cumulative effect of accounting change as of January
1, 2002 in the amount of NIS 4.4 million (US$ 1 million).
Revenues.
Revenues increased by 23% from NIS 185.6 million (US$ 43 million) for the year
ended December 31, 2003 to NIS 228.8 million (US$ 53.1 million) for the year
ended December 31, 2004. The increase was primarily due to revenues from our new
015 international telephony service that was launched on August 7, 2004 and due
to the substantial growth of our interactive advertising and content-based value
added services as well as our intense efforts in after-sale
activities.
Other
Revenues. Other
revenues, which represented 28% of our total revenues for 2004, increased by 63%
from NIS 38.7 million (US$ 8.9 million)
for 2003 to NIS 63 million (US$ 14.6 million) for 2004. The increase was
primarily due to the substantial growth of our interactive advertising and
content-based value added services as well as intense efforts in after-sale
activities.
Cost
of Revenues. Cost of
revenues increased by 4.5% from NIS 93.9 million (US$ 21.8 million)
for 2003 to NIS 98.1 million
(US$ 22.8 million) for 2004. The increase was primarily due to costs of
telecommunication services expenses related to our new international telephony
services. Since the launch of our international telephony service in August 2004
we have entered into agreements with several international carriers all over the
world for the purchase of international long distance voice services to about
240 destinations around the world. The
differences between Israeli GAAP and U.S. GAAP relating to our cost of
revenues expenses was
due to
the consolidation of Gold Trade under U.S. GAAP as required by FIN
46R.
Selling
and Marketing Expenses. Selling
and marketing expenses increased by 70% from NIS 46.4 million (US$ 10.8 million)
for 2003 to NIS 78.7 million (US$ 18.3 million) for 2004. The increase was
primarily due to the initial intensive marketing campaign and other marketing
activities associated with our launch of the new 015 service, and due to the
implementation of our market share strategy to extend our share of the broadband
market, including the costs of our advertising campaigns. The
differences between Israeli GAAP and U.S. GAAP relating to our selling
and marketing expenses was
due to
the consolidation of Gold Trade under U.S. GAAP as required by FIN
46R,
General
and Administrative Expenses. General
and administrative expenses increased by 12% from NIS 24.3 million (US$ 5.6
million) for 2003 to NIS 27.3 million (US$ 6.3 million) for 2004. The
differences between Israeli GAAP and U.S. GAAP relating to our general and
administrative expenses was due to
the consolidation of Gold Trade under
U.S. GAAP as required by FIN 46R, the
amortization of Gold
Trade 's
customer list of NIS 3.3 million compared to NIS 1.2 million in 2003 and the
recording of compensation expenses under U.S. GAAP with respect to grants under
our employee stock option plan as required under APB No. 25 - an expense of NIS
0.1 million in 2004 compared to income of NIS 0.11 million in 2003.
Financing
Income (Expenses), Net. In 2004
we had net financing expenses of NIS 0.08 million
(US$0.02 million)
compared to NIS 3.6 million (US$0.84 million) for 2003. Our
financing expenses were primarily attributable to the exchange rate
differentials on the U.S. dollar cash deposits that remained from our initial
public offering. We also
have U.S. dollar denominated liabilities (rights of use leasing obligations for
our international lines). The
differences between Israeli GAAP and U.S. GAAP relating to our financing
expenses
are due to
the consolidation of Gold Trade under U.S. GAAP as required by FIN
46R.
Net
Loss from Discontinued Operations. At the
end of 2004, Gold Trade's board of directors reached the decision to close down
all its operations except the e-commerce activity P-1000 site. In 2004 we
recorded a net loss of NIS 6.6 million (US$ 1.5 million) net loss from
discontinued operations compared to a net loss of NIS 6.8 million (US$ 1.6
million) in 2003.
Net
Income. We
reported net income of NIS 20.6 million (US$ 4.8 million), for the year ended
December 31, 2004 as compared to a net income of NIS 12.1 million (US$ 2.8
million) for the year ended December 31, 2003. The
differences between Israeli GAAP and U.S. GAAP relating to our net
income are
due to
the consolidation of Gold Trade under U.S. GAAP as required by FIN
46R.
Year
Ended December 31, 2003 Compared to Year Ended December 31,
2002
Under
Israeli GAAP
Revenues. Revenues
decreased by 3% from NIS 184.3 million (US$ 42.8 million)
for the year ended December 31, 2002 to NIS 179.6 million
(US$ 41.7 million)
for the year ended December 31, 2003. The decrease was primarily due to the
sharp competition in the market which
resulted in lower access fees.
Access
Revenues. Revenues
from Internet access services provided to residential and business subscribers,
which represented 82% of our total revenues for 2003, decreased by 6% from NIS
156.3 million (US$ 36.3 million)
for 2002 to NIS 146.9 million (US$ 34.1 million) for 2003. The decrease was
primarily due to the sharp competition in the market.
Other
Revenues. Other
revenues, which represented 18% of our total revenues for 2003, increased by 17%
from NIS 28 million (US$ 6.5 million)
for 2002 to NIS 32.7 million (US$ 7.6 million) for 2003. The increase was
primarily due to the substantial growth of our interactive advertising and
content-based value added services as well as our intense efforts in after-sale
activities.
Cost
of Revenues. Cost of
revenues decreased by 7% from NIS 99.6 million (US$ 23.1 million)
for 2002 to NIS 92.9 million
(US$ 21.6 million) for 2003. The decrease was primarily due to our efforts in
reducing the costs of international lines. Cost of revenues as a percentage of
revenues decreased from 54% for 2002 to 52% for 2003.
Selling
and Marketing Expenses. Selling
and marketing expenses increased by 12% from NIS 37.1 million (US$ 8.6 million)
for 2002 to NIS 41.4 million (US$ 9.6 million) for 2003. The increase was
primarily due to costs incurred in implementing our market share strategy to
extend our share of the broadband market, including our advertising campaigns.
General
and Administrative Expenses. General
and administrative expenses were similar to the expenses in the year 2002, NIS
21.2 million (US$ 4.9 million) for 2002 to NIS 21.9 million (US$ 5.1 million)
for 2003.
Financing
Income (Expenses), Net. In 2003
we had net financing expenses of NIS 3.2 million
(US$ 0.7 million)
compared to net financing income of NIS 2.2 million (US$ 0.5 million) for 2002.
Our
financing expenses were attributable to the exchange rate differentials on the
U.S. dollar cash deposits that remained from our initial public offering.
Other
Expenses, Net. Internet
Gold International recorded an impairment charge of NIS 2.6 million (US$ 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 (US$ 18.9 million).
Company’s
Share in Net Loss of Affiliates. In 2003
we recorded NIS 1.5 million (US$ 0.3 million) of our share in the net loss of
our affiliates from continued operations compared to NIS 1.5 million (US$ 0.3
million) in 2002. We also recorded NIS 3.7 million (US$ 0.9 million) of our
share in net loss of our affiliates from discontinued operations compared to NIS
7.1 million (US$ 1.6 million) in 2002.
Net
Income. We
reported net income from continued operations of NIS 18 million (US$ 4.2
million), for the year ended December 31, 2003 as compared to a net income from
continued operations of NIS 27 million (US$ 6.3 million) for the year ended
December 31, 2002. We reported a net loss from discontinued operations of NIS
3.7 million (US$ 0.9 million), for the year ended December 31, 2003 as compared
to a net loss from discontinued operations of NIS 7.1 million (US$ 1.6 million)
for the year ended December 31, 2002. We also reported net income of NIS 14.3
million (US$ 3.3 million) for the year ended December 31, 2003 as compared to
net income of NIS 20 million (US$ 4.6 million) for the year ended December 31,
2002.
Under
U.S. GAAP
Unless
otherwise explained, there are no significant differences between Israeli GAAP
and U.S. GAAP
Under the
provisions of FIN 46R, we were required to consolidate the financials of Gold
Trade which met the definition of a VIE for all years presented, due to a number
of factors which indicated that we were the primary beneficiary of Gold
Trade.
We
applied FIN 46R by retroactively restating previously issued financial
statements.
Revenues. Revenues
decreased by 5% from NIS 194.6 million (US$ 45.2 million)
for the year ended December 31, 2002 to NIS 185.6 million
(US$ 43.1 million)
for the year ended December 31, 2003. The decrease was primarily due to the
sharp competition in the market which
resulted in lower access fees.
Other
Revenues. Other
revenues were similar in both years, increasing from NIS 38.3 million (US$
8.9 million)
for 2002 to NIS 38.7 million (US$ 8.9 million) for 2003
Cost
of Revenues. Cost of
revenues decreased by 10% from NIS 103.4 million (US$ 24 million)
for 2002 to NIS 93.9 million
(US$ 21.8 million) for 2003. The decrease was primarily due to our efforts in
reducing costs of our international lines. The
differences between Israeli GAAP and U.S. GAAP relating to our net
income was
due to
the consolidation of Gold Trade under U.S. GAAP as required by FIN
46R.
Selling
and Marketing Expenses. Selling
and marketing expenses increased by 4% from NIS 44.8 million (US$ 10.4 million)
for 2002 to NIS 46.4 million (US$ 10.8 million) for 2003. The increase was
primarily due to the costs associated with the implementation of our market
share strategy to extend our share of the broadband market, including the costs
of our advertising campaigns. The
differences between Israeli GAAP and U.S. GAAP relating to our net
income was
due to
the consolidation of Gold Trade under U.S. GAAP as required by FIN
46R.
General
and Administrative Expenses. General
and administrative expenses were similar in both years, increasing from NIS 23.8
million (US$ 5.5 million) in 2002 compared to NIS 24.4 million (US$ 5.7 million)
in 2003. The
differences between Israeli GAAP and U.S. GAAP relating to our net
income was
due to
the consolidation of Gold Trade under U.S. GAAP as required by FIN
46R.
Financing
Income (Expenses), Net. In 2003
we had net financing expenses of NIS 3.6 million
(US$ 0.8 million)
compared to net financing income of NIS 2.1 million (US$ 0.5 million) for 2002.
Our
financing expenses were attributable to the exchange rate differentials on the
U.S. dollar cash deposits that remained from our initial public offering.
The
differences between Israeli GAAP and U.S. GAAP relating to our net
income were
due to
the consolidation of Gold Trade under U.S. GAAP as required by FIN
46R.
Net
Loss from Discontinued Operations. We
reported a net loss from discontinued operations of NIS 6.8 million (US$ 1.6
million), for the year ended December 31, 2003 as compared to a net loss from
discontinued operations of NIS 21.1 million (US$ 4.9 million) for the year ended
December 31, 2002.
Net
Income. We
reported net income of NIS 12.1 million (US$ 2.8 million), for the year ended
December 31, 2003 as compared to a net income of NIS 1.5 million (US$ 0.3
million) for the year ended December 31, 2002 (including a cumulative effect of
accounting change as of January 1, 2002 in the amount of NIS 4.4 million (US$ 1
million)). The
differences between Israeli GAAP and U.S. GAAP relating to our net
income was
due to
the consolidation of Gold Trade under
U.S. GAAP as required by FIN 46R.
Quarterly
Results of Operations
The
following table sets forth our results of operations for our last eight
quarters. 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 report. The data for any quarter is not necessarily indicative of the
revenues that may be expected for any future period. The percentage data shows
revenues and expenses as a percentage of total revenues.
|
|
Three
Months Ended |
|
|
|
Mar.
31,
2003 |
|
Jun.
30,
2003 |
|
Sept.
30,
2003 |
|
Dec.
31,
2003 |
|
Mar.
31, 2004 |
|
Jun.
30,
2004 |
|
Sept.
30, 2004 |
|
Dec.
31, 2004 |
|
|
|
Adjusted
amounts** |
|
reported
amounts* |
|
|
|
Unaudited |
|
|
|
(In
thousands, except number of subscribers data) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access
revenues |
|
|
37,180 |
|
|
36,424 |
|
|
36,151 |
|
|
37,151 |
|
|
39,124 |
|
|
40,537 |
|
|
38,571 |
|
|
38,153 |
|
International
telephony services |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
- |
|
|
2,092 |
|
|
7,289 |
|
Other
revenues |
|
|
6,725 |
|
|
7,531 |
|
|
8,181 |
|
|
10,299 |
|
|
11,852 |
|
|
12,662 |
|
|
13,629 |
|
|
15,668 |
|
Total
revenues |
|
|
43,905 |
|
|
43,955 |
|
|
44,332 |
|
|
47,450 |
|
|
50,976 |
|
|
53,199 |
|
|
54,292 |
|
|
61,110 |
|
Cost
and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues |
|
|
24,267 |
|
|
23,468 |
|
|
22,797 |
|
|
22,339 |
|
|
22,566 |
|
|
21,625 |
|
|
25,344 |
|
|
27,285 |
|
Selling
and marketing expenses |
|
|
9,624 |
|
|
9,917 |
|
|
9,843 |
|
|
12,009 |
|
|
14,915 |
|
|
17,370 |
|
|
20,462 |
|
|
20,408 |
|
General
and administrative expenses |
|
|
5,144 |
|
|
5,408 |
|
|
5,478 |
|
|
5,878 |
|
|
5,830 |
|
|
5,481 |
|
|
6,572 |
|
|
6,375 |
|
Total
costs and expenses |
|
|
39,035 |
|
|
38,793 |
|
|
38,118 |
|
|
40,226 |
|
|
43,311 |
|
|
44,476 |
|
|
52,378 |
|
|
54,068 |
|
Operating
income |
|
|
4,870 |
|
|
5,162 |
|
|
6,214 |
|
|
7,224 |
|
|
7,665 |
|
|
8,723 |
|
|
1,914 |
|
|
7,042 |
|
Financing
income (expenses), net |
|
|
(1,058 |
) |
|
(5,721 |
) |
|
3,695 |
|
|
(151 |
) |
|
460 |
|
|
(549 |
) |
|
342 |
|
|
(131 |
) |
Other
income (expenses), net |
|
|
(4 |
) |
|
(12 |
) |
|
(2,587 |
) |
|
11 |
|
|
(642 |
) |
|
(856 |
) |
|
54 |
|
|
367 |
|
Net
income (loss) after financing expenses |
|
|
3,808 |
|
|
(571 |
) |
|
7,322 |
|
|
7,084 |
|
|
7,483 |
|
|
7,318 |
|
|
2,310 |
|
|
7,278 |
|
Income
tax (expenses) benefit |
|
|
- |
|
|
2,465 |
|
|
(354 |
) |
|
(176 |
) |
|
(519 |
) |
|
(782 |
) |
|
(240 |
) |
|
1,842 |
|
Net
income after income tax |
|
|
3,808 |
|
|
1,894 |
|
|
6,968 |
|
|
6,908 |
|
|
6,964 |
|
|
6,536 |
|
|
2,070 |
|
|
9,120 |
|
Company’s
share in net loss of investees |
|
|
(278 |
) |
|
(459 |
) |
|
(48 |
) |
|
(753 |
) |
|
(398 |
) |
|
(210 |
) |
|
105
|
|
|
107 |
|
Net
income from continued operations |
|
|
3,530 |
|
|
1,435 |
|
|
6,920 |
|
|
6,155 |
|
|
6,566 |
|
|
6,326 |
|
|
2,175 |
|
|
9,227 |
|
Company’s
share in net loss of investees from discontinued
operations |
|
|
(414 |
) |
|
(1,385 |
) |
|
(878 |
) |
|
(1,060 |
) |
|
(576 |
) |
|
(675 |
) |
|
(695 |
) |
|
(2,817 |
) |
Net
income |
|
|
3,116 |
|
|
50 |
|
|
6,042 |
|
|
5,095 |
|
|
5,990 |
|
|
5,651 |
|
|
1,480 |
|
|
6,410 |
|
Number
of subscribers (at the end of the period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
subscribers |
|
|
307,136 |
|
|
305,314 |
|
|
305,261 |
|
|
312,256 |
|
|
318,889 |
|
|
322,863 |
|
|
324,035 |
|
|
339,146 |
|
Business
subscribers |
|
|
1,946 |
|
|
2,128 |
|
|
2,333 |
|
|
2,600 |
|
|
2,879 |
|
|
3,016 |
|
|
3,142 |
|
|
3,510 |
|
* With
respect to discontinuance of adjustment to the effect of inflation as from the
CPI of December 2003.
**
Amounts adjusted to reflect inflation in terms of NIS at December 31,
2003.
|
|
|
Three
Months Ended |
|
|
|
|
Mar.
31,
2003 |
|
|
Jun.
30,
2003 |
|
|
Sept.
30,
2003 |
|
|
Dec.
31,
2003 |
|
|
Mar.
31, 2004 |
|
|
Jun.
30, 2004 |
|
|
Sept.
30, 2004 |
|
|
Dec.
31, 2004 |
|
|
|
|
(As
percentage of total revenues) |
|
Revenues: |
|
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
Access
revenues |
|
|
85 |
|
|
83 |
|
|
82 |
|
|
78 |
|
|
77 |
|
|
76 |
|
|
71 |
|
|
62 |
|
International
telephony services |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
4 |
|
|
12 |
|
Other
revenues |
|
|
15 |
|
|
17 |
|
|
18 |
|
|
22 |
|
|
23 |
|
|
24 |
|
|
25 |
|
|
26 |
|
Total
revenues |
|
|
100 |
|
|
100 |
|
|
100 |
|
|
100 |
|
|
100 |
|
|
100 |
|
|
100 |
|
|
100 |
|
Costs
and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues |
|
|
55 |
|
|
53 |
|
|
51 |
|
|
47 |
|
|
44 |
|
|
41 |
|
|
47 |
|
|
45 |
|
Selling
and marketing expenses |
|
|
22 |
|
|
23 |
|
|
22 |
|
|
25 |
|
|
29 |
|
|
33 |
|
|
38 |
|
|
33 |
|
General
and administrative expenses |
|
|
12 |
|
|
12 |
|
|
12 |
|
|
12 |
|
|
11 |
|
|
10 |
|
|
12 |
|
|
10 |
|
Total
costs and expenses |
|
|
89 |
|
|
88 |
|
|
85 |
|
|
84 |
|
|
84 |
|
|
84 |
|
|
97 |
|
|
88 |
|
Operating
income |
|
|
11 |
|
|
12 |
|
|
15 |
|
|
16 |
|
|
16 |
|
|
16 |
|
|
3 |
|
|
12 |
|
Financing
income (expenses), net |
|
|
(2 |
) |
|
(13 |
) |
|
8 |
|
|
- |
|
|
1 |
|
|
(1 |
) |
|
1 |
|
|
- |
|
Other
income (expenses), net |
|
|
- |
|
|
- |
|
|
(6 |
) |
|
- |
|
|
(1 |
) |
|
(2 |
) |
|
- |
|
|
1 |
|
Net
income (loss) after financing expenses |
|
|
9 |
|
|
(1 |
) |
|
17 |
|
|
16 |
|
|
16 |
|
|
13 |
|
|
4 |
|
|
13 |
|
Income
tax (expenses) benefit |
|
|
- |
|
|
6 |
|
|
(1 |
) |
|
- |
|
|
(1 |
) |
|
(1 |
) |
|
- |
|
|
3 |
|
Net
income after income tax |
|
|
9 |
|
|
5 |
|
|
16 |
|
|
16 |
|
|
15 |
|
|
12 |
|
|
4 |
|
|
16 |
|
Company’s
share in net loss of investees |
|
|
(1 |
) |
|
(1 |
) |
|
- |
|
|
(2 |
) |
|
(1 |
) |
|
- |
|
|
- |
|
|
- |
|
Net
income from continued operations |
|
|
8 |
|
|
4 |
|
|
16 |
|
|
14 |
|
|
14 |
|
|
12 |
|
|
4 |
|
|
16 |
|
Company’s
share in net loss of investees from discontinued
operations |
|
|
(1 |
) |
|
(3 |
) |
|
(2 |
) |
|
(2 |
) |
|
(1 |
) |
|
(1 |
) |
|
(1 |
) |
|
(5 |
) |
Net
income |
|
|
7 |
|
|
1 |
|
|
14 |
|
|
12 |
|
|
13 |
|
|
11 |
|
|
3 |
|
|
11 |
|
Impact
of Devaluation on the NIS vs. US$ on Results of Operations, Liabilities and
Assets
The
dollar cost of our operations in Israel is influenced by the exchange rate of
U.S. dollar. Devaluation or an increase in valuation of the NIS against the U.S.
dollar might reflect on our results of operations.
The
following table presents information about the devaluation of the NIS against
the dollar:
Year
ended
December 31, |
|
NIS devaluation
rate
% |
2000 |
|
(2.7) |
2001 |
|
9.3 |
2002 |
|
7.3 |
2003 |
|
(7.6) |
2004 |
|
(1.6) |
A
devaluation of the NIS in relation to the dollar has the effect of reducing the
dollar amount of any of our expenses or liabilities which are payable in NIS,
unless those expenses or payables are linked to the dollar. This devaluation
also has the effect of decreasing the dollar value of any asset which consists
of NIS or receivables payable in NIS, unless the receivables are linked to the
dollar. Conversely, any increase in the value of the NIS in relation to the
dollar has the effect of increasing the dollar value of any unlinked NIS assets
and the dollar amounts of any unlinked NIS liabilities and expenses. We cannot
assure you that in the future our results of operations may not be materially
adversely affected by currency fluctuations.
Because
exchange rates between the NIS and the dollar fluctuate continuously, with a
historically declining trend in the value of the NIS, exchange rate
fluctuations, particularly larger periodic devaluations, may have an impact on
our profitability and period-to-period comparisons of our results.
As a
result of the devaluation of the dollar in 2004, we recorded exchange rate
expenses on our U.S. deposits of NIS 1.3 million (US$ 0.3 million).
We
have U.S.
dollar denominated liabilities (rights of use leasing obligations for our
international lines).
According
to a new accounting standard, Accounting Standard No. 12, on “Discontinuance
of Adjustment of Financial Statements”, commencing January 1, 2004, the
adjustment of financial statements were discontinued. Consequently, through
December 31, 2003, we prepared adjusted financial statements in accordance with
Opinion No. 36 of the Institute of Certified Public Accountants in Israel. The
adjusted amounts included in the financial statements as at December 31, 2003,
constituted the starting point for the nominal financial report as of January 1,
2004.
Effective
Corporate Tax Rate
Israeli
companies are generally subject to income tax at the rate of 35% of taxable
income. For tax purposes, results of operations are measured in real terms. From
1992 through December 31, 2002 we incurred net operating losses. As of December
31, 2004, we had consolidated net operating loss carry forwards of approximately
NIS 113 million (US$ 26.2 million)
- including the reconsolidated subsidiary Gold Trade with NIS 60 million. Under
current Israeli tax laws, operating loss carry forwards do not expire, are
linked to the Israeli inflation rate and may be offset against future taxable
income. Corporate Tax rates are declining gradually - in 2005-34%, 2006-32% and
2007-30%.
Liquidity
and Capital Resources
Liquidity.
We have
required substantial capital resources to finance the construction of our
network and to fund our operations. Historically we financed the construction of
our network and funded our operations principally from cash flow from
operations, short-term bank credit, revolving short-term bank loans and the
proceeds of the initial public offering of our ordinary shares in August 1999.
Working
Capital. Our
working capital as of December 31, 2004 was NIS 41.7 million (US$ 9.7 million)
as compared to working capital of NIS 76.3 million (US$ 17.7 million) as of
December 31, 2003. The decrease in our working capital is primarily due to the
increase in current maturities of long-term obligations arising from our
purchase of rights of use of international lines. This ratio shall further drop
as we continue to lease additional lines.
The
following table summarizes our cash flows for the indicated years:
|
|
Year
Ended December 31, |
|
|
|
2002 |
|
2003 |
|
2004 |
|
|
|
Adjusted amounts** |
|
Adjusted amounts** |
|
reported amounts* |
|
|
|
(In
thousands) |
|
Net
Income (loss) |
|
|
19,958 |
|
|
14,303 |
|
|
19,531 |
|
Other
adjustments for non-cash items |
|
|
23,611 |
|
|
22,957 |
|
|
27,006 |
|
Net
changes in assets and liabilities |
|
|
(2,366 |
) |
|
(8,088 |
) |
|
(8,352 |
) |
Net
cash provided by (used in) continued operating activities |
|
|
41,203 |
|
|
29,172 |
|
|
38,185 |
|
Net
cash provided by (used in) discontinued operating
activities |
|
|
-
|
|
|
- |
|
|
- |
|
Net
cash provided by (used in) operating activities |
|
|
41,203 |
|
|
29,172 |
|
|
38,185 |
|
Net
cash provided by (used in) continued investing activities |
|
|
(12,147 |
) |
|
(70,706 |
) |
|
(117,665 |
) |
Net
cash provided by (used in) discontinued investing
activities |
|
|
(1 |
) |
|
- |
|
|
- |
|
Net
cash provided by (used in) investing activities |
|
|
(12,148 |
) |
|
(70,706 |
) |
|
(117,665 |
) |
Net
cash provided by (used in) continued financing activities |
|
|
(31,528 |
) |
|
38,280 |
|
|
73,226 |
|
Net
cash provided by (used in) discontinued financing
activities |
|
|
- |
|
|
- |
|
|
- |
|
Net
cash provided by (used in) financing activities |
|
|
(31,528 |
) |
|
38,280 |
|
|
73,226 |
|
Net
increase (decrease) in cash and cash equivalents |
|
|
(2,473 |
) |
|
(3,254 |
) |
|
(6,254 |
) |
* With
respect to discontinuance of adjustment to the effect of inflation as from the
CPI of December 2003.
**
Amounts adjusted to reflect inflation in terms of NIS at December 31,
2003.
Net cash
provided by operating activities was NIS 38.2 million
(US$ 8.9 million)
in 2004, net cash provided by operating activities was NIS 29.2 million
(US$ 6.8 million)
in 2003 and net cash provided by operating activities was NIS 41.2 million (US$
9.6 million)
in 2002. The increase in the net cash provided by operating activities in 2004
compared to 2003 is due to our continuing efforts to implement our profitability
strategy.
Net cash
used in investing activities was NIS 117.7 million (US$ 27.3 million) in 2004
and NIS 70.7 million (US$ 16.4 million) in 2003. Our investing activities have
primarily involved purchases of rights of use for international communication
lines presented as capital leases, network components, expansion of our network
and computer hardware and software costs.
The
increase in our investing activities was primarily related to the purchase of
seven international communication lines during 2004 in the total amount of NIS
69.2 million (US$ 16.1 million) which are presented as capital leases, and also
due to the purchase of network components, expansion of our network and computer
hardware and software costs in connection with our intensive preparations to
provide international telephony services. In December 2004 we obtained long term
loans of NIS 30.5 million (US$ 7.1 million) from banks (presented as cash
provided by financing activities) and granted a loan in the same amount to Gold
Trade to cover its obligations to its banks.
According
to Israeli GAAP, receipt of loans in respect of capital leases are reflected in
the statements of cash flows as cash flows from financing activities rather than
investing activities from the acquisition of assets financed by the lease. Under
U.S. GAAP, this should be reflected as a non-cash financing
activity.
Net cash
provided by financing activities was NIS 73.2 million (US$ 17 million) in 2004
and NIS 38.3 million (US$ 8.9 million) in 2003. Our financing activities in 2004
included receipt of long-term loans from banks as mentioned above and long term
loans with respect to the purchase of rights of use in international
communication lines presented as capital leases.
Financing
Arrangements.
We have a
credit line equal to the deposits that we hold with the First International Bank
of Israel Ltd.. As of December 31, 2004, our deposits totaled NIS 75.3 million
(US$ 17.5 million). The credit line is repayable on demand. As of December 31,
2004, NIS 10.8 million (US$ 2.5 million) was outstanding under the credit
line. Long-term obligations to suppliers for the right of use of international
lines are linked to the U.S. dollar exchange rate, and our long-term leasing
agreements for cars are linked to the consumer price index and bear interest at
annual rates ranging from 5% to 7%. As of December 31, 2004, there was NIS 41.6
million (US$ 9.7 million) outstanding under our long-term leasing
arrangements.
The
following table summarizes our bank debt as of December 31, 2002, 2003 and
2004:
|
|
At
December 31, |
|
|
|
2002 |
|
2003 |
|
2004 |
|
|
|
Adjusted amounts** |
|
Adjusted amounts** |
|
reported amounts* |
|
|
|
(In
thousand) |
|
Short-term: |
|
|
|
|
|
|
|
Credit |
|
|
8,996 |
|
|
4,279 |
|
|
10,817 |
|
Current
maturities of long-term loans under lease arrangements |
|
|
1,461 |
|
|
980 |
|
|
133 |
|
Total
short-term debt |
|
|
10,457 |
|
|
5,259 |
|
|
10,950 |
|
Long-term: |
|
|
|
|
|
|
|
|
|
|
Long-term
loans maturities |
|
|
1,330 |
|
|
273 |
|
|
30,506 |
|
Total
long-term debt |
|
|
1,330 |
|
|
273 |
|
|
30,506 |
|
Liabilities
attributed to discontinued operations |
|
|
- |
|
|
- |
|
|
1,653 |
|
Total
debt |
|
|
11,787 |
|
|
5,532 |
|
|
43,109 |
|
* With
respect to discontinuance of adjustment to the effect of inflation as from the
CPI of December 2003.
**
Amounts adjusted to reflect inflation in terms of NIS at December 31,
2003.
Capital
Expenditures.
In 2004,
we invested NIS 23.8 million (US$ 5.5 million) in fixed assets, which included
purchases of network components, expansion of our network and computer hardware
and software costs. During 2005, we expect to incur capital expenditures of
approximately NIS 13 million (US$ 3 million) (not including the purchase of
rights of use of the international lines), of which US$ 0.6 million of which is
already subject to contractual obligations. We anticipate that these
expenditures will be funded from our cash
flow from operations and borrowings under credit facilities which we may
negotiate. Where feasible, we may also finance certain of these expenditures
through capital leases or installment purchases if these financing alternatives
are available on terms acceptable to us.
Long
Term Loans under Lease Arrangements. Our
lease obligations as of December 31, 2004 were NIS 41.6 million
(US$ 9.7 million), compared to NIS 27.4 million (US$ 6.4 million) for December
31, 2003. Such leasing obligations relate to rights of use of twelve
international lines under financial lease arrangements and 24 motor vehicles
that are under financial lease arrangements as well.
In
December 2004, the monthly costs for the rights of use of international lines
amounted to NIS 3 million
(US$ 0.7 million) and the monthly rental costs for such vehicles amounted to NIS
90 thousands (US$ 20.9 thousands).
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 2006. However, if during that period or thereafter
we are not successful in generating sufficient cash flows from operations or in
raising additional capital, whether debt or equity, when required, in sufficient
amounts and on terms acceptable to us, our business, results of operations and
financial condition could suffer. In addition, if additional funds are raised
through the issuance of equity securities, the percentage ownership of our
then-current shareholders would be diluted.
8. SHARE
CAPITAL
Description
of Securities
We are a
public company registered under the Israel Companies Law as Internet Gold -
Golden Lines Ltd., registration number 52-004426-4.
Our
authorized share capital is NIS 5,010,000, divided into 501,000,000 ordinary
shares of NIS 0.01 par value each, of which 18,431,500 shares were issued and
fully paid, as of March 1, 2005.
All our
issued shares are registered for trade on the TASE (18,431,500) and 5,576,246 of
them are registered for trade on the NASDAQ National Market.
The
ownership or voting of our ordinary shares by non-residents of Israel is not
restricted in any way by our memorandum of association or articles of
association. The State of Israel does not restrict in any way the ownership or
voting of ordinary shares by non-residents of Israel, except with respect to
subjects of countries that are in a state of war with Israel.
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 our shares 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:
The
quorum required for an ordinary meeting of shareholders consists of at least two
shareholders present in person or represented by proxy who hold or represent, in
the aggregate, more than one third of the voting rights of the issued share
capital. A meeting adjourned for lack of a quorum generally is adjourned to the
same day in the following week at the same time and place or any time and place
as the chairman of the board of directors determines with the consent of the
holders of a majority of the shares present in person or represented by proxy
and voting on the matter of adjournment. At the reconvened meeting, the required
quorum consists of any two members present in person or by proxy.
An
ordinary resolution, such as a resolution for the declaration of dividends or
amendment to our articles of association, requires approval by the holders of a
majority of the voting rights represented at the meeting, in person, by proxy or
by written ballot and voting thereon. Under our articles of association, a
special resolution, such as amending our memorandum of association (when
permitted), approving any change in capitalization, winding-up, authorization of
a class of shares with special rights, or other changes as specified in our
articles of association, requires approval of a special majority, representing
the holders of no less than 75% of the voting rights represented at the meeting
in person, by proxy or by written ballot, and voting thereon. Under the
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 for the term as determined for the
relevant category.
The board
of directors may appoint additional directors, whether to fill a vacancy of a
director whose appointment was terminated or as additional director/s provided
that the total number of directors will not exceed the maximum number as
determined by the shareholders.
Currently,
Eurocom Holdings Ltd., which beneficially owns 68.81% 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. Eurocom Holding's beneficial holdings in
us may be diluted following this Offering.
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. 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.
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.
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.
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.
9. DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
Chapter
9: DEBENTURE
TERMS
The
debentures (Series A) being offered under this prospectus are pursuant to the
resolution the Company's board of directors adopted on March 30, 2005, and the
trust deed the company signed with Investec Trust Company (Israel) Ltd.
(hereinafter: “The Trustee”) and the Company (hereinafter: “Trust Deed”) on
March 31, 2005. The main
terms of the debentures (Series A) are as provided herewith.
9.2.
|
Debentures
(Series A) - Repayment |
Debentures
(series A) are repayable in 8 equal annual installments on April 1st of each
of the years 2208 to 2015 (inclusive). In other words, on April 1st of each
of the years 2008 to 2015 (inclusive), the Company will pay up 12.5% of the
nominal principal value of the debentures (Series A) that are still in
circulation, plus differences pursuant to linkage to the consumer price index,
as detailed in Paragraph 9.5 below.
The
unpaid balance of the debentures (Series A) will bear annual interest to be set
by the Tender. Said interest rate will not exceed 5% and will not fall below 4%,
and will be paid once every 12 months, as provided below. The
debentures (Series A) will be indexed (principal and interest) to the CPI, as
provided in Paragraph 9.5 below. The interest will be calculated based on an
interest period of one year. Interest will be paid once a year, on April 1st of
each of the years 2006 to 2015, for the 12-month period concluded on the last
day prior to the date of payment.
Notwithstanding
the above, the first interest payment will be on April 1st 2006,
for the period commencing on the first day of trading after the list of
Subscribers is closed, which shall be March 31, 2006, based on a 365-day year.
The last
interest payment on the debentures (Series A) will be made on April 1st, 2015,
when the balance of the principal on the debentures (Series A) still in
circulation will also be paid. Said payment of interest and principal will be
effected against the return of the debenture certificates to the
Company.
Converted
debentures will be removed from circulation upon their conversion and will be
null and void retroactively to the date on which stock was issued against them.
Such debentures will not entitle holders to any interest after the payment of
interest in respect of the last Date of Record prior to the conversion date, nor
will they entitle holders to any indexation on the principal that may have
accrued under the terms provided herewith.
Tax will
be withheld on all interest payments.
Should
the scheduled date for any payment of interest and/or principal of the
debentures (Series A) occur on a day that is not a business day, the date will
be deferred to the next business day thereafter. No interest shall be paid for
such deferral. A business day is a day on which banks in Israel are open for the
purpose of performing transactions (hereinafter: “Business Day”)
The
debentures (Series A) and the related interest will be indexed to the Consumer
Price Index, as follows:
The term
“Consumer Price Index” (hereinafter: “the CPI”) shall mean - the price index
known as the "Consumer Price Index", including fresh produce, which the Central
Bureau of Statistics publishes, or the same index if published by any other
official institute or agency or any other official index that might replace said
index, whether or not such replacing index is based on the same data. Should the
index be replaced by another one published by some other institute or agency as
mentioned above, and should said institute or agency not announce the ratio
between the new and original index, the ratio will be as set by the Central
Bureau of Statistics. In case no such ratio is established as provided above,
the Company will, in consultation with expert economists of its choice, decide
on the ratio between the new and original CPI.
The term
“CPI of Record” shall mean - the consumer price index known upon the date of any
payment of principal and/or interest. However, if the CPI of Record is lower
than the basic CPI, the former will replace the latter.
The term
“Basic CPI” means - the consumer price index published on March 15, 2005, which
pertains to February 2005.
The term
“the Known CPI” means - the most recently published consumer price
index.
If upon
execution of any due payment it transpires that the CPI of Record exceeds the
Basic CPI, the Company will pay the amount due plus an increase pro rata to the
increase between the Basic and CPI of Record. If the CPI of Record falls below
the Basic CPI, the former will substitute the latter.
The
Company reserves the right to repurchase debentures (Series A) from this issue
on the open market at any time and at any price as it may see fit.
Debentures that the Company buys back will be cancelled and delisted. The
Company will not be allowed to reissue such debentures, and the repurchase will
not effect the Company’s duty to repay the debentures still in circulation.
The
Company will release an immediate report advising of of any such repurchase, and
will notify the trustee.
Subsidiaries
of the Company may buy and/or sell debentures (Series A) on the open market from
time to time at any price they may see fit, and resell them at any price they
see fit. The Company will issue an immediate report of any such purchase and/or
sale. Any debentures (Series A) held as mentioned by a subsidiary shall be
considered an asset of the subsidiary, and will not be delisted.
For the
taxation of debentures, see Paragraph 5.9 of the prospectus.
9.8.
|
Principal
and Interest Payments |
All
principal and interest payments due on the debentures (Series A) will be
effected on the dates stipulated in Paragraphs 9.2 and 9.3 and in compliance
with the terms set forth therewith. Such payments will be made to those persons
who are listed in the Bondholders Register (Series A) at the end of March 20th
of the relevant year for payment (hereinafter: “Date of
Record for Payment”). The last payment of principal and interest will be on
April 1st, 2015,
against the delivery of the debenture certificates to the Company at its
registered address and/or at any other location as designated by the Company.
The debentures must be delivered to the Company at least five business days
prior to the date of payment.
Persons
entitled to payment will be paid with checks or by bank transfer, crediting the
bank account of the persons listed in the Debenture holders’ Register or the
persons delivering the debentures, respectively as above. Payment will be
indexed and tax deducted at source as provided above.
Should a
holder who is eligible for payment fail to give the Company bank account details
in due time, all payments of principal and interest will be effected by checks
posted by registered mail to the most recent address registered in the Debenture
holders’ Register. Postage of checks by registered mail as mentioned above
shall, for all intents and purposes, be deemed as payment of the amount of the
check at the date of postage, provided that said check is paid upon
presentation. Checks for sums lower than NIS 50 will not be sent, but such
amounts may be collected in cash at the Company’s offices.
A holder
may revise the instructions given for payment by written notice delivered by
registered mail. The Company will honor the new instructions for any given
payment only if they arrive at the Company's registered address at least 30 days
prior to the Date of Record for Payment for any payment due in respect of the
debentures (Series A). Should the Company receive said notice later than
stipulated, it will only honor the instructions in respect of payments payable
after the date of payment immediately after the receipt of said
notice.
9.9.
|
Default
for Reasons outside of the Company’s
Control |
Any
payment payable to an holder that is not effected for reasons outside the
Company's control, provided that the Company was prepared to effect said
payment, will no longer bear interest and indexation, and the holder will only
be entitled to the amount to which he was entitled upon the scheduled date of
payment of interest or principal.
Within 30
days of the Date of Record for Payment, the Company will deposit with the
Trustee any amount that has not been paid for reasons outside of the Company's
control. Once such deposit is made, the Company will be deemed to have effected
payment of the due amount. If the payment was to constitute final settlement of
all amounts due relative to the debentures, the Company will also be deemed to
have repaid the debenture.
The
Trustee will invest all amounts deposited with it as mentioned above, on behalf
of the holders, as permitted under Israeli law and the Trust Deed, and at the
Trustee’s discretion, subject to the provisions of the law. The Trustee will pay
every holder of debentures (Series A) for whom money has been deposited with the
Trustee as mentioned above, the money owing to him/her for termination of said
investment, minus the Trustee's expenses, commissions, mandatory payments and
fees, as provided above. Payment to holders will be effected against
substantiating documents to the Trustee's full satisfaction. The Trustee shall
hold said amounts and invest them as provided above for up to one year after
final repayment of the debentures. After one year, the Trustee will return the
monies accrued, including gains, minus expenses, to the Company, which will then
hold these monies for the debenture holders (Series A). Once the Trustee returns
said amounts as provided above, holders who are entitled to them will only be
entitled to the consideration received for liquidation of the investments, minus
any expenses, commission and mandatory payments related to said investment and
management of the trust and minus the Trustee’s fees.
9.10. |
Register
of Debenture holders |
The
Company will, at its registered address, maintain a Debenture holders’ Register
which will list the names of owners of debentures (Series A), their addresses
and the numbers and par value of their debentures. The Register will also record
any transfer of debentures (Series A), in compliance with the Trust
Deed. The
Trustee and all holders will be entitled to review said Register at any
reasonable time. The Company may close the Register from time to time for a
period or periods that will not, in total, exceed 30 days a year.
The
Company will not be obligated to enter in the Register any notice regarding any
express, implied or hypothesized trust, liens or encumbrances of any kind or any
equitable rights, claims or setoff rights in connection with the debentures. The
Company will only recognize the title of the person in whose name the debentures
are registered, provided that his/her lawful heirs, executors or administrators
or any person entitled to the debentures following the bankruptcy of any
registered holder (or, in case of a corporation - following its dissolution),
are eligible to be registered as holders subject to the provision of sufficient
evidence so as to satisfy the Company's management that they are indeed entitled
to be registered as holders.
9.11. |
Modification
of Rights |
The
rights appurtenant to the debentures (Series A) may be modified as provided in
Paragraph 9.22 below.
All the
debenture certificates (Series A) may be split into debenture certificates
(Series A) so that the total value of the principal of the resulting debentures
equals the par value of the original debenture, and provided that the par value
of the new debentures is in new Israeli shekels (NIS), in whole numbers. Such
split may be effected against the delivery of the original debenture that is to
be split to the Company at its registered address. Such
split will be effected within 30 days of the end of the month at which the deed
was delivered at the Company’s registered address.
Any
fraction of the debenture may be transferred, provided that said amount is in
NIS and in whole numbers and provided that the transfer is in compliance with a
transfer deed whose language is as practiced by the Company for the purpose of
transferring stock and which is duly signed by the registered holder of the
debenture or by his/her lawful representative.
The
transfer deed is to be submitted for registration to the Company at its
registered address, together with the debenture and any suitable document
substantiating the identity of the holder and his/her right to transfer as the
company may request, and together with certification, to the Company’s
satisfaction, that stamp tax and any other mandatory payments have been paid.
The Company may choose to keep the transfer deed.
The
Company’s articles of association on stock transfers will govern the transfer or
assignment of debentures, mutatis
mutandis.
Any other
expenses related to the split and/or transfer of debentures, including stamp
tax, handling fees and other duties, if any apply, will be covered by the holder
of the debenture seeking such split and/or transfer, as relevant. The provisions
of this paragraph will also govern in case of waiver, mutatis
mutandis.
The rate
for conversion of debentures (Series A) is as follows: From
registration and until March 31, 2008 (inclusive), every NIS 40 par value of the
debentures (Series A) will be convertible into a single ordinary share of NIS
0.01 par value (hereinafter: “The First Rate of Conversion”).
As of
April 1, 2008 (inclusive), every NIS 50 par value of the debentures (Series A)
will be convertible into a single ordinary share of NIS 0.01 par value
(hereinafter: “The Second Rate of Conversion”) (subject to adjustments as
detailed in Paragraph 9.14 below). (The First and Second Rates of Conversion
will hereinafter be referred to collectively as: “The Conversion
Rate”).
On each
trading day in each of the years 2008 through 2014, starting on the date of
listing of the debentures (Series A) and until March 16, 2015 (inclusive), and
except for March 17 through April 1, (every such day will hereinafter be
referred to as “Conversion Date” and the deadline for conversion, namely, March
16, 2015, will hereinafter be referred to as “End of the Conversion Period”),
the debentures (Series A) still in circulation at the time shall be convertible
into fully paid-up registered Company shares, par value NIS 0.01 each
(hereinafter: “The Conversion Stock”). Conversion notice forms may be obtained
at the Company’s registered address and at any other location the Company
designates.
Any
holder of debentures (Series A) wishing to exercise his/her right to convert the
principal (nominal, in NIS) of unconverted debentures (Series A) (hereinafter:
“The Applicant”) is to submit written notice directly to the Company, using the
form designated by the Company for this purpose, of such intention. Notice shall
be submitted at the Conversion Dates and in any case prior to the End of the
Conversion Period. Said notice is to be submitted to the Company at its
registered offices or anywhere else it may designate for this purpose, or
through the banks or members of the stock exchange. Applicant is to attach the
debenture or allotment letter, as relevant. (Hereinafter: “Conversion Notice”).
The
Applicant will, at any time that the Company so requests, sign any additional
document required under the law and under the Company’s directives in order to
render the allotment of the Conversion Stock effective. The date when the
clearing office of the TASE (hereinafter: “The Clearing Office”) receives notice
from a TASE member of the conversion of a debenture, will be deemed "The
Conversion Date". In this context, conversion notice received by the Clearing
Office after 12 o’clock noon, will be deemed to have been received on the next
business day. The Company’s board of directors may empower any person, at the
board's discretion, to sign any other document that may be required for the
issue of Conversion Stock for and on behalf of the Applicant. Fractions of
debentures or allotment letters may not be converted, but Applicants may split
them as described above.
The
procedures of the Clearing Office regarding the timetable for exercise of a
debenture (Series A) conversion notice provide the following:
9.13.1.
|
TASE
members that receive customers’ conversion notices by 12 o'clock noon are
to transfer these notices to the Clearing Office no later than 12 o’clock
noon on the following day on which trading takes place at the
TASE; |
9.13.2.
|
If
the Clearing Office receives a conversion notice from a TASE member by 12
o'clock noon, it will credit the nominee company by 12 o’clock noon on the
trading day immediately following the day on which it received said
notice; |
9.13.3.
|
Should
the nominee company receive a conversion notice as provided in
sub-paragraph 9.13.2 above by 12 o'clock noon, it is to forward the notice
to the Company’s offices no later than 12 o’clock noon on the on the
following trading day; |
9.13.4.
|
Any
of the notices referred to in sub-paragraphs 9.13.1 through 9.13.3 that
are received after 12 o’clock noon on a trading day, shall be deemed to
have been received before 12 o’clock noon on the following day of
trading. |
Notwithstanding
the above, on the last Conversion Date before final redemption or ex partial
redemption, as relevant, TASE members are to forward all final conversion
notices by 12 o’clock noon to the Clearing Office. Conversion will take place
that same day. TASE
members that do not submit the notice by said hour will be consider to not have
exercised their conversion right. If the last Conversion Date before any partial
repayment date or before the last conversion date is not a trading day, the last
Conversion Date will be deferred to the next trading day immediately thereafter.
Any part
of the debentures (Series A) that is not converted by the End of the Conversion
Period will not entitle the holder to any right of conversion, and the right to
convert such debentures into stock will be null avoid at all subsequent times.
Conversion
notices submitted to the Company may not be altered or revoked.
Applicants
will not be entitled to a fraction of a Conversion Stock. However, if a
conversion yields excess, the Company will sell the excess on the TASE within 30
days after the excess accrues to whole shares in an amount that can reasonably
be put up for sale on the TASE, considering the relevant costs. Net income less
the cost of sale, commissions and any other mandatory payments, will be paid to
the rightful holders, pro rata, within 15 business days of the sale. However,
the Company will not send out checks for amounts lower than NIS 50.
The
Company will allocate the Conversion Stock to the Applicants within two trading
days from the Conversion Date. By the end of the month following the date of
stock issue, the Company will give each Applicant the relevant stock
certificates. The Company will use all the means available to it to have the
Conversion Stock listed for trading on the TASE within 3 days
thereafter.
Conversion
Stock will entitle holders to full dividend and any other distribution for which
the Date of Record occurs at or before the Conversion Date. Conversion Stock
will, for all intents and purposes, grant equal rights to the ordinary shares
comprising the Company’s share capital at that date.
Converted
debentures (Series A) will be removed from circulation upon conversion and will
be null and void retroactively to the date on which stock was issued for their
conversion. Such debentures will not entitle holders to any interest (including
accrued interest) after the payment of interest in respect of the last Date of
Record prior to the conversion date, nor will they entitle holders to any
indexation on the principal that may have accrued under the terms provided
herewith had the Applicant not exercised his/her right of
conversion.
9.14. |
Instructions
Protecting Holders During the Conversion
Period |
Distribution
of Bonus Shares
Should
the Company distribute bonus shares immediately after the date controlling
eligibility for such shares (for the purposes of this sub-paragraph:
“Controlling Date”), the number of Conversion Stock to which debenture holders
will be entitled upon conversion will increase. The increase will be calculated
by adding the same number of Conversion Stock to which the holders would have
been entitled as bonus shares had they converted their debentures at the
Controlling Date.
In case
of issues (including to interested parties) that do not constitute distribution
of bonus shares, the number of Conversion Stock will not increase. However, in
case of a rights issue, the provisions of this paragraph will apply, as detailed
below.
Rights
Offering
Should
the Company offer its shareholders securities of any kind, the number of
Conversion Stock and the conversion rate for a single Conversion Stock will not
decrease. However, the Company must offer the holders of debentures (Series A)
or see that they are offered the same rights under the same terms to which they
would have been entitled had they converted their debentures (Series A) prior to
the Controlling Date for the rights issue.
Dividend
Distribution
Should
the Company distribute dividends, rights of holders of debentures (Series A)
will be protected, by adjusting the conversion rate of the debentures (Series A)
as provided below:
9.14.1.
|
The
ratio between the value of the Company’s traded stock, as determined by
the TASE and adjusted to reflect the dividend distribution (ex dividend),
and the value of the stock at the end of the Controlling Date, will be
calculated immediately after the Controlling Date (hereinafter: “Dividend
Ratio”). |
9.14.2.
|
The
conversion rate of the debentures (Series A) will be adjusted by
multiplying the previous conversion rate and the Dividend Ratio.
|
The
Company will announce the adjusted conversion rate no later than the day on
which the stock is traded ex dividend.
The
aforementioned adjustment methods may not be revised.
9.15. |
General
Instructions Protecting Holders during the Conversion
Period |
As of the
publication of this prospectus and as long as the debentures (Series A) issued
thereunder are not converted or repaid, and in any case no later than the End of
the Conversion Period, the following provisions will apply:
9.15.1.
|
The
Company will not distribute bonus shares if such distribution might
decrease the value of Conversion Stock below their par value.
|
9.15.2.
|
The
Company will not distribute cash dividends and/or bonus shares and/or make
a rights issue if the date controlling the right to such distribution is
less than 10 business days after the date on which the board of directors
adopts the resolution authorizing said
distribution. |
9.15.3.
|
The
Company shall provide a copy of its most recent financial statement as
well as subsequent interim financial statements at its registered address
or anywhere else as the Company may announce. Holders of debentures
(Series A) will be able to review these statements during regular business
hours. Upon written request of any holder of the debentures (Series A),
the Company will send such holder a copy of said
statements. |
9.15.4.
|
Within
ten days of any distribution of bonus shares and/or rights issue and/or
dividend distribution and/or adjustment of the conversion rate as
described above, the Company will publish notice in two widely circulated
Hebrew language daily papers in Israel regarding the entitlement of
holders of debentures (Series A) to convert their debentures. The notice
will specify the Conversion Period and rate and the number of Conversion
Stock to which a holder will be entitled if he converts his stock.
|
9.15.5.
|
Except
subject to the approval of holders of debentures (Series A) as provided in
the Trust Deed, the Company will not modify the rights appurtenant to
ordinary NIS 0.01 par value stock and will not issue any new class of
stock that entitles their holders to the remainder of the Company’s assets
upon dissolution. |
9.15.6.
|
The
Company will maintain a sufficient quantity of ordinary NIS 0.01 par value
stock in its registered share capital to enable the conversion of all the
debentures in circulation. If necessary, the Company will have its
registered share capital increased for this
purpose. |
9.15.7.
|
No
later than three weeks and no earlier than four weeks after the End of the
Conversion Period, the Company will publish notice, and shall send written
notice to all holders of the Series A debentures whose names appear, one
month before the End of the Conversion Period, in the Debenture holders'
Register of the debentures (Series A), and shall send copies to the
Securities Authority and to the Trustee, of the deadline for converting
the debentures (Series A). Said notice will be published in two widely
circulated Hebrew language daily papers in Israel. Said notice will
specify the conversion rates and the number of Conversion Stock and bonus
stock to which a holder of debentures (Series A) would be entitled through
such conversion. |
9.15.8.
|
Should
there be a change in the par value of the Company’s stock of the same
class as that of the Conversion Stock or of the additional conversion
stock that is issued due to conversion of debentures (whether the Company
consolidates the ordinary issued NIS 1 par value stock so as to create
stock of greater par value or whether it splits the stock to stock of
lower par value), the same change will apply respectively to the
Conversion Stock and additional conversion stock as well. However, holders
of debentures (Series A) will not be entitled to receive share fractions.
Once the excess fractions accrues to whole shares in an amount that can
reasonably be put up for sale on the TASE, the Company will sell all such
excess on the TASE over a one-month period after said allocation. Net
income less the cost of sale, commissions and any other mandatory
payments, will be paid to the rightful owners within 15 days of the sale.
However, the Company will not send out checks for less than NIS
50. |
9.15.9.
|
Tel
Aviv Stock Exchange bylaws prohibit any modification to the indexation
method, conversion rate and dates, adjustment mechanism for issue of bonus
stock and adjustment mechanism for rights issue relating to the debentures
(Series A). |
Notwithstanding
the above, TASE bylaws permit the Company to modify the conversion rate or
period, provided it is done in compliance with an agreement or settlement
approved by the court, in adherence to Article 350 of the Companies' Law,
1999.
9.16. |
Voluntary
Dissolution |
In case
of voluntary dissolution, the Company will issue written notice to all holders
of debentures (Series A) and to the Trustee. The Company will also publish such
notice in two widely circulated Hebrew language daily papers in Israel. Any
holder of debentures (Series A) may, within 3 months of the date of notice,
inform the Company in writing of his intention to be deemed to have exercised
his right of conversion immediately prior to the Company’s resolution regarding
voluntary dissolution. In such
case, the holder will be entitled to the same amount he would have been entitled
upon dissolution had he owned the Conversion Stock prior to the resolution, less
an amount equal to the interest and/or indexation that has already been paid for
the debentures (Series A) at or after the date of the resolution (excepting
interest and/or indexation whose scheduled date of payment was prior to the date
of the resolution, even if actual payment was at or after the date of the
resolution). Also, if the amount payable to shareholders upon voluntary
dissolution exceeds the principal of the debentures plus interest and
indexation, debenture holders will be deemed to have converted the debentures
into stock prior to the dissolution resolution.
9.17. |
Early
Repayment of Debentures (Series
A) |
Should
the TASE decide to delist the debentures (Series A) in circulation because the
value of such debentures held by the general public falls below an amount set
forth in the bylaws of the TASE concerning delisting, the Company will proceed
as follows:
9.17.1.
|
Within
45 days of the resolution of the TASE board of directors, the Company will
announce a date for early redemption, on which holders of debentures
(Series A) may cash their securities. Notice of early redemption will be
published in two widely circulated Hebrew language daily papers in Israel
and given in writing to all registered holders of debentures (Series
A). |
9.17.2.
|
Early
redemption will be between 30 and 45 days after publication of said
notice, but will not occur between the Date of Record for payment of
interest and actual payment of interest. |
9.17.3.
|
On
the date of early redemption, the Company will repay the debentures
(Series A) that holders seek to liquidate, according to the par value
balance plus indexation to the CPI and any interest that accrued on the
principal |
Holders
of debentures (Series A) who exercise early payment as noted above, will not be
entitled to interest for the period after redemption.
The
conversion and redemption rights attached to the debentures (Series A) that are
not repaid through early redemption in case of delisting as noted above, will
not be affected by such early repayment. However, the debentures will be
delisted from trading on the TASE. One of the implications will be
taxation.