B. Communications Ltd.
Annual Report 2020
Chapter A - Description of the corporation's business
Chapter B - Report of the Board of Directors on the state of the corporation's business
Chapter C - Financial statements
Chapter D - Additional details on the corporation and corporate governance questionnaire
Chapter E - Report on the effectiveness of internal control
THIS DOCUMENT IS AN ENGLISH TRANSLATION OF THE HEBREW VERSION OF
THE COMPANY’S FINANCIAL STATEMENTS AND THE MANAGEMENT DISCUSSION
AND ANALYSIS FOR THE YEAR 2020 (THE “REPORTS”). THE HEBREW VERSION OF
THE REPORTS IS THE BINDING VERSION AND THE ONLY VERSION HAVING LEGAL
EFFECT. THE ENGLISH TRANSLATION HAS BEEN CREATED FOR THE PURPOSE OF
CONVENIENCE ONLY. THE APPROVAL OF THE COMPANY’S BOARD OF
DIRECTORS WAS GIVEN TO THE HEBREW VERSION ONLY AND NO SUCH
APPROVAL HAS BEEN GIVEN TO THE ENGLISH TRANSLATION. THIS ENGLISH
TRANSLATION WAS NOT SUBMITTED TO THE ISRAELI SECURITIES AUTHORITY
AND IS NOT REVIEWED BY ANY REGULATORY AUTHORITY.
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Chapter A
(Description of the Corporation's
Business)
For the 2020 Periodic Report
ב
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Chapter A - Description of the Corporation's Business - Table of Contents
1. Description of the general development of the Group's business
1
1.1. Group activity and description of the development of its business ........... 1
1.2. Areas of activity ....................................................................................... 9
1.3.
Investments in the corporation's capital and transactions in its shares .. 10
1.4. Dividend distribution............................................................................... 10
1.5. Financial information regarding the areas of activity of the Group ......... 10
1.6. Forecast in relation to the group ........................................................... 16
1.7. General environment and the influence of external factors on the group's
activities ................................................................................................. 17
1.8. Bezeq Group business strategy ............................................................. 30
1.9.
Incident outside the scope of the corporation's business ....................... 31
2. Bezeq – Landline interior communications
33
2.1. General information about the field of activity ........................................ 33
2.2. Products and services ............................................................................ 37
2.3. Products and services revenue segmentation ....................................... 40
2.4. Customers ............................................................................................. 40
2.5. Marketing, distribution and service......................................................... 40
2.6. Competition ............................................................................................ 40
2.7. Fixed assets and facilities ...................................................................... 46
2.8.
Intangible assets .................................................................................... 51
2.9. Human capital ........................................................................................ 51
2.10. Equipment and suppliers ....................................................................... 54
2.11. Working capital ...................................................................................... 55
2.12. Investments ........................................................................................... 55
2.13. Funding .................................................................................................. 55
2.14. Taxation ................................................................................................. 57
2.15. Environmental risks and ways of managing them .................................. 57
2.16. Restrictions and supervision of Brezeq’s operations ............................. 58
2.17. Material agreements .............................................................................. 78
2.18. Legal Proceedings ................................................................................. 79
2.19. Goals and Business Strategy ................................................................. 90
2.20. Discussion of risk factors ....................................................................... 91
3. Pelephone - Mobile radio (cellular telephony)
96
3.1. General information about the field of activity ........................................ 96
3.2. Services and products ........................................................................... 98
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
3.3. Products and services revenue segmentation ....................................... 99
3.4. Customers ............................................................................................. 99
3.5. Marketing, distribution and service....................................................... 100
3.6. Competition .......................................................................................... 100
3.7. Fixed assets and facilities .................................................................... 101
3.8.
Intangible assets .................................................................................. 102
3.9. Human capital ...................................................................................... 105
3.10. Suppliers .............................................................................................. 106
3.11. Working capital .................................................................................... 107
3.12. Taxation ............................................................................................... 107
3.13. Environmental risks and ways of managing them ................................ 107
3.14. Restrictions and supervision of Pelephone’s operations ...................... 108
3.15. Material agreements ............................................................................ 112
3.16. Legal proceedings................................................................................ 112
3.17. Goals and business strategy ................................................................ 116
3.18. Expected development in the coming year .......................................... 116
3.19. Discussion of risk factors ..................................................................... 117
4. Bezeq International - Internet, international communications and
121
network endpoint services
4.1. General ................................................................................................ 121
4.2. Products and services .......................................................................... 122
4.3. Revenue .............................................................................................. 123
4.4. Customers ........................................................................................... 123
4.5. Marketing, distribution and service....................................................... 124
4.6. Competition .......................................................................................... 124
4.7. Fixed assets and facilities .................................................................... 125
4.8. Human capital ...................................................................................... 125
4.9. Suppliers .............................................................................................. 127
4.10. Taxation ............................................................................................... 127
4.11. Restrictions and supervision of Bezeq International's activities ........... 127
4.12. Legal proceedings................................................................................ 128
4.13. Goals, business strategy and development prospects ......................... 130
4.14. Discussion of risk factors ..................................................................... 130
5. DBS - Multi-channel TV
133
5.1. General information about the field of activity ...................................... 133
5.2. Products and services .......................................................................... 136
5.3. Revenue from products and services ................................................... 137
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
5.4. Customers ........................................................................................... 137
5.5. Marketing and distribution .................................................................... 138
5.6. Competition .......................................................................................... 138
5.7. Production capacity.............................................................................. 139
5.8. Fixed assets, real estate and facilities ................................................. 140
5.9.
Intangible assets .................................................................................. 141
5.10. Broadcasting rights .............................................................................. 141
5.11. Human capital ...................................................................................... 142
5.12. Suppliers .............................................................................................. 144
5.13. Financing .................................................. Error! Bookmark not defined.
5.14. Taxation ............................................................................................... 144
5.15. Restrictions and supervision of DBS .................................................... 144
5.16. Substantial agreements ....................................................................... 147
5.17. Legal proceedings................................................................................ 148
5.18. Goals and strategy ............................................................................... 151
5.19. Discussion of risk factors ..................................................................... 152
6. Appendix A - Definitions
160
7. Appendix B - Financial Indices and Key Performance Indicators
164
ה
Chapter A - Description of the corporation's business
Israeli
B. Communications Ltd.
Telecommunications Corporation Ltd. ("Bezeq") and Bezeq’s wholly owned subsidiaries, whose financial
statements are consolidated with Bezeq's statements, will be called together in this periodic report - "the
Group” or "Bezeq Group".
the subsidiary Bezeq
(“the Company")
together with
the
For convenience, Appendix A this chapter contains a glossary of terms in relation to the key terms
mentioned in it.
1. Description of the general development of the Group's business
1.1. Group activity and description of the development of its business
1.1.1. General
The Company was incorporated in Israel in 1999 under the name Gold E Ltd. and on March
16, 2010 changed its name to its current name. From its inception until October 2007, the
Company was fully owned by Internet Gold Ltd., in October 2007 the Company's shares
were first issued on the NASDAQ stock exchange and in November 2007 the Company's
shares were listed on the Tel Aviv Stock Exchange under the double listing arrangement.
On December 2, 2019, the transaction with Searchlight II BZQ LP and a corporation
controlled by the Fuhrer family (TNR Investments Ltd.) was completed, in which control of
the Company and Bezeq was transferred to these entities, following the liquidation of
Eurocom Communications Ltd., in which the holdings in the Company of its subsidiary,
Internet Gold, were sold.
On September 9, 2020, the Company announced the voluntary delisting of its shares from
trading on the NASDAQ Stock Exchange, and as of that date, the Company's securities
are traded on the Tel Aviv Stock Exchange only and the Company is a “reporting
corporation” within the meaning of this term in the Securities Law, 5759-1999. ("Securities
Law").
As of April 14, 2010, the Company operates in the field of communication, through its
holdings in Bezeq shares.
1.1.2. Acquisition of control of Bezeq
On April 14, 2010, the Company completed an acquisition of 30.44% of the issued and
paid-up capital and voting rights in Bezeq, in exchange for a total amount of approximately
NIS 6.5 billion in cash and became the largest shareholder in Bezeq and as of the financial
statements Bezeq's finances.
As of the date of this report, the Company holds approximately 26.72% of Bezeq's issued
and paid-up capital. For Bezeq shares acquired by the Company during the reporting
period, see section 1.3 below.
For further details regarding the control of the Company and the control permit in
connection with the Company's holding in Bezeq shares, see section 1.1.4 below.
1.1.3. Bezeq Group - General
As of the date of publication of this periodic report, Bezeq Group is a major provider of
communications services in the State of Israel. Bezeq Group performs and provides a wide
range of Bezeq operations and Bezeq services, including landline interior communication
services, mobile radio telephone services (cellular telephony), international communication
services, and multi-channel television services over satellite and over the Internet (OTT),
Internet infrastructure and access services, call center services, maintenance and
development of communication infrastructure, providing communication services to other
communication providers, including wholesale market services, distribution of television
and radio broadcasts, supply and maintenance of equipment and services in customer
premises (network endpoint services).
Bezeq was established in 1980 as a government company to which Bezeq's activities that
had taken place up to that date in the Ministry of Communications were transferred, and it
was privatized over the years. Since 1990, Bezeq has been a public company whose
shares are traded on the Stock Exchange.
Below is a diagram of the structure of the holdings in the Group as of the date of approval
of the report (March 25, 2021):
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
CThe
ompany
(*)
26.72
%
Bezeq Israel Telecommunications Corporation Ltd.
100
%
Bezeq
Online
100%
100%
Bezeq
international
100
%
Pelephone
(*) Regarding the Company and the control of Bezeq - see sections 1.1.1, 1.1.2 and 1.1.4 in this
chapter.
Regarding Walla - following previous decisions of Bezeq's Board of Directors regarding the Bezeq
Group's business strategy, including activities for the sale of the subsidiaries Bezeq Online and
Walla, on December 27, 2020, Bezeq's transaction with Jerusalem Post Ltd. (“the Buyer") was
completed for the sale all of Bezeq's holdings in Walla, in exchange for a total of NIS 65 million, of
which NIS 55 million in cash, and the balance through Bezeq's entitlement to receive from the Buyer
and Walla (and entities related thereto) advertising space for a period of up to 7 years from the date
of completion of the transaction. Accordingly, as of the aforesaid date, Walla is not a subsidiary of
Bezeq, and it should be noted that the sale agreement included Bezeq's obligation to indemnify the
Buyer in certain circumstances.
1.1.4. Company control
On December 2, 2019, a debt arrangement was completed between the Company and its
bondholders, as part of which Searchlight II BZQ LP and a corporation controlled by the
Fuhrer family (TNR Investments Ltd.) purchased control of
the Company (and
consequently, the control ofBezeq). The Company holds Bezeq through a company under
its full (indirect) control, B. Communications (SP2) Ltd.1. In this regard, see also Bezeq's
immediate report dated December 2, 2019 regarding the Company's announcement of the
completion of the said transaction, as well as Bezeq's immediate reports dated January 2,
2020 regarding the holdings of stakeholders and those who became stakeholders in the
corporation.
As of the date of completion of the debt arrangement as stated above, the controlling
shareholders of the Company are Searchlight II BZQ LP, a limited partnership incorporated
in the Cayman Islands ("Searchlight") and TNR Investments Ltd. ("TNR"), a private
company incorporated in Israel. The final general partner of Searchlight is Searchlight
Capital Partners II GP LLC, a limited liability company incorporated in the State of
Delaware, which is held by a number of individuals including Eric Zinterhofer, Erol Uzumeri
and Oliver Harmaann, the latter being among the only ones to receive the Company's
control permit from the Ministry of Communications. TNR is wholly owned and fully
controlled by Mr. David Fuhrer (50%) and Mrs. Michal Fuhrer (50%). Searchlight and TNR
are considered controlling shareholders in the Company by virtue of a control permit dated
1 714,169,560 of Bezeq shares are owned by B Communications (SP2) Ltd., a private company registered in Israel, which is wholly
owned and fully controlled by B Communications (SP1) Ltd., a private company registered in Israel. B Communications (SP1) Ltd.
is wholly owned and fully controlled by the Company. In addition to the above, 24,784,153 shares of Bezeq shares are directly
owned by the Company.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
November 11, 2019 and by virtue of a voting agreement between them which gives them
a cumulative holding, as of the date of publication of this report, of approximately 72% of
the voting rights in the Company.
To the best of the Company's knowledge, the shareholders' agreement between
Searchlight and TNR includes, among other things, a provision according to which as long
as the holdings of an "Israeli factor" in Bezeq's controlling shareholder are required,
Searchlight will grant TNR power of attorney regarding the amount of shares that will allow
TNR to vote at the general meetings of the Company, an amount of shares equal to: (a)
the number of shares held by TNR on the effective date of the meeting, or (b) the number
of shares that reflects 19% of the issued capital and voting rights in the Company on the
effective date of the meeting, whichever is higher. To the best of the Company's knowledge,
the shareholders' agreement includes additional provisions, including an obligation by
Searchlight to refrain from voting for the approval of certain issues without the consent of
TNR.
The control permit
On November 11, 2019, the Minister of Communications, by virtue of his authority and by
virtue of the Prime Minister's authority (jointly: "the Ministers") transferred thereto, granted
Bezeq control permits under Article 4D of the Communications Law and Article 3 of the
Communications Order (Bezeq and Broadcasting) (Determination of Essential Service
Provided by Bezeq the Israel Telecommunications Coropration Ltd.), 5757-1997
("Communications Order"), as follows:
a. A control permit for corporations is given to the Company and two private
companies wholly owned by the Company2, Searchlight Corporations, and TNR
("Permit for Corporartions").
b. A control permit for individuals to hold means of control in Bezeq and to control it
is given to Michal Fuhrer, David Fuhrer, Oliver Harmaann, Erol Uzumeri, Eric
Zinterhofer, and Darren Glatt3 ("Permit for Individuals").
The Permit for Corporations and the Permit for Individuals will be jointly referred to as "the
Control Permits" and the parties to whom such permits were granted will be referred to as
"the Permit Holders".
The Control Permits were issued for the control and possession of means of control in
Bezeq at a minimum rate of not less than 25%4. The control permits allow the Permit
Holders to control Bezeq directly and indirectly, and they also allow Searchlight and TNR
to make a "joint appointment" of directors, as defined in the Communications Order, in
Bezeq and the Company.
The Control Permits also stipulate provisions regarding the minimum holding rate in Bezeq
of an "Israeli entity" as defined in the Communications Order5.
Preconditions set out in the Control Permits
The control permit stipulates, inter alia, as follows:
2 B Communications (SP1) Ltd. and B Communications (SP2) Ltd.
3 The permit is given to Mr. Darren Glatt for his status in Searchlight in the context of the acquisition of control of the Company. In addition, he
serves as Chairman of the Company's Board of Directors and as a director in Bezeq.
4 The minimum rate is defined as 25% of any type of means of control in Bezeq, or a lower rate according to the approval of the Ministers by virtue
of Article 3 (a2) of the Communications Order. The minimum rate may change if the Minister of Communications becomes convinced that the
conditions set forth in Article 3 (a3) of the Communications Order are met.
5 The Control Permits were issued subject to the fact that David and Michal Fuhrer are citizens and residents of Israel, and it is stipulated therein
that as long as the Communications Order requires the possession of a means of control by an Israeli entity, as defined in the Communications
Order, TNR and / or Michal Fuhrer and David Fuhrer will not transfer means of control in Bezeq without the prior written approval of the
Ministers, if such a transfer is sufficient to reduce their holdings, as the case may be, in means of control of any kind in Bezeq to a rate lower
than the minimum rate according to the Communications Order. It was also determined that any change in the Israeli citizenship and residency
of Michal Fuhrer and David Fuhrer would constitute a ground for revoking the control permit. In July 2020, after a hearing, the Ministry of
Communications changed the requirement for the holding of a minimum percentage of means of control in a general licensee by an Israeli entity
and expanded the discretion of the Ministers to approve holdings by non-Israeli entities. Following this, the Ministry of Communications
amended the licenses of Cellcom and Partner, but the intended amendment proposed at the hearing in the Communications Order applicable to
Bezeq has not yet been implemented.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
"3.1. The Articles of Association of BCOM, Bezeq and its subsidiaries
must include instructions as detailed below:
A.
The method of appointing the directors set forth in the Company's
Articles of Association will not be changed without the prior written
approval of the Minister of Communications;
B. The Company shall report to the Ministers on a holder of a means
of control therein holding excess holdings as soon as it becomes
aware of the existence of such excess holdings;
C. The Company shall report to the Ministers on the transformation
of a shareholder therein into a stakeholder in Bezeq within 48
hours from the date the Company became aware of the change.
3.2.
The Articles of Association of the subsidiaries must include
provisions regarding the rights of the Israeli entity, as defined in
the Communications Order, for the appointment of directors
the
therein,
Communications Order;"
in accordance with Article 4(a)(2)(b)(2) of
In accordance with the above, the Company amended its Articles of Association as
required.
On April 2, 2020, Bezeq’s Board of Directors convened a general meeting of Bezeq
shareholders for May 14, 2020, on the agenda of which is the amendment of Bezeq’s
Articles of Association in the wording requested by BCOM, as follows:
"After Regulation 95 of the Articles of Association, Regulation 95A shall
be added as follows:
95 a.
The method of appointing the directors set forth in the
Company's Articles of Association will not be changed without prior
written approval from the Minister of Communications;
After Regulation 42, Regulations 42A and 42B shall be added to the
Articles of Association as follows:
42 a.
The Company shall report to the Ministers as defined in
the Communications Order, on a holder of a means of control therein
holding excess holdings therein as defined in the Communications
Order, as soon as it becomes aware of the existence of such excess
holdings;
The Company shall report to the Ministers on the
42 b.
transformation of a shareholder therein into a stakeholder in Bezeq
within 48 hours from the date the Company became aware of the
change."
Bezeq's Board of Directors attached to the above summons a recommendation according
to which "it was found that the requested changes in the Company's Articles of Association
are in favor of the Company and all its shareholders”. Of Bezeq that took place on
14.5.2020 did not approve the company's request to amend Bezeq's regulations as
required by the control permit.
Regarding the manner of amending each of the Articles of Association of each of the
subsidiaries (in order to include in each Articles of Association the provisions of Article
4(a)(2)(b)(2) of the Communications Order, regarding the rights of the Israeli entity, as
defined in the Communications Order, to appoint directors in subsidiaries) - it was agreed
that the amendment of the subsidiaries’ Articles of Association will be made after the
amendment of Bezeq’s Articles of Association.
The lien permit
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
On November 11, 2019, Resnik Paz Nevo Trust Ltd. was granted, as a trustee for
bondholders issued by the Company (“the Trustee") by the Ministers, a permit to hold
means of control in Bezeq by way of encumbrance on the entire shares held by the
Company, directly or indirectly, pursuant to Article 4d of the Communications Law and
section 3 of the Communications Order ("the Lien Permit").
The Lien Permit stipulates that it constitutes a permit for holding or operating means of
control in Bezeq by way of lien only, and it does not constitute a permit for control or transfer
of control in Bezeq. In addition, it was determined that the rights granted to the Trustee and
anyone holding bonds in the framework of which bonds were pledged to the Trustee for
Bezeq should not be considered a transfer of ownership of the means of control of Bezeq,
but only a lien as collateral.
In addition, the Lien Permit includes restrictions on the procedures for exercising the lien
by virtue thereof, taking into account, among other things, the provisions of the
Communications Order, including provisions according to which the lien will be carried out
only by appointing a receiver and trustee whose identity has been approved by the
Ministers according to various parameters specified in the permit. In addition, similar to the
control permits as detailed above and the reuiqred changes, the Lien Permit also includes
provisions allowing the Ministry of Communications to revoke it, including in circumstances
of concern of harming State security or vital public needs and other cases6 in which, If the
Ministers see that there is a real concern of harm to the provision of the essential service
by Bezeq or the ground for determining it as an essential service, the Ministers will be
entitled to act as stated in the Communications Order, including the issue of provisions and
revocation of the permit.
Contacts with the Ministry of Communications
The Company updated the Ministry of Communications on contacts between the Company
and Bezeq in connection with the amendment of the Articles of Association as stated
above.
On May 17, 2020, BCOM updated the Ministry of Communications on the results of Bezeq's
general meeting, and attached the minutes of the general meeting dated May 14, 2020.
In view of the Company's efforts to approve the amendment of the Articles of Association,
the Company appealed to the Ministry of Communications to refrain from taking steps in
connection with Article 3.5 of the control permit (the article requiring the amendment of the
Articles of Association) until the steps to implement the amendment are exhausted.
On October 28, 2020, the Company applied to the Ministry of Communications to cancel
the condition set forth in the control permit granted to it in connection with its holdings in
Bezeq shares, to make amendments to Bezeq's and Bezeq's subsidiaries' Articles of
Association, after Bezeq's general meeting rejected the amendment. Among other reasons,
the Company claims that the requested amendments anchor provisions that in any case
exist in the Communication Order and other laws, and therefore do not create a new law
and are not required.
1.1.5. In accordance with the decision of Bezeq’s Board of Directors dated Spetember 4,
2007 in accordance with Article 50(a) of the Companies Law and in accordance with
Regulations 119 and 121 (1) of Bezeq’s Articles of Association - the powers of the
CEO in all matters related to the corporations held, directly or indirectly, by Bezeq
(Including Pelephone, Bezeq International, DBS And Bezeq Online) were transferred
to the Board.
1.1.6. Mergers, acquisitions and structural changes
Bezeq and DBS merger
Until March 25, 2015 Bezeq held about 49.78% of the shares of DBS, and owned options
that conferred thereon the right to about 8.6% of the shares of DBS and which Bezeq was
prevented from exercising. The balance of DBS shares was held by Eurocom DBS7.
6 Including - inaccuracies in the data submitted in the permit application, failure on the part of the Trustee to provide a report as
required or a material change in the details provided by the Trustee, and failure on the part of the Trustee on behalf of the
bondholders to apply for the appointment of a receiver and trustee on the dates determined in the permit.
7 A company that was (indirectly) controlled by Shaul and Yosef Elovich, who controlled the Company at the time.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
On March 25, 2015, Bezeq exercised the options free of charge, and on June 24, 2015,
Bezeq completed a transaction in which it acquired all the holdings of Eurocom DBS in
DBS, as well as all the owner loans that Eurocom DBS provided to DBS (approximately
NIS 1,538 million as of December 31, 2014) ("The Acquisition Transaction").
Upon completion, Bezeq transferred to Eurocom DBS the cash consideration for the
Acquisition Transaction in the amount of NIS 680 million. Upon completion of the said
Acquisition Transaction, DBS became a wholly owned (100%) subsidiary of Bezeq.
It should be noted that in accordance with the terms of the Acquisition Transaction, in
addition to the cash consideration of NIS 680 million, the consideration also included two
additional conditional consideration as follows:
a. One additional consideration in the amount of up to NIS 200 million in accordance with
the tax synergy according to the terms defined in the Acquisition Transaction ("First
Conditional Consideration”). Most of the First Conditional Consideration was paid
after Bezeq entered into an assessment agreement and a taxation decision with the
Authority Taxes on financing revenue, owner loans, DBS losses and merger (See also
Notes 7 and 13.2 to the 2020 statements).
b. An additional consideration of NIS 170 million, according to the business results of DBS
in the years 2015-2017 ("Second Conditional Consideration"). Bezeq paid advances
on the Second Conditional Consideration in total of about NIS 119 million.
Depending on DBS's financial results for 2017 and since the final amount of the Second
Conditional Consideration was lower than the amount of advances that Bezeq paid to
Eurocom DBS for the same consideration, Eurocom DBS must return the difference to
Bezeq. In this context, Bezeq joined as a creditor in the liquidation process of Eurocom
Communications. In addition, following Bezeq's demand that Eurocom DBS pay Bezeq the
amount of the advance on the Second Conditional Consideration, together with interest as
stipulated in the agreement, after the targets entitling Eurocom DBS to this consideration
have not been achieved, on April 22, 2018, the Tel Aviv District Court, at Bezeq's request,
garnted an order to dissolve Eurocom DBS, and Bezeq’s attorney was appointed as the
liquidator of Eurocom DBS.
For details regarding conditions set forth in the Competition Authority’s approval of the
merger (within the meaning thereof in the Economic Competition Law) between Bezeq and
DBS, see section 2.16.8.3.
On December 25, 2016, a merger agreement was signed between Bezeq and DBS (“the
Merger Agreement") which is subject to the conditions set forth therein, which included,
inter alia, the receipt of various regulatory approvals from the Ministry of Communications,
the Minister of Communications and the Head of the Civil Administration, on the date of
completion of the merger, and retroactively from the effective date of the merger (December
31, 2016), all DBS activities will merge with and into Bezeq, without consideration, in
accordance with the provisions of Article 323 of the Companies Law and in accordance
with the provisions of Article 103B and Article 103C of the Income Tax Order 8, And DBS
will cease to exist as a separate legal entity.
The main purpose of the merger, from a business and economic point of view, is to
streamline the operations and activity of Bezeq and DBS and to consolidate them under
one legal entity in a manner that will result in savings in operating costs over the timeline.
As of the date of this report, the merger in accordance with the Merger Agreement has not
yet been carried out, in view of the non-fulfillment of the preconditions for the merger, in
particular the elimination of the structural separation in the Group (see section 1.7.2.1).
For further details regarding what is stated in this section, see also section2.20.5 and Note
13.2 to the 2020 statements. See also Bezeq's immediate reports dated December 23,
2016, December 25, 2016, December 26, 2016, December 28, 2016, December 29, 2016
and November 8, 2018 included in this report by way of reference.
Examiation of a plan for structural change in the subsidiaries
Bezeq examines ways to deepen the synergy and operational streamlining of the
8
Regarding taxation decision made on September 15, 2016 by the Tax Authority in the framework of an assessment agreement
signed between the Company and the Tax Authority, which includes preliminary approval for tax purposes by the Tax Authority
to merge DBS with and into the Company in accordance with Article 103B of the Income Tax Ordinance, see the Company’s
immediate report dated September 18, 2016.
6
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
subsidiaries Pelephone, Bezeq International and DBS (“the Subsidiaries"), in order to
maximize and unlock value in favor of each of them, among other things against the
background of structural separation restrictions imposed on it (see section 1.7.2.1).
In this context, on March 24, 2021, Bezeq's Board of Directors adopted the decisions of the
Subsidiaries' boards of directors to examine the deepening of the synergies and operational
streamlining in the Subsidiaries, based on the main outline that will include Bezeq
International's full and statutory merger with and into DBS (subject to regulatory approvals),
following the splitting of Bezeq International's integration activity into a new separate
corporation in the Group, while examining the deepening of the synergy between the
Subsidiaries by providing certain administrative services to the Subsidiaries by Pelephone.
The findings of the examination and the implementation plan for the examined change will
be brought for discussion and approval (as required) by Bezeq's Board of Directors ("the
Change Outline").
This decision comes against the backdrop of increasing service and business cohesion in
the industry, increasing competition in the subsidiaries' operating segments, the business
and regulatory changes that apply and are expected to apply to Bezeq International and
DBS and their activities, and the need to examine the deepening synergies and operational
streamlining in the Subsidiaries, in order to maximize and unlock value for the benefit of
each of the Subsidiaries.
The Change Outline will allow, among other things, optimal adjustment of the activities of
the Subsidiaries to the structure of the industry, and providing as uniform a response as
possible to the needs of customers, in terms of sales and service, which will contribute to
growth. As is well known, group synergy that also involves the Company is not possible at
this stage in view of the structural separation set forth in the Company's license, the
elimination of which the Ministry of Communications has not yet approved.
The move, insofar as it is completed, has the potential to contribute to the business results
of the subsidiaries, both as a result of improving the ability to sell and retain subscribers to
the companies' services and as a result of streamlining and reducing expenses estimated
at tens of millions of shekels per year. In addition, splitting the integration activity may also
unlock value for the Company.
The information contained in this section also includes forward-looking information, as
defined in the Securities Law, which is based on the Company's assessments, assumptions
and expectations, including in relation to market conditions, customer preferences and the
realization of the Change Outline, which may not materialize or materialize in a materially
different way that anticipated, according to developments in the communications market,
competition, regulatory approvals and other aspects.
For details regarding processes for sharing management resources and utilizing synergies
between the subsidiaries Pelephone, Bezeq International and DBS, see section1.8.
1.1.7. Investigations by the Israel Securities Authority and the Israel Police
Following the investigations of the Securities Authority from June 2017 and of the Securities
Authority and the Israel Police from February 2018 on suspicion of committing offenses
under the Securities Law and the Penal Code, 5737-1977 ("Penal Code"), in respect of
transactions related to the previous controlling shareholder in the Company and former
Chairman of Bezeq's Board of Directors, Shaul Elovich ("Elovich") regarding the purchase
of DBS shares and the provision of satellite communication services to DBS, the Ministry
of Communications' dealings with Bezeq ("the DBS Case") as well as suspicions of the
exercise of powers by Prime Minister Binyamin Netanyahu, to advance issues concerning
the business of Elovich and the economic interests of him and the Bezeq Group ("Case
4000") -
1.1.7.1 On January 28, 2020, an indictment was filed with the Jerusalem District
Court in Case 4,000, inter alia, against Elovich for various offenses, including
bribery and deliberate misstatement in an immediate report in connection with
suspicions of exercise of powers by Prime Minister Binyamin Netanyahu to
advance issues concerning the business of Elovich and the economic interests of
him and the Bezeq Group.
1.1.7.2 On December 23, 2020, Bezeq received a notice from the Tel Aviv District
Attorney's Office (Taxation and Economy) regarding the consideration of Bezeq's
7
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
prosecution and its summons to a hearing on Case 4,000 ("the Notice")9
According to which:
a) After examining the evidence before him, the Attorney General is considering
filing an indictment against Bezeq on suspicion of bribery (an offense under
Article 291 of the Penal Code and Article 23 of the Penal Code), and a
reporting offense with the aim of misleading a reasonable investor (offense
under Article 53(a)(4) of the Securities Act and Article 23 of the Penal Code).
b) According to the Notice, according to the suspicion, Bezeq's criminal
responsibility for the offense of bribery stems from the actions and criminal
thought of Elovich, who was its organ in the period relevant to the suspicions.
c) Also, according to the Notice, according to the suspicion, Bezeq's criminal
responsibility for the reporting offense stems from the actions and criminal
thought of Elovich who was its organ in the period relevant to the suspicions,
and the actions and criminal thought of Stella Handler (former Bezeq CEO),
who was Bezeq's organ in the relevant period (see section 1.1.5.3b).
According to allegations in this context, Bezeq reported on a letter from the
Director General of the Ministry of Communications that allegedly included a
misstatement (of which Elovich and Stella Handler were aware), and only
after the intervention of senior officials in the State’s legal advice system, the
letter was amended and the amendment was reported by Bezeq to the
public.
d) According to the Notice, before the Attorney General makes a final decision
regarding the criminal prosecution of Bezeq, and insofar as Bezeq wishes to
argue against the possibility of criminal prosecution, it must coordinate a
hearing within 30 days from the date of the Notice, and submit written
arguments two weeks before the date scheduled for the hearing.
e)
It should be noted that Walla (a former subsidiary of Bezeq) also received a
similar notice according to which, after examining the evidence presented
thereto, the Attorney General is also considering filing an indictment against
Walla on suspicion of bribery (an offense under Article 291 of the Penal Code
and Article 23 of the Penal Code) when, according to the suspicion, Walla's
criminal liability for the offense of bribery stems from the criminal acts and
thought of Elovich who was its organ in the period relevant to the suspicions.
f) Bezeq and Walla have received the core of the investigation material relating
to the above suspicions, they are studying the notices and are preparing for
the hearing, and they intend to argue at the hearing against the possibility of
criminal prosecution.
1.1.7.3 On December 23, 2020, to the best of Bezeq’s knowledge, an
announcement by the State Attorney's Office was published, according to which,
among other things, the State Attorney's Office (Taxation and Economics) filed
on the same day an indictment against Elovich with the Tel Aviv District Court, as
well as against former senior officials in Bezeq Group and BBS, Or Elovich,
Amikam Shorer, Linor Yochelman , Ron Eilon and Mickey Neiman in the DBS
Case. According to the publication:
a) The indictment attributes to the defendants the offenses of aggravated
obtainment by fraud, fraud and breach of trust in a corporation, and reporting
offenses under the Securities Law, in relation to two cases: Fraud in relation
to the payment of the consideration for the purchase of DBS shares by
Bezeq, and fraud in relation to the conduct of the independent committees
established by Bezeq for the purpose of examining Bezeq transactions in
which Elovitch had a personal interest.
b) The State Attorney's Office (Taxation and Economics) entered into a
conditional settlement agreement under the Securities Law with Stella
Handler, in which Stella Handler admitted the facts according to which she
was involved in intentional misstatement in Bezeq's statements. In
9It should be noted that on November 20, 2017, Bezeq received a "letter of suspect notification" according to which the investigation
file in the framework of which it was questioned as a suspect was transferred to the State Attorney's Office for review. Since then,
no further notice has been received by Bezeq on this matter.
8
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
accordance with what is stated in the arrangement, the DBS case was closed
in the case of Stella Handler.
c) The investigation files in respect of other suspects investigated in the cases
mentioned above were closed, including against the former VP of regulation
at Bezeq, as well as against Or Elovitch and Amikam Shorer (in relation to
both - except with regard to the DBS Case as indicated in the preamble of
this section).
1.1.7.4 Bezeq does not yet have complete
information
the
investigations, their content, materials and evidence in the possession of the law
authorities in the matter (although in January 2021, Bezeq received the core of
the investigation material in connection with Case 4000, following Bezeq's
summons to a hearing on this matter as detailed in section1.1.7.2). Accordingly,
Bezeq is still unable to assess the effects of the investigations, their findings and
results on Bezeq and its financial statements. For this matter see Note 1.3 to the
2020 statements.
regarding
1.1.7.5
It should be noted that following the opening of the said investigations, a
number of civil legal proceedings were opened against Bezeq, DBS, Bezeq's
officers in the relevant period and companies from Bezeq’s former controlling
group, including motions for approval of class actions and motions for disclosure
of documents before filing a motion for approval of a derivative claim. For details
regarding these procedures see section2.18.
1.1.7.6 Regarding the DBS, which on November 20, 2017, received a "letter of
suspect notification" according to which the investigation case in which it was
questioned as a suspect was forwarded to the State Attorney's Office - in
accordance with the State Attorney's Office's notice received by DBS, after the
Securities Authority case (Ref. No. 03/2017), in which it was questioned as a
suspect, was examined by the State Attorney's Office, it was decided on January
11, 2021 to shelf the case against it, without filing an indictment therein.
1.2. Areas of activity
The Group has four main areas of activity that correspond to the corporate division among the
Group's companies and are reported as business segments in Bezeq’s consolidated financial
statements (see also Note 28 to the 2020 statements):
1.2.1. Bezeq – Landline interior communications
This area mainly includes the activities carried out by Bezeq as an NIO (National Interior
Operator), including telephony services, Internet access and infrastructure services
(including BSA wholesale service), transmission and data communication services and
wholesale services of using Bezeq's physical infrastructure. Bezeq’s activity in the field of
landline interior communications is described in section 2 of this report.
1.2.2. Pelephone - Cellular communication ("Mobile Radio")
Cellular radio-telephone services (cellular communications), marketing of end equipment,
installation, operation and maintenance of equipment and systems in the field of cellular
communications. Pelephone activity is described in section3 of this report.
1.2.3. Bezeq International - Internet, international communications and network endpoint
services
Internet access services (ISP), international communication services, network endpoint
services and the provision of ICT solutions. Bezeq International's activities are described
in section4 to this report.
1.2.4. DBS - Multi-channel TV
Digital multi-channel TV broadcasting services to subscriptions over satellite (DBS) as well
as over the Internet (OTT) and the provision of value-added services to subscribers. DBS
activity is described in section3 to this report.
It should be noted that in addition, Bezeq's consolidated financial statements include the "other"
segment, which includes mainly call center services for customers (via Bezeq Online) and included,
until December 27, 2020, content services in the field of Internet (via Walla, the sale of Bezeq's
holdings was completed on the date specified in section 1.1.1). This "other" segment is not material
at the Group level.
9
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
1.3. Investments in the corporation's capital and transactions in its shares
Regarding the completion of the transaction for the transfer of control of the Company on December
2, 2019, see section 1.1.4 above.
On December 10, 2020, the Company announced the purchase of 10,580,000 ordinary Bezeq
shares in exchange for a total amount of approximately NIS 40 million and an average price of NIS
3.78 per share. Following the said acquisition, the Company holds 26.72% of the issued and paid-
up share capital and of the voting rights in Bezeq.
No further investments were made in the Company's capital in the reporting year and the Company
is not aware of any other material transactions made in Bezeq shares by a stakeholder outside the
Stock Exchange.
1.4. Dividend distribution
From January 1, 2018 until the date of publication of this report, the Company has not distributed
dividends to its shareholders and as of the date of this report, the Company does not have a valid
dividend distribution policy.
1.5. Financial information regarding the areas of activity of Bezeq Group
All data in sections 1.5.1 to 1.5.4 are stated in NIS millions.
1.5.1. 2020
Lnadline
interior
commun
ication
Cellular
commun
ication
(mobile
radio
telephon
e)
Internet
and
internati
onal
commun
ication
services
Other
Multi-
channel
TV (3)
Consolid
ated
Consolid
ation
adjustm
ents (2)
3,813
2,
127
1,
217
1,
286
346
4,
159
59
186
2,
54
271
1,
850
799
1,021
1,
604
1,
471
491
2,454
2,405
2,
270
2,
162
1,512
1,246
1
287
1,
532
797
1,
329
1,
296
280
6
286
186
56
242
236
-
(466)
(466)
8,
723
-
723
8,
(539)
(77)
7,268
7,268
49
108
266
33
6
(462)
-
2,454
2,
270
1,512
1,
329
242
(539)
7,268
1,705
(84)
(241)
(42)
8,471
4,
371
785
1,
365
44
96
73
1,455
1,)
(847
13,241
11,764
1,
742
580
505
42
)
1,242
(
13,391
Total revenue:
External
From other areas of activity in
the corporation
Total revenue
Total attributable costs:
Variable costs attributed to the
area of activity (1)
Fixed costs attributed to the area
of activity (1)
Total costs
Costs that do not constitute
revenue in another area of
activity (3)
Costs that constitute revenue of
other areas of activity
Total costs
Profit from ordinary activities
attributed to the owner of the
Cmpany
Total assets attributed to activity
as of December 31, 2020
Total liabilities attributed to the
area of activity as of December
31, 2020
(1) The Group companies, which are companies that provide services (as opposed to manufacturing companies), do not maintain a
dedicated pricing system that distinguishes between fixed and variable costs. The above distribution was made for the purposes
of this report only. Variable costs are costs in the management and control of which and in the effect of which on direct output the
companies have flexibility in the short term, as opposed to fixed costs that are not flexible in the short term and do not directly
affect output (in this regard, in relation to the definition of fixed costs and variable costs, it is clarified that "short term" means a
period of up to one year).
10
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
The variable costs included non-recurring expenses (revenue) that were included in the other expenses (revenue) item of each
company.
(2) Detailed consolidation adjustments - transactions between areas of activity.
(3) See Note 11 to the 2020 statements regarding the neutralization of the impairment loss in assets in the multi-channel television and cellular
communication segments. The impairment loss in the segmewnt is presented as part of the adjustments.
1.5.2. 2019
Total revenue:
External
From other areas of activity in
the corporation
Total revenue
Total attributable costs:
Variable costs attributed to the
area of activity (1)
Fixed costs attributed to the area
of activity (1)
Total costs
Costs that do not constitute
revenue in another area of
activity (3)
Costs that constitute revenue of
other areas of activity
Total costs
Profit from ordinary activities
attributed to the owner of the
Cmpany
Total assets attributed to activity
as of December 31, 2019
Total liabilities attributed to the
area of activity as of December
31, 2019
Lnadline
interior
commun
ication
Cellular
commun
ication
(mobile
radio
telephon
e)
Internet
and
internati
onal
commun
ication
services
Other
Multi-
channel
TV (3)
Consolid
ated
Consolid
ation
adjustm
ents (2)
3,757
2,316
1,28
3
1,344
316
4,073
46
2,362
65
1,339
1
1,345
307
1,080
1,624
1,381
727
808
630
850
1,931
1,883
2,461
2,357
1,535
1,292
1,480
1,457
229
9
238
177
60
237
232
-
8,92
9
(284)
(428)
-
8,92
9
435
858
8,079
8,079
48
104
243
23
5
(423)
-
1,931
2,461
1,535
1,480
237
435
8,079
2,142
(99)
(196)
(135)
1
(863)
850
8,091
4,088
1,084
1,491
151
1,)
(914
12,991
12,466
1,434
604
576
79
)
1,236
(
13,923
(1) The Group companies, which are companies that provide services (as opposed to manufacturing companies), do not maintain a
dedicated pricing system that distinguishes between fixed and variable costs. The above distribution was made for the purposes
of this report only. Variable costs are costs in the management and control of which and in the effect of which on direct output the
companies have flexibility in the short term, as opposed to fixed costs that are not flexible in the short term and do not directly
affect output (in this regard, in relation to the definition of fixed costs and variable costs, it is clarified that "short term" means a
period of up to one year).
The variable costs included non-recurring expenses (revenue) that were included in the other expenses (revenue) item of each
company.
(2) Detailed consolidation adjustments - transactions between areas of activity.
(3) See Note 11 to the 2020 statements regarding the neutralization of the impairment loss in assets in the multi-channel television and cellular
communication segments. The impairment loss in the segmewnt is presented as part of the adjustments.
1.5.3. 2018
Total revenue:
Lnadline
interior
commun
ication
Cellular
commun
ication
(mobile
radio
telephon
e)
Internet
and
internati
onal
commun
ication
services
11
Other
Multi-
channel
TV
Consolid
ated
Consolid
ation
adjustm
ents (2)
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
External
From other areas of activity in
the corporation
Total revenue
Total attributable costs:
Variable costs attributed to the
area of activity (1)
Fixed costs attributed to the area
of activity (1)
Total costs
Costs that do not constitute
revenue in another area of
activity (3)
Costs that constitute revenue of
other areas of activity
Total costs
Profit from ordinary activities
attributed to the owner of the
Cmpany
Total assets attributed to activity
as of December 31, 2018
Total liabilities attributed to the
area of activity as of December
31, 2018
3,883
2,401
1,338
1,473
226
-
9,321
313
4,196
42
53
-
2,443
1,391
1,473
15
241
(423)
(423)
-
9,321
1,340
1,263
719
678
198
1,632
1,182
595
851
79
2,972
2,915
2,445
2,343
1,314
1,076
1,529
1,516
277
270
1,366
1,783
9,903
9,903
57
102
238
13
7
(417)
-
2,972
2,445
1,314
1,529
277
1,366
9,903
1,224
(2)
77
(56)
(36)
(1,789)
(582)
8,896
4,124
1,370
1,606
159
193
16,348
14,284
1,425
733 (*)
687
84
(1,159)
16,054
(2) The Group companies, which are companies that provide services (as opposed to manufacturing companies), do not maintain a
dedicated pricing system that distinguishes between fixed and variable costs. The above distribution was made for the purposes
of this report only. Variable costs are costs in the management and control of which and in the effect of which on direct output the
companies have flexibility in the short term, as opposed to fixed costs that are not flexible in the short term and do not directly
affect output (in this regard, in relation to the definition of fixed costs and variable costs, it is clarified that "short term" means a
period of up to one year).
The variable costs included non-recurring expenses (revenue) that were included in the other expenses (revenue) item of each
company.
(2) Detailed consolidation adjustments - transactions between areas of activity.
For explanations about the developments in the financial data presented In sections1.5.1 to 1.5.3 aee
Section 1 of the Board of Directors’ report on the state of the corporation's affairs ("Board of Directors'
Report").
1.5.4. Main results and operational data
The following is a summary of data on the results of each of the Company's main areas of
activity in 2019 and 2020.
1.5.4.1 Bezeq Fixed Lines (Bezeq’s activity as NIO)
2020
2019 Q4/
2020
Q3/
2020
Q2/
2020
Q1/
2020
Q4/
2019
Q3/
2019
Q2/
2019
Q1/
2019
Revenue (NIS millions)
4,159
4,073
1,055 1,042 1,044 1,018
985
1,025 1,020 1,043
Operating profit (NIS millions)
1,705
2,142
Depreciation and amortization (NIS millions)
877
861
Operating profit before depreciation and
amortization (EBITDA) (NIS millions) (1)
2,582
3,003
356
225
581
Net profit (NIS millions)
1,040
1,192
216
Cash flow from operating activities (NIS millions)
2,106
1,847
600
Payments for investments in fixed assets and
intangible assets and other investments (NIS
millions)
910
881
237
446
222
668
300
561
272
464
218
682
229
334
201
439
212
651
295
611
200
296
225
521
134
476
440
225
875
204
531
207
665
1,079
738
175
484
562
416
321
471
193
145 *
333 *
210
Receipts from the sale of fixed assets and
146
407
119
1
19
7
14
14
340
39 **
12
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
intangible assets (NIS millions)
Lease payments
111
114
27
26
26
32
28
1,231
1,259
455
264
126
386
269
**
27
396
***
34
266
***
25
328
***
Free cash flow (NIS millions) (2)
Number of active subscribers at the end of the
period (thousands) (3)
Average monthly income per telephony
subscriber (NIS) (ARPL) (4)
1,639
1,718
1,639 1,653 1,675 1,693 1,718 1,743 1,768 1,792
50
49
50
51
51
48
48
49
49
50
Outgoing usage minutes (millions)
3,985
3,499
1,004 1,019 1,079
883
820
888
865
926
Incoming usage minutes (millions)
5,107
4,291
1,326 1,368 1,293 1,120 1,046 1,099 1,056 1,090
Total number of Internet subscribers at the end
of the period (thousands) (7)
Of which are Internet lines at the end of the
period - wholesale (thousands) (7)
Of which are Internet lines at the end of the
period - in retail (thousands) (7)
Average monthly income per Internet subscriber
(NIS) - retail (ARPU)(8)
Average package speed for Internet subscriber –
retail (Mbps) (5)
1,556
1,575
1,556 1,565 1,571 1,566 1,575 1,589 1,613 1,635
557
592
557
570
580
584
592
601
612
624
999
983
999
995
991
982
983
988
1,001 1,011
99
97
102
100
98
98
98
98
97
96
74.2
67.8
74.2
71.6
70.4
69.1
67.8
66.2
64.0
61.5
Churn rate of telephony subscribers (6)
12.5%
11.7%
3.2%
3.4%
2.7%
3.2%
2.9%
3.0%
2.7%
3.0%
(1) Operating profit before depreciation and amortization (EBITDA) is a financial index that is not based on generally
accepted accounting principles. Bezeq presents this index as another index for evaluating its business results
since it is an accepted index in Bezeq’s area of activity which neutralizes aspects resulting from variability in
capital structure, various taxation aspects and manner and period of amortization of fixed and intangible assets.
This index is not a substitute for indices based on generally accepted accounting principles, and does not serve
as a single index for assessing Bezeq’s results of operations or cash flow. Also, the index presented in this report
may not be calculated in the same way as other indices in other companies. Bezeq’s EBITDA is calculated as
operating profit before depreciation, amortization and ongoing losses from impairment of fixed assets and
intangible assets. As of January 1, 2019, and for the purpose of an adequate presentation of economic activity,
Bezeq presents ongoing losses from impairment of fixed assets and intangible assets in DBS and Walla under
the depreciation and amortization item, as well as ongoing losses from impairment of broadcasting rights under
the operating and general expenses item (in the statement of income). For this matter see Note 11 to the financial
statements and section 8 of the chapter on the description of the corporation's business in the 2020 periodic
report.
(2) Free cash flow is a financial measure that is not based on generally accepted accounting principles. Free cash
flow is defined as cash arising from current operations minus cash for the purchase / sale of fixed assets and
intangible assets, net, and as of 2018, with the implementation of IFRS 16, lease payments are also deducted.
Bezeq presents free cash flow as an additional index to evaluate business results and cash flows, since Bezeq is
of the opinion that cash flow is an important liquidity index that reflects the cash derived by Bezeq from its current
operations after investing cash in infrastructure and fixed assets and other intangible assets. For this matter see
section 8 of the chapter on the description of the corporation's business in the 2020 periodic report.
(3) Inactive subscribers are subscribers whose Bezeq lines have been physically disconnected (excluding a
subscriber who has not paid his debt to Bezeq on time in the first three months (approximately) of collection
proceedings).
(4) Calculated according to the average of subscribers for the period. For this matter see also section 8 of the chapter
on the description of the corporation's business in the 2020 periodic report.
(5) In plans where there is a range of speeds, the maximum speed in the plan is taken into account.
(6) Number (gross) of telephony subscribers who abandoned Bezeq Fixed Lines during the period divided by the
average number of telephony subscribers registered in the period. See also section 8 of the chapter on the
description of the corporation's business in the 2020 periodic report.
(7) Total number of Internet subscribers including retail and wholesale subscribers. Retail - Bezeq's direct Internet
subscribers. Wholesale - Internet subscribers through wholesale service to other communication providers.
(8) Revenue from retail Internet services divided by the average number of retail customers in the period. For this
matter, see also section 8 of the chapter on the description of the corporation's business in the 2020 periodic
report.
(*) In the second quarter of 2019 - including payment of an improvements levy in respect of the sale of the "Sakia"
complex in the amount of approximately NIS 149 million. In the third quarter of 2019 - including a receipt for the
improvements levy received in the amount of approximately NIS 75 million.
(**) In the first quarter of 2019 - including consideration from the sale of Sakia in the amount of approximately NIS 5
million as well as a refund of land appreciation tax received in the amount of approximately NIS 5 million. In the
second quarter of 2019 - including consideration from the sale of Sakia in the amount of approximately NIS 323
million.
13
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
(***) See (*) and (**)
1.5.4.2 Pelephone
2020
2019
Q4/
2020
Q3/
2020
Q2/
2020
Q1/
2020
Q4/
2019
Q3/
2019
Q2/
2019
Q1/
2019
Revenue from services (NIS millions)
1,591
1,709
396
396
394
405
416
446
430
417
Revenue from the sale of end equipment (NIS
millions)
595
653
137
149
141
168
186
166
140
161
Total revenue (NIS millions)
2,186
2,362
533
545
535
573
602
612
570
578
Operating profit (loss) (NIS millions)
Depreciation and amortization (NIS millions)
Operating profit before depreciation and
amortization (EBITDA) (NIS millions) (1)
Net profit (loss) (NIS millions)
Cash flow from operating activities (NIS millions)
Payments for investments in fixed assets,
intangible assets and other investments, net
(NIS millions)
Lease payments
Free cash flow (NIS millions) (1)
Number of postpaid subscribers for the end of
the period (thousands) (2)
Number of prepaid subscribers for the end of the
period (thousands) (2)
Number of subscribers for the end of the period
(thousands) (2)
Average monthly income per subscriber (NIS)
(ARPU) (3)
(84)
599
515
(25)
697
318
230
149
(99)
(36)
(27)
(8)
(13)
(97)
16
(8)
(10)
633
534
151
115
147
120
151
143
150
137
163
66
157
173
156
148
157
147
(47)
(12)
(12)
1
(2)
(69)
18
2
2
677
292
242
143
241
80
143
100
149
164
146
200
136
195
73
65
75
72
82
63
48
67
113
(24)
48
28
67
32
51
20
76
52
46
8
69
63
2,044
1,902
2,004 1,976 1,948 1,928 1,902 1,886 1,857 1,834
438
425
438
420
417
428
425
415
397
382
2,442
2,327
2,442 2,396 2,365 2,356 2,327 2,301 2,254 2,216
56
63
55
56
56
58
60
65
64
63
Subscriber churn rate (Churn Rate) (4)
26.9%
30.8%
5.9%
7.0%
6.8%
7.2%
7.3%
7.3%
7.5%
8.7%
(1) For the definition of operating profit before depreciation and amortization (EBITDA) and free cash flow, see notes
(1) and (2) in the Bezeq Fixed Lines table.
(2) The subscriber data include Pelephone subscribers (net of other operators’ subscribers hosted on Pelephone’s
network, and net of IoT subscribers) and do not include subscribers connected to Pelephone’s service for six
months or more but are inactive. Inactive subscribers are subscribers who in the last six months have not received
at least one call, did not make at least one call / message or did not perform a browsing operation or did not pay
for Pelephone’s services. Prepaid subscribers are included in the active subscriber base from the date of
performing a charge and are deducted from the active subscriber base when no making outbound use for six
months or more. It should be noted that a customer may have more than one subscriber ("line"). The number of
subscribers includes subscribers who consume various services (such as data for in-vehicle media systems), the
14
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
average income from which is significantly lower than the rest of the subscribers. The subscriber base includes a
retroactive classification of postapid subscribers as IoT subscribers (which are not included in the subscriber
base), which resulted in a decrease in the number of postpaid subscribers by about 9k in 2019 and about 12k in
2020 without a change in the annual ARPU index.
(3) The average monthly income per subscriber (postpaid and prepaid). The index is calculated by dividing the
average monthly revenue from all cellular services from both Pelephone’s subscribers and other communication
operators, including revenue received from cellular operators using Pelephone’s network, repair service and
extended warranty in the period by the average active subscriber base in that same period. See also section 8 of
the chapter on the description of the corporation's business in the 2020 periodic report.
(4) The subscriber churn rate is calculated according to the ratio of the subscribers who disconnected from Pelephone
services and the subscribers who became inactive during the period to the average of active subscribers during
the period. See also section 8 of the chapter on the description of the corporation's business in the 2020 periodic
report.
1.5.4.3 Bezeq International
2020
2019
Q4/
2020
Q3/
2020
Q2/
2020
Q1/
2020
Q4/
2019
Q3/
2019
Q2/
2019
Q1/
2019
Revenue (NIS millions)
1,271
1,339
323
325
314
317
330
329
339
341
Operating profit (loss) (NIS millions)
(241)
(196)
(22)
(275)
149
190
26
42
27
38
29
43
(189)
(40)
51
47
7
46
26
46
(92)
(6)
4
(233)
65
72
(138)
7
53
72
Net profit (loss) (NIS millions)
(275)
(157)
(13)
(305)
230
255
75
47
21
48
22
60
(149)
(32)
87
64
4
48
20
56
116
128
21
28
33
34
21
40
34
33
Depreciation and amortization (NIS
millions)
Operating profit (loss) before
depreciation and amortization
(EBITDA) (NIS millions) (1)
Cash flow from operating activities (NIS
millions)
Payments for investments in fixed
assets and intangible assets and other
investments, net (NIS millions) (2)
Lease payments
Free cash flow (NIS millions) (1)
30
84
32
95
7
47
7
12
8
7
8
18
8
58
8
16
8
6
8
15
Subscriber churn rate (3)
30.2%
26.2%
10.2%
7.2%
6.1%
6.7%
6.3%
7.1%
6.2%
6.6%
Some of the data in the table were updated following the restatement of the Company's and Bezeq's financial
statements as detailed in section 1.9 and in Note 1.5 to the Company's financial statements.
(1)
For the definition of operating profit before depreciation and amortization (EBITDA) and free cash flow, see
notes (1) and (2) in the Bezeq Fixed Lines table.
The section also includes investments in long-term assets.
(2)
(3) Number of Internet subscribers who left Bezeq International during the period is an average of the
average Internet subscribers registered during the period. See also section 8 of the chapter on the
description of the corporation's business in the periodic report for 2020.
1.5.4.4 DBS
2020
2019
Q4/
2019
Q3/
2019
Q2/
2020
Q1/
2020
Q4/
2020
Q3/
2020
Q2/
2020
Q1/
2020
Revenue (NIS millions)
1,287
1,345
317
313
319
338
331
334
337
343
Operating profit (loss) (NIS millions)
Depreciation, amortization and ongoing
impairment (NIS millions)
39
203
(55)
219
(11)
59
18
50
23
50
9
44
(6)
46
20
50
(24)
(45)
68
55
15
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Operating profit before depreciation,
amortization and ongoing impairment
(EBITDA) (NIS millions) (1)
242
164
48
68
73
53
40
70
44
10
Net profit (loss) (NIS millions)
24
(69)
(24)
163
143
14
16
69
18
39
14
41
(7)
31
15
37
(27)
(50)
22
53
Cash flow from operating activities (NIS
millions)
Payments for investments in fixed assets
and intangible assets and other
investments, net (in NIS millions)
Lease payments
Free cash flow (NIS millions) (1)
Number of subscribers (at the end of the
period, thousands) (2)
Average monthly income per subscriber
(ARPU) (NIS) (3)
141
238
26
38
40
37
32
69
73
64
26
(4)
30
6
(125)
(18)
6
25
7
(8)
7
(3)
7
(8)
8
7
8
(40)
(58)
(19)
557
555
557
556
557
556
555
558
565
568
190
197
186
187
190
195
195
195
197
200
Subscriber churn rate (4)
21.0%
21.2%
4.9%
5.4%
4.8%
5.9%
5.2%
5.5%
4.9%
5.6%
(1) For the definition of operating profit before depreciation and amortization (EBITDA) and free cash flow, see notes
(1) and (2) in the Bezeq Fixed Lines table.
(2) Subscriber - one household or a small business customer. In the case of a business customer who owns more
than a certain number of decoders (such as a hotel, kibbutz or gym), the number of subscribers is adjusted. The
number of non-small business customers is calculated by dividing the total payment received from all non-small
business customers by the average income per small business customer, which is determined once per period.
(3) The average monthly revenue per subscriber is calculated by dividing the total DBS revenue (excluding revenue
from the sale of content to external broadcasters) by the average number of customers in the period. See also
section 8 of the chapter on the description of the corporation's business in the 2020 periodic report. In the first
quarter of 2020, DBS updated the definition of ARPU so that ARPU does not include the sale of content to external
broadcasters. ARPU data for previous periods were restated accordingly.
(4) The number of DBS subscribers who abandoned DBS during the period divided by the average number of
subscribers registered in the period. See also section 8 of the chapter on the description of the corporation's
business in the 2020 periodic report.
1.6. Forecast in relation to the Bezeq Group
The following is the Group's forecast for 2021 based on the information currently known to the Bezeq
Group:
- Adjusted net profit10 for shareholders is expected to be approx. NIS 1 billion
- God-Adjusted EBITDA11 It is expected to be approx. NIS 3.45 billion
- God-CAPEX12 It is expected to be approx. NIS 1.7 billion
The forecasts detailed in this section are forward-looking information, as defined in the Securities
Law. The forecasts are based on Bezeq's assessments, assumptions and expectations.
10 Adjusted net profit and adjusted EBITDA – net of the other operating expenses / revenue, net item, non-recurring losses / gains
from impairment / increase in value, and expenses of options for employees. It should be noted that the adjusted EBITDA and the
adjusted net profit for 2020 were approximately NIS 3.659 billion and approximately NIS 1.144 million, respectively.
11 See footnote 10.
12 CAPEX - Payments (gross) for investment in fixed assets and intangible assets. It should be noted that the CAPEX for 2020 was
approximately NIS 1.50 billion.
16
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
The forecasts are based, among other things, on the Group's assessments regarding the structure
of competition in the communications market and the regulation of the segment, on the current
economic situation in the economy, and accordingly, the Group's ability to implement its plans for
2021, taking into account the changes in business conditions, regulatory decisions, technological
changes, developments in the structure of the communications market, etc. or insofar as one or more
of the risk factors listed in the 2020 periodic report materialize. There is also no certainty that the
forecast will fully or partially materialize, among other things, in the face of the COVID-19 pandemic
and the uncertainty as a result thereof.
The Company will report, as required, deviations of ± 10% or more from the amounts specified in the
forecast.
1.7. General environment and the influence of external factors on the Group's
activities
The communications industry in the world and in the Israeli economy is characterized by a rapid pace
of development, and frequent changes in terms of technology, in terms of the business structure of
the industry and in terms of the regulation applied to it. The main trends and main characteristics of
the communications market in recent years, which have a significant impact on the Group's
operations as a whole, will be described below.
In the communications market, there is fierce competition in most areas of the Group's activity:
In the field of cellular telephony, the multiplicity of competitors leads to fierce competition in the field
that leads to low prices and increased customer mobility. In the field of landline telephony,
competition, including on the part of cellular companies, leads to a decrease in the consumption of
landline telephony minutes as well as the abandonment of landline telephony customers (including
the proliferation of customers without a home landline), and consequently, damage to the Group’s
results.
In the field of television services, there is an increase in competition through the transmission of
television content (VOD services and linear channels) over the Internet (OTT), including by foreign
providers such as Netflix, as well as the reception of "Idan+" channels, which are not subject to
regulatory supervision and to the same duties as those of public multi-channel broadcasters.
In the field of Internet services and Internet access infrastructure, there is fierce competition with
companies with infrastructure, including fiber infrastructure for households, and through the
wholesale market (see section1.7.3 and section 2.16.4), and a deepening in the implementation of
additional wholesale services.
In order to reduce the damage resulting from the aforesaid, the Group companies take streamlining
measures as well as various moves to improve the services they provide and differentiate them from
the competitors.
In view of the diversity in the areas of the Group's communications activities, regulatory and other
developments may in some cases have a different effect (and even in opposite directions) on various
areas of activity in the Group and on its risk factors (see sections 2.20, 3.19, 4.14 and 5.19), that is
- changes in regulation and other factors that adversely affect one area may have a positive effect
on another area. In some cases, adverse effects on areas of activity may be partially offset against
each other at the Group level.
1.7.1. Communication groups in the Israeli market
In recent years,
the market has been characterized by competition between
communications groups (Bezeq Group, Hot Group, Cellcom Group and Partner Group)
operating simultaneously in several segments of the communications market (landline and
mobile telephony, landline and mobile Internet services, multi-channel television and
international calls)13.
Structural changes and mergers between communications groups and competing
companies may have significant consequences for the structure of the communications
market, the competition therein, and the Group's activities. As of this date, the Company is
unable to assess these effects.
It should be noted that there are also competitors in the market who are not part of a
communications group as described above (e.g. XFONE and MVNO operators in cellular,
international operators and ISPs, including providers that provide service within the
13
In this regard, a "group" is characterized by a close relationship that results from the identicality of shareholders, although in
some groups there is a corporate, accounting or marketing separation between the entities belonging to the group.
17
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
wholesale market).
Competition between communication groups is reflected in an increase in the rate of
consumption of "service baskets" or packages of several services that include
combinations of several different communication services. Communication groups market
service packages consisting of different communication services from each group's
corporations, so that the customer can be offered a comprehensive solution that eliminates
the need to communicate simultaneously with several different providers, and offer rates
that are more attractive for the customer than the rate of purchasing each service
separately (in some cases while "cross-subsidizing" between the components included in
the basket). These trends intensified with the implementation of the BSA wholesale service
market (see section 2.16.4.2), enabling infrastructure-less operators, including operators
not part of a communications group, to offer a complete end-to-end service package to their
customers (including infrastructure).
Providing a comprehensive service to the customer that meets his variety of needs has
become easier both due to a trend of technological convergence (see section 2.1.4) and
following regulatory changes and the transition to regulation through a general unified
license, which was granted to different communication operators and under which different
communication services, which previously required separate licenses, could be provided
under the same license.
As of the date of the report, Bezeq Group is s ubject to stricter restrictions on the marketing
of service packages than the other groups, as detailed below.
On August 26, 2020, Cellcom announced the completion of a contract for the acquisition
of full ownership and control of Golan Telecom after the regulatory approvals for the
acquisition were received. In addition, Cellcom, Hot and the Israel Infrastructure Fund hold,
in equal parts, shares in a partnership that holds 70% of IBC. For this matter and for
approvals received by Hot see section 2.6.3.5.
1.7.2. Bezeq Group's activity as a communications group and the limitations of structural
separation
As of the date of the report, the Group is subject to a number of regulatory restrictions in
the context of creating collaborations between the Group's companies, which include a
structural separation obligation between Bezeq and its subsidiaries, as well as restrictions
on marketing shared service baskets which include the services of Bezeq and its
subsidiaries.
Against the background of the challenges the Group faces and the future needs that arise
in the communication market environment, in parallel with Bezeq’s activity for the
elimination of structural separation, Bezeq’s Board of Directors acts for the implementation
of a comprehensive strategic plan for the Group as a communication group within the
complex regulatory constraints imposed on the Group (see section1.8).
The following are additional details about the main restrictions that apply to the Group in its
activities as a communications group:
1.7.2.1 Structural separation
a) Structural separation obligation – the Communications Law gives the
Minister the power to order accounting separation between different services
provided by the same group / company, as well as the power to require the
existence of separate corporations for the purpose of providing different
services, including separation between licensing services and subscriber
services, and provisions on the implementation of the separation.
Bezeq's NIO license stipulates that Bezeq must maintain structural
separation between itself and its subsidiaries14. In this context, full
separation between Bezeq's management and the managements of the
subsidiaries is required, including everything related to the business system,
the financial system and the marketing system, and Bezeq is prohibited from
transferring commercial information to a subsidiary (subject to exceptions).
The limitations of structural separation place the Group in a position of
competitive disadvantage which exacerbates over time vis-à-vis the other
communication groups which are not subject to restrictions of a similar
extent, and in the face of the possibility for operators to provide end-to-end
14 Pelephone, Bezeq International, DBS and Bezeq Online.
18
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
services to subscribers through the use of wholesale services. In addition,
the limitations of structural separation cause high overheads.
b) Elimination of structural separation - on February 14, 2019, Bezeq filed a
petition with the High Court against the Ministry of Communications for the
immediate elimination of the structural separation in Bezeq Group, after the
Ministry did not respond to Bezeq's requests, even though, in Bezeq's
opinion, all the conditions justifying the elimination of the structural
separation, according to the policy document dated May 2, 2012 on the issue
of expanding competition in the field of landline communications - wholesale
market ("the Policy Document") were met, partly because in the field of
television services there are companies that provide television services over
the Internet, since as of February 17, 2015, there is a wholesale market in
the field of broadband, in which there are a variety of providers who provide
end-to-end broadband service on Bezeq's infrastructure to more than half a
million customers, as well as in light of the fact that there is fierce competition
in cellular services.
On July 15, 2020, the State submitted an update notice on its behalf to
Bezeq's petition to the High Court. The State’s notice included an update
according to which on June 30, 2020 the The Director General of the Ministry
of Communications submitted to the Minister of Communications the report
of the inter-departmental team examining the update of the structural
separation obligations in Bezeq and Hot groups (“the Report"), according to
which the members of the Ministry of Communications team and observers
from the Budget Division of the Ministry of Finance and the Competition
Authority recommend to the Minister not to eliminate the structural
separation obligation
in Bezeq and Hot groups at this time. The
announcement also stated that the team’s recommendations had been
presented to the Minister of Communications, and that after studying and
examining the recommendations, he would decide on the matter. In light of
the aforesaid, the State's position is that the petition should be rejected - and
at least removed - while charging Bezeq expenses.
The report (which was attached to the Stat’s notice and also published on
the Ministry of Communications' website) stated regarding Bezeq, among
other things, that:
- The team and the observers found that it was not the right time for the
complete elimination of the structural separation in Bezeq Group, since
Bezeq Group has significant market power and dominance in the
communications market, and that the elimination of the structural
separation at this time could increase Bezeq Group's power and harm its
competitors.
- According to the team, the existing structural separation provisions have
yielded results so far, and the elimination of the structural separation at this
time will
field of
communications, resulting in harm to the public and media consumers.
to severe damage
to competition
lead
the
in
- According to the observers, the current structural separation structure does
not serve the competitive purposes of the separation and does not address
the competitive problems in the market and therefore should not remain in
its current configuration, but other alternatives should be promoted, such
as separating wholesale and retail activities or separating ownership
between passive infrastructure and other Bezeq Group activities.
- Despite the team's position regarding the elimination of structural
separation at this time, the team did find that certain changes could be
made to the overall regulation that have the potential to improve the service
to the public and that will affect structural separation. For example, in
parallel with the team’s work, the Ministry of Communications promoted a
sweeping change in the way of operation of the reverse bundle; In the last
two years, the Ministry of Communications has not opposed Bezeq
Group's moves that reduce the separation in activity between the
the Minister of
subsidiaries;
Communications examine a change in the separation customary in Israel
recommends
team also
that
the
19
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
between the infrastructure service and the ISP service (in this matter see
update to section 1.7.2.2).
It was further noted that since the issue of structural separation is not binary,
the team believes that the issue should be further examined, and in
accordance with, among other things, changes in the market. The team
recommends that a period of time be given for the continuation of the
Ministry's ongoing administrative work or in any other way that the Minister
of Communications decides to deepen and examine the alternatives and
recommend regarding the implementation of the chosen alternative.
On February 16, 211, a hearing was held on the petition, at the end of which
the Court noted that it believes that the petition will be rejected at the end of
the day and therefore recommended that Bezeq withdraw the petition.
Subsequently, on February 23, 2021, Bezeq informed the Court that it had
decided to accept the Court's recommendation and withdraw the petition,
and on February 24, 2021 the petition was removed.
1.7.2.2 Marketing a shared basket of services with a subsidiary and between
subsidiaries
Bezeq was allowed to offer subscribers shared services ("Bundles") with the
subsidiaries, subject to approval by the Ministry of Communications and subject
to a number of conditions set forth in the NIO license, including:
▪ The baskets will be "detachable", that is - each service included in them
will be offered separately outside the framework of a basket of services,
under the same conditions.
▪ At the time of submitting the application for approval of the basket, there
is a group of services in a similar format that is marketed to a subscriber
as a package by a licensee who is not a Bezeq subsidiary, or there is a
group that includes licensees who provide a private subscriber with all
services included in the shared basket of services.
▪ The marketing of shared service baskets by the subsidiaries, which
include Bezeq Services, is also subject, according to their licenses, to
similar restrictions, including the requirement of "detachability" (except for
a basket marketed by a subsidiary that includes only Bezeq's Internet
infrastructure service).
These limitations, and in particular the "detachability" obligation, which severely
limits the Group's ability to provide discounts on various components in the basket
of services, place the Group in an inferior competitive position relative to
competing communications groups that are not subject to similar restrictions on
the marketing of bundles (except for restrictions that are limited to marketing a
shared basket of Hot-Net and other companies from the Hot Group). The Ministry
of Communications has approved Hot Telecom and Hot Systems to market to the
private segment baskets which include broadcasting, Internet infrastructure and
provider and telephony services by Hot. The Ministry later approved the
marketing of a shared basket that includes cellular services and international
calls. Bezeq’s handicap is even more significant with the implementation of the
BSA wholesale service, and the ability of Internet access providers (ISPs) to
provide a full end to end service (infrastructure + provider) to customers at
reduced prices, compared to the detachable baskets the Bezeq is allowed to
market, insofar as they are approved.
Marketing a shared web infrastructure services basket along withISP
In 2017, following the Ministry’s requirement, changes were carried out in the
format of selling bundles, the main one of which is splitting the bundle (supplier
and infrastructure) after one year. On June 18, 2020, Bezeq received a decision
by the Director General of the Ministry of Communications, according to which
the changes made temporarily (on March 25, 2020) in the reverse bundle
marketing format, and especially the elimination of the obligation to split the
bundle after one year and Bezeq's ability to contact customers and renew the
bundle at any time, will be permanently valid. Eliminating the need to split the
"reverse bundle" per se is expected to positively impact Bezeq’s activity in the
field of the Internet, to an extent that cannot be fully assessed at this stage, in
20
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
part, since the results of Bezeq's activity as aforesaid are affected, apart from this
decision, also by the moves of its competitors and the conduct of its customers.
Following a supervisory procedure in which it was alleged that Bezeq did not fully
comply with the license provisions regarding splitting the reverse bundle after one
year (before canceling this format), Bezeq was charged in June 2020 with a
financial sanction for marketing the reverse bundle in the amount of NIS
2,013,760. This amount was paid by Bezeq.
Hearing on examining the separation between broadband infrastructure service
and Internet access service (ISP):
On October 4, 2020, a hearing was published on examining the separation
between broadband infrastructure service and Internet access service (ISP) ("the
First Hearing") according to which the Ministry of Communications intends to
take policy measures that include, among other things, amending the licenses of
infrastructure owners - Bezeq and “Hot Telecom" so that from January 1, 2022
they will be allowed to provide customers with a unified Internet service that
includes the components that are currently known as "broadband access service
for ISP providers" and "ISP service", under the conditions set out in the hearing.
After references to the hearing were submitted, on February 24, 2021, a second
hearing was published on the Ministry of Communications' website on the same
matter (“the Secondary Hearing"), which includes substantive amendments to
the outline proposed in the First Hearing, after the Ministry considered the
responses received at the First Hearing. In line with the Ministry’s position, it is
adamant that the consolidation of the retail Internet service into a unified product
should continue to be promoted, along with the existence of a competitive market
where each supplier will stand in a single line vis-à-vis the end consumer, when
the main tool for reaching this goal is to improve the wholesale market and bring
it to a state of self-government and substantial equality.
The following are the main outlines of the proposed amended application:
The parties (infrastructure owners and access seekers) must reach within two
months agreements on output indices for the wholesale market. These
agreements will be submitted as a shelf agreement for approval by the Ministry
of Communications that can approve, reject or adopt it with changes. Then, a
three-month period for the calibration and testing of the effectiveness of the model
will begin. At the end of the calibration period, the Ministry will announce the
beginning of an assessment period of three months, at the end of which
infrastructure owners will be able to offer a unified service that includes access
services and provider service. The preparation period in both networks will begin
only at the end of the calibration period and run-up on the fiber network.
Infrastructure owners will be required to publish the wholesale market output
indices to suppliers operating in the wholesale market and the Ministry, and act
in accordance with the compensation mechanism, and the Ministry will be allowed
to publish these indices to the public or any of the entities it oversees, with the
possibility for the Ministry to initiate supervision and enforcement proceedings if
the performance indices indicate a violation of the duty of equality in the provision
of wholesale services, in addition to the agreed compensation payment included
in the shelf offer.
If material difficulties arise in implementing a wholesale market, both with respect
to new ultra-broadband networks and with respect to existing broadband
networks, the Ministry will review the policy on this issue and operate with the
tools at its disposal.
The Ministry intends to establish a mechanism of automatic mobility between
suppliers that will take effect on the effective date.
One year after the lifting of the ban on infrastructure providers offering a unified
service, the Ministry will examine the number of subscribers in a split and semi-
unified configuration, and if it is found that a substantial number of subscribers
are still in these configurations, the Ministry will consider taking further steps in
order to bring about a situation where the landline Internet service is provided as
an end-to-end service by one provider..
Bezeq and Bezeq International are studying the Secondary Hearing documents.
Bezeq estimates that as long as the move is implemented and the ban on Bezeq
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
offering a unified service (and Bezeq being able to offer a unified end-to-end
Internet service) from the effective date, this is expected to have a positive effect
on its business. As far as Bezeq International is concerned, the move could lead
to damage to its results and to the impairment of its assets. The total impact on
the Group in the coming years is expected to be positive. On March 11, 2021, the
Company submitted its response to the Secondary Hearing, according to which
the outline of the proposed application at the hearing is incorrect and gives
providers instruments to delay the start of the reform and an incentive to distort
the measurement results, the ground sof which is a baseless concern of
discrimination. The Company offered a shorter and clearer outline for a shelf
offer, which does not include fines.
In this regard, see also Bezeq's immediate report dated February 25, 2021, which
is included in this report by way of reference.
Marketing a shared service basket with DBS - regarding restrictions on
cooperation with DBS for the sale of shared baskets of services by virtue of Bezeq
and DBS licenses, see also section 5.15.2. On March 27, 2017, the Ministry of
Communications announced to Bezeq that it does not approve the Bezeq’s
request to market a shared basket of services with DBS, as the Ministry is facing
the completion of a number of regulatory moves that will enable fuller
implementation of the wholesale market reform, including the telephony resale
regulation, a new regulation of Bezeq retail rates, a regulation of the margin
reduction mechanism and a regulation of the marketing conditions of a shared
basket of services as part of which Bezeq markets infrastructure services
together with ISP Services of an ISP provider ("Reverse Bundle"). Therefore,
according to the Ministry's announcement, it will be right to examine such
requests for a shared basket of services, including Internet, telephony and
television, in at least six months, after examining the effect of the above moves
on the market and when it becomes clear that Bezeq complies with the
regulations. As of the date of the report, Bezeq has not submitted another request
on the subject. It should be noted that on February 15, 2018, the Ministry referred
to Bezeq's announcement regarding an intention to send interested customers a
link to the DBS website and expressed its position that the marketing of DBS’s
television over the Internet ("Sting") by Bezeq is not in accordance with the
structural separation provisions detailed in Bezeq’s license, and Bezeq is not
marketing the DBS "Sting" service in accordance with the aforesaid.
Marketing of a shared basket of services with Pelephone - On February 10, 2019,
the Ministry rejected Bezeq's request of January 13, 2019, to market a shared
basket of Internet infrastructure (with or without an Internet provider), together
with Pelephone's cellular services, inter alia, for the reason that it was not found
that the request has the potential to contribute to competition in the
communications market, but can also lead to harm to the developing competition
in the wholesale market and to the existing competition in the cellular market, and
to the strengthening of Bezeq Group and its existing competitive advantages. The
rejection letter also stated that the marketing of shared services baskets was
discussed by an inter-ministerial team that examines the structural obligations
that apply to Bezeq and Hot groups (the team examining the obligation of
structural separation). It should be noted that in the past, shared baskets with
Pelephone were approved.
1.7.2.3 Additional restrictions on collaboration and preference between group
companies
There are additional restrictions on cooperation between Bezeq and the Group
companies both by virtue of competition law and conditions set by the
Competition Commissioner for mergers between Bezeq and Group companies,
which prohibit discrimination in favor of the Group companies in the provision of
certain services (see section 2.16.8), and by virtue of the provisions of Bezeq's
license, which require it to provide its services equally. For additional restrictions
see also section5.15.2.
Removal of the restrictions on structural separation and other restrictions that
apply to collaborations between the Group companies as detailed above, insofar
as they are removed, may create different opportunities for the Group to exploit
such synergies or facilitate the exploitation of such synergies..
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1.7.3. Regulatory supervision and changes in the regulatory environment - wholesale market
In recent years, a model of "wholesale market" has been implemented in Israel, in which
the owners of the nationwide landline access infrastructure in Israel (Bezeq and Hot) have
been required to allow other communications operators to use Bezeq infrastructure at the
prices set in the regulations.
In this context, the Ministry of Communications established "service portfolios" for the
various services, in which the format of the provision of services by the infrastructure was
determined:
1.7.3.1 Wholesale BSA service
This service allows infrastructure-less service providers to offer their customers
a full Internet service that includes both an Internet connection service (of the
service provider) and an Internet infrastructure service (based on Bezeq’s
network). Since the launch of the service, hundreds of thousands of customers
have moved to receive service through such service providers.
1.7.3.2 Wholesale physical infrastructure use service
This service allows infrastructure-less providers to use Bezeq's physical
infrastructure for the passage of communication cables, as well as the use of dark
fiber.
The service was expanded after Bezeq was obliged to allow other NIO license
holders, who are not necessarily infrastructure-less providers, to use its passive
infrastructure for the purpose of performing any Bezeq operation and providing
any Bezeq service according to their licenses. Bezeq was also given the right to
use the physical infrastructure of other companies.
1.7.3.3 Wholesale telephony service
This service enables infrastructure-less service providers to offer their customers
telephony service at wholesale rates through Bezeq’s network. Until August 2018,
a temporary arrangement for one year was in force, which allowed Bezeq to
provide the service in a resale format, namely - a format in which the service
provider purchases a line and call minutes and receives a package of services
(including technician services) from Bezeq, while in accordance with the Ministry
of Communications' announcement, as of August 2018, Bezeq is obligated to
provide the service in a "Wholesale" format, namely - a service format in which
the service is provided using Bezeq's switch, but the call also goes through the
service provider's switch, both as ann individual service and as an additional
service to the BSA service. As of August 2018, Bezeq is prepared to provide
resale services at wholesale rates (excluding technician services) - although in
this service the call does not pass through the service provider’s switch, and as
of early 2019 Bezeq is prepared to provide a wholesale telephony service solution
that passes through the service provider’s switch, and is based on both Bezeq's
subscribers switch and an additional component external to the switch (for more
details, see also sections2.1.8, 2.7.2 and 2.16.4). As it became clear after
discussions that took place, inter alia, in the Ministry of Communications, the
service providers are not prepared to act according to the format of the service
portfolio.
Regarding the new switch that complies with the requirements of the Ministry of
Communications for the service format, see section2.7.2.
The maximum rates that Bezeq may charge for the provision of services are regulated in
the regulations.
The sale of wholesale services on the Hot network began, to the best of Bezeq's
knowledge, in the middle of 2018, and Bezeq estimates that the volume of wholesale
subscribers on the Hot network is not high at this stage.
The regulatory determinations in relation to the wholesale market as well as its
implementation and development during the reporting period have an impact on a
significant part of the Group's activities. For more details about the wholesale market
services and their regulation, see section2.16.4.
1.7.4. Additional regulatory aspects that are relevant to the whole Group or to a number of
companies in it
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1.7.4.1
Interconnectivity rates
The Group's communications companies (Bezeq, Pelephone and Bezeq
International) pay interconnectivity fees to other communications operators for
calls that end in the networks of those operators and some (Bezeq and
Pelephone) receive interconnectivity fee payments for calls that ended in their
networks and from international communication operators for outgoing and
incoming calls to their networks. Interconnectivity rates are set as maximum rates
by the regulator in the interconnectivity regulations. Changes in interconnectivity
rates have a offsetting effect at the Group level in light of their effect on Bezeq's
expenses and income and the subsidiaries in this matter.
1.7.4.2
Limiting the exit fee that a licensee may charge from a subscriber
In accordance with the provisions of the Communications Law, NIO, international
operator and broadcasting licensees (including Bezeq, Bezeq International, DBS
and BAP) are not allowed to charge an exit fee for cancellation of contract by a
subscriber whose average monthly bill is less than NIS 5,000, or deny him a
benefit he would have received if he had not terminated the contract15. Cellular
operators (including Pelephone) - are not allowed to charge exit fees from
customers who hold up to 100 telephone lines or link a contract for the receipt of
cellular services to a contract for the purchase, rent or borrowing of end
equipment ("disconnection"). As a rule, these restrictions make it difficult for
operators subject thereto to retain customers.
1.7.4.3 Prohibition of discrimination in the provision of benefits and unique rate
plans
The Ministry of Communications has previously expressed, among other things,
in motions for approval of class actions filed against Pelephone, Bezeq
International and DBS claiming customer discrimination, various positions
stemmed from the fact that communications companies may be limited in certain
circumstances in their ability to offer unique benefits and rate plans to their new
customers or prevent a subscriber from switching to plans that are marketed to
new customers. The Ministry of Communications announced in the past that it
intends to examine the holding of a hearing in relation to the change in the
provisions of the licenses regarding price discrimination between subscribers in
order to create unification in the licenses aiming to create unification and in a
manner that is consistent with changes and permutations in the market, and has
not yet done so. On December 9, 2019, the Tel Aviv-Yafo District Court issued a
ruling in which the Court addresses the changing positions of the Ministry of
Communications in the matter and expressed its position that there was no need
to adopt the position of the Ministry of Communications, since there were a
number of major flaws in the formulation of its opinion and the manner in which it
was made (lack of factual infrastructure, lack of consultation wit the Competition
Authority, lack of reasoning, incoherence and failure to hold a hearing). The ruling
rejected the approval of the class actions and an appeal was filed against it. For
further details, including an appeal filed against the ruling, see sections3.16.1d
and e, 4.12.1, 4.12.1c and 5.17.1a.
1.7.4.4
License amendments and related legislation
a) Response times at call centers
The amendment to the licenses of Bezeq, Pelephone and Bezeq
International have established, among other things, provisions regarding the
obligation to route calls in certain matters to professional human response,
response times, as well as provisions regarding call center hours, recording
and documentation of calls and reporting obligations. The amendment
entered into force on the date of its entry into force of the amendment to the
Consumer Protection Law (July 25, 2019), which deals, among other things,
with the waiting period for a human response. The DBS’s broadcasting
license has been similarly amended. The amendments led to an increase in
the operating costs of the Group companies' call centers. It should be noted
15 With regard to the operators' claim in the hearing held by the Ministry in connection with this directive, according to which
discounts or benefits stipulated by conditions that the subscriber is required to comply with do not constitute a violation of the
directive, the Ministry stated that it will examine whether the condition is true and relevant also when the subscriber remains a
subscriber with the operator.
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that in November 2019, the Ministry of Communications issued a demand
for data as part of an inspection of the operation of all communications
companies regarding waiting times for a human response at call centers. A
similar demand was addressed to DBS in January 2020. On June 15, 2020,
Bezeq received an inspection report according to which, in light of the low
deviation rate (7%), it was decided not to continue enforcement proceedings
against Bezeq. In January 2021, Bezeq International received a notification
from the Ministry of Communications stating that Bezeq International had
exceeded the waiting times for a human response it was required to meet,
and therefore the Ministry intends to impose a financial sanction of
approximately NIS 285k. In February 2021, Bezeq International submitted a
response to the Ministry of Communications, in which it challenged the
financial sanction and the manner of measuring the deviations.
b) Amendment of the IPv6 protocol (Internet addresses)
On July 3, 2019, the Ministry of Communications issued a decision by way
of hearing and amendment to the license according to which the transition to
the IPv6 protocol will be executed according to the milestones determined.
For Bezeq (as a holder of a landline NIO license) and for holders of Internet
access licenses, it has been determined, among other things, that the
network and its components will be adapted in a way that allows access to
Internet service subscribers via IPv6 protocol from any end equipment
supporting the IPv6 protocol, that the licensee must proactively transfer to
addresses in the IPv6 protocol existing and new subscribers with end
equipment that supports the IPv6 protocol. The transfer of subscribers will
be done according to milestones, so that up to 24 months from the date of
the amendment, 50% of the subscribers will move, up to 36 months - 75%
and up to 48 months – 100% (except subscribers who hold private end
equipment which does not support the IPv6 protocol and decided not to
replace it, provided that the licensee, among other things, will sign a waiver).
Regarding holders of mobile radio telephone licenses (such as Pelephone),
it was determined that the proactive transfer will reach 100% within 24
months. Bezeq is preparing for the transition, and at this stage does not
anticipate a material expense in respect thereof.
1.7.4.5 Consumer legislation and privacy protection laws
Changes in consumer legislation affect the activities of the Group companies on
an ongoing basis. In recent years, various amendments to the Consumer
Protection Law and its regulations have been approved, including cancellation of
transactions even after the service has begun, disconnection from ongoing
services, the need for explicit consent to continue transactions after the stipulated
period, the sending of messages, provisions regarding the refund of charges
collected from a subscriber not in accordance with an engagement agreement
plus a fixed handling fee in accordance with the law, as well as maximum waiting
time for human response and extension of technicians' visiting hours at
customers' homes. In addition, a variety of bills for additional amendments to the
Consumer Protection Law have been brought before the Knesset, which may
have an impact, among other things, on the terms of the Group's contracting and
conduct with their subscribers.
On November 24, 2020, an amendment to the Consumer Protection Law was
published, according to which a database will be established and managed by
the Consumer Protection Authority to restrict a dealer's marketing inquiries
through telephone calls (including an electronic communication call) in order to
engage in a transaction. Pursuant to the amendment, the database will register
telephone numbers of consumers who wish to restrict such marketing inquiries to
them and a dealer will not be allowed to contact a consumer whose telephone
number is registered in the database with marketing offers (subject to exceptions
provided by law). The date of commencement of the amendment in this matter is
18 months from the date of its publication. The Group companies are unable to
assess at this stage the effect of the amendment on their marketing and sales
ability.
In addition, the activity of the Group companies is affected by the provisions of
the Privacy Protection Law and its regulations regarding the management and
maintenance of databases and the security of the information contained therein.
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In May 2018, the Privacy Protection Regulations (Information Security), 5777-
2017, entered into force, imposing various obligations on the database owner,
including obligations to establish procedures and perform risk assessments in
relation to information security, as well as the use of advanced security measures
for information protection.
1.7.4.6 Enforcement and financial sanctions
In the last few years, the Communications Law, the Economic Competition Law,
the Securities Law, the Consumer Protection Law, the Law for Increasing the
Enforcement of Labor Law and the Telegraph Order were amended and by virtue
thereof, regulators were granted powers of enforcement, supervision and the
imposition of significant tiered financial sanctions for violations of the said laws or
regulations and provisions thereunder. Such legislation has an effect on the
conduct of the Group’s companies, inter alia, in terms of the concern of the
imnposition of sanctions on them, their defense capability, etc.
In recent years, the Ministry of Communications has made extensive use of its
powers to supervise and issue notices of intent to impose financial sanctions on
Bezeq in current regulatory matters. For the financial sanction regarding the
implementation of the wholesale market, see section 2.16.4.2 and for the
announcement regarding the imposition of a financial sanction regarding
wholesale telephony service, see section 2.16.4.4. For the financial sanction for
passive infrastructure in the matter, see section2.16.8.5. For the financial
sanction in the matter of the Reverse Bundle, see section1.7.2.2.
The Consumer Protection and Fair Trade Authority also makes use of the
enforcement powers conferred on it by the Consumer Protection Act, and from
time to time data demands are issued, investigations are conducted against the
Group companies on suspicion of violating this law and fines are imposed. In this
context, in February 2021, Bezeq received a notification from the Consumer
Protection Authority of an intention to charge Bezeq a financial sanction of NIS
6.75 million for alleged violation of Article 2(a)(1) of the Consumer Protection Law,
claiming that Bezeq did not supply thousands of consumers who purchased a
browsing package of the type TOP 100 with this speed. Bezeq submitted its
response to the notification and requested that the notification be canceled, since
after understanding the findings, they do not arise of any concern of misleading
customers.
1.7.4.7 The Centralization Law
In December 2013, the Centralization Law was published. The following is a
summary of the main provisions of the law relevant to the Group:
a) Restrictions on granting credit to business groups
The Minister of Finance and the Governor of the Bank of Israel have been
authorized
to establish regulations and directives regarding credit
restrictions to be granted by financial entities in Israel, cumulatively, to a
corporation or business group (a group of companies under joint control and
ownership).
b) Consideration of centralization considerations of the economy in the
allocation of rights - restrictions on the allocation of rights in essential
infrastructure are to a " centralized entity "
The law establishes a special and restrictive procedure which each regulator
must take before allocating rights (such as a license, franchise, entering into
a contract with the State to operate an essential infrastructure and in some
circumstances also an extension of existing licenses) in areas defined as
"essential infrastructure" to factors who were defined as “centralized
entities”. In this regard, a list has been defined of areas that will be
considered "essential infrastructure areas", including activities in which
certain communication licenses are required (NIO except for unique NIO
(such as VoB operators) and cellular), broadcasting licenses and other
areas. The Company and corporations under its control are included in a list
published by the Competition Authority and are considered a "centralized
entity". The procedure established by law regarding allocation of rights to a
centralized factor shall also apply to the granting of approval for the transfer
of means of control in companies held by the State or which were previously
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state-owned companies (including Bezeq) at the rates prescribed by law, to
a centralized entity.
The law may have adverse effects on the Group's ability to operate in new
areas of activity and even on its activities in its existing areas of activity.
c) Separation between significant real corporations and significant financial
entities
The law sets limits on the holdings of financial entities in significant non-
financial corporations, on certain types of cross-holdings in significant non-
financial corporations and in significant financial entities and on cross-
holdings in such entities. The company and corporations under its control
are defined as significant real corporations under the Centralization Law.
1.7.4.8 Millimeter waves
Millimeter-wave technology makes it possible to wirelessly transmit significantly
larger bandwidth than previously available technologies. The technology can be
used both from point to point and from point to multiple points.
Following the hearing published by the Ministry on September 9, 2019 regarding
the application of the use of frequencies that enable the operation of millimeter
wave technology. On April 6, 2020, an amendment to the Wireless Telegraph
Order (Non-Applicability of the Order) (No. 2), 5742-1982 was published, which
provides, under certain conditions, non-applicability of the Wireless Telegraph
Order with respect to use in the field of V-Band at frequencies 57-66 GHz (it
should be noted that on September 15, 2020 an amendment was published
extending the exemptions to the above frequency range under certain conditions,
both intended to be used as fixed stations in a wireless line from point to point
outside the building (outdoor) and intended to operate inside buildings only
(indoor). Also, on August 2, 2020, an additional amendment was published to the
above Order stipulating, under certain conditions, the non-applicability of the
Wireless Telegraph Order with respect to additional uses. On December 15,
2020, the Wireless Telegraph Regulations (Licenses, Certificates and Fees)
(Amendment), 5720-2020 and the Wireless Telegraph Regulations (Licenses,
Certificates and Fees) (Temporary Order) (Amendment No. 2), 5780-2020 were
published, relating to reduced fees in light licensing in the frequency ranges: 74
to 76 GHz and 84 to 86 GHz.
1.7.4.9 Asymmetry in infrastructure information
Following the hearing held on the subject, the Ministry of Communications issued
a decision on November 2, 2020, regarding asymmetry in information regarding
infrastructure and amendment of the wholesale BSA + telephony service
portfolio, which, among other things, imposes on infrastructure owners, including
Bezeq, periodic advertising obligations on the computerized interface (API) and
on its website regarding advanced network deployment. In addition, Bezeq must
publish detailed statistical information on an internal interface between the
operators, which relates to a wide range of parameters. The service portfolio
amendment also stipulates that Bezeq must provide the service providers with
the characterization of the mechanized interface that is appropriate for the service
providers and complete its development and the publication of the network's
deployment, within the deadlines set in the service portfolio amendment. An
amendment to Bezeq's license was also subsequently issued regarding the
submission of an engineering plan and the preparation of upgrades /
developments in the network.
1.7.4.10 Changing the format of the regulation of the provision of Bezeq services
On March 3, 2021, Communications (Bezeq and Broadcasting) Law (Amendment No.
75) (change in the Format of Bezeq Regulation), 5781-2020, was published. The
bill proposes to change the format of the existing regulation in the law (according
to which the main tool for the regulation is a license to provide Bezeq and
broadcasting services) in such a way as to eliminate the obligation to obtain a
specific license in advance (per person and operation) as a condition for
performing a Bezeq operation. It is proposed instead that the default regulation of
the provision of communications services in Israel be through registration in a
register maintained by the Director General of the Ministry of Communications,
after testing only for minimum threshold conditions. The conditions registered in
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
the register will be subject to conditions to be determined in the general
authorization, which prescribes clear and detailed conditions, which may apply in
the same way to all service providers, allows any person interested in providing a
Bezeq service to know in advance the conditions for such activity, and start
operating without requesting or obtaining a license. According to the explanatory
statement, the change in the format of the regulation is proposed in a way that
will reduce the bureaucratic burden, lower barriers to market entry, and conform
to what is accepted in the world in the field of communications. In addition, the
definition of "Bezeq service" subject to the regulation will be changed, to reduce
the services subject to regulation. "Bezeq service" is defined as a service provided
to the public or part of it through Bezeq’s network, which is one of the following:
(1) a service for the purpose of which the Bezeq network is operated and is a data
transmission service, or other service in respect of which there is a public interest
concerning state security, public safety or the promotion of competition and shall
be a subscriber under the First Schedule (2) telephony; (3) Internet access.
The bill also proposes that the obligation to obtain a license apply when it comes
to (a) Bezeq service for the purpose of providing the operation of a Bezeq network
that is a mobile radio telephone system or a Bezeq network whose number of
users or the number of network endpoints or end points in which exceeds the
number determined by the Minister (B) Bezeq service for the purpose of providing
direct operation of a Bezeq network operating via satellite under certain
conditions; (c) Bezeq service for the purpose of providing direct operation of a
Bezeq network which is an underwater communication cable; (d) Bezeq operation
with an underwater cable. Also, a local authority (including a municipal company
or a municipal subsidiary) will not provide a Bezeq service without a license. The
Minister has the authority to determine additional Bezeq services that will be
subject to a license, as well as additional service providers to whom the licensing
obligation will apply. Under the bill, Article 5(j) of the law is amended so that
passive use of the Company's infrastructure will be possible for an "authorized
provider", including a permit holder. It should be noted that in Bezeq's comments
on the law memorandum dated August 9, 2020 which preceded the above
proposal, it was clarified that despite the need to facilitate essential services
(especially those based on physical infrastructure), multiplicity of operators may
affect other regulations in the market in a way that may undermine Bezeq's
investment considerations in light of its inability to compete on equal terms in
areas where deployment by providers by virtue of a general permit is expected.
Moreover, amending the law could lead to the entry of dozens of elements into
Bezeq infrastructure and their uncontrolled use thereof, with all that that implies.
1.7.4.11 Data demand hearing - Consumption of Communication Services
On January 17, 211, the Ministry of Communications issued a hearing according
to which the Ministry intends to demand a very large monthly transfer of data on
the characteristics of the consumption of communication services by subscribers
(including identifying details about the subscriber, the package consumed
thereby, and details regarding each of the services consumed by the subscriber).
The data demand will be sent to all operators in the communications market that
provide services to end customers (private and business) as well as to various
licensees and it applies to all types of customers who receive service from the
licensee (private and business), both wholesale and retail. According to the
hearing, cross-referencing the information will allow the Ministry to obtain a
complete picture of the activities of communications providers on the one hand,
as well as the characteristics of the communications consumer on the other, and
it is expected to allow the Ministry to monitor the level of competition in the various
sub-markets. On March 9, 2021, Bezeq submitted its response to the hearing,
according to which the hearing is fundamentally flawed by many problems and
failures, including a breach of privacy and business secrecy; Information that is
vast in scope without defining a purpose on the basis of which an adapted data
demand has been clearly formulated, when this is not intended by authority in
law; Creating a very tangible danger due to the construction of a huge database,
which centralizes detailed information, at the personal, financial and business
level, of all citizens of Israel and the business companies active in it, while creating
endless opportunity for cross-referencing information; The individual resolution of
the requested data creates an opening for a jungle of legal issues. The reporting
format is often irrelevant and / or inapplicable; The scope of resources required
by Bezeq for the benefit of the matter is very significant and requires a diversion
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of manpower in the field of information systems from critical business activities.
Bezeq believes that the solution to these problems is to shelf the intention
presented at the hearing for the comprehensive transfer of all Bezeq's customer
data, or alternatively a specific definition of goals and objectives on the basis of
which the data relevant for their achievement will be clearly and accurately
defined, and which complies with the Ministry's powers in receiving information
and is supported by the structure of Bezeq's information systems. A similar
reference was also submitted by the subsidiaries Pelephone, Bezeq International
and DBS.
1.7.4.12 For the decision by hearing regarding licensing for new operators for the
provision of Internet access infrastructure services - see section2.6.3.6.
1.7.4.13 Inactive subscribers
On September 10, 2020, the Ministry of Communications contacted the
telecommunications operators
(including Bezeq, Pelephone and Bezeq
International) in a letter in which it raised concerns that some of the subscribers
to the operators' services are not using them and are not even aware of it. The
Ministry recommended in its appeal to operators to act to notify and stop charging
subscribers who do not use these services, and also requested periodic reports
on the matter, over the next 6 months. It was also stated that the Ministry will
consider in the future whether to set binding provisions in the matter, in case
proactive actions will not lead to a significant reduction therein. Regarding the
handling and consequences of the Ministry of Communications' request to Bezeq
International, see section 4.4. Bezeq and Pelephone transmit the requested
information and from an examination of the issue by them, it does not appear that
this is a phenomenon with significant consequences for them. On January 14,
2021, a preliminary request was also sent to DBS by the Cable and Satellite
Broadcasting Council regarding "Demand for information about "dormant"
subscribers as well as about services that subscribers pay for and do not use". In
March 2021, DBS replied that due notice was given to its subscribers, and that it
could not provide the requested information due in part to the lack of established
information in its hands, due to the Council's lack of authority in at least some of
its requests, and due to additional difficulties inherent in the Council's application.
1.7.5. Restrictions on creating liens on the assets of the Group companies
For the sake of convenience, the following are references to sections in the 2020 periodic
report that relate to the restrictions that apply to the Group companies in the lien on their
assets and the main restrictions:
1.7.5.1 Regulatory restrictions - The Communications Law, the Communications
Order (applicable to Bezeq) and some of the communications licenses of the
Group companies include restrictions on the granting of rights to third parties in
the assets used to provide the essential service or in the license assets.16, as the
case may be, including the need to obtain regulatory approvals to create liens on
these assets. In some cases, for example Pelephone's mobile radio telephone
license and Bezeq International's unified license, there are exceptions that allow
the creation of liens in favor of a banking corporation without the need for advance
regulatory approval, provided that the lien agreement includes provisions
ensuring that the exercise of the lien by the banking corporation will not impair the
provision of the services under the license. In addition, according to the provisions
of the law and the media licenses, the license and the rights under it are not
transferable, and cannot be encumbered or foreclosed (subject to exceptions).
See also sections2.16.3.7, 3.14.2 and5.15.1.7.
1.7.5.2 Restrictions on agreements- Bezeq undertook to certain financiers in an
undertaking not to encumber its assets unless it creates in favor of those financing
bodies at the same time a lien of the same type, rank and amount (negative lien),
subject to certain exceptions. see also Note 14.4 to the 2020 statements.
1.7.6. Pandemic - Outbreak of COVID-19
At the beginning of 2020, a global outbreak of the Coronavirus (COVID-19) began, which
is an incident with many implications, including macroeconomic ("the Incident"). Following
16 The assets needed to ensure the provision of services by the licensee.
29
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
the Incident, many countries, including Israel, have taken and are taking significant steps
in an attempt to prevent the spread of the virus, such as restrictions on the movement of
citizens, gatherings, transport restrictions on passengers and goods, closing borders
between countries, and so on. As a result, the Incident and the actions taken as aforesaid
have significant implications for many economies as well as for the capital markets in the
world, including a general decline in the levels of business activity in the economy (see
section2.20.10), leading to payment problems in certain segments.
In view of the effects of the pandemic on the whole economy, on the world and on the
Group companies, which also involve a great deal of uncertainty, there may be a material
adverse effect on the Group's results, mainly as a function of the duration and scope of the
restrictions. During 2020 until the date of publication of the report, the impact of the Incident
is mixed - a significant decrease in revenues from roaming services in Pelephone and a
certain decrease in revenues from the business segment in all Group companies were
offset almost entirely by
landline
communications services in the private segment. In addition, the prolongation or
exacerbation of the crisis may damage revenues from the sale of mobile end equipment as
well as collection amounts and dates, mainly from some of the Group's small to medium-
sized business customers.
increased consumption and
revenues
from
The Group companies take various actions to deal with the risks and exposures arising
from the consequences of the Incident, including remote work, training for employees
required to be in contact with the public, purchase of required accessories, activities to
increase equipment inventory and expanding core product supply sources.
It should be noted that since the beginning of 2021, an operation to vaccinate the population
in Israel against the virus has begun, an activity that may mitigate the effects of the
pandemic and allow, to a certain extent, a return to the economy's routine of economic
activity.
The Company's estimates as aforesaid are forward-looking information and may vary
depending on various developments regarding the COVID-19 pandemic and its effects, in
particular the duration and extent of the Incident, the nature and extent of the economic
and other restrictions associated with it, and the intensity and duration of the economic
recession.
It should be noted that during the period various actions were taken by the Ministry of
Communications (and also by the Council and the Chairman of the Council regarding DBS)
to deal with the consequences of the Pandemic, including providing temporary relief to
communications companies (some of which have already expired), inter alia, regarding
response times at call centers, mobility, connection and collection of equipment and
TReverse Bundle.
For the purposes of this section, see also section __ of the Board of Directors’ Report and
Note 1.4 to the 2020 statements.
For this matter, see also the description of the risk factors in all areas of activity in
sections2.20.13, 3.19.1.2, Error! Reference source not found. and 5.19.1.4.
1.7.7. For a description of additional regulatory developments during the reporting period
and to describe the main restrictions that apply to the Group's areas of activity, see
sections 2.16, 3.14, 4.11 and 5.15.
1.8. Bezeq Group Business Strategy
The Group's vision
Bezeq Group will lead the communications market in Israel, satisfy the entire communications needs
of the private and business market and strive for continuous improvement in its business results.
Group strategy
-
-
-
Leading the communications market In Israel, through investment in quality and advanced
infrastructure and the provision of quality and efficient service.
Focus on broadband infrastructure: fiber optics and the 5G network (core areas), as the Group's
continuous growth engines.
Profitability and market share:
Subsidiaries - striving to improve profitability without impairing market share
Bezeq Fixed Lines - striving to preserve market share / increase in specific segments, while
30
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
maintaining profitability
-
Continued streamlining based on focusing on core business and administrative reduction, and
striving to improve managerial flexibility and responsiveness
- Maintaining financial resilience and stability
-
-
-
Initiating business development measures (including M&A), in areas that touch / expand on the
core areas
Striving for regulatory elimination of the structural separation, which will enable a full merger of
the companies in order to improve customer service, strengthen competitive capacity and bring
value to shareholders
Connecting and harnessing management and employees to create value for the Company
through incentives and rewards.
Streamlining moves and promoting the assimilation of synergies between subsidiaries
The subsidiaries Pelephone, Bezeq International and DBS (the "Subsidiaries") have implemented
and are implementing significant moves to promote and assimilate the synergy between them,
including the signing of collective agreements which include streamlining and synergy procedures;
Transition to managements in a similar composition, while streamlining decision-making processes,
along with savings in expenses; Implementing streamlining measures and saving on operating
expenses; Sales of the companies' services through the distribution channels of the other companies;
Implementing a shared customer management system (CRM) over an advanced Cloud platform;
Implementing additional synergistic moves such as cross sales, deepening shared procurement and
using shared resources. In this matter, see also section 1.1.4.
For details on additional strategic objectives in relation to each of the Group companies, see
sections2.19, 3.17, 4.13 and 5.18.
In respect of decisions by Bezeq’s Board of Directors and DBS’s Board of Directors regarding an
outline for a gradual transition from satellite broadcasts to transmission via the Internet (OTT) see
section5.19.
The assessments described in this section are forward-looking information that may be affected by
various factors, including future changes in the Israeli market in general and in the communications
market in particular, strategic and other moves to be made by Bezeq and its subsidiaries, regulatory
changes, Bezeq's competitive position, etc. The above may be affected by the materialization of
some of the risk factors listed in the sections 2.20,3.19, 4.14 and 5.19.
1.9. Incident outside the scope of the corporation's business
As part of the preparation of the quarterly report and as part of the process of preparing and closing
the financial statements for the period ended September 30, 2020, Bezeq International found that
there are discrepancies between the assets and liabilities listed in its books and the actual assets
and liabilities, due, among other things, from the non-imputation of costs from previous years in
respect of payment of advances to suppliers to the income statement and improper recognition of
advance expenses. Following the discovery of the discrepancies, Bezeq International's Management
began an immediate examination of the issue and carried out compensatory actions, tests and
procedures, while investing a great deal of effort and resources, in order to prepare the financial
statements lawfully.
Bezeq's Board of Directors has appointed an independent external examiner17 for an in-depth
investigation of the incidents and circumstances. On February 4, 2021, the external auditor presented
his findings to Bezeq's Board of Directors as part of an examination report prepared by him (the
"Examination Report"). The findings mainly referred to: payable balances of suppliers that were not
reflected in Bezeq International's statement of income in 2001-2003 (as part of the audit,
documentation was found that some of Bezeq International's CFOs had known for years about
unexplained debit balances); Lack of recognition of expenses in parallel to revenue in service
agreements with customers between the years 2018-2019; Failures in the control systems that
enabled the occurrence of the incidents and their duration; And disruption of data presented to the
auditor. The executive summary of the Examination Report is attached as an appendix to Bezeq's
immediate report dated February 7, 2021, which is included in this report by way of reference. It
should be noted that the Examination Report did not reveal any new findings in relation to the data
that Bezeq reported in relation to the amounts of the discrepancies discovered between the assets
and liabilities registered in Bezeq International's books and the actual assets and liabilities, or in
17 An examination team from Fahn Kana & Co. headed by CPA Mickey Blumenthal.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
relation to the effect of these discrepancies on Bezeq International's financial results as included in
Bezeq's financial statements as of September 30, 2020 and its financial statements as of December
31, 2019 and September 30, 2019, which were restated. After discussing the findings of the
Examination Report and its conclusions, Bezeq's Board of Directors and Bezeq International's Board
of Directors decided to adopt the external examiner's recommendations included in the Examination
Report and complete the implementation of the recommendations from the Examination Report, as
part of the deficiencies correction plan that Bezeq International's Management began to carry out
immediately upon its discovery of the discrepancies. Bezeq International’s Board of Directors also
decided to act in accordance with the law to terminate the employment of a number of employees in
the Finance Division at Bezeq International who were involved in the incidents subject to the
investigation (who are not officers therein). It should be noted that the Examination Report states
that from the examination results and the samples made by the external examiner, no indications
were found that raise suspicion of the occurrence of an embezzlement incident during the examined
period. In addition, Bezeq's Board of Directors decided to authorize Bezeq's Audit Committee to
continue discussing the findings and recommendations of the report, including monitoring the
implementation of the recommendations, discussing implications for audit and control issues and
examining the need to draw conclusions and take further action.
For further details on this matter, including the details of the effect of the discrepancy corrections on
the Group's capital and the recognition of an additional impairment loss as a result of the update of
the value of the activity and the book value of Bezeq International, as well as adjsutment by way of
restatement of the Group's financial statements made in light of the examintion results as stated
above, see also immediate reports by Bezeq and the Company dated Septmber 11, 2020, November
18, 2020, November 19, 2020, November 30, 2020 and December 3, 2020 included in this report by
way of reference, as well as Chapter E of the 2020 statements. Also, regarding legal proceedings
related to this matter see section2.18.1.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
2. Bezeq – Landline interior communications
2.1. General information about the field of activity
2.1.1. The field of activity and changes that apply to it
Bezeq owns a general license for the provision of landline interior communications services
and provides a variety of communication services as specified in section 2.2, the main ones
being: Internet access infrastructure services, landline interior telephony, transmission and
data communication services, Cloud and digital services and wholesale services (for
wholesale services, see section2.16.4).
2.1.2. Legislative and regulatory constraints and special constraints
2.1.2.1 Communications Law and Bezeq's NIO license
Bezeq's activities are subject to governmental regulation and comprehensive
supervision arising from Bezeq's status as a general licensee under the
Communications Law, subject to the provisions of the Communications Law, the
provisions, regulations, orders and rules enacted thereunder and the provisions
of the NIO license and other laws. In this regard and for the restrictions on
Bezeq's activities, inter alia, regarding the determination of rates, structural
separation, approvals for new services and service baskets as well as wholesale
market see section1.7.2 and section 2.16.
Additionally, Bezeq has been declared an essential Bezeq service provider under
the Communications Order. By virtue of this declaration, Bezeq is obligated to
provide a number of basic services under the NIO license and may not
discontinue or reduce them without approval. The order further stipulates
restrictions on the transfer and purchase of means of control of Bezeq and certain
restrictions on Bezeq’s activity. For details, see section2.16.3.
2.1.2.2
Laws of Economic Competition
Bezeq has been declared a monopoly in the main areas of its operations, and it
is also subject to supervision and restrictions under the Economic Competition
Law (see section2.16.8).
2.1.2.3 Environmental law and planning and construction law
Some of Bezeq's activities involve the use of wireless frequencies and the
operation of facilities that emit electromagnetic radiation, which are subject,
respectively, to the Telegraph Order (see section 2.16.9), to the Non-Ionizing
Radiation Law (see section2.15.2), and to National Outline Plan 36 and National
Outline Plan 56 (see section 2.16.10).
2.1.3. Changes in the scope of activity in this field and its profitability and developments in
the market and in the characteristics of customers
For key data on the scope of activity in the field of landline interior communications and its
profitability in 2019 and 2020, see section 1.5.4.1. The following is a description of the main
changes in the scope of activity in this field during the reported period18:
2.1.3.1 Wholesale market - At the beginning of 2015, Bezeq began providing a
wholesale BSA service for service providers, when as of the end of 2020, the
number of wholesale Internet subscribers on Bezeq’s network was approximately
557k subscribers, constituting approximately 36% of all Bezeq's Internet
subscribers. In this context, it should be noted that within these subscribers there
are also subscribers that were not on Bezeq’s network in the first place (new or
from a competing network). There is no demand for wholesale telephony services
(zero subscriptions as of the date of publication of the report). For this matter see
section2.16.4.
2.1.3.2 The field of landline telephony - in recent years, the field of landline
telephony has been characterized by a decrease in demand, which is reflected in
a decrease in the rate of landline telephone subscribers and a gradual erosion in
the number of calls originating in landline networks. In Bezeq's estimation, this
trend is mainly due to the increase in the use of cell phones in light of large-scale
18 For details of the data as well as subscrber definitions and average income, see the notes to the table in section 1.5.4.1.
33
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
call packages that cellular companies have marketed extensively in recent years
and a decrease in prices in the field (Bezeq estimates that 85% of all calls
originate in the cellular network), as well as an increase in the number of calls
over the Internet (See section2.1.4). In 2020, there was a decrease of about 5%
in the number of Bezeq subscribers. Also, probably due to the effects of the
COVID-19 crisis, there was a 17% increase in the number of call minutes
(outgoing and incoming) on Bezeq landline telephone lines compared to 2019,
and a corresponding increase of about 2% in the average monthly income from a
telephone subscriber.
Diagram - Rate of households without a landline telephone line19
2.1.3.3 The field of Internet access - in the Internet market, there has been growth
in recent years in terms of the number of customers. In addition, the Internet field
is characterized by an increase in browsing rates and the adoption of advanced
services and value-added applications. During 2020, Bezeq estimates that there
will be a 2% increase in the number of landline Internet subscribers in Israel
compared to 2019. In 2020, there was a 1% decrease in the number of Bezeq
Internet subscribers (retail and wholesale) compared to 2019. In 2020, there was
an increase in Internet subscribers through fiber optic infrastructures of competing
companies. The COVID-19 crisis has accelerated the shift of subscribers to other
infrastructures that can provide higher speeds. In addition, in 2020 there was an
increase in the number of subscribers to the wholesale market on Hot's cable
infrastructure, the number of Hot subscribers is not known and Bezeq does not
have information about this figure. Bezeq began marketing the 200Mb speed in
November 2020 to potential customers using 35B technology. As of the end of
2020, the number of subscribers in this technology constitutes about 1% of the
number of retail Internet subscribers. The average monthly income per Bezeq
Internet subscriber (retail) increased by about 2% compared to 2020.
19 The data were taken from the publications of the Central Bureau of Statistics (press releases, preliminary findings from the
Household Expenditure Survey 2017) dated November 26, 2019 and December 12, 2018. In relation to the data for the years
2019-2020 - in accordance with the assessment of Bezeq based on surveys by the Central Bureau of Statistics from previous
years.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Diagram - Distribution of Internet subscribers on Bezeq infrastructure (quarterly, in thousands):
Retail
subscribers
Internet
Wholesale
subscribers
Internet
2.1.3.4 Data transmission and communication services
The areas of transmission and communication data for business customers and
communication providers are characterized by a rapid increase in customers'
bandwidth needs, but generally a decrease in the price of a given volume of
traffic, which stems from the development of technology to increase bandwidth at
lower costs than in the past (see section 2.6.4). In addition, there is a decrease
in the use of Bezeq's transmission and data communications services by
telecommunications providers, mainly due to the shift to the use of the
telecommunications providers' own infrastructure, including within the wholesale
market. For this matter see section2.16.4.3.
2.1.3.5 Use of physical infrastructure - for the purpose of wholesale service and
for the provision of the possibility to competitors with infrastructure to use Bezeq's
passive infrastructure, see section 2.16.4.
2.1.3.6 Service packages
For an increase in the rate of consumption of packages and baskets of services,
see section1.7.1. Regarding Bezeq's shared service baskets, see section 1.7.2.
2.1.4. Technological changes that have a significant impact on this field of activity
2.1.4.1
In the communications market, a trend has been established towards IP-
based
the phenomenon of "technological
technologies, which promote
convergence" between the various communication systems (such as telephony
and DATA). There has also been an increase in the penetration of integrated end
devices that enable the consumption of various communication solutions on the
same device (such as cellular and Wi-Fi services). These two, together with the
increase in the availability of IP protocol-based technologies and the continuing
trend of increasing bandwidth, enable the customer, including the business
customer, a wide range of applications and services on IP based infrastructures,
such as telephony services, including private exchange services, video
transmission services , TV, private networks, network services with enterprise
applications on the Internet infrastructure (ERP, CRM, etc.) and Cloud services.
These developments are leading to an increase in bandwidth demand by Bezeq's
Internet infrastructure, transmission and data communications customers. For the
deployment of optical cables and ultra-fast browsing speeds, see section2.7.2.
Technological developments and declining equipment prices may even allow
other operators to provide services similar to those provided by Bezeq at lower
costs.
Technological changes can also lead to the cannibalization of services. An
example of this is a decrease in the consumption of the Group's traditional
landline telephony services (for competition in the field of telephony through the
provision of services on Bezeq's Internet infrastructure (VoB), see section2.6.2).
The increase in the speedds of the cellular service enables the cellular operators
to compete with Bezeq's telephony and Internet services, and to market greater
bandwidths to their customers at lower prices than in the past. In the Bezeq’s
opinion, as of the date of the report, the increase in the number of customers
browsing the cellular Internet did not materially affect the scope of Bezeq's
Internet activity. However, the potential for increase in the use of cellular networks
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
at the expense of the use of the Bezeq network exists and may increase with the
establishment of 5G (see section3.1.5), since it will also be able to provide ultra-
fast internet at the customer's home.
The COVID-19 crisis has highlighted the need for greater bandwidth in home
browsing. The competitors who have fiber optic infrastructure and cable
infrastructure of up to 500Mb took advantage of this to recruit subscribers to their
infrastructure.
2.1.4.2 Bezeq also develops and provides services based on wireless
technologies for IoT (Internet of Things) solutions, including for homes,
businesses and smart complexes. See section2.2.5. In 2020, Bezeq launched the
new "smart home" based on the Be router capable of a variety of IoT solutions.
2.1.5. The critical success factors in the field of activity and the changes that apply to them
2.1.5.1 The ability to offer reliable communication systems at a competitive price
based on a cost structure adapted to the frequent changes in Bezeq's business
environment.
2.1.5.2 Regulatory decisions and the ability to deal with them.
2.1.5.3 The ability to maintain innovation and technological leadership and
translate it into advanced, reliable and valuable applications for the customer in
short response times, as well as marketing primacy.
2.1.5.4 Preservation of brand values and their adaptation to the conditions of the
changing competitive environment.
2.1.5.5 Effectiveness of sales and service systems.
2.1.5.6
Informed pricing policy management, subject to regulatory restrictions.
2.1.6. The main barriers to entry and exit of this field of activity and changes that apply to
them
Activities in the field of landline interior communications require the receipt of appropriate
NIO licenses. For a memorandum of understanding of the bill regarding a change in the
format of the regulation and transfer to the issuance of general permits, see section
1.7.4.10.
Traditionally, the main barrier to entry into this field has stemmed from the need for heavy
investments in technological infrastructure and enveloping systems to achieve size
advantages, and high costs associated with setting up marketing, sales, collection and
customer support systems and brand building. Over the years, the traditional barriers to
entry into Bezeq's areas of activity have been significantly reduced, as a result of the
following factors: technological improvements, declining prices of infrastructure and
equipment, changes in the rules of regulation (see sections2.7.2 and 2.16.12), regulatory
relief granted to new competitors, obligation to allow the use of Bezeq (and Hot)
infrastructure and services - including within the wholesale market and the use of VoB
telephony services over another operator's broadband
technology
infrastructure, without the need for independent landline telephony infrastructure.
that enables
The main barriers to exit stem from the following: Bezeq's obligation, set forth in its license,
to provide its services on a universal basis (to the general public in Israel, except in relation
to fiber as specified in section 2.16.12); Its subordination to the provisions of the
Communications Order, regulations under the Communications Law, as well as provisions
under Article 13a of the Communications Law regarding emergency activities; Its
commitment to some of its employees employed under collective agreements; Large
investments that require a long return on investment; And a commitment to repay long-term
loans taken to finance investments. Some of these exit barriers are unique to Bezeq and
are not relevant to other operators operating in this field of activity.
2.1.7. Substitutes for products in this field of activity and changes that apply thereto
Cellular communication services are a substitute product for Bezeq services, both in the
field of telephony, Including through apps and in IP technologies such as VoB (see
section2.6.2), and in the field of the Internet (see sections2.6.2 and2.6.3), transmission and
data communication. Technological developments (such as 4G and 5G in cellular, fiber-
optic-based infrastructure and advanced cable Internet protocols) enable the provision of
new services at high speeds and at competitive prices.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
2.1.8. The structure of competition in this field of activity and changes that apply thereto
The field of landline interior communications is regulated and supervised by the Ministry of
Communications, among other things, through the issuance of licenses to bodies operating
in the field.
In the communications market there are two licensees for the provision of landline interior
communications services obligated to provide service to everyone, nationwide deployment
and universal service (except in relation to fiber): Bezeq, and Hot Telecom. IBC is also
bound by an obligation of a limited deployment to at least 40% of households in Israel within
10 years from the date of receipt of a single general license of a unique general type
(infrastructure) (July 31, 2019) that replaced the general license (NIO Infrastructure)20. The
three companies compete with each other. At the same time, they were allowed to make
mutual use of each other’s physical infrastructure (except for infrastructure owned by the
IEC needed to provide essential service) and infrastructure of another NIO, so that in fact
the competition can be through physical infrastructure of another licensee, and in practice,
mainly on Bezeq's infrastructure (see on this matter2.16.4.4).
The companies Cellcom and Partner, which have unique NIO licenses (which do not
require universal deployment), have deployed an independent fiber network, including
Bezeq's physical infrastructure (regarding Cellcom and Hot joining IBC see section2.6.3.5).
The Internet field is characterized by high penetration rates attributed to the deployment of
national access infrastructure. Bezeq's main competitor in this field is Hot. With the
implementation of the wholesale market, Internet access service providers (ISPs) have
become Bezeq’s competitors that provide a package of services that includes broadband
Internet access infrastructure through Bezeq infrastructure which they use in wholesale
services, and Partner and Cellcom are competing with Bezeq through broadband fiber
infrastructure they deployed. In addition, Bezeq is also exposed to competition from the
cellular networks (see section2.1.4).
The field of landline telephony is in competition, and Bezeq’s competitors, some of whom
are within the framework of communication groups (see section 1.7.1), are the cellular
companies (see section 2.6.2.2), Hot Telecom, as well as VoB service providers operating
under licenses without universal service obligation for several years, without their own
independent access infrastructure. For details on wholesale telephony services see
section2.16.4.
For a hearing on the elimination of the separation between the Internet infrastructure
service and the access service (ISP) - see section1.7.2.2.
In the field of wholesale services, Hot competes with Bezeq as an infrastructure owner
obligated to provide wholesale services. In practice, BSA services started on Hot’s network
in the second half of 2018 (see also section2.16.4).
In the field of data transmission and communication, Bezeq’s main competitors are Hot
Telecom, Cellcom and Partner, operating within the framework of communication groups
and offering a complete communication solution to the customer.
Competition in the industry depends on various factors such as: regulatory decisions,
possible changes in the terms of the licenses of Bezeq and its subsidiaries and the terms
of the licenses of their competitors; Mergers and collaborations between companies
competing with the Group companies; Possible implications of the Centralization Law;
Continued development of the wholesale market and the asymmetry between Bezeq's
ability and the ability of competitors to sell a comprehensive service; The new services that
Bezeq will be allowed to provide; The rates policy, Cancellation of the structural separation
and the degree of flexibility that will be given to Bezeq in offering undetachable service
packages, including with subsidiaries and technological developments.
For a description of the development of competition, see section1.7 and2.6.
2.2. Products and services
2.2.1. General
Bezeq provides a wide range of communication services to its business and private
customers as detailed below.
20 The duty of nationwide service for all also applies to holders of general licenses for the provision of mobile radio telephone
services such as Pelephone, Cellcom and Partner, as well as in the field of internaiotnal operator services - such as Bezeq
International.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
2.2.2. Telephony
Bezeq's telephony services mainly include the basic telephone services via the home
telephone line, and ancillary services such as: voicemail and caller ID.
Bezeq also provides its customers with national numbering services for businesses ("1-
800", "1-700"), the calls in which are paid in full or in part by the business.
Bezeq operates a unified call center21, under the code (1344) established by the Ministry
of Communications also for operators of landline and cellular telephony, as well as a unified
website free of charge, in addition to Bezeq's 144 service.
For the provision of a resale service and for wholesale telephony service, see
section2.16.4.4.
2.2.3. Internet access infrastructure services
Bezeq provides broadband Internet access infrastructure services using xDSL technology.
For details regarding changes in the number of Bezeq Internet subscribers and the average
monthly income per Internet subscriber, see section 1.5.4. For details regarding Bezeq's
market share in this field, see section2.6.3.
The Internet service is one of Bezeq's main occupations and a major route in its
investments in technologies, marketing, advertising and customer acquisition and upgrade.
The average package speed of Bezeq's Internet subscribers22 At the end of 2020
amounted to about 74.2Mbps, compared to an average package speed of 67.8Mbps at the
end of 2019. The minimum package provided in the service to new customers is usually at
a maximum speed of 15Mb.
xDSL service is also provided on a subscriber line without telephony at no extra charge for
the access line. It should be noted that in accordance with the decision of the Ministry of
Communications, Bezeq may not discriminate in the price of the xDSL service between a
subscriber who consumes the service together with a telephony service and a subscriber
who consumes only the xDSL service.
Bezeq is committed to providing a broadband Internet access service in the BSA wholesale
format to service providers who provide their customers with an end-to-end Internet service
in this manner, including infrastructure. For this service see section2.16.4.
Diagram - Changes in the package speeds of Bezeq Internet subscribers in the years 2013-
2020 (Mbps, as of the end of each year)*:
Up
to 5
* In packages where there is a range of speeds, the maximum speed in the package is
taken into account
2.2.4. Data transmission and communication services
Data communication services are network services for transferring data from point to point,
data transfer between computers and various communication networks, services for
21
"Unified" information service is an information service that contains data regarding the subscribers of all operators. Landline and cellular
telephony operators are required to provide unified intelligence services by virtue of their communications licenses. The activity is exempt
from receiving a restrictive arrangement approval, valid until November 11, 2023.
22 In packages where there is a range of speeds, the maximum speed in the package is taken into account.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
connecting communication networks to the Internet and remote business access services.
Bezeq offers transmission services, including at high speeds, to communications operators
and its business customers in a variety of interfaces (see section2.6.4).
There is a decrease in the use of Bezeq's transmission and data communications services
by telecommunications operators (see section2.1.3.4).
2.2.5. Cloud and digital services
This category includes, among others, virtual server services, Bcyber service, "smart
home", "smart business" and smart complexes services, virtual private hub services (IP
Centrex), as well as the B144 service which is Bezeq's advertising platform for digital
advertising and marketing for small businesses, BCAM, SMS, WiFi and remote backup.
2.2.6. Other services
2.2.6.1 Additional services for communications operators
Bezeq provides services to other communications operators, including: cellular
operators; International operators; Hot; Network endpoint operators; Internet
Service Providers (ISPs);
Interior operators; Palestinian communications
providers.
The services that Bezeq provides, as stated, include infrastructure services,
linking to the Bezeq network, billing and collection services, renting areas and
providing services in rented properties.
For the provision of wholesale services to communications operators and for the
possibility of using Bezeq's physical infrastructure also for infrastructure owners,
see section1.7.3. In this regard, it should be noted that as of 2019, there has been
a certain deterioration in the payment ethics of communications operators,
deferral of payments and an increase in the volume of dispute claims. This state
of affairs, in parallel with the erosion in the financial strength of various operators,
increases the risk of having to recognize loan-loss. However, as of this date, this
deterioration does not have a material effect on Bezeq. On April 27, 2020, Bezeq,
through its attorney, contacted the Ministry of Communications and announced
that it does not intend to allow the continued provision of wholesale services to
service providers who do not pay for these services. On May 12, 2020, the
Ministry announced that it is examining the issues that arose from the letter by
Bezeq’s attorney, and on February 10, 2021, the Ministry published a hearing to
determine an updated procedure for dealing with a licensee's complaint about
another licensee in matters that are regulated by the Ministry, according to which,
among other things, the team handling complaints can recommend to the
competent body in the Ministry to make a decision that the Ministry will not
prevent injured licensees from taking action against the licensee against whom
the complaint was filed, such as discontinuing service, not connecting new
subscribers and more, all according to the circumstances and severity of the
case. On March 3, 2001, Bezeq submitted its response to the procedure,
according to which the team's powers must be clarified and binding schedules
must also be set for examination and enforcement.
2.2.6.2 Broadcast services
Bezeq operates and maintains radio transmitters, among others, for the
broadcasting corporation, Galei Tzahal and a number of regional radio stations.
Bezeq also operates the DTT broadcasters for the Second Authority. Bezeq is
responsible solely for operating and maintaining the transmitters for the purpose
of distributing the broadcast of the radio and television programs, and not for the
content of the broadcasts. For this matter, see also section2.15.
2.2.6.3 Contractor work
Bezeq performs construction and operation of networks or sub-networks for
various customers (such as the Ministry of Defense, radio and television
international communications
broadcasting companies, cellular operators,
operators, local authorities, municipalities and government bodies).
2.2.7. Sales of end equipment
As of 2019, Bezeq has been selling smartphones (in addition to other end equipment sold
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
thereby). Bezeq intends to expand its supply to additional end equipment in the future.
2.3. Revenue segmentation of products and services
The following is data about the distribution of the Company's revenues according to the main
products and services in its field of activity in the years 2018-2020 (in NIS million):
Revenue from Internet infrastructure
services
Rate out of the total Company revenue
in the field of activity
Revenue from landline telephony
Rate out of the total Company revenue
in the field of activity
Revenue from transmission and data
communication services
Rate out of the total Company revenue
in the field of activity
Revenue from Cloud and digital
services
Rate out of the total Company revenue
in the field of activity
Revenue from other services and sale
of end equipment
Rate out of the total Company revenue
in the field of activity
Total revenues from the field of
landline interior communications
2020
1,622
2019
1,578
2018
1,596
39.0% 38.74% 38.04%
1,156
1,039
1,008
24.24% 25.50% 27.55%
1,011
948
977
24.31% 23.27% 23.28%
288
274
260
6.92%
6.73%
6.20%
230
234
207
5.53%
5.74%
4.93%
4,159
4,073
4,196
2.4. Customers
Bezeq is not dependent on a single customer, and there is no customer Bezeq's revenues from
whom constitute 10% or more of its total revenues. Bezeq's revenues are divided into two main types
of customers: private customers (approximately 50%) and business customers (approximately
50%).23. The aforesaid distribution is according to revenue, as detailed in the table below (in NIS
millions):
Revenue from private customers
Revenue from business customers
Total revenue
2020
2,033
2,126
4,159
2019
2,029
2,044
4,073
2018
2,101
2,095
4,196
2.5. Marketing, distribution and service
Bezeq has marketing, sales and service systems for businesses and private customers, including
customer managers for the business segment, integrated sales and service centers throughout
Israel, technical support centers for private customers and business customers,Several points of sale
and service (Bezeq Store chain of stores) throughout Israel, as well as an online virtual store.
Bezeq markets its services mainly through advertising in the mass media, telephone sales centers,
customer managers and through a system of marketers that includes outsourced sales centers, as
well as Internet providers (ISPs) which, with the establishment of a wholesale market, mostly market
end-to-end service packages based on Bezeq's wholesale BSA service. In addition, Bezeq has
independent service and sales channels on its website, in a dedicated application (My Bezeq), and
through a computerized voice response.
2.6. Competition
The following is a description of the development of competition in the field of landline interior
communications:
2.6.1. Wholesale market (see also section 2.16.4)
23
Including revenue from wholesale service providers.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
The wholesale market allows telecommunications providers to compete with Bezeq using
its physical infrastructure and services, at regulated prices not determined by Bezeq. The
wholesale market allows telecommunications providers to offer their subscribers, among
other things, broadband services and end-to-end service packages.
In June 2017, rates for some of the wholesale market services were published on the Hot
network. To the best of Bezeq's knowledge, the volume of wholesale subscribers on the
Hot network is not large (see in this regard section 2.16.4).
2.6.2. The field of telephony
The field of private landline telephony is characterized by a decrease in the number of
owners of a landline telephone line and a gradual erosion in the number of calls originating
from landline networks (see section2.1.3.2). Bezeq estimates that in 2020 the entire
telephony market continued to erode at a similar rate to 2019 and at a higher rate compared
to previous years. For this matter, see also section2.4.In Bezeq's estimation, as of the end
of 2020, its market share in the landline telephony market was about 54% in the private
market and about 70% in the business market, an increase of 1% compared to 2019 in the
private market and a decrease of 1% compared to 2019 in the business market24.
2.6.2.1 Competition from additional NIO licensees
Bezeq and Hot Group have a fixed telephony infrastructure nationwide, and there
is competition between them, which is reflected, among other things, in the fact
that Hot Group markets a "Triple" (which combines Internet infrastructure,
telephony and cable television), and possibly also cellular services, especially for
households (regarding the marketing of a business service basket for Hot Group
as well as the marketing of service baskets of Bezeq Group, see section1.7.2.2).
In addition, Hot Group markets telephony services for business customers.
In addition, there is competition with existing licensees for the provision of landline
interior communications services, including VoB (see section 2.1.8), which
provide the service (including via "Triple"), inter alia, over Bezeq's broadband
access service, including the wholesale BSA service.
As of July 2017, Bezeq allows holders of unified licenses who are authorized to
provide NIO services, reselleing telephony service over Bezeq’s network. As of
August 2018, Bezeq offers a wholesale telephony service available in a format
similar to that of the service portfolio in the rates of use regulations, and as of
January 2019, a service that also passes through the service provider switch. As
of the date of the report, there is no demand for service. For this matter and for
the purpose of wholesale telephony service, see section2.16.4.
2.6.2.2 Telephony competition from cellular companies
According to Bezeq, the high penetration rate, combined with low airtime rates
compared to the rest of the world and packages that include call minutes with no
effective limit on a fixed monthly fee, have made cellular telephony a substitute
for
the
In Bezeq's estimation,
interchangeability between a landline and a mobile line is one of the main reasons
for the decrease in the average traffic per line, and the high rate of removal of
telephone lines (see section2.1.3).
the deepening of
telephony.
landline
In the field of cellular telephony, there is a trend of moving to the use of
applications allowing you to make calls and send text messages over the Internet.
Partner and Cellcom also provide landline NIO services through corporations
owned by them and also sell service baskets that combine landline telephony,
cellular telephony and Internet services.
2.6.3. The field of Internet infrastructure
In Bezeq's estimation, as of the end of the 2020, its market share in the Internet
infrastructure market (retail and wholesale customers) amount to about 61% (compared to
approx. 63% at the end of 2019). In addition, Bezeq estimates that its market share in terms
24 These market shares are in terms of lines and are based on Bezeq’s estimates.It should be noted that Hot is not a reporting
corporation, and its data is not public, and accordingly, there is difficulty in obtaining accurate data regarding the market shares,
and these are only estimates.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
of retail customers as of the end of 2020 amount to approx. 39%25.
There is fierce competition in the field of Internet infrastructure:
2.6.3.1 Competition from Hot Group - Hot has nationwide Internet infrastructure
through which a variety of communication services and interactive applications
can be provided.
Hot’s network is currently a major alternative competing with Bezeq infrastructure
in the private segment. Hot was obliged to provide wholesale services, including
BSA service, and to the best of Bezeq's knowledge, wholesale BSA service on
the HOT network has been marketed since the middle of 2018. For that matter,
see also section2.6.1.
During 2019, Hot began marketing Internet services at a speed of 500 megabits
per second (500Mbps).
To the best of Bezeq's knowledge, after a number of postponements and
facilitations given to Hot over the years in implementing its universal service
obligation, on Kuly 28, 2019, the Minister of Communications adopted the
recommendations of the Advisory Committee and approved Hot to provide its
services in infrastructure-free areas in the form of technological neutrality, i.e.,
without being required to deploy wired infrastructure, but being allowed to use any
cellular network to provide its services at download speeds of up to 12/30Mbps,
immediately. The adopted recommendations also set out, among other things,
milestones for upgrading the network for the cellular network alternative, minimum
service quality and reporting obligations.
2.6.3.2 Competition from ISPs and communication groups based on wholesale
BSA service – the activation of the wholesale market allows Internet providers
and related companies (with a unified license) to offer customers service
packages that also include Internet infrastructure based on Bezeq’s infrastructure
and its services (in exchange for regulated rates to be paid by the communications
providers to Bezeq). If and to the extent that a "margin reduction" prevention
mechanism
the Ministry of
Communications hearing (see section2.16.4.2), at the same time, Bezeq's ability
to market marketing offers of its retail services will be impaired - both in terms of
timing (Time to Market) and regarding the prices at which the services are offered.
Also, regarding Bezeq's bundles, see section1.7.2.2.
is activated, similar
that described
to
in
2.6.3.3 Competition by the Partner and Cellcom communication groups on the
basis of an independent fiber network that enables the provision of an ultra-fast
Internet service - in addition to what is stated in section2.6.3.2, the Partner and
Cellcom communication groups provide, on an increasing scale, ultra-broadband
Internet services over an independent fiber infrastructure, while also using
Bezeq's passive infrastructure within the wholesale market. According to the
publications of the two companies in March 2021, the volume of Partner's
deployment reaches about 760k households (of which about 150k are connected
customers) as of March 2021, and the volume of Cellcom's deployment (including
IBC), as of the end of 2021, reaches about 560 households (of which 105k are
connected as of March 2021).
2.6.3.4 Competition from cellular operators - cellular companies have deepened
their activity in the field of the Internet on the cellular medium in both the private
segment and the business segment. In contrast to the field of landline
communications (where there is a separation between the provision of access
infrastructure services and the provision of Internet access services), the cellular
internet service is provided as one piece. Browsing services are provided both
from the cellular device and through a cellular modem that connects to laptops
and desktops.
25 Bezeq’s estimate regarding its market share in the field of Internet infrastructure services by the end of 2020 is based on the
number of customers who consume services on Bezeq infrastructure (retail and wholesale), and on its estimate of the number
of Hot (retail and wholesale), Partner (fiber) and Cellcom (fiber and IBC) subscribers. It should be noted that Hot is not a reporting
corporation and its data is not public. Accordingly, it is difficult to obtain accurate data regarding market shares and these are
only estimates. Also, Partner and Cellcom (IBC) do not report the number of subscribers connected to their fiber and these are
estimates only.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
2.6.3.5 Competition from IBC - IBC is setting up a fiber infrastructure to provide
Internet over the electricity grid (and has started operating commercially in a
limited number of cities). According to media reports, as of the date of publication
of the report, the number of customers recruited by IBC is not significant.
In accordance with the decision of the Minister of Communications dated August
8, 2018, the deployment obligation of IBC was reduced and has been determined
as no less than 40% of households in Israel within 10 years, when only after the
"Cherry Picking" period (which will last three and a half years) will the new
licensee be required to make at least one household accessible in the periphery
for every household accessible in the center (for this matter, see also
section2.1.8).
IBC’s license enables the provision of services to licensees. On January 13, 2020,
a hearing document was published regarding the privision of the possibility for
IBC to provide a Reverse Bundle service to private end subscribers and additional
services to large business customers (“the Hearing Document"). Pursuant to the
hearing document, the Ministry is considering approving IBC's requests as
follows: (1) enable it to cooperate with access providers in an outline whereby IBC
and the access provider will jointly engage with the end customer so that the
access provider will provide the end customer with IBC’s Internet infrastructure
service and Internet access service, and IBC will provide the end customer with
ancillary services ("Reverse Bundle Service"), and (2) enable IBC under its
special license, to sell its services to companies in the business segment and also
serve as an ISP in providing services to the business market. According to the
Hearing Document, the approval of the applications will be granted while setting
conditions (including approval to market a Reverse Bundle Service for a limited
period of 5 years or to up to 400k end subscribers, whichever is earlier, equal
marketing with access providers and end subscribers, as well as maintaining
structural separation obligations and the prohibition of preference), in a way that
would contribute to increased competition in the landline infrastructure market and
while reducing gaps compared to the regulation applied to IBC's competitors. The
Hearing Document also stated that since the State’s decision stipulates that IBC
will only deal with licensees and not directly with private consumers (except for
large business customers with the approval of the Minister of Communications),
as long as the recommendations in the hearing are finalized, the State’s decision
will need to be amended, and appropriate amendments to the IBC license will be
required. On February 3, 2020, Bezeq submitted its reference, focusing on (1) the
significant gap between the purpose on which the IBC project was established
and the state of affairs at the current point in time, cumulatively. According to
Bezeq's position, in this state of affairs it is not possible to continue to act by
providing additional relief to IBC. (2) In that it turns out that the deal to sell
Cellcom's fiber network to IBC and IBC's alleged reliance on that network as a
primary platform for meeting its license terms and providing Internet services to
end customers fundamentally change the rules of the game. Bezeq believes that
since at the present point in time, the details of the transaction and its meanings
are not fully visible to Bezeq and are not mentioned at all in the Hearing
Document, it is not possible to hold a hearing without receiving full and complete
information in this matter. Accordingly, Bezeq requested the full information and
the Ministry's reference to the new circumstances that the Ministry claims have
been created. It was further clarified that in this state of affairs, and prior to
receiving the requested details and clarifications, any move offering changes and
benefits to IBC is invalid, lacks transparency and is not accepted or implied on
the basis of complete information. In a hearing dated December 15, 2020
regarding a change of regulation following Hot's request for approval by the
Minister of Communications to acquire control and means of control in IBC (see
below), it was stated that as long as the request is approved, it is proposed not to
change the existing regulation that applies to IBC regarding its activity in the
"suppliers’ supplier" format, and to shelve the format detailed in the hearing
above.
To the best of Bezeq's knowledge, the acquisition of control of IBC by Cellcom
and another investor (Israel Infrastructure Fund) was completed on July 31, 2019,
in which Cellcom sold the fiber-optic infrastructure to IBC. Also, to the best of
Bezeq's knowledge, after an investment agreement was signed in September
2020 under which Hot will enter into a partnership in the IBC fiber venture and an
IRU agreement between Hot and IBC under which Hot will acquire the right to use
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
the infrastructure to be established by IBC, at the beginning of 2021 the approvals
of the Competition Commissioner and the Ministry of Communications were
received so that after the merger IBC is owned by the Israel Electric Corporation
(30%) and by HOT, Cellcom and the Israel Infrastructure Fund (23.3% each). In
addition, the Ministry of Communications made an amendment to the HOT
license, which allows, among other things, the marketing of a shared basket of
services on the IBC network and the IBC license, which requires it to submit to
the Ministry for approval a shelf offer to purchase its services (in IRU format) at a
reduced rate.
2.6.3.6
Licensing for new operators for the prvoisoin of Internet access
infrastructure service
On October 13, 2020, a decision was issued by the Minister of Communications
in a hearing (published in March 2020) in which the threshold requirements for
obtaining a license that allows the provision of broadband infrastructure services
were significantly reduced, while this reduction will be made temporarily by
providing an option to obtain a special license (for a period of thirty-six months
from the date of the decision) instead of a unified license. The special license will
be granted subject to the conditions set out in the decision, including that through
the special license a service will be provided to no more than 8k private
subscribers and to no more than 800 network endpoints of business subscribers.
Prima facie, Bezeq believes that in certain circumstances the Minister's decision
may lead to a possible harm to Bezeq's business, the extent of which Bezeq
cannot assess at this stage.
2.6.3.7 Regarding the announcement by the Minister of Communications as part
of the draft economic plan for 2020 regarding an examination for the
reorganization of the retail Internet market in Israel, including the elimination of
the separation of Internet service provision between infrastructure service and
Internet access service (ISP) and a hearing to examine the separation between
broadband infrastructure service and Internet access service (ISP) see sections
1.7.2.2, 2.7.22.16.12.
2.6.4. The field of transmission and data communication
In addition to Bezeq, operating in this field are mainly Cellcom and Partner, as well as ISP
companies.
To the best of Bezeq's knowledge, Cellcom has established a transmission network, which
is used both for its own needs and for competition with Bezeq’s services in the transmission
and data communications market. Partner also operates in the field of providing
transmission and data communication services, combined with telephony and Internet, to
business customers.
Cellcom and Partner use Bezeq's physical infrastructure as part of the wholesale service
(see section2.16.4.3)26, inter alia, in order to compete with Bezeq in this field and / or for its
own needs.
Operating in this field are also infrastructure owners IBC (to the date of the report, to an
insignificant extent) and Hot (in national but not complete deployment). These infrastructure
owners may use Bezeq's physical infrastructure. In this matter see sections 2.16.4.3
and2.6.5.
According to IBC’s license, IBC will contact the IEC for the right to use its fiber optic
network, and will be the operator of the network. In addition, IBC has a special license
(which does not impose a universal obligation) for the provision of landline interior data
communication services, under which it is eligible to provide IPVPN services and
broadband data communication lines.
2.6.5. Additional competing infrastructures27
In addition, there are currently a number of infrastructures in Israel that have the potential
to serve as communications infrastructures, which are based on fiber optics and mostly
owned by companies and government bodies, such as: Israel Railways, Mekorot, Oil
Infrastructure Company and Trans-Israel Highway. Some local authorities are also trying
26 Unified license owners eligible to provide NIO services are also eligible to receive wholesale service for the use Bezeq’s physical
infrastructure.
27 Beyond Hot and IBC infrastructure.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
to create an alternative for laying pipes or fibers using the infrastructure of these local
authorities. It should be noted that the amendment of the Communications Law regarding
the deployment of fibers and the decision of the Ministry regarding the granting of special
licenses that allow for a limited deployment may accelerate the deployment by such bodies.
2.6.6. Bezeq's preparations and ways of dealing with the growing competition
Bezeq faces competition in the landline interior Bezeq services in a number of ways:
2.6.6.1 Bezeq
launches communication services and new value-added
applications (such as a smart home, smart business, smart complexes,
integration services and more) as well as product and service packages and
shared baskets (equivalent to certain baskets marketed by its competitors,
although under a detachability limit, see section 1.7.2), in order to expand the
scope of use of subscriber lines, to meet customer needs and strengthen its
image of technological innovation. Bezeq is investing in the improvement and
modernization of Bezeq's infrastructure, in order to enable the provision of
advanced services and products to its subscribers.
Bezeq is working to introduce the high-speed Internet infrastructure service, as
well as to increase the number of its customers in this field and create added
value for the customer by expanding the consumption of content, leisure and
entertainment applications (see also sections2.2.3 and2.7.2, including in the
matter of fiber deployment). Bezeq manufactures and markets value-added
solutions and services for quality and secure browsing. During 2019, Bezeq
launched a new browsing speed that meets customer needs to increase the rate
of data upload (upload speed of up to 5Mbps). In addition, in November 2020,
Bezeq launched a browsing package up to 200Mb, using the 35B technology,
under feasibility conditions.
2.6.6.2 Bezeq is constantly working to improve the quality of its services and retain
its customers, simplify processes and automate and adapt its operations to the
structure of competition in its areas of activity.
2.6.6.3 Bezeq offers alternative payment baskets to telephony customers (see
section2.16.1.4), packages, consumption-adjusted routes and promotions.
2.6.6.4 Bezeq is working to reduce its operating expenses and to focus
investments on growth activities and as a means of reducing maintenance
expenses. Despite the above, Bezeq's ability to make short- and medium-term
adjustments to its expenses is limited due to its cost structure, which is mainly
rigid short- and medium-term costs (mainly depreciation and payroll-related
expenses, as well as operating costs, such as infrastructure maintenance and
rental and maintenance of buildings).
2.6.6.5 As of 2018, Bezeq has been marketing its Be router. This is an advanced
router with an innovative design, and with advanced capabilities that include,
among other things, Smart Wi-Fi that enables quality and continuous browsing
over the home Internet, Cyber protection and preparation for a smart home. The
router and services are managed by a dedicated app. As of the end of 2020,
Bezeq's customer base using the Be router is approximately 537k customers
(approximately 54% of Bezeq's retail Internet customers). Bezeq also markets
products to improve the reception range of the Bspot and Be mesh home Internet
networks, and as of the end of 2020, about 248k units of these products were
marketed by Bezeq.
2.6.7. Main positive and negative factors affecting Bezeq's competitive position
2.6.7.1 Positive factors
a) Quality nationwide infrastructure, through which a variety of services are
provided.
b) Presence in most businesses and households.
c) A well-known and strong brand.
d) Technological innovation.
e) High positive cash flow.
f) Extensive service infrastructure and diverse customer interfaces.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
g) Professional, experienced and skilled personnel.
2.6.7.2 Negative factors
Bezeq believes that various restrictions that apply to it make it difficult for it to
compete in its areas of activity. The following are the main limitations in this
regard:
a) Wholesale market (see section2.16.4) - operating a wholesale market at
regulated prices, arrangements prone to intervention by the regulator,
implementation of a mechanism for supervising Bezeq's retail marketing
offers, Expanding uses and those authorized to use Bezeq infrastructure.
b) Limited rate flexibility
Bezeq is limited in its ability to provide discounts on its main services and
offer differential rates. For this matter as well as for a hearing regarding a
change in the rate control mechanism, see also section2.16.1.
For the hearing on the prevention of "margins reduction" in the wholesale
market, see section 2.16.4.2.
c) Structural separation obligation
Regarding the obligation of structural separation applicable to Bezeq, see
section1.7.2.
d) The universal service and fiber deployment obligation
Bezeq has an obligation to provide service to the general public in Israel at
a uniform price (universal service). By virtue of this obligation, Bezeq is
required to provide services even in non-economic circumstances (subject
to the possibility of obtaining an exemption in exceptional circumstances).
Regarding the scope of the obligation in relation to the provision of services
on an ultra-broadband fiber infrastructure, see section2.7.22.16.12. This
obligation does not apply to unique NIO license holders, who can offer their
services to Bezeq's profitable customers only, who constitute a substantial
source of income for Bezeq, and these companies actually carry out an
accelerated deployment of fibers in economically viable areas. In addition,
Hot, which has a universal service obligation, received various reliefs in the
implementation of full deployment obligation, significant exemptions and
reliefs were granted to IBC, and Bezeq is committed to allowing Hot and IBC
to use Bezeq's passive infrastructure. (see section2.16.4).
e) Restrictions on the marketing of shared service packages by Bezeq and
Group companies
See section1.7.2.2.
f) The nature of end equipment in landline telephony
End equipment in the field of landline telephony does not have personal
characteristics. It is also less technologically advanced compared to cellular
end equipment, and the range of advanced services that can be consumed
through it is limited.
2.7. Fixed assets and facilities
2.7.1. General
fixed assets
Bezeq's
interior
communications, real estate assets (land and buildings), computer systems, vehicles and
office equipment.
infrastructure and equipment
include, mainly:
for
2.7.2. Infrastructure and stationary interior communications equipment
2.7.2.1 Telephony network
The infrastructure of Bezeq's telephony network consists of exchanges (used to switch the
calls and transfer them from the origin to the destination), a transmission network (through
which the connection between the exchanges takes place), data communication networks,
an access network (connecting the subscriber's endpoint to the subscriber), and end
equipment installed with the end consumer. The connection from the end equipment to the
access network is based on copper cables, and this copper network forms Bezeq's access
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
infrastructure for telephony services (it should be noted that those copper cables also form
part of Bezeq's Internet network as detailed below). Subscriber management is performed
using a Class 5 telephony switch. During 2020, Bezeq completed the replacement of its
telephony switch with a new switch and the conversion of all telephony customers to the
new switch.
2.7.2.2
Internet
Bezeq has an NGN network based on the core of an IP network and the
deployment of fiber optic infrastructure to street cabinets (a network topology
known as FTTC-Fiber To The Curb), as well as an access network (a system that
connects the network endpoint with the network subscriber) and engineering
systems. The connection from the home to the access network is based on the
copper cables (mentioned in the description of the telephony network above) and
the connection from the access systems to the transmission network (Backbone)
is based mainly on optical cables. In addition, some of the end equipment
(equipment installed by the subscriber, such as routers) is owned by Bezeq and
is rented by the customer. The NGN network can now provide, through VDSL2
technology, bandwidths of up to 100Mbps in the downloading channel, as well as
innovative value-added services. Additional benefits of this network are
simplification of network structure and improved management capability.
On July 12, 2020, the Ministry of Communications approved the use of the 35B
technology by Bezeq (extension of xDSL technology) through which Bezeq can
provide rates of up to 200Mb depending on the quality of the copper
infrastructure. Due to the characteristics of the technology, the deployment, which
was completed by Bezeq, does not cover all Bezeq sites (the connection potential
is about 350k households).
2.7.2.3 Ultra-broadband fiber infrastructure
Bezeq is expanding the deployment of infrastructure, including, starting in 2013,
deploying optical fibers so that they reach as close as possible to the customer's
premises (FTTH / FTTB), as a basis for the future provision of advanced
communication services and larger bandwidths than those provided to its
customers today, among other things, on the basis of new technologies that use
the copper cables in the customer's premises.
The main advantage of optical fiber over copper is the ability to transmit at higher
rates. There are also operational advantages that are insignificant compared to
this advantage. In the past, Bezeq froze the deployment of fiber to the customer's
premises until an appropriate arrangement due to the lack of certainty required
for the existence of a business plan with economic sustainability, on the one
hand, and the lack of economic justification for Bezeq to launch the service on
the other. The deployment of fiber by Bezeq's competitors increases competition
and adversely affects Bezeq. However, Bezeq estimates that due to the
operational advantages it holds and especially the access to a professional and
skilled workforce, and the beginning of the execution of the fiber project as
detailed below, it will remain in the lead in the medium and long term.
On September 14, 2020 (in light of developments in the matter and further to the
State’s approval prior to the legislative procedures detailed in section 2.16.2),
Bezeq's Board of Directors approved the launch of the Bezeq plan for the
deployment of ultra-broadband landline infrastructure (“the Fiber Project"). The
Fiber Project is a complex and resource-intensive project that involves significant
investments of billions of NIS by Bezeq over the years of the project and is
expected to include a massive deployment of fiber optics throughout Israel that
will allow ultra-fast Internet services. It should be noted that up to that date, Bezeq
had deployed fibers directly to about 120k buildings and in certain areas to a point
in the center of a group of buildings, with a total connection potential of up to
about 1.5 million households and businesses. Following the above-mentioned
Board decision, Bezeq began deploying fiber to buildings, including deploying
vertical GPON equipment in buildings, and on March 14, 2021, Bezeq announced
the launch of services to its customers on its fiber optic network. Bezeq's fiber
network, which has been deployed as of this date, covers about a quarter of a
million households throughout Israel, and the Company estimates that by the end
of 2021 it will cover about one million households, constituting about 40% of all
households in Israel.
47
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Some of the information contained in this section is forward-looking information,
as defined in the Securities Law, which is based on the Company's assessments,
assumptions and expectations, and may vary depending on regulatory
developments and decisions, technological developments, communications
market developments and technical and other difficulties in the implementation of
the plan.
2.7.3. Computing
Bezeq's computing system supports
four main areas: marketing and customer
management, Bezeq's engineering infrastructure, Bezeq's resource management and
lateral systems.
Bezeq's computer system is a large and complex system, which supports critical work
processes and handles very large volumes of data. This system consists of a large number
of systems, some are information systems whose development began many years ago,
and some of which are modern systems developed and implemented in recent years. Most
systems operate in open computing environments.
2.7.4. Real estate
2.7.4.1 General
Bezeq has real estate assets from two sources: assets transferred to Bezeq by
the State in 1984 as part of the asset transfer agreement (see section 2.17.1.1),
and assets in which rights were acquired or received by Bezeq after this date,
including assets that it leases from third parties.
The real estate assets are used by Bezeq for communications activities
(switchboards, concentration rooms, broadcasting sites, etc.) and for other
activities (offices, warehouses, etc.). Some of Bezeq's assets are undeveloped
or partially developed assets, which can be utilized further.
Below is a list of Bezeq assets in accordance with the nature of the rights in the
asset. In addition, Bezeq has easements (passage rights, etc.) in other real estate
(such as for the purpose of setting up transmitters and laying cables):
The
essence of
the right
Number
of assets
Ownership,
lease or
right to lease
Approx.
304
Lot area
(sqm.
thousand
s)
Approx.
849
Built-up
area (sqm.
thousands)
Approx. 101
Possession
(authorized
by right /
right of
possession
according to
law)
rent
Various
rights in
"concentrati
on rooms"
Approx.
40
Approx.
1.5
Approx. 0.8
Approx.
332
Approx.
30.6
Approx. 63
Approx.
2,428
Irrelevant
Approx. 26.6
(based on
an estimate)
2.7.4.2 Registration
48
Notes
From this, approx.. 300 field assets in the area
approx. 820k thousand sqm. of plots, approx. 80k
sqm. built-up are assets for communication needs
and the rest are for administrative needs.
Approx. 14 assets shared with the Ministry of
Communications and / or the Israel Postal Company
Ltd., with which an agreement was signed for the
definition and regulation of the parties' rights in these
properties (see section2.17.1.3). The parties act as
required by the provisions of the agreement, and inter
alia, for the separation of charges and shared
systems.
Properties in Israeli localities in Judea and Samaria,
all for communication purposes. There is no written
series of contractual rights, but in Bezeq's opinion
this does not create material exposure.
Approx. 316 assets, of which a built-up area of about
15k sqm. are for communication needs and the rest
for administrative needs. Approx. 2k sqm. built-up of
which are sublet.
rooms and
These are cable
neighborhood communication needs.
As for most of the properties, this is a right-of-use
granted
the
Communications Law and regulations thereunder,
and there is no written rights arrangement with the
asset owners. In Bezeq's opinion and based on past
experience, this does not create material exposure.
in accordance with
to Bezeq
facilities
for
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
As of the date of publication of the periodic report, Bezeq's rights in a significant
portion of its real estate assets are not registered with the Land Registry, and
therefore are contractual rights. Bezeq is in the ongoing process of registering in
its name the real estate assets that can be registered with the Land Registry.
2.7.4.3 Settlement agreement regarding the real estate
ILA) and
Israel Land Administration (now
On March 10, 2004, an agreement signed on May 15, 2003 between Bezeq and
the State ("Settlement
the
Agreement") regarding most of the real estate assets which were transferred to
Bezeq as part of the transfer agreement signed prior to the beginning of Bezeq's
business operations was given the validitiy of a ruling. The Settlement Agreement
stipulated that the assets remaining with Bezeq are in the status of a capitalized
lease, and subject to the signing of individual lease contracts, Bezeq will be
entitled to carry out any transaction in the assets, as well as to carry out
improvement operations in them. The agreement stipulates a mechanism for
payment to ILA for improvement actions to be performed on the assets (if any)
beyond rights under plans approved until 1993 as stipulated in the agreement, at
a rate of 51% of the increase in value of the asset following the improvement
actions (and deducting some of the amounts to be paid in respect of an
improvements levy or to the Administration in respect of an increase in value, if
an improvements levy is paid). The Settlement Agreement also stipulates that 17
assets will be returned to the State, through ILA, on various dates (until 2010)
and under the conditions set forth in the Settlement Agreement.
As of the date of publication of this periodic report, Bezeq returned to ILA 15
assets. Two additional assets will be returned to ILA after Bezeq receives
alternative assets in their place in accordance with the Settlement Agreement.
2.7.4.4 Real estate exercise
General
Subject to the approval of the Board of Directors, Bezeq continues to act for the
sale of assets that are inactive and / or that can be vacated relatively easily and
without significant expenses, in accordance with the lists presented to the Board
from time to time. The move to the NGN network made it possible for Bezeq to
streamline the structure of the network and exercise some of the real estate
assets that were evacuated as a result of the move to this network.
In recent years, Bezeq has sold real estate that was inactive or could have been
relatively easily vacated while recording capital gains on these sales, which in
some years were significant (during 2020, Bezeq sold real estate for a total of
approximately NIS 16.5 million.
Bezeq has completed the sale of most of the assets (in terms of value) that met
the aforesaid definition and intends to complete the sale of the balance of such
assets in the coming years. The sale of the balance of such assets may yield
Bezeq additional capital gains in substantial amounts (although in a significantly
lower amount than the cumulative amount of capital gains that Bezeq has
recorded in recent years).
It should be emphasized that the aforesaid also applies to real estate assets for
the sale of which a concrete decision has not yet been made and there is no
certainty as to the timing of their sale, if any. Also, the sale of some assets may
involve difficulties, including circumstances of lack of demand or various planning
constraints.
In light of the aforesaid, it should be emphasized that Bezeq's assessments as
aforesaid are forward-looking information as defined in the Securities Law, which
may not materialize or materialize in a materially different manner than
anticipated. These assessments are based, among other things, on Bezeq's
assessments of the value of the real estate assets it owns in relation to their book
value, since Bezeq does not have appraisals in relation to some of the assets, or
Bezeq's appraisals are not up-to-date, therefore, the assessments are also based
on Bezeq's internal estimates, and in light of Bezeq's inability to anticipate the
amount of consideration actually paid in respect of the assets to be sold (if and
to the extent that they are sold).
The asset in Sakia
49
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
On January 21, 2018, Bezeq entered into an agreement for sale of the asset in
Sakia (property near the Mesubim junction where Bezeq had a discounted lease
right) to Migdalei Naimi Ltd. On May 5, 2019, the transaction was completed,
when the total consideration received by Bezeq for the asset (including linkage
differences and interest in accordance with the provisions of the agreement)
amounted to NIS 511 million, plus VAT.
On May 21, 2018, Bezeq received a demand from ILA for the payment of a permit
fee in the amount of NIS 148 million plus VAT, in respect of a property
improvement plan approved prior to the signing of the agreement (“the
Demand"). On January 20, 2019, ILA rejected all of Bezeq's claims in the legal
attainment, however, the parties conducted contacts within the framework of the
dispute resolution mechanism set forth in the Settlement Agreement. At the same
time, Bezeq submitted an appraisal contention on the Demand. On August 5,
2018, Bezeq received a demand from the Or Yehuda Local Planning and
Construction Committee to pay an improvements levy in the amount of NIS 143.5
million due to the sale of the asset by way of a sale ("the Improvements Levy
Demand”). On September 17, 2018, Bezeq filed an appeal against the
Improvements Levy Demand, and sent ILA a demand for payment of the full
improvements levy in accordance with the Authority's obligation under the
Settlement Agreement. On January 20, 2019, ILA rejected Bezeq's demand for
payment of the said improvement levy. Upon completion of the sale transaction
as stated above and receipt of the full consideration, Bezeq paid half of the
improvements levy in the amount of NIS 75 million and provided a bank
guarantee for the other half of the levy, without detracting from or harming the
proceedings that Bezeq has taken or will take in order to cause the cancellation
or reduction of this levy. It should be noted that the amount of the permit fee to
be determined at the end of the proceedings can also affect the amount of the
improvements levy that Bezeq will have to pay to the Planning Committee. In
Bezeq's estimation, the amount of the permit fee and the improvements levy that
it will be required to pay is expected to be low and may even be significantly lower
than the total amount of the demands. Following Bezeq's request, an attempt was
made between it and the Accountant General's Division of the Ministry of Finance
and the Israel Land Authority in early 2020 to clarify and resolve the above
disputes within the framework of the dispute settlement mechanism set forth in
the settlement agreement. In March 2021, Bezeq received a notice from the
Accountant General and the Israel Land Authority that given the significant
differences in positions between the parties that do not seem to be possible to
bridge, they accept the Company's request to end the dispute resolution process
and allow the dispute to be transferred to the courts. Under these circumstances,
Bezeq intends to file a claim against the Israel Land Authority, as soon as
possible, for the return of the full amount of money it paid as a permit fee and
improvements levy. In its financial statements for the second quarter of 2019,
Bezeq recorded a capital gain of NIS 403 million. The capital gain recorded as
aforesaid is on the basis of Bezeq's assessment regarding the amount of the
permit fee and the improvements levy that it will be required to pay as aforesaid.
To the extent that Bezeq’s aforesaid estimates do not materialize, the final capital
gain will range from approximately NIS 250 million to approximately NIS 450
million. For this matter see also Note 6.6 to the 2020 statements.
The information contained in this section regarding Bezeq valuations and capital
gains as a result of the sale of the asset is forward-looking information as defined
in this term in the Securities Law, and is based, inter alia, on the above as well
as on Bezeq's assessments of Bezeq's claims regarding the payment of the
requirements. The information may not fully materialize as long as the said Bezeq
assessments take place in a manner different than expected.
Sale of a Bezeq asset at 8 Harakevet Street in Tel Aviv
On February 25, 221, Bezeq entered into an agreement for the sale of a real
estate asset located at 8 Harakevet Street, Tel Aviv ("the Asset") to the Azrieli
Group Ltd. ("The Buyer") in exchange for a total amount of NIS 180 million +
VAT. It should be noted that the Asset was jointly owned by Bezeq and the Israel
Postal Company and that the sale transaction includes the purchase of the Israel
Postal Company’s share by Bezeq and the sale of this share together with
Bezeq's share to the Buyer. The full consideration was paid by the Buyer at the
50
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
time of signing the agreement28. Bezeq is expected to record in its financial
statements for the first quarter of 2021 a capital gain in the amount of NIS 125
million before tax for the sale of the Asset (after deducting the cost of purchasing
the Israel Postal Company’s share, purchase tax, expenses and reduced cost
value to Bezeq).
The information contained in the above paragraph regarding the registration of
capital gain as a result of the sale of the Asset is forward-looking information as
this term is defined in the Securities Law and is based, inter alia, on the above
and on Bezeq estimates regarding completion of the agreement, transaction
costs, taxes and levies in respect thereof, as well as various costs to Bezeq in
connection with the Asset. The information may not fully materialize as long as
the said Bezeq assessments take place in a manner different than expected.
Bezeq moving its headquarters
In October 2020, Bezeq vacated the Bezeq headquarters offices in Azrieli Towers
in Tel Aviv and moved to its new offices at 7 HaManor Street in Holon. In
accordance with the lease agreement signed in December 2018, Bezeq leases
areas in the amount of approximately 20k sqm. for a period of 10 years, which
can be extended for a number of additional periods.
2.8. Intangible assets
2.8.1. Bezeq's NIO license
Bezeq operates under an NIO license, which, among other things, forms the basis for its
activity in the field of landline interior communications (for a description of the main points
of the NIO license, see section2.16.2).
2.8.2. Trademarks
Bezeq uses trademarks that characterize its services and products. As of the date of
publication of the periodic report, approximately 200 trademarks are registered in Bezeq's
name, or are in the process of being registered with the Registrar of Trademarks. The main
trademarks are Bezeq – Bezeq’s name and "B" – Bezeq’s logo. Also, Bezeq registered a
patent for Bezeq’s Be router and the new Be router.
2.9. Human capital
2.9.1. Organizational structure and employee base according to organizational structure
The following is a diagram of Bezeq's general organizational structure as of December 31,
2020:
28 The full consideration except VAT has been deposited in trust to secure various liabilities of Bezeq, the trustee will
transfer to Bezeq the trust funds in accordance with the provisions of the agreement.
51
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Board of
Directors
CEO
Management
(without
directors)
)32(
Internal
Auditor*
Corporate
Communications
Legal
Counsel
Group Secretary
and Internal
Compliance
Office
Headquarters
Division
(
540
)
Regulation
Division
Finance
Division
Marketing
and
Innovation
Division
Operations
and
Logistics
Division
Human
Resources
Division
Technology
and Network
Division
Business
Division
Private
Division
(
1564
)
(
2553
)
*Until December 10, 2020, was organizationally subordinate to the CEO and from that date
was organizationally subordinate to the Chairman of Bezeq’s Board of Directors.
2.9.2. Number of Bezeq employees and employment frameworks
The number of employees at Bezeq as of December 31, 2020 was 5,408 employees
(compared to 5,256 employees at the end of 2019). The increase in the number of
employees was mainly due to the absorption of infrastructure workers and technicians in
favor of the fiber project (see section 2.7.2.3). About 92% of Bezeq employees are
employees employed under collective agreements (of which approximately 59% of Bezeq’s
employees are permanent employees and the rest are non-permanent employees). The
rest of Bezeq’s employees (approximately 8%) are employed under individual agreements
not within the framework of the collective agreements.
For details regarding the special collective agreement from December 2006 and its
amendments, see section2.9.4.
2.9.3. Early retirement plans for employees
During a 2020, 98 permanent Bezeq employees retired in accordance with the early
retirement plan.
On December 16, 2018, Bezeq's Board of Directors approved, among other things, a
provision for an early retirement plan, until the end of the collective agreement period (end
of 2021), for all Bezeq employees transferred
to Bezeq from the Ministry of
Communications ("Transferred Employees") (94 employees) retiring in 2020 and 2021.
On December 10, 2020, as part of the implementation of Bezeq's streamlining plan,
Bezeq's Board of Directors approved the retirement of approximately 50 veteran permanent
employees in the early retirement track at a total cost of approximately NIS 68 million. In
light of the aforesaid, Bezeq recorded in its financial statements for the fourth quarter of
2020 an expense in the amount of NIS 65 million. It should be clarified that this retirement
is in addition to the retirement plan of Transferred Employees as stated above.
For this matter see also Note 17.5 to the 2020 statements.
2.9.4. The nature of the employment agreements with Bezeq
The employment relationship with Bezeq is regulated in collective agreements signed
between Bezeq and the representatives of Bezeq employees and the Histadrut, and in
individual agreements. Bezeq employees are also subject to extension orders for certain
general collective agreements, such as cost increase agreements.
52
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
In December 2006, following the transfer of control of Bezeq from the State of Israel to
AP.SB.AR Holdings Ltd. (the former controlling shareholder in Bezeq), a special collective
agreement was signed between Bezeq and the employees’ organization and the Histadrut
that regulates labor relations in Bezeq (see section 2.9.1). The following are the main points
of the collective agreement and the amendments to it that have been signed over the years
(jointly referred to as "the Agreement" in this section):
According to the Agreement, all existing agreements, arrangements and practices at Bezeq
on the eve of the signing of the Agreement, including the wage linkage mechanism for the
public sector, will continue to apply only to Bezeq's veteran permanent employees, to whom
the Agreement applies, subject to changes explicitly included in the Agreement. The
employment of existing and new temporary employees will be carried out on the basis of
monthly / hourly wage agreements based on a market wage model by occupation, with
high managerial flexibility. The Agreement set limits on certain types of future
organizational changes, as well as a mechanism for notification, dialogue and arbitration
with the employees’ organization in the event of organizational changes.
According to the Agreement, during the period of validity of the Agreement, two directors
from among the employees will serve on Bezeq's Board of Directors29 which will be
proposed by the employees' organization (subject to the approval of their identity by the
Chairman of the Board and their election to the general meeting). The directors from among
the employees will not be entitled to payment for their office as directors and will not
participate in Board discussions regarding the terms of employment of senior executives.
The status of "new permanent employee" has been defined, whose terms of employment
are different from Bezeq's veteran permanent employee (according to the collective
agreement): his salary model will be in accordance with Bezeq's salary policy in
accordance with market wages. Upon termination of his employment with Bezeq, he will
be entitled to an increased severance track only (in accordance with seniority).
As part of the retirement arrangements, Bezeq will be entitled to terminate at its discretion
the employment of up to 203 permanent employees (including a new permanents) each
year (the figure is relevant for the years 2017-2021).
On December 16, 2020, an amendment (No. 6) was signed to the Agreement, the main
points of which are:
2.9.4.1 Amendment and extension of the collective agreement until 31.12.2025
and the retirement arrangement in the collective agreement until 31.12.2026.
2.9.4.2 As part of its retirement arrangements, Bezeq may, at its discretion,
terminate the employment of up to 80 permanent employees (including a new
permanent) each year (in addition to the retirement quota of approximately 300
permanent employees remaining from the previous agreement, which Bezeq may
terminate at the end of the agreement).
2.9.4.3 The estimated cost of the Agreement, not including the retirement of
employees subject to Bezeq's discretion (but including the additional retirement
cost of Transferred Employees) is approximately NIS 65 million throughout the
period of the Agreement.
For a list of other material agreements in the field of labor relations, see section 2.17.2.
2.9.5. Labor disputes
Upon signing the amendment to the collective agreement as specified in section 2.9.4, the
collective conflict that was declared on January 23, 2019 ended.
2.9.6. Officers and employees of Bezeq's senior management
As of the date of publication of the periodic report, Bezeq has 8 directors (out of a
composition of 9 directors decided by the Board of Directors), of which two are external
directors, one independent director (who is not an external director) and 5 directors who
are not independent directors (including one director from among the employees). In
addition, Bezeq has 10 senior management members.
As of August 27, 2020, Mr. Gil Sharon has served as Chairman of the Board of Directors,
29 At the beginning of 2016, the employees' representation announced that it agrees that as long as up to 15 directors serve on
Bezeq’s Board of Directors, one representative from among the employees will serve on the Board, and as the number of
directors exceeds 15, another representative from among the employees will serve on the Board.
53
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
after the former Chairman of the Board of Bezeq, Mr. Shlomo Rodav, resigned on June 22,
2020. (In the period between June 23, 2020 and August 16, 2020, independent director Mr.
David Granot, served as interim Chairman of the Board).
Senior management members are employed under personal agreements that include, but
are not limited to, pension coverage, payment of target-based bonuses and early notice
months upon retirement.
For details regarding benefits for officers, see Section 7 of Chapter D of this periodic report
and Note 29 to the 2020 statements.
On May 23, 2019, the general meeting re-approved Bezeq's remuneration policy in
accordance with Article 267A of the Companies Law, including the update thereof, for a
period of 3 years, starting on January 1, 2019.
on June 2, 2020 the general meeting of Bezeq’s shareholders approved, inter alia,
amendment to the letters of indemnification and exemption granted to Bezeq's officers and
directors who serve at Bezeq and / or who will serve at Bezeq from time to time (including
those who are Bezeq's controlling shareholders and / or relatives and / or offciers in the
controlling shareholders' companies), as well as amendments to Bezeq's regulations and
its Remuneration Policy.
On May 14, 2020, the general meeting of Bezeq's shareholders approved, among other
things, additional amendments to the Remuneration Policy of Bezeq's officers as detailed
in Bezeq's immediate reports of April 2, 2020 and May 14, 2020 regarding the convening
and results of the meeting included in this report.
On December 10, 2020, Bezeq's Board of Directors approved a capital compensation plan
(“the Plan") under which options will be allotted which are exercisable into up to 84,000,000
ordinary shares, constituting approximately 2.94% of Bezeq's issued and paid-up capital
fully diluted after exercise, for which an outline was published on December 12, 2020 (as
amended on January 14, 2021) ("the Outline"). As part of the approval, an allocation of up
to 58,735,000 options was approved for up to 117 executives, managers and employees
in Bezeq and in the subsidiaries, including Bezeq's Chairman of the Board and Bezeq's
CEO, by virtue of the outline and a material private offer report. On February 10, 2021,
Bezeq's Board of Directors approved the allocation of up to 2,730,000 additional options
by virtue of the Outline to 4 Bezeq officers and / or employees (including an officer expected
to be appointed at Bezeq and who has not yet taken office as of the date of the report),
subject, inter alia, to the approval of the stock exchange of the listing for trade of the shares
that will result from the exercise of the options, which have not yet been received as of the
date of the report.
Also on January 18, 2021, the general meeting of Bezeq shareholders approved:
A.
Increasing Bezeq's registered share capital by 24,485,753 ordinary shares of NIS
1 par value each, in order to enable future allocation of capital remuneration up to the
maximum possible volume for allocation under the Plan.
B.
Mr. Gil Sharon's term of office and employment as Chairman of Bezeq's Board of
Directors, which will apply retroactively from August 27, 2020, and the effective date of his
entry into office (including the allocation of 12,000,000 options in accordance with the Plan).
C.
with the Plan.
Allocation to Mr. Dudu Mizrahi, CEO of Bezeq, of 9,000,000 options in accordance
D.
Amendments and updates to Bezeq's Remuneration Policy.
For further details on this matter, see Bezeq's amended immediate reports dated January
14, 2021 regarding the convening of a special general meeting of Bezeq's shareholders
and regarding an outline for the issuance of options to employees included in this report by
way of reference.
2.10. Equipment and suppliers
2.10.1. Equipment
The main equipment used by Bezeq is: exchanges, communication cabinets (MSAG),
copper cables, optical cables, transmission equipment, data communication systems and
equipment, servers, routers and Internet modems. Bezeq purchases most of the equipment
needed for its communications infrastructure from Israeli companies associated with
manufacturers of communications equipment from around the world. Bezeq purchases
hardware and software from a number of major suppliers.
54
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
2.10.2. Rate of purchase from major suppliers and the form of contact therewith
Bezeq sees as a "major supplier", for the purposes of Article 23 of the First Schedule to the
Prospectus Details Regulations, a supplier whose scope of Bezeq's annual purchases
exceeds 5% of the Group's total annual purchases and the volume of purchases from which
out of the total volume of purchases in the field of activity exceeded 10%.
During 2020, Bezeq had no major supplier as defined above.
2.10.3. Dependence on suppliers
Most of the equipment purchased in the fields of data communications, branding,
transmission and radio systems is unique equipment and throughout all its years of
operation the possibility of receiving support, other than from the manufacturer, is limited.
In Bezeq's opinion, given the importance of the manufacturer's support for certain systems
used by Bezeq, it may be dependent on the following suppliers:
Supplier name
Nokia
Solutions
Networks Israel Ltd.
and
Juniper Networks
Cisco / BroadSoft
Dialogic Networks (Israel)
Ltd.
Adtran Holdings Ltd.
IBM
VMware
Hits Telecom Ltd.
Field
Metro transmission and network access systems -
NGN
(It should be noted that GPON equipment for the
fiber network was also purchased from the
supplier. This is equipment that has not yet been
activated as of the date of publication of the report,
but when it is activated, Bezeq may also be
dependent on the supplier in this field)
Metro transmission
Subscriber switches
Transition switchboards for linking operators to the
Bezeq switching network
Network access systems - NGN
Hardware and solutions for backups, restorations
and system and
infrastructure survivability,
storage equipment
Infrastructure for most of the server virtualization
system
Be Router
Agreements with suppliers on which Bezeq may have a dependency as stated in this
section usually include a warranty period for a period of time and under the conditions set
forth in the agreements, followed by another period of maintenance or support. If
necessary, Bezeq may enter into an agreement with the supplier for the provision of support
and / or maintenance services for an additional period of time. As a rule, these agreements
will include various remedies to Bezeq in the event of a breach of the agreement by the
supplier. Usually, at the time of contracting with these providers, the contract is long term.
2.11. Working capital
For details regarding Bezeq's working capital, see Section 1.4 of the Board of Directors' Report.
For information on investments in investee companies, see Note 13 to the 2020 statements, and also
2.12. Investments
see sections 3 and 4 of Chapter D of this periodic report.
2.13. Funding
2.13.1. The average and effective interest rate on loans
As of December 31, 2020, Bezeq is not financed by short-term credit (less than a year).
The following is the distribution of long-term loans (including current liabilities):
55
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Loan
period
Source of
funding
The
principal
amount
(NIS
millions)
Long-
term
loans
Banks
1,113
Non-
banking
sources
Non-
banking
sources
Non-
banking
sources
71
3,971
3,189
Currency
or linkage
type
NIS
unlinked
NIS
unlinked
NIS
unlinked
CPI-
linked
NIS
Type of
interest rate
and change
mechanism
Average
interest
rate
Effective
interest rate
Interest
rate range
in 2019
Fixed
3.49%
3.64%
Variable on
the basis of
the short-
term loan
interest rate
per year *
1.43%
1.51%
Fixed
3.10%
3.19%
Fixed
1.92%
1.95%
3.20% -
5.30%
1.43% -
1.54%
3.20% -
5.25%
1.70% -
3.70%
* Yield of the short-term loan for the year (212) - minus 0.00200% (average of the last 5 trading
days of February 2021) for the interest period that began on March 1, 2021.
For more details about Bezeq loans, see Note 14 to the 2020 statements.
2.13.2. Credti receipt limitations
2.13.2.1 Limitations included in Bezeq loans
See Note 14 to the 2020 statements. As of the date of the financial statements,
as well as the date of publication of this periodic report, Bezeq meets all the
restrictions that apply to it.
2.13.2.2 Restrictions of the Bank of Israel related to a single borrower and a group
of borrowers
The directives of the Supervisor of Banks in Israel include restrictions on the
liability of a borrower and a group of borrowers towards the banks. The
Supervisor of Banks’ instructions may from time to time influence the ability of
banking corporations to grant additional credit to Bezeq. Regarding the
authorization to set restrictions on the provision of credit to a business group in
the Centralization Law, see section 1.7.4.7.
2.13.3. Reportable credit
As of December 31, 2020, Bezeq's reportable credit, in accordance with legal position 104-
15 of the Securities Authority (reportable credit incident) is Bezeq's bonds from series 6, 9,
10, 11 and 12, all as specified Note 14 to the 2020 statements and in section 4 of the Board
of Directors’ report.
2.13.4. Amounts of credit received during the reporting period
For details regarding the credit received during the reporting year through a private
placement of tradable bonds, see section 2.13.5.
On April 7, 2020, Bezeq published a prospectus of registration for trading and unblocking
of Bezeq bonds (Series 11 and 12) and a shelf prospectus (dated April 8, 2020) (“the
Prospectus"). Further, pursuant to section 2.1.2 of the prospectus and in accordance with
the provisions of section 2.3 (e) of the trust deeds for Bezeq's bonds (Series 11 and 12)
dated July 10, 2019, on April 26, 2020, these bonds, which were originally listed for trading
in the "Institutional Sequence" system of the TASE, were delisted from trading from this
system and listed for trading on the TASE's main list.
On May 27, 2020, Bezeq completed a placement according to a shelf offer report from May
26, 2020, which was published according to the Prospectus, of Bezeq's bonds (Series 11
and 12) by expanding the series listed for trading on the Stock Exchange's main list. In this
framework, 231,906,000 bonds (Series 11) in exchange for an amount of approximately
NIS 243,919,000 million and 470,000,000 bonds (Series 12) in exchange for an amount of
approximately NIS 480,481,000 were issued.
It should be noted that during 2020, Bezeq made two early repayments of private loans
(from an institutional body and a bank) in the total amount of NIS 860 million (principal).
56
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
2.13.5. Bezeq's bonds
For details regarding the bonds issued by the Company and by Bezeq see Note 14 to the
2020 statements and Section 4 of the Board of Directors' Report. Also, see section 2.13.4.
2.13.6. Credit rating
As of August 13, 2020, the Company's bonds are not rated in any rating. On the eve of the
termination of the rating, the rating of the Company's bonds (Series C) by Midroog was
Caa2.il, with a stable rating horizon.
Bezeq's bonds are rated by Standard & Force Maalot Ltd. as il/AA-/Stable and by Midroog
Ltd. as Aa3.il rating with a stable rating horizon. On December 22, 2020, Midroog
announced that it was placing the Bezeq rating under examination with negative
consequences.
For details regarding the history of Bezeq ratings in the last two years, see Bezeq's
immediate reports dated May 7, 2019, June 25, 2019, July 10, 2019, August 12, 2019,
November 25, 2019 and December 10, 2019, May 4, 2020, May 26, 2020 (Standard &
Force Maalot Ltd.), and dated April 8, 2019, June 25, 2019, July 10, 2019, August 6, 2019,
November 25, 2019 and December 10, 2019, April 22, 2020, May 26, 2020, December 22,
2020 (Midroog Ltd.) included in this report by way of reference.
For this matter see also section 4 of the Board of Directors' Report.
2.13.7. Bezeq's assessment in relation to debt raising in the coming year (2021) and the
sources of raising
During 2021, Bezeq is expected to repay a total of NIS 1.3 billion for the principal and the
interest on its loans, including bonds (including an amount planned for early repayment of
credit at Bezeq's discretion).
Bezeq raises funds from time to time for the purpose of managing its cash flow. The
financing options available to Bezeq are: Raising debt through new loans from banking
corporations and / or through raising private or negotiable debt. Bezeq intends to continue
operating during 2021 to adjust its debt structure to its needs and sources.
2.13.8. Liens and collateral
For information regarding Bezeq's liens and collateral, see Note 20 to the 2020 statements.
2.14. Taxation
For information on taxation, including losses carried forward for tax purposes in DBS, see Note
7 to the 2020 statements. Also, regarding the application for approval of a derivative claim
regarding the assessment agreement in connection with DBS losses, see section 2.18i.
2.15. Environmental risks and ways of managing them
2.15.1. General
Some Bezeq facilities, such as broadcasting facilities, wireless communication facilities, or
high-voltage facilities30 are sources of electromagnetic radiation which are included in the
definition of "radiation source" in the Non-Ionizing Radiation Law.
2.15.2. The Non-Ionizing Radiation Law
The law regulates the practice of radiation sources, their establishment and operation, as
well as their supervision. Among other things, the law stipulates that the construction and
operation of a radiation source is subject to a permit; Provides for punitive provisions, and
strict liability for a company that has violated the provisions of the law, its employees and
its officers; Imposes registration and reporting obligations on the permit holder and confers
supervisory powers mainly to the Commissioner for Non-Ionizing Radiation in the Ministry
of Environmental Protection (in this section - "the Commissioner"), including regarding
conditions in the permit, revocation of the permit and disposal of radiation source.
Bezeq has issued operating permits from the Commissioner for the communication
facilities and broadcasting sites operated by it. In addition, Bezeq performed the necessary
actions for issuing radiation permits for high-voltage facilities located in Bezeq's assets,
30The construction and operation of these facilities requires an establishment permit as well as an operating permit in accordance
with the Non-Ionizing Radiation Law. The construction of high-voltage facilities (transformers) at Bezeq sites is intended for the
supply of energy for the use of Bezeq facilities.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
and as of the date of the report, radiation permits exist for 13 high-voltage facilities, all of
which have a construction and operating permit or a valid type approval.
It should be noted that the Commissioner requires building permits as a condition for the
continued validity of operating permits for communication facilities (including broadcasting
facilities) issued by him, as well as the existence of additional conditions, inter alia, in
relation to "wireless access facilities" that have a "type certificate" issued by the
Commissioner . See also section2.16.10.
The law includes a penalty chapter which stipulates, inter alia, that the construction or
operation of a radiation source in violation of the terms of the permit and the construction
or operation of a radiation source without a permit after receiving written notice from the
commissioner, are a criminal offense.
2.15.3. Permits
For permits for broadcasting facilities required by the Planning and Construction Law, see
section 2.16.10.
2.15.4. Bezeq policy regarding radiation risk management
Bezeq implements a work procedure regarding the establishment, operation and
measurement of non-ionizing radiation sources, and an appropriate enforcement
procedure approved by Bezeq's Board of Directors. Bezeq has been appointed an
enforcement procedure implementation officer. Periodic reports on the status of radiation
sources are forwarded to Bezeq's CEO and the Board of Directors.
2.16. Restrictions and supervision of Bezeq operations
Bezeq is subject to various legal systems that regulate and limit its business activities. The main
body that supervises Bezeq's activities, as a communications company, is the Ministry of
Communications.
2.16.1. Supervision of Bezeq rates
Arrangements under Sections 5 and 15 to 17 of the Communications Act and under the
NIO license apply to Bezeq’s rates, as detailed later in this section.
Bezeq rates supervision (as detailed below) has several implications - Bezeq rates are
subject to regulatory intervention (even if not provided for in regulations or alternative
payment baskets), and from time to time, Bezeq is exposed to significant changes in its
rate structure and rate level. The mechanism of updating the supervised rates, as stipulated
in the authorizing legislation and regulations, leads to the fact that on average the
supervised Bezeq rates have actually eroded over the years. Rate control creates or may
create difficulties for Bezeq in providing an appropriate competitive response to changes
in the market and competitors' offers in short schedules. In addition, the restrictions on the
granting of discounts in rates limit Bezeq’s participation in certain tenders.
The following are the main principles of the control arrangements on Bezeq rates:
2.16.1.1 In accordance with
the Communications Law,
the Minister of
Communications may, with the consent of the Minister of Finance, determine
payments (including maximum or minimum) for licensee services. Determination
of payments can be made, inter alia, based on (1) cost according to a calculation
method ordered by the Minister plus a reasonable profit; Or (2) by reference points
derived from the following: payment for services provided by the licensee,
payment for comparable services, payments in other countries for such services.
2.16.1.2 Rates set by regulations (FIX) - Bezeq's supervised service rates
(telephony and other services) set in the regulations were updated according to
the linkage formula minus a reduction coefficient as stipulated in the regulations,
so that on average Bezeq's supervised rates were eroded in real terms. After five
years in which the rates were not updated, on May 23, 2018, the Ministry of
Communications issued an announcement updating the Bezeq rates set forth in
the regulations as of June 1, 2018, based on the formula of the update set forth
in the Communications (Bezeq and Broadcasting) Regulations (Calculation of
Payments for Bezeq Services and their Linkage), 5767-2007, so that the rates for
the services provided by Bezeq set forth in the regulations decreased by an
average of 11.88%, except for the fixed monthly payment for a telephone line
which remained unchanged. In accordance with the temporary provisions from
June 1, 2019 and June 1, 2020, the payments have not been updated and the
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
details in the formula have been updated to the date of the next update that will
apply on June 1, 2021. For the hearing regarding the determination of maximum
rates for Bezeq's retail telephony services, see section2.16.1.6.
2.16.1.3 The Minister of Communications and Finance have the authority
(according to Article 5 of the Communications Law) to determine payments for
interconnectivity or for a licensee's use of another licensee's Bezeq facilities and
to issue instructions (including in relation to ancillary arrangements), inter alia,
based on the parameters stated in section 2.16.1.1.
for a group of
2.16.1.4 Alternative payment baskets - if rates that are not maximum or minimum
are set for the supervised services, Bezeq may offer an alternative payment
the Ministers of
basket
those services, provided
Communications and Finance do not oppose the basket. In the Gronau report31
It is stipulated that an alternative payment basket will only be approved if it is
worthwhile to 30% or more of the subscribers who consume the services offered
in the basket and that the maximum allowable discount rate in an alternative
payment basket will be higher the smaller the Group's market share in fixed
telephony.32
that
If maximum or minimum payments have been determined under Articles 5 or 15
of the Communications Law for Bezeq services provided to another licensee,
Bezeq may, in a non-discriminatory manner, offer each other licensee both an
alternative payment basket for a group of services in maximum or minimum
payments, and such services together with together with services for which no
payment has been prescribed under Article 5 or 15 of the Communications Law,
insofar as the Ministers have not objected.
2.16.1.5 For a service for which no payment has been determined or for which a
maximum or minimum payment has been determined according to Article 5 or 15,
Bezeq may demand a reasonable payment. The Minister of Communications may
order Bezeq to inform him of a payment that it intends to demand as aforesaid
and of any change in payment before the service is provided or the change is
made. If the Minister of Communications sees that Bezeq intends to demand an
unreasonable payment, or a payment that raises concerns in respect of
competition, he will be entitled to order Bezeq (for a period not exceeding one
year) the amount of payment it may demand for the service, or order the
separation of the payment for a service from the payment for the group of
services. The Minister's examination of whether a payment is unreasonable may
in
be made,
section2.16.1.1(1), and the Minister may examine the payment based on what is
stated in section2.16.1.1(2).
the parameters as stated
in accordance with
inter alia,
2.16.1.6 On December 15, 2020, a hearing was published by the Ministry of
Communications regarding the determination of maximum rates for Bezeq's retail
telephony services (“the Hearing"). This Hearing replaces an earlier hearing from
June 2017 regarding the change in the mechanism for supervising Bezeq's retail
rates and is significantly different from it.
a) According to the Hearing documents, in view of the elapsed time since the
establishment of the existing retail telephony rates ("the Rates") and the
changes in the communications industry, the Rates supervision mechanism
and the level of Rates must be adjusted to these changes. Also, following an
earlier hearing published by the Ministry in 2017 regarding the Rates control
mechanism in which two alternatives were proposed (transition to maximum
Rates and removal of Rates control from major telephony services), the
Ministry believes that at present the alternative of removing Rates control is
irrelevant and will not necessarily reduce Rates. The level of Bezeq's Rates
must be examined and updated in accordance with the passage of time, the
current cost structure and the state of competition.
31 Report of the Gronau Committee for the Rules of Competition in the Field of Communications in a letter from the then Minister
of Communications dated August 13, 2008 regarding the adoption of the report (as amended) ("the Gronau Report").
32 Maximum discount rate of 25% when the Group's market share is between 75% and 85% and 40% when the market share is
between 60% and 75%.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
b) Accordingly, and based on an economic opinion attached to the Hearing
documents, it is proposed in the Hearing to adopt a uniform usage fee rate
and that the usage fee rates and call minutes be set as maximum rates.
According to the Hearing, the basis for determining the proposed rates is the
wholesale costs plus a proposed retail margin component of 25%.
c) Accordingly it is proposed that the maximum rates for line and calls (in NIS)
be as follows:
Service
Current rate
Rate proposed at
Hearing (maximum)
Monthly usage fee for telephone
line
Rate for one minute of call to
landline networks33
Rate for one minute of call to
mobile networks34
VAT free
VAT
included
VAT free
VAT
included
49.5
57.92
20.82
24.36
Low - 0.035
Low - 0.041
High -
0.0857
High -
0.010
0.012
0.014
0.1098
0.128
0.072
0.084
d)
In addition, it is proposed to set a maximum rate for a line package of minutes
and a quota of minutes that Bezeq will be obligated to market to its
subscriber, which will include 500 minutes of calls to landline and mobile
destinations at a maximum rate of NIS 28 plus VAT plus the fixed rate for
each minute. At the same time, it is proposed to cancel all existing alternative
payment baskets while allowing Bezeq to market new service packages at
reasonable rates in relation to the maximum rates that are proposed to be
determined at the Hearing and which are not higher thereof.
e) According to the Ministry of Communications, the proposed change in rates
is expected to reduce the expenses of the individual lines segment
subscribers in a way that will reduce the expenses of Bezeq's fixed telephony
consumers by NIS 331 million per year (approximately 390 million including
VAT).
f)
It should be noted that the Hearing proposes additional changes to Bezeq's
rates, including adjustments to the new rates proposed at the Hearing,
determining the existing rates for ancillary services to the telephone line as
maximum rates and enabling Bezeq to set lower prices relative to them, and
terminating the rates of calls initiated by business customers In my PRI axis.
g) Also, according to the Hearing, insofar as there is a change in the
interconnectivity rates, this will result in a change in the corresponding call
minute rates that include this component.
In addition, a draft amendment to Bezeq's rates regulations was attached to the
Hearing documents.
In Bezeq's opinion, as the changes proposed in the Hearing are implemented, a
material adverse effect on Bezeq's financial results is expected.
Some of the information contained in this section is forward-looking information
as defined in the Securities Law based on assessments, assumptions and
expectations, including the final decisions to be made in the Hearing, the Ministry
of Communications' assessments in the Hearing, demands for Bezeq services
and the behavior of various communications operators. Accordingly, the
33 Includes an interconnectivity rate for landline destinations.
34 Includes an interconnectivity rate for mobile networks.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
information may not materialize or materialize differently from what is stated
depending on the materialization of the above assessments.
On December 17, 2020, Bezeq sent a request to the Ministry of Communications
for a postponement of its response to the Hearing in light of the complexity of the
issue, and in this context, it expressed initial substantive reservations about the
Ministry of Communications' position in the Hearing.
On January 11, 21, Bezeq submitted a report to the office of the international
research company Cullen International with a concise overview of EU policies,
rules and experience regarding the issue of the hearing, according to which,
among other things - the practice of intervening in any form in retail rates through
an update mechanism known as price cap has not existed in the world for over a
decade, a fortiori, when it comes to unilaterally setting the rates of services. Even
when telephony rates were regulated (in the 1990s and early 2000s), pricing was
always based on "top down" models based on the Full Distributed Costing of
accounting costs (sometimes with adjustments), and that methods of determining
prices based on bottom-up models that reflect the cost structure of a hypothetical
efficient operator were used solely when determining wholesale prices. This is
because operating this method when setting retail prices does not by definition
allow for actual cost coverage, and thus will lead to a continuous loss to the point
of the veteran operator leaving the market.
On February 28, 2021, Bezeq submitted to the Ministry an economic opinion from
the consulting firm Ernst & Young ("the EY Opinion"), regarding the regulation
of Bezeq's landline telephony rates, according to which the implementation of the
recommendations in the Hearing document is expected to lead to a material
impairment of Bezeq's revenues and profits. EY writes that the Ministry has an
obligation to justify the regulatory intervention in the market and if it is found that
there is justification for the intervention, it must be reasonable and proportionate
in the face of economic justification and in the face of the expected harm to
Bezeq. According to the EY Opinion, analysis of the landline telephony market in
Israel shows that no regulatory intervention is required, among other things,
because the definition of the product market should include both landline
telephony and mobile telephony, since these are products that constitute close
alternatives. The EY Opinion clarifies that the economic opinion on which the
Hearing is based does not provide the necessary justification for the proposed
regulation and that the recommendations contained therein are the result of
methodological biases, mistakes and computational error, when instead of an
orderly competitive economic analysis (basic practice in Israel and around the
world), the economic opinion is based on biased or unfounded determinations
that are also inconsistent with reality; Instead of determining the rate on the basis
of Bezeq's actual data and costs, the economic opinion deviates from the practice
of previous committees and European practice and states in an unprecedented
manner that the retail rate should be determined on the basis of the cost structure
of a hypothetical efficient operator. This has a crucial impact on the actual results;
The assumptions made for the purpose of determining retail rates by estimating
retail costs as a percentage of the wholesale cost of telephony services are
unfounded, erroneous and biased. Some even contradict the findings of previous
work by the Ministry of Communications itself in a way that significantly reduces
the maximum retail rate recommended in the Hearing; Once a result was
obtained that meant a dramatic reduction in the rate - a reduction of tens of
percent - no in-depth examination was conducted regarding the reasonableness
of the outcome and an examination of its expected implications for competition
and consumers. In addition, the aforesaid correction of the deficiencies illustrates
that the rates recommended in the Hearing are tens of percent lower than those
required in order to cover Bezeq's costs and are therefore unreasonable.
In Bezeq’s letter accompanying the EY Opinion, Bezeq stated that the economic
opinion on the basis of the Hearing and its conclusions could not stand. They
express unreasonableness and obvious failures in relation to the intervention
itself, both in relation to the process and to the results. In view of this and in light
of the analysis presented in the EY Opinion, the obvious conclusion is that the
implementation of regulation in the landline communications market no longer
serves a legitimate consumer interest but on the contrary, in a market where there
are no barriers to entry and a high level of competitiveness exists, achieved in
light of technological, regulatory and structural changes, applying regulation
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
creates damage to the consumer interest. Therefore, the adoption of the Hearing
recommendations will be a decision made in an unreasonable manner, which
creates an arbitrary and unjustified violation of Bezeq's rights. In addition, Bezeq
believes that in the circumstances presented in an orderly manner in the EY
Opinion, the correct and required step is to remove the supervision of Bezeq's
telephony service rates.
2.16.1.7 For the hearing dated August 29, 2017 regarding the mechanism for
preventing margin reduction, and the submission of marketing proposals for
approval by the Ministry of Communications, as well as for wholesale service
rates and for updating the wholesale rates for the years 2019-2021 - see section
2.16.4.
2.16.1.8 Regarding wholesale market rates in the BSA service - on February 20,
2020, the Minister of Communications decided to amend the Communications
(Bezeq and Broadcasting) Regulations (Use of an NIO Public Network), 5774-
2014 (“the Amendment" and “the Regulations", respectively) as detailed below:
a) The amendment includes formulas for updating the maximum payments to
which Bezeq is entitled for use of its network (wholesale BSA service) on
January 1 of each year, between the years 2019 and 2022, and also
stipulates that the Minister of Communications will publish on November 15
each year the demand forecast index, which is a component of the update
formula. The demand indices for the years 2019 and 2020 were determined
in the Minister's announcement which was attached to the Minister's
decision. The amendment will apply retroactively from January 1, 2019.
b)
It was further determined that with the entry into force of the regulations, a
reduction of certain payment components will apply in a manner that will
offset Bezeq and another licensee, who consumed the services between
February 2017 (the date of the decision to update the maximum payments)
and July 2018 (the date of updating the regulations) until the end of the
offsetting for that period.
The update of the maximum payments for the years 2019 and 2020 resulted in
an insignificant decrease in Bezeq's revenues in relation to the revenues that
would have been received on the basis of the current rates at which the
communications market operated from July 2018.
On November 29, 2020, a Public Notice (Bezeq and Broadcasting) (Use of an
NIO Public Bezeq Network), 5720-2020 (“the Notice") was published, in which
the demand forecast indices for 2021 were updated in the regulations, from which
Bezeq’s rates for wholesale infrastructure ownership services in accordance with
the formulas are derived. Bezeq's revenues in respect of such services are
affected by both the rates and the extent of the actual use of Bezeq’s network,
which depends on the behavior of the various communications operators. Based
on Bezeq's estimates of the extent to which telecommunications operators use
its network during 2021, Bezeq estimates that the updated rates, which are
expected in light of the demand forecast indices in the Notice, may have a
material adverse effect on its results for 2021. Bezeq has reservations about the
procedure and the manner of determination of some of the demand forecast
indices in the Notice by the Ministry of Communications, which were presented,
among other things, in Bezeq’s letter to the Ministry, and Bezeq is examining its
steps in this regard.
Some of the information contained in the above paragraph is forward-looking
information as defined in the Securities Law based on Bezeq's assessments,
assumptions and expectations, including the scope of use of Bezeq’s network
and the behavior of the various communications operators. Accordingly, the
information may not materialize or materialize differently from what is stated
depending on the materialization of the above assessments.
For wholesale market rates on Hot’s network, see section2.16.4.
2.16.1.9 On September 17, 2020, the Ministry of Communications approved a new
arrangement proposed by Bezeq, which includes prior approval of alternative
payment baskets that include increased use, following a hearing published by the
Ministry regarding unusual uses of landline call minutes in the face of the outbreak
of the COVID-19 pandemic and following a temporary amendment of alternative
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
payment basket provisions provided by Bezeq in accordance with the outline
proposed by Bezeq which enabled a retroactive increase of packages in cases of
use in excess of a certain threshold. The validity of the arrangement has been
extended from time to time (as of the date of publication of the report, it is valid
until July 31, 2021).
2.16.2. Bezeq's NIO license
Bezeq operates, among other things, under the NIO license35. The NIO license contains
provisions that mainly concern:
2.16.2.1 The scope of the license, the services that Bezeq must provide and the
universal service obligation
Bezeq must provide its services to everyone on equal terms for each type of
service, regardless of location or unique cost. The license is not limited in time;
The Minister may change, revoke, and suspend the license; The license and any
part thereof may not be transferred, encumbered or foreclosed. Regarding the
addition of wholesale services to the Bezeq license, see section1.7.3. Regarding
the deployment and universal service obligation in connection with ultra-
broadband infrastructure, see section2.7.2.
2.16.2.2 Rules of structural separation
For a description of the structural separation rules applicable to Bezeq, see
section1.7.2.
2.16.2.3 Rates
Bezeq will provide a service or package of services for which no rate has been
set under Articles 15 or 15A of the Communications Law at a reasonable price,
and will offer it to everyone, without discrimination, and at a uniform rate. See
also section2.16.1.
2.16.2.4 Marketing shared service baskets
For the provisions in the NIO license that allow Bezeq to apply to market baskets
of shared services subject to restrictions, see section 1.7.2.2.
2.16.2.5 Operation of Bezeq’s networks and the level of its services
Bezeq must maintain and operate the network, and maintain its services at all
times, including in times of emergency, in a proper and regular manner, in
accordance with the technical requirements and the quality of service
requirements, and act to improve its services. The license includes an appendix
regarding the "level of service to the subscriber", which was determined to be
amended after Bezeq provides the Ministry with data. Bezeq forwarded proposals
to the Ministry to amend the appendix while adapting it to the reality and licenses
of other operators, but as of the publication of the report, the amendment has not
yet been made. For the amendment to the license regarding answering at the call
centers, see section1.7.4.4a).
2.16.2.6 Interconnectivity and use
Provisions have been made regarding the obligation of interconnectivity to
another public network and allowing the use of another licensee (including
wholesale service); There is also an obligation to provide infrastructure services
to the another licensee on reasonable and equal terms, and to refrain from
preferring a licensee who is an affiliated company.
2.16.2.7 Arrangements in the field of security
Provisions have been made regarding the operation of Bezeq’s network in time
of emergency, including an obligation to operate in a manner that will prevent it
from collapsing in an emergency.
Bezeq must perform Bezeq services and construction and maintenance services
for infrastructure and end equipment for defense forces in Israel and abroad, as
stipulated in its agreements with the defense forces. Bezeq will also provide
special services to the defense forces. Bezeq will work to ensure that all
35 A copy of the NIO license is published on the Ministry of Communications' website at - www.moc.gov.il.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
purchases and installation of hardware in its Bezeq facilities, with the exception
of terminal equipment, will be made in full compliance with the instructions given
to Bezeq under Article 13 of the Communications Law.
Bezeq must appoint a security officer and strictly comply with the security
provisions in the appendix to the license.
2.16.2.8 Supervision and reporting
Bezeq has extensive reporting obligations to the Ministry of Communications. In
addition, the Director General of the Ministry of Communications (as defined in
Bezeq’s license) was granted access rights to the facilities and offices used by
Bezeq and the seizure of documents. On August 1, 2019, Bezeq's general license
was amended so that the reporting obligations were consolidated and reduced.
2.16.2.9 Miscellaneous matters
a) The NIO license includes restrictions on the acquisition, possession and
transfer of means of control in accordance with the provisions of the
Communications Order (see section 2.16.3), as well as restrictions on
"cross-ownership", the main principle of which is the prohibition on cross-
holding by entities that have an affiliation with another material NIO36 as
stated in the license, and restrictions on cross-holding by entities with NIO
licenses or general licenses in the same segment of activity.
b) Bezeq provided the Director General of the Ministry of Communications with
a bank guarantee in the total amount of NIS 15 million to ensure compliance
with the terms of the license and to indemnify the State for any damage
caused to it due to their violation by Bezeq.
c) The Director General of the Ministry of Communications is authorized to
impose a financial sanction for violating the terms of the license (for this
matter, see also section 1.7.4.6).
d) Bezeq may invest during a calendar year up to 25% of its annual income in
activities not intended for the provision of Bezeq services (when the income
of subsidiaries is not considered Bezeq's revenue for this purpose).
e) On October 26, 2020, Bezeq was received from the Communications and
Postal Service Officer in the Judea and Samaria Civil Administration a
general license for the provision of landline interior Bezeq services in the
Judea and Samaria area. In accordance with what is stated in the preamble
to the license, this is a license in the form of a reference to Bezeq's general
license granted to
it by the competent bodies in the Ministry of
Communications, while making the necessary adjustments in the area, and
it is nothing but an existing snapshot in the field of infrastructure that is under
the responsibility and ownership of Bezeq. Accordingly, no material change
is expected in Bezeq's conduct in Judea and Samaria in relation to the
existing situation prior to the granting of the license (at the same time, it
should be noted that the license in principle allows Bezeq to streamline the
service in the area through the use of technicians from the entire Group,
subject to the approval of an appropriate procedure to be formulated by
Bezeq and brought for approval by the Communications Officer).
For the wholesale market and wholesale service portfolios see section 2.16.4.
2.16.3. The Communication Order
Bezeq has been declared a provider of essential Bezeq services in accordance with the
Communication Order. By virtue of this declaration, Bezeq is obligated to provide certain
types of services and may not stop or reduce them, including basic telephone service,
infrastructure service, transmission service and data communication service, including
interconnectivity, and other services listed in the addendum to the Order.
Main additional provisions in the Communication Order:
2.16.3.1 Restrictions on the transfer and purchase of means of control in Bezeq,
including a restriction on the possession of means of control of a certain type at a
rate of 5% or more without the prior written approval of the Prime Minister and the
36 NIO with a market share of 25% or more.
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Minister of Communications (“the Ministers").
2.16.3.2 The transfer or acquisition of control of Bezeq requires the approval of the
Ministers ("Control Permit"). The Control Permit will determine a minimum
holding rate in each of Bezeq's means of control by the Control Permit holder,
with the transfer of shares or the issuance of shares by a company, as a result of
which the controlling shareholder's holdings fall below the minimum rate – is
prohibited without the Minsiters’ prior approval, subject to permissible exceptions
(including public offering under a prospectus or sale or private allotment to
institutional investors)37.
2.16.3.3 Holdings that have not been approved as aforesaid will be considered
"excess holdings". The Order stipulated that there would be no validity to the
exercise of a right by virtue of excess holdings, and also stipulated provisions
authorizing the Ministers and Bezeq to apply to the court for a forced sale of
excess holdings.
2.16.3.4 Bezeq was required to report to Ministers, upon request, on all information
on matters related to the provision of an essential service.
2.16.3.5 At least 75% of the members of Bezeq's Board of Directors will be citizens
of Israel and its residents with a security classification and security suitability, as
determined by the General Security Service. The Chairman of the Board of
Directors, the external directors, the CEO of Bezeq and other Bezeq officials as
specified in the Order will be citizens of Israel and its residents and have a security
classification according to the classification of the position.
2.16.3.6 "Israeliness" requirements have been set for the controlling shareholder in
Bezeq: in the case of an individual - he is an Israeli entity (as defined in the Order),
in the case of a corporation - it is incorporated in Israel, its business center in
Israel and an Israeli entity (as defined in the Order) holds at least 19% of any of
the means of control in it, or holds at least 19% of the voting rights at the general
meeting and the right to appoint directors of the controlling shareholder and he
has the right to appoint at least one-fifth of the number of directors in Bezeq and
Bezeq's subsidiaries, and no less than one director, in each them, to be appointed
by him, provided that the rate of his holdings in Bezeq, both directly and indirectly,
shall not at any time be less than 3% of any type of means of control in Bezeq.
the Ministry of Communications regarding "changing
It should be noted that on March 8, 2020, Bezeq received hearing documents
the
published by
requirement for a minimum percentage of means of control of a general licensee
held by an Israeli entity". During the hearing, it was proposed to amend the
Communications Order as well as additional legislation stipulating Israeliness
requirements in relation to additional holders of communications licenses, so that
it will be possible to convert the Israeliness requirement in the legislation under
Article 13 of the Communications Law and the procedure set forth therein. The
date for reference to the hearing is set for March 29, 2020. On July 8, 2020, an
amendment was published in Reshumot to some of the communications
regulations that stipulate an Israeli requirement so that the possibility of
converting the Israeliness requirement into a provision under Article 13 of the
Communications Law and in the procedure set forth therein, which will apply to
the relevant licensee alternative provisions to the Israeliness requirement. The
date for reference to the hearing is set for March 29, 2020. On July 8, 2020, an
amendment was published to some of the Communications Regulations
stipulating the requirement of Israeliness, so that the possibility of converting the
requirement of
the
Communications Law, which will apply alternative provisions to the Israeliness
requirement on the relevant licensee. To the best of Bezeq's knowledge, no
parallel amendment has yet been made to the Communications Order.
into a provision under Article 13 of
Israeliness
2.16.3.7 The approval of the Ministers is required for the granting of rights in certain
Bezeq assets (switches, cable network, transmission network and databases and
information). In addition, the granting of rights by means of control of Bezeq's
subsidiaries, including the allotment of shares in excess of 25% by the subsidiary,
requires the approval of the ministers.
37 Per lesson The minimum holding in the control permit of a group flashSee section 8 lEpisode D' report This period is.
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2.16.3.8 Certain Bezeq operations require the approval of the Minister of
Communications, including voluntary dissolution, compromise or settlement
between Bezeq and its creditors, change or reorganization of Bezeq's structure,
merger and splitting of Bezeq.
2.16.4. Wholesale market
In recent years, Bezeq has been providing services under the "wholesale market" model,
in which it has imposed obligations on the owners of the lanlinde interior access
infrastructure in Israel (Bezeq and Hot) to sell wholesale services to other communications
operators.
The regulatory determinations in relation to the wholesale market as well as its
implementation and development during the reported period have an impact on a
significant part of the Group’s activity.
2.16.4.1 Policy document
in which
the Minister of Communications adopted
The wholesale services are set out futher to the policy document dated May 2,
2012,
the main
recommendations of the committee for examining the structure of Bezeq's rates
and updating them and for determining rates for wholesale services in the field of
communications (Hayek Committee). The policy document stipulates, inter alia,
that owners of landline interior access infrastructures, which provide retail
services, including Bezeq, will be required to sell wholesale services to
communications license holders, on the basis of non-discriminatory conditions
and no size discounts. The document set out conditions for the elimination of
structural separation (See section 1.7.2.1b) and that the Minister will work to
move to the method of controlling Bezeq rates by setting a maximum price, within
6 months of publishing a "shelf offer" for the sale of services by infrastructure
owners, and that the Ministry will formulate a regulation within 9 months aimed at
increasing investment in Israel's fixed communications infrastructure.
the end of 2014,
the policy document, at
Following
the Ministry of
Communications established service portfolios for the various services, which
determine the format of the provision of services by the infrastructure owners. The
maximum rates that Bezeq may charge for these services were set by the Minister
of Communications with the consent of the Minister of Finance in the regulations
for the use of that year. On June 26, 2017, the rates for Hot’s wholesale services
were announced.
2.16.4.2 BSA service
Bezeq began providing the service on February 17, 2015. This service enables
infrastructure-less service providers to offer their customers an Internet
servicefull (end to end) which includes both an Internet connection service and
Bezeq's infrastructure service. Since the launch of the service, hundreds of
thousands of customers have moved to receive service through such service
providers, in this regard, see sections 1.5.4.1 and- 2.1.3.
In the first days of the service, the Ministry conducted a supervisory procedure in
Bezeq that led to the imposition of sanctions in the amount of NIS 8.5 million.
Bezeq paid the amount of the sanctions. Bezeq's petition to the court against this
procedure was rejected. Bezeq's appeal on the rejection og the petition was
denied.38. In addition, disputes arose between Bezeq and the service providers
and the Ministry of Communications regarding the implementation of the service
portfolio. These disputes concerned, among other things, the payments due to
Bezeq for the service, the division of responsibility for installation and
malfunctions.
On August 29, 2017, the Ministry of Communications issued a secondary hearing
(to a hearing published on November 17, 2014), regarding the determination of a
format for examining the margin squeeze by owners of broadband fixed
38
It should be noted that on January 19, 2020, a judgment was rendered in the framework of which a motion was partially accepted
for the disclosure of documents under Article 198A of the Companies Law regarding this financial sanction. The applicant seeks
to examine through the disclosure of the documents the possibility of submitting a motion for approval of a derivative claim
against Bezeq officers / employees who were involved in dealing with the issue, with the relevant derivative claim amounting to
the financial damage caused to Bezeq as a result of the financial sanction imposed on Bezeq (NIS 8.5 million). Bezeq informed
the applicant that Bezeq's Board of Directors has appointed an independent claims committee, inter alia, in matters subject to
the ruling, which examines Bezeq's claim rights in connection with the financial sanction.
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communications infrastructure in marketing proposals. Margin squeeze is an
operation in which the infrastructure owner lowers his retail prices and thereby
reduces the gap between his retail prices and the wholesale price at which he
sells the infrastructure inputs to service providers in a way that reduces the profit
of service providers to economic inefficiency. According to the secondary hearing,
the Ministry is considering allowing an independent examination track to rule out
margin squeeze, using testing tools that will be approved by the Ministry (in
addition to the limited testing track). According to the considerations, the effective
rate of the tested service or the group of tested services will not be lower than the
minimum price threshold set for the marketing of those services tested by the
licensee. The "licensee" at the hearing includes Bezeq, Bezeq International, DBS,
Hot Broadcasting, Hot Telecom and Hot Net. Bezeq submitted its response to the
hearing, according to which there is no need to determine a format for examining
the margin squeeze, but insofar such is detemined determines, the mechanism
of self-examination proposed at the hearing should be expanded. In Bezeq's
estimation, the format of examining the margin squeeze, insofar as it is
implemented, may impair Bezeq's and the Group's ability to market packages in
terms of the timing of the offers and the prices they can offer.
To the best of Bezeq's knowledge, the sale of wholesale services on the Hot
network has begun. Also, to the best of Bezeq's knowledge, the volume of
wholesale subscribers on the HOT network is not large at this stage, although
Bezeq estimates that there has been an increase recently.
For service rates BSA on fibers See section2.7.22.16.12.2.
2.16.4.3 Wholesale service use of physical infrastructure
a) Format and applicability of the service
The "Use of Physical Infrastructure" service file (the "original service file") came
into force on the July 31, 2015 and accordingly allows Bezeq for infrastructure-
less suppliers to use Bezeq's available physical infrastructure for the passage of
communication cables, as well as to use available dark fiber from Bezeq's
available optical cable, when for connecting the service provider’s infrastructure
to Bezeq’s infrastructure the service provider must establish a passive
infrastructure facility near Bezeq's passive infrastructure facility.
In December 2016, as part of the amendment to the Communications Law, every
holder of NIO license was obliged to allow other NIO license holders (who are not
necessarily infrastructure-less licensees) to use his passive infrastructure (except
for passive NIO infrastructure held by the Electric Company and required by it for
the purpose of its activity as an essential service provider licensee), for the
purpose of performing any Bezeq operation and providing any Bezeq service
according to its license. This provides the possibility of using Bezeq's passive
infrastructure to IBC, and as of October 1, 2017 - also to Hot Telecom.
On January 16, 2019, the Ministry of Communications issued a decision
regarding a service portfolio for the reciprocal use of passive infrastructure. The
administrative instruction and the amendment of the service file attached to the
decision determined, among other things, and differently from the original service
file39- that for the purpose of deployment, an operator using the infrastructure
owner will not be required to build a passive infrastructure facility, not even at pit
zero (the last pit before the buildings). Connection of "other NIO" infrastructure
(i.e. - NIO licensee, including infrastructure owner, who uses the physical
infrastructure of another licensee) to the infrastructure of the infrastructure owner
will be done by the passive infrastructure component (canal / piping, etc.) to be
installed between the passive infrastructure facilities of the operator using the
the passive
infrastructure (pit, branch cabinet,
infrastructure facility of the infrastructure owner. In addition, the definition of the
physical infrastructure available to an operator using the infrastructure has been
expanded
things, communication rooms. The
amendment and provision also anchored the eligibility of an infrastructure owner
to pay for the ancillary activity of the operator’s employees using the
infrastructure.
junction box, etc.) and
include, among other
to
39 These provisions were also anchored in the mutual service portfolio which replaced the administrative order described.
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On December 31, 2019, the Ministry of Communications issued a decision and
service portfolio to complete the regulation for the implementation of the
obligation of mutual use of physical infrastructure. The Ministry established the
"mutual use of passive infrastructure" service portfolio (the "mutual service
portfolio") as a uniform portfolio, in the licenses of all operators with a general
license for the provision of landline interior Bezeq services (including holders of
a unique general license). The mutual service portfolio replaces the aforesaid
administrative directive dated January 16, 2019, and combines both new
provisions and some of the provisions that were in the original service portfolio
and the administrative directive.
The mutual service portfolio does not include instructions for the dark fiber rental
service and the optical wavelength service. Respectively, the original wholesale
service portfolio was amended and the regulation regarding the use of dark fiber
and wavelengths remained. Thus, the original wholesale service portfolio is used
only by holders of a unique general interior operator license, while the mutual
service portfolio is used by all operators with a general license to provide landline
interior services.
The application processes are anchored in the mutual service portfolio and apply
to both service portfolios. The implementation processes include, among other
things, provisions regarding the stages of service delivery (access to information,
planning, execution of works), principles and components of the service (so that
an infrastructure owner intending to establish an underground infrastructure in an
area where there is no physical infrastructure will offer each NIO to share
expenses. The infrastructure that owes a universal service obligation will not have
to allow NIOs with such an obligation that refused its offer to use the
infrastructure, but only after 5 years from the completion of the construction of the
infrastructure). Preference will be given to the use of infrastructure between
interior operators will be done using the FIFO method.
b) Operators of the works
Following the decision of the Ministry of Communications and the rejection of
Bezeq's petition against it, the works in Bezeq's infrastructure within the
wholesale market are carried out by the service providers through contractors on
their behalf. Also, since this is a service in a new format, disagreements arise
from time to time.
In this context, On April 16, 2018. the Ministry of Communications ordered,
among other things, that Bezeq allow service providers to run a communication
cable through the Bezeq pit located at the entrance to the canal leading to private
real estate and perform all the work required in the pit for this purpose, without
detracting from the service providers' consent.
For the notice of the Competition Authority in the matter of infrastructure and for
the appeal by Bezeq, see section2.16.8.5, and for the motion for approval of a
class action and two demands for the exercise of rights before filing a derivative
claim in this matter, see section 2.18.1k.
c) Rates
The rates for the use of Bezeq's physical infrastructure by the service providers
(NIO with a unique general license) were set in the regulations of use. Until such
determination, the rates set forth in the use regulations shall apply, and after the
determination of such rates, a retroactive settlement will be made between Bezeq
and Hot Telecom only. The rate will be the same as the payments currently set
in the use regulations for NIOs who has a unique general license. On September
9, 2018, Bezeq submitted its reference to the hearing (together with an economic
opinion), in which it was clarified, among other things, that there is a need to
preserve the distinction between infrastructureless operators and operators with
infrastructure, and certainly those who have a universal service obligation. Rates
have not yet been set as of the date of the report. It should be noted that in
accordance with the letter from the Ministry of Communications dated August 9,
2018, the Ministry is considering not determining a maximum or minimum
payment for a service provided by other NIO for which no such payment has been
determined. For the Minister's authority to reduce rates in use mainly in incentive
areas, see section2.7.2.
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2.16.4.4 Wholesale telephony service
On May 18, 2017, a decision was issued by the then Minister of Communications,
according to which Bezeq will provide, starting on July 31, 2017 and for a year
thereafter, telephony services in a resale format at prices set by him (higher than
the wholesale rates in light of the content of the service). The aforesaid decision
is the result of a petition filed by Bezeq to the High Court, inter alia, against the
Minister of Communications' decision of November 14, 2014 regarding the
provision of a wholesale telephony service in the format of the service file as of
May 17, 2015. The petition included, among other things, allegations of lack of
applicability of the service in the format of the service portfolio (BSA + telephony)
and lack of authority. Bezeq appealed to the Ministry in 2018 that the Ministry
extend the period of the arrangement, in its format and at its existing prices, and
become a permanent arrangement. Bezeq clarified that the service format in the
service portfolio is not applicable, has no justification and contradicts the global
trend.
On June 5, 2018, the Ministry of Communications informed Bezeq that it was not
extending the temporary arrangement regarding the resale telephony service,
and that accordingly, as of August 1, 2018, Bezeq will provide a wholesale
telephony service in the format specified in the "Wholesale Service Portfolio "BSA
- Bit Stream Access + Telephony ", and that Bezeq will have to provide the said
service as both a discrete service and as an additional service to the BSA service.
Upon receipt of the notice, Bezeq clarified that it expects not to meet the schedule
specified in the notice because the service format in the service portfolio is not
technologically feasible and requires the replacement of a switch which is a
complex and lengthy move, and that it intends to contact the Minstry to find a
solution to the issue. After talks with the Ministry, Bezeq offered, as of August 1,
2018, a telephone call service and related wholesale services in the wholesale
market based on the service portfolio in a technological format similar to that of
the resale arrangement and wholesale market rates. Bezeq’s license was
amended about two months later and included this service as a voluntary service.
At the same time, Bezeq has begun the process of replacing a switch that will
also enable it to meet the requirements of the service portfolio
During December 2018, Bezeq offered the Ministry of Communications another
technological solution for providing the wholesale telephony service. In view of
the fact that this solution is intended to be a temporary solution which will be
implemented for a limited period, until the switch is replaced, and taking into
account its estimates in relation to a relatively low potential scope of customers
in the service. Bezeq reiterated its claim that the wholesale telephony service in
the engineering outline defined in the service portfolio in the Carrier Preselection
format at the Telco-Grade level was and still is inapplicable on a Bezeq switch.
On January 31, 2019, the Ministry replied that it does not intend to confirm in
advance that the proposed solution complies the service file, and that only after
coordination with the service providers, and after the service is launched, the
Ministry will examine whether the violation has stopped, and that the Ministry will
not accept a solution that does not fully meet the instructions. As of the beginning
of 2019, Bezeq is prepared to provide a wholesale telephony service solution that
passes through the service provider switch, and is based on both Bezeq's
subscriber switch and an additional component external to the switch. Bezeq
clarified to the Ministry of Communications that in light of the expected low volume
of customers and the stage of transition to a new switch, the fact that the solution
is not at the Telco Grade level is not expected to be significant.
On May 27, 2020, Bezeq received a letter from the Ministry of Communications
regarding the minutes of telephone call service, which includes a dispute between
Bezeq and the service providers "Partner" and "Cellcom" regarding the
interpretation of the service portfolio regarding the provision of ancillary services.
The Ministry accepted Bezeq's position on the matter, stating that the telephony
service that Bezeq will offer to service providers is a service that will allow the
service provider to receive incoming calls and create outgoing calls and also
enable the provision of all ancillary services to the basic telephony services
provided to its customers. The service provider and Bezeq will not be obliged to
offer the ancillary services using the switch it operates (except in the event that it
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is not possible to provide them via the service provider's switch).40. In accordance
with the Ministry's announcement, after completing all the actions required to
provide the telephony service, Bezeq is required to update the Ministry regarding
the date on which it will be prepared to provide the service as required in the
service portfolio. As Bezeq stated in its statements from the beginning of 2019,
Bezeq is prepared to provide a wholesale telephony service in a manner
consistent with the Ministry’s decision in its announcement (currently Bezeq is
prepared to provide the service on its new switch in the service portfolio format
but at this stage there is no demand for the service).
Bezeq estimates that the application of wholesale telephony in general will
adversely affect its financial results, but at the same time Bezeq cannot assess,
at this time, the extent of the impact that could have a material effect, as it
depends on various variables, including demand for service. In the market today
(such as service VoB) and more.
Supervision and financial sanction reports
On October 19, 2017, the Ministry of Communications sent Bezeq a final
supervision report regarding the implementation of a wholesale telephony service
("the first supervision report"). In accordance with the supervision report,
Bezeq violated the instructions by failing to provide the wholesale telephony
service on May 17, 2015. At the same time as the supervision report, Bezeq was
notified that after it was found that Bezeq violated the provisions of the Bezeq
Use Regulations and License, and in accordance with the authority set forth in
the Communications Law, Bezeq is notified of an intention to impose a financial
sanction on Bezeq in the amount of NIS 11,343,800. Following the supplementary
supervision report to the first supervision report dated August 8, 2018, on
December 27, 2018, Bezeq received a notification from the Ministry of
Communications, according to which the Director General of the Ministry of
Communications decided to impose a financial sanction of NIS 11,163,290 on
Bezeq for violation of provisions regarding the implementation of a wholesale
telephony service for the period between August and December 2018 (after the
Advisory Committee on Financial Sanctions did not approve the imposition of a
sanction for the period stated in the first supervision report). Bezeq filed a petition
against the decision. The State submitted its response on January 22, 2020, in
which it rejected Bezeq's claims and insisted on the sanction decision, arguing
that not only is it reasonable, but also necessary for the Ministry to play a key role
in promoting competition. A hearing on the petition is scheduled for April 6, 211.
For this purpose, see also two motions for approval of class actions in which it is
alleged, among other things, that Bezeq acted to delay and thwart the wholesale
market reform. (section2.18.1c).
2.16.5. Powers over real estate
Pursuant to the provisions of Article 4 (f) of the Communications Law, the Minister of
Communications granted Bezeq real estate-related powers in accordance with the
provisions of Chapter F of the Law.
The law distinguishes between state-owned land, the Development Authority, the Jewish
National Fund, a local authority or a corporation established by law and held by one of
them, as well as a road ("public land") and other land ("private land"). With regard to
public land, Bezeq, and any person authorized thereby, may enter for the purpose of
performing works for laying and maintaining a network and providing Bezeq services,
provided that the laying of the network was done in accordance with the provisions of the
Planning and Construction Law. The amendment to the Communications Law and the
Planning and Construction Law abolished the obligation to obtain approval from the local
planning and construction committee, so that certain actions are not subject to a building
permit if they are carried out by a licensee who has been granted powers under Chapter F
of the Communications Law if they are made according to an approved plan.
Laying ofnetwork on private land will be done in accordance with the provisions of the
40 It should be noted that the Ministry's letter states that the Ministry's decision does not express a position regarding Bezeq's
compliance with the service portfolio's provisions regarding the telephony service, and does not prevent the Ministry from taking
supervision and enforcement procedures in this matter.
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Planning and Construction Law, and requires the consent of the landowner, the tenant for
generations or the protected tenant, as the case may be.
Pursuant to the provisions of the Bezeq Regulations (Installation, Operation and
Maintenance), 5745-1985, if Bezeq believes that the provision of a Bezeq service to the
applicant requires the installation of a Bezeq facility, in the applicant's premises (or in
common premises), Bezeq may require the applicant as a precondition for providing the
requested Bezeq service to assign a suitable place to Bezeq in the premises for the
installation of the facility, for Bezeq use only, and it may provide service through the facility
to other applicants as well.
According to the Planning and Construction Regulations (Application for a Permit, its Terms
and Fees), 5730-1970, an applicant for a permit for the construction of a residential
building, it is mandatory to install infrastructure for telephone, radio, television and Internet
services so that the customer can choose a provider of his choice. In commercial buildings,
if communication facilities are installed, underground infrastructure will be laid. At the same
time, Bezeq’s license (as well as the Hot Telecom and DBS licenses) was amended so that
as long as Bezeq uses the internal threading (the part of the access network, installed in a
person's premises and common premises, and intended to serve that person's premises
only), it is obligated to provide a maintenance service for the internal threading installed by
the permit applicant, without giving it any property rights in the internal threading. Regarding
the draft amendment of these regulations for the purpose of imposing an obligation on the
laying of infrastructure in favor of fiber, see section 2.16.12.
2.16.6. Immunities and limitations of liability
The Minister of Communications granted Bezeq certain immunities from liability for
damages, listed in Chapter I of the Communications Law, in accordance with his authority
to grant immunities to a general licensee.
In addition, Article 13 of the Communications Law stipulates restrictions on criminal and
civil liability in fact made in the framework of the fulfillment of a provision for the provision
of services to the security forces by virtue of the article.
2.16.7. Regulations and rules under the Communications Law
As of the date of publication of the periodic report, Bezeq is subject to regulations in two
other main areas: (1) cessation, delay or limitation of Bezeq operations and Bezeq services;
(2) Installation, operation and maintenance.
2.16.8. Laws of Economic Competition
2.16.8.1 The Competition Commissioner (in this section - "the Commissioner")
declared Bezeq as having a monopoly in these areas:
a) Basic
telephone services, provision of communication
infrastructure
transmission services of public
services, and
broadcasts41.
transmission and
b) Providing fast-access services through subscriber access network42.
c) Providing fast access services to Internet providers through a central Bezeq
public network.
The declaration by the Commissioner of Bezeq as having a monopoly constitutes
prima facie evidence to all that is determined in it, in any legal proceeding,
including in criminal proceedings.
2.16.8.2 Bezeq has adopted an internal enforcement procedure with rules,
guidelines and an internal reporting and control system, the purpose of which is
to ensure that Bezeq and its employees' activities are carried out in accordance
with the provisions of the Economic Competition Law.
2.16.8.3 In accordance with the conditions set forth in the approval of the
Competition Authority dated March 26, 2014 for the merger (as defined in the
Economic Competition Law) between Bezeq and DBS, the following restrictions
41 Announcement dated 30.7.1995.
42 On November 10, 2004, the Commissioner split his announcement of December 11, 2000 in the field of Internet access infrastructure into
two separate Announcements (Announcements B and C).
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apply in relation to Bezeq and DBS:
a) Bezeq and any person related to it (in this section - "Bezeq") will not impose
any restriction on the consumption of landline Internet infrastructure services
resulting from the customer's cumulative browsing volume, nor will they
cause a restriction or block of the customer's ability to use any service or
application the Internet.
b) Bezeq will deduct from the payments of an Internet provider for its connection
to the Bezeq network sums for the provision of multi-channel television
services.
c) Bezeq will sell and provide Internet infrastructure services and television
services on equal terms to all Bezeq customers (sale of Internet
infrastructure services as part of a basket of services will not in itself be
considered for sale on unequal terms).
d) Bezeq and DBS will cancel all exclusivity arrangements regarding non-
original productions and will not be a party to such exclusivity arrangements
(except in relation to a third party who has a license to broadcast at the time
of the decision). In addition, for two years from the date of approval of the
merger (which have since passed), Bezeq will not prevent any party (except
those who have a broadcasting license at the time of the decision) from
acquiring rights in original productions (does not apply to new productions).
For the full text of the decision of the Competition Authority, see Bezeq's
immediate report dated March 26, 2014.
On November 24, 2020, the Competition Authority published an amendment
considered by it to the terms of the merger, in accordance with which, in light of
changes in the market, which impose barriers to entry into multi-channel television
and the entry of competition, the Commissioner considers: (1) cancelling the
merger terms that require sale on equal terms to all Bezeq customers, whether or
not they purchase additional communication services from Bezeq as mentioned
in the section 2.16.8.3c); (2) to update the terms of the merger, which stipulates
that Bezeq and Yes will cancel all exclusivity arrangements to which they are a
party with respect to television content that is not original productions, and will not
be parties to such exclusivity arrangements (as mentioned in section2.16.8.3d)),
So that the section does not apply to the purchase of foreign content (excluding
sports content). The deadline set for the submission of comments on the
proposed amendment to the terms of the merger was December 24, 2020. To the
extent that the considered amendment is carried out, it will allow DBS to sell a
package of services that includes a television service and Bezeq's Internet
services in an unobtrusive manner. Regarding the sale of such a package of
services by Bezeq, it now requires the approval of the Ministry of Communications
only.
2.16.8.4 As part of the approval of the merger of Bezeq and Pelephone dated
August 26, 2004 (as amended below), restrictive conditions were imposed, the
main of which is the prohibition of discrimination in favor of Pelephone in the
supply of a product in which Bezeq is a monopoly, prohibition of the conditioning
of the supply of certain products by one of the companies with the purchase of
products or services from the other and restrictions on certain joint activities.
2.16.8.5 On March 7, 2018, Bezeq received a notice from the Competition
Authority, according to which the competition commissioner is considering
determining in accordance with its authority under Article 43 (a) (5) of the
Economic Competition Law that Bezeq abused its position in violation of Article
29A (a) and Article 29A (b) ( 3) of the law, and to impose financial sanctions on
Bezeq and the former CEO of Bezeq for alleged violation of the provisions of
Article 29 of the law and of the provisions of the aforementioned sections.
According to the announcement, the evidence in its possession indicates that
Bezeq allegedly used the market power it has as a result of its control of the
passive infrastructure and has placed barriers on new players seeking to use
Bezeq's passive infrastructure in order to provide Bezeq with competing networks
in providing communication services to consumers, in a way that could have
deterred and even prevented them from setting up an independent landline
communications network or at least delayed them and limited the scope of the
network. According to the notice, Bezeq's actions raise concerns about harm to
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the final consumer. The violations alleged against Bezeq are the blocking of
access to private areas and placing a demand for fiber cutting.
from
Following a hearing held in the matter, in which Bezeq and the former CEO of
Bezeq presented arguments and evidence that there was no defect in their moves
and that they did not violate the Economic Competition Law, on September 4,
2019, Bezeq received a determination ("the Determination")
the
Competition Commissioner regarding the abuse of Bezeq's position in violation of
the provisions of Article 29A of the Economic Competition Law and the demand
for payment under the provisions of Article 50H of the law of NIS 30 million from
Bezeq and NIS 0.5 million from the former Bezeq CEO. On May 7, 2020, Bezeq
filed an appeal on the Determination. The Competition Commissioner submitted
a response to the appeal which was submitted to Bezeq on December 23, 2020,
and Bezeq requested that its response be submitted 90 days after the end of the
procedures for submitting to Bezeq the materials in the Authority's file or 90 days
after presenting a full copy of the Commissioner's response to the appeal (since
the copy transferred to Bezeq is partial), whichever is later. Along with receiving
the ruling, Bezeq also received a notification of a new billing intent from the
Competition Authority, according to which the Competition Commissioner is
considering imposing an additional financial sanction on Bezeq in the amount of
NIS 8,285,810 due to non-response to the requirement to provide information and
data and providing incorrect information, as part of an inspection conducted by
the Competition Authority in connection with the issue of the Determination.
Bezeq submitted its comment according to which Bezeq did not violate the
Economic Competition Law, therefore, there is no need to exercise any
enforcement powers against it by virtue of the law, and the Competition
Commissioner was asked not
financial sanction under
consideration. In addition, Bezeq claimed that even if it had been possible to
determine that it had violated the Economic Competition Law in connection with
this matter (and it did not), then the amount of the sanction under consideration
was incorrect, and must be immeasurably lower than the amount considered. On
July 24, 2020, the Competition Court approved an agreement between Bezeq and
the Competition Commissioner regarding an agreement agreed under the
Economic Competition Law in connection with the announcement of a bill of
intent, according to which Bezeq will pay the State Treasury a total of NIS 4.2
million (“the Agreement") and gave it the validity of an order. As part of the
agreement, Bezeq admitted that it did not provide full information as required in
meeting the data requirements of the Competition Authority in connection with the
determination (before the determination was given), thereby violating Article 46
(b) of the Economic Competition Law, and on the other hand, Bezeq did not admit
that it knew at the time of the response that the information provided was
incorrect. The Agreement stipulates that subject to the approval of the order
agreed by the Competition Court and the payment to the State Treasury, the
Competition Commissioner or the Competition Authority will not take enforcement
action against Bezeq or anyone on its behalf for violating the provisions of Article
46 (b) of the Economic Competition Law. The information required in the
examination that preceded the Determination and which was submitted to the
(“the
Competition Authority by Bezeq prior
Arrangement"). It should be emphasized that the said arrangement does not
affect the continuation of the proceedings in the matter of the determination itself,
for which Bezeq filed an appeal to the Competition Court on May 7, 2020.
Regarding a new motion for approval of a class action and requirements for
exercising rights before filing a derivative claim, further to this Determination, see
section2.18.1k.
to Bezeq's Agreement
impose
the
to
2.16.8.6 On January 10, 2019, an amendment to the Economic Competition Law
entered into force (as part of this amendment, the name of the law was changed
from the Antitrust Law to the "Economic Competition Law"), the main points of
which are:
a)
Imposing an independent and increased duty on officers to monitor and
prevent violations of the law.
b) Aggravation of criminal punishment for a restrictive arrangement - five years
imprisonment without the requirement of aggravating circumstances.
c) Raising the ceiling for the imposition of a financial sanction of up to NIS 100
million (for each violation).
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d) Another definition for "monopolist", based on a market power test (in addition
to the alternative of those who hold more than 50% market share).
e) Raising the aggregate sales turnover threshold, which requires merger
announcements to NIS 360 million.
2.16.9. Telegraph Order
The government is addressing the existing shortage of radio frequencies for public use in
Israel (due in part to the allocation of many frequencies for security uses), by limiting the
number of licenses that can be used for frequencies, and by providing incentives for the
efficient use of frequencies.
The Telegraph Order regulates the use of the electromagnetic spectrum, and applies,
among other things, to Bezeq's use of radio frequencies, as part of its infrastructure.
Establishment and operation of a system that uses radio frequencies is subject, under the
Telegraph Order, to licensing, and the use of radio frequencies is subject to the commission
and allocation of an appropriate frequency. According to the Telegraph Order, license fees
and fees are imposed for the Frequencies Committee and their allocation.
2.16.10. Establishment of communication facilities
The National Communications Outline Plans, National Outline Plan 36 (within the Green
Line) and National Outline Plan 56 (in the Territories) are intended to regulate the
deployment and manner of construction of communications facilities in such a way as to
enable transmission and reception of radio, television and wireless communications, while
preventing radiation and minimizing environmental and landscape damage, and with a view
to simplifying and streamlining the construction processes of the facilities.
Bezeq has established and is setting up transmission facilities and wireless communication
facilities for the transmission services of its customers, and also uses wireless
communication facilities mainly for the purpose of providing services to areas that are not
connected to the fixed communication infrastructure (remote areas or new localities).
National Outline Plan 36 - Communication facilities within the Green Line
The classification of the facilities according to their technical variables and physical
dimensions, which ultimately affect the determination of safety ranges for protection against
radiation effects and the degree of their prominence in the landscape, determined which
facilities will be included in Part A of National Outline Plan 36 and in Part B of the plan.
National Outline Plan 36 deals with guidelines for the construction of small and miniature
broadcasting facilities and Part B deals with guidelines for the construction of large
broadcasting facilities.
Bezeq has issued building permits for most of the small transmission facilities in
accordance with National Outline Plan 36A. From time to time, there is a need to add
transmission facilities that require the issuance of building permits in accordance with
National Outline Plan 36A. Bezeq believes that it is not obliged to obtain building permits
for miniature broadcasting facilities, due to the exemption granted in this matter in the
Planning and Construction Law and in the Communications Law with respect to "wireless
access facilities" (which include the miniature broadcasting facilities). It should be noted
that in 2008 a draft was submitted for the amendment of National Outline Plan 36A, which
concerns a change in the guidelines for licensing small and miniature transmission facilities.
As of this date, the draft has not been adopted.
NAP 56 - Communication facilities in the Territories
National Outline Plan 56 regulates the manner of construction and licensing of
communications facilities in the Territories. The plan includes transitional provisions to
facilities established in the permit and to existing facilities.
The plan includes a requirement to obtain a communications license and to obtain the
consent of the Commissioner of Government Property in the Civil Administration.
Bezeq has regulated the licensing of 71 facilities located in the Territories and which are
owned by Bezeq (there are a few additional sites that have not been regulated). In addition,
Bezeq also arranged with the Communications Officer in the Civil Administration the
licensing of the facilities located in the premises of the customer in accordance with the
requirement that the Communications Officer sent to Bezeq in November 2016.
Radiation permits
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Regarding radiation permits for communication and transmission facilities, see section2.15.
Exemption from the permit to add antennas to legally existing transmission facilities
Addition of an antenna to a legally existing transmission facility is exempt from obtaining a
permit subject to the existence of cumulative conditions and exceptions specified in the
Planning and Construction Regulations (exemption from the permit).
2.16.11. Consumer legislation
Regarding consumer legislation applicable to Bezeq, see section 1.7.4.5.
2.16.12. Fiber - Ultra-broadband landline infrastructure
2.16.12.1 Amendment to the Communications Law to regulate the "advanced
network" deployment
Following a public appeal and hearings published by
the Ministry of
Communications, the recommendations of the report of the inter-ministerial team
on examining the policy of deploying ultra-broadband landline infrastructure in
Israel, and their adoption with a number of changes by the Minister of
Communications and a government decision on the matter – on December 24,
2020, an amendment to the Communications Law was published. The following
are the main points of the amendment to the law:
Obligation to deploy and provide service to non-general public throughout
Israel:
1. Bezeq may select the statistical areas in which it seeks to deploy an advanced
network (which is not based on its metallic network) and provide it with an Internet
access service even though not to the general public throughout Israel. This, in a
notice that Bezeq will submit to the Minister of Communications within five months
from January 1, 2021. The Minister may extend this period by up to two months.
The Minister will determine in Bezeq’s license the obligation to deploy and provide
an Internet access service to anyone who requests it in a service area that
includes all the areas Bezeq has chosen, in accordance with the conditions to be
determined, including milestones for deployment.
"Advanced network" - a network based on fiber optics that reaches the end point
of a network in an end user's apartment, or an equivalent network in terms of the
level of service that can be provided according to criteria ordered by the Minister
and published on the Ministry of Communications' website; For this purpose,
"apartment" - a room or compartment, or a system of rooms or compartments
intended to serve as a complete and separate unit for residence, business or any
other need, including a ground-level apartment;
2. Bezeq will meet the deployment obligation in all areas listed in its
announcement no later than the end of six years from (1) the date on which Bezeq
began providing paid Internet access service over the advanced network, (2) the
date of determination of the Bezeq license obligation, whichever is earlier.
3. The Minister may not prescribe a deployment obligation in a Bezeq license and
consider it as if no Bezeq notice was given - if it is found that Bezeq's
announcement includes a limited number of areas that indicate that the choice of
areas was made for reasons of economic viability and that this would significantly
impair the ability to bring about the nationwide deployment of an advanced
network. Bezeq will be entitled to deliver a new notice provided that the time limit
for submitting such notice has not yet expired.
4. Once the obligation in the Bezeq license has been determined regarding the
said service area, a holder of a general NIO license other than Bezeq (for
example Hot) will be entitled to deploy an advanced network (which is not based
on his metallic access network) and to provide Bezeq service collection not to the
general public throughout Israel and not least in the service area. The Minister
may prescribe conditions for deployment and the provision of the service in
licenses.
5. The Minister may permit, in Bezeq and other general NIO licenses, the
provision of service on their metallic access network that has been upgraded to
an advanced network, not to the general public throughout Israel and not least in
the service area, provided it contributes to competition and service.
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Incentives for deployment in the incentive areas
6. After determining the obligation as stated in the Bezeq license, an incentive
fund will be opened, which will be managed by the Accountant General in the
Ministry of Finance, in order to encourage deployment while participating in
statistics in areas not chosen by Bezeq for deployment ("incentive zones").
7. In the fund will be deposited annual mandatory payments from obligated
bodies, including Bezeq, at a rate of 0.5% of the annual income of such bodies.
The Minister of Communications, with the consent of the Minister of Finance and
with the approval of the Economy Committee, can change this rate.
8. The Minister may prescribe in the regulations a reduced rate for the use of
Bezeq's passive infrastructure (including dark fiber) in the incentive areas, and in
an area that is not an incentive area and is not Bezeq's deployment area or is
used by Bezeq for deployment, if the infrastructure is used for deployment in the
incentive area.
Tenders for the allocation of incentive fund money
9. The allocation of the incentive fund money will be through tenders. Under the
terms of the tenders, the Tenders Committee may determine a threshold
condition for participation in the tender, including a condition according to which
the tenderer must be a licensee.
10. The only criterion for selecting winners in the tenders will be the ratio between
the number of households in the incentive areas in the bidders' proposals and the
amounts from the incentive fund that will be allocated as part of the tenders. No
weight will be given to the geographical location of the incentive areas in the
bidders' proposals or to the characteristics of the households in the incentive
areas.
11. In the first three years of the incentive fund's activity, the Minister may order
that the minimum percentage of households in the incentive areas to be included
in the bidders' proposals - which does not exceed 15% of the households to be
distributed in incentive areas per year - be in geographical areas; Lack of
economic and social resilience and level of services in the field; Low population
density in the same field; Its geographical location or distance from population
centers and the center of Israel; The need to reduce disparities.
12. The license of the winner of the tender will stipulate an obligation to deploy
an advanced network in a service area that includes the incentive areas which it
won, including an obligation to provide Internet access service on the network to
any one who requests them in the area (even if it has a unique general license).
With regard to the determination of an obligation as aforesaid in the area of Judea
and Samaria, the provisions of the law in this matter applicable in the area of
Judea and Samaria shall apply.
Prohibitions on Bezeq and an affiliated corporation in relation to the
incentive areas
13. Bezeq and any corporation with an affiliation to Bezeq are not allowed to
participate in the tender for the allocation of the incentive fund's money, and will
be able to deploy and provide service in the incentive area on an advanced
network that deployed only five years after the obligation to deploy.
14. Bezeq and an affiliated corporation may not deploy an advanced network in
the incentive areas and provide Bezeq services on an advanced network they
deployed, unless the Minister allowed Bezeq, at its request, to do so in incentive
areas for which the fund money have not yet been allocated, provided that 10%
of households in areas included in the statistical areas selected by Bezeq.
15. The above limitations do not detract from the possibility for Bezeq or an
affiliated corporation to deploy an advanced network in the incentive area in order
to provide a Bezeq service to a business subscriber, or to provide a service to a
business subscriber on an advanced network deployed.
Internal threading
16. Ownership of the internal threading shall be that of the subscriber whose
threading is used for his premises only. A licensee may demand a reasonable fee
for its installation.
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Sanctions
17. The authority of the Director General of the Ministry of Communications to
impose a financial sanction of up to 10 times the basic amount for violating a
license provision regarding the obligation to deploy an advanced network or
provide a service for it.
2.16.12.2 Rates in service over ultra-broadband fiber infrastructure
Regarding the determination of a uniform price for fiber-optic-based Internet
services (FTTP) - on June 25, 2020, the Ministry of Communications issued a
decision at a hearing according to which in providing fiber-optic Internet access
services to the residential building (FTTH) for private subscribers, licensees will
not be able to offer subscribers offers on different terms or at different rates,
depending on In the proposed infrastructure. The decision further stated that what
was stated in the letter from the Director General of the Ministry dated February
23, 2015 (which included clarification that the type of infrastructure offered would
constitute a reasonable characteristic justifying the differentiation of one
subscriber group from another) would continue to apply to non-fiber internet
access services to the residential building.
In the matter of service rates of wholesale BSA on the Bezeq network - Following
a hearing on setting a maximum rate for a managed ultra-broadband access
service on the Bezeq fiber network, the Minister of Communications' decision was
published on August 25, 2020, according to which the Minister decided to adopt
the Ministry's professional echelon’s recommendations, and subsequently came
into force the Communications Regulations Bezeq and Broadcasts (Use of NIO
Public Network) (Amendment No. 2), 5742-2020, which sets the maximum rates
for an ultra-broadband access service managed on Bezeq's fiber network.
Accordingly, the maximum rate for BSA service via fiber for accessibility and data
transfer service at a cumulative rate of up to 550 megabits / second will be NIS
71 per customer per month (excluding VAT), and for accessibility and data
transfer services at a cumulative rate above 550 megabits / second and up to
1,100 megabits / second - 79 NIS per customer per month (excluding VAT). The
regulations do not set a supervised rate for the initial installation of an internal
cable to the subscriber premises, and Bezeq will be entitled to demand a
reasonable payment for this service (the rates are stated in June 2020 prices and
will be updated once a year on January 1, starting in 2021. According to the
recommendation of the professional team in the Minstry, the said rates will be
valid for a period of three years and then will be replaced by a fixed rate.
2.16.12.3 Joint use of fiber optic infrastructure in existing residential buildings
On July 27, 2020, the decision of the Ministry of Communications dated July 22,
2020 was announced at the hearing. In accordance with the decision, a directive
was issued regarding the manner of sharing fiber-optic infrastructure in existing
residential buildings, which includes, among other things, the principles for
shared use (including the obligation to contact an interior operator that lays the
fiber infrastructure in a residential building where there is no fiber infrastructure
for any other interior operator in the proposal to make joint use of the fiber
infrastructure to be deployed in the building), the procedure for making shared
use, principles for determining payment for shared use (based on the cost of
establishing the fiber infrastructure plus a reasonable premium for the
participating operator), the need to reach an agreement between the interior
operators regarding the level of service and maintenance of the fiber and the
prohibition of discrimination. The decision also states that the determination of an
arrangement for the joint use of existing buildings in which fiber-optic
infrastructure has already been deployed will be examined by the ministry
separately, and that the need for adjustments in the inter-ministerial team's
recommendations for examining the deployment of ultra-broadband stationary
communications infrastructure adopted by the Minister of Communication on July
15, 2020 (see this section). In this regard, see also Bezeq's immediate report
dated July 27, 2020, which is included in this report by way of reference.
With regard to deployment in new residential buildings, a draft amendment to the
Planning and Construction Regulations (application for permit, conditions and
fees) was distributed, which stipulates, among other things, provisions regarding
the installation of communications infrastructure in new buildings. According to
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includes coaxial cable (used
the explanatory memorandum to the draft amendment, according to the current
wording of the regulations, the communications infrastructure currently installed
in new buildings
for cable and satellite
transmissions) as well as additional communications infrastructure of copper
cables used for telephony and Internet. This amendment is intended to establish
provisions regarding the establishment of advanced fiber-optic communication
infrastructure in new buildings by the contractors already at the time of
construction. On August 17, 2020, Bezeq submitted professional comments on
the draft amendment to the regulations.
2.16.12.4 On January 19, 2021, the Director General of the Ministry of
Communications announced the appointment of a dedicated team aimed at the
existence of an active and effective wholesale market on advanced networks.
2.17. Substantial agreements
The following is a concise description of material agreements, not in the ordinary course of Bezeq's
business, that were signed during the period of the periodic report and / or that were in force during
the said period:
2.17.1. Real estate
2.17.1.1 Agreement on the transfer of assets between Bezeq and the state dated
January 31, 1984
An agreement between the state and Bezeq, according to which Bezeq was
granted the State’s rights in assets available to the Ministry of Communications
for the provision of Bezeq services, and Bezeq replaced the state with respect to
the rights in the said assets and regarding the obligations and duties relating to
those rights on the eve of the agreement. In addition, according to the said
agreement, Bezeq was transferred the rights, powers, obligations and duties of
the State under the agreements, as well as the agreements and transactions that
were valid in the field of Bezeq services on the eve of the beginning of the
agreement.
2.17.1.2 Settlement agreement dated May 15, 2003 between Bezeq and the State
and the Israel Land Administration regarding the rights relating to the land. See
section2.7.4.3.
2.17.1.3 Agreement between Bezeq and the Postal Authority (now the Israel Postal
Company) dated June 30, 2004
An agreement between Bezeq and the Postal Authority for the definition and
regulation of Bezeq and the Postal Authority in their joint assets. The agreement
specified the common assets and defined the share of each party in them. It is
stipulated that each of the parties will have exclusive rights in part, except in the
matter of rights in common property, building rights or rights in respect of which
it is expressly stated otherwise. The agreement stipulates, among other things, a
mechanism of the right of refusal if a party wishes to make a sale transaction and
a right of way in the matter of a lease transaction. With respect to a number of
additional assets it has been determined that the sole rights holder in them, in its
entirety, will be one determined party.
2.17.2. Employment agreements
2.17.2.1 A comprehensive pension agreement dated September 21, 1989 between
Bezeq, the Histadrut and the Joint Representation of the Employees' Committees
and the Makefet Fund for Pension and Benefits Cooperative Association Ltd.
stipulates a complete and autonomous arrangement regarding the pension
insurance of Bezeq employees. The agreement applies to all transferred
employees (transferred from the Ministry of Communications to Bezeq), to all
members of the accruing pension fund who were employed by Bezeq on the day
the pension agreement was signed, and to all permanent and temporary
employees at Bezeq, except special groups of employees.
2.17.2.2 A special collective agreement for early retirement dated November 23,
1997, as amended and extended on September 4, 2000, March 18, 2004, April
17, 2005 and June 28, 2005 between Bezeq and the Histadrut and the employees’
representatives.
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A collective agreement for the early retirement of employees in the pension track
and in the increased compensation track in which Bezeq employees previously
retired. The collective agreement
in
section2.17.2.6 is based, inter alia, on this agreement. For information on this
matter and on the subject of early retirement, see also Note 17 to the 2020
statements.
from December 2006 specified
2.17.2.3 Anchoring rights agreement dated September 4, 2000 between Bezeq and
the Histadrut and the employees' representatives
A special collective agreement, among other things, regarding the anchoring of
the rights of the transferred employees (who were transferred from the Ministry
of Communications to Bezeq). This agreement enshrines the rights of the
transferred employees, to receive any entitlement to pensions that arose for them
as former civil servants under Bezeq's pension agreement, which were adopted
by Bezeq under its pension agreement. Under this agreement, these rights
become "personal rights" that cannot be revoked, except in a way that a personal
right can be waived by law (that is, through a personal waiver by the employee).
2.17.2.4 "Generation 2000" agreement dated January 11, 2001 between Bezeq
and the Histadrut and the employess' representatives
Following an amendment from July 2000 to the Employment of Workers by
Manpower Contractors Law (Amendment), 5760-2000, a special collective
agreement was signed on January 11, 2001 for the absorption of new employees
and the determination of their wage conditions. The agreement applies to new
employees and employees who were previously employed by Bezeq through
manpower companies in the positions specified in the appendix to the agreement
(for example, customer service representatives at call centers,
typists,
warehouses, secretaries, sorters and mail distributors, porters, drivers and forklift
operators, etc.). As part of the special collective agreement from December 2006
(see section 2.17.3.6), it was agreed that the "Generation 2000" agreement will
not apply to such employees who were absorbed into Bezeq from July 1, 2006
onwards. It was also agreed to introduce insignificant changes in the terms of
employment of employees who were hired in accordance with the "Generation
2000" agreement.
2.17.2.5 Agreements with alternative entities in place of a comprehensive fund with
regard to early retirement arrangements for Bezeq employees
As of 2005, early retirement arrangements for Bezeq employees are carried out
through alternative entities instead of a comprehensive fund.
On April 24, 2014, Bezeq signed an agreement with Menora Mivtachim Insurance
Ltd. ("Menora") for the arrangement of pension payments for early retirement of
Bezeq employees, as well as the differences in old-age and survivors' pension
payments, to employees retiring from Bezeq in accordance with a special
collective agreement signed between Bezeq, the employees’ representative and
the Histadrut on February 12, 2014. The insurance policy was approved by the
Supervisor of Insurance and came into effect on March 31, 2016. Accordingly, as
of May 1, 2016, Menora is issuing policies to retiring employees, and benefit
payments and related payments are paid on the basis of these policies. The term
of the agreement (after being extended twice) is until the end of 2021.
2.17.2.6 A special collective agreement from December 2006 and amendments to
it, see section 2.9.4.
2.18. Legal Proceedings
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reporting policy
Bezeq's
is based on qualitative considerations and quantitative
considerations. Bezeq decided that the quantitative materiality threshold in relation to events
affecting the net profit would be an effect of about 5% and more on Bezeq's net profit, after
deducting the effects of events outside the ordinary course of business which have a one-off
effect on Bezeq results such as impairment of assets, cancellation of tax assets, provisions
for retirement, capital gains, etc., According to Bezeq's most recent consolidated annual
statements. Therefore, in the absence of relevant qualitative considerations, this section
describes legal proceedings to the extent of NIS 65 million or more43, before tax, as well as
legal proceedings in which the amount claimed is not specified in the statement of claim,
unless it is a claim that does not reach the aforementioned quantitative threshold (and all -
unless Bezeq assesses additional aspects or consequences of the procedure beyond its
financial scope). With regard to class actions, attention is drawn to the fact that the filing of
class actions in Israel does not involve the payment of a fee as a derivative of the amount of
the claim. Thus, the claim amounts in such claims may be significantly higher than the actual
exposure volume in respect of those claims.
2.18.1. Procedures are pending
Date
Sides
Court
a.
January
2015
Sharehold
er vs.
Bezeq and
former
Bezeq
executives
District
(Tel
Aviv -
Econo
mics
Depart
ment)
Type of
procedu
re
Motion
for
approval
of a class
action
Claim
amount
(NIS
millions)
687
Details
the
from
investing public" regarding
Claim for compensation of shareholders for losses alleged
to have been caused by "Bezeq's failure to report to the Tel
Aviv Stock Exchange and concealment of material
information
two
significant and material moves: "Reduction of reciprocal link
fees" and "Wholesale market reform".
On August 27, 2018, the decision of the Economic
Department of the Tel Aviv District Court was approved,
approving the claim as a class action ("the Approval
Decision"). With regard to the cause in the wholesale
market matter, the Group was defined as having purchased
Bezeq shares as of June 9, 2013 and holding Bezeq shares
(in whole or in part) until the date of filing the lawsuit. In this
matter, the Court ruled that the petitioner proved the
existence of alleged damage, due to the fact that during the
period of the discovery, Bezeq shares fell by 10%, but the
calculation of the damage itself will be made during the
hearing in the main case. With regard to the reason for the
reduction of the connectivity fee, the Group was defined as
the one that purchased Bezeq shares as of February 28,
2013 and held them until May 29, 2014. In this matter, the
Court ruled that no impairment was recorded that could be
attributed to the discovery of the deception, but that the
applicant should be allowed to prove the damage alleged by
her in the main case.
On October 28, 2018, Bezeq and the defendants submitted
to the Economic Department of the Tel Aviv District Court a
request for a reconsideration of the approval decision in
which the Court was requested to revoke the approval
decision and reject the application for approval of a class
action.
On December 1, 2019, a ruling was given in the retrial, which
stated as follows:
1. In the matter of reducing the interconnectivity fee - the
Court granted the motion as far as claims concerning
reports of reduction of the interconnectivity fee were
concerned, after concluding that the plaintiff had not even
ostensibly proved the existence of damage as a result of
the reduction of the reciprocal link fee, and therefore there
was no need to approve the class action on this ground.
43 In order to examine the compliance of the claim amounts with the said threshold, the amounts were linked to the
consumer price index. The amounts specified in this section are the original amounts (excluding linkage
differences). With regard to the aforesaid threshold, in the case of similar proceedings against several companies
in the Group, the amount of the claim may be examined cumulatively in respect of all the proceedings together.
It is also clarified that if certain proceedings largely concern common legal or factual issues, or it is known that
such issues are examined or considered together, then for the purpose of meeting the quantitative materiality
threshold as stated in these sections, the amount involved in all those proceedings together.
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amount
(NIS
millions)
2. In the matter of wholesale market reform - the Court
denied the motion in relation to the defendants' claims
regarding the reports about the wholesale market reform.
At the same time, regarding the definition of the group of
plaintiffs, the Court accepted the defendants' claim that
the date June 9, 2013 is irrelevant in relation to the
alleged misrepresentation in the report dated Janury 16,
2014 (reporting the decision on the list of services and the
price hearing document) and ruled that a distinction must
be made between the ground relating to this report and
the ground relating to the allegation of lack of reporting
regarding the receipt of a hearing document for the list of
services dated June 9, 2013. Accordingly, the Court
reduced the definition of the group of plaintiffs in relation
to the report dated January 16, 2014 for all those who
purchased Bezeq shares (except the respondents and /
or those on their behalf) as of January 16, 2014 (instead
of June 9, 2013) and held these shares (in whole or in
part) during the period between January 15 and 20, 2014.
Following the Court’s proposal and with the consent of the
parties, the case was referred to mediation but the mediation
was unsuccessful.
On July 12, 2020, an amended statement of claim was filed
that includes amendments, including deletion of the matter
of reducing the interconnectivity fee and reducing the
definition of the group of plaintiffs regarding the wholesale
market reform, following the Court ruling in the retrial. In
addition, the total amount of the claim was amended and it
is estimated by the plaintiff in the amount of NIS 687 million
(instead of a total amount of NIS 2 billion according to the
"financial damage" method or alternatively NIS 1.1 billion
according to the "approximate financial damage" method.
The statement of claim has not been amended). It should be
noted that the amended statement of claim was not
accompanied by an economic opinion.
Motion against Bezeq, as well as against Mr. Shaul Elovich,
former controlling shareholder and chairman of the board of
Bezeq against directors of Bezeq at the relevant times who
voted in favor of Bezeq's engagement in the transaction that
is the subject of the motion as detailed below (“the
Respondents").
The matter of the application, according to what is alleged in
it, IS Bezeq's decision, through the respondents, to enter
into a transaction for the purchase of full holdings and
shareholder loans of Eurocom DBS (a company under the
indirect control of Bezeq's controlling shareholder) in DBS
for NIS 680 million in Cash and contingent consideration of
up to an additional NIS 370 million.
According to the applicant, the consideration that was
expected to be paid for the transaction is excessive, and the
Respondents' decisions to enter into the transaction caused
Bezeq a great deal of damage after they violated their duties
of care and reliability to Bezeq, and were negligent in their
role. It was also alleged by the applicant that Bezeq's
controlling shareholder had breached its duty of fairness,
and that Bezeq had breached the duty of disclosure and
reporting regarding the trustee's commitment to Eurocom
DBS's holdings in DBS to sell the holdings beginning at the
end of March 2015.
In light of the aforesaid, the petitioner requests that the Court
approve the filing of a derivative claim on behalf of Bezeq
against the Respondents for the claim for damage caused
to us by Bezeq as a result of the Respondents' decisions
regarding the transaction in the amount of NIS 502 million.
on July 3, 2017, the Court approved the filing of an amended
motion by
includes additional
allegations relating, inter alia, to the independence of the
entities that advised Bezeq, alleged defects in the work of
the applicant, which
81
502
b.
March
2015
Sharehold
er vs.
Bezeq
and
former
Bezeq
executive
s
District
(Tel
Aviv -
Econo
mics
Depart
ment)
Motion
for
approval
of a
claim as
a
derivativ
e claim
together
with a
derivativ
e claim
statemen
t
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Details
Claim
amount
(NIS
millions)
the Audit Committee, the Board of Directors and the general
meeting, and alleged defects resulting from Eurocom being
represented by Bezeq directors.
In light of the Securities Authority's investigation, inter alia,
regarding the engagement that is the subject of this lawsuit
(see section1.1.7) and the position of the Securities
Authority that it was improper to delay the proceedings, the
Court decided to delay the proceedings in this case. On
January 17, 2021, the Attorney General announced his
appearance in the proceedings (regarding the delay of the
proceedings and not the body of the proceedings). Following
the Attorney General's request, the procedure is delayed at
this stage until September 6, 2021, in light of the Securities
Authority's investigation and indictments filed later in it (see
section1.1.7).
Regarding motions for disclosure of documents before
submitting an application for approval of a derivative claim
that the Court ordered to unite in April 2018, see
subsectionh.
Novembe
c. s
s
r 2015
s
And
March
2018
Customer
against
Bezeq
Central
District
Court
Two
claims
together
with
motions
for
approval
as class
actions
556 in the
motion
from
Novembe
r 2015
and 258
in the
motion
from
March
2018
The motion from November 2015 - It is alleged that Bezeq
abused its monopolistic position, inter alia, by "preventing
and blocking the existence of competition in general and the
existence of effective competition in the communications
market in Israel" and acted to delay and thwart the wholesale
market reform, thereby harming the Israeli public and
earning unreasonable profits as a result of the abuse of
power as a monopoly. According to the plaintiffs, the
damage caused by Bezeq to the communications market in
Israel is reflected in Bezeq's excess and unreasonable
profitability, and they seek to claim damage in the amount of
NIS 800 million, which they claim is based on 10% of
Bezeq's excess operating profit due
to abuse of
monopolistic power. The plaintiffs set the amount of the
claim at NIS 556 million, after a reduction of the amount
claimed in another proceeding (which in the meantime
ended in departure).
In December 2017, the Court approved the attachment as
evidence in the case of an immediate report published by
Bezeq on October 22, 2017, in which Bezeq reported on a
final inspection report by the Ministry of Communications
regarding the implementation of a wholesale telephony
service and an announcement of an intention to impose a
financial sanction. In December 2018, the Ministry of
Communications imposed a financial sanction in the amount
of NIS 11 million on Bezeq (for these matters, see
section2.16.4.4).
On March 3, 2019, Bezeq informed the Court that in light of
the expected change of case in the case as soon as the
request for approval is received, it agrees to the Court's
proposal to approve the motion to conduct the class action
without a reasoned decision by the Court and preserving all
the same
its claims.
announcement, Bezeq informed the Court that on February
25, 2019, it filed an administrative petition against the
decision of
the Ministry of
Communications from December 2018 described above.
Subsequently, on March 5, 2019, the Court approved the
motion to conduct the class action lawsuit and clarified that
all the parties' claims are reserved for them to discuss the
lawsuit itself and that all evidence and investigations heard
in the motion for approval will form part of the evidence in
the class action lawsuit.
The motion from March 2018- a motion similar to the
November 2015 motion submitted by the same applicants in
which it was also alleged that Bezeq abused its monopolistic
inter alia, by preventing competition in the
position,
communications market, thereby harming the Israeli public
and gaining unreasonable profits as a result of abusing its
the Director General of
It should be noted
that
in
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Claim
amount
(NIS
millions)
monopoly power. While in the motion from November 2015
the remedies and damages claimed related to the date of
filing the same motion, in this motion the remedies and
damages defendants relate to the period from the date of
filing the application from November 2015 to the end of
2017, in view of the plaintiffs' claim In addition to the abuse
of power by Bezeq, there were also "acts of corruption and
unlawful acts and foreign and improper purposes of the
Director General of the Ministry of Communications".
According to the plaintiffs, the damage caused by Bezeq to
the communications market in Israel is reflected in Bezeq's
excess and unreasonable profitability. The damage claimed
in the amount of NIS 258 million is also based in this motion
on 10% of Bezeq's excess operating profit resulting from the
claim regarding the abuse of its monopolistic power (in
addition to the damage claimed in the previous application).
On May 31, 2018, Bezeq submitted a request to delay the
procedure in light of the Securities Authority's investigation
(see section1.1.7). In light of the Securities Authority's
investigation, the Court approved a request on behalf of the
Attorney General to continue delaying the proceedings in the
case until May 2, 2021. The Attorney General will update on
his current position by this date.
In September 2019, the applicants submitted a request for
the submission of a new motion for approval of a class action
(a request filed against Bezeq in September 2019 following
the determination dated Septemebr 4, 2019 of
the
Competition Commissioner regarding the abuse of Bezeq's
status - see description below subsection k) to the Court
where this proceeding is conducted and to the deletion of
that motion on the ground that it was a similar late motion.
In addition, on October 23, 2019, Bezeq was submitted a
request from the applicants for the motion for approval to
order the amendment of the motion for approval by adding
respondents (directors and officers from the relevant period,
some of whom still serve at Bezeq) and to attach additional
evidence to the motion for approval. On October 30, 2019,
the Court announced that in view of its decision to delay the
proceedings in the case, it does not consider it appropriate
at this time to order the transfer of the request to amend the
motion for approval for Bezeq's response, and that upon
termination of the proceedings in the case, the applicants
must petition for appropriate instructions.
d.
August
2016
Customer
s against
Bezeq
Tel
Aviv
District
Court
e.
February
2017
Customer
s against
Bezeq
Central
District
Court
A claim
with a
motion
for
approval
as a
class
action
Motion
for
approval
as a
class
action
its
the use of
in connection with
A motion alleging that Bezeq illegally and without consent
charges a monthly fee for "support and / or warranty"
Internet
services
infrastructure, and illegally attaches customers to this
service, that Bezeq charged for Internet access services
even after the end of the "bundle" package, and that Bezeq
has added to the plan a browsing speed that is not suitable
for the existing infrastructure. On January 11, 2021 the Court
approved a hearing arrangement formulated between the
parties, according to which the decision on the motion for
approval will be given on the basis of the statements of claim
in the case, without the need for a hearing of evidence.
A motion in which it is claimed that some of Bezeq’s
customers are charged a fee for "antivirus service" while in
practice it does not provide them with the service and that it
begins to charge for the provision of the service from the
conclusion of the agreement with the customers and not
from the actual provision of service. Accordingly, the
applicant seeks to obligate Bezeq to compensate Bezeq
customers who purchased the service and did not actually
receive it for the damages caused to them, including
restitution of amounts collected for the service. Following the
mediation procedure that took place in the case, the parties
submitted to the Court a motion for approval of a settlement.
83
* Claim in
unknown
amount
*
There is
no exact
estimate,
estimated
at tens of
millions of
NIS
Claim
amount
(NIS
millions)
* The
amount of
the claim
is not
estimated
About
1,240 in
the first
applicatio
n and-568
in the
second
applicatio
n
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Court
Type of
procedu
re
Details
The Attorney General forwarded his comments to the
settlement. The settlement has not yet been approved
f.
April
2017
And May
2017
Customer
s against
Bezeq
Tel
Aviv
District
Court
Two
motions
for
approval
as class
actions
g.
June
2017
Two
motions
for
approval
of class
actions
In the
District
Court
(Econo
mic
Depart
ment)
in Tel
Aviv
Bezeq
sharehold
ers
Against
Bezeq,
Chairman
of the
Board of
Bezeq
and
former
members
of the
Board of
Bezeq, as
well as
members
of the
Eurocom
Group
(the first
applicatio
n also
against
the former
CEO of
Bezeq
and the
former
CEO and
CFO of
DBS)
the subscribers
The motions deal with Bezeq's B144 service, a service that
enables advertising to business owners via the Internet ("the
Service"), and according to the petitioner the respondents
charged
the Service in unlawful
for
payments.
On January 25, 2018, the Court decided, following the
requests submitted by Bezeq and other respondents, to
dismiss in limine the first motion on the grounds that the
applicant does not meet the criteria set forth in the Class
Actions Law, the existence of defects in the motion, and in
view of the existence of the second motion whose matter is
similar to the first motion (an appeal against this decision
was dismissed).
On July 21, 2019, the parties submitted a motion for
approval of a settlement in the second motion in an
insignificant amount for Bezeq, which is awaiting objections
from the public as well as the position of the Attorney
General and the Regulator.
The interest in the requests in the 2015 transaction in which
Bezeq acquired from Eurocom DBS (a company controlled
by Bezeq's controlling shareholders at the time) the balance
of DBS shares held by it (in this section: "the Transaction"):
The first motion was submitted on behalf of everyone who
purchased the Bezeq shares from February 11, 2015 until
June 19, 2017 (except for the respondents and / or those on
their behalf and / or related to them). The motion alleges
misleading and / or missing reporting in connection with the
Transaction, and that following an open investigation by the
Securities Authority regarding the Transaction, the public
became aware of details regarding the transaction and its
implementation, which led to a decline in Bezeq's share
price. According to the applicant, the respondents acted in
violation of the provisions of the Securities Law and in
legal provisions, causing Bezeq's
violation of other
securities holders heavy financial damages, amounting to
hundreds of millions of NIS, if not more than that.
to
the applicant, a
The second motion was submitted on behalf of three sub-
groups - anyone who purchased on the Tel Aviv Stock
Exchange from May 21, 2015 to June 19, 2017 (1) the Bezeq
shares, (2) the Company's shares and (3) the Internet Gold
shares. According
serious
misrepresentation of the investors who invested in the
shares of the aforementioned companies was made, which
was revealed following the opening of an open investigation
into the Securities Authority on June 20, 2017, by increasing
the increase in DBS' cash flow reported in Bezeq According
to the claim, artificially misleading the reasonable investor
who relied on DBS' cash flow data to estimate its value,
which led to overpricing of the above companies. The
applicant also claims additional damages caused to groups
of Company and Internet Gold shareholders.
Pursuant to a hearing arrangement approved earlier by the
Court, the petitioners have agreed in the above petitions on
their joint management and they are to file a consolidated
petition on their behalf.
Following the request of the Attorney General (who
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Date
Sides
Court
Type of
procedu
re
Details
Claim
amount
(NIS
millions)
announced in 2017 his appearance in the proceedings
regarding the delay of the proceedings and not the body of
the proceedings), the proceedings are delayed at this stage
until September 6, 2021 in light of the Securities Authority
investigation and indictments filed further thereto (see
section 1.1.7)
Various
motions
for
disclosur
e of
documen
ts before
submittin
g a
motion
for
approval
of a
derivativ
e claim
in
accordan
ce with
Article
198A of
the
Compani
es Law
Motion
for
approval
of a
derivativ
e claim
h.
June -
August
2017 and
June
2018
Tel
Aviv
District
Court
Bezeq
sharehold
ers
against
Bezeq
and DBS
i.
February
2018
Tel
Aviv
District
Court -
Econo
mic
Depart
ment
Bezeq
shareholde
rs against
Bezeq as a
formal
respondent
, as well as
against
Bezeq
directors at
times
relevant to
the motion
and
against
Bezeq's
controlling
shareholde
rs at
the
times
relevant to
the motion,
Mr. Shaul
Elovich
and
Yosef
Elovich
(the
"Responde
nts").
Mr.
An amended and consolidated motion submitted following
the Court's decision of April 15, 2018 regarding the
consolidation of four applications filed in the same matter.
The Court is requested to order Bezeq (and DBS, as the
case may be) to provide the applicants with certain
documents in connection with a stakeholder transaction
between DBS and Space from 2013 as amended at the
"DBS-Space
beginning of 2017
Transaction")44. On January 17, 2021, the Attorney General
announced his appearance in the proceedings (regarding
the delay of the proceedings and not the body of the
proceedings). Following the Attorney General's request, the
procedure is delayed at this stage until September 6, 2021,
in light of the Securities Authority's investigation and
indictments filed later in it (see section1.1.7).
this section:
(in
65
Minimum
threshold
219
Maximum
threshold
The matter of the motion, according to what is claimed in it,
is Bezeq's conclusion in an assessment agreement with the
Tax Authority which was signed on September 15, 2016
(“the Assessment Agreement") and according to which
Bezeq paid tax to the Tax Authority on financing income
from loans to DBS in the amount of NIS 462 million, while on
the other hand, it was agreed, among other things, that DBS'
losses in respect of financing expenses in respect of Bezeq's
owner loans to DBS will be fully recognized to Bezeq after
the merger between Bezeq and DBS..
According to the applicants, as a result of the signing of the
assessment agreement, Bezeq paid a total of NIS 660
million. Of this total, NIS 462 million was paid to the Tax
Authority and approximately NIS 198 million was paid to
Bezeq's controlling shareholders as a conditional
consideration stipulated
the
in
acquisition of full holdings and shareholder loans of
Eurocom DBS, a company under the indirect control of the
controlling owner of Bezeq, in DBS ("DBS Transaction").
According to the petitioners, Bezeq's engagement in the
assessment agreement
constituted an exceptional
transaction of a public company in which Bezeq's controlling
shareholders have a personal interest, and was carried out
illegally because it was contrary to Bezeq's favor and
because the required legal approvals were not obtained.
According to the plaintiffs, the damage caused to Bezeq
following the conclusion of the Assessment Agreement
ranges from a minimum threshold of NIS 65 million (as long
as all DBS losses in respect of financing expenses are
allowed to be offset by Bezeq) to a maximum threshold of
NIS 219 million (to the extent that all DBS losses in respect
of financing expenses are not allowed to be offset by
Bezeq). The alleged damage was estimated by comparing
the payments charged to Bezeq (tax liability and contingent
the agreement
for
44
It should be noted that on July 23, 2017, a motion was submitted to the District Court (Economic Department) in Tel Aviv for
approval of a class action in the amount of approx. NIS 37 million against Space, controlling shareholders and officers in it as
well as against Bezeq CEO and Bezeq Secretary at the relevant times to the claim in connection with the DBS-Space
Transaction. The proceedings in this motion are also delayed, at this stage, until September 6, 2021.
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consideration) and the tax asset created for it in the
Assessment Agreement, compared to the payments it could
have been liable for and the tax asset it would have created
had it entered into a settlement agreement with the tax
authorities which was proposed by the tax authorities at the
time of approval of the DBS Transaction.
According to the plaintiffs, the respondents who are directors
violated, inter alia, the duties of care and trust (and with
regard to the respondents controlling Bezeq, also the duty
of fairness), and accordingly the plaintiffs motion that the
Court approve the filing of a derivative claim on behalf of
Bezeq and Yes, because it will oblige them to compensate
Bezeq for the said damages caused to it, according to them,
as a result of the breach of their obligations to Bezeq.
At the request of the Securities Authority, the procedure was
delayed in light of the investigation and its derivatives. On
January 17, 2021, the Attorney General announced his
appearance in the proceedings (regarding the delay of the
proceedings and not the body of the proceedings) and on
that date a motion was submitted by the State Attorney's
Office to continue the proceedings until September 6, 2021.
Following the Attorney General's motion, the procedure is
delayed at this stage until September 6, 2021, in light of the
Securities Authority's investigation and indictments filed
later there (see section1.1.7).
j.
June
2018
Sharehold
er against
Bezeq,
DBS, Mr.
Shaul
Elovich,
and Mr. Or
Elovich
Tel
Aviv
District
Court
(Econo
mic
Depart
ment)
Motion
for
disclosur
e and
review of
documen
ts under
Article
198A of
the
Compani
es Law
k.
(1)
Septemb
er 2019
Customers
against
Bezeq
Tel
Aviv
District
Court
Applicati
on for
approval
of a
class
action
the controlling shareholder of Bezeq,
It is requested that the Court order Bezeq, DBS, the former
controlling shareholder in Bezeq, Mr. Shaul Elovich, and his
son, Mr. Or Elovich (hereinafter collectively "Elovich"), to
submit to the applicant, as a shareholder in Bezeq, various
documents for examination Filing an application for approval
of a derivative claim in the name of Bezeq. According to the
the
applicant,
Company, and Elovich violated their fairness and fiduciary
obligations to Bezeq by selling 115 million Bezeq shares on
February 2, 2016 by the Company using Bezeq's company
and Elovich’s insider information, and at a value significantly
higher than the true value of the shares. According to the
applicant, this sale provided the Company with illegitimate
profits in the amount of approximately NIS 313 million.. The
insider information that was allegedly used in the application
is, among other things, that the financial statements of DBS
and Bezeq do not reflect Bezeq's de facto financial position,
but rather a "free cash flow" inflated for the purpose of
increasing the consideration as part of the transaction in
which Bezeq acquired
shares of Eurocom
Communications in DBS (“the Yes Transaction"). It should
be noted that Bezeq is pending another motion for approval
of a derivative claim in the matter of the Yes Transaction
(see section2.18.1b). According to the applicant in the
motion that is the subject of this report, although his motion
is based in part on the same factual background, its matter
is different from the existing procedures in the matter. At the
request of the Securities Authority, the procedure is delayed,
at this stage until September 6, 2021, in light of the
Securities Authority's investigation and its derivatives. On
January 17, 2021, the Attorney General announced his
appearance in the proceedings (regarding the delay of the
proceedings and not the body of the proceedings).
Motion submitted
the determination dated
following
September 4, 2019 of the Competition Commissioner
("the
regarding
Determination") (for this matter, see section 2.16.8.5) in
which it was alleged that Bezeq's acts and omissions as
described in the Determination (blocking the transition of
Bezeq competitors from Bezeq's infrastructure to the
building access section, as well as refusing to thread cables
of Bezeq's
abuse
status
the
the
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Type of
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re
Details
Claim
amount
(NIS
millions)
(2) March
2020
Sharehold
ers against
Bezeq
Haifa
District
Court
Consolid
ated
request
for
disclosur
e of
documen
ts prior to
request
for
approval
of a
derivative
claim
l.
October
2019
Customers
against
Bezeq and
another
respondent
In the
Haifa
District
Court
Motion
for
approval
of a
class
action
in the continuous method and conditioning the deployment
in an inferior, expensive and problematic threading method)
caused substantial damage to consumers. The definition of
the group in whose name the class action will be conducted
is anyone who purchased landline communication services
in Israel, in the period between July 2015 and March 2018,
whether or not he purchased these communication services
from Bezeq. Damage is claimed due to the loss from the
decrease in the rate for communications packages, which
was prevented from the group members due to Bezeq's
alleged acts or omissions. Regarding a request for the
transfer of this motion and its cancellation due to the fact that
it is a similar late motion that was submitted by the applicants
in another motion for approval of a class action in March
2018 - see subsection C. On June 25, 2020, the Court ruled
that the parties will petition for the provision of appropriate
instructions in the proceedings upon termination of the stay
of proceedings in the same motion for approval of a class
action from March 2018.
to delay
In January 2020, Bezeq received two demands for the
exercise of rights before filing a derivative claim and motions
for disclosure of documents relating to the exercise of
Bezeq's rights against officers in connection with the
Determination. The claims allege that the findings and
violations included in the Determination give Bezeq cause of
action against Bezeq's officers and that Bezeq is entitled to
compensation from the officers for the damages caused and
that will be caused to it. Bezeq replied to the two applicants
that the inquiries were early and that it was not yet time to
discuss them, among other things, since Bezeq is currently
working to exercise its rights in appeal proceedings against
the commissioner's decision. Subsequently, in March 2020,
the two applicants submitted motions (separately, to the
economic departments of the Haifa and Tel Aviv District
Courts) for disclosure of documents pursuant to Article 198A
of the Companies Law, 5759-1999, in order to examine the
filing of a motion for approval of a derivative claim. On June
the
23, 2020, Bezeq submitted a request
proceedings in the motions for disclosure, until the work of
the Claims Committee established for the purpose and the
submission of its recommendations to Bezeq's Board of
Directors. On July 19, 2020, Bezeq submitted its response
to the motions. The Attorney General submitted a notice of
his appearance in the proceedings, and at the same time
submitted his position, according to which a decision to
appeal the decision that the petitioners claim constitutes the
damage caused to Bezeq, may be a derivative proceeding
as long as the above decision is not final. A decision has not
yet been made on Bezeq's request to delay the proceedings.
It is alleged that Bezeq violates the provisions of Article 13B
of the Consumer Protection Law by not specifying in the
invoice or in the payment notice sent to the consumer the
components of the fixed payment in respect of a "telephone
line" and their amount. Accordingly, it was argued that
Bezeq was prevented from collecting the fixed payment and
that it should return it to the customers who paid it. The
definition of the group in whose name the class action is
sought to be managed is all Bezeq customers who were
charged by it with a fixed payment, without the invoice or the
payment notice sent to them specifying the components of
the fixed payment and their amount. The alleged personal
pecuniary damage is NIS 490 (a fixed payment of NIS 35
per month multiplied by 14 months, starting from the date of
amendment of the Consumer Protection Law set forth in the
provision above).
On April 28, 2020, the Court ordered the applicants to split
the motion for approval into two different motions, one
motion for approval in relation to each respondent in
87
63
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Date
Sides
Court
Type of
procedu
re
Details
Claim
amount
(NIS
millions)
accordance with the cause of action against each of them.
Accordingly, on May 10, 2020, split motions were filed.
Subsequently, in view of the Court's determination that the
applicant was required to be replaced due to a doubt in its
eligibility, on June 17, 2020 an amended motion for approval
was submitted (by other applicants) in which the aggregate
claim amount of all the alleged group members was
estimated at NIS 63 million. On November 17, 2020, the
lawsuit was approved as a class action. Pursuant to the
decision, the group in whose name the class action will be
conducted is all Bezeq consumers who were charged a fixed
fee by it, as defined in Article 13B (b3) of the Consumer
Protection Law, without specifying in the invoice or the
payment notice sent to them after June 25, 2018, the
components of the fixed payment and their amount, with the
common questions for the group members being: Has
Bezeq violated the obligation applicable to it in the above
section of the Consumer Protection Law, to specify in the
invoice or in the payment notice on its behalf the
components of the fixed payment and their amount; the
amount of the refund due to the group members for violation
of this obligationl. The remedy claimed is the return of the
fixed payment in which they were charged. On December
17, 2020, Bezeq filed a motion for leave to appeal the
decision. The Court ruled that the motion for leave to appeal
requires an answer (and later that it be determined for
hearing before the panel) and also granted Bezeq's request
for a stay of execution.
It was alleged that Bezeq also signed the applicant, when
ordering a regular telephone line by him, to another service
(voicemail and caller ID) without his knowledge and without
requesting it. Accordingly, the applicant includes in the
definition of the group of plaintiffs in whose name it is
requested to conduct the class action all those charged by
Bezeq for ancillary service for telephone service without
Bezeq receiving his request and / or express consent to
order the ancillary service, in the seven years prior to
approval. During a hearing held in February 2021, after a
number of difficulties arose in relation to the applicant's
identity as to his eligibility to be a class action plaintiff, the
applicant's attorney announced that they intended to find an
alternative applicant within a period of 60 days.
It was alleged that Bezeq misled customers who joined the
B144 service for online businesses (online advertising for
businesses through the B144 website) ("The Service") to
think that the cost of the Service depends on the actual use
up to a billing ceiling, when in fact it has charged its
customers the amount of the ceiling even if in practice a
lower amount of it has been used. Accordingly, it is
requested to include in the definition of the group of plaintiffs,
on whose behalf the class action will be conducted, all
Bezeq customers and / or subscribers who registered and
joined the service packages of all kinds from the date the
service was marketed by Bezeq and charged by it in excess
amounts. The motion or the statement of claim does not
include an explanation or calculation in relation to this
amount, except for the indication in the body of the
application that "these are thousands or tens of thousands
of consumers". In addition, non-pecuniary damage was
generally claimed.
88
It is not
possible
to
estimate
at this
stage and
is over
NIS 2.5
million
"NIS
27,537
per
applicant
and any
future
amount
that will
be
determine
d for all
members
of the
group"
(next to
which
appears
in
handwriti
ng NIS
908,721,0
00 ")
m.
Decembe
r 2019
Customer
against
Bezeq
Tel
Aviv
District
Court
Motion
for
approval
of a
class
action
n.
May
2020
Customers
against
Bezeq
Tel
Aviv
District
Court
Motion
for
approval
of a
class
action
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Date
Sides
Court
o.
October
2020
The
Jerusal
em
District
Court
Sharehold
er of Bezeq
against
Bezeq and
Bezeq
Internation
al
p.
Novembe
r 2020
q.
Novembe
r 2020
The
Jerusal
em
District
Court
Sharehold
er of Bezeq
against
Bezeq and
Bezeq
Internation
al
Tel
Aviv
District
Court -
Econo
mic
Depart
ment
Bezeq
shareholde
rs Against
Bezeq, the
Company,
Bezeq's
CEO and
members
of Bezeq's
board
of
directors
Type of
procedu
re
Motion
for
disclosur
e and
review of
documen
ts prior to
filing a
derivativ
e claim
Motion
for
disclosur
e and
review of
documen
ts prior to
filing a
derivativ
e claim
Motion
for
approval
of a
class
action
r.
January
2021
Bezeq
shareholde
rs v Bezeq
et al.
Motion
for
approval
of a
class
action
Tel
Aviv
District
Court -
Econo
mic
Depart
ment
Details
Claim
amount
(NIS
millions)
regarding collection
A motion in the framework of which an order addressed to
the respondents is requested for disclosure and review of
various documents
from Bezeq
International customers. According to the petition, the
respondents made false representations that led to an
inflation of Bezeq International by including in their reports
"dormant subscribers" who do not use Bezeq International's
services but continue to pay it a subscription fee. This
means, according to the claim, that with the discovery of this
activity, the value of Bezeq International was "cut by
hundreds of millions of shekels". According to the claim, the
source of this injury is the malicious or at least negligent
behavior of officials who knew about the situation, but
refrained from taking action to rectify the situation and
alternatively neglected to find out the true situation of Bezeq
International. For this matter, see also section4.4. Also,
regarding motions for approval of class actions filed against
Bezeq International in this matter, see section4.12.1.
Motion for disclosure and review of documents before filing
a derivative claim in the framework of which an order is
requested addressed to the respondents for disclosure and
review of various documents regarding asset balances in
Bezeq International's books (see section 1.9) Following the
immediate report published by Bezeq on 9.11.2020.
A motion concerning the approval of a class action for
compensation of the applicant and members of the
represented group for damages caused to them, according
to the motion, due to Bezeq's failure to report and disclose
material information from the investing public, in connection
with public reporting "about the Ministry of Communications'
moves to eradicate the phenomenon of dual subscribers in
the field of ISP Internet services, about the extensive and
substantial scope of the phenomenon of dual subscribers in
the subsidiary Bezeq International (hereinafter: “Bezeq
International") and their significant negative impact on the
subsidiary and Bezeq's business". The definition of the
group according to the application is anyone who purchased
the Bezeq shares from Aguust 17, 2020 until Octoebr 30,
2020 and held the above shares or some of them on Octoebr
30, 2020, except for the respondents and / or those on their
behalf and / or entities related to them.
A consolidated motion (filed in lieu of two similar motions in
the same matter that was deleted) against Bezeq, the
Company, and 90 other respondents, including past and
present officers at Bezeq, BCOM and Bezeq International,
as well as the auditor firm (the "Respondents"). The motion
deals, as alleged in it, with damages caused to the
applicants and members of the represented groups (as
detailed below) as a result of acts and omissions of the
respondents who violated the provisions of the law, including
that Bezeq and BCOM included misleading details in their
reports. In accordance with the provisions of the law, in
connection with Bezeq and BCOM’s report dated November
9, 2020, according to which Bezeq International's books
contain discrepancies in the amounts of hundreds of millions
of NIS. The definition of the groups according to the
application is: (a) Everyone who purchased Bezeq shares
as of March 9, 2003 (date of publication of the annual report
for the year 2002) until November 9, 2020, and held them on
November 9, 2020, except for the respondents or those on
their behalf and (b) anyone who purchased the shares of
BCOM on the Tel Aviv Stock Exchange from October 25,
2009 until November 9, 2020, and held them on November
9, 2020, except for the respondents or those on their behalf.
In accordance with the economic opinion attached to the
89
55-65
"Over NIS
2.5 million
(for the
purposes
of
substantiv
e
authority)"
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Date
Sides
Court
Type of
procedu
re
Details
Claim
amount
(NIS
millions)
motion, it was alleged that following the publication of the
immediate report dated November 9, 2020 published by
Bezeq and BCOM, the Bezeq share price decreased in the
range of 5.26%-5.40% (it should be noted that the motion
also claims, in accordance with another opinion attached to
it, that compared to Bezeq's benchmark indices, the damage
to Bezeq's shareholders is higher than the decrease in the
value of the shares, and is about 7%), and BCOM’s share
price decreased in the range of 9.07%-9.36%. Accordingly,
it was argued that the damage caused to the applicants is in
the amount obtained from doubling the amount of shares
held by the members of the groups as aforesaid at the rate
of the aforesaid decrease in Bezeq and BCOM shares..
2.18.2. Legal proceedings completed during the reporting period or until the date of
publication of the report
Date of
Sides
Court
Type of
procedur
e
Details
The
amount
of the
original
claim
(NIS
millions)
90
filing
the
claim
a.
Septem
ber
2019
The
Jerusal
em
District
Court
Motion for
approval
of a class
action
Customer
s against
Bezeq
and
another
service
company
A motion regarding the entitlement of certain
populations (such as the elderly and disabled) to
discounts on payments for essential services
which the defendants provide to them. It is argued
that the defendants do nothing so that the rights
of these people are exhausted, make it difficult for
them and do not even credit them for excess
payments made. On June 25, 2020, a judgment
was rendered according to which the claim was
struck out in view of the non-payment of a fee.
2.18.3. In view of the completion of the sale of Bezeq's holdings in Walla at the end of 2020
(see section 1.1.1) As of this report no legal proceedings are described against her.
2.19. Goals and business strategy
2.19.1. Forward-looking information
Bezeq's strategy review below includes forward-looking information within the meaning
thereof in the Securities Law, and involves assessments of future developments in the
economy in general regarding customer behavior and needs, the pace of adoption of new
services, technological changes, regulatory policy, competitors' marketing strategy, and the
effectiveness of strategic marketing. .
Bezeq's strategy and the business objectives derived from it are based on internal research
and analysis, secondary sources of information, especially research company statements,
publications regarding activities undertaken by similar communications operators in Israel
and around the world, and consulting work by which Bezeq is assisted.
However there is no assurance that the main strategy and activities described below will
be implemented in practice or in the manner described below. The circumstances that may
lead to the non-implementation of the strategy or even to its failure are due to the general
situation in the economy, frequent technological changes, regulatory constraints,
formulation of a sustainable business model for new services that Bezeq intends to provide
and adopting a superior marketing strategy from competitors. In addition, changes in the
composition of Bezeq's Board of Directors or ownership of Bezeq, which will lead to a
change in the composition of the Board of Directors, may lead to a change in its strategy
and business objectives.
2.19.2. The essence of the strategy and intentions for the future
90
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
2.19.2.1 Vision and purpose
Bezeq has set itself the goal of being the leading communications company in
Israel, providing a wide range of communications services and solutions, to
private and business customers.
Bezeq works to maintain its competitive position and continue to be the
customer's first choice in telephony, Internet and IT, and for this purpose it has
set itself a number of goals:
a) Preservation of leadership in the aggravating competitive environment
(service leadership and strengthening perceived values - product innovation,
reliability, price perception);
b) Encouraging the recruitment of new customers and strengthening a sense
of loyalty and closeness among existing customers;
c) Creating new sources of income through the launch of new and innovative
services and products;
d) Ongoing adaptation of the organization to the competitive, technological and
operational excellence environment.
2.19.2.2 Means
To implement the said strategy and objectives, Bezeq operates a wide range of
advanced communication networks, which operate on a wide range of
infrastructures nationwide, and enable the provision of the most advanced
communication services in the world. Bezeq is working to upgrade and develop
the communications networks it operates, and strives to constantly expand and
improve the basket of products and services it offers. Bezeq operates the widest
service network among communications companies in Israel, including technical
and commercial centers, and a wide range of service and installation technicians.
2.19.3. Major projects in planning or execution
Regarding the deployment of a fiber optic network by Bezeq, see section 2.7.2.
2.19.4. As of the date of the report, the Company intends to continue to support Bezeq's
strategy as detailed above and in particular to improve its underlying asset - control
of Bezeq, and does not intend to enter other areas beyond its control of Bezeq as
aforesaid.
2.20. Discussion of risk factors
The Israeli economy in which Bezeq operates is stable in nature, however, there are risk factors that
arise from the macroeconomic environment, from the unique characteristics of the industry in which
Bezeq operates, and risk factors that tare unique to Bezeq, which may have significant
consequences for Bezeq and affect, among other things, Bezeq's status, its results, its credit rating
and its ability to repay its debt, all as specified below:
2.20.1. Competition
through which
the wholesale market,
Competition in the field of landline interior communications increasing in recent years by
other telecommunications groups, both by other interior operators, including HOT (with a
general license), and by cellular operators, has significantly increased with the application
of
telecommunications groups and other
telecommunications operators (with a special or unified license) compete with Bezeq in the
sale of end-to-end service packages, based on Bezeq infrastructure at prices set by the
regulator (see section1.7.3 and 2.16.4). A large number of customers receive wholesale
Internet services, which are provided on the Bezeq network, when Bezeq does not have
contact with those customers. There is also competition from infrastructure owners (see
section2.62.6). Increased competition in the field of interior communications causes the
abandonment of some of Bezeq's customers and leads to lower prices of some of Bezeq's
services and an increase in the costs of recruiting new customers and retaining existing
customers. The entities that compete with Bezeq at present, or may compete with it in the
future, enjoy greater business flexibility than Bezeq, including the ability to cooperate with
subsidiaries and affiliates and market shared service packages with them (see section1.7.2
and section 1.7.3). The ability of competitors to market service packages with rate flexibility,
in the face of Bezeq's limitations to do so as of this date, impairs Bezeq's competitive ability.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
2.20.2. Governmental supervision and regulation
Bezeq is subject to governmental supervision and regulation relating, inter alia, to licensing
activities, determining permitted areas of activity, determining rates, operations,
competition, payment of royalties, universal service obligation, the possibility of holding its
shares, the relationship between Bezeq and its subsidiaries and prohibiting cessation or
restriction of its services (which may oblige Bezeq to provide services even in non-
economic circumstances) - for details, see section2.16. The aforesaid supervision and
regulation sometimes causes government intervention, which in Bezeq's opinion burdens
its business activities. In this context, Bezeq is exposed to the imposition of various
sanctions by the Ministry of Communications, including the imposition of financial sanctions
(for this matter, see section1.7.4.6).
In addition, the Minister of Communications may revoke Bezeq's license, restrict it or
suspend it as appropriate, in accordance with the conditions set forth in the
Communications Law, and is authorized to change the terms of Bezeq's license, interfere
with existing rates and marketing proposals and issue instructions. Substantial changes in
the rules of regulation that apply in the field of communications in general, and to Bezeq in
particular, may oblige Bezeq to make changes to its strategic plans and impair its ability to
carry out long-term planning of its business activities. For possible changes following the
wholesale market reform, see section2.16.4. For possible restrictions under the
Centralization Law on the renewal of licenses and the allocation of new licenses, see
section1.7.4.7.
2.20.3. Rates supervision
Bezeq rates for a key part of its services (including rates for reciprocal linking and use of
Bezeq infrastructure and its network) are subject to government supervision and
intervention. The Minister of Communications has the authority to intervene in existing rates
and marketing proposals and to give it instructions (see section2.16.1). On average,
supervised Bezeq rates are eroding in real terms. Substantial changes in Bezeq's regulated
rates, if implemented, could have a material adverse effect on its business and its results.
Regarding the supervision of the supervised Bezeq rates and their updating, see
sections2.16.1 (Including regarding a hearing on the determination of maximum rates for
Bezeq's retail telephony services) and2.16.4. In addition, the restrictions that apply to
Bezeq in marketing alternative payment baskets may create difficulties for Bezeq in
providing an appropriate competitive response to changes in the market and are
significantly reflected in Bezeq's competitors on the basis of its infrastructure in selling end-
to-end service packages through Bezeq's wholesale service. This is also the case as long
as a mechanism is established that will be determined by the Ministry of Communications
for approval and inspection regarding the reduction of intervals in Bezeq packages and
routes (see section2.16.4.2). As part of the application of a wholesale market, the Ministry
of Communications updated the rates for wholesale services according to which Bezeq will
sell its services to licensees. The update of the rates leads to lower prices in a way that
could adversely affect Bezeq's level of revenue and its profitability (for the wholesale
market, see section 2.16.4).
2.20.4. Streamlining procedures and labor relations
Bezeq's implementation of personnel and organization programs (including retirement
plans and organizational changes) involves coordination with employees and significant
costs, including early retirement compensation costs. Processes of implementing such
plans may cause unrest in the employment relationship and harm Bezeq's day-to-day
operations - see also sections2.9.3 and 2.17.2.
Also, as described in section1.8, according to the report, Bezeq, like the other companies
in the Group, implements streamlining procedures, which include, among other things,
moving to new offices, organizational changes and reducing the workforce, while managing
significant infrastructure and other projects. Streamlining procedures, by nature, carry with
them the risks of loss of knowledge, turnover of employees, shift of managerial focus, and
so on.
2.20.5. Restrictions regarding the relationship between Bezeq and companies in the Bezeq
Group
Structural separation - Bezeq's NIO license requires that its relations with the main
companies in the Group held by it be without their preference over their competitors. A
separation is required between the managements of Bezeq and the said companies, as
well as a separation in the business systems, finances and marketing, assets and
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
employees, which causes duplication, high overheads and also makes it difficult to manage
strategy at the Group level. Also, at this stage, Bezeq's ability to offer shared service
packages of Bezeq and the said companies is limited (see section 1.7.2).
In light of the increase in competition based on the provision of a basket of services to the
customer and the ability of competitors, given wholesale services, to offer customers end-
to-end services, the effect of this risk factor on Bezeq's operations and its results has
increased. Regarding the possibility that in the future the Group will be granted a permit for
the provision of non-detachable service packages and the elimination of structural
separation and for further possible changes following the wholesale market, see sections
1.7.2 and 2.16.4.
2.20.6. Legal Proceedings
Bezeq is a party to legal proceedings, including class actions, which may result in charges
in substantial amounts, most of which cannot be estimated, and therefore no provision was
made for most of them in Bezeq's financial statements. In addition, Bezeq's insurance
policies are limited to defined coverage limits and for certain reasons, and may not cover
claims for certain types of damages. In recent years, the trend of increasing class action
lawsuits against large commercial companies has intensified. By their very nature, class
actions can reach large sums. In addition, since Bezeq provides communications
infrastructure as well as billing and collection services to other licensees, those who sue
the said licensees in other class actions may also try and involve Bezeq as a party in these
proceedings. For a description of the legal proceedings, see section2.18.
2.20.7. Exposure to exchange rate fluctuations, inflation and interest rates
Bezeq measures exposure to changes in currency and inflation according to surplus or lack
of assets versus liabilities, as well as according to cash flow forecasts, according to the
type of linkage. Bezeq's exposure to changes in inflation is high and Bezeq's exposure to
changes in the exchange rate against the shekel is low. Bezeq is hedging some of its
exposure to inflation and foreign exchange. In addition, Bezeq has exposure to changes in
interest rates in relation to the credit it receives. For this matter, see also Note 30 to the
2020 statements.
2.20.8. Electromagnetic radiation and licensing of transmission facilities
The issue of electromagnetic radiation emitted from transmission facilities is regulated
mainly in the Non-Ionizing Radiation Law (see sections 2.15 and 2.16.10). Bezeq works for
the existence of permits for the construction and operation of its various transmission
facilities, but the difficulties encountered by Bezeq in this activity, including difficulties
arising from changing the policy of the relevant parties and changes in legislation and
regulations, may adversely affect the infrastructure of the said facilities, the regularity of the
provision of the services through them, and consequently also the Bezeq revenues from
these services. Bezeq's third party insurance policy does not currently cover warranty for
electromagnetic radiation.
2.20.9. Frequent technological changes
The field of communications is characterized by frequent technological changes and the
shortening of the economic life of new technologies - see section2.1.4. These trends mean
the need to invest a lot of resources in upgrading Bezeq's existing technologies, lowering
the barriers to entry for new competitors, increasing depreciation rates and in some cases
there may be a redundancy of Bezeq-owned technologies and networks. The introduction
of innovative technology that is not used by Bezeq or that Bezeq has refrained from using
may harm Bezeq's competitive position.
2.20.10. Dependence on macro factors and on levels of business activity in the economy
The stability of the financial markets and the resilience of the economies of the countries
of the world have been in recent years subject to high volatility. Bezeq estimates that as
the local economy slides into a period of recession and deterioration in business activity
due to external or internal events, including shocks in the global economy, political-security
uncertainty, etc., then its business results may be harmed, among other things, as a result
of Bezeq revenues (including investee revenues) or as a result of increased Group
financing costs.
2.20.11. Failure of Bezeq systems and cyber risks
Bezeq provides its services through various infrastructure systems, including, among
93
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
others, exchanges, data transmission and access transmission networks, cables, computer
systems, physical infrastructure and more ("the systems"). The systems are of critical
importance in the operation of Bezeq's business and they play a vital role in its ability to
successfully carry out its activities. Hacking, disruption, damage or collapse of systems can
adversely affect Bezeq's business. Some Bezeq systems have backup, but at the same
time, in the event of damage to some or all of the above systems, either due to various
technical faults (including in the event of termination of contact with a supplier who is
dependent on system support), or due to natural disasters (earthquakes, disasters, fire),
whether due to damage to physical infrastructure by communications providers using them
or due to malicious damage (including through Cyber attacks as detailed below), there may
be significant difficulties in providing Bezeq services, including in the event that Bezeq is
unable to return the systems to capacity quickly.
Bezeq carries a risk of activity occurring that is intended to harm the use of a computer or
computer material stored on it ("cyber attack"). Such attacks can disrupt business, theft of
information / money, damage to reputation, and damage to systems. As a leading
communications company that provides diverse communications services in various fields,
it is a target for cyber attacks and experiences cyber attacks, which are handled by it.
Bezeq is a body guided by the State Authority for Information Security and is committed to
meeting strict information security standards. In this context, Bezeq implements a defense
policy that includes the most advanced security systems in the world operated in a
configuration that combines effective security with Bezeq's operational needs and security
circuits to protect Bezeq's infrastructure and systems designed to prevent and reduce the
possibility of Bezeq data being exploited by an external or an internal party maliciously or
accidentally, as well as the possibility of an outsider taking over and managing network
components or abusing information about Bezeq's infrastructure and networks in any way.
Bezeq monitors the implementation of its defense policy, which includes an examination of
Bezeq's level of effectiveness and readiness. In this context, Bezeq conducts tests and
assault drills with different frequency for different scenarios (including through external
companies that specialize in the field).
Despite Bezeq's investments in measures to reduce such risks, Bezeq is unable to
guarantee that these measures will succeed in preventing damage and / or disruption to
systems and related information.
2.20.12. Impairment of subsidiaries
In accordance with the accounting standards, Bezeq performs valuations for subsidiaries
for the purpose of examining the periodic impairment of goodwill and of assets in respect
of which signs of impairment have been identified. Considering the business situation of
the subsidiaries and the difference between the book value of Bezeq and their recoverable
amount as a cash-generating unit, a decrease in the value of the subsidiaries' activity may
lead to impairment loss (write-off) in Bezeq books. Also, a significant change in
circumstances that leads to a change in estimates can occur as a result of a high-intensity
discrete event and / or as a result of a sequence of small changes occurring over time that
have a significant cumulative effect in the long run and / or a change in estimates (even at
low rates). Valuations are based on assumptions as of the date of the statements that may
not materialize or materialize partially and different aspects have different intensities
affecting the value of the unit measured when long-term assumptions may have a relatively
large weight compared to short-term assumptions.For this matter, see also Note 11 to the
2020 statements and Section 3.1 of the Board of Directors' Report.
2.20.13. Pandemic
At the beginning of 2020, an outbreak of the COVID-19 virus began worldwide. Following
this, Bezeq monitors developments in connection with this outbreak and pandemic
incidents in general and examines potential implications for its business operations, with
some of the implications already being reflected in Bezeq in practice. These consequences
can be manifested, and some of them have already been manifested, among other things,
in the damage to the supply chain and the customer service system. According to Bezeq's
estimates, as of the date of the report, the COVID-19 pandemic caused an increase in
demand and increased use of Bezeq's Internet and telephony services, without significant
adverse effects in other areas of activity that can be attributed to the outbreak. At the same
time, naturally, this is a variable event that is not under Bezeq's control, and therefore
widespread spread of the virus or decisions of countries and authorities in Israel and around
the world in this regard, may affect Bezeq. In this regard, see also section2.20.10.
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It should be noted that a significant part of Bezeq's operations (in a consolidated manner) is carried out in
its subsidiaries. The risk factors of these companies and the assessments of their managements in relation
to the risk factors are described in sections 3.19, 4.14 and 5.19.
The following is a rating of the impact of the risk factors described above on Bezeq's operations, in Bezeq's
Management's assessment. It should be noted that Bezeq’s assessments below regarding the degree of
influence of the risk factor reflect the degree of influence of the risk factor in assuming the materialization
of the risk factor, and the aforesaid does not express an assessment or give weight to the chances of such
materialization. The order in which the risk factors appear above and below is not necessarily according to
the degree of risk:
Risk Factors Summary Table – Landline Interior Communications45
The extent of the impact of the
risk factor on Bezeq's operations
Low effect
Medium
effect
High
effect
X
Macro risks
Exposure to exchange rate fluctuations, inflation
and interest rates
Dependence on macro
business activity in the economy
Pandemic
factors and
levels of
Industry risks
Growing competition
Governmental supervision and regulation
Rate supervision
Electromagnetic radiation / licensing of transmission
facilities
Frequent technological changes
X
X
X
X
X46
X
X
Special risks for Bezeq
X
X
Exposure to legal proceedings
Labor relations
Restrictions regarding the relationship between
Bezeq and companies in the Bezeq Group
Failure of Bezeq systems and cyber risks
Impairment of subsidiaries
The information contained in this section 2.20 and Bezeq's assessments regarding the impact
of risk factors on Bezeq's activities and business are forward-looking information as defined
in the Securities Law. The information and assessments are based on data published by the
Ministry of Communications, Bezeq assessments of the market situation and the structure of
competition in it and regarding possible developments in this market and in the Israeli
economy. The actual results may differ materially from the estimates given above if there is
a change in one of the factors taken into account in these estimates.
X
X
X
45
It will be clarified that in the assessments of the Group companies regarding the effect of the risk factors in the summary tables
(in this section and in sections 3.19 , 4.14 and 5.19), the probability of the risk factor materialization was not estimated, but the
effect of the risk factor on the relevant company if it materialized. It should be noted that some of the Group companies make
estimates regarding the probability of the occurrence of some of the risk factors mentioned in these sections for their specific
internal needs, but no orderly estimate was made at the Group level of all the risks listed in the summary tables in these sections.
Also, in general, the degree of influence of a risk factor on the Company's operations depends in some cases also on the extent
and duration of the materialization of the risk, so that it may differ from what is indicated.
46 The extent of the impact of this risk factor on Bezeq's activity was classified as moderate, assuming that the event would be
limited in scope and time. Otherwise, the degree of impact may be great.
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3. Pelephone - Mobile radio telephone (cellular telephony)
3.1. General information about the field of activity
3.1.1. Pelephone's field of activity
Pelephone provides cellular communication services and the sale and repair of end
equipment. Pelephone services are detailed in the section3.2. Pelephone is a company
wholly owned by Bezeq.
3.1.2. Principles of legislative and regulatory restrictions unique to the field of activity
3.1.2.1 Communications Law and mobile radio telephone license
Pelephone's activities are subject to regulation and supervision by virtue of the
Communications Law and its regulations, by virtue of the Telegraph Order, and
by virtue of mobile radio telephone license owned by it. The mobile radio
telephone license sets conditions and rules that apply to Pelephone's operations
(for details, see section3.14.2).
3.1.2.2 Rate supervision
Interconnectivity fees (rates for completing a call and completing short message
messages (SMS) charged by Pelephone from other communication operators are
fixed in interconnectivity regulations. The rest of the rates are under a certain
supervisory regime as regulated under the mobile radio telephone license and
the Communications Law (see sections 3.14.1 and 3.14.2).
3.1.2.3 Environmental law and planning and construction law
Establishment and operation of wireless communication infrastructure, including
cellular communications, is subject to the provisions of the Non-Ionizing Radiation
Law and the permits required thereunder by the Ministry of Environmental
Protection, as well as the provisions of planning and construction law (see section
3.13.1).
3.1.3. Changes in the scope of activity in the field
For financial data on the scope of Pelephone's activity, see sections Error! Reference
source not found. and 3.3.
Revenue from services
The cellular industry is characterized by fierce competition. Competition in the industry (see
section3.6) led to a high transfer of subscriptions between the cellular operators while
continuously eroding the prices of the base packages along with a further increase in the
browsing volumes included in the packages, which caused another significant erosion of
the average revenue per subscriber. The growth in the number of postpaid subscribers
over the past five years has partially compensated for the erosion of prices. In 2020, there
was a decrease in income from migration services, due to the effects of the COVID-19 virus
crisis on travel and stay abroad (see section 3.19.1.2).
Revenue from the sale of end equipment and electronics
The end equipment market is also characterized by fierce competition among cellular
operators and vis-à-vis many stores that sell end equipment in parallel imports. In 2020,
the trend of launching device models at low price levels continued compared to previous
years among manufacturers, which, along with a decrease in the volume of units sold to
end customers, led to a further decrease in the average revenue per device. In order to
reduce the damage to revenue, Pelephone is increasing the range of equipment sold by it
and also sells electronic equipment that is not cellular devices. In 2020, there was a
decrease in revenues from the sale of end equipment, due to the effects of the COVID-19
virus crisis on retail trade (see section 3.19.1.2).
Most peripheral and electronic equipment are sold in installments. The decline in end
equipment sales over the years has led to a decrease in the balance of customers in parallel
with a decrease in the volume of payments to end equipment suppliers.
3.1.4. Market developments and changes in customer characteristics
The cellular market is characterized by low growth rates due to saturation in the penetration
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
rate47. The estimated penetration rate as of September 30, 2020 is approximately 121%.
3.1.5. Technological changes that have an impact on the field of activity
The cellular communications market is dynamic, and is characterized by frequent
technological developments in all areas of activity in it (communications network
technology, end equipment and value-added services).
Technological developments, as well as the desire to expand the range of services offered
to the customer and their quality, require cellular operators to upgrade the technology of
cellular networks from time to time. The cellular networks in Israel currently operate mainly
in GSM technology, UMTS / and LTE technology, and during 2020 the use of NEW RADIO
technology in the NONSTAND ALONE architecture (5G) began.
As of the date of the report, Pelephone's LTE network is deployed in parts of Israel, and
Pelephone continues to expand its network to improve coverage through the use of 700
MHz frequencies and to improve performance through 2600 MHz frequencies, in addition
to launching 5G technology using 3500 MHz frequencies, which will be carried out
according to a regular deployment plan.
In addition, Pelephone has started activating additional network features that include
CARRIER AGGREGATION and MIMO8x8 in 5G.
Pelephone offers technology-based services IMS48: Voice over WiFi as an improved
response for coverage within buildings, as well as Voice over LTE that enables voice calls
based on 4G. This capability improves the quality of voice calls and in addition enables the
evacuation of 3G frequency resources for future use of LTE. In addition, Voice over LTE
enables continuity of service with Voice over WiFi.
Pelephone is constantly examining the new technologies in the market and the need to
upgrade the technology of existing networks, in accordance with the state of competition in
the market and the economic viability of investing in such technologies.
Expanding the capacities and speeds of technologies from the LTE (4G) and NEW RADIO
(5G) as well as the development of future cellular generations are conditional on frequency
allocation. For details, see section3.8.2.
Following the winning of the frequency tender, Pelephone began operating frequencies in
the field of 700 MHz and 2600 MHz in 4G technology, and in addition operates 5G
technology at a frequency of 3500 MHz in some sites (see section 3.8.2.4).
3.1.6. Critical success factors
3.1.6.1 Nationwide deployment of a high-quality and advanced cellular network,
ongoing maintenance of the network at a high level and significant investments
on an ongoing basis in the cellular infrastructure, both for quality coverage
throughout Israel and to provide customers with advanced services through
advanced technological infrastructure (see also section 3.7.1).
3.1.6.2 Growth in the subscriber base.
3.1.6.3 Competitive price level.
3.1.6.4 Wide and varied distribution channels.
3.1.6.5 A variety of service channels, including digital channels, that provide
efficient and quality support and service to a large variety of customers.
3.1.6.6 Adjusting the cost structure and implementing operational streamlining
that make it possible to cope with increased competition.
3.1.6.7 A brand that represents a quality, reliable and advanced network.
3.1.6.8 High quality and skilled personnel.
47 Penetration rate - the ratio between the number of subscribers in the market and the total population in Israel (excluding foreign
and Palestinian employees, although they are included in the number of subscribers).
48
IMS - IP Multimedia Sub System - a system in the core of the network that is used, among other things, to switch calls made in
IP networks (for example: Voice over LTE, Voice over Wifi). These two services are provided in combination to provide a solution
for coverage within homes and for lowering traffic from the 3G network. The infrastructure will be used for additional services,
such as One Number, Rich Call Services and more.
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3.1.7. The main barriers to entry and exit49
3.1.7.1 The main barriers to entry into the field of activity are:
a) Saturation in the penetration rate in the field (see section 3.1.4).
b) The need for a mobile radio telephone license, the allocation of frequencies
involved in high costs resulting, among other things, from the fact that these
resources are in short supply (see section 3.8.2.1) and the subordination of
the activity to regulatory supervision (see section 3.14.2).
c) The need for significant financial means for heavy and continuous
investments in infrastructure, which are affected by frequent technological
changes (see also section3.7.1.3).
d) The difficulty in setting up radio sites due to regulatory restrictions and public
opposition.
3.1.7.2 The main barriers to exit from the field are:
a) Large investments that require a long return on investment.
b) The commitment to provide service to customers derives from the terms of
the radio telephone license license and the agreements in accordance with
the terms set forth in the license.
3.1.8. The structure of competition in the field and changes that apply in it
3.1.8.1 General
The cellular communications market in Israel is characterized by fierce
competition, which is reflected in high subscriber turnover among operators, tariff
erosion and profitability erosion.
As of the date of this report, five operators with a radio telephone license license
are operating in the cellular communications market in Israel. Cellcom, Partner,
Hot Mobile and XFONE), and a number of MVNO operators with an radio
telephone license in another network (virtual operators) including the recent
addition of Golan Telecom to this status after its radio telephone license was
converted following the acquisition of control of it by Cellcom. Regarding a
contract for the sale of Golan Telecom shares to Cellcom, see section1.7.1.
3.1.8.2
Infrastructure sharing
Infrastructure sharing enables the consolidation of cellular operator sites in a way
that will significantly reduce the cost of operating and maintaining radio sites for
each operator. To the best of Pelephone's knowledge, as of the date of the report,
infrastructure is shared in the market as described below:
a) Partner and Hot Mobile operate as part of an infrastructure sharing in the
radio segment within a shared corporation.
b) Cellcom and XFONE operate as part of infrastructure sharing in the radio
segment of the 4G network as part of a joint corporation and the acquisition
of other interior roaming services.
3.1.8.3 Virtual operators MVNO
A number of MVNO licenses have been issued so far for vrtual operators. Only a
few MVNO license holders are active in the market.
For more details on the structure of competition in the field, see section 3.6.
3.2. Services and products
3.2.1. Services
Below is a description of the services that Pelephone provides to the subscriber:
3.2.1.1 Package services that include:
49 Some of the above entry and exit barriers apply in a partial and limited manner to virtual operators.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
a) Basic telephone services (VOICE) - basic call services, call completion
services as well as ancillary services such as - waiting call, "follow me",
voicemail, voice conference call, caller ID, and more.
b) Browsing and data communication services - Internet browsing services
using end equipment that is compatible with the use of 3G, 4G and 5G
technologies.
c) SMS delivery and receipt service and multimedia messages MMS -SMS
receiving and sending service (text messaging - SMS) and multimedia
messaging (video / voice / text).
3.2.1.2 Value Added Services - Pelephone offers its customers value-added
services and related services, such as data storage backup services (Pelephone
Coud), antivirus services, cyber protection services, and more.
3.2.1.3
IoT Services (Internet Of Things) - Pelephone offers its customers
advanced solutions in the field of IoT, such as smart building networks with
command and control systems, and more.
3.2.1.4 Roaming services - Pelephone Provides its customers with roaming
coverage in about 190 countries around the world. In addition, Pelephone also
provides inbound roaming services to the customers of foreign operators who stay
in Israel.
3.2.1.5 Services PTT (Push to Talk) - Pelephone offers its business customers
some of the most advanced PTT services in the world, enabling fast and secure
corporate communication at the touch of a button.
3.2.1.6 Maintenance and repair services for end equipment - Pelephone offers
repair service and extended warranty, for a monthly fee that entitles the customer
to repair service and extended warranty for the cellular device, or for a one-time
payment at the time of repair.
Pelephone provides some of these services also in the framework of hosting
agreements, to holders of an mobile radio telephone license in another network
that use the Pelephone network in order to provide service to their customers.
3.2.2. Products
End equipment devices - Pelephone offers different types of mobile phones, car devices,
devices PTT, headsets and accessories that support its range of services. Pelephone also
provides end equipment such as tablets, laptops, modems, speakers, smart watches,
headphones and other related electronics.
3.3. Segmentation of revenues from products and services
The following is data regarding Pelephone's revenues from products and services (in NIS millions):
Products and services
Revenue from services
Rate of Pelephon’s total revenue
Revenue from products (end equipment)
Rate of Pelephon’s total revenue
Total revenue
2020
1,591
72.8%
595
27.2%
2,186
2019
1,709
72.4%
653
27.6%
2,362
2018
1,755
71.8%
688
28.2%
2,443
3.4. Customers
The following is data on the distribution of revenue from customers (in NIS millions):
Products and services
Revenue from private customers
Revenue from business customers (*)
Total revenue
2020
1,194
992
2,186
2019
1,334
1,028
2,362
2018
1,415
1,028
2,443
(*) Revenue from customers in business tracks includes revenue from hosting agreements, which
were received mainly from Rami Levy.
At the end of 2020, the number of Pelephone subscribers was approximately 2.4 million, including
approximately 2 million postpaid subscribers and approximately 0.4 million prepaid subscribers. It
should be noted that the volume of revenue from prepaid subscribers is not material in relation to
Pelephone’s total revenue.
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3.5. Marketing, distribution and service
Pelephone's distribution system includes about 300 points of sale where you can join Pelephone
services. The set of points of sale is diverse and includes stores and stalls operated by Pelephone,
retail chains that market Pelephone products and about 20 Service and sales centers located
throughout Israel that handle service, customer sales, repair device and customer retention. In
addition, Pelephone operates an internal and external network of telephone marketers. As a rule, the
remuneration to the marketers is paid as commissions from the sales.
Pelephone's service system for subscribers includes diverse digital channels including the
Pelephone website hone, self-service app and call centers.
3.6. Competition
3.6.1. General
In recent years, the Ministry of Communications has taken a number of regulatory moves
in order to increase competition in the cellular communications market. The large number
of cellular operators in the market led to a high level of competition, which continued in
2020. The continuation of the trend led to a large number of subscribers among operators
and a reduction in cellular package prices, which led to erosion in rates and profitability in
both private and business customers.
In order to compensate for the erosion of package prices, Pelephone employs a strategy
for growth in the number of subscribers alongside streamlining and costs structure
adjustment (see section3.17).
For details regarding the acquisition of Golan Telecom shares by Cellcom, see section1.7.1
above.
Below is data, to the best of Pelephone's assessment, about the number of subscribers of
Pelephone and its competitors over the years 2019 and 2020 (thousands of subscribers,
approximately):
Pelephon
e
Cellcom
(includin
g Golan
Telecom)
(3)
Partner(3
)
Hot
Mobile(2
)
MVNO
And other
operators(
1)
Total
subscriber
s in the
market
2,327
3,671
2,657
1,630
684
21.2%
33.5%
24.2%
14.9%
6.2%
2,396
3,641
2,762
1,636
782
21.4%
32.5%
24.6%
14.6%
7.0%
10,969
11,217
As of
Decembe
r 31, 2019
As of
Septembe
r 30,
2020
Number of
subscriber
s
Market
Share
Number of
subscriber
s
Market
Share
(1) Most of the MVNOs and the other operators (which include, among others,
XFONE) are private companies that do not publish data regarding the number of
their subscribers, and the said data is based on an estimate of data on mobility
between companies.
(2) Hot Mobile's Q3/2020 data is based on an estimate, according to data published in
Altice's reports.
(3) The number of subscribers is correct as of September 30, 2020, based on Cellcom
and Partner reports to the public.
3.6.2. Infrastructure sharing agreements and granting network use right
For details regarding the existing infrastructure sharing agreements in the market as of the
date of the report, see section 3.1.8.2. As mentioned, infrastructure sharing enables the
consolidation of cellular operator sites in a way that will significantly reduce the cost of
operating and maintaining radio sites for each operator.
Pelephone is not a party to the radio network sharing agreement, so it does not enjoy the
savings resulting from the shared use of the radio network, but on the other hand it
exclusively controls its cellular network, the maintenance of its technological route and the
volume of investments in it. In addition, the frequency inventory in the Pelephone network
is smaller compared to the frequency inventory in the networks of participating competitors.
3.6.3. Positive and negative factors that affect Pelephone's competitive position
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3.6.3.1 Positive factors:
a) A cellular network with a broad and high-quality deployment.
b)
Its position as a fast and advanced cellular network.
c) A diverse and wide distribution system that operates through call centers and
through a large number of fromtal points of sale and is operated by
Pelephone, external marketers and through leading retail chains.
d) A wide range of services and a variety of customer service interfaces,
including digital channels, which enable the provision of a high level of
service to customers.
e)
Ability to sell through sub-brands in dedicated sales channels alongside the
Pelephone brand.
f) A solid capital structure and a positive cash flow.
3.6.3.2 Adverse factors:
a) As a subsidiary of Bezeq, Pelephone is subject to regulatory restrictions on
entering additional areas of activity and expanding the basket of services to
customers who do not apply to its competitors.
b) There are restrictions on joint activities with Bezeq, including the marketing
of joint service packages (see section 1.7.2).
c) The costs of setting up, operating and maintaining cellular networks in
Pelephone are expected to be higher compared to competitors operating
through the sharing of radio segment infrastructure.
3.7. Fixed assets and facilities
Pelephone's fixed assets include infrastructure equipment of the network core, radio sites, electronic
equipment, computers, vehicles, end equipment, office furniture and equipment, and leased
improvements.
3.7.1. Infrastructure
3.7.1.1
Pelephone currently operates communication networks in three main
technologies, as follows:
a) 5G - the NEW RADIO technology that uses a very broadband spectrum (100
MHz at Pelephone) and enables higher capacity and higher browsing rates
for the user. In the future, the technology will enable IoT applications at
significantly higher volumes than today and at a very high level of
performance.
b) 4G - LTE technology from the GSM standards family. The advantages of the
technology are high capacity for data communication and faster download
and upload rates than those that exist in 3G. All end devices that support this
technology also support 3G technology and there is a smooth transition
between the technologies.
c) 3G - technology in the UMTS method based on GSM standard. This
technology is very common in the world and enables subscriber identification
and service through a subscriber identification card (SIM) that can be
On December 10, 2020,
transferred from one end device to another.
the Ministry of Communications issued a hearing regarding the future closure
of networks mobile radio telephone operating on old technologies, in Israel
(2G and 3G networks) with state-of-the-art technologies (4G onwards),
public notification, and disconnection of these devices from the network. The
Ministry has not yet announced its decision at this hearing.
3.7.1.2 As of the date of the report, Pelephone's network infrastructure is mainly
based on two switching farms connected to more than 2,400 sites.
3.7.1.3 Network investments
In recent years, Pelephone has invested in deploying a 4G network and
upgrading it with innovative technologies (such as Beam Forming, MIMO4x4 and
QAM 256 and Carrier Aggregation in the access network, and in IMS at the core
of the network (see section3.1.5). Pelephone estimates that the financial volume
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of investments in the network in 2021, including the expansion of the 4G network
(with the use of 700/2600 MHz frequencies) and the deployment of the 5G (with
the use of 3500 MHz frequencies) will be similar to investments made in 2020,
during which many investments were made. Winning frequencies in the
framework of the 5G tender, except in the case of changing frequencies in
accordance with state requirements (see section3.8.2.3).
In addition, as part of its current investments, in the next ten years, Pelephone
will be required to continue to establish new transmission sites, among other
things for the purpose of complying with the conditions of the mobile radio
telephone license.
In addition, Pelephone has begun planning and evaluating the implementation of
advanced data communication services in the 5G track. The layout is designed
to integrate with existing infrastructure and systems. Activating such advanced
services will be based on 5G technology that Pelephone will continue to deploy,
and will later be based on a new network core dedicated to 5G (see section
3.8.2.4).
Pelephone's estimates as aforesaid regarding the costs of investing in the
network and the date of their formation are forward-looking information within its
meaning of the Securities Law, based on Pelephone's forecasts and estimates,
inter alia, regarding the rate of network expansion and upgrade of the network.
Accordingly, the information may not fully or partially materialize or may
materialize in a different format than that which was assessed, insofar as the said
forecasts and assessments are not fulfilled or will be fulfilled in a different way
than expected.
3.7.2. Areas used by Pelephone
Pelephone does not own real estate and it leases from others, including Bezeq, the areas
it uses for its activities. The following is a description of most of the areas used by
Pelephone:
3.7.2.1 The areas used by Pelephone to place communication sites and network
centers as stated in the section 3.7.1 are spread throughout Israel and leased for
different periods (in many cases for 5 years plus the option to extend the
agreement for another 5 years). For site licensing, see sectionError! Reference
source not found..
3.7.2.2 Until December 31, 2019, a license agreement was in force between
Pelephone and ILA for the use of ILA real estate for the construction and operation
of communication sites, which regulated, among other things, the license fee for
such use for the period until December 31, 2019. These days, a dialogue is taking
place between Pelephone and the other cellular companies and ILA regarding the
terms of the renewal of the license agreement.
3.7.2.3 Pelephone's headquarters are in Petah Tikva.
3.7.2.4 For service and sales activities, Pelephone rents about 50 service centers
and sales points spread throughout Israel.
3.7.2.5 Pelephone has additional lease agreements for warehouses (including a
central logistics center with a central laboratory for repairing customer devices),
offices, call centers and 2 switching farms used by it for its operations.
3.8. Intangible assets
3.8.1. Licenses
For details regarding Pelephone's mobile radio telephone license and operating license in
Judea and Samaria, see section 3.14.2.
3.8.2. Right to use frequencies
3.8.2.1
In Israel, there is a shortage of radio frequencies for public use (among
other things, due to the allocation of many frequencies for security uses). As a
result, the government limits the number of licenses that can be used in
frequencies.
3.8.2.2 Pelephone’s frequency inventory
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Pelephone has the right to use frequencies by virtue of the mobile radio telephone
license and the Telegraph Order in the ranges of 850 MHz50 and 2100 MHz for
operating the network in UMTS / HSPA technology, and in the 1800 MHz, 700
MHz and 2600 MHz range for network operation in the LTE technology (see also
section3.1.5) and in the range of 3500 MHz for the purpose of operating a network
with 5G technology. During 2017, Pelephone returned to the National Frequency
Database 2 frequency bands with a width of 1 Mega each in the range of 850
MHz, and towards the end of April 2017, it received a temporary allocation of a
band in the range of 1800 MHz with a width of 5 Mega. This allocation is limited
in use and is for a fixed period.
The Ministry of Communications has reassigned a temporary allocation of this
band until the end of December 31, 2021 under conditions and restrictions, in
order to allow Pelephone to prepare for the expected change in the replacement
of frequencies in the first Giga range (see section 3.8.2.3).
3.8.2.3 Switching freqencies in the first Giga range
In July 2018, the Ministry of Communications informed Pelephone that it intends
to adjust cellular frequencies in Israel to European standards and the area in
which the State of Israel is located, so that Pelephone and another cellular
operator will be required to replace the 850 MHz frequencies with other
frequencies in the first GHz. In 2020, the Ministry of Communications announced
to Pelephone that it intended to implement an outline for the replacement of 850
MHz frequencies in the use of Pelephone, against the background of
electromagnetic interference caused to neighboring countries due to non-
compliance of cellular frequencies in Israel with European standards and the
stadards of the region. According to the outline, Pelephone will receive
frequencies in the range of 800 MHz instead of 850 MHz, when in the first stage
and for the purpose of treating such interruptions, the amount of 850 MHz
frequencies used by Pelephone will be reduced to 5 MHz (instead of 10 MHz
today) and this as of May 31, 2020. Pelephone forwarded to the Ministry of
Communications, following his request, its reference to a number of issues and
on March 17.
On June 1, 2020, Pelephone returned to the Ministry of Communications
frequencies in the range of 850 MHz, with a width of 5 MHz, so that the amount
of 850 MHz frequencies owned by Pelephone decreased from 10 MHz to 5 MHz.
On November 26, 2020, the Ministry of Communications allowed Pelephone to
reuse full 2X10 MHZs in the 850 range until March 31, 2021.
Reducing the amount of 850 MHz frequencies, as stated, may cause damage to
the service provided by Pelephone. It should be noted that the frequency serves
Bezeq's 3G services, but damage to these services may also affect 4G services
in certain areas due to possible network congestion and traffic in 4G networks.
The harm is expected to be moderate due to increased penetration of the use of
VOLTE and thanks to the expansion of the 700 frequency deployment in LTE
technology. Pelephone is preparing to minimize the expected damage.
Frequency replacement is a complex engineering project that requires replacing
and upgrading active / passive infrastructure on Pelephone's radio sites, and may
involve significant costs that may vary depending on the process and timing to be
determined with the Ministry of Communications.
Pelephone's assessments as stated above are forward-looking information within
its meaning of the Securities Law. These assessments may not materialize,
partially materialize or materialize in a manner substantially different from what is
stated, depending, among other things, on the actual implementation of the
outline and the state of the Pelephone network.
3.8.2.4 Tender for advanced broadband services ("the Tender")
On August 12, 2020 Pelephone won the allocation of frequencies as a result of
its participation in the tender for mobile radio telephone services in advanced 5G
bandwidths.
50 Pelephone has the option of requesting a 5-mega allocation in the 800 MHz range following the 850 MHz frequency evacuation
project.
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The main points of the Tender in which it won, as stated, among other things, are
as follows:
The Tender includes provisions regarding the coverage and quality requirements
of the network that will be anchored as part of the amendment of the mobile radio
telephone licenses of the existing operators (see amendment to Pelephone’s
license below).
The Tender including the possibility of receiveing the following incentives:
• Possibility of discounts in the frequency fees for the first four years, subject
to the approval of the Ministry of Communications and the Ministry of
Finance.
• Possibility of receiving a conditional grant for the deployment of 5G sites
according to the conditions specified in the Tender (such as meeting the
scope of deployment, schedules, deployment period and timing of
deployment in relation to others and additional conditions set in the
Tender).
For details, see also section 3.19.2.1. For details regarding exposure to
interference in the frequency ranges of Pelephone, see section3.19.3.10.
The following are the conditions under which Pelephone won the allocation of
such frequencies:
1. Winning at 10 Mega in the 700 MHz range (for a period of 15 years); at 20
Mega in the 2600 MHz range (for a period of 10 years); And at 100 Mega in the
field of 3500 MHz (for a period of 10 years). The license period does not change
as a result of the Tender and can be renewed in accordance with the license
provisions (hereinafter: "Frequency Allocation"). It should be noted that the
frequencies won by Pelephone are used exclusively by Pelephone network.
This will give a competitive advantage to the Pelephone network, and it should
also be noted that companies that do not own existing networks did not win the
Tender.
2. Pelephone's win in the Frequency Allocation has a total cost of NIS 88,230,000,
with the payment date set for September 2022. In this context, it should be noted
that the Tender further stipulates that incentives may be obtained, as specified
in above, including receiving a conditional grant for the deployment of 5G sites
according to the conditions specified in the Tender, the amount of which, for all
the winners, can reach a total amount of NIS 200 million. As part of the update
of the regulations under which the frequency fees are paid, a reduction in the
amounts of the fees for 2600 and 3500 MHz frequencies was determined, as
well as a conditional annual discount, from the total amount of the frequency
fees to be paid by Pelephone in the next four years, which will be examined by
the Ministry of Communications every year).
On October 1, 2020, Pelephone's license was amended in accordance with the
winning results (shortly before, Pelephone was allocated the frequencies at which
it won as stated). With the amendment of the license, Pelephone began operating
the frequencies which it won in the Tender at the broadcast sites upgraded by it.
Said Frequency Allocation will enable support for the increase in the volume of
browsing in the 4G and in the future offer services in the 5G at much higher
browsing rates than today, which will allow, among other things, expanding a
variety of advanced cellular uses, such as smart cities, IoT services, critical
mission services with low latency, private networks and more and all in order to
provide a competitive solution in the market and will involve ongoing investments.
In this regard, see also Note 11 to the 2020 statements.
3.8.3. Trademarks
Pelephone has a number of registered trademarks. The main one is the "Pelephone" brand.
3.8.4. Computer software, systems and databases
Pelephone uses software and computer systems, some based on licenses it has acquired
and some developed by Pelephone's information systems division. Many of these licenses
are limited in time and are renewed from time to time. The main systems used by
Pelephone are an ERP system by Oracle Applications and a customer billing and
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management system by Amdocs.
Pelephone is also working to upgrade the CRM (customer management) to an advanced
Salesforce cloud platform together with Bezeq International and DBS. Pelephone is
dependent on the Salesforce system and services, due to their importance for the purpose
of managing relationships with its customers. System failures or the cessation of services
by this provider are likely to cause operational difficulty until the matter is rectified or the
system / provider is replaced, which may take a long time
3.9. Human capital
3.9.1. Organizational structure
The following is a diagram of Pelephone's organizational structure, as of the date of the
report:
Board of
Directors
CEO
Deputy
CEO
HR and
Administr
ation
Division
Finance
Division
Private
Custome
r
Division
*
Informati
on
Systems
Division
Engineer
ing
Division
Busines
s
Division
DBS
Marketin
g
Division
Legal
advice
and
Regulati
on
Public
Relation
s
Internal
Auditor
(*) The Director of the Private Customers Division is the Deputy CEO.
As part of the implementation of the synergy processes with the Group's subsidiaries,
Pelephone's CEO, Mr. Ran Guron also serves as CEO of DBS and Bezeq International. In
addition, most of the VPs who serve on Pelephone also serve as VPs at DBS and Bezeq
International.
3.9.2. Employee base and number of jobs
The following is a breakdown of the number of employees in Pelephone according to its
organizational structure:
Division
and
and
Management
administration divisions
Private
customer divisions
Engineering and Information
Systems Divisions
Total
business
Number of employees
December
31, 2020
210
December
31, 2019
238
1,290
1,533
400
431
1,900
2,202
The number of employees included in the table above includes employees employed part-
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time. The total number of jobs51 in Pelephone as of December 31, 2020, was 1,619 (as of
December 31, 2019 - 1,956).
3.9.3. Terms of employment
Most Pelephone employees are employed under a monthly agreement or an hourly
agreement, according to the professions and positions in which they are engaged. Most of
the service and sales staff are part-time shift workers and are employed on an hourly basis.
The other Pelephone employees are employed on a monthly basis.
3.9.4. Collective agreement
The labor relations at Pelephone are regulated in a collective agreement signed between
Pelephone and the new Histadrut - the Cellular, Internet and High-Tech Workers' Union
("the Histadrut") and the Pelephone Employees’ Committee. The agreement applies to all
Pelephone employees, with the exception of senior executives and certain employees in
pre-defined positions.
On November 13, 2019, a renewal of the existing collective agreement was signed between
the parties, which includes streamlining and synergy procedures, for a period of up to June
30, 2022 (“the Agreement").
Under the Agreement, Pelephone will, among other things, terminate the employment of
210 permanent employees during the term of the Agreement, some of them as part of a
voluntary retirement. Moreover, according to its plan, it will terminate the employment of
190 additional non-permanent employees, in addition to not recruiting employees instead
of employees the employment oh whom will be terminated. The Agreement also includes
providing a one-time bonus to employees who will not be included in the retirement plan.
Expenses in respect of the Agreement amounted to approximately NIS 100 million and
were recorded in 2019 and 2020.
3.9.5. Labor disputes
On January 31, 2018, Pelephone was notified by the Histadrut ("the Histadrut Notice") of
the declaration of a labor dispute in accordance with the Labor Disputes Settlement Law,
5717-1957. According to the Histadrut Notice, the issues in the dispute are the employees’
requirements for consultation and negotiations regarding the sale of Bezeq's controlling
shares to the new owners and the regulation of their rights as a result.
Following the Histadrut Notice, on November 28, 2019, Pelephone's offices received a
notice from the Chairman of the Histadrut and the Pelephone Employees’ Committee,
including a demand for collective bargaining with the employees' representatives against
the background of the acquisition of control of Bezeq.
3.10. Suppliers
3.10.1. End equipment suppliers
Pelephone purchases some of the end equipment and accessories from different providers
in Israel and in the world and some it imports independently. In addition, Pelephone
purchases end equipment and accessories by way of purchase consignation with the right
to return to the end equipment suppliers. Contracts with some suppliers are based on
framework agreements that regulate, inter alia, the supplier's technical support for the end
equipment provided thereby, the availability of spare parts and repairs and the supplier's
warranty for the products. In most cases, these agreements do not include an obligation
on Pelephone's part to make purchases, and they are executed on an ongoing basis
through a purchase order according to Pelephone's needs.
In the event of a termination of contract with a particular end equipment supplier, Pelephone
may increase the quantity purchased from other end equipment suppliers, or purchase end
equipment from a new end equipment supplier.
Pelephone’s essential suppliers are Apple and Samsung with which Pelephone does not
have an agreement that requires the purchase of a minimum annual quantity and the
purchases are made on the basis of orders made by Pelephone from time to time.
Pelephone purchases rate from each of the suppliers Apple and Samsung in 2020
51The calculation of the number of "jobs" in Pelephone is: the total monthly working hours divided by the monthly working hours quota.
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accounted for over 10% of all Pelephone purchases from all Pelephone’s suppliers52, but
less than 5% of total Group purchases (consolidated) from all its suppliers. The distribution
of peripheral equipment purchases among suppliers is such that it does not create a
material dependence on the supplier or model of equipment.
3.10.2. Infrastructure providers
Cellular infrastructure equipment in the UMTS, LTE and the 5G networks are provided by
LM Ericcson Israel Ltd. ("Ericcson"). Ericcson is also a significant supplier of Pelephone
in the field of microwave transmission. Pelephone has multi-year agreements for
maintenance, support and software upgrades for the UMTS network, as well as an
agreement for the purchase of 4G (LTE) and 5G equipment with Ericsson, and in its opinion
it may be dependent on it in connection with network support and expansion. In addition,
the cellular network uses transmission, and Bezeq is a significant supplier of Pelephone in
this field.
Pelephone has a multi-year transmission agreement with Bezeq that includes use and
maintenance.
3.11. Working capital
Credit policy
Credit in device sales transactions - Pelephone gives most of its customers who purchase mobile
phones the option to spread the payments up to 36 equal payments. In order to reduce exposure
that may arise as a result of providing credit to its customers, Pelephone operates in accordance
with a credit policy that is reviewed from time to time. Pelephone also checks the financial strength
of its customers (in accordance with the parameters set by it).
Monthly billing credit for cellular services - Pelephone customers are charged once a month with
billing cycles, performed on different dates throughout the month, for the consumption of last month's
cellular services.
Pelephone receives credit from most of its providers for a period ranging from 30 days to end of
month + 92 days.
The following are data regarding average suppliers' and customers' credit in 2020:
Customers for the sale of end
equipment (*)
Customers for services (*)
Suppliers
(*) Net of loan-loss
Credit volume
in NIS millions
Average credit
days
626
180
234
328
35
32
3.12. Taxation
See Note 7 to the 2020 statements.
3.13. Environmental risks and ways of managing them
3.13.1. The provisions of the law concerning the environment and apply to the activities of
Pelephone
The broadcast sites used by Pelephone are "radiation sources" in accordance with the
Non-Ionizing Radiation Law. The establishment and operation of these sites, with the
exception of sites listed in the appendix to the law, requires the receipt of a radiation permit.
The law establishes a two-stage licensing mechanism for obtaining a permit to operate a
radiation source, according to which the applicant for a permit must first obtain a permit to
establish the radiation source ("Establishment Permit"), valid for a period not exceeding
three months, which can be extended by the Commissioner by up to 9 months, followed by
a permit to operate a source of radiation ("Operating Permit"), which is valid for a period
of five years or as otherwise determined by the Minister of Environmental Protection.
With regard to the Establishment Permit, the law stipulates the granting of the permit by
performing an assessment of the maximum levels of exposure of people and the
52 All suppliers - all Pelephone’s suppliers, including suppliers who are not suppliers of end equipment and electronic devices.
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environment to the radiation expected from the radiation source when it is activated,
including in the event of a malfunction; And taking the necessary measures to limit the
levels of exposure of humans and the environment to the radiation expected from the
radiation source when it is activated, including the use of technological means in use
("Limitation Means").
With regard to the Operating Permit, the law stipulates the granting of the permit by the
taking of measures to limit and make measurements of the levels of exposure of humans
and the environment to the radiation generated during the activation of the radiation source.
The law also conditions the granting of an Operating Permit by presenting a license in
accordance with the Communications Law, and in some cases, also by presenting a permit
under the Planning and Construction Law.
The law includes a penalty chapter which stipulates, inter alia, that the construction or
operation of a radiation source in violation of the terms of the permit and the construction
or operation of a radiation source without a permit after receiving written notice from the
Commissioner, are a criminal offense.
It will be noted that regulating the maximum permissible levels of exposure of human beings
to radiation from a radiation source and the safety ranges from transmission facilities to
communications, including the restriction on placing a radiation source on roof terraces, is
still in the process of legislation with the Knesset's Interior Committee on the Environment,
as part of an amendment proposed to the regulations under the Non-Ionizing Radiation
Law, which was accompanied with disagreements between government ministries.
In January 2009, the Commissioner for Radiation at the Ministry of Environmental
Protection issued guidelines regarding safety ranges and maximum permitted levels of
exposure regarding radiation from radio frequencies, including cellular antennas.
Discussions are taking place around these ranges against the background of the
announcement by the World Health Organization (IARC) according to which radio
frequency electromagnetic fields associated with cell phone use have been classified as
possible carcinogens in humans (Group 2B)53.
It should also be noted that the Ministry of Environmental Protection operates a system of
continuous supervision and monitoring of the broadcasting centers to check their
compliance with the requirements of the law.
Cellular services are provided through a mobile phone that emits non-ionizing radiation
(also known as electromagnetic radiation). The Consumer Protection Regulations
(Information on Non-Ionizing Radiation from a Mobile Phone) 5762-2002 stipulate the
maximum permissible level of radiation of a cellphone measured by units SAR (Specific
Absorption Rate) and informing Pelephone's customers in this context. To the best of
Pelephone's knowledge, all the cellular devices it markets meet the required SAR
standards. See also section3.19.2.5.
3.13.2. Pelephone policy in environmental risk management
Pelephone conducts periodic radiation tests to ensure compliance with permitted operating
standards and international standards. These tests are outsourced to companies licensed
by the Ministry of Environmental Protection. Pelephone has an internal enforcement
procedure for supervising the implementation of the provisions of the Non-Ionizing
Radiation Law, according to which a senior administrative body has been appointed as
responsible for its implementation. The purpose of the procedure is to implement the
provisions of the law and to reduce the possibility of violating it.
3.13.3. Transparency to consumers
Pelephone is subject to relevant laws that stipulate advertising obligations and information
about the sources of radiation that it activates and the mobile devices that it provides.
Pelephone publishes information on its website regarding the level of SAR emitted from
cell phones and the Ministry of Health's recommendations for precautionary measures in
the use of cell phones.
3.14. Restrictions and supervision of Pelephone’s operations
3.14.1. Legislative restrictions
53
It should be noted that from time to time various documents are published on the website of the Ministry of Environmental
Protection, at www.sviva.gov.il, and on the World Health Organization website, at www.who.int
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3.14.1.1 Communications Law
The provision of cellular services by Pelephone is subject to the provisions of the
Communications Law and its regulations. For details regarding the mobile radio
telephone license granted to Pelephone under the Communications Law, see
section3.14.2.
The law authorizes the Director General of the Ministry of Communications to
impose financial sanctions due to various violations of the provisions of the law
and of orders and provisions issued under it, as well as due to violation of
conditions in the license.
3.14.1.2 Wireless Telegraph Order
The Telegraph Order regulates the use of the electromagnetic spectrum, and
applies, among other things, to the use of radio frequencies made by cell phones,
as part of its infrastructure. Establishment of a system that uses and operates
radio frequencies is subject, under the Telegraph Order, to licensing, and the use
of radio frequencies is subject to the designation and allocation of an appropriate
frequency. According to the Telegraph Order, license fees and fees are imposed
for the designation of frequencies and their allocation. The Order authorizes the
Ministry of Communications to impose financial sanctions due to various
violations of its provisions.
For radio frequencies assigned to cell phones, see section 3.8.2.
3.14.1.3 The Non-Ionizing Radiation Law
With respect to facilities that emit electromagnetic radiation see section 3.13.
3.14.1.4 Consumer legislation and privacy protection and information security laws
As part of its activities, Pelephone is subject to the Consumer Protection Law,
which regulates a dealer's obligations to consumers, as well as the laws of privacy
protection and information security (see section 1.7.4.5).
3.14.1.5 Change in interconnectivity fee rates (Call Completion Fee)
Interconnectivity rates are set by the regulator. For details see section 1.7.4.1.
3.14.2. Pelephone's mobile radio telephone license
3.14.2.1 General
Pelephone's mobile radio telephone license as well as the general license to
provide cellular services in the Judea and Samaria area are valid until September
202254.
The following are the main instructions from Pelephone's mobile radio telephone
license:
a)
In certain circumstances, the Minister may change the terms of the license,
restrict it or suspend it and, and in some cases even cancel it.
b) The license is not transferable and includes restrictions on the purchase or
transfer (including by way of lien) directly or indirectly of control or of 10% or
more of any means of control in Pelephone, including the lien of such means
of control, unless the Minister's prior consent is given.
c) Pelephone must provide an interconnectivity service on equal terms to any
other operator and must avoid any discrimination in interconnectivity.
d) Pelephone must refrain from preference of providing infrastructure services
to a licensee who is an affiliated company (as defined in the license) over
another licensee.
54 The wording of the Pelephone’s mobile radio telephone license is published on the website of the Ministry of Communications at
www.moc.gov.il. The provisions of the mobile radio telephone license applies on the license in the Judea and Samaria area (with certain
changes)).
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e) The license specifies the mobile radio telephone services that Pelephone
may provide and states that it is not allowed to provide additional mobile
radio telephone services that are not specified in the license.
f) Pelephone may not sell, rent, or mortgage property from the properties used
the Minister of
to carry out
Communications, except for certain exceptions set forth in the license.
the consent of
license without
the
g)
In times of emergency, the person authorized by law has the authority to give
Pelephone various instructions regarding the manner of its operation and /
or the manner of providing the services (see section 3.19.2.9).
h) The license specifies the types of payments that Pelephone may charge its
subscribers for cellular services, and the reports it must give to the Ministry
of Communications. The license also stipulates the authority of the Minister
to intervene in rates, in some cases.
i) The license requires Pelephone to a minimum standard of service.
j)
In order to secure Pelephone's obligations and in order to compensate and
compensate the State of Israel in the event that Pelephone's action causes
it damage, Pelephone provided a bank guarantee to the Ministry of
Communications, in the amount of NIS 71.6 million.
Pelephone submitted a request to the Ministry of Communications to renew the
license for a period of 10 years.
3.14.2.2 Ministry of Communications guidelines regarding license changes
The Ministry periodically updates Bezeq’s license on various issues, as part of
hearings held by it.
3.14.3. Site construction licensing
Pelephone's cellular services are provided, among other things, through cellular sites that
are deployed throughout Israel in accordance with engineering needs. The constant need
to upgrade and improve the quality of cellular services requires the establishment of cellular
sites, configuration changes, and changes to existing antenna arrays.
Pelephone uses transmission sites of two main types and in two tracks: macro sites that
require a building permit from the Planning and Construction Committees (see reference
to National Outline Plan 36A below) and wireless access facilities ("Access Facilities"),
which are exempt from a building permit under the Communications Law and the planning
and Construction Law ("Exemption Provision") and for which regulations were published
in 2018.
Pelephone's ability to maintain and preserve the quality of its cellular services, as well as
its coverage, is based in part on its ability to establish cellular sites and install infrastructure
equipment, including broadcasting sites. The difficulties encountered by Pelephone in
obtaining the necessary permits and approvals can adversely affect the existing
infrastructure, the network's performance as well as the establishment of additional cellular
sites required by the network. Difficulties in deployment also exist in the Judea and Samaria
area, for which a special legal system applies.
The inability to resolve these issues in a timely manner may even prevent the achievement
of service quality goals set forth in the mobile radio telephone license.
Pelephone, like other cellular operators in Israel, has set up some of the cellular sites
throughout Israel on properties managed by the Israel Land Authority. This, among other
things, according to an umbrella contract from June 2013. It should be noted that this
umbrella contract ended on December 31, 2019, and Pelephone, as well as the other
cellular operators, and the Israel Land Authority are conducting a dialogue regarding the
possibility of extending the contract for another period to be determined between the
parties.
Building permits for the construction of a transmission facility for cellular communications
by virtue of National Outline Plan 36A:
Licensing of the construction of cellular transmission sites subject to building permits,
regulated by National Outline Plan 36A, which came into force in 2002.
The licensing procedure according to NPA 36A requires, inter alia, the receipt of approvals
as follows: A. Approval of establishment and operation by the Ministry of Environmental
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Protection, as specified in section 3.13.1; B. Approval of the Civil Aviation Administration,
in some cases; C. IDF approval.
In addition, according to the law, a condition for granting a permit for the establishment of
a transmission facility for cellular communications is the submission of a letter of indemnity
to the local committee in respect of claims for compensation for impairment. As of the date
of this report, Pelephone has deposited approximately 650 indemnity letters with various
local committees.
Despite NPA 36A in its existing format, Pelephone (and to the best of its knowledge, also
from its competitors) encounters difficulties in obtaining some of the necessary approvals,
especially the approvals of the planning and construction authorities.
In view of the criticism leveled against National Outline Plan 36A by various parties, a
proposal to amend National Outline Plan 36 (the "New National Outline Plan 36/A
Proposal") was published about a decade ago, which is stricter and heavier in relation to
the wording in force, and may make it difficult to license cellular sites in this route. The
amendment to National Outline Plan 36A has not been implemented in recent years, but
the need and desire to make amendments to National Outline Plan 36A remains in place.
It should also be noted that in two administrative petitions filed against cellular companies,
including Pelephone, in the Haifa District Court, the legality of building permits issued
pursuant to National Outline Plan 36A to cellular transmission facilities was chakkenged.
The main arguments of the petitioners in the two petitions were that the frequencies used
by the cellular companies do not correspond to the frequencies set forth in National Outline
Plan 36A. On April 12, 2018, a ruling was given in one of the petitions in which the claims
of the cellular companies were accepted by the Appeals Committee and in which it was
determined, among other things, that despite the use of varying frequencies during the
development of cellular infrastructure, the building permits were valid. On October 17,
2018, a ruling was given in the other petition in relation to the same issue, in which an
opposite determination was made regarding the interpretation of the National Outline Plan
and the alleged invalidity of the building permits. The two rulings were appealed to the High
Court. On August 11, 2020 and November 2, 2020, the High Court ruled on the appeals. It
was determined that the petitioners' interpretation must be rejected.The High Court also
ordered the annulment of the judgment of October 17, 2018, in which a reverse
determination was made in connection with the interpretation of the National Outline Plan.
As part of the "Pergola Reform" - Amendment 101 to the Planning and Construction Law,
the Planning and Construction Regulations (works and buildings exempt from the permit)
5774-2014 entered into force on 1 August 2014. Regulation 34 of the regulations stipulates,
among other things, that adding an antenna to an existing broadcasting facility is legally
exempt from the permit subject to the existence of cumulative conditions and restrictions,
including compliance with applicable spatial plans and guidelines, to be determined by the
local committees. It should be noted that this exemption regulation is not practical due to
one of its conditions, and has not been used.
Access Facilities exempt from building permits:
The second route in which Pelephone is deploying broadcast sites is the Access Facilities
route. The Access Facilities are subject to the receipt of individual radiation permits but are
exempt from obtaining a building permit provided that they are established under the
conditions set forth in the exemption directive (Article 266C (a) of the Planning and
Construction Law (installation of a wireless access facility for cellular method), 5778-2018
and the regulations.
Various local authorities have disputed the applicability of the exemption provision of
Access Facilities operating on a cellular network and its use. In a number of judgments and
decisions by local Courts, Pelephone's position was adopted regarding the applicability of
the exemption and the approval of the use of these facilities and the equipment that
supports them. Some of these decisions and judgments have been appealed to the High
Court.
As of the date of the report, Pelephone operates about 450 wireless access sites.
It should be noted that in spot enforcement proceedings, which are taken from time to time,
additional allegations arise regarding the manner in which the exemption is used, including
compliance with regulations. To the extent that there are Pelephone facilities that do not
meet the conditions set forth in the regulations, there is exposure in respect thereof if the
dismantling or adjusting of those facilities becomes necessary.
On March 27, 2018, an exemption provision was added to the Planning and Construction
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Regulations (exemption from the permit) for a "miniature transmission facility", as defined
in the regulations. The regulations further stipulate, among other things, that the installation
of a miniature transmission facility and its external components on an existing building or
facility is exempt from a permit subject to the existence of cumulative conditions.
In conclusion:
A few sites that were established years ago still lack the approvals of the Civil Aviation
Administration and the IDF, although the applications for approvals have already been
submitted. Also, some planning and construction committees have administrative or other
delays in issuing building permits to sites. Therefore, Pelephone operates a number of
broadcasting sites that have not yet been issued building permits.
The establishment of a broadcasting site without obtaining a building permit is a violation
of the law and in some cases this has led to the issuance of demolition orders or the filing
of indictments or the filing of civil proceedings against Pelephone and some of its officers.
As of the date of the report, Pelephone has in most cases been able to avoid demolition or
delay the execution of demolition orders within the framework of arrangements reached
with the planning and construction authorities, in order to try to settle the missing license.
These arrangements did not require a confession of guilt and / or a conviction on the part
of Pelephone officials. However, there is no certainty that this situation will continue in the
future, or that there will be no further cases in which demolition orders will be issued and
indictments will be filed for building permits, including against officers.
Pelephone, like the other cellular operators in Israel, may be required to dismantle
transmission sites for which the necessary approvals and permits have not yet been
obtained in accordance with the deadlines set by law. Pelephone uses the access facilities
to provide coverage and capacity in crowded areas. If a legal constraint is created for the
simultaneous dismantling of the sites in a given geographical area, there may be a
deterioration in the service in that area, until the establishment of alternative broadcasting
sites.
3.14.4. Economic Competition Law
In the terms of the merger of Pelephone and Bezeq, various restrictions are anchored
regarding cooperation between the companies (see section 2.16.8.42.16.8).
3.15. Substantial agreements
3.15.1. For agreements with Ericsson, see section 3.10.2.
3.15.2. In July 2016, an agreement was signed between Pelephone and the Accountant
General of the Ministry of Finance, according to which Pelephone will provide cellular
services to state employees in an estimated 100,000 subscribers over three years.
Under the agreement, Pelephone provides devices to some Accountant General
subscribers.
In May 2019, the state chose to exercise the extension option granted to it in the
agreement, and the agreement was extended until August 2022.
3.15.3. Regarding an agreement with ILA (which expired and has not yet been renewed) see
section 3.7.2.2.
3.15.4. Regarding a collective agreement between Pelephone and the Histadrut and
Pelephone’s Employees’ Committee, see section 3.9.4.
3.16. Legal Proceedings55
During the day-to-day business, lawsuits were filed against Pelephone, including motions for
approval of class actions.
3.16.1. Pending legal proceedings
The following is a list of the claims in which the amount claimed is material and claims that
may have material consequences for Pelephone's operations:
55 For material reporting and material thresholds, see section 2.18.
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Date
Sides
Court
a.
August
2010
District
(Center)
Custom
er vs.
Pelepho
ne
Type of
procedure
A monetary
claim
together
with a
motion to
recognize it
as a class
action
May
b. 7
2012
.
Custom
er vs.
Pelepho
ne
District
(Tel
Aviv)
Class
action
lawsuit
c.
Novem
ber
2012
d.
Novem
ber
2013
Custom
er vs.
Pelepho
ne
Custom
er vs.
Pelepho
ne
District
(Jerusal
em)
District
(Tel
Aviv)
Monetary
claim and a
motion to
recognize it
as a class
action
Monetary
claim and a
motion to
recognize it
as a class
action
Amount of
the claim
NIS million
The amount of
the lawsuit is
not specified,
but in the
motion it is
estimated at
tens of
millions of
NIS.
About 124
About 107
About 300
Details
It was argued that Pelephone should refrain from
charging VAT from customers who consume its
services during their stay outside Israel. The motion
also includes the remedy of an order instructing
Pelephone to cease making VAT charges in respect
of the services subject to the motion for approval
consumed by them outside Israel, and an order
directing to return the funds collected so far. In
August 2014, the Court denied the motion for
approval. In October 2014, an appeal was filed
against the ruling. On July 3, 2017, a High Court
ruling was given, according to which the applicants'
appeal of the deinal decision was accepted, and the
hearing will be returned to the District Court for a
decision on whether VAT money was illegally
collected for overseas cellular services. According to
the ruling of the High Court, to the extent that the
District Court decides in the positive in the question
and Pelephone is required to return to customers the
VAT money it has collected, it will have an indemnity
claim against the tax authority for the amounts it will
be required to return. It was also determined that in
the context of service packages abroad for which
payment is made in advance, the VAT rate is 0.
According
to a preliminary assessment by
Pelephone, the ruling of the Hight Court means that
the results of this proceeding have no further material
impact on Pelephone. The petitioners and the State
are negotiating between them and therefore the
Court is delaying the decision on the petition.
It is claimed that Pelephone does not inform
customers who wish to join its services with a device
that was not purchased from Pelephone, that as long
as the device does not support the 850 MHz
frequency, they will enjoy partial reception of one
frequency and not two. In March 2014, the Court
approved the lawsuit as a class action, following
Pelephone's announcement regarding its consent
(for reasons of efficiency) to the management of the
lawsuit as a class action, while maintaining its claims.
The procedure is split into two stages (the stage of
clarifying liability and the stage of quantifying
damages, as necessary in stage two). On January
20, 2019, a decision was given in the sale case under
Pelephone's responsibility for the claim in the lawsuit,
on the grounds of deception under the Consumer
Protection Law and on the grounds of lack of good
faith in negotiations, in relation to the period up to the
date of the decision to approve the claim as a class
action (March 2014). Depending on the decision and
previous decision in the case the next step in the
hearing of the case will be on the question of the
alleged damage.
It is alleged that Pelephone allowed the illegal
charging of as subscriber in respect of cellular
content services that were not ordered at all from the
non-interactive content services company. At that
time, the parties are in mediation proceedings.
It is alleged that Pelephone does not provide benefits
in the same way to all its customers, thereby
discriminating between customers whom Pelephone
preferred, as the plaintiff claims, other customers,
contrary to Pelephone’s license and the law. In
December 2019, a ruling was given rejecting the
motion without an order for expenses. An appeal was
subsequently filed with the High Court.
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Date
Sides
Court
Type of
procedure
Details
e.
July
2014
f.
May
2015
Custom
er vs.
Pelepho
ne, three
other
cellular
compani
es and
addition
al
respond
ents
Custom
er vs.
Pelepho
ne
District
(Tel
Aviv)
Monetary
claim and a
motion to
recognize it
as a class
action
It was alleged that Pelephone, along with three other
cellular companies, signed up subscribers to content
services without their consent and illegally, thereby
creating a "platform" that led the Accutech Group to
charge tens of thousands of people for illegal content
services.
District
(Tel
Aviv)
Monetary
claim and a
motion to
recognize it
as a class
action
to all
its existing and
It is alleged that Pelephone does not offer the "Walla
Mobile" routes
joining
customers who apply to switch to another route, in a
manner that violates the license provisions that
require equal
its
customers. The proceedings in the case were
merged with another case in view of the similarities
between the proceedings. In December 2019, a
judgment was rendered rejecting the motion without
an order of expenses and an appeal was
subsequently filed with the High Court.
thus misleading
treatment,
Amount of
the claim
NIS million
About 100 in
relation to the
cellular
companies
and about 300
against all the
defendants
The amount of
the lawsuit is
not specified,
but in the
application it
is estimated at
NIS million
g.
October
2016
District
(Lod)
Custom
er vs.
Pelepho
ne and
Cellcom
Monetary
claim and a
motion to
be
recognized
as a class
action
It is argued that the defendants do not allow their
customers to take advantage of the full package
abroad through discriminatory conditions acording to
which the package can be redeemed for a very short
period (between one week and one month only)
when at the end of that period, the balance of the
unused package expires and no refund is given for it.
The parties are awaiting a Court ruling.
The amount of
the lawsuit is
not specified,
but in the
motion it is
estimated at
tens of
millions of NIS
On April 5, 2020 a
judgment was rendered
dismissing the motion. On June 29, 2020, an appeal
was filed against the judgment by the petitioners for
approval of the class action.
h.
April
2017
Custom
er vs.
Pelepho
ne
District
(Tel
Aviv)
i.
October
2017
j.
April
2018
Custom
er vs.
Pelepho
ne and
Partner
Custom
er vs.
Pelepho
ne
Central
District
District
(Tel
Aviv)
Monetary
claim and a
motion to
be
recognized
as a class
action
Monetary
claim and a
motion to
be
recognized
as a class
action
Monetary
claim and a
motion to
be
recognized
as a class
action
It is alleged that the defendant unilaterally and
without consent changed the terms of the agreement
between itself and the applicant, and others like it, by
allowing browsing to continue after exhausting the
browsing volume included in the package instead of
stopping it, contrary to Pelephone’s notice on the
issue
It is alleged that the defendants are illegally using the
location data of their clients and thus violating the
contract agreements with
the operating
licenses and various laws, including the Privacy
Protection Law, 5741-1981.
them,
About 80
About 850
It is alleged that Pelephone markets and sells to its
customers a repair service with a commitment for
unreasonable periods of time, without there being an
option in the agreement to cancel the transaction
during the commitment period and / or transfer the
service to another mobile device.
The amount of
the claim is
not specified
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Date
Sides
Court
k.
April
2019
Central
District
Customer
vs.
Pelephon
e, Bezeq
Internatio
nal and 6
other
companie
s
Type of
procedure
Monetary
claim and a
motion to be
recognized
as a class
action
Details
It is claimed that the respondents do not inform their
customers as required about the possible dangers of
using the Internet and about the possibility of joining
a free content filtering service, contrary to the
provisions of the Communications Law. In addition,
the respondents provide a website and offensive
content filtering service that they claim is not
effective enough. According to the petitioners, the
aforesaid constitutes, inter alia, a violation of the
provisions of the Consumer Protection Law, a
violation of debts under the Torts Order, a breach of
contract and unjust enrichment.
Amount of
the claim
NIS million
The amount
of the lawsuit
is not
specified, but
in the motion
it is estimated
at tens of
millions of
NIS
l.
Novembe
r 2019
m.
January
2020
Customer
vs.
Pelephone
Cellcom
and
Partner
Customer
vs.
Pelephone
District
(Tel Aviv)
District
(Tel Aviv)
Monetary
claim and a
motion to be
recognized
as a class
action
Monetary
claim and a
motion to be
recognized
as a class
action
It is alleged that Pelephone charged its customers
money in the past for third parties in respect of
content services through the means of payment
provided to Pelephone to pay for the cellular bill, in
violation of the provisions of Pelephone’s license and
the provisions of the law.
It is alleged that Pelephone forces every customer
who purchases from it, through the website or in the
application on the mobile phone, a communication
package abroad - which includes calls and / or
Internet browsing, to give its consent to receive
advertising messages from it.
About 400
(against each
of the
defendants)
The amount
of the claim
is not
specified
3.16.2. Legal proceedings concluded during the reported period
Date of
Sides
Court
filing
the
claim
Februar
y 2014
a.
Custome
r against
Pelepho
ne
District
(Tel
Aviv)
b.
March
2018
c.
Decem
ber
2016
Custome
r against
Pelepho
ne,
Golan
Telecom,
Cellcom
and
Hamilton
Custome
r against
Pelepho
ne
Central
District
District
(Tel
Aviv)
The original
amount of the
claim
(NIS millions)
The amount of
the claim is not
specified
About 65 (The
amount is
against all the
respondents and
not just
Pelephone,
without division
among the
respondents)
About 70
Type of
procedure
Monetary
claim
together
with a
motion to
recognize it
as a class
action
Monetary
claim
together
with a
motion to
recognize it
as a class
action
Monetary
claim
together
with a
motion to
recognize it
as a class
action
Details
It is alleged that Pelephone acted in a manner that
amounts to harassment of the general public by
making repeated
inquiries aimed at
telephone
recruiting customers. The causes of action are
breach of statutory duty, negligence, invasion of
privacy and lack of good faith in negotiations. In May
2019, a ruling was given rejecting the motion. In July
2019, an appeal against the ruling was filed in the
High Court by the petitioner for approval of the class
action.
On June 24, 2020, a judgment was rendered by the
the
High Court according
recommendation of the High Court, the appellant
withdrew from the appeal and the appeal was
dismissed.
to which, on
It was alleged that the defendants marketed and / or
provided a mobile radio telephone service for cellular
devices made by Xiaomi, from which it was not
possible to call the emergency numbers in Israel.
On July 26, 2020, a judgment was rendered
approving a request for consented withdraw from the
motion for approval of the class action and to dismiss
the applicants' personal claim.
It was alleged that due to a fire that broke out in one
of the switching systems operated by Pelephone, the
public was harmed on the grounds of breach of
statutory duty, deception under
the Consumer
Protection Law, negligence and unjust enrichment
and breach of good faith duties.
On October 30, 2020, a ruling was issued confirming
a settlement between
in which
Pelephone will offer a benefit in the form of 50,000
discount vouchers for the purchase of accessories
for mobile phone use, for a total of NIS 30 each,
the parties,
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Date of
Sides
Court
filing
the
claim
Type of
procedure
Details
The original
amount of the
claim
(NIS millions)
including VAT, with a cumulative value of up to NIS
1.5 million, and will also pay compensation to the
representing plaintiffs and the plaintiffs’ attorneys’
fees in a total of approximately NIS 350.
d.
Novem
ber
2018
Custome
r against
Pelepho
ne
District
(Tel
Aviv)
Monetary
claim
together
with a
motion to
recognize it
as a class
action
Approx. 200
It is alleged that due to the disruptions that occurred
in the Pelephone network, the defendant owes
compensation to its customers due to breach of
contract with its customers, as well as the license
provisions and various
the
Communications Law. On February 3, 2021, a
judgment was rendered confirming a settlement
between it and the applicants in the two proceedings,
relevant
which
customers with benefits with a total value of NIS 1.4
million.
includes compensation
including
laws,
the
to
3.17. Goals and business strategy
Pelephone's strategic goals are continued growth in its customer base while promoting a variety of
packages and solutions to customers and promoting synergies with the Group's companies,
continuing to develop innovation and network technologies and providing excellent service.
Continued streamlining and improvement in the cost structure.
3.18. Expected development in the coming year
In 2021, a number of factors are expected to affect Pelephone's activity, the main ones being:
3.18.1. Continuing competition and increasing the value to the customer
Pelephone expects that in 2021 the transition of subscribers between the companies will
continue, and that the competition will focus on increasing the value and volume of
browsing to the customer in the packages offered to him.
3.18.2. Cellular network innovation and products
In 2021, Pelephone is expected to continue to promote a number of services and products
that will enable increased revenue and image advantage over competitors: cyber and IoT
services and continued focus on large device launches, at the same time as the
implementation of the deployment plan of the 5G network.
3.18.3. Increasing service consumption by Pelephone subscribers
Pelephone expects that as a result of an increase in the volume of browsing included in the
packages, the trend of increasing the consumption of data communication volume on the
network will continue.
3.18.4. Digital transformation
In 2021, Pelephone is expected to continue to develop and expand its digital service and
sales channels.
3.18.5. Synergies with the subsidiaries in the Group
In 2020, Pelephone continued to implement synergy processes with the Group's
subsidiaries. For details, see section 1.8. These processes are expected to continue in
2021 and reduce Pelephone’s costs.
3.18.6. 5G network
In 2021, Pelephone is expected to continue the deployment of the 5G network, and promote
the marketing and sale of services based on this technology.
Pelephone's assessments regarding developments in the coming year presented in this
section above are forward-looking information within its meaning in the Securities Law.
These assessments are based, among other things, on the state of competition in the
cellular field, the existing regulatory situation and the manner in which the new regulatory
changes are implemented. These assessments may not materialize, or materialize in a
materially different way than described above, depending, inter alia, on the structure of
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
competition in the market, changes in the consumption habits of cellular customers,
technological developments and regulation begun in the field.
3.19. Discussion of risk factors
The following are risk factors arising from the macroeconomic environment, the unique
characteristics of the industry in which Pelephone operates, and risk factors unique to Pelephone.
3.19.1. Macroeconomic risk factors
3.19.1.1 Exposure to changes in exchange rates - Pelephone is exposed to risks
due to changes in exchange rates as most purchases of end equipment,
accessories, spare parts and infrastructure are made in US dollars, while
Pelephone's income is in shekels. Erosion of the shekel against the dollar could
hurt Pelephone's profitability if it is not possible to adjust selling prices in the short
term.
3.19.1.2 Pandemic - at the beginning of 2020, an outbreak of the COVID-19 virus
began worldwide, which is an incident with many consequences, including
macroeconomic. Following the pandemic, many countries, including Israel, are
taking significant steps in an attempt to prevent the spread of the virus, such as
restrictions on civilian movement and gatherings, employment restrictions,
transportation restrictions on passengers and goods, closing borders between
countries and so on. As a result, the event and the actions taken as aforesaid
have significant implications for many economies as well as for the capital
markets in the world. During 2020, as a result of the COVID-19 crisis, there was
a significant damage to revenue from migration services. Along with this
decrease, Pelephone took extensive measures to reduce expenses, which
partially offset the decrease in these revenues. As of the date of approval of these
financial statements, Pelephone's working assumption regarding the continued
spread of the COVID-19 pandemic is that measures to limit the spread of the virus
will continue at varying intensities during 2021 along with a long and gradual
recovery in aviation and international tourism. In accordance with and subject to
the above assumptions, Pelephone anticipates that the impact of the COVID-19
pandemic on its operations will be primarily reflected in declining revenues from
roaming services, as a result of the effects of the pandemic on aviation and
international tourism, with no significant adverse effects in other areas of activity.
At the same time, this is a variable incident that is not controlled by Pelephone,
and therefore the continuation of the crisis or its exacerbation beyond
Pelephone's assumptions as detailed above, as they occur, may have a material
adverse effect on Pelephone's results. These effects may be reflected, inter alia,
in the injury, in addition to the assessments as stated above, in income from
roaming services. The prolongation or exacerbation of the crisis may also affect
revenues from the sale of end equipment, employee availability, customer service
and technician activity systems, supply chain and amounts and dates of the
collection from customers.
3.19.2. Industry risk factors
3.19.2.1 Infrastructure investments and technological changes - the cellular market
in Israel and around the world is characterized by significant capital investments
in the deployment of infrastructure. Frequent technological changes in the field of
infrastructure and end equipment, as well as the difficult struggle over various
market segments, impose high costs on the companies operating in the market,
which are forced to update their infrastructure technologies from time to time.
3.19.2.2 Competition - the cellular market in Israel is characterized by saturation in
the penetration rate, fierce competition and a high number of operators, and is
also exposed to effects as a result of technological and regulatory developments.
The costs of setting up, maintaining and operating the cellular network in relation
to the number of subscribers are expected to be higher in Pelephone in light of
the fact that it does not operate in the network sharing model. The end equipment
market is also characterized by fierce competition between cellular operators and
in front of stores that sell end equipment in parallel imports.
3.19.2.3 Customer credit - sales of end equipment are mostly made by granting
credit. The vast majority of this credit that is not covered by collateral is at risk. It
should be noted, however, that the credit is spread among a large number of
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
customers and Pelephone has efficient and experienced collection mechanisms.
3.19.2.4 Regulatory developments - in the field of Pelephone's activities, there is a
trend of legislation and standards in connection with issues such as increasing
competition, setting rates, the environment, product warranty and ways of repair
thereof, regulating interconnectivity rates and more. The regulatory intervention
in the field of activity may materially affect the structure of competition and the
operating costs of Pelephone.
(determined
3.19.2.5 Electromagnetic radiation - Pelephone operates hundreds of transmission
facilities and sells end equipment that emits electromagnetic radiation (see
section 3.13). Pelephone works to ensure that the levels of radiation emitted from
the transmission facilities and end equipment sold by it do not exceed the
permissible radiation levels according to the guidelines of the Ministry of
Environmental Protection
international
standards). Although Pelephone operates in accordance with the guidelines of
the Ministry of Environmental Protection, if it turns out that there are health risks
or if there are deviations from the radiation facilities at the transmission sites or
end equipment, which has a health risk, this may have an adverse effect due to
reduced use of Pelephone services, difficulty in renting sites, claims for
compensation for bodily and property damages to a considerable extent and
attempts to implement indemnity deeds deposited by planning institutions in
connection with Article 197 of the Planning and Construction Law. Pelephone's
third party insurance policies do not currently cover insurance for electromagnetic
radiation.
in accordance with
3.19.2.6 Website licensing - construction and operation of cellular antennas,
requires building permits from the various planning and construction committees,
a procedure that requires, among other things, obtaining a number of approvals
from government bodies and series bodies. For a list of the difficulties
licensing websites, see
encountered by Pelephone
sectionError! Reference source not found.. These difficulties can impair the
quality of the existing network and even more so the deployment of a new
network.
in setting up and
3.19.2.7 Serious faults in the information systems and engineering systems -
Pelephone provides its services through various infrastructure systems, including,
among others, switches, data transmission and access transmission networks,
cables, computer systems, physical infrastructure and more (“the systems").
Pelephone businesses have a high dependence on these systems. Some
Pelephone systems have backup, but at the same time, in the event of damage
to some or all of the above systems, either due to a large-scale technical
malfunction, due to a natural disaster (such as an earthquake, fire, etc.), or due
to damage to physical infrastructure and due to malicious damage (such as the
introduction of viruses and cyber attacks as detailed below), there may be
significant difficulties in providing services, including in the event that Pelephone
is unable to return the systems to service quickly.
3.19.2.8 Information security, customer data protection and cyber risks - as a
leading cellular company that provides service to hundreds of thousands of
customers, Pelephone is a target for cyber attacks, which aim to harm the use of
information systems or the information itself. This type of assault activity or
intrusion event may cause business disruption, information / money theft, damage
to reputation, damage to systems and information leakage.
Pelephone is experiencing cyber attacks handled by it. Pelephone operates
information security systems to protect against the intrusion of an unauthorized
person into the network and / or critical systems. Pelephone monitors the
implementation of its protection policy, which includes an examination of its level
of effectiveness and readiness. In this context, Pelephone performs tests and
assault drills for various scenarios (including through external companies that
specialize in the field).
Despite Pelephone's investments in measures to reduce such risks, it is unable
to guarantee that these measures will succeed in preventing damage and / or
disruption to the systems and information related to them.
3.19.2.9 State of emergency - in times of emergency, certain provisions of the
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
legislation and provisions of the mobile radio telephone license allow persons
authorized under the law to take steps required to ensure state security and / or
public safety, including: charging Pelephone (as a mobile radio telephone license
holder) to give service to the security forces, comandeering of engineering
equipment and facilities of Pelephone, and even taking control of the system.
3.19.2.10 Lack of frequencies - for details on the lack of frequencies, see section
3.8.2.1. In many cases, frequency allocation is carried out through tender
procedures, in a manner that may increase the costs of purchasing the
frequencies and place the cellular companies that do not receive the allocation as
part of the tender at risk of competitive inferiority.
3.19.3. Risk factors of Pelephone
3.19.3.1 Property risks and liabilities - Pelephone is exposed to various property
risks and liabilities. Pelephone is assisted by an external insurance consultant
who is an expert in the field. Pelephone has insurance policies that cover the risks
that are acceptable to them, Pelephone is subject to the limitations of the terms
of the policies, such as: various property insurance, various liability insurance,
loss of profits, third-party liability insurance and officers' insurance. However,
Pelephone's insurance policies do not cover certain types of risks, including
certain malfunctions caused by negligence or human error, radiation risks,
terrorism and more.
3.19.3.2 Serious faults in the cellular network - Pelephone's cellular network is
spread throughout Israel through the network's core sites, antenna sites and other
systems. Pelephone’s sytems are completely dependent on these systems, which
are sometimes, temporarily, in a state of partial survival. Malicious damage or
malfunction on a large scale can adversely affect Pelephone’s business and its
results.
3.19.3.3 Damage caused by force majeure, war, disaster - damage to the switching
farms and / or servers on which Pelephone concentrates its core activity, may
adversely affect Pelephone's business and its results.
3.19.3.4 Epidemic malfunctions in devices - various exposures resulting from
Pelephone's liability as an importer due to manufacturer malfunctions in devices
that will not be supported by the manufacturers.
3.19.3.5 Legal proceedings - Pelephone is a party to legal proceedings, including
class actions, which may result in a charge of substantial amounts, which cannot
be estimated, and no provision has been made for some of them in Pelephone’s
financial statements. These class actions can reach large sums, as a substantial
portion of the state's residents are consumers of Pelephone, and a claim relating
to a small damage to a single consumer may become a material claim to
Pelephone if it is recognized as a class action applicable to all or a significant
portion of consumers.
3.19.3.6 Significant suppliers and customers - for agreements with significant
suppliers and customers, see sections 3.10 and 3.15. Some of Pelephone's
agreements, including with its key customers, are timed. There is no certainty that
these agreements will be renewed at the end of their term or that options granted
to customers to extend them will be exercised. In addition, Pelephone may be
dependent on certain suppliers as specified in the section3.10.2.
3.19.3.7 Labor relations - Pelephone has a collective agreement with the Histadrut
and the Employees’ committee, which effects most of its workers. The collective
agreement may reduce administrative flexibility and impose additional costs on
Pelephone (see section 3.9.4). In addition, the implementation of personnel-
related plans may cause unrest in labor relations and harm to Pelephone's
ongoing operations.
3.19.3.8 Streamlining procedures - as described in section 1.8. Pelephone
implements streamlining plans that involve, among other things, the management
of management resources and organizational changes and the reduction of the
workforce, in parallel with the management of significant infrastructure and other
projects. Streamlining procedures, by nature, carry with them the risks of loss of
knowledge, turnover of employees, shift of managerial focus, etc.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
3.19.3.9 Impairment of Pelephone properties- in accordance with accounting
standards, Pelephone conducts a periodic examination of the impairment of
assets in respect of which indications of impairment have been identified. For
details on the risk factor relating to the recognition of impairment losses, see
section2.20.12.
3.19.3.10 Frequency ranges - the 700, range 850, range 1800, range 2100, range
2600 and 3500 MHz ranges. The frequencies are exposed to interruptions that
may affect the quality of service of the networks operated by Pelephone. Among
the other reasons that may cause interruptions, it should be noted that the 850
range is also used for terrestrial television broadcasts, so that television stations
broadcasting in the Middle East in the same range of frequencies cause
interference on Pelephon’s UMTS / HSPAAt 850 MHz network. In addition, the
Jordanian networks also use the same frequency range of 2100 MHz that
Pelephone uses and in light of the limited cooperation between the operators in
Jordan and Pelephone, this may have an effect. In addition, Pelephone must
avoid interfering with satellite broadcasts made at several points in Israel at 3500
frequencies, which limits the operation of 5G services around these points.
For details on the implications of switching frequencies in the first giga field, see
section 3.8.2.3.
3.19.3.11 Maintaining a sufficient cash flow - Pelephone must maintain a sufficient
cash flow in order to meet its long-term business plan. The lack of sufficient cash
flow may adversely affect Pelephone's business and its ability to make large-scale
online investments, and may make it difficult for it to cope with competitive threats
in the field.
Below is a ranking of the impact of the risk factors described above on
Pelephone's activities as estimated by Pelephone's Management. It should be
noted that Pelephone's assessments below regarding the degree of influence of
the risk factor reflect the degree of influence of the risk factor in assuming the
materialization of the risk factor, and the aforesaid does not express an
assessment or give weight to such chances of materialization. The order in which
the risk factors appear above and below is not necessarily according to the
degree of risk.
Risk factors summary table - cellular telephony
The extent of the impact of
the risk factor on
Pelephone's operations as
a whole
Medium
effect
High
effect
Small
effect
Macro risks
Exposure to changes in exchange rates
Pandemic
technological
investments and
Industry risks
Infrastructure
changes
Competition
Customer credit
Regulatory developments
Electromagnetic radiation
Website licensing
Serious malfunctions in information systems and
engineering systems
Information security, customer data protection and
cyber risks
Economic emergency
Lack of frequencies
Risk factors of Pelephone
Property risks and liabilities
Serious malfunctions in the cellular network
Damage due to force majeure, war, disaster
Epidemic malfunctions in devices
Legal proceedings
120
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
X
X
X
Substantial suppliers and customers
Labor relations
Streamlining procedures
Impairment of Pelephone's assets
Frequency ranges
Maintaining sufficient cash flow
The information contained in section 3.19 and Pelephone's assessments regarding the
effect of the risk factors on Pelephone's activities and business, are forward-looking
information as defined in the Securities Law. The information and assessments are
based on data published by the Ministry of Communications, Pelephone's
assessments of the market situation and the structure of competition in it and
regarding possible developments in the Israeli market and economy. The actual
results may differ materially from the estimates given above if there is a change in one
of the factors taken into account in these estimates.
X
X
X
4. Bezeq International - Internet, international communications and network
endpoint services
4.1. General
4.1.1. The structure of the field of activity and changes that apply to it
Bezeq International operates in a number of key areas: the provision of Internet access
services (ISP); International telephony services; Interior telephony services; network
endpoint services; as well as providing ICT solutions (information and communication
systems), DATA (data communication) and PBX services (switchboards).
Bezeq International's international telephone services, similar to the services of other
international operators, are provided based on Bezeq and Hot's interior networks, as well
as on the cellular networks, for the purpose of connecting the subscriber to the international
hub.
Regarding regulatory changes in the Internet services market, which are expected to
materially affect Bezeq International's activity in this market, see section 4.11.5.4.
4.1.2. Legislative and regulatory restrictions that apply to Bezeq International
Most of Bezeq International's areas of activity are regulated mainly by the Communications
Law and regulations thereunder, and the terms of the license granted to Bezeq International
(see section 4.11).
Regarding major developments in the regulation applicable to Bezeq International, see
section 4.11.5.
4.1.3. Changes in the scope of activity in the field and its profitability
For data on changes in the scope of Bezeq International's operations and its profitability,
see sections1.5.4.3 and-4.3.
4.1.4. Developments in the market and in customer characteristics
The international call market in Israel has been characterized in recent years by a decrease
in the number of call minutes (inbound and outbound), mainly due to the service packages
offered by the cellular companies, which include international call minutes and a multiplicity
of free applications that allow calls over the Internet. The erosion trend in the international
call market continued.
In the Internet access market, there was an increase in demand for Internet services in
2020. This is probably due to the consequences of the COVID-19 virus crisis, which led to
an increase in the volume of distance learning and work.
4.1.5. The main barriers to entry and exit
4.1.5.1 The main barriers to entry into the international call market are the need
to obtain a license under the Communications Law and make investments in
infrastructure (the volume of investments required in infrastructure is lower than
the
in NIO or cellular infrastructure), affected by frequent
technological changes. In IPV technology in this area, the impact of these barriers
is significantly reduced.
investments
4.1.5.2 The main barrier to entry into the DATA and Internet services market is
the need for infrastructure investments (international capacity, Internet access)
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and a wide range of services.
4.1.5.3 The main barriers to exit from these markets stem from long-term and
binding agreements with infrastructure providers and from investments that
require a long time to return. In addition, Bezeq International is committed to
providing service to its customers during the contract period with them.
4.1.6. Substitutes for Bezeq International products and the structure of competition in the
international call market and changes that apply to it
In the international call market - the use of VoIP technology, the transfer of international
calls over the Internet to other users of this technology, as well as to the users of the TDM
networks, through the use of software products (such as Skype, WhatsApp or Zoom) and
in the services of telecommunications providers abroad, as well as the attractive rates of
use of these services (including the absence of usage fees) lead to a continuous increase
in the number of users, and as a result - to harm to Bezeq International's revenues. At the
same time, there are currently more than ten international operators, licensed to provide
international Bezeq services by the Ministry of Communications.
4.1.7. The structure of competition in the Internet market and the changes that apply to it
In the field of Internet access services (ISP), diverse licenses have been provided so far to
provide access services to 80 companies, who may also provide, inter alia, International
operator services.
For more details regarding competition in the field of activity, see section 4.6.
4.2. Products and services
The following is a list of Bezeq International's main products and services:
4.2.1. Internet services
In the field of Internet services, Bezeq International provides: Internet access services
(ISP) for private and business customers, including the provision of required end equipment
and support for it based on DSL infrastructure, transmissions or cables, and a service that
includes Bezeq's Internet access infrastructure (within the wholesale market); Hosting
services - web hosting services and servers in a dedicated facility, including value-added
services (such as monitoring and control); Information security services, Internet
connection and LAN network security services, using required end equipment or software,
including monitoring; Data services
international data
that
communications solutions for business customers, globally deployed; and Wi-Fi access
services, including in public complexes (Hotspot); Bezeq International also markets
packages that include the Sting TV brand of the DBS company - a television services
platform based on the Internet (along with Internet access services), and in addition, DBS
markets the Internet access services of Bezeq International. The packages are subject to
the “detachability” obligation (see section 1.7.2.2).
IP-based
include
Bezeq International provides the above-mentioned Internet services mainly through a fully
and exclusively owned underwater cable between Israel and Italy (JONAH) launched in
December 2011. Among the ISP providers operating in Israel, Bezeq International is the
only one that owns an underwater cable. The ownership of the underwater cable frees
Bezeq International from its dependence on infrastructure providers, and also enables it to
offer its customers better quality browsing performance.
4.2.2. VOICE services (telephony)
In the field of VOICE services, Bezeq International provides: Direct international dial-up
services (IDD) to business and private customers; Free international dial-up service for
business customers; international calls routing and termination services (Hubbing) -
Transferring international calls between foreign communication providers (world-world);
Calling card service, which allows dialing from Israel to abroad and from abroad to Israel,
on prepaid and postpaid routes, and the 1809 service, which allows dialing from Israel to
abroad. In addition, Bezeq International provides interior telephony services.
4.2.3. International data Services
Providing international data communication solutions for business customers, including
global deployment, according to customer needs.
The services are provided through Bezeq International's underwater cable and the optical
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
cables deployed from Israel to Europe, in which Bezeq International has long-term use
rights, as well as through its business partnerships with telecommunications providers such
as British Telecom, which provide its customers with global network services.
In addition to the above services, Bezeq International offers holders of licenses to provide
international Bezeq services and Internet access licenses, international capacity (in the
form of rent, or purchase of indefeasible use rights), based on Bezeq International's
underwater cable and use rights in continental Europe and other international networks.
4.2.4. ICT solutions for business customers
Bezeq International provides ICT (information and communication systems) solutions to
business customers. The ICT solutions for the customer includes extensive communication
services that include server and website hosting services, maintenance and technical
support services, networking and system services, security & risk management solutions,
IP-based managed services, Cloud computing services, online backup services and
equipment sales. Bezeq International adopts a broad customer service model, with one
contact vis-à-vis the customer and it takes comprehensive responsibility for the entire
service ("one supplier, one responsibility").
PBX Services (swithcboards)
Bezeq International markets and maintains communication systems that include
exchanges, telephony networks and IP communications, mainly for its business customers.
As part of the service contracts, Bezeq International provides maintenance services from
a variety of PBX manufacturers. The services are provided to lobbies, exchanges and
network terminals (endpoints), for extensions intended to be used on both outbound and
inbound lines.
4.3. Revenue
The following are data regarding Bezeq International's revenues (in NIS million):
Internet services
2020
596
2019
632
2018
659
Rate of total Bezeq International revenues
46.89%
47.23%
47.35%
VOICE and Business Communication services
(PBX, ICT, DATA)
675
707
732
Rate of total Bezeq International revenues
53.11%
52.77%
52.65%
Total revenue
4.4. Customers
1,271
1,339
1,391
Bezeq International has no dependence on a single customer, and has no customer whose revenues
constitute 10% or more of its total revenues.
Below are data about the distributioin of revenue from private and business customers (NIS
millions)56:
Revenue from private customers
Revenue from business customers
Total revenue
2020
401
870
1,271
2019
441
898
1,339
2018
468
923
1,391
Regarding Bezeq International customers and their characteristics, the diverse consumption
characteristics for purchasing Internet packages among the public have led to a certain percentage
of customers purchasing an ISP service from more than one ISP when in practice they use the
services of only one ISP. On September 10, 2020, the Ministry of Communications wrote to the
operators in a letter in which it raises concerns that some subscribers to Internet services or other
services, such as an email box, do not use them and are not even aware of it. The Ministry
recommends that operators act to inform and stop charging subscribers who do not use these
services, and also requests periodic reports in the matter, during the next 6 months. It was also stated
that the Ministry will consider in the future whether to establish binding provisions in the matter, in
case proactive actions will not lead to a significant reduction in this matter. Therefore, on November
8, 2020 another letter was received from the Ministry of Communications, according to which at the
56 The data are after changing the classification of small customers (SOHO) from private customers to business customers carried
out in 2019 (and also applied to 2018 and 2017 data).
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
next reporting point (set for December 17, 2020) the data reported to the Ministry by the media
operators will reflect the reduction of the phenomenon most significantly, that reference should be
made at this time to the question of how the licensee acts to prevent recurrence of the phenomenon,
and, as noted in his previous letter, that as long as the phenomenon is not significantly reduced, the
Ministry will take various actions, including the determination of binding provisions in this matter.
Bezeq International is working to reduce the phenomenon while addressing its customers in
accordance with what is stated in the letters.
As part of Bezeq International's preparations to operate in the outline of notifying and treating
customers who pay it by virtue of an agreement and do not use the ISP services for an extended
period and further to the Ministry of Communications' recommendation as stated above, an up-to-
date valuation of Bezeq International was performed. Regarding the valuation, see Note 11.6 to the
2020 statements. Also, in this regard, see two Bezeq immediate reports from Octoebr 30, 2020
(including regarding a request for approval of a class action in this context) as well as another
immediate report from Bezeq dated November 8, 2020. The above reports are included in this
statement by way of reference. Regarding motions for approval of class actions in this matter that
were filed against Bezeq International, see section 4.12.
4.5. Marketing, distribution and service
Bezeq International has sales channels for the private market, which include telephone recruitment
and retention centers, nationally-deployed direct sales system, technical support systems and
customer service, as well as a system of distribution channels, which includes external centers for
resellers and dealers. The sales channels for the business market include customer recruitment
centers and service centers and solutions for businesses and business customer managers. In
addition, Bezeq International's services are also sold by Bezeq, as part of the marketing of basket of
joint services - "Reverse Bundle" (see section1.7.2.2), and Bezeq International services are sold by
DBS, as part of the marketing of "Triple" packages (see section4.2.1).
4.6. Competition
4.6.1. ISP Services
4.6.1.1 The market is saturated with competitors, the main ones being Cellcom,
Partner, and Hot Net.
Bezeq International estimates its market share in the field of Internet services as
of December 31, 2020 at about 34%57.
4.6.1.2 Competition in 2020 is characterized by erosion in rates.
4.6.1.3 Developments in 2020:
a) Continued
trend of selling service baskets, especially against
the
backgroundThe activity of a wholesale sales model (supplier + infrastructure)
in 2020.
b) Competitors' focus on promoting browsing services at high browsing rates.
Some of the competitors have launched browsing packages at a particularly
high browsing rate, among other things through fiber-optic infrastructure
deployed thereby.
c) There is growing competition between Internet access providers as part of
reverse bundle packages.
d) Rise in the trend of selling "Triple" packages by competitors, which include,
in addition to the television services, a provider and Internet infrastructure in
a non-detachable basket of services.
e) Regarding the decision of the Minister of Communications dated July 20,
2020 to adopt (with changes) the recommendation of the inter-ministerial
team regarding the deployment of ultra-broadband landline infrastructure in
Israel (See sections2.7.2,2.16.12) - the deployment of fiber by Bezeq is
expected to improve Bezeq International's competitiveness and to enable it
to increase revenues from its customers.
4.6.2. International telephony services
57 Bezeq International's assessment of its market share in the field of Internet access services is based on an external telephone
survey conducted for Bezeq, and is not based on significant data held by Bezeq to date.
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4.6.2.1 As of the end of 2020, about ten companies are operating in the market
(among them Bezeq International, Cellcom, Partner, Golan Telecom and Hot
Mobile).
Bezeq International estimates that its market share in the field of outgoing calls
from customers as of December 31, 2020 is approximately 22.3%58.
4.6.2.2 General characteristics of the competition in 2020:
a)
In 2020, the number of call minutes made through international telephony
continued to decline, among other things, due to an increase in the use of
various applications for making calls, as well as due to the service packages
offered by cellular companies, which include international call minutes,
including an increase in the use of services that enable online calls and
meetings, while reducing the use of international telephony services.
b) Competition is focused on defined segments of the population who are more
active in this field.
c) The product is a commodity (no brand importance).
4.6.3. Communication solutions for the business segment
4.6.3.1
In the field of ICT - Bezeq International faces competitors such as Bynet,
Taldor, IBM and more. In 2020, Bezeq International continued to establish its
position in the ICT market.
4.6.3.2 Network endpoint services - the traditional central area is characterized by
a large number of competitors and fierce competition, which has led to the erosion
of service prices.
4.6.4. Bezeq International promotes its business by emphasizing the distinction from its
competitors, which stems from having its own international infrastructure (JONAH
cable) that provides quality browsing performance, as well as its leading customer
service.
4.6.5. The fact that Bezeq International does not own interior access infrastructures is a
competitive disadvantage compared to competitors that control such infrastructures.
4.7. Fixed assets and facilities
Bezeq International's fixed assets include switching and Internet equipment, underwater cable,
central equipment and routers for rent, office equipment, computers, software licensing, and leased
improvements. Bezeq International has five server farms throughout Israel.
Bezeq International has SoftSwitch switches from the Dialogic company. These switches are used
to route Bezeq International's VOICE movement. Value-added services, including calling cards, are
based on a smart (IN) system. Bezeq International is working to upgrade the CRM (customer
management) system to an advanced platform in the Salesforce cloud together with Pelephone and
DBS. Bezeq International has dependence on the Salesforce system and services, due to their
importance for managing relationships with its customers. System failures or the cessation of
services by this provider are likely to cause operational difficulty until the matter is rectified or the
system / provider are replaced which may take a long time.
Bezeq International's technological infrastructures that support the voice, data and the Internet is
deployed on a number of sites, in Israel and abroad, among others, to ensure, when necessary, high
survivability for the provision of services.
Bezeq International has long-term agreements for the rent of the two main buildings in which it is
housed. For one of the buildings, the lease period is until March 2024, with a number of options for
leaving for Bezeq International during the said period. The lease period in the other building is until
December 2021 (with three equal options for extension until 2027). Bezeq International has
additional lease agreements in connection with warehouses (including the logistics center), server
farms, and buildings in which call centers are used for its operations.
4.8. Human capital
Below are details about the number of Bezeq employees International in years2019 and 2020:
58 Based on publications from the Ministry of Communications regarding the number of minutes spent in the third quarter of 2020.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
31.12.2020
12/31/2019
Administrative employees
Service and sales representatives
Total
827
484
1,311
863
556
1,419
The number of employees included in the table includes employees employed part-time. Total jobs59
Bezeq International as of December 31, 2020 was 1,228 compared to 1,329 as of December 31,
2019.
Organizational structure
The following is a diagram of Bezeq International's organizational structure as of the date of the
report:
Board of
Directors
CEO
Deputy CEO
HR
Divison
Intern
al
Audit
*
Finance
and
Econom
ics
Division
Technologie
s
informatio
n Division
Global
Busniess
es and
Business
Solutions
Division
Business
Custome
rs
Division
Custo
mer
Divisi
on**
Marke
ting
Divisi
on
Public
Relatio
ns
Legal
advice
and
regulatio
n
Engine
ering
Divisio
n
(*) The internal auditor is a Pelephone employee.
(**) The director of the Private Customer Division is the Deputy CEO.
As part of the implementation of the synergy processes with the Group's subsidiaries, Bezeq
International's CEO, Mr. Ran Guron, also serves as the CEO of Pelephone and DBS. In addition,
most of the VPs who serve on Pelephone also serve as VPs at DBS and Bezeq International.
On July 11, 2019, Bezeq International signed a collective agreement between it and the Histadrut
and the Employees’ representation, which includes streamlining and synergy procedures for the
period up to December 31, 2021. According to Bezeq International’s plan and in accordance with the
agreement, Bezeq International will, among other things, reduce the employment of up to 325
employees (of whom 150 are permanent, some as part of a voluntary retirement), in addition to the
option of not recruiting employees instead of employees terminating their employment. The
agreement also includes providing a one-time bonus to employees who will not be included in the
retirement plan. The estimated cost of the agreement is about NIS 60 million, assuming the full
realization of Bezeq International's rights to such stramlining and the existence of conditions for the
provision of additional economic benefits to employees.
Regarding streamlining processes and internal organizational changes at Bezeq International,
Pelephone and DBS, see section 1.8.
On November 28, 2019, Bezeq International received a notice from the chairman of the Histadrut
and the Bezeq International Employees’ Committee that included a demand for collective bargaining
59 Total monthly working hours divided by the monthly working hours quota.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
with the workers' representatives against the backdrop of the transaction to acquire control of Bezeq.
On October 11, 2020, Bezeq International was notified by the New Histadrut - the Internet and High-
Tech Cellular Workers' Union, of a declaration of a labor dispute in accordance with the Labor
Disputes Settlement Law, 5717-1957 and a strike from October 26, 2020 onwards (“the Notice").
According to the Notice, the issues in the dispute are: Unilateral intention to make changes in the
communications market and allow Bezeq to enter the field of ISP services and serve as an Internet
provider, in a manner that could harm Bezeq International to the point of real closure and layoffs,
changes in working conditions, rights, status, job security and organizational strength. The demands
of the employees’ representatives are to refrain from unilateral steps and to present them to finished
facts regarding those changes, as well as a demand for consultations and negotiations for the
purpose of signing a special collective agreement regarding employees’ rights in light of said changes
and their consequences, including a series of safety nets..
On December 28, 2020, Bezeq International was notified by the New Histadrut - the Internet and
High-Tech Cellular Workers' Union, of a declaration of a labor dispute in accordance with the Labor
Disputes Resolution Law, 5717-1957 and a strike from January 10, 2021 onwards ("The Notice").
According to the Notice, the issues in the dispute are: Bezeq International intends to close the dining
room used by Bezeq International employees, for the purpose of using the area for the business
activities of Bezeq International.
4.9. Suppliers
4.9.1. Foreign operators
Bezeq International has collaborations with about 200 foreign operators, as part of which
Bezeq International forwards and receives international telephone calls from these
operators (including calls leaving Israel, entering Israel, and calls between various
destinations outside Israel) to about 240 destinations worldwide.
4.9.2. Capacity providers
Most of the interior capacity used by it for the purpose of providing its services is purchased
by Bezeq International from Bezeq.
Most of the international capacity that Bezeq International uses is transmitted through the
underwater cable it owns. As a backup, Bezeq International uses the capacity purchased
from Med Nautilus and Cyprus Telecommunications Authority (CYTA).
As part of its contract with Med Nautilus, Bezeq International acquired the indefeasible right
of use, in an indefinite and non-specific attribution, in the communication capacity
transmitted through the underwater cable system operated by Med Nautilus between Israel
and Europe. The use periods were extended until July 2030. For the said use rights, Bezeq
International paid one-time payments, close to the date of commencement of the use of
the capacity.
As part of her engagement with CYTA, Bezeq International has acquired the indefeasible
right of use, in an indefinite and non-specific attribution, in the communication capacity
transmitted through the submarine cable system operated by CYTA between Cyprus and
Europe. The period of use is at least until May 2022, with the possibility of extending the
period.
4.10. Taxation
See Note 7 to the 2020 statements.
4.11. Restrictions and supervision of Bezeq International's activities
4.11.1. Restrictions by virtue of laws
According to the Communications Law, performing Bezeq operations and providing Bezeq
services, including international Bezeq services and Internet access services, require a
license from the Minister of Communications. The Minister is authorized to change license
terms, add to them or derogate from them, while considering, among other things,
government policy in the field of Bezeq, considerations in the public interest, adjusting the
licensee to provide services, the license contribution to competition in the field of Bezeq
and its level of service.
The law authorizes the Director General of the Ministry of Communications to impose
financial sanctions due to various violations of the provisions of the law and of orders and
provisions issued under it, as well as due to violation of conditions in the license.
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4.11.2. Licenses
Bezeq International has a unified general license for the provision of Bezeq services (the
"Unified License"), which is valid until May 2, 2025.
The following are the main instructions from the unified license:
a)
In certain circumstances, the Minister may change the terms of the license,
add to them or detract from them, and in some cases even revoke it.
b) The license is not transferable and includes restrictions on the purchase or
transfer (including by way of lien) directly or indirectly of control of 10% or
more of any means of control in Bezeq International, including the lien of
such means of control, unless prior consent of the Minister.
c) Bezeq International must provide an interconnectivity service on equal terms
to any other operator and must avoid any discrimination in performing
interconnectivity.
d) Bezeq
International must
the provision of
infrastructure services to a licensee who is an affiliated company (as defined
in the license) over another licensee.
from preferring
refrain
e) Bezeq International may not sell, rent, or mortgage property from the
properties used to carry out the license without the consent of the Minister of
Communications, except for certain exceptions set forth in the license.
f)
In times of emergency, a person authorized to do so by law has the authority
to give Bezeq International various instructions regarding the manner in
which it operates and / or the manner in which the services are provided.
g) The license specifies the types of payments that Bezeq International may
charge its subscribers for Bezeq services, and the reports it must provide to
the Ministry of Communications. The license also stipulates the authority of
the Minister to intervene in rates, in some cases.
h) The license requires Bezeq International to have a minimum level of service.
In accordance with the requirement of the Ministry of Communications,
Bezeq International provides a bank guarantee, in the amount of NIS 2
million, to fulfill the conditions of the unified license.
4.11.3. On July 9, 2014, the Minister of Communications granted Bezeq International the
powers related to real estate, which are listed in Chapter F of the Communications
Law, including entering the land for the purpose of laying a network and maintaining
it (see section 2.16.5).
4.11.4. Payments for interconnectivity
In the matter of interconnectivity fees paid to the NIO and the cellular operator, see section
1.7.4.1.
4.11.5. Major regulatory developments
4.11.5.1 For possible changes in the communications market that also affect Bezeq
International following the Competition Expansion Policy document, see section
2.16.4.1.
4.11.5.2 For decisions made in connection with the "wholesale market" which also
have implications for the field of activity, see section 2.16.4.
4.11.5.3 Regarding the decision of the Ministry of Communications regarding the
elimination of the need to split the "reverse bundle", see section 1.7.2.2.
4.11.5.4 Also, regarding the publication of a hearing to examine the separation
between a broadband infrastructure service and an Internet access service (ISP),
see section1.7.2.2. Bezeq International is studying the details of the hearing and
examining its possible effects on its business and its ways of operation.
4.12. Legal proceedings60
60 For material reporting and material thresholds, see section2.18.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
During the day-to-day business, lawsuits were filed against Bezeq International, including motions
for approval of class actions.
4.12.1. Pending and current legal proceedings
Date
Sides
Court
a.
January
2015
District
(Central)
Client
against
Bezeq
Internatio
nal
Type of
procedure
Monetary
claim
together with
a motion to
recognize it
as a class
action
Details
It is argued that the "Moreshet" content filtering service
provided by Bezeq International to paid customers in
the religious and traditional segments does not protect
users from offensive content, and that as a result of
their exposure to this content, they were harmed. In
addition, it was argued that Bezeq International should
compensate customers who purchased content
filtering services and were not offered the basic filtering
service, which is provided at no additional charge.
In April 2018, the Court partially approved the lawsuit
as a class action (the part concerning additional
compensation in the amount of NIS 1,000, for each of
the school students who use the website filtering
software was struck out).
District
(Central)
Monetary
claim
together with
a motion to
recognize it
as a class
action
things,
is alleged, among other
It
that Bezeq
International sells its customers Internet browsing
speeds, even though the infrastructure at their place of
residence does not allow them to reach this speed. In
January 2021, the Court upheld the claim as a class
action.
Claim
amount
(NIS
millions)
About 61,
plus NIS
1,000 per
group
member
(each
student
in the
Israeli
educatio
n
system)
Unspecifi
ed
b.
March
2016
c.
April
2019
d.
October
2020
e. Novembe
r 2020
Client
against
Bezeq
Internatio
nal and
other
communi
cations
compani
es
Client
against
Bezeq
Internatio
nal and
other
communi
cations
compani
es
Client
against
Bezeq
Internatio
nal
Client
against
Bezeq
Internatio
nal
District
(Central)
District
(Central)
District
(Central)
Monetary
claim
together with
a motion to
recognize it
as a class
action
It is alleged that Bezeq International does not inform its
customers as required about the possible dangers of
using the Internet and about the possibility of joining a
free content filtering service, in violation of the
provisions of the Communications Law. In addition,
Bezeq International provides a website filtering service
and offensive content that the applicants claim is not
sufficiently effective.
Unspecifi
ed
Monetary
claim
together with
a motion to
recognize it
as a class
action
Monetary
claim
together with
a motion to
recognize it
as a class
action
things,
is alleged, among other
It
that Bezeq
International charges its customers payments for
services that it does not provide to them, ostensibly
knowing that the customer has replaced the Internet
provider and disconnected from Bezeq International.
On November 5, 2020, Bezeq International received
another motion for approval of a class action in the
same matter.
things,
is alleged, among other
It
that Bezeq
International charges fees for the provision of 'antivirus
service' and 'backup service' without actually being
provided, when according to the claim it does not
disclose to customers when concluding the contract
that they must initiate special operations including
installation of special software at the time of the
conclusion of the contract and not at the time of the
actual provision of the service.
Unspecifi
ed
Unspecifi
ed
Regarding two motions for disclosure and review of documents before filing derivative claims under Article
198A of the Companies Law against Bezeq and against Bezeq International, from October 2020 regarding
"dormant subscribers" and from November 2020 regarding asset balances in Bezeq International's books
- see section 2.18.1.
Legal proceedings completed during the reportedperiod or until the date of publication of the report
Date
Sides
Court
Type of
procedure
129
Details
Claim
amount
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
District
(Tel
Aviv)
Monetary
claim
together with
a motion to
recognize it
as a class
action
a.
June
2015
Client
against
Bezeq
Internati
onal
(The
Israeli
Consum
er
Council
replaced
the
applican
t as a
class
action
plaintiff)
(NIS
millions)
It was
not
estimate
d, but it
was
stated
that it
exceeds
NIS 3
million
It is claimed that excessive collection was made
from Internet service customers. On July 25,
2019, the Court approved the lawsuit as a class
action and ruled that the definition of the Group
would be any customer of Bezeq International
who entered into an agreement with it for a fixed
period and which after the fixed period Bezeq
International charged a higher price for the
services provided under the agreement, this was
done without receiving prior written notice in
accordance with the Consumer Protection Law,
and without giving Bezeq International consent to
receive notifications and updates by e-mail, in the
seven years prior to the submission of the
application for approval and until today. The
causes of action for which the motion was
approved are a breach of statutory duty as well
as unjust enrichment. On October 6, 2019, Bezeq
filed a motion for leave to appeal the approval
decision, the hearing of which is scheduled for
July 13, 2020.
On August 11, 2020, a hearing was held in the
High Court on the motion for leave to appeal filed
by Bezeq International regarding the approval of
the claim as a class action. During the hearing,
the High Court recommended that the plaintiff
agree to accept the motion for leave to appeal
and to reject the motion for approval of the class
action. On August 25, 2020, a ruling was given
according to which the motion for leave to appeal
was granted and the motion for approval was
denied, following the recommendation of the High
Court and the consent of the plaintiff.
4.13. Goals, business strategy and development prospects
Bezeq International has set itself the goal of continuing to lead the Internet-based services market in
Israel for private and business customers, while preserving revenues in the traditional markets:
4.13.1. Dealing with changes in the Internet market, deepening and focusing on wholesale
market packages and fiber-based services, along with managing the decline in retail
market subscribers.
4.13.2. Deepening and expanding the basket of cloud-based solutions.
4.13.3. Establishing Bezeq International's status as one of the leading ICT players in Israel,
and entering large-scale projects in the security and public sectors.
4.13.4. Increasing customer satisfaction, by deepening and expanding service openings
(automated services, social networks, etc.).
4.13.5. Straemlining and synergy with the subsidiaries in the Group.
4.13.6. Deepening synergy processes with the other subsidiaries in the Group. For details,
see section1.8.
The objectives set out above may not materialize, or materialize in part, due to regulatory
changes that may impair Bezeq International's ability to meet existing or changing market
requirements, as well as due to all other risk factors listed below.
4.14. Discussion of risk factors
The following is a description of the risk factors arising from the macroeconomic environment, the
unique characteristics of the industry in which Bezeq International operates, and risk factors unique
to Bezeq International:
4.14.1. Competition
For the effect of competition on Bezeq International's business, see section 4.6.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
4.14.2. Frequent technological changes and investments in infrastructure
Bezeq International's areas of activity are characterized by frequent technological changes.
The development of technologies that constitute attractive alternatives to some of Bezeq
International's products (such as Skype, WhatsApp or Zoom) may materially impair Bezeq
International's operations. Also, technological developments require frequent investments
in infrastructure. See sections 4.1.5.2 and 4.1.6.
4.14.3. Governmental supervision and regulation
Regarding the applicability of the provisions of the law and the licensing policy and their
effect on Bezeq International, see section 4.11. Certain changes in the regulations applied
to Bezeq International may have an adverse effect on its results and operations.
4.14.4. Internal enterprise information security
Bezeq International operates information security systems to protect against information
leaks or intrusion by an unauthorized party into the network and / or critical systems. An
intrusion event may impair the functioning or adversely affect Bezeq's business, disclose
sensitive information, and even expose Bezeq to financial sanctions and legal proceedings
against it.
4.14.5. Legal Proceedings
Bezeq International is a party to legal proceedings, including class actions, which may
result in charges in substantial amounts, which cannot be estimated, and no provision was
made for some of them in Bezeq International's financial statements. These class actions
can reach large sums, since a substantial part of Israel’s residents are consumers of Bezeq
International, and a claim relating to a small damage to an individual consumer may
become a material claim for Bezeq International if it is recognized as a class action lawsuit
against all consumers. For legal proceedings to which Bezeq International is a party, see
section4.12.
4.14.6. Failure of Bezeq International systems and cyber attacks
For details on this risk factor, see section 2.20.11, Which is also relevant to the applicability
of a risk factor in relation to Bezeq International.
4.14.7. Labor relations and streamlining procedures
Bezeq International has a collective agreement with the Histadrut and the Employees’
Committee in respect of most of its employees. The implementation of the collective
agreement may affect Bezeq International's day-to-day operations. In addition, the
implementation of manpower plans may cause unrest in labor relations and harm the day-
to-day operations of Bezeq International. As described in section1.8, Pelephone, DBS and
Bezeq International implement streamlining plans that involve, among other things, the
sharing of management resources, organizational changes and the reduction of the
workforce, in parallel with the management of significant infrastructure and other projects.
Streamlining procedures, by their nature, involve the risks of loss of knowledge, turnover
of employees, shifting of managerial focus, etc. Bezeq International has a number of open
labor disputes.
4.14.8. Impairment of Bezeq International's assets
Bezeq International conducts a periodic impairment test of assets in respect of which
identification signs of impairment have been identified in accordance with the accounting
standards. For details regarding the risk factor relating to the recording of impairment
losses, see section 2.20.12. Changes in regulations in the Internet services market (see
section 1.7.2.2) may lead to damage to Bezeq International's results and / or a decrease in
the value of its assets. Regarding the effect of the treatment of Bezeq International
customers who do not use ISP services on the value of Bezeq International's assets, see
section 4.4.
4.14.9. Pandemic
In early 2020, an outbreak of the COVID-19 virus has begun in the world. Following this,
Bezeq International monitors developments in connection with this outbreak and pandemic
incidents in general and examines potential implications for its business operations, with
some of the implications already being reflected in Bezeq International. These
consequences can be manifested, and some of them are already manifested, among other
things, in damage to the supply chain and the customer service system. According to
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
estimates by Bezeq International, as of the date of the report, no significant decrease in
Bezeq International's revenues is expected, which can be attributed to the consequences
of this outbreak. At the same time, naturally, this is a variable event that is not controlled
by Bezeq International, and therefore the widespread spread of the virus, and / or decisions
of countries and authorities in Israel and around the world in this regard, may affect Bezeq
International accordingly.
4.14.10. Cash flow
Bezeq International must maintain sufficient cash flow for it to meet its long-term business
plan. Cash flow may be affected in cases of planning gaps, as well as difficulties in
collecting payments from customers or telecommunications operators. The lack of
sufficient cash flow may adversely affect Bezeq International's business, and may make it
difficult for it to deal with competitive threats in the field.
The following is a rating of the impact of the risk factors described above on Bezeq
International's operations, in accordance with the assessment of Bezeq International's
Management. It should be noted that Bezeq International's assessments below regarding
the degree of influence of the risk factor reflect the degree of influence of the risk factor in
assuming the materialization of the risk factor, and the aforesaid does not express an
assessment or give weight to such chances of materialization. The order in which the risk
factors appear above and below is not necessarily according to the degree of risk61:
Risk factors summary table - international communications, Internet services and network
endpoint
The extent of the impact
of the risk factor on
Bezeq International's
operations
Medium
effect
Low
effect
High
effect
X
X62
X
X
Industry risks
Growing competition
Investments in infrastructure and
technological changes
Governmental supervision and regulation
Pandemic
Special risks for Bezeq International
Internal enterprise information security
Exposure to legal proceedings
System failure and cyber attacks
Labor relations and streamlining procedures
Impairment of Bezeq International's assets
Cash flow
The information contained in this section 4.14 and Bezeq International's assessments
regarding the impact of risk factors on Bezeq International's activities and business, are
forward-looking
information and
assessments are based on data published by the Ministry of Communications, Bezeq
International's assessments of the market situation and the structure of competition in it and
regarding possible developments in the Israeli market and economy. The actual results may
differ materially from the estimates given above if there is a change in one of the factors taken
into account in these estimates.
in the Securities Law. The
information as defined
X
X
X
X
X
X
61 See footnote 45.
62 The extent of the impact of this risk factor on Bezeq International's activities was classified as moderate, assuming that the
incident would be limited in scope and time. Otherwise, the degree of impact may be high.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
5. DBS - multi-channel TV
DBS, also known by the trade name "yes", is a subsidiary, wholly owned by Bezeq, which provides a service
of multi-channel television broadcasts via satellite and on the Internet (OTT) as well as additional services
for subscribers in Israel and in the Judea and Samaria area, and it also has broadcasting rights in content
purchased from third parties and in productions in which it invests.
DBS is currently the only Bezeq holding (non-exclusive) licenses to broadcast multi-channel satellite
television in Israel.
5.1. General information about the field of activity
5.1.1. The structure of the field of activity and the changes that took place in it
5.1.1.1
In the field of subscriber television broadcasts, there are a number of
factors in a number of main categories:
a) Holders of a license to broadcast under the Communications Law, which
provides multi-channel television services - DBS, as well as Hot, which
provides cable television services, which has a monopoly declared under the
Economic Competition Law in the field of multi-channel television ("the field
of satellite and cable broadcasting"). For details regarding the regulation
applicable to the owners of such broadcasting licenses, see section5.15.
DBS and Hot provide both linear channel broadcasts (also referred to in this
chapter as "channels") and VOD services (for the question of regulating the
field of DBS’s VOD services, see section5.15.2).
b)
Internet content providers (in format OTT) - in Israel, there are a number of
local and international providers of audio-visual content via the Internet,
which can be viewed using various types of equipment / end devices. The
main local providers operate in a format that includes linear channels and
VOD content (including DTT array content transmitted via the array or via the
Internet), and the main ones are DBS (through the yesGO, Yes+, Sting TV
services, for details, see sections 5.2.2 ,5.2.1.1 and 5.2.3) Cellcom, Partner
(Partner TV) and Hot (Next and Play service). The main international
providers operating in Israel are Netflix, Apple and Amazon, which provide
options for watching VOD content (as of the date of the report, most of this
content is translated into Hebrew) without linear channels. To the best of
DBS' knowledge, most subscribers of international providers in Israel also
subscribe to the services of some of the local providers or holders of
broadcasting licenses.
c) Entities offering content without the permission of the copyright holders
(pirated)
63
.
d) The DTT array
A digital distribution system for digital television (DTT), known as "Idan+",
64.
through which certain channels are distributed to the public, free of charge
The system is operated as of the date of the report by the Second Authority,
where the Minister of Communications and the Minister of Finance may
appoint a private operator for its operation, for whom the council may also
grant a general license for broadcasts funded by subscription fees or
commercials.
The distribution of the channels is done in exchange for the payment of a
distribution fee, where the Minister of Communications and the Minister of
Finance may determine that the State will subsidize the distribution fee that
will apply to thematic channel broadcasters and a dedicated channel.
63 DBS is one of the shareholders of Zira Ltd., which works to prevent copyright infringement in video content on the Internet.
64 As of the date of this report, the television channels of the Broadcasting Corporation (Kan 11, Kan Educational and Channel 33), the commercial
television channels ("Keshet" and "Reshet"), Channel 20, and the Knesset channel (Channel 99) and a number of radio stations. The DTT
operator must also distribute thematic channels (most of whose broadcasting hours are devoted to the subject of the Broadcasting through
Digital Broadcasting Stations Law, 5772-2012 (“the Broadcasting Law"), as well as the broadcasts of a minor licensee and a designated minor
licensee (as defined by the Second Authority Law) - if requested.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
As of the date of this report, the DTT constitutes a replacement product, in
part, for multi-channel TV broadcasts.
5.1.1.2 According to the Broadcasting Law, a broadcaster, whose broadcasts are
part of the "open broadcasts" (i.e., television channels distributed through the
65 consent to
digital stations), will give each "registered content provider"
broadcast his broadcasts on the Internet free of charge, but without prejudice to
copyright and promotions by law and subject to certain conditions set out in the
law, including obtaining a license from the copyright holders and performers
(including through the broadcaster). In relation to the commercial channels
, The
commencement of the said arrangement was postponed for five years (until
January 2022), during which special arrangements will apply, including granting
a license to broadcast online broadcasts by the broadcaster to any content
provider registered in the registry requesting it, at the best price and conditions
given by the commercial channel to provide other content. For another broadcast
that is valid at the time the license is granted, everything is as specified in the
transitional provision set forth in the law.
66
5.1.1.3 Hot, Partner and Cellcom offer
their services alongside other
communication services provided by them, including as part of baskets that are
“non-detachable" (such as a "triple" package that includes landline telephony,
Internet and television services). For additional communication services provided
by groups Communication See section 1.7.1. For the offer of baskets of
detachable communication services by DBS, see section1.7.2.2.
In the year of the report, the upward trend in the level of competition in the field continued,
mainly due to the establishment of local and international content providers via the Internet,
as mentioned, operating at a relatively low price level. The activity of these factors via the
Internet, without the need to establish a dedicated infrastructure system as of the date of
this report, even without regulatory supervision, has a material adverse effect on the
competitive position of DBS. For more details about the competition in the field and
changes that took place in it in the year of the report, including the manner in which DBS
operates - see section5.6. For the question of arranging broadcasts with new broadcast
technologies, see section 5.15.2.
For changes in the number of DBS subscribers, see section 5.6.1.
In the opinion of DBS, the continuation of the intensification of the said competition may
have significant adverse effect on its activity and results.
This assessment of DBS is forward-looking information, as defined in the Securities Law,
based, among other things, on the expected conduct of the various parties. This
assessment may not materialize, or materialize in a materially different way than forcasted,
inter alia, depending on the manner in which the said TV services are developed and
established, the entry of additional players, as well as the application of regulatory rules
regarding the said TV services.
5.1.2. Restrictions, legislation and special constraints in the field of activity
Activities of broadcasting license holders are subject to extensive legislation in the field of
communications, and in particular to the Communications Law, the licensing regime, as
well as supervision and policy decisions on behalf of the Ministry of Communications. The
said activity is also under the constant supervision of the council, which sets policy,
establishes rules and supervises many areas of activity, including broadcast content, local
production obligations, broadcast ethics, consumer protection and the approval of
broadcast channels.
The provision of television services other than via satellite or cable within the meaning of
the Communications Law is not subject to supervision as stated above.
In 2017, the Minister of Communications adopted most of the recommendations of an
advisory committee regarding the regulation of satellite and cable broadcasts and the
content and transferred some to designated teams. In addition, in recent years a number
65
66
"Registered content provider" is defined in the Broadcasting Law as a registered content provider;"Content Provider" is defined in the
Broadcasting Law as having its main activity broadcasting a variety of content to the public in Israel (such as DBS), provided that the content
is broadcast on its own initiative, through an interface under its control, whether all content can be viewed in real time, by the public, or the
content can be viewed at a time and place of the viewer's choice.
To the best of DBS' knowledge, as of the date of the report, such commercial channels are channels 12 and 13.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
of legislative initiatives have been published that have not yet been completed
67
:
A memorandum was published for the Communications (Bezeq and Services)
No. _), 5778-2018, the
Law (Regulation of Content Providers) (Amendment
purpose of which was to change the format of the regulation in the multi-channel
TV market and to adapt it to technological developments, while applying
regulation to audio content providers who transmit content to the public in Israel,
under certain conditions, encouraging competition and reducing the regulatory
burden.
A government bill from 2018 which dealt, among other things, with the issues of
regulating the obligation to sell sports content, including the granting of a license
for the broadcasting of a sports channel or a significant sports enterprise by their
producers.
In September 2020, the Minister of Communications appointed a committee to examine
the superregulation in the field of broadcasting, chaired by former MK Roy Folkman
("Folkman Committee"), in order for it to formulate a recommendation regarding the
regulatory principles relevant to broadcasting, taking into account the trends in Israel and
around the world in this field, and propose amendments to the relevant legislation.
According to the letter of appointment, the committee was to work to reduce regulation and
focus on issues that need to be regulated at this time, while emphasizing the promotion of
competition in the market, the committee is to formulate its recommendations taking into
account the reports of previous committees examining the field, noting the said legislation
memorándum. The committee applied for the public's positions on the main issues on its
agenda, and in accordance, DBS submitted its comments to the committee. As of this date,
the committee's recommendations have not yet been submitted.
As the committee's recommendations have not yet been submitted, which also require the
approval of the Minister of Communications and probably also appropriate legislative
amendments, and the legislative initiative mentioned has not yet matured into binding
legislation, as of the date of the report, Bezeq or DBS cannot assess whether the
recommendations or the legislative initiatives will indeed mature into legislation, in full or in
part, and in what format, and it is also unable to assess the extent of the effect of the said
legislative amendments on the DBS business, to the extent that they are adopted and in
the wording and manner adopted.
These assessments of DBS are forward-looking information, as defined in the Securities
Law, based, inter alia, on the conclusions of the Folkman Committee, previous decisions
of the Ministry of Communications (see section 5.1.2) and the wording of the legislative
initiatives. There is no certainty that this issue will be regulated in legislation and regulation
in general, and in the manner proposed in particular. These assessments may not
materialize, or materialize in a materially different way than was observed, depending on,
inter alia, the practical implementation of the Folkman Committee's conclusions, the
Council's decisions, the Minister's decisions and subsequent legislative amendments. For
possible impacts on OTT services see section 5.15.2.
5.1.3. Changes in the scope of activity in the field and its profitability
For data on changes in the scope of DBS' activity and profitability, see section 1.5.4.4.
5.1.4. The critical success factors in the field of activity and the changes that apply to them
5.1.4.1 Quality, differentiation and originality in the content of the broadcasts, in
their variety, branding and packaging.
5.1.4.2 Providing relevant value propositions.
5.1.4.3 Providing television services using advanced technologies (in relation to
broadcast technologies, in relation to end devices and in relation to the user
interface).
5.1.4.4 Providing TV services via the Internet.
5.1.4.5 Offering a "basket" of communication services that will include television
services and other services, such as Internet browsing services (see section
5.15.2) and telephony services.
67
For further recommendations of the Broadcasting Committee that the Minister of Communications decided to adopt, see Bezeq’s 2017 periodic
report.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
5.1.4.6
Accessibility and connection to international content applications.
5.1.4.7 High level of customer service tailored to the type of service.
5.1.4.8 The strength of the brand and its identification with quality, innovation and
leadership, content and services for subscribers.
5.1.4.9 Attractiveness of the price.
5.1.5. The main barriers to entry and exit in relation to the field of activity
5.1.5.1 The main barriers to entry into the field of activity are (a) for cable and
satellite broadcasts - the need to obtain licenses for cable and satellite broadcasts
and to comply with the relevant regulatory requirements; (B) investments required
from operators in the field, including the purchase and production of content, as
well as for cable and satellite broadcasts - the establishment of a dedicated
infrastructure; (C) The limited scope of the Israeli market and its characteristics.
The scope and level of barriers to entry in relation to Internet TV services are very
low, especially for the international providers for which Israel is another market
for existing activity, and this is reflected in an increase in the quantity and variety
of services offered in this format.
5.1.5.2 The main exit barriers are: (a) For broadcast license holders there is a
regulatory barrier - termination of activity under the broadcast license entails the
Minister of Communications' decision to cancel the license before the end of the
license period, including conditions (including the licensee) to ensure broadcast
continuity and services and to reduce the harm to subscribers; (B) Long-term
engagements with material suppliers.
5.1.6. Substitutes for products in the field of activity and changes that apply to them
DBS sees the possibility of receiving many foreign channels using relatively cheap end
equipment as a substitute for its services in relation to certain segments. For additional
substitutes, see section5.1.1.
5.1.7. The structure of competition in the field of activity and changes that apply to it
Competition in the field of television is characterized by a relatively large number of players,
most of whom operate at relatively low price levels (see section 5.1), and through advanced
web client interfaces in a way that has led to the intensification of competition in the field.
An increase in the number of subscribers in the current competitive situation can be
achieved mainly through the recruitment of subscribers from competitors, which requires
the investment of considerable resources in retaining existing subscribers and recruiting
new subscribers.
In the reported year, Cellcom and Partner continued to establish themselves, as did Netflix
in the field of television services.
The total market share of the owners of the broadcasting licenses, DBS and Hot, is in an
eroding trend. DBS does not have data on the number of subscribers of the international
companies operating in the field and on the number of viewers of the DTT system, and
according to DBS, most of them are, in addition, subscribers of the local television providers
operating in the field. According to DBS, the trend of increasing the total market share of
all players (out of all households in Israel) is weakened due to the fact that the majority of
the remaining households are not potential audiences.
.
68
For more details on the competition in the field see section 5.6.
5.2. Products and services
DBS offers satellite TV services and servicesOTT, in a variety of value propositions that differ from
each other in the scope of the content, the scope of the services included in them, the interface
through which they are offered and the price. The offer of OTT services is part of a gradual trend of
migration of DBS services from satellite TV services to OTT services. For the migration process see
section5.18.3.
Satellite broadcasts and related services
Broadcasts Satellite DBS includes linear channel broadcasts (about 150 channels, of
68
This estimate is based, among other things, on the estimate in relation to the number of HOT subscribers (see footnote 69 below).
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
which about 35 Channels (HD (High Definition and two 4K channels), as well as interactive
radio, music and services channels.
For the purpose of receiving DBS services via satellite, reception dishes are installed in the
buildings and decoders of several types are installed in the subscribers' houses, some of
which allow the reception of broadcasts only (whether SD or more advanced resolutions),
and some allow advanced features such as recording content and watching VOD content.
In accordance with the DBS broadcasting license and the council's decisions, the
broadcasting of the DBS via satellite includes a basic package that each subscriber is
required to purchase (along with other basic packages that DBS may offer), as well as other
channels that the subscriber can choose to purchase, either as packages or as discrete
channels.
DBS provides satellite subscriber services to its subscribers ("satellite subscribers") VOD
via the Internet (in the OTT format). The vast majority of satellite subscribers subscribe to a
content package that includes VOD and the rest may purchase these services, when some
of the content included in the VOD service is provided in exchange for a separate payment.
Connecting satellite subscribers to VOD services requires, among other things, the use of
certain types of decoders. To the question of the regulation of the field of DBS’s VOD
services see section5.15.2.
Satellite TV services are offered in a wide package, which includes the vast majority of
linear channels and VOD services, which is purchased by most satellite subscribers, and
in packages with a smaller content scope (when subscribers can purchase additional
channels that are not included in any of the packages they purchased).
5.2.1. OTT Services
DBS offers a number of OTT services:
5.2.1.1 Yes+ services
DBS offers the Yes+ service, which includes linear TV channels, as well as VOD
content in a number of offered packages, the most common of which is similar to
that offered in the broad package offered to the satellite subscriber. Advanced
technological interface that includes advanced features that are not available in
the satellite interface. The service is provided via streamer devices by Apple and
from May 2020 is also available via compatible streamer devices. The service
can be used on its own or in parallel with the satellite service.
5.2.2. Sting TV services
DBS operates the "Sting TV” service, which includes linear TV channels as well as VOD
content, and is intended for customers who are not satellite subscribers. The service is
offered in a number of viewing packages that do not include the full range of content offered
as part of DBS' other services, and are characterized by relatively low price levels. The
service is provided via compatible streamers and other end devices.
5.2.3. YesGo services
DBS operates the service called YesGo, which allows satellite subscribers and Yes+
subscribers to watch via smartphones and tablets in the channels included in this service,
which the subscriber purchased as part of the TV broadcasts in his home, as well as in
VOD content.
5.3. Revenue of products and services
The following are data regarding the distribution of DBS revenues (in NIS millions):
2020
2019
from multi-channel
Revenue
TV
broadcasts and services for subscribers
Rate of total revenue
About 97% *
* The rest of the revenue derives, mainly, from payments from channels in respect of their transfer
by DBS as well as from the sale of rights in the content.
About 98% *
1,316
1,254
5.4. Customers
The vast majority of DBS subscribers are private customers. In general, DBS enters into a
subscription agreement with its subscribers, which regulates the subscribers' set of rights and
137
2018
1,431 th most
common
About 97% *
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
obligations in their relationship with DBS. With respect to the subscription agreement with the satellite
subscribers, the approval of the council is required, which was received. According to the
broadcasting license, the approval of the Uniform Contracts Tribunal for the subscription agreement
is also required (approval previously given and expired). DBS applied to the Council for amendments
to the subscription agreement and to amend the license, in which case DBS requested, among other
things, to revoke the license provision requiring the approval of the Uniform Contracts Tribunal, in
view of an amendment to legislation made in this regard. As of the date of this report, the Council's
position regarding DBS’ requests has not yet been received.
5.5. Marketing and distribution
5.5.1. The marketing of DBS services is done through advertising in the various media. DBS'
sales activity to existing and new customers is carried out through the following main
distribution channels (some of which are operated by DBS employees and some by
external marketers, which also include Bezeq International and Pelephone):
5.5.1.1 Call centers.
5.5.1.2 Digital channels.
5.5.1.3 Field sales people, working to recruit new subscribers.
5.6. Competition
5.6.1. Competitors in the field
The field is characterized as of the date of the report by a number of competing groups
(see section 5.1).
DBS's main competitors are Hot, which is a declared monopoly in the field of supply Multi-
channel TV broadcasting services and holds the largest market share, as well as Cellcom,
Partner and Netflix.
Below is data on subscription numbers and market shares69 of DBS, to the best of its
knowledge, as of December 31, 2019 and 202070:
The year 2019
Year 2020
Subscriptions
(thousands)
555
Market
Share
32%
Subscriptions
(thousands)
557
Market
Share
32%
5.6.2. Competitive characteristics today
The competition in the field focuses on the variety and content of the broadcasts, the price
of the services, the quality of the service, and the offer of advanced end equipment and
advanced user interfaces, as well as the offer of additional services, including broadcasts.
HD, 4K and VOD services.
The competition is also characterized by the offer of additional communication services
alongside the offer of video content (for the offer of "service baskets" of the Hot, Cellcom
and Partner groups, see also section 1.7.1, and for the offer of service baskets by DBS,
see also section 1.7.2.2.) and by the increase in the number of competitors and their
establishment (see section 5.1).
5.6.3. Positive and Negative Factors Affecting the Competitive Status of DBS
5.6.3.1
In the opinion of DBS’s Management, the main competitive advantages of
the DBS are:
a) The quality and variety of content that DBS broadcasts to its subscribers.
69
70
The market shares were calculated from all DBS, Hot, Partner and Cellcom subscribers as detailed below (and not from all viewers and
subscribers in the field in the absence of actual data about them). The assessment of DBS’ market shares in 2019 and 2020 is based on the
number of DBS subscribers, of Cellcom and Partner (according to their reports on the number of subscribers as of the end of the third quarter
of 2020), as well as of Hot, when in relation to the years 2019 and 2020, Hot did not publish the number of subscribers, so the data in relation to
Hot is according to DBS’s estimate, taking into account past trends and the existing data in relation to the other players). However, there is no
certainty that the data presented in relation to Hot are accurate, and therefore it is possible, respectively, that the actual market shares are
different from those estimated.
The number of subscribers is approximate, and the market share is in a circle. Subscriber - one household or a small business customer. In the
case of a business customer who owns more than a certain number of decoders (such as a hotel, kibbutz or gym), the number of subscribers is
adjusted. The number of non-small business customers is calculated as the total payment received from all non-small business customers
divided by the average income from a small business customer, which is determined once per period.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
b) Level, quality and availability of DBS' customer service system
c) Use of advanced technologies to provide advanced services.
d) Cultivating and promoting the "Yes" brand as a preferred, well-liked brand
with a high level of loyalty.
e) Marketing several call formats, characterized by different price levels,
different content offerings, different broadcast methods, different
technological interfaces and different types of customer service format.
5.6.3.2 DBS's competitive activity in the field of broadcasting suffers from
disadvantages or factors that adversely affect it, in a number of areas, the main
ones being:
a)
Infrastructure inferiority - DBS' satellite infrastructure does not allow two-way
communication, does not allow the provision of VOD services and does not
allow the transfer of telephony and Internet services, in contrast to the
infrastructures used by HOT, Cellcom and Partner, which enable the
provision of these services. For details about OTT services - see
section5.2.1. In addition, the satellite infrastructure is limited in relation to
the Internet infrastructure in the offer of advanced technological interfaces.
b) Regulatory restrictions -
For restrictions regarding the marketing of a shared basket of services, see
section 5.15.2.
For restrictions by virtue of the terms of the Commissioner for a merger with
Bezeq, see section 2.16.8.3. These restrictions also apply to DBS activities
in the field of OTT.
For competitive inferiority resulting from the lack of regulatory oversight of
players who do not have broadcasting licenses, see section 5.19.2.2.
Establishment of
in
section1.7.3, which does not allow DBS to purchase Bezeq services
according to it, may facilitate the entry of new competitors into the field and
establish their status.
the wholesale market arrangement, as stated
c) Space segments - the use of space segments involves heavy fixed
expenses, depending on the receipt of the services by a third party (see
section 5.16), and involves a limitation with respect to the ability to expand
the supply of broadcasts (see section 5.7).
5.6.4. Main methods of dealing with competition
Here are the main methods of DBS to deal with the competition:
5.6.4.1 Content - DBS works to purchase, produce and broadcast quality,
innovative and diverse content, while creating differentiation, emphasizing
branding and achieving originality in relation to the content broadcast by it.
5.6.4.2 Pricing policy - offering a variety of services at different price levels.
5.6.4.3 Offering OTT services (see section5.2.1).
5.6.4.4 Service - DBS places emphasis on the customer service system.
5.6.4.5 Technology - DBS is investing in expanding its technological capabilities,
with an emphasis on providing innovative and advanced services.
5.6.4.6 Branding - DBS cultivates, promotes and differentiates the brand "Yes".
5.7. Production capacity
The number of channels that DBS can transmit to satellite subscribers depends on the number of
space segments it uses, the content compression capabilities and the bandwidth required to transmit
each type of channel. As of the date of the report, DBS almost fully utilizes the space segments it
uses, thus increasing the number of channels broadcast by DBS to satellite subscribers, and in
particular increasing the number of HD and 4K channels, that consume more bandwidth, will require
the use of additional space segments or an improvement in the compression systems used by DBS.
The space segments are provided to DBS by Space (see section 5.16). These restrictions do not
apply in relation to the OTT and VOD services whose transmission depends on web browsing
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volumes.
5.8. Fixed assets, real estate and facilities
The following are the main components of DBS' fixed assets:
5.8.1. Real estate
DBS leases a number of real estate properties for its operations. DBS' headquarters, as
well as its main broadcasting center, are located in leased real estate in Kfar Saba, whose
lease period ends in 2024 (with options granted to DBS for the extension of the lease,
subject to the terms of the agreement, until 2034). The balance of the lease period of the
other properties that DBS leases ranges from a few months to two and a half years (these
periods are based on the exercise of lease extension options granted to DBS).
5.8.2. Satellite end equipment
DBS installs reception dishes and other end infrastructures in its subscription houses,
including decoders that enable the reception of the broadcasts, as well as smart cards used
to decode them. The decoders are rented to subscribers in exchange for fixed fees, paid
during the period of receipt of the services, or lent to subscribers.
5.8.3. End equipment for OTT services
Yes+ and Sting TV services can be viewed via a variety of end devices, including streamers
of various models. DBS purchases streamers from various providers and leases them to
its subscribers. The streamers are usually off-the-shelf products that require relatively
limited adjustment operations.
5.8.4. Broadcasting equipment and computer and communication systems
DBS has a main broadcasting center located in Kfar Saba, as well as a secondary
broadcasting center located in the Ella Valley, through which its broadcasts are transmitted
via satellite and OTT. The broadcast centers have reception and transmission equipment,
as well as computer and communication systems. The secondary broadcasting center is
partly operated on third-party premises, which provides DBS with the services of operating
the secondary broadcasting center and maintaining it in accordance with the framework
agreement valid until the end of 2023 (with the right to extend granted to DBS, which can
be realized six months before the end of the agreement).
5.8.5. Operating and encryption systems
DBS purchases from Cinemedia ("Cinemedia") development, implementation, encryption,
maintenance and warranty services related to the operating systems of the satellite
broadcasting system and also purchases similar services from Cinemedia in relation to the
OTT system, in accordance with the framework agreements between DBs. SS and
Cinemedia from January 2020. These services are provided in relation to various DBS
systems, end equipment, and viewing cards and other hardware components required to
receive these services, and DBS has also been granted relevant licenses for the use of
systems and end equipment.
The contract period with Cinmedia in relation to the satellite system is until February 2026
subject to the terms of the agreement, with the possibility of early termination by DBS in
the event of the cessation of satellite broadcasts as part of the migration. See section
5.18.1.
For the services and products provided under this agreement, DBS pays monthly
payments, where the agreement stipulates a minimum monthly consideration for the
provision of services to the extent specified, and an additional consideration is possible,
the amount of which depends on the types of services provided to DBS, and on
development services that DBS may order under the agreement.
The engagement period in relation to OTT is until December 2024 (after which an automatic
renewal mechanism applies for periods of two years unless one of the parties notifies
otherwise in accordance with the dates set for this matter in the agreement). DBS is granted
the right to exit the agreement in relation to the OTT system, from January 2023 onwards,
subject to prior notice and payment of an "exit fee" (at a decreasing rate depending on the
duration of the agreement period).
DBS depends on the continuous supply of these services, both in relation to the satellite
system and in relation to OTT.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
5.8.6. Computerized customer management system
DBS uses software and computer systems to manage the contracts with its subscribers,
including its billing and collection system. In this context, DBS contracts for licenses,
development services and technical support with NetCracker Technology Solutions Ltd and
NetCracker Technology EMEA Limited (jointly: "NetCracker"), and DBS also uses
Salesforce software together with Pelephone and Bezeq International,, according to
Pelephone's contract with Salesforce (for details, see section 3.8.4).
DBS is dependent on the NetCracker system and services and-Salesforce, due to their
importance for the management and monitoring of DBS 'acquisition of services and content
by its subscriber as well as for the purpose of charging and collecting from a subscriber.
System failures or discontinuation of services to DBS(Including depending on cell phone
connection with Salesforce) Are expected to cause operational difficulty until the matter is
repaired or the system / supplier replaced, which may take a long time. As of the date of
this report, some of the components of the engagementWith NetCracker is renewed
annually and some are valid until the end of 2023. The contracting with Salesforce is until
the end of 2025.
5.9. Intangible assets
5.9.1. Licenses
DBS has the following main licenses:
5.9.1.1 Broadcasting license valid until January 2023 - this license is material to
DBS' satellite activity and constitutes the main regulatory permit for this activity
(for the terms of this license, see section 5.15).
5.9.1.2
License for satellite television broadcasts in the Judea and Samaria area
valid until December 2022, the provisions of which are similar to DBS’s
broadcasting license specified in section 5.9.1.1.
5.9.1.3
License to perform uplink operations (transfer of broadcast-focused
broadcasts to the broadcast satellite and to carry out ancillary set-up and
operation operations), which are valid until January 2023 or until the expiration of
DBS’s broadcasting license, whichever is earlier. This license is essential for
DBS’s activity and constitutes the regulatory permit for the transmission of
transmission messages from the transmission center to the transmission satellites
and from them to the subscribers' homes.
5.9.2. Trademarks
DBS has registered trademarks, the main ones of which are intended to protect its trade
name (Yes).
5.10. Broadcasting rights
5.10.1. DBS has broadcasting rights in video content of two types:
Content whose rights to broadcast are acquired from third parties, including discrete
content and channels. DBS works to adapt as much as possible broadcasting rights
acquired by it in a way that will allow broadcasting in the various media and formats in
which it operates.
Content that DBS invests in its production (in full or in part), and in addition to the right to
broadcast the content as part of its broadcasts, DBS usually has rights in the same content,
at the rates specified in the agreements with the producers. In most cases, DBS is also
entitled to grant rights to the use of rights and to participate in revenues arising from
additional uses of the content beyond their transmission on DBS.
Broadcasting and distribution of content by DBS, in the various media, involves the
payment of royalties to copyright holders and performers in musical works, sound records,
scripts and content directing, as well as in respect of sub-broadcasting, including under the
Copyright Law, 5768-2007 ("Copyright Law") and the Performers and Broadcasters'
Rights Law, 5744-1984. Such royalties are paid to a number of organizations, which collect
the royalties to which they are entitled through comprehensive licenses (blanket licenses)
for the intellectual property rights holders. The payments under these licenses are
sometimes based on a fixed payment and sometimes on different pricing methods, with
some organizations being required to pay additional fees for the transfer of content in
certain media or in certain formats, in amounts that DBS estimates are not expected to be
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substantial.
This assessment of DBS is a forward-looking assessment, based on, among other things,
DBS estimates, including in relation to the extent of the use of the said content, and the
positions of the various organizations, and in the event of changes in any of them, this
assessment may materialize differently.
5.10.2. In view of the large number of content providers from whom DBS acquires
broadcasting rights, DBS does not have a primary content provider and is not
dependent on a single content provider. However, in the field of Israeli sports
broadcasting, as of the date of this report, there is a dependence on the acquisition of
the broadcasting rights of local sports channels from Sports Channel Ltd. and Charlton
Ltd., with whom there is a contract for several years. This dependence stems from the
fact that they are the exclusive providers of Israeli sports broadcasts and in light of
the existence of a high demand for such services, from among a significant group of
DBS customers. Remuneration under these agreements is based on a fixed monthly
payment in accordance with the number of subscribers to DBS broadcasts (except for
exceptions set forth in these agreements).
5.11. Human capital
5.11.1. Organizational structure
DBS’s Management consists of divisions, with each division headed by a VP, who serves
as a member of the DBS management.
The board of
directorsEcono
mics and
CEO
Deputy
CEO
Inter
nal
Audit
(*
719
)
Finan
ce
Conte
nt
Busines
s
Custom
ers
Division
Private
Custom
ers
Divisio
n **
Public
Relatio
ns
Market
ing
Informati
on
Technolo
gy
Engine
ering
Huma
n
Resou
rces
Legal
advice
and
Regulati
on
(*) The internal auditor is a Pelephone employee.
(**) The director of the private customer division is the deputy CEO.
As part of the implementation of the synergy processes between subsidiaries in the Group, the CEO
of DBS, Mr. Ran Guron, also serves as the CEO of Pelephone and Bezeq International. In addition,
most of the VPs who serve at DBS also serve as VPs at Pelephone and Bezeq International.
5.11.2. DBS employee base by divisions:
Administration
142
Number of employees
December 31,
2020
382
December 31,
2019
411
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Customer Division
Total
847
1,229
942
1,335
The number of employees included in the table above includes employees employed part-
time. The total number of jobs in DBS as of December 31, 2020 was 1,120.
5.11.3. Benefits and nature of employment agreements
The terms of employment in the DBS are regulated, among other things, in collective
agreements and in a collective arrangement, that applies to the majority of the employee
population (does not apply to some of the management levels and also employees in
special positions of trust). The workers' organization of DBS employees is the Histadrut.
In addition, DBS employees are employed in accordance with personal employment
agreements on a monthly or hourly wage basis, with some employees also being entitled
to performance-based compensation. The employment agreements are usually for an
indefinite period and each party may terminate the contract with prior notice in accordance
with the personal agreement and the law, subject to the provisions of the collective
agreement, as applicable.
A special collective agreement signed in 2016 and amended in 2019 sets out, among other
things, the periods after which a DBS employee will be considered a permanent employee,
mechanisms that involve the Employees’ Committee in decision-making regarding
employment and permanent termination of employment, as well as annual salary increases
and additional financial benefits provided by DBS to employees, during the term of the
agreement.
Also in 2018, a special collective agreement was signed, which regulated the actions of the
parties in relation to the implementation of reforms and structural changes that were then
on the table.
In 2019, DBS signed a collective agreement between it and the Histadrut and the
Employees’ Committee in connection with streamlining and synergy procedures. The
arrangement stipulates, among other things, that DBS will be entitled to terminate the
employment of up to 325 employees during the years of the arrangement and that a one-
time bonus will be given to employees who will not be included in the retirement plan. As
part of the arrangement, it was agreed to cancel all pending labor disputes. In addition, the
arrangement stipulates that DBS may also become more efficient by not recruiting
employees in place of employees who have terminated their employment.
DBS’s estimates of the cost of the agreement are forward-looking information, as defined
in the Securities Law, based, inter alia, on DBS' assumptions regarding the implementation
of the streamlining plan and additional conditions set forth in the agreement. These
assessments may not materialize, or materialize differently from what was observed, inter
alia, depending on the actual implementation of the streamlining plan, taking into account
the needs of DBS and its ability to implement its plans and additional conditions set forth
in the agreement.
The collective agreements and the arrangement mentioned above are valid until December
31, 2021. The validity will be automatically extended for a period of 12 months each time,
if one of the parties does not notify, at least 90 days before the end of the validity, of its
desire to make changes.
In December 2019, DBS received a notification from the Histadrut announcing a labor
dispute. According to the announcement, the issues in the dispute are: a. DBS intends to
make organizational and structural changes in DBS, including the change of ownership in
Bezeq, which, as far as they are carried out, have implications for employees' conditions,
rights and employment security, harm the status and organizational power of employees,
and constitute a fundamental violation of the collective agreement applicable on the parties;
B. Lack of good faith manifested in non-compliance with the duties of consultation and
negotiation within the framework of the collective discourse on issues that by law require
consultation and negotiation in matters that by law require consultation and negotiation.
Bezeq and / or DBS cannot assess at this stage the meanings derived from the above
announcement.
5.11.4. Employee compensation plans
DBS usually provides its officers, as well as managers and some of its employees, with
bonuses on an annual basis based on meeting goals and evaluating performance, for
components of capital compensation from Bezeq in relation to some of DBS's managers,
see section 2.9.5.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
5.12. Suppliers
For engagement with Space, see section 5.16.
For engagement with Cinmedia, see section5.8.5.
For engagement with NetCracker and Salesforce, see Section5.8.6.
For the purchase of broadcasting rights of local sports channels, see section 5.10.2.
5.13. Financing
DBS's main sources of financing are owner loans or investments from Bezeq in accordance with
DBS's needs, which, according to DBS, is expected to need financing from Bezeq in the foreseeable
future.
The assessment of DBS as stated above is forward-looking information. There is no certainty that
DBS will be required to finance Bezeq in the future or that Bezeq will provide funding for DBS's
activities and in which periods and this depends, among other things, on DBS's situation,
developments in its areas of activity and competition in these areas and on DBS’s future financing
needs.
In March 2021, Bezeq approved a credit facility or investment in DBS capital in the total amount of
up to NIS 150 million, for a period of 15 months starting on January 1, 211. This approval is in lieu of
a similar approval given in November 2020 (and not in addition to it).
5.14. Taxation
For more details, see Note 7 to the 2020 statements.
5.15. Restrictions and supervision of DBS
5.15.1. Arrangement of satellite broadcasts
DBS's activity as a holder of a regulated satellite broadcasting license in an extensive legal
system has applied to the field of satellite and cable broadcasting, which includes primary
legislation (and in particular the Communications Law and regulations enacted thereunder),
secondary legislation (including communications rules) and board directives.
In addition, DBS's satellite activity is subject to the provisions of its licenses, primarily the
broadcasting license.
The law authorizes the Director General of the Ministry of Communications as well as the
Council to impose financial sanctions for various violations of the provisions of the law and
of orders and provisions issued under it, as well as for violation of conditions in the
broadcasting license.
5.15.1.1 Terms of service for a satellite broadcasting license holder, restrictions on
cross-ownerships
Satellite broadcasting license regulations set various restrictions on the licensee,
including, among other things, eligibility conditions in relation to the holdings of
the licensee and stakeholders, directly and indirectly, in holders of cable
broadcasting licenses, in holders of franchises under the Second Authority Law
71 and in newspapers with daily circulation, as well as "Israeliness" requirements
regarding officers in the DBS and "Israeli" holding at a minimum rate of 26%, in
accordance with the provisions set forth in the regulations.
5.15.1.2 Rates supervision
The broadcasting license sets forth provisions regarding the types of payments
that the licensee may charge its subscribers for services provided by virtue of the
license, and these are determined in the DBS price list. The vast majority of
satellite subscribers subscribe to promotions, offering DBS services, including
various composition of content packages, ancillary services as well as receiving
and installing end equipment, at prices lower than the list price.
DBS has a duty to notify the chairman of the Council of any change in the price
list approved by the Council immediately upon its publication and the chairman
may in certain cases prohibit the change of the price list. The chairman of the
Council may also interfere with promotions or discounts offered by DBS, if he
71 As of the date of the report, the activities of these entities (both in the field of cable broadcasting and under the Second Authority Law) are
regulated through licenses and not franchises.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
finds that they have the effect of misleading the public or discriminating between
subscribers.
By virtue of the Communications Law, the license can set maximum prices at
which a subscription can be charged. As of the date of this report, no such prices
have been set.
5.15.1.3 Obligation to invest in local productions
In accordance with the requirements of the broadcasting license and the
decisions of the Council, in each of the years 2020 and 2021, DBS must invest
an amount of not less than 8% of its revenues from the subscription fees of
satellite subscribers72 in local productions, when according to the rules of the
media and the decisions of the council, DBS must invest different rates out of
these investment amounts in different categories of local productions.
In December 2020, the Council decided to postpone for 2022 the entry into force
of its previous decision, according to which the rate of investment obligation in
local productions will exceed and stand at 9%. The Council also determined that
during 2021 and in accordance with developments, the Council will hold another
discussion to examine the current legislative situation and the economic situation
of licensees, including a hedging formula set out in the council's previous decision
and give instructions as it sees fit.
5.15.1.4 Duty to transfer channels
DBS is obligated to transmit the "mandatory channels" in satellite broadcasts and
everything as determined by the Minister and in the broadcasting license.
In addition, DBS is required to allow channel producers provided by law to use its
infrastructure to distribute broadcasts to its subscribers, for a fee ("transfer fee")
to be determined in the agreement, and in the absence of consent - for a fee to
be determined by the Minister, after consulting the Council. In addition, the
Minister may require the transmission of small-license broadcasts under the
Second Authority Law (which did not have dedicated licenses prior to the
amendment to the law), taking into account the satellite capacity of DBS.
According to an amendment to the Second Authority Law of 2018, holders of
small and small designated licenses, who had a dedicated license under the
Communications Law, are exempt from paying transfer fees to Hot to DBS, for a
period of 5 years from the date of the amendment.
5.15.1.5 Contents of the broadcasts and obligations in relation to the subscriber
The broadcasting license sets forth provisions relating to the content of DBS
broadcasts, including the obligation to obtain the approval of the Council in
relation to channels broadcast by DBS. The Communications Law prohibits
broadcast licensees from broadcasting commercials, subject to a number of
exceptions.
In addition, the broadcasting license includes conditions regarding the terms of
service for subscribers, including the prohibition of discrimination between them.
For a hearing published by the Ministry of Communications in January 2021
regarding the data demand on the consumption of communications services from
communications operators, see section 1.7.4.11.
For a preliminary data demand Council in connection with inactive subscribers
see section1.7.4.13.
5.15.1.6 Ownership of broadcast channels
According to the rules of communication, DBS, including entities affiliated with it
(as defined in the rules of communication), may own up to 30% of the local
channels broadcast as part of DBS broadcasts (compared to a limit of 20%
applicable to HOT). DBS is also restricted according to the Communications Law,
in owning a news broadcast producer.
5.15.1.7 General provisions regarding the broadcasting license
72 Based on its revenues in the past year from satellite subscribers, including DBS's revenues from end equipment and its installation. According
to the position of the Council, according to which the actual investments are made, even though DBS disagrees with it, these revenues also
include revenues from VOD service to satellite subscribers.
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
The Minister and the Council have parallel authority to amend the Broadcasting
License. The Minister is authorized to revoke or suspend the Broadcasting
License on the grounds set forth in the Communications Law and the
Broadcasting License. The Communications and Broadcasting License Law sets
limits on the transfer, foreclosure and encumbrance of the Broadcasting License
and of assets from the license assets. The Broadcasting License requires the
approval of the Minister in relation to certain changes in the maintenance of
means of control in the DBS and imposes reporting obligations regarding the
holders of the means of control; Infringement of competition is prohibited by way
of an agreement, arrangement or understanding with a third party regarding the
provision of broadcasts and services unless approved in advance and in writing
the Ministry of
by
Communications, as well as conditions related to the supervision of the licensee's
activities, were established; The obligation to provide bank guarantees to the
Ministry of Communications to secure DBS's liabilities under the license has been
determined, in the amount (principal) of NIS 30 million (a total as of the date of
the report of approximately NIS 40 million).
the Council; The obligation
to submit reports
to
5.15.2. Arrangement of OTT services
OTT services (such as those offered by Cellcom, Partner, Netflix and also by DBS) are not
subject to the current standard in relation to multi-channel satellite television broadcasts or
other arrangements under the Communications Law. DBS also believes that the VOD
services it provides via the Internet to satellite subscribers (see section0) are not subject to
such regulation. However, from various decisions of the Council (see also section 0), it
seems that the Council considers itself authorized to arrange the VOD services for DBS
satellite subscribers.
For the processes of examining the regulation of OTT services, see section 5.1.2.
To the extent that a regulation of content transfer via the Internet is implemented, it is
expected to impose restrictions on the provision of the said services by DBS, but this
regulation may reduce the existing gap in the regulation regimes between licensees and
broadcasters between other entities active in the field.OTT.
These assessments of DBS are forward-looking information, as defined in the Securities
Law, based, inter alia, on the conclusions of the Folkman Committee, previous decisions
of the Ministry of Communications (see section 5.1.2) and the wording of the legislative
initiatives. There is no certainty that this issue will be regulated in legislation and regulation
in general, and in the manner proposed in particular. These assessments may not
materialize, or materialize in a materially different way than would be expected, inter alia,
depending on the actual implementation of the Folkman Committee's conclusions, the
Council's decisions, the Minister's decisions and subsequent legislative amendments.
5.15.3. Offer of baskets of services
According to the broadcasting license, DBS may offer a shared basket of services,
including Bezeq service and DBS service, subject to obtaining approval from the Ministry
of Communications (in the absence of objection within the period specified in the license
will be considered as possible) and subject to conditions, the main ones are the
“detachability” obligation and the existence of a parallel basket marketed by a licensee who
is not affiliated with Bezeq (see section 1.7.2.2). A shared basket of services marketed by
DBS, which includes Bezeq's Internet infrastructure service only, does not require the
approval of the Ministry of Communications and does not have detachability obligation..
Regarding conditions published by the Commissioner in connection with the merger of
Bezeq and DBS and the amendment under consideration, see section 2.16.8.3.
In the opinion of DBS, in view of the development of competition between the
importance of providing comprehensive
communication groups and
communication services (see section 1.7.1), in particular in the competition between it and
HOT, Cellcom and Partner, which are not subject to these restrictions, insofar as the
restrictions remain in relation to Bezeq's collaborations with it (see section 1.7.2.2), may
increase the adverse effect of these restrictions on DBS results.
the growing
5.16. Substantial agreements
The following is a concise description of the main points of the agreements that may be considered
material agreements that are not in the ordinary course of business of DBS, which were signed or
are valid during the reporting period:
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Agreement for the lease of space segments73
According to an agreement with Space74, since 2013, as amended, DBS has leased space
segments in satellites from the "Amos" series ("the Space Agreement").
Comply with the provisions of the Space Agreement, DBS leases space segments on "Amos 3"
satellite75 (whose estimated end of useful life is at the beginning of 2026), as well as the "Amos 7"
satellite, in which Space has the right to lease space segments under an agreement between it and
the owner of the rights in this satellite, and which was leased to DBS until February 2022 (after
exercise of an extension option).
Under the Space Agreement, Space undertook to make reasonable efforts to deploy a new satellite,
"Amos 8", by February 2021, in which case DBS will lease space segments from that date on Amos
3 and Amos 8, beginning at the end of Amos 3's life – in Amos 8 only. To the extent that Amos 8 is
not deployed by February 2022, DBS will lease space segments in Amos 3 until the end of its useful
life, and it will have the right, if it so chooses, to lease space segments in Amos 8 to be deployed
later as well. In the opinion of DBS, noting, among other things, that Space did not announce in the
agreement a contract to build Amos 8 and according to the information provided by Space76 the
placement of Amos 8 is not expected to materialize until February 2022, if at all77. Thus, although
the period of the original Space Agreement is until 2028, in accordance with the provisions of the
Space Agreement, the Space Agreement will come to an early end at the end of Amos 3 satellite’s
useful life, which to the best of DBS's knowledge is expected to be in early 2026, without
compensation and the terms subject to additional early termination options listed below).
The leased segments of space - According to the Space Agreement, during the engagement period
(and subject to unavailability events) DBS will lease space segments from Space, in accordance with
the division between the relevant satellites stipulated in the agreement in accordance with the various
periods78, starting with the end of the lease of the Amos 7 satellite, DBS is expected to lease ten
space segments in Amos 3. The agreement also regulates the provision of backup segments for the
leased space segments during the term of the agreement, under the terms and restrictions set forth
therein.
Cost - the estimated total nominal cost for the engagement period (from 2017) is approximately USD
263 million, reflecting an average annual cost of approximately USD 21.9 million, subject to the
discount and reimbursement mechanisms set forth in the Space Agreement.
Early termination of the agreement - the Space Agreement stipulates a right to early termination
without cause, subject to 12 months' prior notice and payment of the consideration in accordance
with the mechanism set forth therein.79For further details regarding the Space Agreement, see the
corrective transaction report and the announcement regarding the convening of a special general
meeting of Bezeq dated March 26, 2017 and an immediate report on the results of the general
meeting of Bezeq dated April 3, 2017, which are presented here by reference.
The usage fee in 2020 amounted to about NIS 75 million.
DBS has a substantial dependence on Space, as the sole owner and sole supplier of the space
73
The assessments in this section regarding the dates of satellite delivery, their launch, their placement in space, the commencement of their
activity and end of useful life, the amount of segments leased and those intended to be made available to DBS for various event controls (such
as backup cases), and all implications are forward-looking information, as defined in the Securities Law, which is based, among other things,
on the information provided by Space to DBS, and which in part is not even controlled by Space and depends on its engagements with third
parties. Therefore, these assessments may not materialize, or materialize in a materially different manner than expected, inter alia, depending
on the conditions associated with satellite launch, the start of satellites, the conditions required for their proper operation and availability, the
end of the existing satellite’s useful life, and external factors (including third parties and the rights in Amos Satellite 7) that affect their activity
and the activity of Space as well as the business position of Space.
74 A company that at the time of entering into the Space Agreement was controlled by Eurocom Communications which was in (indirect) control
of Bezeq at the same time.
75 According to what was reported by Space, Amos 3 satellite is suffering from a malfunction in its battery (as detailed in the amendment report
to the transaction report, which is presented by way of reference in this section below). As of October 2019, the Amos 3 satellite suffered from
a malfunction in the spare horizon meter, at a level that prevented it from being used in case as required. In December 2019, Space reported
that the spare horizon meter was in good condition and could be used if required. For more details about the fault of the spare horizon meter,
see immediate reports of Space from the October 1, 2019 and December 18, 2021 presented by way of reference.
76 According to Space’a reports, an agreement to build Amos 8 was canceled by Space in 2018.
77
For the cancellation of an agreement in which a Space contracted for the production of the Amos 8 satellite, for Space’s announcement
regarding the examination of the alternatives for the construction of Amos 8 in light of a notice received from a government source regarding
the State's intention to act to set up a satellite, for the setting up an independent committee by Bezeq’s Board of Directors, appointed to examine
alternatives for the termination of the activity of the aforesaid committee and for DBS’s announcement to Space regarding the protection of
the rights not to lease space segments on Amos 8 satellite in case of delay in placing it as stated above, see section 5.16 of Chapter A of Bezeq's
2017 period report, updates in Chapter A of the periodic report attached to the report for the third quarter of 2018 of the Company as well as the
immediate report of Bezeq dated December 17, 2018 presented by way of reference.
78 As of 2018, DBS leases another transponder in Amos 7, a space segment in Amos 3 has been replaced for a temporary period. It was agreed
that the said replacement will not detract from the possibility of shutting down one of the "Amos 3" transponders during the Eclipse period (as
specified in the facility report to the transaction report, presented by way of reference in this section below).
The space agreement also stipulated a right of DBS to terminate the agreement in early February 2021 due to a delay in the entry into force of
the agreement for the construction of "Amos 8". DBS has informed Space that it will not exercise this right.
79
147
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
segments used by DBS, which is also responsible for the operation of the space segments.
Regarding exposure to risks in the event of a failure in the activity of one of the satellites, the
unavailability of the space segments used by DBS and the lack of redundancy for the Amos 3 satellite
from the end of the Amos 7 lease, see section5.19.3.4. For Space dependence, see
section5.19.3.5 .
5.17. Legal Proceedings80
5.17.1. Legal proceedings are pending
Date
Sides
Court
a.
June
2015
Clients
against
DBS
District
(Central
)
Type of
proced
ure
Financi
al
claims
togethe
r with
motion
to
recogni
ze them
as class
actions
Amount of
claim /
remedies
Amount of the
claim
The
subject of the
was
motion
estimated by
the applicants
13
at NIS
million
plus
non-pecuniary
damage
as
decided by the
Court.
The applicant
the
in
additional
motion
does
not specify the
amount of the
but
claim,
the
estimates
extent of
the
damage at tens
of millions of
NIS.
Details
this
Claim regarding discrimination against new
DBS customers and returning customers who
were previously DBS customers,
is
allegedly contrary to the provisions of the
license and the law. Applicants seek non-
pecuniary compensation for members of the
represented group as well as allow each
subscriber to receive the terms received by
repeat subscribers (the “First Motion”). In
July 2015, another motion was submitted for
approval of a class action lawsuit against DBS
alleging price discrimination in which Bezeq
discriminated between existing customers and
existing customers, between new customers
and new customers and between existing
customers and new customers by offering
them different rates for the same service. .
This is contrary to the provisions of the license
and the law. The additional applicant requests
that DBS compensate the members of the
represented group with
the monetary
difference between the price each of them
actually paid to DBS for the services, and the
cheapest price they could pay for those
services. In addition, the additional petitioner
asks the Court to order DBS to offer and
provide its services to every claimant on the
same terms and present them in its various
publications. In September 2015, the Court
ruled that the two lawsuits would be defined as
related cases and in November 2015 ordered
the consolidation of the hearing on the two
motions for approval.
With the consent of the parties, the Court
decided to delay the hearing of the case in
view of a parallel delay that occurred in
parallel cases against other defendants when
a requesy for transfer of the hearing of the
motions to the other Court is pending.
In its decision of March 2018 on the motions
for approval of the hearing arrangements, the
Court ruled that the proceedings against all
media companies, including the television
companies and the applications against DBS,
will be heard jointly and set procedures for
clarifying the motions for approval. In addition,
after the parties to the proceeding submitted
summaries on their behalf to the Court, in July
2018 a hearing was held on all motions for
approval against all media companies, in
which the Court advised the applicants to
consider a rewarded departure from the
motions for approval, and ruled that to the
extent
is not
received by September 2018, a decision will
be given by the Court in the motions for
recommendation
that
the
80
For material reporting and material thresholds, see section 2.18.
148
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Date
Sides
Court
Type of
proced
ure
Details
Amount of
claim /
remedies
approval. In November 2018, as no further
notice was filed in the matter, the Court ruled
that the case would be transferred for a
decision on the motions for approval. In
December 2019, a ruling was received in the
Tel Aviv-Yafo District Court rejecting all
motions for approval.
In January 2020, the applicants in the First
Motion filed an appeal against the judgment to
the High Court.
In February 2021 as part of a hearing on the
first appellant's appeal, and on the other
appeals conducted jointly with this appeal, the
High Court
the
recommended
appellants, including the first appellant, to
withdraw the appeal on their behalf, without an
order for expenses. Following this, the first
applicant announced the withdrawal of the
appeal on its behalf. On February 16, 2021 the
partial judgment of the High Court was given,
ordering the striking out of the appeal of the
first petitioner without an order for expenses.
to all
For details regarding an indictment filed in
December 2020 by the State Attorney's Office
(following an open investigation opened in
June 2017), inter alia, against the former CEO
of DBS and its former CFO see section1.1.7.
Motion
for
approv
al of
class
actions
For details regarding a motion for approval of
a class action lawsuit filed against, among
other things, the former CEO of DBS and its
former CFO, in connection with a 2015
transaction in which Bezeq acquired the
remaining shares of the DBS shares held
thereby from Eurocom DBS, see section
2.18.1.
The
Jerusal
em
District
Court
In the
Distric
t
Court
(Econ
omic
Depar
tment)
in Tel
Aviv
Tel
Aviv
Distric
t
Court
Motion
for
disclosu
re of
docume
nts
before
submitti
ng a
For details regarding a motion for disclosure
of documents before submitting a motion for
approval of a derivative claim in accordance
with Article 198A of the Companies Law
against Bezeq and DBS, for disclosures of
certain documents in connection with a 2013
DBS and Space stakeholder transaction as
149
b.
Dece
mber
2020
c.
June 2017
d.
July -
August
2017
Bezeq
sharehol
ders
vs.
Bezeq,
Chairma
n of the
Board of
Bezeq,
member
s of the
Board of
Bezeq,
as well
as
member
s of the
Euroco
m Group
and vs.
the
(former)
CEO of
Bezeq
and
CEO
(former)
and
CFO of
DBS
Bezeq
sharehol
ders
against
Bezeq
and
DBS
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Date
Sides
Court
e.
June
2018
Tel Aviv
District
Court
(Econo
mic
Depart
ment)
Bezeq
shareho
lders
against
Bezeq,
DBS
and the
former
controlli
ng
shareho
lders of
Bezeq
Type of
proced
ure
motion
for
approval
of a
derivativ
e claim
in
accorda
nce with
Article
198A of
the
Compan
ies Law
Reques
t for
disclosu
re and
review
of
docume
nts
under
section
198A of
the
Compa
nies
Law
Details
Amount of
claim /
remedies
amended in 2017 (Space Agreement) See
section 2.18.1 subsection h.
the
For details regarding a motion for disclosure
of documents prior to filing a motion for
approval of a derivative claim in accordance
with Article 198A of the Companies Law,
which were filed by shareholders against
Bezeq, DBS,
controlling
shareholder in Bezeq, Mr. Shaul Elovich, and
his son, Mr. Or Elovich for the delivery of
documents and information in connection with
the breach of the fiduciary, fairness and trust
obligations of Elovich in connection with the
sale of Bezeq shares on February 2, 2016 by
the Company, see section 2.18.1, subsection
i.
former
5.17.2. Legal proceedings completed during the reported period or until the date of publication
of the report
Date
Sides Court
of
filing
the
claim
Septe
mber
2014
Client
again
st
DBS
Distric
t (Tel
Aviv)
Type
of
proced
ure
Moneta
ry
claim
togethe
r with a
motion
to
recogni
ze it as
a class
action
Details
The amount of
the original
claim (NIS million)
NIS 402 million
(plus a remedy
that the Court is
asked
to
determine at its
discretion).
the
Court
it and
Allegation regarding the sending of
electronic advertisements by DBS to its
customers, which allegedly was done in
violation of Article 30A of
the
Communications Law, violation of the
rules of DBS’s license and violation of
its
the agreement between
sought
customers. The plaintiffs
redress
for
from
inconvenience, harassment,
loss of
time, etc., caused to DBS customers as
well as relief, the amount of which will
be determined at the discretion of the
Court, for enrichment of DBS as a result
of sending these messages.
In June 2019, the Court approved the
filing of the lawsuit as a class action.
The motion was approved in respect of
non-pecuniary damage only, when the
the
applicants'
existence of pecuniary damage were
rejected.
In June 2020, a ruling was given by the
High Court, according to which, prior to
the approval decision, the applicants
regarding
claims
150
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Date
Sides Court
of
filing
the
claim
Type
of
proced
ure
Details
The amount of
the original
claim (NIS million)
for
will withdraw
approval and will be paid compensation
in the amount of NIS 100,000.
the motion
from
5.18. Goals and strategy
5.18.1. DBS's goals are to maintain market share, while maintaining DBS's business and
competitive position in the field and Yes’s brand status as a leading communications
brand, and continuing to take streamlining and synergy measures with Pelephone and
Bezeq International.
As of 2019, DBS has been implementing a migration plan from satellite broadcasts to the
Internet (OTT) in a long-term gradual procedure that is expected to be spread over a period
of up to about 7 years (early 2026), in accordance with the decision of the Boards of
Directors of DBS and Bezeq. The said decisions were made in light of the trends in the
television content market, which include lowering entry barriers, entry of new players and
establishing OTT broadcast technologies, changing the value chain and changing
consumption habits, along with the differences between old satellite broadcast technology
and OTT broadcast technology, changing the value chain and changing consumption
habits, along with the differences between the old satellite transmission technology and the
OTT transmission technology on the benefits inherent in it (also paying attention to the
aspects of equipment, obligations and content rights). In accordance with the decision,
DBS will regularly monitor market conditions, competition and the technological
environment, and will frequently examine the applicability of the outline and the need, if
any, to make changes to it, the pace of implementation or the manner in which it is
implemented, taking into account its customer needs as well as regulatory amd other
obligations of DBS.
Since this is the implementation of an outline for the transition in a multi-year gradual
procedure, with ongoing monitoring, there is no certainty, at this stage, regarding the actual
duration of the process and / or that the move will be completed and such a transition will
be made. As the transition is completed, it is expected to lead to savings in DBS expenses
and a better adaptation to changing market conditions.
As of the date of approval of the statements, the rate of DBS subscribers using the Services
Yes+ and StingTV transmitted via the Internet (as stated in the sections5.2.1.1 and 5.2.2
above) is about 25%81 of all DBS subscribers.
5.18.2. In order to achieve the aforementioned goals, along with actions to reduce expenses,
DBS invests considerable efforts in the areas of marketing and sales and in an
appropriate marketing strategy designed to further recruit existing subscribers and
retain existing subscribers; Continuous improvement in the subscriber service system;
Upgrading customer value propositions, creating differentiation and originality in the
content of its broadcasts; Offering a variety of products (both low cost and premium),
increasing the volume of content purchased by each subscriber and expanding the
added value services of DBS; As well as investment in the development and
implementation of advanced technologies, advanced customer interfaces and new
services; These efforts include the pursuit of DBS to implement the outline of the
transition to OTT services while increasing the penetration rate of advanced services
among subscribers in a way that will increase DBS revenue and subscriber loyalty to
DBS services.
5.18.3. DBS's objectives as stated above, including with respect to the transition outline
described above, are forward-looking information, as defined in the Securities Law,
based, inter alia, on DBS's Management's assumptions, estimates and forecasts
regarding the current trend in the broadcasting market, regarding competition,
business developments, consumption habits, the technological environment, the
regulatory environment and the manner of regulation (both on DBS and other parties)
both in the satellite broadcasting market and in the Internet television broadcasting
81 This rate also includes subscribers who also use satellite services.
151
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
market (OTT), also paying attention to the restrictions that apply and will apply to
Bezeq, which affect DBS. However, the predictions of the DBS Management, its
preparations, objectives and the above outline may not materialize, or materialize in
a materially different manner, in view of changes in demand in the broadcasting
market, in view of the intensification of competition in this field or in its alternative
fields, in view of change in technologies and in consumption habits, in view of the
pace of development of market browsing rates, in view of regulatory restrictions
imposed or imposed on DBS, or its collaborations with Bezeq and other parties in the
field, and in view of how the field will be regulated both in relation to licensees and in
relation to those who do not have licenses.
5.19. Discussion of risk factors
The following are the threats, weaknesses and other risk factors of DBS (“the Risks") arising from
its general environment, from the industry and from the unique characteristics of its activities.
5.19.1. Macro Risks
5.19.1.1 Financial Risks - a significant portion of DBS's expenses and investments
are made in US dollars (mainly content, satellite segments, purchase of end
equipment and other logistics equipment). Therefore, sharp exchange rate
changes have an effect on DBS's business results.
5.19.1.2 Recession / economic slowdown - an economic slowdown in the economy,
an increase in unemployment rates and a decrease in disposable income may
lead to a decrease in the number of DBS subscribers, a decrease in DBS
revenues and damage to its business results.
5.19.1.3 Security situation - an ongoing deteriorating security situation in large
areas of Israel, which disrupts the daily lives of the residents, could lead to a
deterioration in the business results of DBS.
5.19.1.4 Pandemic - at the beginning of 2020, an outbreak of the COVID-19 virus
began in the world. Subsequently, DBS monitors developments in connection with
the consequences of the COVID-19 pandemic and the legislative restrictions that
followed, which have affected and are affecting its business activities. These
consequences are manifested and may be manifested, inter alia, in damage to
the supply chain (including streamers) and in the customer service and sales
system. As of the date of the report, no material decrease in DBS revenues is
expected which can be attributed to the consequences of this outbreak. At the
same time, naturally, this is a variable incident that is not under the control of
DBS, and therefore the continuation of the COVID-19 pandemic and its
aggravation and / or decisions of countries and authorities in Israel and around
the world in this regard, may affect DBS accordingly.
5.19.2. Industry risks
5.19.2.1 Dependence on licenses - DBS satellite TV broadcasts are provided in
accordance with the broadcasting license and through additional licenses, and
therefore depend on the existence of these licenses and their extension from time
to time. Violation of the provisions of the licenses, as well as the provisions of the
law by virtue of which the licenses were granted, may result, subject to the
conditions set forth in the licenses, to revoke, change, suspend or not extend the
licenses and consequently materially impair DBS's ability to continue operating in
the field.
5.19.2.2 Regulation - the provision of satellite television broadcasts is subject to
the obligations and limitations set forth in the legislation as well as to the licensing
regime, supervision and approvals by various regulatory bodies, and may
therefore be affected and limited in light of policy considerations dictated by these
bodies and their decisions (see section 5.15). Regulatory changes may affect
DBS activity and may materially impair its financial results. The OTT services
including those of DBS are not monitored, as of the date of the report (for the
possibility of arranging these services, see section 5.15.2). Continued activity of
content providers (and the entry of additional providers) via the Internet as stated
in the section5.1.1 without the application of regulatory rules to their activities and
/ or without appropriate amendment of the regulatory rules applicable to broadcast
license holders, may materially impair the financial results of DBS. In addition,
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Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
DBS's activity, as a company that provides services to the public, is subject,
among other things, to legislation in the field of consumer protection as well as to
the laws of protection of privacy and information security (see section1.7.4.5).
5.19.2.3 Fierce competition - the field is characterized by fierce competition with a
variety of different competitors (see section 5.1.75.6), and changing consumer
preferences in a way that requires DBS to constantly and continuously invest in
recruiting and retaining customers and dealing with high transfer rates of
subscribers between companies. For the characteristics of the competition, see
section5.6.
5.19.2.4 Technological developments and
technological
improvements and the development of new technologies that will make existing
technology inferior, may require DBS to make large financial investments in order
to maintain its competitive position (see section5.1.1).
improvements
-
5.19.2.5 Alternative infrastructure for multi-channel broadcasts - the activity of the
DTT system, and in particular its expansion, as well as the deepening of the
intrusion of OTT operators, may harm the financial results of DBS (see section
5.1.1).
5.19.2.6 Unauthorized viewing - the field of broadcasts is exposed to the "pirated"
connection of viewers to the reception of the broadcasts, without paying a
subscription fee, and is also exposed to the public's access to content in which
the broadcaster has rights.
5.19.2.7 Exposure to class actions - there is exposure to class actions in significant
amounts.
5.19.3. Special risks for DBS
5.19.3.1 Limitations as a result of the ownership structure - DBS is limited in its
cooperation with Bezeq in relation to the offer of a basket of communications
services in a manner that materially affects DBS's business situation and its
competitive capabilities (see section 5.15.2).
5.19.3.2 Restrictions as a result of the eligibility conditions - "cross" holdings of
holders, directly or indirectly, in DBS, as well as a decrease in the holding rate of
Israeli citizens or residents in DBS, may lead to non-compliance with the eligibility
conditions of its broadcasting license (including in light of the Israeliness
requirement (see section 5.15.1.1).
5.19.3.3 Maintaining a sufficient cash flow - DBS must maintain a sufficient cash
flow for the purpose of meeting its business plan. The lack of sufficient cash flow,
including through investment or financing from Bezeq, may adversely affect
DBS's business and DBS's ability to increase the penetration rate of advanced
services, as well as make it more difficult for it to deal with competitive threats in
view of technological developments and changes in consumption habits in the
field.
According to DBS, it is expected to continue to accumulate operating losses in
the coming years and therefore without Bezeq’s support it will not be able to meet
its obligations and continue to operate as a going concern. According to DBS, the
sources of financing available to it, which include, inter alia, the working capital
deficit and the credit and Bezeq’s investment framework in capital as stated in
sectionError! Reference source not found., will meet the needs of DBS activity
for the coming year.
5.19.3.4 Satellite failure, damage, unavailability or termination of service of the
satellite - DBS transmissions are made using space segments of satellites located
at the same point in space. Failure to operate one of the satellites, damage to one
of them or unavailability of space segments in any of the satellites, including
unavailability of a new satellite intended to replace a previous satellite that has
ceased to transmit or provide services to DBS or termination of segment leasing
in any of the satellites may significantly disrupt and reduce the volume of satellite
broadcasts via satellite, unless an alternative is found to the segments of space
that are not available as aforesaid and also in view of the lapse of time until the
implementation of such an alternative. However, the duplication of satellites
through which transmissions are made to subscribers as of the date of this report,
153
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
also taking into account the partial backup mechanisms set forth in the Space
Agreements (the quality and scope of which depend on the identity of the backed
satellite), significantly reduces the risk of damage, failure or unavailability, and
improve the survivability of the bulk of the broadcast. In the event of the availability
of such satellite, it will be possible, through space segments available to DBS on
the other satellite, to broadcast the main channels broadcast by DBS, but not all
the channels broadcast (for the Space Agreement, including backup mechanisms
determined under it, see section 5.16). However, according to DBS, the said
duplication of satellites is expected to end in early 2022, and from that period
onwards, DBS will operate with one satellite - see section 5.1682. DBS does not
have insurance for loss of revenue caused by satellite failure. Termination of the
receipt of the satellite services, for any reason (including due to the end of the
agreement period), prior to the completion of the outline of the transition to
transmission via the Internet in relation to a substantial part of DBS subscribers
may result in damage to DBS revenues.
The progress of the process of switching to or accelerating transmission via the
Internet may reduce the vulnerabilities mentioned above involving the failure,
damage, unavailability or termination of satellite services.
The assessment of DBS as stated in this paragraph above is forward-looking
information. This assessment is based on the provision of space segments and
the implementation of space backup mechanisms and space assessments in
relation to the useful life of satellites, the beginning of the activity of new satellites,
the end of the activity of existing satellites and the exercise of contracts83. This
assessment may not materialize or be partially or otherwise materialized if there
is a change in the useful life of the satellites and the exercise of their lease option
or if space does not provide the BBC with alternative segments in the event of
unavailability or failure of the space segments or satellites.
5.19.3.5 Dependence on the owner of the rights in the space segments - DBS has
a substantial dependence on Space, as the sole rights holder and the sole
supplier of the space segments used by DBS, which is also responsible for the
operation of the space segments. In relation to Amos 7, the supply of the
segments of space also depends on the third party who owns the satellite and the
body responsible for its operation, with whom Space has contracted (see
section5.16 and on the realization of its engagement with Space in relation to
this satellite until the end of the period determined in a manner that will allow the
continued leasing of the segments of space on this satellite.
5.19.3.6 Dependence on software suppliers, equipment, content, infrastructure and
services - DBS has dependence on software vendors and equipment, as well as
on certain content vendors (see section 5.8.2) and receipt of certain services,
including broadcast encryption services (see section 5.8.5). Failure to receive the
products and services provided by them may impair the functioning of DBS and
its results. In addition, inability to purchase streamers or receiving support
services from current providers, is expected to involve a period of preparation that
will be required to make the alternative engagement and change their supply and
support system.
5.19.3.7 Impairment of the activity of the broadcasting centers and the logistics
center - Impairment of the activity of the broadcasting center may cause a
significant limitation in the continuation of the broadcasts, but decentralization of
broadcasts to two broadcasting centers (in Kfar Saba and the Ella Valley) partially
reduces the risk of damaging one of them. In the event of damage to one of the
broadcasting centers, DBS will be able to continue to broadcast from the other
broadcasting center only part of its channels as part of the satellite broadcasts,
with this limitation being more significant in the event of damage to the Kfar Saba
site. In the current format of satellite broadcasts. In the event of a cessation of
activity on the Kfar Saba site, no services will be allowedOTT, and in the event of
the termination of the activity of the secondary site, the main activity of the OTT
services will be made possible through the Kfar Saba site. Each transmission
center has the same encryption system, and therefore there is also a backup for
the encryption system in the event of a damage to one of the transmission
82 See footnote 72.
83 And see also footnote 72.
154
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
centers. Damage to the DBS logistics center may also disrupt its operations, in
particular the installation and maintenance of end equipment.
The assessment of DBS as stated in this paragraph is forward-looking
information. This assessment is based on the provision of the provider services
that operate the secondary broadcasting site in the event of an injury to the
broadcasting center in Kfar Saba. This assessment may not materialize or
partially or otherwise materialize if DBS is not allowed to receive the services of
the said provider in full and properly.
5.19.3.8 Failure of DBS’s computer systems - significant failure of DBS's major
computer systems could significantly impair DBS's operational capacity. DBS has
a remote backup site designed mainly for storing information and providing a
limited internal computing service in case of failure, but major and significant
operational capabilities of DBS will not be able to be realized without the proper
operation of the computer systems at the site in Kfar Saba.
5.19.3.9 DBS's assessment in relation to the backup capability as stated in this
paragraph is forward-looking information. This estimate is based on the
functionality of the remote backup site. This assessment may not materialize or
partially or otherwise materialize if such functionality is not possible.
5.19.3.10 Cyber risks - DBS is exposed to the risk of the occurrence of an activity
intended to harm the use of a computer or computer material stored on it ("cyber
attack"). Such attacks can disrupt business, cause theft of information / money,
damage databases and subscriber privacy, damage to reputation, damage to
systems and leak information. As a leading company in the field of subscriber
television broadcasting, DBS is a target for cyber attacks and experiences cyber
attacks, which are handled by it.
DBS implements protection policies that include layers of protection ranging from
a layer of procedures and policies to a physical layer of security systems operated
in a configuration that combines effective security with the operating needs of
DBS in order to protect its infrastructure and systems and reduce the illegal use
of its resources.
Despite DBS's investments in measures to reduce such risks, DBS is unable to
guarantee that these measures will succeed in preventing damage and / or
disruption to the systems and information related to them.
5.19.3.11 Technical limitation that prevents the offering of integrated services - DBS
infrastructure suffers from technical limitations compared to Hot infrastructure.
The technical limitation prevents DBS from providing telephony, Internet and
various interactive services, including VOD, on its satellite infrastructure, and
therefore their supply depends on third parties.
5.19.3.12 Defects in the encryption system or its bypass – DBS’s broadcasts via
satellite and via the Internet, are based on the encryption of the broadcasts
transmitted by it, including the encoding of its satellite broadcasts using the "smart
cards" installed in the decoders in the subscriber houses. Defects in its encryption
system or hacking or bypassing it may allow free viewing of DBS broadcasts,
thereby leading to a decrease in revenue, as well as a breach of agreements
between DBS and its content providers.
5.19.3.13 Lack of exclusivity in the field of frequencies - the field of frequencies used
by DBS to transfer satellite transmission from the transmission satellites to the
reception dishes installed in the subscribers' homes, and which has been
allocated under a license by the Ministry of Communications, is defined as a
frequency range that an Israeli entity that may make authorized use of in the field
of frequencies. If the holder of the main allotment uses the above-mentioned
frequencies, disruptions in the quality of the DBS broadcasts and / or the
availability of the broadcasts to the subscriber may result in damage to the
financial results of DBS. As of the date of this report, to the best of DBS's
knowledge, no holder of the main allotment used the said frequencies in a manner
that caused actual and / or persistent interruptions in DBS broadcasts.
5.19.3.14 Interference for transmissions - since DBS transmissions via satellite are
transmitted wirelessly from the transmission centers to the transmission satellites
and from there to the reception dishes in the subscribers' houses, transmission of
155
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
wireless signals, in the same frequency range, whether originating in Israel and
abroad, and extreme weather conditions of heavy rain, hail or snow may cause
disruptions in the quality and / or availability of the broadcasts via the satellite
provided by DBS to the subscriber and material damage to its financial results. In
relation to broadcasts via the Internet, there may be disruptions in the quality and
/ or availability of the broadcasts as a result of disruptions or unavailability of the
Internet infrastructure.
5.19.3.15 Labor relations - DBS is a party to a collective agreement with the
Histadrut and the Employees’ Committee, which may reduce its administrative
flexibility (see section 5.11.3). In addition, the implementation of manpower plans
may cause unrest in labor relations and impair the day-to-day operations of DBS.
5.19.3.16 Streamlining procedures - DBS implements streamlining plans that
involve, among other
resources,
organizational changes and the reduction of the workforce, in parallel with the
management of significant infrastructure and other projects. Streamlining
procedures, by their nature, carry with them the risks of loss of knowledge,
turnover of employees, shift of managerial focus, and so on.
the sharing of management
things,
5.19.3.17 Delay in improving internet browsing speeds - as Bezeq’s outline for the
transition to OTT broadcasting (see section0) is also based on an improvement
in Internet browsing speeds, nationwide, failure to improve browsing speeds
through the deployment of fiber optics or through the implementation of another
technological solution, by Bezeq or other communications operators, can delay
the implementation of the layout or impair its implementation.
DBS assessments as to the browsing speeds required to enable OTT broadcasts
as designed in an outline in a way that enables the operation of several converters
in a customer's home is forward-looking information. These estimates are based
on the expected development in browsing speeds, taking into account, among
other things, the expected needs of customers' homes and the expected mix of
broadcasts. These assessments may not materialize or materialize differently if
there is a delay in improving Internet browsing rates or a change in customer
needs or DBS.
Below is a presentation of the risk factors according to their influence in the
opinion of the DBS’s Management. It should be noted that the following DBS
assessments regarding the extent of the risk factor's impact on DBS reflect the
extent of the risk factors’ impact in assuming the materialization of the risk factor,
and the aforesaid does not express any assessment or give any weight to such
prospects. In addition, the order in which the risk factors appear above and below
is not necessarily according to the risk inherent in each risk factor or the
probability of its occurrence.84:
Risk Factors Summary Table - Multi-Channel TV
Macro risk
Financial risks
Recession / economic slowdown
Security situation
Pandemic
Industry risk
Dependence on licenses
Changes in regulation
Fierce competition
Technological developments and changes
Alternative infrastructures
Unauthorized viewing
Exposure to class actions
The degree of influence
Medium Small
High
X
X
X
X
X
X
X85
X
X
X
X
84 See footnote 45.
85 The extent of the effect of this risk factor on DBS activity was classified as moderate, assuming that the event
would be limited in scope and time. Otherwise, the degree of impact may be large.
156
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
The degree of influence
Medium Small
High
Unique risk
Limitations as a result of the ownership structure
Restrictions due to eligibility conditions
The need to maintain a sufficient cash flow
Satellite failure and damage
Dependence on the supplier of space segments
Dependence on software, content, equipment and
infrastructure vendors
Impairment of the activity of the broadcast centers
Failure of computer systems
Cyber failures
Technical limitation that prevents the offer of
integrated services
Encryption system failure
Lack of exclusivity in frequencies
Interference with transmissions
Work relations
Efficiency procedures
Delay in improving internet browsing rates
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
The information contained in this section 5.19 and DBS's assessments regarding the
impact of risk factors on DBS's activities and business, are forward-looking
information as defined in the Securities Law. The information and assessments are
based on data published by the regulatory bodies, on DBS’s assessments of the
market situation and its competitive structure, on possible developments in the
Israeli market and economy, and on the factors specified in this section above. The
actual results may differ materially from the estimates given above if there is a
change in one of the factors taken into account in these estimates.
157
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
6.
The Company
6.1. Funding
6.1.1. The Company's bonds
For details about the bonds issued by the Company See Note 14 to the 2020 statemtns
and Section 4 of the Board of Directors' Report.
6.1.2. Credit rating
As of August 13, 2020, the Company's bonds are not rated in any rating. On the eve of the
termination of the rating, the rating of the Company's bonds (Series C) by Midroog was
Caa2.il, with a stable rating horizon.
6.2. Legal proceedings
6.2.1. On June 2, 2020, the Company and former directors of the Company signed a
settlement agreement as part of the Horev claim, according to which the directors will
pay an amount of NIS 2.5 million (hereinafter "the directors settlement amount") to
the Company. On July 2020, the district Court approved the settlement agreement,
and the directors' insurance paid the company the full directors’ settlement amount.
As part of the settlement, the Company paid the derivative plaintiff and his attorney a
total of NIS 720,000. The net amount received by the Company is charged directly to
the Company's shareholders' equity under the loss balance item.
6.2.2. On August 10, 2020, the Court in New York (the New York Southern District District)
the settlement in the class action lawsuit filed against the Company, according to
which, among other things, the insurance company that insured the Company paid a
total of USD 1.2 million. See the Company's immediate report dated August 12, 2020
(Reference No. 2020-02-087540).
6.2.3. On September 14, 2020, a settlement agreement was completed in a derivative
lawsuit against the Company in connection with claims regarding the distribution of a
dividend of NIS 113 million by the Company, of which approximately NIS 73 million
was paid to Internet Gold - Gold Lines Ltd. ("Internet Gold"). In 2016. As part of the
settlement agreement, the Company received bonds (Series C) of the Company worth
approximately NIS 22 million (principal and accrued interest) which were held by
Internet Gold, in exchange for waiving the claim against Internet Gold. The Company
also paid the derivative plaintiff a total of approximately NIS 4.23 million for expenses,
attorneys' fees and remuneration.
6.2.4. In November 2020, a claim was filed with the Tel Aviv District Court (Economic
Department) accompanied by a motion for approval as a class action by a private
person who claims to be a shareholder of Bezeq ("the Applicant") against the
Company, Bezeq and members of Bezeq’s Board of Directors ("the Respondents").
The matter of the motion is the approval of a class action for compensation of the
Applicant and the members of the represented group for damages caused to them,
according to the motion, "due to Bezeq's failure to report and disclose to the Tel Aviv
Stock Exchange (hereinafter: "TASE") and the concealment of material information
from investors, in connection with a public report on "the Ministry of Communications'
moves to eradicate the phenomenon of dual subscribers in the field of ISP Internet
services, on the extensive and substantial scope of the phenomenon of dual
subscribers in the Bezeq International subsidiary (hereinafter: "Bezeq International")
and their material negative impact on the business of the subsidiary and Bezeq". The
definition of the group according to the motion is anyone who purchased the Bezeq
shares from August 17, 2020 until October 30, 2020 and held the above shares or
some of them on October 30, 2020, except for the respondents and / or those on their
behalf and / or entities related to them. In the application, the damage caused to the
group members as a result of the incidents that are the subject of the lawsuit amounts
to approximately NIS 55 million to NIS 65 million, based on an expert opinion attached
to the motion.
6.2.5. In November 2020, a lawsuit was filed in the Tel Aviv District Court (Economic
Department) with motion for approval as a class action by a private individual ("the
Applicant") who claims is a shareholder of the Company who claims to hold the
Company's shares and Bezeq shares, against the Company, Bezeq and 72 other
158
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
respondents, which include past and present officers in the two companies ("the
Respondents"). The matter of the application is the approval of a class action for
compensation of the Applicant and the members of the represented groups for
damages caused to them, as alleged in the motion, as a result of the Respondents'
actions and omissions when they refrained from disclosing to the investing public
seemingly material information that they had to disclose in accordance with the
provisions of the law, in connection with the two companies' report dated November
9, 2020 according to which Bezeq International books have unexplained net asset
balances (deductible) of tens of millions of NIS, whin a significant portion of them
otiginate, apparently, in past periods of more than 15 years. The definition of the
groups according to the motion is: (a) Anyone who purchased Bezeq shares from
November 8, 2005 to November 9, 2020, except the Respondents or those on their
behalf and (b) Everyone who purchased the Company's shares on the Tel Aviv Stock
Exchange from November 8, 2007 to November 9, 2020, except the Respondents or
those on their behalf. The amount of the class action specified in the statement of
claim is "over NIS 2.5 million (for matters of substantive authority)" when in
accordance with the economic opinion that was attached to the motion, "the estimate
for the drop in the price of the security" in respect of the information included in the
immediate report dated November 9, 2020 is 5.26%-5.40% in relation to Bezeq and
9.07% - 9.36% in relation to the Company.
__________________________________
B Communications Ltd.
March 24, 2021
Date
The names of the signatories and their functions:
Darren Glatt, Chairman of the Board
Tomer Raved, CEO and Director
159
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
7. Appendix A - Glossary
A. Names are abbreviated according to the legislation that appear in the report
Consumer
Protection Law
Economic
Competition Law
- Consumer Protection Law, 5741-1981
- Economic Competition Law, 5748-1988
Companies Law
- Companies Act, 5769-1999
Non-Ionizing
Radiation Law
- The Non-Ionizing Radiation Law, 5776-2006
Centralization Law
- Law for the Promotion of Competition and the Reduction of Centralization,
Second Authority
Law
Planning and
Construction Law
Communications
Law
5774-2013
- Second Television and Radio Authority Law, 5755-1990
- Planning and Construction Law, 5725-1965
- The Communications (Bezeq and Broadcasting) Law, 5742-1982
Securities Law
- Securities Law, 5728-1968
Rules of
communication
Rules of Communication (Holder of a Broadcasting License), 5747-1987
-
Telegraph Order
- Wireless Telegraph Order [New Version], 5732-1972
Usage regulations
Communications (Bezeq and Broadcasting) Regulations (Use of the Mapa
Public Network), 5775-2014
The media order
-
Communications Order (Bezeq and Broadcasting) (determination of an
essential service provided by Bezeq, The Israel Telecommunications
Company Ltd.), 5777-1997
The Planning and
Construction
Regulations
(Exemption from
the Permit)
Prospectus Details
Regulations
- Planning and Construction (works and buildings exempt from the permit),
5774-2014
- Securities Regulations (Prospectus Details, Draft Prospectus Structure and
Form), 5729-1969
Reciprocal linking
- Communications Regulations (Bezeq and Broadcasting) (Payments for
regulations
Satellite
Broadcasting
License
Regulations
Reciprocal Linking), 5764-2000
- Communications Regulations (Bezeq and Broadcasting) (Procedures and
Conditions for Licensing Satellite Broadcasting), 5758-1998
B. Technological terms and other key terms appearing in the report86
Internet Gold
Bezeq Online
Bezeq
International
-
-
-
Internet Gold Gold Lines
Bezeq online Ltd.
Bezeq International Ltd
86
It should be noted that the definitions of the terms are provided for the convenience of the reader, and are not necessarily identical to the definitions in the
Communications Law or its regulations.
160
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
BAP
Golan telecom
2020 statements
Interconnectivity
fee
DBS
Hot
Hot Telecom
Hot Mobile
Hot-Net
The Stock
Exchange
The Histadrut
Council
The Second
Authority
Walla
space
Eurocom DBS
Eurocom
Communications
Switching
Mbps
NIO
Roaming
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Network endpoint
-
BAP Communications Solutions (Limited Partnership) which is
controlled by Bezeq International
Golan Telecom Ltd.
The Company's consolidated financial statements for the year ended
December 31, 2020
The interconnectivity fee (also called the call completion fee) is a
payment that one operator pays to another operator for a reciprocal
link (see definition below)
DBS Satellite Services (1998) Ltd.
Hot Communications Systems Ltd., and corporations under its control
that operate in the field of broadcasting (multi-channel television)
Hot Telecom Limited Partnership
Hot Mobile Ltd. (formerly MIRS Communications Ltd.) and
corporations under its control
Hot-Net Internet Services Ltd.
The Tel Aviv Stock Exchange Ltd.
The New General Workers' Union
Cable and Satellite Broadcasting Council
The Second Television and Radio Authority
Walla! Communications Ltd. and corporations under its control
Space Communications Ltd.
Eurocom DBS Ltd.
Eurocom Communications Ltd.
In the context of a communications network - a telephony system that
supports the connection of devices for transferring calls between
different end units
Megabits per second; Measurement unit for data transfer speed
National interior operator; A body that provides landline interior
telephony services under a general or unique NIO license
Roaming services allow a customer of one communication network
to receive services from another communication network other than
his "home network" (the network with the license he subscribes to),
based on roaming agreements between the home network and the
host network
Network endpoint - an interface to which one is connected, on the
one hand a public Bezeq network and on the other hand end
equipment or a private network. Network endpoint services include
the supply and maintenance of equipment and services in the
customer's premises
Cellcom
Pelephone
Partner
-
-
-
Cellcom Israel Ltd. and corporations under its control
Pelephone Communications Ltd.
Partner Communications Ltd. and corporations under its control
161
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
Interconnectivity
-
Mobile phone
radio
Unified general
license / unified
license
NIO license
Mobile Radio
license
Broadcasting
license
ILA
Rami Levi
Bezeq services
Transmission
services
Data
communication
services
Report period
Bitstream Access
(BSA)
xDSL
DTT
GSM
HD
4k / UHD
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Interconnectivity enables the transmission of instant messages
between subscribers of different licensees, or the provision of
services by one licensee to the subscribers of another licensee;
Interconnectivity is possible through a connection between a public
Bezeq network of one licensee (for example - Bezeq) and a public
network of another licensee (for example - a cellular operator); See
also " Interconnectivity Fee" Definition
Mobile radio telephone phone; Cellular telephony
A general license that is one of the following or a license that unites
several thereof:
(1) a unique general license;
(2) a general mobile radio telephone license in another network;
(3) a general license for the provision of international flash services;
(4) a special license for the provision of network endpoint services;
(5) Special license for the provision of Internet services.
Unique general or general license for the provision of landline interior
Bezeq services
General license for the provision of mobile radio telephone services -
in the cellular method
License for satellite television broadcasts
Israel Lands Authority
Rami Levy Cellular Communications Ltd.
Performing Bezeq operations (transmission, transfer or reception of
signs, signals, writing, visual forms, sounds or information, using
wire, wireless, optical system or other electromagnetic systems) for
others
Electromagnetic signal transmission or bit sequence
Network services for data transfer from point to point, data transfer
between computers and various communication networks and
remote business access services
The twelve months ended December 31, 2020
Managed broadband access that allows provider services to connect
to the infrastructure owner network and offer broadband services to
subscribers
Digital Subscriber Line - technology that uses the copper wires of
telephone lines to transmit data at high rates by using frequencies
higher than the audible frequency and therefore allows simultaneous
use of call and data transmission
Digital Terrestrial Television- Wireless digital broadcasting of TV
channels via terrestrial relay stations
Global System for Mobile Communications - International Standard
for Cellular Communication Networks ("2G")
High Definition TV - High definition (broadcast) TV broadcasts
Ultra Hi Definition - Internationally defined transmission technology,
compared to pixel image size. In this transmission method the
amount of pixels is 4 times larger (2160 × 3840) compared to HD
transmission (1080 × 1920)
162
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
HSPA
IBC
IP
IPVPN
ISP
LTE
MVNO
NGN
UMTS
VoB
VoC
VOD
VoIP
Wi-Fi
-
-
-
-
-
-
-
-
-
-
-
-
-
High Speed Packet Access - Cellular
technology that is a
continuation of the UMTS standard that enables data transfer at high
speeds ("3.5G")
ABC Israel Broadband Company (2013) Ltd.
Internet Protocol. The use of this protocol enables convergence
between voice (data) and contractual (video) services over the same
network
A virtual private network (Virtual Private Network) based on an
Internet Protocol (IP) which is established on the public network, and
through which it is possible to: (a) allow end users to connect to the
corporate network and perform remote access; And - (b) make a
connection between the branches of the organization (intranet)
Internet Service Provider - has a special license to provide Internet
access services (Internet Service Provider). The Internet access
provider is the body that allows the end user to connect to the IP /
TCP protocol that connects it to the global Internet network
Long Term Evolution - Fast WIFI mobile standard devices such as
cell phones
Mobile Virtual Network Operator - a virtual cellular operator, which
uses the existing communication infrastructure of the cellular
operators without the need for its own infrastructure
Next Generation Network - Bezeq's communications network based
on IP architecture
Universal Mobile Telecommunications System - an international
standard for cellular communications that is a development of the
GSM standard ("3G")
Voice Over Broadband - Telephony services and related services in
IP technology using landline broadband access services
Voice over Cellular Broadband - Telephony services over a cellular
data communication channel ("Mobile VoB Services")
Video on Demand - TV services on demand by the subscriber
Internet Protocol -
Voice over
the
transmission of voice messages (telephony service delivery) via IP
protocol
that enables
technology
Wireless Fidelity - Wireless access to the Internet in the local area
163
Chapter A (Description of the Corporation's Business) for the 2020 Periodic Report
8. Appendix B - Financial Indices and Operational Performance Indices (Key
Performance Indicators)
General
The indices below, which are specified in the chapters of the Company's periodic report, are financial
indices that are not defined or detailed in generally accepted accounting principles included in the
financial statements. The definition of the indices and / or how they are calculated may change from
time to time, they do not constitute a substitute for indices based on accepted accounting rules and
they may not even be calculated in the same way as parallel indices in other companies.
Details will be provided below in relation to the aforesaid indices, including in accordance with the
update of the decision of the Securities Authority 99-6 regarding the use of financial indices that are
not based on generally accepted accounting rules.
Financial Indices
EBITDA
(Earnings Before Interest, Taxes, Depreciation and Amortization) EBITDA is defined as profit before
interest, taxes, depreciation and amortization. The EBITDA index is an accepted index in the field of
the Company's activity which neutralizes aspects due to differences in the capital structure, various
aspects of taxation and the manner and period of the reduction of fixed and intangible assets. The
Company's EBITDA is calculated as operating profit before depreciation, amortization and
impairment (ongoing losses from impairment of fixed assets and intangible assets). As of January 1,
2019, and for the purpose of adequately presenting economic activity, the Company presents
ongoing losses from impairment of fixed assets and intangible assets in the DB and Walla under
depreciation and amortization, as well as ongoing losses from impairment of broadcasting rights
under operating expenses and general expenses (in the statement of income).
Free flow (Free Cash Flow - FCF)
The Company's free cash flow is calculated as cash arising from current activities less cash for the
purchase / sale of fixed assets and intangible assets (net) and as of 2018, with the application of a
IFRS16 standard, payments for leases are also deducted. The free cash flow index is an accepted
index in the field of the company's activity in general and it represents the cash that the Company is
able to produce after the investment needed to maintain or expand its asset base.
Operational performance indices (Key Performance Indicators)
ARPU (Average Revenue Per User)
The ARPU reflects the average monthly income per line / subscriber / parent house and is calculated
as the monthly average distribution of the total relevant income for the period in the average number
of active lines / subscribers / households in that period, as applicable. It will be clarified that the Group
has four main areas of activity that correspond to the corporate division between the Group
companies and the definition of a different active subscription between the areas of activity.
Churn rate
The churn rate reflects the Company's ability to retain its customer base and is calculated as the
distribution of the number of lines / subscribers / households that disconnected from the Company's
services during the period in the average number of active lines / subscribers / households in that
period, as applicable. It will be clarified that the Group has four main areas of activity that correspond
to the corporate division between the Group companies and the definition of a different active
subscription between the areas of activity.
164
Chapter B'
Report of the Board of Directors on the
state of affairs of the corporation for
the year ended December 31, 2020
Report of the Board of Directors on the state of affairs of the corporation for the year
ended December 31, 2020
We are hereby honored to submit the Board of Directors' report on the state of affairs of "B
Communications Ltd." (hereinafter: “the Company") and the Group companies in a consolidated
manner (the Company and its subsidiaries will be collectively referred to hereinafter as: “the
Group"), for the year ended December 31, 2020.
For the investigation by the Securities Authority and the Police, see Note 1.3 to the financial
statements.
The auditors referred to this in their opinion on the financial statements.
For restatement, see Note 1.5 to the financial statements.
Regarding the effects of COVID-19 crisis, see Chapter 1.6 below.
The Group reports on four main operating segments in its financial statements as follows:
1.
Landline interior communication
2. Cellular communication
3.
Internet services, international communications and network
endpoint
4. Multi-channel TV
It should be noted that the Company's consolidated financial statements also includes the
"other" segment which mainly includes call center services for customers (through "Bezeq
Online") and up to December 2020, also included content services in the field of the Internet (via
"Walla").
On December 27, 2020, Bezeq completed a transaction for the sale of all its holdings in Walla,
see Note 13.4 to the financial statements. The "other" segment activity is not material at the
Group level.
1
Report of the Board of Directors on the state of affairs of the corporation for the year
ended December 31, 2020
The following are consolidated results of the Group:
2020
2019
Increase (decrease)
NIS millions NIS millions NIS millions
%
Net profit (loss)
EBITDA*
Adjusted EBITDA*
900
3,566
3,647
(1,460)
2,530
3,671
2,360
1,036
(24)
-
40.9
(0.7)
The increase in consolidated net profit in 2020 relative to 2019 also resulted mainly from the
registration of impairment in the cellular communications segment and the cancellation of the
tax asset due to losses in DBS. In 2019, these losses were partially offset by the record of capital
gains from the sale of a real estate property in the "Sakia" complex in 2019, for more information
see Section 1.2.1 below.
The increase in consolidated EBITDA in 2020 was due to the record of impairment in the cellular
communications segment in 2019, which was partially offset by the recording of a capital gain
from the sale of a real estate property in the Sakia complex in 2019.
* Financial indices that are not based on generally accepted accounting principles
As of the date of the report, the Group's Management is assisted by financial performance
indices that are not based on the generally accepted accounting rules for examining and
presenting the Group's financial performance. These indices do not constitute a substitute for
the information contained in the Company's financial statements.
The following is a breakdown of the indices:
Index
Details of the method of calculation and the purposes of the index
EBITDA
(Earnings Before
Interest, Taxes,
Depreciation and
Amortization)
Adjusted EBITDA
interest,
taxes, depreciation and
Defined as profit before
amortization.
The EBITDA index is an accepted index in the Group’s field of
activity which neutralizes aspects due to differences in the capital
structure, various aspects of taxation and the manner and period of
the amortization of fixed and intangible assets. The Group's EBITDA
is calculated as operating profit before depreciation, amortization
and impairment (including ongoing losses from impairment of fixed
assets and intangible assets as described in Note 3.10.2 and 11.5
to the financial statements).
Calculated as an EBITDA index net of other operating expenses /
revenue, net and one-off losses / profits from impairment / increase
in value and expenses in respect of options for employees. The
index allows comparisons of operational performance between
different periods while neutralizing one-off effects of exceptional
expenses / revenue.
It should be noted that the correlated EBITDA index should not be
compared to indices with a similar name reported by other
companies due to a possible difference in the way the index is
calculated.
2
Report of the Board of Directors on the state of affairs of the corporation for the year
ended December 31, 2020
Method of Adjusted EBITDA calculation
Operating Profit
Depreciation, amortization and impairment
EBITDA
Impairment loss
Other operating expenses (income), net
Adjusted EBITDA
* reclassified
2020
2019
NIS millions
NIS millions
1,708
1,858
3,566
8
73
3,647
466
2,064
2,530
1,329*
(188)
3,671
3
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
1.
Explanations by the Board of Directors on the state of the corporation's business, the results of its operations, shareholders'
equity, cash flows and other matters
1.1 The financial position
December
31, 2020
December
31, 2019
Increase
(decrease)
NIS millions
NIS
millions
NIS
millions
%
1,775
-
2,315
2,055
(280) (13.62)
39
2,496
39
(181)
-
(7.2)
Cash and current
investments
Limited cash
Current and non-current
customers and trade
receivable
Inventory
Assets held for sale
Broadcasting rights
73
10
67
96
43
59
(23)
(33)
8
(23.9)
(76.7)
13.6
Right-of-use assets
1,804
1,217
587 48.23
Fixed assets
Intangible assets
6,131
3,268
5,968*
3,167*
163
101
2.73
3.18
Deferred expenses and
non-current investments
402
343*
59
17.2
Explanation
For more information, see chapter 4.1 below.
The decrease was mainly due to the landline interior communications segment due to a
decrease in balances receivable as a result of the sale of real estate offset by an increase
in customer balances and also from the cellular communications segment due to a
decrease in customer balances offset by a frequency grant (see Note 11.1 to the financial
statements).
The increase was due to the landline interior communications segment and the cellular
communications segment as a result of new lease agreements due to the move to new
offices, see Note 9.5 to the financial statements.
The increase was due to the landline interior communications segment, offset by a
decrease in the Internet, international communications and network endpoint services
segments due to recognition of losses from impairment of assets, see Note 11.6 to the
financial statements.
The increase was mainly due to the registration of the cost of 5G frequencies in the cellular
communications segment, see Note 11.1 to the financial statements. The increase was
offset by recognition of losses from impairment of assets in the Internet, international
communications and network endpoint services segments, see Note 11.6 to the financial
statements.
The increase in BCOM was due to cash deposited in a long-term deposit. On the other
hand, there is a decrease in Bezeq, which resulted from the recognition of losses from
impairment of long-term advance expenses for capacities and additional advance expenses
in the Internet, international communications and network endpoint services segments in
the amount of NIS 112 million (see Note 11.6 to the financial statements).
4
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
Deferred tax assets
108
81
27
33.3
The increase was mainly due to the initial recognition of a deferred tax asset in respect of
an expected loss for tax purposes from the sale of Walla (see Note 7 to the financial
statements).
Total assets
15,953
15,564
389
2.49
* Reclassified
5
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
1.1. Financial position (continued)
December
31, 2020
NIS millions NIS
December
31, 2019
millions
Increase
(decrease)
NIS
millions %
Debt to financial institutions
and bondholders
10,270
11,419
(1,149)
(10.06)
Liabilities in respect of leases
Suppliers and trade payables
Employee benefits
1,907
1,385
522
37.7
1,766
1,627
139
8.54
817
1,010
(193)
(19.1)
Other liabilities
Total liabilities
Total capital deficit attributed
to the Company's
shareholders
766
561
205
36.54
15, 526
16,002
(476)
(2.97)
(107)
(241)
134
(55.6)
Explanation
The decrease in debt was mainly due to repayment (including early
repayment) of loans and repayment of bonds, offsetting the issuance and
expansion of Series 11 and 12 bonds in the landline interior communications
segment (for more information, see Note 14 to the financial statements).
The increase was due to the landline interior communications segment and
the cellular communications segment due to new leases agreements as a
result of relocation to new offices, see Note 9.5 to the financial statements.
The increase was mainly due to the landline interior communications
segment, due in part to an increase in the tax liability balance.
The decrease was due to payments for retirement of employees and
streamlining plans in the Group, offset by expenses due to the termination
of an employee-employer relationship in early retirement in Bezeq in the
amount of NIS 65 million, see Note 17.5.1 to the financial statements.
The increase was mainly due to a long-term liability in the cellular
communications segment for winning a frequency tender, see Note 1.11. to
the financial statements.
The capital deficit is approx. 0.06% of the total balance sheet, compared with
a capital deficit that was approx.1.54 of the total balance sheet as of
December 31, 2019.
6
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
1.2. The results of operations
1.2.1. Results summary
2020
2019
Increase (decrease) Explanation
NIS millions
%
Revenue
8,723
8,929
(206)
(2.3)
Operating and
general expenses
3,182
3,321
(139)
(4.2)
Payroll
1,894
1,937
(43)
(2.2)
Depreciation,
amortization and
impairment
1,858
2,064
(206)
(10)
Impairment loss,
net
8
1,329
(1,321)
(99.3)
The decrease was mainly due to the cellular communications
segment, mainly due to the impact of the COVID-19 crisis which led to
a decline in revenues from roaming services as well as the Internet
services, telecommunications services and multi-channel television
segments, offset by an increase in landline interior communications
segment revenues.
The decrease was due to a decrease in expenses in all of the Group's
main segments, except for the landline interior communications
segment, as well as a decrease in the loss from the impairment of
broadcasting rights in DBS compared with the corresponding year,
see Note 11.5 to the financial statements.
The decrease was mainly due to the cellular communications segment
as well as the multi-channel television segment and the Internet,
international communications and network endpoint services
segments, mainly due to a decrease in the number of jobs. The
decrease was partially offset mainly due to an increase in payroll
expenses in the "others" segment - at Bezeq Online.
The decrease was due to the Internet, international communications
and network endpoint services segments, the cellular communications
segment and a decrease in the loss from the impairment of intangible
assets and fixed assets in DBS, see Note 11.5 to the financial
statements, offset by an increase in the landline interior
communications segment.
In the current year, a loss was recognized from the impairment of
assets in the Internet and international communications services cash-
generating unit in the amount of NIS 279 million (see Note 11.6 to the
financial statements) compared to NIS 157 million in the
corresponding year. Also, following an agreement to sell all Bezeq’s
holdings in Walla, Profit from the cancellation of the impairment
recognized in the past in the amount of NIS 14 million was recognized
in the year 2020 (see Note 13.4 and 11.2 to the financial statements).
Also, loss from impairment of goodwill attributable to the cellular
7
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
communications cash-generating unit in the amount of NIS 951 million
was recognized in 2019, compared with the cancellation of an
impairment loss from 2020 in the amount of NIS 258 million.
The change was due to the fixed landline interior communications
segment, mainly due to a capital gain from the sale of a real estate
property in the Sakia complex, which was recognized in the
corresponding year in the amount of NIS 403 million. The aforesaid
change was partially offset mainly due to expenses recognized in the
corresponding year due to the termination of the employer-employee
relationship in early retirement and a streamlining agreement in the
other segments of the Group, see Note 25 to the financial statements.
In 2020, there was a decrease in net financing expenses in the
landline interior communications segment, which was offset by non-
registration of financing revenue as a result of the change in the
Company's debt terms recorded in 2019, see Note 26 to the financial
statements.
The decrease in income taxes was mainly due to the recognition of tax
expenses in the corresponding year in the amount of NIS 1,259 million
from the write-off of the tax asset in respect of losses of DBS. In the
current year, a tax asset was written off in the Internet, international
communications and network endpoint services segment in the
amount of NIS 31 million, see Note 7 to the financial statements.
Other operating
expenses
(revenue), net
73
(188)
261
-
Operating Profit 1,708
466
1,242
266.5
Financing
expenses, net
474
472
Share in losses
of investee
companies
-
(2)
2
2
0.4
(100)
Income taxes
334
1,452
(1,118)
(76.99)
Profit (loss) in the
year
* Reclassified
900
(1,460)
2,360
-
8
Report
December
the of
31,
Board
2020
of
Directors
the on
state
of
affairs
the of
corporation
for
the
year
ended
1.2.2. Operating segments
a. The following are data regarding revenues and operating profit in accordance with the Group's
operating segments:
2020
NIS
millions
% of total
revenue
2019
NIS
millions
% of total
revenue
Revenue by operating
segments
Landline interior communication 4,159
Cellular communication
2,186
Internet services, international
communications and network
endpoint
Multi-channel TV
1,271
1,287
Others and adjustments
Total
(180)
8,723
47.68
25.06
14.57
14.75
(2.06)
100.00
4,073
2,362
1,339
1,345
(190)
8,929
45.6
26.5
15.0
15.1
(2.2)
100
Year 2020
NIS
million
% Of
revenue
The sector
Year 2019
NIS
million
% Of
revenue
The sector
Operating profit (loss) by
operating segment
Landline interior communication 1,705
Cellular communication
Internet services, international
communications and network
endpoint
Multi-channel TV *
(241)
(42)
(84)
41.0
(3.8)
(19.0)
(3.3)
2,142
(99)
52.59
(4.2)
(196)
(135)
(14.63)
(10)
Others and adjustments
370
-
** (1,246)
-
Consolidated operating profit /
percentage of Group income
1,708
19.58
466
5.2
* The results of the multi-channel television segment are presented net of the overall impact of
impairment recognized since 2018. This is in accordance with the way the Group's chief
operating decision maker evaluates the segment's performance and makes decisions
regarding the allocation of resources to the segment. In addition, see Note 31.3 regarding a
summary of selected data from the financial statements of DBS.
** Impairment loss (cancellation of impairment loss) attributable to the cellular communications
cash-generating unit is presented under "Others and adjustments".
9
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
1.2.2. Activity segments
b. Landline interior communications segment
2020
2019
Increase
(decrease)
NIS millions
%
Internet infrastructure 1,622
1,578
44
2.8
Landline telephony
1,008
1,039
(31)
(3.0)
Explanation
The increase was mainly due to an increase in the average revenue per retail subscription
and an update in the rates of wholesale Internet services. In addition, there is an increase
in the number of retail internet subscribers mainly due to the impact of the COVID-19
crisis. The increase was mitigated by a decrease in the number of wholesale Internet
subscribers.
The decrease was due to a decrease in the number of subscribers and was mitigated by
an increase in the average revenue per telephone subscriber due to an increase in
revenue from calls due to the COVID-19 crisis.
Transmission,
communication
Data and others
Cloud and digital
services
Total
1,241
1,182
59
5.0
The increase was due, among other things, to an increase in revenues from transmission
services to Internet providers and to businesses and the sale of cellular end equipment.
288
274
4,159
4,073
14
86
5.1
2.1
The increase was due, among other things, to virtual exchange services.
Operating and general
expenses
590
565
25
4.4
Payroll
919
911
8
0.9
Depreciation and
amortization
877
861
16
1.9
Other operating
expenses (revenue),
net
68
(406)
474
-
The increase was mainly in connectivity to telecommunications operators due to an
increase in consumption, expenses for subcontractor services, provision for loan-loss,
advertising and end equipment costs, offsetting a decrease in building maintenance
expenses, mainly due to property tax credit deductions due to the COVID-19 crisis
The increase in payroll was mainly due to wage increases and actuarial provisions,
offsetting the retirement of employees and an increase in the attribution of payroll for
investment.
The change was due to a decrease in capital gains from the sale of real estate, mainly
due to a capital gain from the sale of a real estate property in the "Sakia" complex that
was recognized in the corresponding year in the amount of NIS 403 million. On the other
hand, there was a decrease in expenses recognized in respect of the termination of the
employee-employer relationship in early retirement and in addition, a capital gain of NIS
22 million was recognized from the sale of Walla, see Notes 13.4, 17.5 and 25 to the
financial statements.
10
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
Operating profit
1,705
2,142
(437)
(20.4)
Financing expenses,
net
403
569
(166)
(29.2)
Income taxes
262
381
(119)
(31.2)
Segment profit
1,040
1,192
(152)
(12.8)
The decrease was mainly due to a decrease in financing expenses for employee benefits,
a decrease in interest expenses due to repayment (including early repayment) of loans,
a decrease in linkage differences due to bonds due to a decrease in the consumer price
index and lower repayment costs of loans and bonds recognized in the corresponding
year, see Notes 14.2 and 26 to the financial statements.
In the reported year, a deferred tax asset was recognized in respect of a loss for tax
purposes from the sale of Walla in the amount of NIS 37 million (see Note 7 to the
financial statements).
11
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
1.2.2. Activity segments
c.
Cellular communications segment
2020
NIS
millions
2019
NIS
millions
Growth (decrease)
%
NIS
millions
Explanation
Services
1,591
1,709
(118)
(6.9)
Sale of end equipment to
the customer
595
653
(58)
(8.9)
Total revenue
2,186
2,362
(176)
(7.5)
Operating and general
expenses
1,329
1,373
(44)
(3.2)
Payroll
324
373
(49)
(13.1)
The decrease was mainly due to the impact of the COVID-19 crisis which led to a
decrease in revenue from roaming services which was partially offset due to an increase
in revenue from incoming airtime. In addition, there is a continuation of the transition of
existing customers to cheaper packages that include a wide browsing volume and which
are compatible with current market prices. This decline was partially offset by growth in
the post-pay subscriber base.
The decline was mainly due to a decrease in retail sales due to the closure of points of
sale as a result of the closures following the COVID-19 crisis. The decline was partially
offset by an increase in wholesale sales.
The decrease was mainly due to a decrease in the cost of sales and roaming services
expenses due to the COVID-19 crisis as well as a continued reduction and streamlining
of operating expenses, which were offset by an increase in call completion fees due to an
increase in subscribers and increases in uses due to the COVID-19 crisis.
The decrease was mainly due to the continued decrease in the number of jobs as part of
a streamlining plan and employees going on unpaid leave against the background of the
COVID-19 crisis.
Depreciation and
amortization
Other operating expenses,
net
Operating loss
Financing income, net
Revenue from taxes on
income
Sector loss
599
633
(34)
(5.4)
18
(84)
(48)
(11)
(25)
82
(99)
(39)
(13)
(47)
(64)
(78.0)
The decrease was mainly due to the recording of expenses in 2019 due to the renewal of
the collective agreement, which includes streamlining and synergy procedures.
15
(9)
2
22
(15.2)
23.1
(15.4)
(46.8)
For information regarding impairment in the cellular communications segment, see Note 11.3 to the financial statements.
12
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
1.2.2. Activity segments
d.
Internet, international communications and network endpoint services
2020
NIS
millions
2019
NIS
millions
Increase (decrease)
NIS
millions
%
Explanation
Revenue
1,271
1,339
(68)
(5.1)
Operating and general
expenses
802
827*
(25)
(3.0)
Payroll
Depreciation and
amortization
Other operating
expenses
248
149
261*
190
(13)
(41)
(5.0)
(21.6)
313
257
56
-
Operating loss
(241)
(196)
(45)
23.0
Financing expenses, net 2
6
Income Tax expenses
(revenue)
32
(45)
(4)
77
(66.7)
-
Sector loss
(275)
(157)
(118)
75.2
The decrease was mainly due to a decrease in Internet revenues, sales of
equipment and licensing for businesses and revenues from international calls. The
decrease was slightly offset due to an increase in revenues from business
services.
The decrease was due to a decrease in expenses from equipment and licensing
for businesses, expenses for international calls and other operating expenses. The
decrease was partially offset by an increase in expenses for communications and
computing services for businesses and local capacity.
The decrease was due to a continued decrease in the number of Company
employees as part of the streamlining plan.
The decrease was due to impairments of assets recognized as of December 31,
2019 and September 30, 2020.
In the current year, an impairment loss was recognized in the amount of NIS 307
million, compared with NIS 196 million in the corresponding year, see Note 11 to
the financial statements. Also, in the corresponding year, costs were recognized in
respect of a collective agreement and an update of a provision for legal claims.
In the current year, deferred tax assets have been written off as a result of a low
probability of generating future profits for tax purposes.
13
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
1.2.2. Activity segments
e. Multi-channel TV *
2020
NIS
millions
2019
NIS
millions
Increase (decrease)
%
NIS
millions
Explanation
Revenue
1,287
1,345
(58)
(4.3)
Operating and general
expenses
838
895
(57)
(6.4)
Payroll
195
209
(14)
(6.7)
The decrease was mainly due to a decrease in the average revenue per subscriber, as a
result of a change in the mix of subscribers from premium to discount, offsetting revenue
from the sale of content to external entities.
The decrease was mainly due to a decrease in content and marketing expenses as well as
streamlining of operating expenses
The decrease was mainly due to a continued decrease in the number of jobs as part of the
streamlining plan as well as employees going on unpaid leave due to the COVID-19 crisis.
Depreciation and
amortization
Other operating
expenses (revenue)
Operating (loss)
Financing expenses,
net
Income taxes
310
334
(24)
(7.2)
The decrease was mainly due to a decrease in fixed asset investments.
(14)
(42)
13
2
42
(56)
-
(135)
93
(68.9)
12
2
1
-
8.3
-
The change was mainly due to the recording of expenses in respect of an arrangement for
the retirement of employees in the corresponding year.
Segment loss
(57)
(149)
92
(61.7)
* The results of the multi-channel television segment are presented net of the overall impact of impairment recognized since 2018. This is in accordance
with the way the Group's chief operating decision maker evaluates the segment's performance and makes decisions regarding the allocation of
resources to the segment. For further information, see Note 11.5 to the financial statements. In addition, see Note 31.3 regarding the summary of
selected data from the financial statements of DBS.
14
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
1.3.
Main data from the consolidated quarterly income statements (NIS millions)
Q1-2020 Q2-2020 Q3-2020 Q4-2020 2020
Explanation
Revenue
2,187
2,155
2,178
2,203
8,723
The third quarter includes loss from impairment of assets in the Internet,
international communications and network endpoint services segment in the
amount of NIS 254 million and the fourth quarter includes an additional loss
of NIS 25 million, see Note 11.6 to the financial statements.
The fourth quarter includes the cancellation of a loss from impairment of
assets in the cellular communications segment in the amount of NIS 266
million.
The fourth quarter includes expenses in respect of the termination of the
employee-employer relationship in early retirement in the amount of NIS 65
million as well as expenses for a one-time bonus for employees in the
amount of NIS 40 million in the landline interior communications segment,
see Note 17.5 to the financial statements.
In the second quarter, Bezeq recognized financing expenses in respect of the
payment of an early repayment fee in the amount of approximately NIS 51
million due to early repayment of a loan.
Operating expenses
1,718
1,650
1,973
1,674
7,015
Operating profit
469
505
205
529
1,708
Financing expenses,
net
Profit after financing
expenses, net
60
186
106
122
474
409
319
99
407
1,234
Income taxes
102
82
Profit for the period
307
237
93
6
57
350
334
900
* Fourth quarter 2020 VS fourth quarter 2019
The profit for the fourth quarter of 2020 amounted to approx. NIS 350 million, compared with a profit of NIS 182 million in the corresponding quarter
last year. The change was mainly due to the fact that the corresponding quarter included a net loss from impairment of assets in the Internet,
international communications and network endpoint services segment in the amount of NIS 285 million (compared with NIS 25 million in the current
quarter), and included other operating expenses higher by approx. NIS 77 million in the fourth quarter of 2019, on the other hand, financing revenue
was recorded in the Company as a result of a change in the Company's debt terms in the amount of NIS 175 million in the fourth quarter of 2019.
15
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
1.4.
Cash Flow
2020
NIS
millions
2019
NIS
millions
Change
NIS
millions
%
Net cash flow from
operating activities
3.209
2,905
304
10.46
Net cash flow used for
Investing activity
(1,067)
(577)
(490)
84.92
Net cash flow used for
financing activities
(2,062)
(2,618)
556
(21.23)
Explanation
The increase in net cash flow from operating activities was
mainly due to the landline interior communications segment,
mainly as a result of an increase in profit and a decrease in
the income tax paid.
In 2019 there were higher repayments of deposits and sales
of investments compared to 2020. Also, in the previous year
net proceeds from the sale Sakia complex was recorded.
interest paid, mainly due
The decrease in the net cash flow used for financing
activities was mainly due to a decrease in loan and bond
repayments and
to early
repayment of loans and bonds in the corresponding year in
the Company and in the landline interior communications
segment, offsetting a decrease in the receipt of loans and
the issuance of bonds. There is also a decrease in costs
due to early repayment. For further information, see Note 14
to the financial statements.
Net increase (decrease)
in cash
80
(290)
370
-
Average volume in the reported year
Long-term liabilities (including current liabilities) to financial institutions and bondholders: approx. NIS 10,845 million.
Credit providers: approx. NIS 955 million. Short-term customer credit: approx. NIS 1,678 million. Long-term customer credit: approx. NIS 283 million
16
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
Working capital
The Group's consolidated working capital as of December 31, 2020 amounted to
approximately NIS 94 million, compared with working capital of approximately NIS 423
million as of December 31, 2019.
The Company (according to the "Solo” financial statements) has working capital as of
December 31, 2020 in the amount of NIS 228 million, compared with working capital in the
amount of NIS 485 million as of December 31, 2019.
The decrease in the working capital of the Group and the Company was due to a decrease
in current assets, mainly in accounts receivable in respect of the sale of buildings and
current investments in Bezeq, as well as a classification of long-term deposits, at the same
time as raising debt with a longer duration (see Note 14 to the financial statements) and
also due to retirement payments to Bezeq employees.
For a forecast cash flow, see Chapter 1.5 below.
17
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
1.5. Disclosure regarding the Company's projected cash flow
Pursuant to Regulation 10(b)(14) of the Securities Regulations (Periodic and Immediate Reports),
5737-1970 and upon the occurrence of warning indications - Equity Deficit in - in the Company's
statement (Solo) as well as in the consolidated statement and ongoing negative cash flow from
current operations in the Company’s statement (Solo), the following is a cash flow forecast for the
Company, detailing the sources and financial uses for the period between January 1, 2021 and
December 31, 2022.
Projected cash flows
January 1, 2021 to
December 31, 2021
January 1, 2022 to
December 31, 2022
Company - solo
NIS millions
NIS million s
Bank deposits and marketable securities
for the beginning of the period
Cash and cash equivalents for the
beginning of the period
Total liquidity for the beginning of the
period
Sources - Company
317
55
372
(33)
Cash from investing activities
Investment in marketable securities
Proceeds from repayment of bank deposits 80
Profits from marketable securities and
interest on bank deposits
Total net cash from investing activities
Uses - Company
Cash for current operations
Operating expenses
Total cash for current operations
4
51
(10)
(10)
Cash for financing activities
Payment of interest on bonds
Total cash for financing activity
Bank deposits and marketable securities
for the beginning of the period
Cash and cash equivalents for the end of
the period
Total liquidity at the end of the period
(78)
(78)
270
18
288
270
18
288
-
80
4
84
(10)
(10)
(78)
(78)
190
14
204
18
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
1.5 Disclosure regarding the Company's projected cash flow (continued)
The following is a comparison table between the forecast given as part of the PR report for 2019
and the actual cash flow period between January 1, 2020 and December 31, 2020:
Comparison - cash flows,
solo
Performance
1-12.2020
NIS millions
Forecast
1-12.2020 Gap
NIS
NIS
millions
millions
Explanation of the gap
Bank deposits and
marketable securities for
the beginning of the period 46
Cash and cash equivalents
for the beginning of the
period
Total liquidity for the
beginning of the period
Sources - Company
Cash from investing
activities
Proceeds from marketable
securities and interest on
deposits Banking
Total net cash from
investing activities
452
498
6
6
46
452
498
4
4
-
-
-
2
2
Uses - Company
Cash for current
operations
Operating expenses
Total cash for current
operations
Cash for investing
activities
Investment in Bezeq
shares
(11)
(11)
(10)
(10)
(1)
(1)
(40)
-
(40)
Investment in bank
deposits and securities, net (265)
Total cash for investing
(305)
activities
Cash for financing
activities
Net compensation in
respect of the Horev claim
Payment of interest on
bonds
Total cash for financing
activities
(3)
(78)
(81)
(339)
(339)
74
34
-
(78)
(78)
(3)
-
(3)
An additional investment in
Bezeq shares was decided
upon during the year
Part of the change was due
to the purchase of Bezeq
shares and part of a ZK
deposit that was classified
as cash
19
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
Bank deposits and
marketable securities for the
end of the period
317
Cash and cash equivalents
for the end of a period
55
Total liquidity for the end
of the period
372
385
(68)
29
26
414
(42)
20
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
1.5 Disclosure regarding the Company's projected cash flow (continued)
1.
The following are the assumptions underlying the cash flow forecast:
a. The Company's cash flow forecast for years 2021 and 2022 is based on current estimates for the
years in question.
b. The Company expects an average annual return of Between 1% to 2% on its investments in
marketable securities and bank deposits.
c. The annual interest payments in respect of the Company's traded bonds amount to NIS 78 million
in accordance with the repayment schedule of the bonds.
d. The Company has sufficient resources to repay its liabilities through cash balances and investments
in deposits and marketable securities that can be exercised in the short term and through raising
debt from non-banking sources.
2.
The Board of Directors has examined and approved the sources included in the disclosure regarding
the projected cash flow after being found reasonable regarding the financial scope of each source
and the expected timing of its receipt. In addition, the Board of Directors examined the existence of
restrictions on raising new debt and assumed that such raising was possible. There is no material
effect of the pandemic on the Company's liquidity balances.
The aforesaid in the context of the disclosure of the projected cash flow is forward-looking
information. The Company's assumptions and estimates regarding the projected cash flow,
regarding the sources of repayment of the Company's existing and expected liabilities, and
regarding the assumptions underlying the cash flow forecast are based on the Company's data
as of the reporting date, and assuming continued operations during normal business. There is no
certainty that these assumptions and estimates will materialize in full or in part, since they also
depend on external factors which the Company has no ability to influence or its ability to influence
them is limited, and in view of the current uncertainty in the communications market. Actual data
may differ materially from the above estimate if there is a change in one of the factors taken into
account in these estimates.
21
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
2. Aspects of corporate governance
2.1.
Involvement of the Group companies in the community and donations
The Company supports Bezeq's corporate responsibility policy and will continue to uphold this policy in
all Group companies, and in addition, each year, the Company discusses the Company's contribution
policy, with a focus on health and education issues. In the reported year, due to the COVID-19 crisis, the
Company donated a lot of protective equipment to the Ichilov Hospital and the Reut Rehabilitation
Hospital, in amounts that are not material to the Company.
In accordance with the community contribution policy approved by the Bezeq Board of Directors, Bezeq
contributes to the community out of its deep commitment to the issue of social responsibility, through
financial donations, contribution of communication services and infrastructure and encouraging
employee volunteering in a variety of community activities. Most of Bezeq's financial contributions are
focused on programs on education and reducing the digital disparity in Israel.
in the year 2020 Bezeq Group contributed a total of approx. NIS 3.7 million.
In addition, Bezeq assisted non-profit organizations in the amount of about 2 NIS million for
communication services.
2.2. Disclosure regarding the auditor’s fee
The following are fee expenses for the accountants of the main subsidiaries in the group
In respect of audit services and audit-related services:
Company name
Auditor
B. Communications Ltd.
Somekh
Chaikin
the
Bezeq
-
Telecommunications
Corporation Ltd.
Israel
Somekh
Chaikin
Pelephone
Communications Ltd.
Somekh
Chaikin
Bezeq International Ltd
Somekh
Chaikin
2020
Fees
(NIS
thousands)
Hours
2019
Fees
(NIS
thousands)
Hours
515
166
2,542
634
2,816
416
174
387
1,700
15,250
1,700
15,500
951
670
520
3,485
596
1,898
6,350
670
6,500
1,259
327
778
1,166
8,250
417
4,630
122
435
133
423
Details
Audit
and
accompanyi
ng review
Other
services1
Audit
and
accompanyi
ng review
Other
services
Audit
and
accompanyi
ng review
Other
services1
Audit
and
accompanyi
ng review
Other
services1
1 "Other services" provided to the Group's main companies in the years 2020 and 2019 including, among other things, consulting
services on tax and accounting matters and special approvals.
22
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
DBS Satellite Services
(1998) Ltd.
Somekh
Chaikin
Audit
and
accompanyi
ng review
Other
services1
680
5,200
580
5,400
52
162
26
66
The accountants’ fees are discussed in the Board’s Committee for Examining the Financial
Statements and are approved by the Company's Board of Directors and the Board of Directors of
each of the Group's companies.
23
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
2.3.
Directors with accounting and financial skills and independent directors
Details regarding directors with accounting and financial expertise and independent directors are
included in sections 2 and 9 of the corporate governance questionnaire and in section 14 in Chapter
D of the periodic report.
2.4.
Additional corporate governance issues
In the year of the report, the Company established a gatekeepers’ forum, with the participation of
the Internal Auditor, the auditors and external legal advisers and led by the Company's CFO. This
forum convenes as needed, and at least once a year to discuss general control and compliance
issues in the Company. In the year of the report, one meeting of the forum was held.
2.5.
Disclosure regarding an internal auditor in a reporting corporation
Concentration of
details
Name
auditor
of
internal
Ilan Chaikin
Term of office
2008
Compliance with legal
provisions
The internal auditor meets the conditions set forth in Article 3 (a) and 8 of the
Internal Audit Law, and the provisions of Article 146 (b) of the Companies Law.
Employment format
Hourly fee, according to the number of hours determined at the beginning of each
year by the Audit Committee.
Method
appointment
of
The Organizational
Commissioner of
The internal auditor
Work plan
Method of appointment and summary of reasons for approving the
appointment:
The appointment was approved by the Board of Directors in 2008, following the
recommendation of the Audit Committee.
Duties, powers and roles imposed on the auditor:
The authority and responsibility of the Company's internal auditor are set forth in the
Company's internal audit procedure approved by the Audit Committee. According to
the procedure, the auditor's duties and powers are:
Checking the correctness of the Company's operations and the actions of its
officers and functionaries, checking the reliability and integrity of the financial and
operational information, examining the management of funds and liabilities and
examining the Company's computerized information systems and the Company's
information security system. The internal auditor is also responsible for examining
employee complaints in accordance with the arrangements established by the Audit
Committee in accordance with Article 117(6) of the Companies Law, 5769-1999.
He is empowered to obtain any information, explanation and document necessary
for the performance of its duties, to have access to any standard or computerized
database of the Company, to any database and to any automatic or non-automatic
data processing work plan of the Company and its units and to obtain access to any
Company property. The internal auditor is also entitled to be invited to all the
meetings of Management, the Board of Directors and its committees.
The organizational manager of the internal auditor is the Company's CEO
The work plan in 2020 was derived from the Company’s multi-year work plan
determined for the years 2017-2022.
The considerations in determining the work plan of the internal audit
24
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
The guiding principle in building the work plan of the internal audit is the risk
inherent in the processes and activities of the Company. To assess these risks, the
internal audit referred to the risk survey conducted thereby, as well as other sources
that influenced the risk assessment in these processes, such as discussions with
Management, previous audit findings and other relevant activities.
The main considerations taken into account in constructing the work plan are:
Reasonable coverage of most of the Company's areas of activity in accordance with
exposure to material risks, taking into account existing controls in the Company's
areas of activity and the findings of previous audits.
Factors involved in determining the work plan
The internal auditor, Management, and the Audit Committee of the Board of
Directors.
2.5 Disclosure regarding an internal auditor in a reporting corporation (continued)
Concentration of
details
Work plan
The audit's treatment
of material investee
corporations
Performing the audit
Access to information
The body who receives the work plan and approves it
The Audit Committee of the Board of Directors, after the matter has been
discussed with the Company CEO.
The auditor's discretion to deviate from the work plan
The Company CEO or the Chairman of the Audit Committee may propose issues
in matters where the need arises to conduct an urgent examination as well as
recommend the reduction or cessation of examination on a subject approved in
the work plan. The internal auditor has the discretion to deviate from the work
plan.
Examination of material transactions
The internal auditor is present at the Board discussions in which material
transactions are approved and reviews the relevant material sent as part of these
discussions.
The work plan of the Company's Internal Auditor does not include an audit of
material investee corporations.
The internal auditor conducts meetings with the internal auditor and other control
entities of material subsidiaries for the purpose of receiving periodic updates.
In accordance with the Internal Auditor's notice, the audit work is conducted in
accordance with the internal audit standards accepted in Israel and around the
world and in accordance with professional guidelines in the field of internal audit,
including international internal audit standards and in accordance with the Internal
Audit Law and the Companies Law.
The internal auditor was provided with documents and information as stated in
section 9 of the Internal Audit Law and was given constant and direct access to
the corporation's information systems, including financial data.
25
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
Auditor's report
The Bard's
assessment of the
internal auditor's
activities
Remuneration
The Internal Auditor submits the written audit reports on an ongoing basis during
the reported year to the Chairman of the Board, the CEO, the Chairman of the
Audit Committee and the members of the Committee. The reports are submitted
prior to the date of the committee discussion (usually about three days prior to
that date).
The Company's Audit Committee convened to discuss internal audit reports
regarding the reporting of the implementation of the Supervision Procedure by the
Internal Auditor for the second quarter of 2020 on August 16, 2020. In addition,
the report on the implementation of the supervision procedure by the Internal
Auditor for the fourth quarter of 2020 was completed, as well as an audit on the
implementation of the supervision procedure by the Company, which were
presented on March 22, 2021.
The Board of Directors is of the opinion that the scope of the audit, the nature of
the internal auditor's activity and its continuity as well as the work plan are
reasonable in the circumstances of the case and are there to achieve the
objectives of the audit.
Remuneration to the Internal Auditor is determined each year according to the
volume of the audit hours, according to the hourly fee. In 2020, the volume of the
hours invested in the audit by the Internal Auditor was approximately 200 hours,
noting that the said hours volume is sufficient for the Internal Auditor to complete
the audit work properly.
In 2020, the Internal Auditor was paid compensation in the amount of NIS 56,160,
including VAT.
In the opinion of the Board of Directors, the extent of the internal auditor's
remuneration had no effect on his professional judgment.
26
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
3. Disclosure in connection with the corporation's financial reporting
3.1. Disclosure regarding valuations
The following are details regarding highly material valuations and a material valuation in accordance with Regulation 8B of the Securities Regulations (Periodic and
Immediate Reports), 5730-1970.
The highly material valuations of Pelephone and DBS as of December 31, 2020 are included in these financial statements by reference to Bezeq's financial statements
as of December 31, 2020, which were published on March 25, 2021.
Bezeq International's valuation as of September 30, 2020 is included in these financial statements by reference to the Company's financial statements as of
September 30, 2020, which were published on November 30, 2020.
A highly material valuation of Bezeq Fixed Lines as of December 31, 2020 is not attached to the report since the Company was of the opinion that there are no
indications of impairment of the cash-generating unit.
Pelephone -
Bezeq Fixed Lines -
DBS -
Bezeq International -
Highly material valuation
as of December 31, 2020
Highly material valuation
as of December 31, 2020
(attached to Bezeq's
financial statements as of
December 31, 2020)
See Section 3.1.4 below
Highly material valuation as of
December 31, 2020
(Attached to Bezeq’s financial
statements as of December 31,
2020).
Highly material valuation as
of September 30, 2020
(Attached to the financial
statements as of September
30, 2020).
See sections 3.1.2 and 3.1.4
below.
See section 3.1.1 below
Identification of
subject of
valuation
Value in use of Pelephone for
the purpose of examining the
impairment of goodwill
recognized in the Company's
financial statements in
accordance with International
Accounting Standard 36.
Value in use of Bezeq Fixed
Lines for the purpose of
examining the impairment of
goodwill recognized in the
Company's financial
statements in accordance
with International Accounting
Standard 36.
Value in use of DBS Satellite
Services (1988) Ltd. for the
purpose of examining the
impairment of the Company's
assets in accordance with
International Accounting Standard
36 and the net exercise value of
DBS' assets for the purpose of
examining the impairment of non-
current assets.
Value in use of Bezeq
International for examination of
impairment.
27
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
Timing of the
valuation
Value of the
subject of the
valuation close
to the date of
the valuation
Value of the
subject of the
valuation
determined in
accordance
with the
valuation
Pelephone -
Bezeq Fixed Lines -
DBS -
Bezeq International -
Highly material valuation
as of December 31, 2020
Highly material valuation
as of December 31, 2020
(attached to Bezeq's
financial statements as of
December 31, 2020)
See Section 3.1.4 below
Highly material valuation as of
December 31, 2020
(Attached to Bezeq’s financial
statements as of December 31,
2020).
Highly material valuation as
of September 30, 2020
(Attached to the financial
statements as of September
30, 2020).
See sections 3.1.2 and 3.1.4
below.
See section 3.1.1 below
December 31, 2020
The valuation was signed on
March 24, 2021
December 31, 2020
The valuation was signed on
March 24, 2021
December 31, 2020
The valuation was signed on
March 24, 2021
September 30, 2020
The valuation was signed on
November 30, 2020
NIS 290 million book value of
the net operating assets of
Pelephone (*) (including cost
surplus balance net of
goodwill at the Company
level).
Approx. NIS 10 billion book
value of the net operating
assets of
Bezeq Fixed Lines (including
cost surplus balance net of
goodwill at the Company
level).
A negative total of approx. NIS.
(27) million
NIS 393 million book value of
the net operating assets of
Bezeq International.
Approx. NIS 2,332 million
Approx. NIS 14,615 million.
The Company has concluded
that an impairment loss
recorded in the Company's
books in previous periods in
the amount of NIS 266 million
(NIS 205 million net of tax)
must be canceled.
The Company has concluded
that there is no impairment
that requires a reduction in
the amount of goodwill
recorded in the Company's
books.
Approx. NIS 123 million.
The Company recognized a loss
from impairment of assets in the
amount of NIS 270 million.
The total value of the Company's
operations is negative in the
amount of NIS (145) million. In
light of the negative value of
operations, the value of the
Company's non-current assets
was determined to be their fair
value and zero, whichever is
higher. As a result of the fair
value of the balance sheet items
that have been revaluated in
accordance with IAS36 and
IFRS15 requirements, it is
negative in the amount of
approximately NIS (134) million.
28
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2020
Pelephone -
Bezeq Fixed Lines -
DBS -
Bezeq International -
Highly material valuation
as of December 31, 2020
Highly material valuation
as of December 31, 2020
(attached to Bezeq's
financial statements as of
December 31, 2020)
See Section 3.1.4 below
Highly material valuation as of
December 31, 2020
(Attached to Bezeq’s financial
statements as of December 31,
2020).
Highly material valuation as
of September 30, 2020
(Attached to the financial
statements as of September
30, 2020).
See sections 3.1.2 and 3.1.4
below.
See section 3.1.1 below
Identification
characterization
of the valuator
Prometheus Economic Consulting Ltd. The work was carried out for Bezeq by a team headed by CPA Gideon Peltz, a graduate
of the Department of Accounting and Economics at Tel Aviv University. CPA Peltz has extensive experience in performing
valuations, analyzing financial statements, preparing expert opinions and performing various types of economic consulting work
for companies and businesses. The valuator has no dependence on Bezeq. Bezeq undertook to indemnify the valuator for
damages in excess of three times his fee, unless he acted maliciously or with gross negligence.
Valuation
model
Discounted
method (DCF).
Cash
Flow
Discounted
method (DCF).
Cash
Flow
In the first stage - the Discounted
Cash Flow method (DCF).
Discounted Cash Flow method
(DCF).
In the second stage - the fair value
of the non-current assets of DBS
was determined.
Assumptions
under which the
valuator made
the valuation
Capitalization rate - 10.3%
(after tax).
Discount rate - 7.5% (after
tax).
Discount rate - 8.5% (after tax).
Discount rate - 9.7% (after tax).
Permanent growth rate - 0%.
Permanent growth rate - 0.8%.
Permanent growth rate -
2.5%.
The percentage of scrap
value from the total value
determined in the valuation is
approximately 84%.
Permanent growth rate - 0%.
The percentage of scrap
value from the total value
determined in the valuation is
approximately 72%.
The percentage of scrap value
from the total value determined in
the valuation - not relevant
The percentage of scrap value
from the total value determined
in the valuation is 76%.
(*) Pelephone's net operating assets do not include customer debt balances in respect of the sale of end equipment in payments presented at current value
29
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
3.1. Disclosure regarding valuations (continued)
3.1.1. The period that has elapsed since the effective date of the valuation of Bezeq
International as of September 30, 2020 until the date of approval of this report exceeds
90 days. As of December 31, 2020, an additional valuation of Bezeq International's
operations was performed in accordance with the provisions of International Accounting
Standard 36, which does not constitute a material valuation in accordance with the
provisions of the Securities Authority's position No. 105-23. For further information, see
Note 11.6 in the financial statements.
3.1.2. Despite the negative value of DBS' operations, Bezeq supports DBS by approving credit
facilities or investing in DBS' capital (see Note 13.2.2 to the financial statements). Bezeq's
support as stated in DBS stems, among other things, from the current and expected
contribution of the multi-channel television activity to all Bezeq Group's operations.
3.1.3.
In the Company's consolidated financial statements as of December 31, 2020, the value
of the operating segments of Bezeq Israel Telecommunications Company Ltd.,
Pelephone Communications Ltd., DBS Satellite Services (1998) Ltd. and Bezeq
International Ltd. amounted to 25% of its total assets. Accordingly, Prometheus Economic
Consulting Ltd. is considered a highly material valuator according to position 105-30 of
the legal staff of the Securities Authority (the "Staff Position"). For details regarding the
appraiser as required by the Staff Position, see the valuations attached to Bezeq's
financial statements.
3.1.4.
Information under Regulation 10(b)(8) of the Securities Regulations (Periodic and
Immediate Reports), 5730-1970
a. Regarding the valuation of Pelephone for June 30, 2019, which was attached to
Bezeq’s report for the second quarter of 2019, the Group examined the actual data in
2020 regarding Pelephone's free cash flows compared to the 2020 forecast included
in the aforesaid valuation and found that Pelephone's free cash flows2, according to
its financials reports for 2020, are significantly higher than the forecast in the said
valuation. Most of the discrepancy is due to timing differences in investments to
purchase frequencies. For further information, see Appendix C in Pelephone's
valuation as of December 31, 2020, which is attached to Bezeq's financial statements
as of December 31, 2020.
b. Regarding the valuation of DBS as of December 31, 2019, which was attached to
Bezeq’s financial statements of 2019, the Group examined the actual data in 2020
regarding the free cash flows compared to the 2020 forecast included in the said
valuation and found that the free cash flows of DBS, according to its financial
statements for 2020, are significantly higher than the forecast in the said valuation.
Most of the discrepancy is due to low operating expenses relative to the forecast
(some due to the effects of the COVID-19 crisis) and timing differences in engineering
and technology investments, offsetting changes in working capital. For further
information, see Appendix F in the valuation of DBS as of December 31, 2020,
attached to Bezeq's financial statements as of December 31, 2020.
3.1.5. For further information, see Note 11 to the financial statements.
2 The free cash flows for this purpose are the cash flows from operating activities minus capital investments and minus changes in
interest-bearing customer debt in respect of the sale of end equipment in installments (financial instrument).
30
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
3.2. Due to the materiality of the claims filed against the Group and which at this stage either cannot
be assessed on the exposure in respect thereof cannot be calculated, accountants have drawn
attention to this in their opinion on the financial statements.
3.3. Material incidents after the date of the financial statements
Regarding material incidents after the date of the financial statements - see Note 32 to the
financial statements.
31
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
4. Details related to a series of liability certificates
The following is data about the Company's bonds in circulation, as of December 31, 2020:
A
B
Series E bonds
Issue date (no extensions) September 15, 2016 February 12, 2019 February 12, 2019
Series C bonds
Series D bonds
Total value denominated at
the date of issue (par
value)
NIS 1,882,265,000 NIS 58,000,000
NIS 100,000,000
C Nominal value (par value) NIS 1,856,535,487 NIS 58,000,000
NIS 100,000,000
D
E
The amount of interest
accrued as of the date of
the report
Fair value as included in
the financial statements
NIS 6,070,617
189,652 NIS
NIS 326,986
NIS 1,722,895,467 NIS 54,109,440
NIS 100,326,986
F Stock market value
NIS 1,772,991,390 NIS 55,569,800
NIS 105,020,000
G
Type of interest
Fixed rate 3.85%
Fixed rate 33.85% Fixed rate 33.85%
H
Principal payment dates
November 30, 2024 November 30, 2024 November 30, 2024
I
Interest payment dates
On May 31 and
November 30 of
each year, from May
31, 2020 until
November 30, 2024.
J
K
Linkage
Total liability in relation to
total company liabilities
Not linked
Material
On May 31 and
November 30 of
each year, from
May 31, 2020 until
November 30,
2024.
Not linked
Immaterial
On May 31 and
November 30 of each
year, from May 31,
2020 until November
30, 2024.
Not linked
Immaterial
L
Trustee details
Trust company - Reznik Paz Nevo Trust Ltd.
Name of the person in charge of the trust company - CPA
Michal Avtalion
E-mail michal@rpn.co.il, tel. 03-6389200, fax 03-6389222
Address - 14 Yad Harutzim St., Tel Aviv.
M Rating
The bonds are not rated
N
Compliance with the terms
of the trust deeds
O
Liens
P
Financial conditions /
restrictions that apply to
the Company for the
purpose of ensuring the
value of the collateral and
the rights of the holders to
The Company issued to the trustees of Series C, D and E bonds
certificates regarding its compliance with the terms of the trust
deeds for 2020.
Unlimited amount second-degree lien (pari-passu Series C and
D) on 14,204,153 ordinary Bezeq shares of NIS 1 par value
each held directly by the Company and on 714,169,560 ordinary
Bezeq shares of NIS 1 par value each held by B
Communications and the rights attached to these shares. Series
E has a first-degree lien on those shares. The lien for series C
and D will be replaced by a first-degree lien after the repayment
of the entire debt in respect of the bonds (Series E).
The Company has committed that during two consecutive
quarters the LTV will not exceed (1) a rate of 80% by November
30, 2023 and (2) 75% from December 2023 until the final
maturity date of the bonds. This commitment will take effect only
at the end of a period of 24 months from December 2, 2019.
32
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
act to exercise the lien
granted in their favor
Q
A restriction that applies to
the Company in connection
with the creation of
additional liens on its
assets or in connection
with its authority to issue
additional bonds
For details regarding the restrictions that apply to the Company
in connection with the expansion of the series, see section 3.2.2
of the Company's trust deeds (Series C, D and E).
For details regarding the restrictions that apply to the Company
in connection with the creation of additional liens, see section
6.1.3 (c) of the Company's trust deed (Series C).
33
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2020
4.1 Amendment of the terms of the Company's bonds
On September 17, 2020, the meetings of the holders of bonds (Series C and E) of the
Company approved the amendment of the trust deeds of the said series, in a manner that
will enable the Company to raise additional debt that will be secured by a lien on Bezeq
shares pledged in favor of Series C, pari-passu with Series C, under the following
restrictions:
1.
The additional debt raised by the Company (less the issue expenses) will first repay
the bonds (Series D) and the bonds (Series E) in full, so that after its raising and
after completing the conditions required for release in exchange for issuing the
additional series and amending existing liens in favor of Series C, a lien will be
recorded. The first tier on Bezeq shares pledged (as defined in the trust deed) for
the benefit of holders of the bonds (Series C), instead of the second-degree lien
registered in their favor (as long as the bonds (Series E) are in circulation).
After the full repayment of the debt in respect of the bonds (Series D) and the bonds
(Series E), the balance of the proceeds for the net issue of the additional debt will
be used for the purpose of repayment of the bonds (Series C), by early redemption
(full or partial), according to the terms of the existing trust deed.
The maturity of the new series issued by the Company will be longer than that of
bonds (Series C) and the payment of the first principal in respect of the bonds from
the new series as aforesaid will be only after full repayment of bonds (Series C).
2.
3.
The early repayment amount to be paid to the bondholders in the event of early repayment
of the bonds by the Company was also amended as follows:
With respect to the bonds (Series C) - in the case of a partial early repayment of the bonds
(Series C), the price of the partial early repayment will be par value of the bonds (Series C)
or their market value according to the 30 trading days preceding the early repayment,
whichever is higher.
In relation to bondholders (Series E) - the full early repayment price will be: (1) The market
value of the bonds according to the price of the bonds on the stock exchange in the 30
trading days preceding the early repayment in the early repayment price, but not more than
103.5%, or (2) the par value of the bonds (Series E), whichever is higher.
4.2 Credit Rating
On August 13, 2020, Midroog announced the termination of rating of the bond (Series C)
issued by the Company in light of the Company's request. On the eve of its termination,
the Company's rating (Series C) was rated Caa2.il with a stable rating horizon.
4.3 Financial terms
In accordance with the Company's obligation in bonds Series C, D and E to meet the
condition of LTV (the first examination date is according to the financial statements as of
December 31, 2021). The LTV ratio as of December 31, 2020 was 59.8%3.
5.
Miscellaneous
For information regarding the statement of liabilities of the reporting corporation and the
subsidiaries in its financial statements as of December 31, 2020, see the report form that will
be reported by the Company on March 25, 2021.
Date of signing: March 24, 2021
Darren Glatt
Chairman of the Board
Tomer Raved
CEO
3 The LTV ratio shown is net of approximately 22 million nominal Series C bonds held by a partnership held by the Company.
Without this neutralization, the LTV ratio is approximately 60.6%.
34
Chapter C
Consolidated Financial Statements
for the Year Ended December 31, 2020
Consolidated Financial Statements as of December 31, 2020
Table of contents
Auditors' reports
The financial statements
Consolidated statements of financial position
Consolidated statements of income
Consolidated statements of comprehensive income
Consolidated statements of changes in equity
Consolidated statements of cash flows
Notes to the consolidated financial statements
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
General
Basis of preparation of the financial statements
Accounting policy principles
Cash and cash equivalents
Investments
Trade receivables
Income taxes
Broadcast rights, net of rights exercised
Leases
Property, plant and equipment
Intangible assets
Deferred expenses and non-current investments
Investee companies
Bank loans and debentures
Trade and other payables
Provisions
Employee benefits
Contingent liabilities
Engagements
Collateral, liens and guarantees
Capital
Revenue
Operating and general expenses
Salaries
Other operating expenses (income), net
Financing expenses (income), net
Profit per share
Segment reporting
Related parties transactions
Page
3
6
8
8
9
10
11
15
17
32
32
33
35
38
45
Error!
Bookmark
not
defined.
50
51
53
57
64
64
65
68
71
72
74
76
76
77
77
78
78
79
84
Consolidated Financial Statements as of December 31, 2020
30
Financial instruments
Summary of selected data from
the financial statements of Bezeq – The Israel
Telecommunications Company Ltd., Pelephone Communications Ltd., Bezeq International Ltd.
and DBS Satellite Services (1998) Ltd.
Subsequent events
31
32
89
97
101
Somekh Chaikin
KPMG Millennium Tower
17 HaArbaa Street P.O.B. 609
Tel Aviv 6100601
8000 684 03
Auditors' report to the shareholders of B Communications Ltd. the Israel Telecommunications
Corporation Ltd.
We audited the consolidated financial statements of B Communications Ltd. (hereinafter – “the
Company”) as of December 31, 2020 and 2019 and the consolidated statements of income,
comprehensive profit, changes in equity and cash flows for each of the three years in the period ended
On December 31, 2020. These financial statements are the responsibility of the Company's Board of
Directors and Management. It is our responsibility to express an opinion on these financial statements
based on our audit.
We have not audited the financial statements of consolidated companies whose assets included in the
consolidation constitute approximately 1% of the total consolidated assets as of December 31, 2019,
and their revenues included in the consolidation constitute approximately 1% of total consolidated
revenues for the years ended December 31, 2019 and 2018. The financial statements of those companies
have been audited by other auditors whose reports have been presented to us and our opinion, insofar as
it relates to the amounts included in respect of those companies, is based on the reports of the other
auditors.
We conducted our audit in accordance with generally accepted auditing standards in Israel, including
standards set forth in the Auditors Regulations (Mode of Performance), 5733-1973. According to these
standards, we are required to plan and perform the audit with the aim to obtain a reasonable degree of
assurance that the separate financial information does not constitute a material misstatement. Our audit
includes a sample examination of evidence supporting the amounts and details contained in the separate
financial information. Our audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by the Company’s Board of Directors and
Management, as well as evaluating the overall adequacy of the presentation of the financial statements.
We believe that our audit and the reports of the other auditors provide an adequate basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the aforesaid consolidated financial
statements adequately reflect, in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 2020 and 2019 and the results of their operations, changes in equity and
cash flows for each of the three years in the period ended December 31, 2020 in accordance with
International Financial Reporting Standards (IFRS) and the provisions of the Securities Regulations
(Annual Financial Statements), 5770-2010.
We also audited, in accordance with Audit Standard (Israel) 911 of the Institute of Certified Public
Accountants in Israel "Audit of Internal Control Components of Financial Reporting", Internal Control
Components of Financial Reporting of the Company as of December 31, 2020, and our report of March
24, 2021 included a negative opinion on said components due to the existence of material vulnerabilities.
2
Without limiting our above conclusion, we draw attention to what is stated in Note 1.3, which refers to
what is stated in Note 1.3 to the annual consolidated financial statements, regarding the Securities
Authority's investigation into suspicions of committing offenses under the Securities Law and the Penal
Code concerning, inter alia, transactions related to the former controlling shareholder and the transfer
of the case to the State Attorney's Office, as well as what is stated in said note regarding the filing of an
indictment against the former controlling shareholder in the Company, for various offenses, including
offenses of bribery and intentional misstatement in an immediate report. As stated in the above note, at
this stage, the Company is unable to assess the effects of the investigations, their findings and results on
the Company as well as on the financial statements and estimates used in the preparation of these reports,
if any.
In addition, without limiting our above opinion, we draw attention to what is stated in Note 19 regarding
claims filed against the Company and the exposure in respect of which cannot be assessed or calculated
at this stage.
Somekh Chaikin
Certified Public Accountants
March 24, 2021
Somekh Chaikin, Israeli partnership and a member of the KPMG network of independent firms
incorporated u n d e r t h e Swiss entity K P M G I n t e r n a t i o n a l C o o p e r a t i v e ( " K P M G I n t e r n a t i o n a l " )
3
Somekh Chaikin
KPMG Millennium Tower
17 HaArbaa Street P.O.B. 609
Tel Aviv 6100601
8000 684 03
Auditors' report to the shareholders of "B Communications Ltd.” on the audit of components of
internal control over financial reporting in accordance with Article 9B (c) of the Securities
Regulations (Periodic and Immediate Reports), 5733-1970
We audited components of internal control over financial reporting of "B Communications Ltd."
(hereinafter – “the Company") as of December 31, 2020. These control components were determined as
explained in the next paragraph. The Company's Board of Directors and Management are responsible
for effective internal control over financial reporting and for their evaluation of the effectiveness of the
components of internal control over financial reporting attached to the periodic report for the above date.
It is our responsibility to provide an opinion on the components of internal control over the Company's
financial reporting based on our audit.
Components of internal control over financial reporting that have been audited have been determined in
accordance with Auditing Standard (Israel) 911 of the Institute of Certified Public Accountants in Israel,
"Auditing of Internal Control Components of Financial Reporting" (hereinafter - "Auditing Standard
(Israel) 911"). These components are:
(1) Organizational level controls, including controls on the process of preparing and closing financial
reporting;
(2) Controls over cash flow and debt management;
We conducted our audit in accordance with Audit Standard (Israel) 911. This Standard requires us to
plan and perform the audit with an aim to identify the audited control components and achieve a
reasonable degree of confidence that these control components have been effectively complied with in
all material respects. Our audit included gaining an understanding of internal control over financial
reporting, identifying the audited control components, assessing the risk of a material vulnerability in
the audited control components, and examining and evaluating the design and operational effectiveness
of those control components based on the assessed risk. Our audit regarding those control components
also included performing other procedures that we deemed necessary depending on the circumstances.
Our audit referred only to the audited control components, as opposed to an internal audit of all material
processes in connection with the financial reporting, and therefore our opinion relates only to the audited
control components. Also, our review did not address the interactions between the audited and unaudited
control components and therefore, our opinion does not take into account such possible effects. We
believe that our audit provides a proper basis for our opinion in the context described above.
Due to understandable limitations, internal control over financial reporting in general, and components
thereof in particular, may not prevent or detect misstatement. Also, drawing conclusions about the future
based on any current effectiveness assessment is prone to the risk that controls will become inadequate
due to changes in circumstances or that the degree of compliance with the policies or procedures will
change adversely.
A material vulnerability is a defect, or combination of defects, in the internal control over financial
reporting, to the extent of a reasonable possibility that a material misstatement in the Company's annual
or quarterly financial statements will not be avoided or detected in a timely manner.
The following significant vulnerabilities in the audited control components were identified and included
in the assessment of the Board of Directors and Management:
4
Significant vulnerabilities in the internal control over financial reporting in the controls at the
organization level and in the controls on the process of preparing and closing financial reporting as
described in the assessment of the Company's Board of Directors and Management.
These material vulnerabilities have been taken into account in determining the nature, timing and scope
of the audit procedures applied in our audit of the Company's financial information as of December 31,
2020 and the year ended on that date, and this report does not affect our report of the said financial
statements.
In our opinion, due to the impact of the material vulnerabilities identified above on the achievement of
the control objectives, the Company did not effectively maintain the audited control components as of
December 31, 2020.
As described in the report regarding the effectiveness of the internal control over the financial reporting
and disclosure as of December 31, 2020 of B Communications Ltd. (hereinafter - "the Corporation"),
regarding the investigations by the Israel Securities Authority and the Israel Police, as specified in Note
1.3 to this report, the Corporation does not have complete information regarding these investigations,
their content, and the relevant materials and evidence in the possession of the law authorities.
Accordingly, the Corporation is unable to assess the effects of the investigations, their findings and
results on the Company as well as the financial statements and estimates used in the preparation of these
reports, if any.
We also audited, in accordance with auditing standards generally accepted in Israel, the Company's
consolidated financial statements as of December 31, 2020 and 2019 and for each of the three years
ended December 31, 2020 and our report, dated March 24, 2021, included an unconditional opinion on
those financial statements. Based on our audit and the reports of the other auditors, as well as references
to the contents of Note 1.3 regarding the Securities Authority's investigation into suspicions of
committing offenses under the Securities Law and the Penal Code concerning Filing an indictment
against the former controlling shareholder in the Company, for various offenses, including offenses of
bribery and intentional misstatement in an immediate report. As stated in the above note, at this stage
the Company is unable to assess the effects of the investigations, their findings and results on the
Company as well as on the financial statements and estimates used in the preparation of these reports,
if any. In addition, without limiting our above opinion, we draw attention to what is stated in Note 18
regarding claims filed against the Company and the exposure in respect of which cannot be assessed or
calculated at this stage.
Somekh Chaikin
Certified Public Accountants
March 24, 2021
Somekh Chaikin, Israeli partnership and a member of the KPMG network of independent firms
incorporated u n d e r t h e Swiss entity K P M G I n t e r n a t i o n a l C o o p e r a t i v e ( " K P M G I n t e r n a t i o n a l " )
5
Consolidated financial statements as of December 31, 2020
Consolidated statements of financial position as of December 31
Assets
Cash and cash equivalents
Restricted cash
Investments
Trade receivables
Other receivables
Inventory
Assets held for sale
Total current assets
Other long-term trade receivables
Broadcasting rights, net of rights exercised
Right-of-use assets
Property, plant and equipment
Intangible assets
Deferred expenses and non-current investments
Deferred tax assets
Total non-current assets
Total assets
* Reclassified
2020
2019
Note
NIS millions
NIS millions
4.3.3
5,3.3
3.3, 6
3.3, 6
3.10
3.3, 6
3.4, 8
3.7, 9
3.5, 10
3.6, 11
12
3.16, 7
894
-
881
1,621
180
73
10
814
39
1,241
1,677
342
96
43
3,659
4,252
514
67
1,804
6,131
3,268
402
108
12,294
477
59
1,217
*5,968
*3,167
*343
81
11,312
15,953
15,564
6
Consolidated financial statements as of December 31, 2020
Consolidated statements of financial position as of December 31 (cont.)
2020
2019
Note
NIS millions
NIS millions
Bank loans and debentures
Current maturities of liabilities in respect of leases
Trade and other payables
Employee benefits
Provisions
Total current liabilities
Loans and bonds
Liabilities in respect of leases
Employee benefits
Derivatives and other liabilities
Deferred tax liabilities
Provisions
Total non-current liabilities
Total liabilities
3.3, 14
3.7, 9
15
3.12, 17
3.13, 16
3.3, 14
3.7, 9
3.12, 17
3.16, 7
3.13, 16
Capital (capital deficit):
21
Attributed to the shareholders of the Company
Attributed to non-controlling interests
Total capital (capital deficit)
785
415
1,766
482
117
3,565
9,485
1,492
335
307
290
52
1,007
416
1,627
654
125
3,829
10,412
969
356
139
*248
49
11,961
12,173
15,526
16,002
(107)
534
427
(241)
(197)
(438)
Total liabilities and capital (capital deficit)
15,953
15,564
* reclassified
Darren Glatt
Chairman of the Board of
Directors
Tomer Raved
CEO
Itzik Tadmor
Chief Financial Officer
Date of approval of the financial statements: March 24, 2021.
The notes attached to the consolidated financial information form an integral part thereof.
7
Consolidated financial statements as of December 31, 2020
Consolidated statements of income for the year ended December 31
2020
2019
2018
Note
NIS millions
NIS millions
NIS millions
3.14, 22
8,723
8,929
9,321
Revenue
Operating expenses
Operating and general expenses
Salaries
23
24
Depreciation, amortization and impairment
9,10,11,12
Impairment loss
Other operating expenses (income), net
11
25
Total operating expenses
Operating profit (loss)
Financing expenses (revenue)
3.15, 26
Financing expenses
Financing revenue
Financing expenses, net
Profit (loss) after financing expenses, net
Share of loss of equity accounted investees
Profit (loss) before income taxes
Income taxes
3.16, 7
Net profit (loss) for the year
Profit (loss) attributed to the shareholders
of the Company
Profit (loss) attributed to non-controlling
interests
Net profit (loss) for the year
Profit (loss) per share (NIS)
27
3,182
1,894
1,858
8
73
7,015
1,708
525
(51)
474
1,234
-
1,234
334
900
157
743
900
3,321
1,937
2,064
*1,329
(188)
8,463
466
738
(266)
472
(6)
2
(8)
*1,452
(1,460)
3,428
1,995
2,388
2,324
635
10,770
(1,449)
620
(89)
531
(1,980)
3
(1,983)
(67)
(1,916)
(853)
(1,066)
(607)
(850)
(1,460)
(1,916)
Basic diluted profit (loss) per share
1.38
(19.7)
(36.5)
Consolidated statements of comprehensive profit for the year ended December 31
* reclassified
8
Profit (loss) for the year
Reassessment of a defined benefit plan, net of tax
Other comprehensive profit (loss) items (net of tax)
Total comprehensive profit (loss) for the period
Attributable to:
Shareholders of the Company
Non-controlling interests
Total comprehensive profit (loss) for the period
2020
2019
2018
NIS millions
NIS millions
NIS millions
900
(9)
(5)
886
154
732
886
(1,460)
(1,916)
(33)
1
16
26
(1,492)
(1,874)
(862)
(630)
(1,492)
(1,055)
(819)
(1,874)
The notes attached to the consolidated financial information form an integral part thereof.
9
Consolidated financial statements as of December 31, 2020
Consolidated statements of changes in equity for the year ended December 31
Share
capital
Share
Premium
Treasury
shares
NIS
millions
NIS
millions
NIS
millions
Other
reserves
NIS
millions
Retained
earnings
(Deficit)
NIS
millions
Total
NIS
millions
Non-
controlling
interests
Total
NIS
millions
NIS
millions
Balance as of January 1, 2018
3
1,057
(*)
(45)
214
1,229
1,757
2,986
Dividend distributed to non-
controlling interests (Note 21)
Loss for the year 2018
Other comprehensive income for
the year, net of tax
Total comprehensive loss for
the year 2018
Balance as of December 31,
2018
Issuance of shares
Loss for the year 2019
Other comprehensive income for
the year, net of tax
Total comprehensive loss for the
year 2019
Balance as of December 31,
2019
Acquisition of non-controlling
interests
Net compensation for the Horev
Claim (See Note 18)
Profit for the year 2020
Other comprehensive (profit) loss
for the year, net of tax
Total comprehensive profit for
the year 2020
Balance as of December 31,
2020
-
-
-
-
3
9
-
-
-
-
-
-
-
1,057
438
-
-
-
-
-
-
(*)
-
-
7
7
-
-
(1,066)
(1,066)
(505)
(850)
(505)
(1,916)
4
11
31
42
(1,062)
(1,055)
(819)
(1,874)
(*)
(38)
(848)
174
447
433
-
607
447
-
-
-
-
(*)
-
-
-
-
(853)
(853)
(607)
(1,460)
(9)
(9)
(23)
(32)
(862)
(862)
(630)
(1,492)
12
1,495
(*)
(38)
(1,710)
(241)
(197)
(438)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1)
(1)
(39)
(39)
(1)
(40)
19
157
19
157
-
743
19
900
(2)
(3)
(11)
(14)
155
154
732
886
12
1,495
(*)
(39)
(1,575)
(107)
534
427
(*) Represents an amount less than NIS 1 million.
The notes attached to the consolidated financial information form an integral part thereof.
9
Consolidated financial statements as of December 31, 2020
Consolidated statements of cash flows for the year ended December 31
Cash flows from operating activities
Profit (loss) for the year
Adjustments:
Depreciation and amortization
Impairment loss
Cancellation of impairment loss
Capital gain, net
Share of loss of equity accounted investees
Financing expenses, net
Income tax expenses
Change in other trade receivables
Change in inventory
Change in trade and other payables
Change in provisions
Change in employee benefits
Change in other liabilities
Income tax paid, net
Net cash derived from operating activities
Cash flows from investing activities
2020
2019
2018
Note
NIS millions
NIS millions
NIS millions
900
(1,460)
(1,916)
9,10,11,12
11
11
26
27
7
6
16
17
18
1,858
266
(258)
(40)
-
507
334
56
13
17
(8)
(192)
(1)
(243)
3,209
2,064
*1,329
(475)
2
416
*1,452
105
(19)
(77)
(49)
(50)
(8)
(325)
2,905
(1,067)
(577)
(2,618)
Purchase of property, plant and equipment
Investment in intangible assets and deferred expenses
10
11.12
(1,133)
(366)
(1,095)
(382)
Investment activity, net
Revenue from the sale of property, plant and equipment
Deposit to restricted cash
Tax payments regarding the sale of the "Sakia" property
Receipt from the sale of Walla, net
Miscellaneous
Net cash used for investing activities
Cash flows from financing activities
Issuance of bonds and receipt of loans
Acquisition of non-controlling interests
Repayment of debentures and loans
Principal and interest payments in respect of leases
Net compensation in respect of the Horev Claim
Receipt from issue of shares, net
Dividend paid to non-controlling interests
Interest paid
13
13
15
15
9
18
22
15
Costs in respect of early repayment of loans and bonds
Payment for expired hedging transactions
15.2
Miscellaneous
222
148
-
-
44
18
569
404
(39)
(69)
-
35
718
(40)
(1,828)
(391)
(3)
-
-
(392)
(65)
(57)
(4)
2,275
-
(4,287)
(414)
-
447
-
(496)
(93)
(46)
(4)
Net cash used for financing activity
(2,062)
(2,618)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents as of January 1
Cash and cash equivalents at the end of the year
82
80
814
894
(290)
(290)
1,104
814
* reclassified
The notes attached to the consolidated financial information form an integral part thereof.
10
2,388
2,324
(13)
3
541
(67)
266
(5)
(138)
81
489
-
(467)
3,486
(1,216)
(390)
(1,168)
315
-
(201)
-
42
1,139
-
(1,793)
(422)
-
-
(505)
(523)
-
(36)
(10)
(2,150)
(1
(1,282)
2,386
1,104
Notes to Consolidated Financial Statements as of December 31, 2020
1. General
1.1. The reporting entity
B Communications Ltd. (hereinafter "the Company") is a company registered in Israel,
headquartered at 144 Menachem Begin Street, Tel Aviv, and whose shares are traded on
the Tel Aviv Stock Exchange (regarding the delisting of the Company's shares from
trading on NASDAQ, see Note 21.1.4). The Group's consolidated financial statements as
of December 31, 2020, include those of the Company and its subsidiaries (hereinafter
“the Group"), as well as the rights of the Group in affiliated companies.
On April 14, 2010, the company acquired 30.44% of the shares of Bezeq, the largest
communications group in Israel, and became the controlling owner of the company.
Bezeq's ordinary shares are listed for trading on the Tel Aviv Stock Exchange.
As of December 31, 2020, the Company holds approximately 26.72% of the issued share
capital of Bezeq.
1.2. Control of the Company
As of December 2, 2019, Searchlight Capital Partners, through its subsidiary Searchlight
II BZQ (hereinafter “Searchlight”) and the Forer family that controls TNR Investments
Ltd. (hereinafter “the Forer Family”) have completed the acquisition of control of the
Company in such manner that Searchlight holds 60.18% and the Forer Family holds
11.39% of the Company's ordinary and issued shares.
1.3. Investigation by the Securities Authority and the Police
1.3.1 During 2017 and 2018, the Israel Securities Authority and the Israel Police
conducted investigations into suspicions of committing offenses under the
Securities Law and the Penal Code, 5737-1977 (the "Penal Code"), regarding
transactions related to Bezeq's former controlling shareholder and the former
Chairman of Bezeq’s Board of Directors, Mr. Shaul Elovitch ("Elovitch")
regarding the purchase of DBS shares and the provision of satellite
communication services to DBS, the Ministry of Communications' dealings
with Bezeq ("the DBS Case") and suspicions of the exercise of powers by
Prime Minister Binyamin Netanyahu, to promote issues related to Elovitch’s
business and his and Bezeq Group's economic interests. ("Case 4000 Case").
Following the investigations, indictments were filed and notices were received
as follows:
1.3.1.1. On January 28, 2020, an indictment was filed with the Jerusalem
District Court against Elovitch for various offenses, including
offenses of bribery and intentional misstatement in an immediate
report in connection with suspicions of abuse of power by Prime
to
Minister Binyamin Netanyahu, promoting
Elovitch’s business and his and Bezeq Group's economic interests.
issues related
1.3.1.2. On December 23, 2020, Bezeq received a notice from the Tel Aviv
District Attorney's Office (Taxation and Economy) regarding the
11
Notes to Consolidated Financial Statements as of December 31, 2020
consideration of Bezeq's prosecution and its invitation to a hearing
in Case 4000 (“the Notice"), according to which:
a. After examining the evidence before him, the Attorney General
is considering filing an indictment against Bezeq on suspicion of
bribery (an offense under Article 291 of the Penal Code and
Article 23 of the Penal Code), and a reporting offense with the
aim of misleading a reasonable investor (offense under Article
53(a)(4) of the Securities Law and Article 23 of the Penal Code).
b. According to the Notice, according to the suspicion, Bezeq's
criminal responsibility for the offense of bribery stems from the
actions and criminal thoughts of Elovitch, who was its organ in
the period relevant to the suspicions.
c. Also, according to the Notice, according to the suspicion,
Bezeq's criminal responsibility for the reporting offense stems
from the actions and criminal thought of Elovitch who was its
organ in the period relevant to the suspicions, and the actions and
criminal thought of Stella Handler (former Bezeq CEO), who
was Bezeq's organ at the relevant time (see Note 1.3.1.3b).
According to the allegation in this context, Bezeq reported on a
letter from the Director General of the Ministry of
Communications that allegedly included a misleading
presentation (of which Elovitch and Stella Handler were aware),
and only after the intervention of senior legal advisers was the
letter corrected and reported by Bezeq to the public.
d. According to the announcement, before the Attorney General
makes a final decision regarding the criminal prosecution of
Bezeq, and insofar as Bezeq wishes to argue against the
possibility of criminal prosecution, it must coordinate a 30-day
hearing within 90 days of the Notice, and submit written
arguments two weeks before the date determined for the hearing.
e. It should be noted that Walla (Bezeq's former subsidiary)
received a similar notice according to which, after examining the
evidence before him, the Attorney General is also considering
filing an indictment against Walla on suspicion of bribery (an
offense under Article 291 of the Penal Code and Article 23 of the
Penal Code), while according to the suspicion, Walla's criminal
responsibility for the bribery offense stems from Elovitch’s
criminal actions and thought which was its organ in the period
relevant to the suspicions.
Bezeq and Walla have received the core of the investigation material relating
to the above suspicions, they are studying the notices and preparing for the
hearing, and they intend to argue at the hearing against the possibility of
criminal prosecution.
12
Notes to Consolidated Financial Statements as of December 31, 2020
1.3.1.3. On December 23, 2020, to the best of Bezeq's knowledge, a notice
was issued by the State Attorney's Office, according to which, among
other things, the State Attorney's Office (Taxation and Economics)
filed with the Tel-Aviv Court’s Economic Department, on the same
day, an indictment against Elovitch, as well as former senior
executives in the Bezeq Group and DBS, Or Elovitch, Amikam
Shorer, Linor Yochelman, Ron Eilon and Miki Neiman as part of the
DBS case. According to the publication:
a. The indictment attributes to the defendants the offenses of
aggravated obtainment by fraud, fraud and breach of trust in a
corporation, and reporting offenses under the Securities Law, in
relation to two cases: Fraud in relation to the payment of the
consideration for the purchase of DBS shares by Bezeq, and
fraud in relation to the conduct of the independent committees
established by Bezeq for the purpose of examining Bezeq
transactions in which Elovitch had a personal interest.
b. The State Attorney's Office (Taxation and Economics) entered
into a conditional settlement agreement under the Securities Law
with Stella Handler, in which Stella Handler admitted the facts
according to which she was involved in intentional misstatement
in Bezeq's reports. In accordance with what is stated in the
arrangement, the DBS case was closed in the case of Stella
Handler.
c. The investigation files in respect of other suspects investigated
in the cases mentioned above were closed, including against the
former VP of regulation at Bezeq, as well as against Or Elovitch
and Amikam Shorer (in relation to both - except with regard to
the DBS Case as indicated in the preamble of this section).
1.3.1.4. Regarding DBS, which on November 20, 2017, received a "letter of
suspect notification" according to which the investigation file in
which it was questioned as a suspect was transferred to the State
Attorney's Office for review - in accordance with the State
Attorney's Office's notice received by DBS, after the Securities
Authority's case in which it was questioned as a suspect was
reviewed by the State Attorney's Office, it was decided on January
11, 2021 to shelf the case against it, without filing an indictment.
It should be noted that following the opening of such investigations, a number
of civil legal proceedings were initiated against Bezeq and DBS, Bezeq’s
officers in the relevant period, as well as companies of Bezeq’s former
controlling group, including motions for approval of class actions and motions
for disclosure of documents prior to filing a derivative claim. For details
regarding these procedures, see Note 18.
1.3.2
1.3.3 Bezeq does not yet have complete information regarding the investigations,
plans, materials and evidence in the possession of the law authorities in the
matter (although in January 2021, Bezeq received the core of the investigation
material in connection with Case 4000, following Bezeq's summons to a
13
Notes to Consolidated Financial Statements as of December 31, 2020
hearing on this matter as detailed in the above section 1.3.1.2). In accordance,
Bezeq is not yet able to assess the effects of the investigations, their findings
and their results on Bezeq, as well as the financial statements and estimates
used in the preparation of these reports, if any. Upon the lifting of the
restriction on conducting tests and inspections related to issues that arose in
the course of the investigations, the tests shall be completed as necessary with
respect to matters that arose in the framework of said investigations.
1.4
Pandemic - Outbreak of COVID-19
The beginning of 2020 saw a worldwide outbreak of the Coronavirus (COVID-19)
which is an event with many implications, including macroeconomic. Following
the epidemic, many countries, including Israel, are taking significant steps in an
attempt to prevent the spread of the virus, such as restrictions on the movement of
citizens, gatherings, transport restrictions on passengers and goods, closing borders
between countries, and so on. As a result, the incident and the actions taken as
aforesaid have significant implications for many economies as well as for the
capital markets in the world.
During 2020, as a result of the COVID-19 epidemic crisis, there was an injury
mainly to revenues from Pelephone’s roaming services, as well as a certain injury
to revenues from the business segment in all Bezeq Group companies, when the
total impact of the pandemic on the financial situation and business position of the
Group companies was mixed, while the increase in Bezeq’s activity along with
actions taken by the Group's companies in light of the consequences of the incident
offset most of the damage to revenue from roaming services.
It should be noted that tests carried out by the Group companies indicate that at this
point, the COVID-19 crisis had no material impact on the Group companies’ ability
to meet the repayment of liabilities and on the indices of assets and liabilities,
impairment of assets and recognition of expected credit losses. In addition, there
was no material impact on critical estimates and considerations.
As of the date of approval of these financial statements, Bezeq Group's working
assumption regarding the continued spread of the COVID-19 pandemic is that
measures to limit the spread of the virus will continue at varying intensities during
2021 along with a long and gradual recovery in aviation and international tourism.
Accordingly, and subject to the above assumptions, Bezeq Group expects that the
effects of the COVID-19 pandemic on its activities will be mainly reflected in the
damage to Pelephone's revenues from roaming services, as a result of the effects of
the spread of the pandemic on the aviation and international tourism segments,
without significant adverse effects in other areas of activity.
At the same time, it is a variable incident which is not in the Group’s control, and
therefore the continuation or exacerbation of the crisis beyond the Group's
assumptions as set forth above, if any, may materially adversely affect the Group's
results. These effects may be reflected, inter alia, in injury, beyond the estimates
as stated above, to income from roaming services, as well as to the Group
companies' revenues from the business segment, revenues from the sale of cellular
end equipment, employee availability, customer service and technician activity
14
Notes to Consolidated Financial Statements as of December 31, 2020
systems, the supply chain, and the amounts and dates of collection from the Group's
customers.
The Group’s preparation as stated above may vary depending on various
developments regarding the COVID-19 pandemic and its effects, in particular the
duration and extent of the incident, the nature and extent of the economic and other
restrictions that accompany it, as well as the intensity and duration of the economic
recession that will develop as a result.
1.5
Restatement
As part of the preparation of the quarterly report for September 30, 2020, Bezeq
International found that there are discrepancies between the assets and liabilities
listed in its books and the actual assets and liabilities, resulting, among other things,
from non-imputation of costs from previous years due to advance payments to
suppliers.
In light of the above findings, on December 21, 2020 the Company restated Its
financial statements for 2019 (including comparative data for 2018 and 2017), in
order to retroactively reflect the effect the correction of the discrepancies as stated.
Comparative data that are included in these financial statements are data after the
restatement.
1.6
Definitions
In these financial statements:
The Company
The Group
Bezeq
B Communications Ltd.
The Company and its subsidiaries
DBS
Subsidiaries
Affiliated
companies
Investee
companies
Related party
Bezeq Israel Telecommunications Corporation Ltd. and
its
subsidiaries whose reports are fully consolidated, directly or
indirectly, with the Company's reports as detailed in Note 13.
DBS Satellite Services (1998) Ltd.
Companies whose financial statements are consolidated in full,
directly or indirectly, in the financial statements of the Company
Companies that the Group's investment in which is included,
directly or indirectly, in the financial statements based on the equity
method
Subsidiaries or affiliates
As defined in International Accounting Standard 24 regarding
related parties
Stakeholders
Within the meaning thereof in Paragraph (1) of the definition of
"stakeholder" in a corporation in Article 1 of the Securities Law,
15
Notes to Consolidated Financial Statements as of December 31, 2020
5728-1968
CPI
The Consumer Price Index published by the Central Bureau of
Statistics
2. Basis of preparation of the financial statements
2.1. Declaration of compliance with international financial reporting
standards
The consolidated financial statements have been prepared by the Group in accordance
with International Financial Reporting Standards (hereinafter: "IFRS") and in accordance
with the Securities Regulations (Annual Financial Statements), 5770-2010.
The consolidated financial statements were approved by the Board of Directors on March
24, 2021.
2.2. The currency of the activity and the currency of the statements
The consolidated financial statements are presented in new shekels, which is the currency
of the Group's activity and is rounded to the nearest million. The shekel is the currency
that represents the main economic environment in which the Group operates.
2.3. The basis for measurement
The consolidated financial statements have been prepared on the basis of historical
cost, with the exception of the following items:
• Derivative financial instruments, measured at fair value through income
•
Inventory measured as cost or net exercisable value, whichever is lower
• Deferred tax assets and liabilities
• Provisions
• Assets and liabilities in respect of employee benefits
For more information regarding the measurement of these assets and liabilities, see
Note 3 regarding the main principles of accounting policy.
2.4. Operating cycle period
The Group's operating cycle does not exceed one year. therefore, Current assets and
current liabilities include items that are intended and expected to materialize within
one year from the date of the financial statements.
2.5. Format of expense analysis recognized in the statement of income
Costs and expenses in the statement of income are presented and analyzed
according to a classification method based on the nature of the expenses. The said
classification is appropriate for understanding the business of the Group, which
deals with a wide range of services provided through a common infrastructure. All
costs and expenses are used To provide the services.
16
Notes to Consolidated Financial Statements as of December 31, 2020
2.6. Use of estimates and discretion
In preparing the financial statements in accordance with IFRS, the Group's
Management is required to use discretion, assessments, estimates and assumptions
that affect the implementation of accounting policies and amounts of assets and
liabilities, income and expenses. It is hereby clarified that the actual results may
differ from these estimates.
Estimates and assumptions are reviewed on an ongoing basis. Changes in
accounting estimates are recognized in the period in which the estimates were
updated and in any future period affected.
The following is information regarding significant estimates and discretion, a
change in estimates and assumptions in respect of which has the potential to have
a material effect on the financial statements:
Topic
Measuring the
recoverable amounts
of cash-generating
units
Deferred taxes
Determining the
lease period
Duration and
expected operation
of property, plant
and equipment,
intangible assets and
other long-term
assets
Uncertain tax
positions
Provisions and
contingent
liabilities, including
levies
17
Main discounts
Assuming the expected cash flows
from the cash-generating units
Possible consequences
Recognition of impairment
loss or cancellation of
impairment loss
Reference
Note 11
Discount on the expected exercise of
the tax benefit in the future,
including the assumption that it is
more likely than not that transferred
losses accrued in DBS for tax
purposes will not be used
For the purpose of determining the
lease period, the Group takes into
account the period during which the
lease cannot be canceled, including
extension options that are likely to
be exercised and / or options for
cancellation that are likely to be
exercised
Assumptions regarding the life
duration of fixed asset groups,
intangible assets and other assets
The degree of uncertainty regarding
the accepting of the Group's tax
positions (uncertain tax positions)
and the risk that tax and interest
expenses will be higher or lower
than the expenses included in the
reports. This is based on an analysis
of a number of factors, including
interpretations of the tax laws and
the Group's past experience
Assessing the likelihood of claims
against the Group companies and
measuring the potential liabilities
relating to the claims
Recognition of deferred tax
asset
Note 7
9
Increase or decrease in the
measurement of right-of-use
asset and liability in respect
of lease and in depreciation
and financing expenses in
subsequent periods
Notes
10,11,12
Change in the value of
property, plant and
equipment and intangible
assets and other assets and in
depreciation and amortization
expenses
Recognition or cancellation
of income tax expenses
Note 7
Note 16 and
Note 18
Cancellation or creation of a
provision in respect of a
claim, recognition of revenue
/ expenses and recognition of
income in respect of such a
change, respectively
Notes to Consolidated Financial Statements as of December 31, 2020
Employee benefits
Inevitable costs of a
contract
Existence of
effective control
over Bezeq
Note 13
Note 17
Note 3.13.3
Note 13.5
Change in capital gain from
the sale of a real estate asset
in the "Sakia" property
An increase or decrease in
employee benefits liabilities
and early retirement liabilities
Recognition of the provision
in respect of an onerous
contract
Consolidation of Bezeq's
financial statements or
treatment of an investment in
Bezeq using the equity
method
The Company's assumption of the
estimated payment to the authorities
regarding levies on real estate in the
"Sakia" property
Actuarial assumptions such as
discount rate, future wage increase
rate and departure rate
Assuming that the economic benefits
will outweigh the unavoidable costs
of the contract
The possibility of appointing most of
Bezeq's members of the Board of
Directors, as a result of the
Company's control permit in Bezeq,
the control of the composition and
distribution of the other Bezeq
shareholders and the restrictions that
apply to these shareholders under the
Communications Law
2.7. Determining fair value
For the purpose of preparing the financial statements, the Group is required to
determine the fair value of certain assets and liabilities. Further information
regarding the assumptions used in the fair value determination is provided in Note
30.7 regarding fair value.
3. Accounting policy principles
The accounting policies outlined below have been applied consistently to all
periods presented in these consolidated financial statements by the Group entities.
In this note, where the Group has chosen accounting alternatives, which are
permitted by accounting standards and / or accounting policies on a subject on
which there is no explicit provision in accounting standards, the said disclosure is
presented in bold. The said emphasis does not attach more importance in
comparison to the other accounting policies that were not emphasized.
3.1. Consolidation of financial statements
3.1.1.
Subsidiaries
Subsidiaries are entities controlled by the Company. The financial statements
of subsidiaries are included in the consolidated financial statements from the
date of acquisition of control until the date of loss of control.
Control exists when the Group is exposed to, or has rights in, returns that
vary from its involvement in the acquired entity and has the ability to
influence those returns through its power of influence in the acquired entity.
In terms of control, real rights held by the Group and by others are taken into
account.
3.1.2. Non-controlling interests
Non-controlling interests are the capital in a subsidiary that cannot be
attributed, directly or indirectly, to the parent company and include
18
Notes to Consolidated Financial Statements as of December 31, 2020
additional components, such as a share-based payment that will be disposed
of in the equity instruments of subsidiaries.
3.1.3. Allocation of income or other comprehensive profit among the shareholders
Income and any other component of other comprehensive profit are
attributed to the owner of the Company and to non-controlling interests. The
total income and the other comprehensive profit is attributed to the owner of
the Company and to non-controlling interests even if as a result the balance
of the non-controlling interests will be negative.
3.1.4.
Transactions with non-controlling interests, while maintaining control
Transactions with non-controlling interests while maintaining control are
treated as capital transactions. Any difference between the consideration paid
or received and the change in non-controlling interests is imputed to the
Company owner's share in the capital directly to surplus. The amount by
which the non-controlling interests are adjusted is calculated as follows: an
increase in the holding rate, according to the proportionate share of the
balance of the non-controlling interests in the consolidated financial
statements on the eve of the transaction. Also, in the event of changes in the
holding rate in a subsidiary, while retaining control, the Company reallocates
the cumulative amounts recognized in other comprehensive profit between
the owner of the Company and the non-controlling interests.
3.1.5.
Transactions canceled in the consolidation
Mutual balances in the Group and revenue and expenses, arising from
transactions between companies, were eliminated in the consolidated
financial statements.
3.1.6.
Contingent consideration for the merging of businesses
After the acquisition date, the Group recognizes changes in the fair value of
a contingent consideration recognized in the merging of businesses, which is
classified as a financial liability, in the income statement under the
financing expenses item.
3.2. Foreign currency transactions
Foreign currency transactions are translated into the Group's operating currency
according to the exchange rate in effect on the transaction dates. Financial assets
and liabilities denominated in foreign currency at the reporting date are translated
into the activity currency at the exchange rate in effect on that date.
3.3. Financial Instruments
3.3.1. Non-derivative financial assets
Non-derivative financial assets mainly include investments in deposits, other trade
receivables and cash and cash equivalents.
The Group initially recognizes financial assets at the date on which the Group
becomes a party to the contractual provisions of the instrument, meaning the date
on which the Group undertook to buy or sell the asset.
A financial asset is initially measured at fair value plus transaction costs that can be
directly attributed to the acquisition or issuance of the financial asset. Customers
19
Notes to Consolidated Financial Statements as of December 31, 2020
who do not include a significant financing component are initially measured by the
transaction price.
Financial assets are deducted when the Group's contractual rights to the cash flows
arising from the financial asset expire, or when the Group transfers the rights to
receive the cash flows arising from the financial asset in a transaction in which all
risks and rewards of ownership of the financial asset are transferred in practice.
Classification of financial assets into groups and accounting treatment for each
group
At the time of initial recognition, financial assets are classified into one of the
following measurement categories: reduced cost; Or fair value through income.
A financial asset is measured at reduced cost if it meets the two cumulative
conditions below and is not intended to be measured at fair value through income:
a. Held as part of a business model that aims to hold assets to back up the
contractual cash flows; and
b. The contractual terms of the financial asset provide entitlement at specified
dates to cash flows that are only payments of principal and interest in respect
of the principal amount that has not yet been repaid.
All financial assets in the Group that are not classified for measurement at amortized
cost are measured at fair value through income.
The Group classifies financial assets as follows:
Cash and cash equivalents
Cash includes immediately available cash balances and on-demand deposits. Cash
value includes short-term investments (when the time from the original deposit date
to the redemption date is up to 3 months), at a high level of liquidity that can be
easily converted into known amounts of cash and which are exposed to insignificant
risk of changes in value.
Customers, trade receivables and deposits
The Group has customer balances, other trade receivables and deposits held as part
of a business model aimed at collecting contractual cash flows. Contractual cash
flows in respect of these financial assets, include only principal and interest
payments which reflect a consideration for the time value of the money and the
credit risk. Accordingly, these financial assets are measured at amortized cost.
Subsequent measurement and income
Reduced financial assets are measured using the effective interest method net of
impairment losses. Interest income, profit or loss from exchange rate differences
and impairment are recognized in income. Any profit or loss arising from a
deduction is also recognized in income.
Fair value financial assets through income are measured in subsequent periods at
fair value. Net profit and loss, including income from interest or dividends, are
recognized in income.
3.3.2. Non-derivative financial liabilities
20
Notes to Consolidated Financial Statements as of December 31, 2020
Non-derivative financial liabilities include: debentures issued by the Group, loans
and credit from banking corporations and other credit providers, suppliers and other
trade payables.
The Group initially recognizes debt instruments issued at the time of their
formation. The rest of the financial liabilities are recognized at the time of the
transaction. Financial liabilities are initially recognized at fair value net of all
attributable transaction costs. Once initially recognized, financial liabilities are
measured at amortized cost using the effective interest method.
Financial liabilities are deducted when the Group's liability, as specified in the
agreement, expires or when it is eliminated or canceled.
Change in terms of debt instruments
Exchanging debt instruments, with substantially different terms, between an
existing borrower and an existing lender is treated as the settlement of the original
financial liability and the recognition of a new financial liability at fair value. The
difference between the reduced cost of the original financial liability and the fair
value of the new financial liability is recognized in income in the financing revenue
or expenses item.
The terms differ materially if the discounted present value of the cash flows under
the new terms, including any commissions paid, net of any commissions received
and discounted using the original effective interest rate, is at least ten percent
different from the discounted present value of the remaining cash flow of the
financial liability.
In addition to the aforementioned quantitative test, the Group examines, among
other things, whether there have also been changes in various economic parameters
inherent in the replaced debt instruments.
In the event of a change in the terms (or replacement) of a non-material fixed-rate
debt instrument, the new cash flows are discounted at the original effective interest
rate, with the difference between the present value of the new financial liability and
the present value of the original financial liability recognized in income under the
item "Financing expenses (revenue)".
The Group has chosen an accounting policy according to which when a portfolio
of financial liabilities with the same characteristics is repaid / replaced, the
calculation of income or loss / replacement will be performed using the FIFO
method.
3.3.3.
Index-linked assets and liabilities that are not measured at fair value
The value of CPI-linked assets and liabilities, which are not measured at fair
value, is estimated in each period in accordance with the actual rate of increase /
decrease of the index.
3.3.4. Offsetting financial instruments
A financial asset and a financial liability are offset and the amounts are presented
net in the statement of financial position when the group has immediate existence
(currently) an enforceable legal right to offset the amounts recognized as well as an
intention to liquidate the asset and liability on a net basis or to realize the asset and
eliminate the liability at the same time.
3.3.5. A. Hedge accounting
21
Notes to Consolidated Financial Statements as of December 31, 2020
The Group holds derivative financial instruments for the purpose of hedging cash
flow in respect of risks of future changes in the consumer price index in connection
with the bonds issued by the Group.
At the time the hedge relationship is created, the Group documents the purpose of
risk management and its hedging strategy. The Group also documents the economic
relationship between the hedged item and the hedging instrument, including
whether the changes in the cash flows of the hedged item and the hedging
instrument are expected to offset each other.
Derivatives are initially recognized at fair value. Attributable transaction costs are
recognized in income as incurred. After initial recognition, the derivatives are
measured at fair value, with the effective portion of the changes in the fair value of
the derivative being charged to a hedge fund under other comprehensive profit. The
effective portion of the changes in the fair value of a derivative, which is recognized
in other comprehensive profit, is limited to the cumulative change in the fair value
of the hedged item (at present value), from the date of creation of the hedge. The
part that is ineffective, the change in fair value is immediately recognized in income.
B. Economic hedging
In addition, the Group holds derivative financial instruments for the purpose of
hedging cash flow in respect of foreign exchange risks. Hedge accounting is not
applied to these instruments. Such derivative instruments are recognized at fair
value; The changes in fair value are immediately recognized in the statement of
income, as financing revenue or expenses.
3.4.
Broadcasting rights
The broadcasting rights are presented according to cost, net of rights exercised
and impairment losses.
Costs of acquired broadcasting rights for broadcasting content includes the amounts
paid to the rights providers plus direct costs incurred for the purpose of adjusting
the broadcasting rights.
An examination of the impairment of broadcasting rights is made as part of the
cash-generating unit with which the broadcasting rights are associated (see also
Note 11).
The net change in broadcasting rights is presented as adjustments to profit as
part of current operations in the statement of cash flows.
3.5.
Property, plant and equipment
3.5.1.
Recognition and measurement
The Group chose to measure the property, plant and equipment items by cost net
of accumulated depreciation and impairment losses.
Cost includes costs that can be directly attributed to the purchase of the asset. The
cost of self-constructed assets includes the cost of materials, direct salaries and
financing costs, any additional costs that can be directly attributed to bringing the
asset to the location and condition necessary for it to operate as Management
intended, as well as an estimate of the costs of dismantling and removing the items
and restoring the site where the item is located in cases where the Group is obligated
to vacate and restore the site. The cost of purchased software, which is an integral
part of the operation of the related equipment, is recognized as part of the cost of
this equipment.
22
Notes to Consolidated Financial Statements as of December 31, 2020
Spare parts, auxiliary equipment and backup equipment are classified as property,
plant and equipment when they meet the definition of property, plant and equipment
in accordance with IAS 16, otherwise they are classified as inventory.
When significant pieces of property, plant and equipment have different lifespans,
they are treated as separate items (significant components) of property, plant and
equipment.
Profit or loss from the deduction of a property, plant and equipment item is
determined by comparing the consideration from the deduction of the asset to its
book value. Profit or loss from the sale of property, plant and equipment is
included in the Other income or expenses item, as the case may be, in the
statement of income.
3.5.2.
Subsequent costs
The cost of replacing part of a fixed asset item is recognized as part of the book
value in the of that item if it is expected that the future economic benefit inherent
in the new part will flow to the Group and if its cost can be measured reliably.
Ongoing maintenance costs of property, plant and equipment are recognized in
income as they arise.
3.5.3. Depreciation
Depreciation is charged to the statement of income using the straight-line method
over the estimated useful life of each of the items of property, plant and equipment,
since this method best reflects the projected consumption pattern of the future
economic benefits inherent in the asset.
An asset depreciates when it is available for use, that is, when it has reached the
necessary position and condition in order for it to be able to act in the manner
intended by Management.
Improvements in leased buildings generally depreciate over the lease term, which
includes the period of extension options held by the Group that it intends to exercise
and the useful life of the lease improvements, whichever is shorter.
23
Notes to Consolidated Financial Statements as of December 31, 2020
The estimate of the useful life for the current period is as follows:
Landline and international network equipment (switching, transmission and
power)
Landline network
Multi-channel TV equipment and infrastructure
Subscription equipment and installations
Vehicles
Office and general equipment
Electronic equipment, computers and internal communication systems
Cellular network
Passive radio equipment on cellular network sites
Structures
Underwater cable
Years
4-12
12-33
1-17
4-8
6-7
5-10
3-7
4-10
Until December 31, 2037
25
4-25 (mostly 25)
Estimates of the depreciation method, useful life and residual value are reviewed at least
once every reporting year and adjusted as necessary.
3.6.
Intangible assets
3.6.1.
Goodwill
Goodwill created as a result of the acquisition of subsidiaries is included in the intangible
assets item. After initial recognition, goodwill is measured at cost net of accumulated
impairment losses. Reputation is reviewed at least once a year for impairment examination.
See also Note 11.
3.6.2.
Software development costs
Software development costs are recognized as an intangible asset only if: the development
costs can be reliably measured; The software is technically and commercially applicable; A
future economic benefit is expected from the development, and the Group has sufficient
intention and resources to complete the development and use the software. The costs
recognized as an intangible asset include the cost of materials, direct salaries and overhead
expenses that can be directly attributed to the preparation of the asset for its intended use.
Other development costs are recognized in the statement of income as incurred.
Discounted development costs are measured at cost net of amortization and impairment
losses.
Software
Software that is an integral part of the hardware, which cannot operate without the software
installed on it, is classified as property, plant and equipment. In contrast, software licenses
that stand on their own and add additional functionality to the hardware are classified as
intangible assets.
Rights to frequencies
Frequency rights refer to the frequencies allocated to Pelephone for cellular activity,
following its winning special tenders conducted by the Ministry of Communications.
Depreciation in respect of the asset is recognized in the statement of income according to
the "straight line" method depreciates over the frequency allocation period, which begins on
the date of their use. 4G frequencies (LTE) and 3G frequencies (UMTS / HSEA) depreciate
until August 22, 2028. 5G frequencies will depreciate until September 2032.
Depreciation of rights in frequencies is attributed to the depreciation and amortization item
in the statement of income.
3.6.3.
3.6.4.
3.6.5.
3.6.6.
Other intangible assets
24
Notes to Consolidated Financial Statements as of December 31, 2020
Other intangible assets acquired by the Group, with a defined useful life, are measured
at cost net of amortization and impairment losses.
3.6.7.
Subsequent costs
Subsequent costs are recognized as an intangible asset only when they increase the future
economic benefit inherent in the asset in respect of which they were incurred. Other costs,
including those related to goodwill or self-developed brands, are recognized in the statement
of income as incurred.
3.6.8.
Amortization
Amortization of intangible assets is charged to the statement of income according to the
straight-line method (except as stated below regarding the amortization of customer
relationships), over the estimate of the useful life of the intangible assets from the date on
which the assets are available for use. Goodwill is not systematically amortized, but is
exmained at least once a year for impairment.
The estimated useful life for the current period is:
Property type
Frequency use rights
Reduction period
Over the license period until 2032
3-7 years depending on the license period or
beyond the estimated duration of use of the
Computer software and software use licenses
software
Estimates of the depreciation method and useful life are reviewed at least once every
reporting year and adjusted as necessary.
3.7.
Leased assets
3.7.1. Determining whether an arrangement contains a lease
At the time of entering into the lease, the Group determines whether the
arrangement is a lease or contains a lease, examining whether the arrangement
transfers a right to control the use of an identified asset for a period of time in
exchange for payment. In assessing whether the arrangement transfers the right to
control the use of an identified asset, the Group assesses throughout the lease term
whether it has the following two rights:
a) The right to obtain virtually all economic benefits from the use of the
identified asset; also
b) The right to direct the use of the identified asset
For leases that include non-lease components, such as services or maintenance,
related to a lease component, the Group has chosen to treat the contract as a single
lease component without separating the components.
3.7.2.
Leased assets and liabilities in respect of lease
Contracts that give the Group control over the use of an identifiable asset over a
period of time for consideration are treated as leases. At the initial recognition, the
Group recognizes a liability at the present value of the future minimum lease
payments (these payments do not include variable lease payments that do not
depend on the CPI or, change in any interest rate or change in exchange rate), and
at the same time the Group recognizes the right-of-use asset in the amount of the
liability, adjusted for lease payments that have been paid in advance or
accumulated, plus the direct costs incurred in the lease.
25
Notes to Consolidated Financial Statements as of December 31, 2020
Because the interest rate inherent in the lease cannot be easily determined, the
Group's additional interest rate was used (the interest rate the Group was required
to pay in order to borrow for a similar period and with similar collateral the amounts
needed to obtain an asset with a similar right of use in a similar economic
environment).
After initial recognition, the asset is treated according to the cost model, and is
amortized over the lease term or the useful life of the asset (whichever is earlier).
3.7.3.
Lease period
The lease period is determined as a period in which the lease is non-cancellable,
and includes the periods for which there is an option to extend or cancel the lease if
it is reasonably certain that the Group will exercise the options for extending the
lease and will not exercise the option to cancel the lease.
3.7.4. Variable lease payments
Lease payments that are linked to the consumer price index are initially measured
by using the existing index at the beginning of the lease and are included in the
measurement of the lease liability. When there is a change in the cash flow of future
lease payments resulting from the change in the index, the balance of the liability is
updated against the right-of-use asset.
3.7.5. Amortization of right-of-use asset
After the date of commencement of the lease, the right of use property is measured
using the cost method, net of cumulative depreciation And after deducting
cumulative losses from impairments and adjusted for re-measurements of the
liability in respect of the lease. Calculation is calculated On a straight-line basis
Over the useful life or the contractual lease period, whichever is earlier as follows:
Asset type
Cellular communication sites
Structures
Vehicles
3.7.6.
Subleases
Weighted average of the
agreement period as of
December 31, 2020
(years)
6.4
14.8
2.3
In leases in which the Company leases the underlying asset in a sublease, the
Company examines the classification of the sublease as a finance or operating lease
in relation to the right-of-use obtained in the main lease. The Company examined
existing leases at the date of initial application in accordance with the balance of
their contractual terms as of that date.
3.8. Capacity use rights
Transactions for the purchase of Indefeasible Right of Use (IRU) in underwater
cable capacities were treated as service acceptance transactions. The amount of the
prepaid expense is reduced in a straight line in accordance with the period specified
in the agreement and no more than the estimated useful life of those capacities.
26
Notes to Consolidated Financial Statements as of December 31, 2020
Capacities which identifiable and used exclusively by the Group are presented in
the property, plant and equipment item. The asset is reduced in a straight line in
accordance with the period specified in the agreement and for no longer than the
estimate or the expected useful life of those capacities. Capacity use rights are
presented net of accumulated impairment losses.
3.9. Inventory
The cost of inventory includes the costs of purchasing the inventory and bringing
it to its existing place and condition.
Inventory is measured as the cost and net exercisable value, whichever is lower.
The Group chose to determine the cost of inventory according to the weighted
moving average method.
Stock includes end equipment and accessories intended for sale and service, as well
as spare parts used for repairs as part of the repair service provided to customers.
Inventory of end equipment, accessories and spare parts whose consumption is slow
are presented net of provisions for impairment.
3.10.
Impairment
3.10.1. Non-derivative financial assets
The Group has chosen to measure the provision for projected credit losses
in respect of trade receivables in an amount equal to the contractual credit
losses throughout the life of the instrument.
Projected credit losses throughout the life of the instrument are projected
credit losses resulting from all possible failure events throughout the life of
the financial instrument.
Projected credit losses constitute a weighted estimate — probabilities of
credit losses. Credit losses are measured at the present value of the difference
between the cash flows to which the Group is entitled under the contract and
the cash flows that the Group expects to receive and are discounted according
to the effective interest rate of the financial asset.
Examination of projected credit losses for customer and trade receivable
balances in substantial amounts is done on the basis of each asset separately.
For the rest of the financial assets, projected credit losses are examined
collectively, according to groups with similar credit risk characteristics,
taking into account past experience.
Provision for projected credit losses is presented as a deduction from the
gross book value of customers.
Regarding deposits in banks, for which the credit risk has not increased
significantly from the date of initial recognition, the Group measures the
provision for projected credit losses in an amount equal to the projected
credit losses due to a failure incident in a period of 12 months.
When assessing whether the credit risk of a financial asset has increased
significantly from the date of initial recognition and assessment of projected
credit losses, the Group takes into account reasonable information that can
be established, which is relevant and achievable without excessive cost or
effort. Such information includes quantitative and qualitative information, as
27
Notes to Consolidated Financial Statements as of December 31, 2020
well as analysis, based on the Group's past experience and includes forward-
looking information.
3.10.2. Non-financial assets
Timing of impairment examination
The book value of the Group's non-financial assets, that are not inventory and
deferred tax assets, is reviewed at each reporting date to determine whether there are
any indications of impairment. If there are indications, as stated, an estimate of the
recoverable amount of the asset is calculated.
The Group performs once a year on a fixed date, an assessment of the recoverable
amount of the cash generating unit to which goodwill is attributed, or more
frequently, if there are indications of impairment.
Measurement of recoverable amount
The recoverable amount of an asset or a cash-generating unit is the value in use and
the fair value, whichever is higher, net of costs of sale. In determining the value in
use, the Group discounts the projected future cash flows according to the discount
rate, which reflects the market estimates of the time value of the money and the
specific risks relating to the asset or cash-generating unit (for which future cash
flows have not been adjusted).
Determining cash-generating units
For the purpose of examination of impairment, the assets are grouped together into
the smallest group of assets which generates cash flows from continuous use, which
are mainly independent of assets and other groups ("cash-generating unit"). See Note
11.
Assignment of goodwill to cash-generating units
For the purpose of examining the impairment of goodwill, cash-generating units to
which goodwill has been allocated are grouped so that the level at which the
impairment is examined reflects the lowest level at which the goodwill is monitored
for internal reporting purposes, but in any case is not larger than an activity segment.
Goodwill acquired as part of merging businesses is assigned for the purpose of
examining impairment to cash-generating units that are expected to generate benefits
from the synergy of the merger.
Recognition of impairment loss
Loss from impairment of a cash-generating unit is recognized when the book value
of the cash-generating unit, including goodwill, as applicable, exceeds its
recoverable amount and is recognized in the statement of income. An impairment
loss recognized in respect of a cash-generating unit is initially allocated to an
impairment loss in the book value of goodwill attributable to the unit, and
subsequently to an impairment loss in the book value of other assets in the cash-
generating unit. For the purpose of allocating the impairment loss, the value of the
assets is not reduced below the fair value net of exercise costs, their value in use (if
determinable) or zero, whichever is higher.
Impairment loss resulting from a one-off update of forecasts for the
coming years is classified in the statement of income under the Impairment
loss item. On the other hand, an impairment loss resulting from a
continuing adjustment of non-current assets of the Group companies to
fair value net of exercise costs (resulting from the expectation of continued
negative cash flow and negative operating value of those companies), is
classified in the statement of income under the same items in which the
current expenses in respect of these assets were classified. The said
classification is more compatible with the presentation method based on
28
Notes to Consolidated Financial Statements as of December 31, 2020
the nature of the expense and is also more suitable for understanding the
Group's business.
Accordingly, the statement of income shows the continuing impairment of
broadcasting rights in DBS and Walla as part of "Operating and general
expenses" while the continuing impairment of property, plant and equipment
and intangible assets is presented as part of "Depreciation, amortization and
impairment" expenses. See also Note 11.
Cancellation of impairment loss
Loss of goodwill impairment is not cancelled. As for other assets, in respect
of which impairment losses have been recognized in previous periods, at
each reporting date it is examined whether there are indications that these
losses have decreased or that they no longer exist. Impairment loss is
cancelled if there is a change in the estimates used to determine the
recoverable amount, only to the extent that the book value of the asset, after
the loss is deducted, does not exceed the book value less depreciation or
amortization, which would have been determined if no impairment loss had
been recognized.
3.11. Employee benefits
3.11.1. Post-employment benefits
The Group has a number of post-employment benefit plans. The plans are
usually funded by deposits with insurance companies and are classified as
defined deposit plans as well as defined benefit plans.
a. Defined deposit plans
A defined deposit plan is a post-employment plan whereby the Group
pays regular payments to a separate entity without having any legal or
implied liability to pay additional payments.
The Group's liabilities to deposit to the defined deposit plan are
recognized as a loss in the statement of income for the periods during
which the employees provided the services.
b. Defined benefit plans
The Group's net liability, which relates to a defined benefit plan for
post-employment benefits, is calculated for each plan separately by
estimating the future amount of the benefit that the employee will
receive in return for his services in the current period and in past
periods. This benefit is presented at present value less the fair value of
the plan's assets. The calculations are conducted annually by a
qualified actuary. The discount rate is determined according to the
return on the reporting date for high-quality corporate bonds, whose
currency is the same as the currency in which the benefit is paid or to
which it is linked, and whose maturity date is similar to the Group's
commitment terms.
Net interest costs in respect of a defined benefit plan are calculated by
multiplying the net liability by the discount rate used to measure the
liability in respect of a defined benefit, as determined at the beginning
of the annual reporting period.
The Group chose to present the interest costs imputed to income, as part of
the financing expenses item.
29
Notes to Consolidated Financial Statements as of December 31, 2020
Recalculation of the net liability in respect of a defined benefit includes
actuarial income and the return on plan assets (excluding interest). Re-
measurements are imputed immediately, through other comprehensive profit
directly to surplus.
When there is an improvement or reduction in the benefits that the Group
provides to its employees, some of the increased or reduced benefits relating
to employees' past services are immediately recognized as profit or loss when
the plan is amended or reduced.
3.11.2. Other long-term employee benefits
The Group's liability for long-term employee benefits (such as liability for
accrued vacation and sick days), which do not relate to post-employment
benefit plans, is in respect of the amount of future benefit to employees for
services rendered in the current and past periods. The amount of these
benefits is shown at its current value. The discount rate is determined in
accordance with the return of high-quality indexed corporate bonds on the
reporting date whose currency is the shekel, and their maturity date is similar
to the Group's commitment terms. Actuarial changes are recognized in the
statement of income in the period in which they were created. The actuarial
changes resulting from a change in the discount rate are recognized
under the financing expenses / revenue item, while the remaining
differences are imputed to payroll expenses.
3.11.3. Early retirement and dismissal benefits
Dismissal benefits are recognized as an expense when the Group has
expressly committed, with no real possibility of cancellation, to the dismissal
of employees, before they reach the usual retirement date according to a
detailed formal plan. Benefits provided to employees in voluntary retirement
are recognized as an expense when the Group has offered employees a plan
that encourages voluntary retirement, and the employees accepted the offer
or when the Company can no longer withdraw its offer.
Expenses in respect of early retirement and dismissal that have been
imputed to income are presented in the item Other operating expenses
(revenue). The actuarial changes resulting from a change in the discount
rate of long-term benefits in respect of early retirement and dismissal are
imputed to the item of financing expenses, while the other actuarial
changes are imputed to other operating expenses (revenue).
3.11.4. Short-term benefits
Liabilities for short-term employee benefits are measured on a non-
discounted basis, and the expense is recognized when the relevant service is
provided. Liabilities in respect of short-term employee benefits regarding a
cash bonus is recognized at the amount expected to be paid when the Group
has a current legal or implied liability to pay the said amount for a service
provided by the employee in the past and the liability can be reliably
estimated.
The classification of benefits for employees as short-term benefits or as other
long-term benefits for measurement purposes is determined in accordance
with the forecast of the date of full disposal of the benefits.
30
Notes to Consolidated Financial Statements as of December 31, 2020
The classification of benefits for employees as current benefits or as non-
current benefits for the purpose of presenting them in the statement of
financial position is made in accordance with the date on which the liability
is due for payment.
3.12. Provisions
A provision is recognized when the Group has a current, legal or implied obligation
as a result of a past incident that can be reliably estimated, and when it is expected
that a flow of economic benefits will be required to discharge the liabiltiy.
31
Notes to Consolidated Financial Statements as of December 31, 2020
3.12.1. Legal claims
The handling of pending lawsuits is in accordance with IAS37 and its
accompanying provisions. According to the provisions, the claims are
classified according to groups with similar characteristics, in accordance
with the areas of probability for the realization of the risk exposures as
detailed below:
a. Expected - probability above 50%.
b. Possible - probability is more than weak and smaller or equal to
50%.
c. Weak - probability less than or equal to 10%.
Regarding claims in respect of which the Group has a legal or implied
liability as a result of an event that has occurred in the past that is likely to
materialize, the financial statements include provisions which, in the opinion
of the Group's Management, based, inter alia, on its legal counsel who
handle such claims, are appropriate in the circumstances of each case, even
though the above claims are denied by the Group companies. In addition,
there is a limited number of legal proceedings, most of which have recently
been accepted, the chances of which cannot be assessed at this stage, and for
the aforesaid reason no provision has been made in respect thereof.
Note 18 provided details regarding the amount of the additional exposure
due to pending claims that are likely to materialize.
3.12.2. Costs of dismantling and removing sites
The provision for a commitment to dismantle and remove sites is recognized
in respect of such lease agreements in which Pelephone has an obligation to
return the leased property to its former state at the end of the lease period,
after dismantling and transferring the site and restoring the site when
necessary. The provision is measured by discounting future cash flows at a
risk-free discount rate that reflects the period of time until the expected end
of the contract under which Pelephone was required to dismantle the site.
The book value of the provision is adjusted in each period to reflect the lapse
of time recognized in financing expenses.
3.12.3. Onerous contracts
When the Group expects that the unavoidable costs in respect of a contract
will exceed the economic benefits expected to be received from the contract,
a provision for an onerous contract is recognized. The provision is measured
according to the present value of the projected cost for cancellation of the
contract or the present value of the unavoidable costs (net of income) for the
performance of the contract, whichever is lower. Inevitable costs are costs
that the Group cannot avoid because it is subject to a contract (i.e.,
supplemental costs).
3.13. Revenue
3.13.1. The Group recognizes revenue when the customer gains control of the promised
goods or service. Revenue is measured by the amount of consideration that the
Group expects to be entitled to in exchange for the transfer of goods or services
32
Notes to Consolidated Financial Statements as of December 31, 2020
promised to the customer, other than amounts collected for the benefit of third
parties.
The model for recognition of revenue from contracts with customers includes
five steps for analyzing transactions in order to determine the timing of
revenue recognition and its amount:
a.
b.
c.
d.
e.
Identifying the contract with the customer
Identifying separate performance obligations in the contract
Determining the transaction price
Assigning
obligations
Recognition of revenue upon fulfillment of performance
obligations
to separate performance
transaction price
the
3.13.2. Contract identification
The Group handles a contract with a customer only when all of the following
conditions are met:
1. The parties to the contract have approved the contract (in writing,
orally or in accordance with other customary business practices) and
are obligated to fulfill the obligations attributed to them
2. The Group can identify the rights of each party regarding the
products or services to be exchanged
3. The Group can identify the terms of payment for the goods or
services to be exchanged
4. The contract has a commercial substance (i.e. the risk, timing and
amount of the entity's future cash flows are expected to change as a
result of the contract); and
5. The Group is expected to collect the consideration to which it is
entitled for the goods or services that will be delivered to the
customer
3.13.3.
Identification of performance commitment
At the time of entering into the contract, the Group evaluates the goods or
services promised under a contract with a customer and identifies as a
performance obligation any promise to deliver to the customer one of the
following two:
(1) Goods or services (or a package of goods or services) that are separate;
or
(2) A series of separate goods or services to the customer that are in fact
identical and have the same transfer pattern.
3.13.4. Determining the transaction price
The transaction price is the amount of consideration that the Group expects
to be entitled to in exchange for the transfer of goods or services promised
to the customer, in addition to amounts collected for the benefit of third
parties. When determining the transaction price, the Group takes into account
the effects of all of the following: variable consideration, the existence of a
significant financing component in the contract, non-cash consideration and
consideration to be paid to the customer.
3.13.5. Existence of a significant financing component
33
Notes to Consolidated Financial Statements as of December 31, 2020
For the purpose of measuring the transaction price, the Group adjusts the
amount of consideration promised for effects of the time value of the money
if the timing of payments agreed between the parties provides the customer
or Group with a significant financing benefit. In these cases the contract
contains a significant financing component. In assessing whether a contract
contains a significant financing component, the Group examines, inter alia,
the expected length of time between the date on which the Group transfers
the promised goods or services to the customer and the date on which the
customer pays for these goods or services, and the difference, if any, between
the amount of the promised consideration and the cash sale price of the
promised goods or services.
When there is a significant financing component in the contract, the Group
recognizes the amount of the consideration using the discount rate that
will be reflected in a separate financing transaction between itself and the
customer at the time of engagement. The financing component is
recognized as income or interest expenses during the period calculated in
accordance with the effective interest method.
In cases where the difference between the date of receipt of payment and the
date of transfer of the goods or service to the customer is one year or less,
the Group applies the practical relief provided by the standard and does
not separate a significant financing component.
3.13.6. Existence of performance obligation
Revenue is recognized when the Group maintains a performance obligation
by transferring control of a customer or service promised to the customer.
3.13.7. Contract costs
Supplemental costs of obtaining a contract with a customer such as sales
commissions paid to resellers and Group salespeople for sales and upgrades
are recognized as an asset when the Group is expected to recoup those costs.
Costs for obtaining a contract that would have arisen regardless of whether
the contract was obtained are recognized as an expense at the time they were
incurred, unless the customer can be charged for these costs.
Costs discounted as an asset are recognized in the statement of income on a
systematic basis, depending on the expected duration of the subscribers and
depending on their expected average churn rate according to the type of
subscription and the service received (mainly for a period of between 2.6 to
4 years).
In each reporting period, the Group examines whether the book value of the
recognized asset exceeds the balance of the consideration the entity expects
to receive in return for the goods or services to which the asset relates, net of
the costs directly attributable to the supply of those goods or services that
were not recognized as expenses, and if necessary, recognized an impairment
loss in the statement of income.
3.13.8. Major supplier or agent
When another party is involved in the supply of goods or services to the
customer, the Group examines whether the essence of its promise is a
commitment to provide the defined goods or services by itself, i.e., if the
Group is a major supplier and therefore recognizes revenue in gross
34
Notes to Consolidated Financial Statements as of December 31, 2020
consideration amount, or act for another party to provide these goods or
services, i.e. the Group is an agent and therefore recognizes income in the
net commission amount.
The Group is a major supplier when it controls the goods or service promised
prior to delivery to the customer. Indicators that the Group controls the goods
or service prior to their transfer to the customer include, inter alia, the
following: the Group is primarily responsible for keeping the promises in the
contract; The Group has an inventory risk before the goods or service are
delivered to the customer; And also if the Group has discretion in setting the
prices for the goods or service.
3.14. Government grants
Government grants are initially recognized at fair value when there is reasonable
assurance that they will be accepted and that the Group will meet the conditions
that qualify for their receipt. Government grants received for the purpose of
purchasing an asset are presented as deferred income in the statement of financial
position and are unfrozen in the statement of income throughout the useful life of
the asset.
3.15. Income and financing expenses
Financing revenue mainly includes interest revenue accrued using the effective
interest method in respect of the sale of end equipment in installments, interest
revenue from deposits and changes in the fair value of financial assets presented at
fair value through the statement of income.
Total financing expenses mainly include interest expense and linkage on loans
received and bonds issued, expenses in respect of early repayment of the debt as
well as financing expenses in respect of benefits to employees.
In statements of cash flows, interest received is shown as part of cash flows from
investing activities. The Group chose to present the interest rates and linkage
differences paid in respect of loans and debentures as part of cash flows used for
financing activity.
3.16. Income tax expenses
Income tax expenses include current and deferred taxes. Income tax expenses
are recognized in the statement of income or other comprehensive profit if
they arise from items that are recognized in other comprehensive profit.
Current taxes
The current tax is the amount of tax that is expected to be paid on the taxable income
for the year, when it is calculated according to the tax rates that apply according to
the laws that were enacted or enacted in fact at the date of the report. Current taxes
also include changes in tax payments relating to previous years.
Uncertain tax positions
Provision for uncertain tax positions, including additional tax expenses and interest,
is recognized when it is more likely than not that the Group will be required to use
its financial resources to eliminate the liability.
Deferred taxes
Recognition of deferred taxes is with respect to temporary differences between the
book value of assets and liabilities for financial reporting purposes and their value
35
Notes to Consolidated Financial Statements as of December 31, 2020
for tax purposes. The Group does not recognize deferred taxes in respect of the
following temporary differences:
1. Initial recognition of goodwill
2. Differences arising from investment in subsidiaries and affiliates, if it is not
expected that they will be reversed in the foreseeable future and if the Group
controls the date of reversal of the difference.
Deferred taxes are measured according to the tax rates expected to apply to the
temporary differences at the date they are implemented, based on the laws enacted
or the enactment of which was completed in fact as of the reporting date.
Deferred tax asset is recognized in the books in respect of carried forward losses,
tax benefits and deductible temporary differences, when it is expected that in the
future there will be taxable income, against which it will be possible to exercise
them. Deferred tax assets are reviewed at each reporting date, and if the related tax
benefits are not expected to materialize, they are amortized (see also Note 7).
Offsetting assets and deferred tax liabilities
The Group offsets assets and the tax liability is deferred if there is an enforceable
legal right to offset deferred assets and liabilities, and they are attributed to the same
taxable income taxed by the same tax authority in the same taxable company, which
intends to eliminate deferred tax assets and liabilities on a net basis or if the deferred
tax assets and liabilities are settled simultaneously.
Presentation of tax expenses as part of the statement of cash flows
Cash flows arising from income taxes are classified in the statement of cash flows
as cash flows from operating activities, unless they can be specifically identified
with investing activities and financing activities.
3.17. Dividend
An obligation relating to a dividend offered or declared after the date of the
financial statements is recognized only in the period in which the announcement
was made (approval of the general meeting). In statements of cash flows, dividend
paid is presented as part of financing activity.
3.18. New standards not yet adopted:
3.18.1. Correction to IAS1 Standard "Presentation of Financial Statements: Classification of
Liabilities as Current or Non-Current"
The amendment replaces a certain classification requirement of liabilities as
current or non-current. The amendment will enter into force in respect of
reporting periods as of January 1, 2023. Early application is possible. The
amendment will be applied retrospectively, including an amendment to
comparative figures. The Group is examining the implications of applying
the amendment to the financial statements.
3.18.2. Amendment to Standard IAS37 "Provisions, contingent liabilities and contingent
assets" in respect of onerous contracts
The amendment stipulates that in examining the costs of maintaining a
contract, it is necessary to also consider indirect costs in addition to
supplemental costs (see Note 3.12.3).
36
Notes to Consolidated Financial Statements as of December 31, 2020
The date of initial application of the amendment is set for January 1, 2022,
and it will be carried out by adjusting the surplus balance in respect of the
cumulative effect to this date. The amendment may have effects on the
identification and measurement of onerous contracts in the Group, which
may even be reflected in the creation of material provisions which the Group
is unable to assess at this stage. The Group is studying the amendment and
is preparing to implement it on time.
4. Cash and cash equivalents
Cash balance and cash value as of December 31, 2020 mainly includes deposits in banks
for a period of up to 90 days as well as balances in checking accounts.
5.
Investments
Banking deposits in shekels and foreign currency (1)
Investment in monetary funds and marketable securities measured at fair
value through statement of income and others
Deposit used for security in respect of hedging transactions
December 31,
2020
December 31,
2019
NIS millions
804
NIS millions
883
77
881
358
1,241
(1) Bank deposits in shekels and USD, due for repayment by December 2021.
37
Notes to Consolidated Financial Statements as of December 31, 2020
6. Other trade receivables
6.1. Composition of other trade receivables:
Trade receivables *
Open debts and checks for collection
Credit cards
Revenue receivable
Long-term customer maturities
Related parties and stakeholders
December 31,
2020
December 31,
2019
NIS millions
NIS millions
656
405
224
332
4
729
415
146
382
5
1,621
1,677
Other trade receivables and current tax assets *
Current tax assets
Other trade receivables and authorities (mainly in respect of real
estate sales)
Advance expenses
Other long-term trade receivables*
Clients - open debts
Long-term trade receivables and authorities (in respect of real estate
sales) **
Frequency grant receivable (see Note 11.1)
42
105
33
180
256
185
73
514
56
24 7
39
342
304
173
-
477
* Customer balances and trade receivables are presented net of provision for loan-loss.
** See Note 6.6
6.2. Discount rates of long-term customers are in line with the customers' credit risk estimates.
The interest rates used by the Group for discount in 2020 are 3.26% -8.5% (in 2019: 3.5%-
5.6%).
2,315
2,496
6.3. Expected exercise dates for long-term trade receivables:
Expected repayment dates
2021
2022
2023 onwards
December 31,
2020
NIS millions
266
114
134
514
38
Notes to Consolidated Financial Statements as of December 31, 2020
6.4. Aging of customer debts as of the reporting date:
December 31, 2020
Gross customer
balance
Provision for
loan-loss
December 31, 2019
Gross customer
balance
Provision for
loan-loss
NIS millions
NIS millions
NIS millions
NIS millions
Not in arrears
Arrears of up to one year
Arrears of between one and
two years
Arrears of over two years
1,732
165
30
30
1,957
(5)
(37)
(15)
(23)
(80)
1,800
185
34
42
2,061
(5)
(32)
(14)
(29)
(80)
6.5. The activity in the provision for doubtful debts during the year is as follows:
Balance as of January 1
Impairment loss recognized
Loan-loss
No longer consolidated
Balance as of December 31
2020
2019
NIS millions
NIS millions
80
26
(22)
(4)
80
87
13
(20)
-
80
6.6 The balance of long-term trade receivables and authorities includes the balance of
trade receivables in the amount of NIS 106 million in respect of sums paid by Bezeq
to the Israel Land Authority and the Or Yehuda Local Authority for the sale of the
Sakia property in 2019:
On January 21, 2018, Bezeq entered into an agreement for the sale of a real estate
asset in Sakia (property near Mesubim Junction in which the Company had a
discounted lease right) and the transaction was completed on May 5, 2019, when
the total consideration received by Bezeq for the asset (including linkage
differences and interest in accordance with the provisions of the agreement)
amounted to NIS 511 million, plus VAT.
On May 21, 2018, Bezeq received a demand from ILA ("Israel Land Authority")
for the payment of a permit fee in the amount of NIS 148 million plus VAT, in
respect of a property improvement plan approved prior to the signing of the
agreement (“the Demand"). Bezeq filed for a legal contention on the Demand. On
January 20, 2019, ILA rejected all Bezeq claims in the legal contention, however,
the parties conducted negotiations within the framework of the dispute resolution
mechanism set forth in the settlement agreement (the 2003 agreement between
Bezeq and the Israel Lands Administration [currently the Israel Land Authority]
and the State regarding most of the real estate assets, including the real estate in the
"Sakia" property, which were transferred to the Company as part of the transfer of
assets prior to the commencement of Bezeq's business operations). At the same
time, Bezeq submitted an appraiser's contention in respect of the Demand.
On August 5, 2018, Bezeq received a demand from the Or Yehuda Local Planning
and Construction Committee for the payment of an improvement levy in the amount
of NIS 143.5 million due to the exercise of the asset by way of sale ("the
Improvement Levy Demand"). On September 17, 2018, Bezeq filed an appeal
39
Notes to Consolidated Financial Statements as of December 31, 2020
against the Improvement Levy Demand, and sent to ILA a demand for the payment
of the full improvement levy in accordance with the authority's obligation in the
settlement agreement. On January 20, 2019, ILA rejected Bezeq's demand for
payment of the said improvement levy. Upon completion of the sale transaction as
stated above and receipt of the full consideration, Bezeq paid half of the
improvement levy in the amount of NIS 75 million and provided a bank guarantee
for the other half of the levy, without detracting from or impairing the proceedings
it has taken or will take in order to cause the cancellation or reduction of this levy.
It should be noted that the amount of the permit fee to be determined at the end of
the proceedings can also affect the amount of the improvement levy that Bezeq will
have to pay to the Planning Committee. In Bezeq's estimation, the amount of the
permit fee and the improvement levy that it will be required to pay is expected to
be low and may even be significantly lower than the total amount of the demands.
In March 2021, Bezeq received a notice from the Accountant General and the Israel
Land Authority that given the significant differences of position between the parties
that could not be bridged, they accepted Bezeq’s request to end the dispute
resolution procedure and allow the dispute to be transferred to the courts. In these
circumstances, the Company intends to file a lawsuit as soon as possible against the
Israel Land Authority for the full refund of the money it paid as a permit fee and
improvements levy.
Bezeq recognized in its financial statements for 2019 a capital gain before tax in
the amount of NIS 403 million. The recognition of the capital gain is based on
Bezeq's estimates of the final amount to be paid to the authorities. It should be noted
that to the extent that Bezeq's Management estimates are not realized, the final
capital gain before tax will range between about NIS 250 million to about NIS 450
million.
7.
Income taxes
7.1. Corporate tax rate
Current taxes for the reported periods and deferred tax balances as of
December 31, 2020 are calculated according to the relevant tax rate for the
group which is 23%.
7.2. Final tax assessments
7.2.1.
7.2.2.
The Company has final tax assessments up to and including 2018.
Bezeq has final tax assessments up to and including 2018.
On September 15, 2016, at the same time as signing an assessment agreement that
ended the dispute between Bezeq and the Assessing Officer regarding financing
income in respect of the owner's loans to DBS, the Tax Authority granted approval
for tax purposes to merge DBS with and into Bezeq, in accordance with Article
103B of the Income Tax Ordinance. According to the approval, DBS’s losses as of
the date of the merger are allowed to be offset against the profits of the absorbing
company, provided that in each tax year, no more than 12.5% (spread over 8 years)
of the total losses of the transferring company and the absorbing company or 50%
of the taxable income of the absorbing company in the same tax year before
offsetting the loss from previous years, whichever is lower. Following this, the
40
Notes to Consolidated Financial Statements as of December 31, 2020
validity of the taxation decision was extended, at this stage, until December 31,
2021.
On October 2, 2019, Bezeq received a letter from the Tax Authority (“the
Certificate") extending, at Bezeq's request, the validity of the taxation decision until
December 31, 2020. In said Certificate, the Tax Authority clarified, among other
things, that the Tax Authority has full authority to revoke the certificate in the event
that it becomes clear that there was a material change in Bezeq and DBS's business
from the date of signing the certificate until December 31, 2019, that the extension
of the validity of the tax decision refers only to the taxation decision of September
15, 2016 and only in the outline specified in the taxation decision, that it does not
detract from the authority of the Tax Authority not to extend for another year the
validity of the taxation decision beyond December 31, 2020, and that it does not
attest to the companies' compliance with the taxation decision. On November 8,
2020, Bezeq received a letter from the Tax Authority extending the validity of the
taxation decision for another year (i.e. until December 31, 2121).
The balance of DBS losses for tax purposes, as of December 31, 2020, amounts to
approximately NIS 5.2 billion. See Note 7.6 below regarding deferred taxes that
were not recognized as carried forward losses.
Pelephone has final tax assessments up to and including 2018.
Bezeq International has final tax assessments up to and including 2015.
7.2.3.
7.2.4.
7.2.5. DBS has final tax assessments up to and including 2014.
7.2.6.
Bezeq Online has final tax assessments up to and including 2018.
7.3. Income tax expenses components
For the year ended December 31
2020
2019
2018
NIS millions
NIS millions
NIS millions
Current tax expenses
Expenses for the current year
Adjustments for previous years according to the
assessment agreement
Adjustments for previous years
Total current tax expenses
Deferred tax expenses
Write-off of a deferred tax asset in respect of transferred
losses in DBS (see Note 7.6)
273
53
(3)
323
-
391
-
(11)
380
1,259
303
-
(24)
279
(93)
41
Notes to Consolidated Financial Statements as of December 31, 2020
Creation and reversal of other temporary differences
Write-off of a tax reserve due to impairment
Adjustments in respect of previous years according to
the assessment agreement
Reversal of temporary differences under an assessment
agreement
Creation of deferred taxes in respect of losses for tax
purposes from the sale of a subsidiary
Total deferred tax expenses (revenue)
Income tax expenses
* reclassified
83
-
(53)
18
(37)
11
334
(187) *
-
-
-
-
1,072
1,452
(139)
(114)
-
-
-
(346)
(67)
42
Notes to Consolidated Financial Statements as of December 31, 2020
7.4. Correlation between the theoretical tax on profit before income
taxes and tax expenses
For the year ended December 31
2020
NIS millions
2019
NIS millions
2018
NIS millions
(1,983)
23%
(456)
Profit (loss) before income taxes
Statutory tax rate
Income taxes according to the statutory tax rate
Write-off of a deferred tax asset in respect of carried
forward losses in DBS (see Note 7.6)
Impairment of goodwill in the cellular communications
segment in respect of which no deferred taxes were
created (see Note 11.2)
Impairment of assets in respect of which no deferred tax
assets were created
Expenses that are not recognized for tax and other
purposes as well as losses in respect of which deferred
tax assets were created, net
Creation of deferred taxes in respect of losses for tax
purposes from the sale of a subsidiary
Write-off of provision for tax in respect of previous
years
Deletion of tax asset due to non-anticipation of future
profits
Temporary differences due to impairment of assets in
respect of which deferred tax assets were not created
(see Note 11.4)
Income tax expenses
1,234
23%
284
-
-
47
16
(37)
(7)
31
-
334
* Reclassified
(8)
23%
(2)
1,259
(93)
160
(31) *
69
-
-
-
(3)
1,452
149
253
80
-
-
-
-
(67)
7.5. Deferred tax assets and liabilities recognized and changes in them
Deferred
tax
liabilities in
respect of
property,
plant and
equipment
and
intangible
assets
NIS
millions
Tax asset in
respect of
loss for tax
purposes
from the
sale of a
subsidiary
NIS
millions
Deferred
tax asset
due to
losses in
DBS
NIS
millions
Deferred
tax assets
in respect
of employee
benefit
plans
NIS
millions
Balance as of January 1,
2019
Changes imputed to
income:
Creation and reversal of
temporary differences
Write-off of a tax reserve
due to impairment (see Note
7.6)
Changes that were
imputed to capital
43
1,259
268
(640)
-
28
133 *
(1,259)
-
-
2
-
-
-
-
-
-
Other
deferred
taxes
NIS
millions
Total
NIS
millions
16
903
26*
187
-
-
(1,259)
2
Notes to Consolidated Financial Statements as of December 31, 2020
Balance as of December
31, 2019
Changes imputed to
income:
Creation and reversal of
temporary differences
Changes that were
imputed to capital
Balance as of December
31, 2020
Book value
-
-
-
-
Deferred tax assets
Deferred tax liabilities
Balance as of December 31
* Reclassified
298
(507)
-
42
(167)
(36)
(1)
261
(31)
-
(538)
37
-
37
19
(3)
58
(11)
(4)
(182)
As of December 31
2020
NIS millions
108
(290)
(182)
2019
NIS millions
81
(248) *
(167)
7.6. Unrecognized deferred tax assets and liabilities
Following the acquisition of control by Bezeq of DBS in 2015 (as described in Note 13.2.1
below), the Group recognized a deferred tax asset in respect of transferred losses for tax
purposes in DBS, the balance of which as of December 31, 2018 amounted to NIS 1,259
million. Bezeq's approval by the Tax Authority to utilize transferred losses for tax
purposes is conditional on obtaining approval from the Ministry of Communications to
eliminate the structural separation between the two companies, and requires the extension
of the Tax Authority's approval each year from 2020 until the actual merger, as described
in Note 7.2.1. above.
In 2019, the Group wrote off the tax asset by changing its estimate and recognizing tax
expenses in the amount of NIS 1,259 million as part of the statement of income after
Bezeq's assessment of the probability of utilizing the tax asset did not meet the threshold
of more likely than not.
As of the date of the financial statements, no deferred taxes were recognized in respect of
carried forward losses for the purpose of tax in DBS in the amount of NIS 5.2 billion and
no deferred taxes are taken into account in respect of loss from impairment of assets in
DBS (see Note 11.4). Is not expected in accordance with the Company's estimate for the
date of the financial statements.
In addition, in calculating the deferred taxes, the taxes that would have applied in the
event of the exercise of the investment in subsidiaries and affiliates are not taken into
account, since it is the intention and within the ability of the Group to hold these
investments. Deferred taxes for the distribution of profits in subsidiaries and affiliates are
not taken into account because the dividends are not taxable. Also, the Company does not
create deferred taxes in respect of its carried forward losses.
8. Broadcasting rights
44
December 31, 2020
December 31, 2019
Notes to Consolidated Financial Statements as of December 31, 2020
Cost
Deducting rights exercised
Impairment loss (Note 11.5)
NIS millions
NIS millions
1,441
(599)
(775)
67
1,242
(578)
(605)
59
See also Note 19 "Engagements" regarding the Group's engagements for the acquisition of the broadcasting
rights.
9. Leases
Under the lease agreements, the Group leases mainly cellular communication sites, buildings
(including offices, warehouses, communication rooms and points of sale) and vehicles.
9.1. Right-of-use assets
Communication
sites
Structures
Vehicles
Total
NIS millions
NIS millions NIS millions
NIS millions
Cost
Balance as of January 1, 2019
Additions *
Deductions in respect of agreements
terminated or cancelled
Balance as of December 31, 2019
Additions *
966
146
(71)
1,041
200
Deductions in respect of agreements
terminated or cancelled
No longer consolidated
(51)
-
Balance as of December 31, 2020
1,190
Depreciation and impairment losses
Balance as of January 1, 2019
Amortization for the year
Deductions in respect of agreements
terminated or cancelled
Changes in agreements and others
Impairment loss
Balance as of December 31, 2019
Reduction for the year
Deductions in respect of agreements
terminated or cancelled
Changes in agreements and others
No longer consolidated
Impairment loss (loss write-off)
Balance as of December 31, 2020
Book value
As of January 1, 2019
As of December 31, 2019
169
185
(65)
(4)
82
367
179
(45)
(4)
-
(82)
415
797
674
625
34
(13)
646
609
(146)
(14)
1,095
115
120
(5)
(2)
9
237
116
(121)
(2)
(3)
(9)
218
510
409
286
28
(27)
287
118
(80)
-
325
89
110
(25)
(21)
-
153
102
(83)
(2)
-
3
173
197
134
1,877
208
(111)
1,974
927
(277)
(14)
2,610
373
415
(95)
(27)
91
757
397
(249)
(8)
(3)
(88)
806
1,504
1,217
45
* Additions in respect of new agreements and changes in existing agreements
Notes to Consolidated Financial Statements as of December 31, 2020
As of December 31, 2020
775
877
152
1,804
9.2. Liabilities in respect of leases
Communication
sites
Structures
Vehicles
Total
NIS millions
NIS millions
NIS millions
NIS millions
Balance as of January 1, 2019
Additions *
Deductions
Financing expenses in respect of
lease liabilities
Lease payments
Balance as of December 31, 2019
Additions *
Deductions
Financing expenses in respect of
lease liabilities
Lease payments
No longer consolidated
Balance as of December 31, 2020
Book value as of December 31,
2019
Current tax liability maturities
Long-term lease liabilities
Total balance as of December 31,
2019
Book value as of December 31,
2020
Current tax liability maturities
Long-term lease liabilities
Total balance as of December 31,
2020
810
150
(6)
16
(180)
790
203
(9)
18
(169)
-
833
519
32
(8)
9
(124)
428
607
(23)
10
(117)
(10)
895
197 One. Two. Three
593
790
230
603
833
305
428
97
798
895
222
53
(2)
4
(110)
167
117
(2)
2
(105)
-
179
96
71
167
88
91
179
1,551
235
(16)
29
(414)
1,385
927
(34)
30
(391)
(10)
1,907
416
969
1,385
415
1,492
1,907
* Additions in respect of new agreements and changes in existing agreements
9.3. Analysis of repayment dates of liabilities in respect of the Group's
lease (Including principal and interest to be paid)
Expected repayment dates
Up to one year
Between one and five years
Over five years
Total
46
December 31,
2020
NIS millions
433
897
803
2,133
Notes to Consolidated Financial Statements as of December 31, 2020
9.4. Options for termination or extension of lease
In most of its leases the Group has assumed that it was reasonably certain that the
extension option existing in the agreements will be exercised and therefore there
are no material liabilities in respect of leases not presented in the financial
statements.
Most lease agreements include an option to cancel the agreement while giving prior
notice and / or payment of a penalty in accordance with what is stipulated in the
agreements. The Group assumed that it was reasonably certain that the cancellation
options would not be exercised.
9.5. Information regarding material lease agreements that have not yet
been included in the lease liability measurement
a. In October 2020 Bezeq vacated the Company's headquarters in Azrieli Towers
in Tel Aviv and moved to its new headquarters in Holon.
b. In November 2020 Pelephone’s headquarters moved to its new headquarters in
Petah Tikva.
10. Property, plant and equipment
Cables and
Cellular
Landline and
landline and
network
Equipment
international
internationa
network
l network
equipment
communicat
(switching,
ions
and
infrastruct
ure for
multi-
Office
equipment,
Land and
buildings
transmission,
infrastructu
channel
Subscriber
computers
power)
re
television
NIS millions
equipment
and vehicles
Total
1,002
63
(147)
*3,124
186
(169)
5,967
202
(159)
3,351
173
(6)
1,446
147
(42)
2,034
322
(113)
1,153
63
(51)
18,077
1,156
(687)
(113)
-
-
-
-
-
(113)
805
35
(59)
(20)
47
808
550
57
(59)
3,141
233
(181)
-
6,010
222
(119)
-
-
-
3,518
181
1,551
120
2,243
360
-
-
-
-
1,165
97
(67)
(53)
18,433
1,248
(40)
(73)
-
47
3,193
6,113
3,697
1,610
2,536
1,169
19,126
1,794
3,150
231
(169)
201
(159)
2,640
202
(3)
1,331
1,355
944
11,764
26
(39)
249
(105)
65
(50)
1,031
(584)
Cost
Balance as of January 1,
2019
Additions
Subtractions
Transfer to assets held
for sale
Balance as of December
31, 2019
Additions
Subtractions *
No longer consolidated
Transfer from assets
held for sale
Balance as of December
31, 2020
Depreciation and
impairment losses
Balance as of January 1,
2019
Depreciation for the
year
Subtractions
47
Notes to Consolidated Financial Statements as of December 31, 2020
Transfer to held assets
for sale
Impairment loss *
Balance as of December
31, 2019
Depreciation for the
year
Subtractions
No longer consolidated
Transfer to assets held
for sale
Impairment loss (loss
cancellation) (see Note
11)
Balance as of December
31, 2020
Book value
As of January 1, 2019
(70)
36
584
28
(32)
(15)
13
(4)
504
452
-
82
-
59 *
-
74
-
106
-
22
-
19
(70)
324
1,864
3,251
2,913
1,424
1,521
978
12,535
230
(175)
-
-
8
180
(119)
-
-
1
167
(1)
36
(54)
-
-
258
-
-
(63)
101
26
1,928
3,313
3,016
1,507
1,754
1,330
2,817
711
115
679
69
(51)
-
15
973
209
698
(66)
13
84
12,995
6,313
As of December 31,
2019
As of December 31,
2020
* Reclassified
291
1,277
1,759
605
127
722
187
5,968
304
1,265
2,800
681
103
782
196
6,131
10.1. The residual value of the Group's copper cables is determined by valuation at the end of
each quarter. The residual value is approximately NIS 191 million as of December 31,
2020 and approximately NIS 159 million as of December 31, 2019.
10.2. The Group companies examined the lifespan of the property, plant and equipment within
the framework of depreciation committees, in order to determine the estimated lifespan
of their equipment. Such a change did not have a material effect on the Group's
depreciation expenses. Following the findings of the depreciation committees,
insignificant changes were made in the estimate of the useful life of certain assets.
10.3. Most of the real estate assets used by Bezeq are in a discounted lease from the Israel Lands
Administration from 1993 for a period of 49 years with an option to extend for another
49 years. The lease rights are amortized over the term of the lease.
10.4. Since 2013, Bezeq has been establishing a fiber optic network that will reach the
customer's premises, as a basis for the future supply of advanced communication services
and larger bandwidths than those provided to its customers today. During 2017, the scope
of the fiber deployment reached the level necessary for them to operate when it was
decided on the technology that would be used, and Bezeq began amortizing the network.
On September 14, 2020, Bezeq's Board of Directors approved the launch of Bezeq’s fiber
network deployment plan. Following the decision of the Board of Directors, Bezeq began
deploying fiber to buildings, including deploying vertical equipment in buildings and on
March 14, 2021, announced the launch of services to its customers on the fiber network.
It should be noted that the customer connection will be carried out gradually.
10.5. Pursuant to the Communications Order (Telecom and Broadcasting) (Determination of
Essential Service Provided by Bezeq, the Israel Telecommunications Corporation Ltd.),
5757-1997, the approvals of the Prime Minister and the Minister of Communications were
48
Notes to Consolidated Financial Statements as of December 31, 2020
required to grant rights to certain Bezeq assets (including switches, cable network,
transmission network and databases and information).
10.6. For liens in connection with loans and credit, see Note 14. For additional liens, see Note
20.
10.7. For engagements for the purchase of property, plant and equipment, see Note 19.
49
Notes to Consolidated Financial Statements as of December 31, 2020
11. Intangible assets
Computer
software
and
licenses
NIS
millions
Goodwill
NIS
millions
Right to
use
cellular
communic
ation
frequencie
s
NIS
millions
Customer
relations
and brand Other
NIS
millions
NIS
millions
3,079
2,214
480
7,479
-
-
234
(39)
-
-
-
-
3,079
2,409
480
7,479
-
-
(10)
220
(36)
(11)
86
-
-
-
-
221
-
(21)
200
-
-
(119)
Total
NIS
millions
13,473
234
(60)
13,647
306
(36)
(140)
3,069
2,582
566
7,479
81
13,777
818
-
-
702
1,786
291
6,151
175
(39)
107 *
19
-
20
113
-
139
1,520
2,029
330
6,403
-
-
(10)
153
(36)
(6)
-
89
1,510
2,229
2,261
1,559
428
380
21
-
-
(20)
331
189
150
-
-
-
(45)
6,358
1,328
1,076
1,559
353
235
1,121
217
2
(21)
-
198
2
-
(119)
-
81
4
2
2
9,263
309
(60)
968
10,480
176
(36)
(135)
24
10,509
4,210
3,167
3,268
Cost
Balance as of January 1,
2019
Self-developed
acquisitions or additions
Subtractions
Balance as of December
31, 2019
Self-developed
acquisitions or additions
Subtractions
No longer consolidated
Balance as of December
31, 2020
Depreciation and
impairment losses
Balance as of January 1,
2019
Amortization for the
year
Subtractions
Impairment loss
Balance as of December
31, 2019
Amortization for the
year
Subtractions
No longer consolidated
Impairment loss (loss
cancellation) (see 11.2,
11.4 and 11.5 below)
Balance as of December
31, 2020
The value in the books
As of January 1, 2019
As of December 31,
2019
As of December 31,
2020
* reclassified
11.1.
Right to use cellular communication frequencies
In August 2020, Pelephone won a collection of frequencies following its
participation in a tender for advanced bandwidth cellular services.
50
Notes to Consolidated Financial Statements as of December 31, 2020
Pelephone's win in the frequency allocation has a total cost of NIS 88.2 million (as
of the balance sheet date, discounted amount of NIS 86 million), with the payment
date set for September 2022.
In accordance with the terms of the tender, in order to promote and accelerate the
development of cellular networks, inter alia, advancing the deployment of 5G
technology, the winning companies will be eligible for a grant if they meet the
engineering conditions of deployment and operation of 250 cellular radio stations
on 5G and the operation of a minimum bandwidth as specified in the terms of the
tender, the amount of which, for all its winners, can reach a total amount of NIS
200 million.
The grants will be distributed among the eligible winners according to the following
distribution:
The first eligible winner will be entitled to 41% of the grant (NIS 82 million), the
second eligible winner will be entitled to 33% of the grant (NIS 66 million) and the
third eligible winner will be entitled to 26% of the grant (NIS 52 million). If there
are two first eligible winners, the grant will be distributed to such winners as an
average between the amounts (approximately NIS 74 million). If there are three
first eligible winners, the grant will be divided equally between them.
As of the date of the financial statements, Pelephone estimates that it meets the
conditions for eligibility for the grant and anticipates that it will be entitled to a
grant in the amount of approximately NIS 74 million (as of the balance sheet date,
discounted amount of NIS 73 million), which was recognized in the report on the
financial position under the other trade receivables item under non-current assets.
On September 29, 2020 upon receipt of the frequencies, Pelephone began operating
the 5G frequencies at the broadcast sites it upgraded.
11.2. Cash-generating units impairment examination
11.2.1. For the purpose of impairment testing, goodwill was attributed to the Group's
operating segments as follows:
Landline interior communications (Bezeq) (11.3)
December 31,
2020
NIS millions
1,559
1,559
December 31, 2019
NIS millions
1,559
1,559
11.2.2. The following is the composition of the impairment loss recognized by the Group during
the years 2018 - 2020:
Impairment loss in the Internet and international
communications services segment (see Note 11.6
below)
Impairment loss (loss cancellation) in respect of Walla
(see note 13.4)
Impairment loss (loss cancellation) in the cellular
communication segment (see Note 11.3), net
Impairment loss in the multi-channel TV segment
2020
2019
2018
NIS millions
NIS millions
NIS millions
279
(14)
(257)
-
8
354
-
975
-
1,329
171
37
478
1,638
2,324
51
Notes to Consolidated Financial Statements as of December 31, 2020
11.3. Cellular communications goodwill
impairment examination
(Pelephone)
11.3.1. Valuation as of June 30, 2020
In light of the update of Pelephone's forecasts due to the spread of the COVID-19
pandemic (as described in Note 1.2) and in light of the low gap between the value
of Pelephone's activity as measured on December 31, 2019 and the book value of
its net operating assets in the Company's books as of June 30, 2020, the Company
identified possible impairment and updated its forecasts for the coming years. Due
to the aforesaid, the Company estimated the recoverable amount of the cellular
communication cash-generating unit as of June 30, 2020.
The value of use of a cellular communication cash-generating unit, calculated using
the method of discounting future cash flows (DCF), based on the forecast of cash
flows from operations for a period of five years from the end of the current period
plus scrap value. The cash flow forecast is based, among other things, on
Pelephone's performance in recent years and estimates of the expected trends in the
cellular market in the coming years.
The valuation was conducted by an external valuator. Based on the valuation as
detailed above, the value of Pelephone's activity amounted to approximately NIS
1,388 million, compared with the value in the Company's books of NIS 1,394
million. Therefore, the Company recognized a loss from impairment of assets
attributed to the cellular communication cash-generating unit in the amount of NIS
8 million. On the other hand, the balance of the deferred tax liability in respect of
the impairment in the amount of NIS 2 million was reduced. After recognizing the
impairment, the recoverable amount of the unit is the same as its value in the books.
11.3.2. Valuation as of December 31, 2020
Due to the existence of an asset with an indefinite useful life (brand), the Company
examined the recoverable amount of the cellular communication cash-generating
unit as of December 31, 2020.
The value of use of the Cellular communication cash-generating unit as of
December 31, 2020 is calculated using the method of discounting future cash flows
(DCF) based on the forecast of cash flows from operations for a period of five years
from the end of the current period plus scrap value. The cash flow forecast is based,
among other things, on Pelephone's performance in recent years and estimates of
the expected trends in the cellular market in the coming years (level of competition,
price level, regulation and technological developments). A key assumption
underlying the forecast is that competition in the market will continue at high
intensity in the short term and that a stabilization and a certain increase in the price
level will occur in the medium-long term. The revenue forecast is based on
assumptions regarding Pelephone’s subscriber base, the average revenue per
subscriber and the volume of sales of end equipment. The forecast of expenses and
investments is based, among other things, on assumptions regarding Pelephone’s
employee base and the salary expenses derived from them, while the rest of the
operating expenses and the level of investments were adjusted to Pelephone's
predicted scope of activity.
It will also be explained that the forecast includes estimates regarding the effect of
the COVID-19 pandemic on Pelephone's performance for years to come, according
to which the pandemic will have a material adverse effect on the Company's
revenues from roaming services in 2021. The forecast also assumes some damage
52
Notes to Consolidated Financial Statements as of December 31, 2020
to roaming revenue in later years in light of the expected long and gradual recovery
of the aviation and international tourism industries.
The nominal capital price used in the valuation is 10.3% (after tax) (identical to
2019). In addition, a permanent growth rate of 2.5% was assumed (identical to
2019).
The valuation is sensitive to changes in the rate of permanent growth and the
discount rate. In addition, the valuation is sensitive to the net cash flow in the
representative year in general, and to the estimated ARPU level (average revenue
per subscriber) and the number of subscribers at the end of the forecast range in
particular (a change of NIS 1 in ARPU throughout the forecast years leads to a
change in the value of the activity in the amount of approx. NIS 387 million, a
change of 50k subscribers throughout the forecast years leads to a change in the
value of the activity in the amount of approx. NIS 445 million).
The valuation was conducted by an external valuator. Based on the valuation as
explained above, Pelephone’s recoverable amount amounted to NIS 2.33 billion,
compared with a book value in the Company's books of NIS 1.432 billion.
Accordingly, the Company recognized the cancellation of a loss from impairment
attributable
the amount of
approximately NIS 265 million in the fourth quarter of 2020. The cancellation of
the loss was carried out up to the amount of impairment attributed to the segment's
assets.
the cellular communications segment
to
in
In addition, the Company recognized deferred tax expenses in the amount of NIS
61 million in respect of changes in deferred tax balances relating to these assets.
Below is a breakdown of the allocation of the cancellation of the loss from the
impairment of Pelephone's assets as of December 31, 2020:
Property, plant and equipment
Intangible assets
Right-of-use assets
Total recognized impairment canceled
NIS millions
65
121
79
265
11.4. Interior
landline
communications
goodwill
impairment
examination (Bezeq)
The balance of goodwill attributable to the landline interior communications cash-
generating unit is NIS 1,559 million. Therefore, the Company examined the
recoverable amount of the landline interior communications cash-generating unit
as of December 31, 2020.
Bezeq Group’s value in use of the landline interior communications cash-
generating unit is calculated using the method of discounting future cash flows
(DCF) based on the forecast of cash flows from operations for a period of five years
from the end of the current period plus scrap value.
The cash flow forecast is based, among other things, on the Company's
performance in recent years and estimates of the expected trends in the landline
53
Notes to Consolidated Financial Statements as of December 31, 2020
market in the coming years (level of competition, price levels in retail and
wholesale, regulatory aspects and technological developments).
The main assumptions at the base of the forecast are: Decrease in revenues from
telephony (decrease in the number of subscribers, erosion in consumption of call
minutes per subscriber and a reduction in rates following the hearing regarding the
determination of maximum rates for the Company's retail telephony services),
erosion of Internet revenue in the very short term and return to the growth outline
in the medium and long terms (supported by market growth, establishment of
Internet services on the fiber network and expected the elimination of the split
between broadband infrastructure service and Internet access service), stability in
revenue from data communications and transmission and moderate growth in
Cloud and digital revenue. Operating, sales, marketing and investing expenses
were adjusted to the scope of the segment's activity, including forecasts of
discounts regarding the gradual decline in the Company's employee base,
retirement and payroll expenses derived therefrom and discounts regarding the
timing of fiber-based services and the rate of fiber infrastructure deployment.
The nominal capital price used in the valuation is 7.5% (after tax) (identical to
2019). In addition, a permanent growth rate of 0% (identical to 2019) was assumed.
The valuation was conducted by an external valuator. Based on the valuation as
explained above, the Group was not required to amortize in respect of impairment
of the interior landline communication cash-generating unit.
11.5. Multi-channel TV goodwill impairment examination (DBS)
Bezeq Group’s value in use of the multi-channel television cash-generating unit as
of December 31, 2020 was calculated using the method of discounting future cash
flows (DCF) Based on the forecast of DBS's cash flows up to and including 2026,
plus scrap value. The forecast period has been chosen so that the representative year
is the year after the estimated date for the completion of the planned outline of the
migration to television broadcasting via the Internet instead of satellite, as stated
below. The nominal capital price used in the valuation is 8.5% (after tax) (identical
to 2019). In addition, a permanent growth rate of 0% was assumed (identical to
2019).
The cash flow forecast was based, among other things, on DBS’s performance in
recent years and estimates of expected trends in the television market for years to
come including technology development, consumer preferences, competitors and
level of competition, price level and regulatory obligations.
A key assumption underlying the forecast is that the relevant future technology will
be interactive and two-way and that the satellite product will be gradually replaced
by the IP product (TV broadcasts via the Internet) due to the growing gap in
customer experience. As a result, the multi-year forecast reflects a planned outline
of a gradual migration process (from satellite transmission to distribution of
transmissions based on the Internet network) and accordingly, a gradual
replacement of satellite converters with IP converters, upgrading the broadcasting
infrastructure, building a support system for customer service and adjusting the
content contracts to OTT (Over The Top) broadcasts. As stated above, the forecast
period reflects the period of transition from satellite transmission to distribution of
broadcasts over the Internet network up to complete exit from satellite. These
circumstances, along with the expectation of a continued high level of competition
54
Notes to Consolidated Financial Statements as of December 31, 2020
throughout the forecast period and a relatively rigid expenditure structure, led to
significant operating losses and negative cash flows in the coming years and low
positive cash flow, expected at the end of the forecast period upon the completion
2020
2019
2018
NIS millions NIS millions NIS
Broadcast rights – net of rights exercised (the expense was
presented as operating and general expenses)
Property, plant and equipment (expense was presented as
depreciation and impairment expenses)
Intangible assets (expense was presented as depreciation and
impairment expenses)
Deferred expenses (expense was presented as operating and
general expenses)
Customer relations and brand
reputation
Purchasing subscriptions
Rights to use leased assets (reduction of expenditure
presented as depreciation, amortization and impairment)
Total recognized impairment
170
112
29
13
-
-
-
-
324
202
117
44
-
-
-
-
(1)
362
smillio
n
403
559
106
-
505
33
29
3
1,638
of the change in the technological and business model of DBS. It should be noted
that the actual implementation of the outline is carried out and will be carried out
the
while continuously examining market conditions, competition and
technological environment and making the adjustments that will be required as a
result.
The valuation was conducted by an external valuator. Based on the valuation as
explained above, DBS’s total operating value as of December 31, 2020 is negative
in the amount of approx. NIS 145 million (as of December 31, 2019, total negative
activity value of 581 NIS million). In light of the negative value of the activity, as
of December 31, 2020, the value of DBS's non-current assets was determined to be
their fair or zero, whichever is higher, similar to the end of 2019 and the end of
2018.
in accordance, in 2020 Bezeq Group recognized loss due to impairment in the
amount of approx. NIS 324 million. The impairment loss was attributed to DBS’s
assets as detailed below, and is included in the depreciation, amortization and
impairment expenses item, as well as in the operating and general expenses item in
the statement of income as stated in Note 3.10.2 above.
The following is a breakdown of the allocation of loss from the impairment of the
Group's assets:
55
Notes to Consolidated Financial Statements as of December 31, 2020
The following is information regarding the manner in which the Group determined
the fair value (at level 3) of DBS assets in which the impairment occurred as
detailed above:
Rights Broadcast - the fair value of the broadcasting rights is calculated taking into
account legal restrictions on their sale and based on the stage of production, the
probability of sale and the expected rate of return on investment therein.
Property, plant and equipment - the fair value of property, plant and equipment
available for sale to a market participant (mainly converters) was based on an
estimate of the amount that can be sold on the day of the assessment net of costs
that will be required to make the sale.
Intangible assets – no material fair value was attributed to intangible assets of DBS
because most of the software and licenses of DBS are uniquely adapted to DBS and
therefore have no material value in a transaction between a voluntary buyer and a
voluntary seller.
Use rights of leased assets - the fair value of the right-of-use assets is affected by
the ability to lease the asset that is the subject of the lease to a third party, the lease
fee of the asset on the market and the exit penalties in the lease contract.
11.6. Bezeq International Ltd. Impairment examination
(Bezeq
International)
11.6.1. Valuation of September 30, 2020
As of the date of the financial statements for the third quarter of 2020, Bezeq
International has identified indications of a possible impairment in view of the
absence of a gap between the value of its operations and the book value of its net
operating assets as measured on December 31.2019, and following its preparation,
also following the recommendation of the Ministry of Communications in its
appeal from September 10, 2020 and November 8, 2020 to market operators to act
in a known outline and treating customers who pay Bezeq International by virtue
of an agreement and do not use ISP services for an extended period (as described
in Note 13.3). Due to the aforesaid, Bezeq Group estimated the recoverable amount
of the Internet services, international communications and network endpoint cash-
generating unit as of September 30, 2020. The calculation of the value in use is
made using the method of discounting future cash flows (DCF) based on the
forecast of cash flows from operations for a period of four years from the end of
2020 plus scrap value.
The valuation was conducted by an external valuator. Based on the valuation as
explained above, Bezeq International's recoverable amount amounted
to
approximately NIS 123 million, compared with the book value in the Company’s
books of NIS 392 million. Thus, the Company recognized in the financial
statements as of September 30, 2020 loss from impairment attributable to the
Internet services, international communications and network endpoint segment in
the amount of approximately NIS 254 million. Since Bezeq International does not
expect future profits, no tax asset has been recognized. In addition, the Group wrote
off the deferred tax balance which existed in its books in the amount of 43 NIS
million.
11.6.2. Valuation as of December 31, 2020
56
Notes to Consolidated Financial Statements as of December 31, 2020
At the end of 2020, Bezeq International has updated its forecasts for the coming
years, taking into account trends and changes in its operating environment. Due to
the aforesaid, and in view of the absence of a gap between the value of the activity
and the book value of Bezeq International’s net operating assets as measured on
December 31, 2019 and September 30, 2020, and following preparations for the
hearing published by the Ministry of Communications on October 4, 2020 and the
secondary hearing published on February 24, 2021 on examining the split between
infrastructure service and access service (as described Note 13.3). The Group
international
estimated
communications and network endpoint cash-generating unit as of December 31,
2020.
the recoverable amount of
the Internet services,
The value in use of the Internet services, international communications and network
endpoint cash-generating unit is calculated using the method of discounting future
cash flows (DCF) based on the forecast of cash flows from operations for a period
of five years from the end Year 2020 plus scrap value.
The cash flow forecast was based, among other things, on Bezeq international’s
performance in recent years and estimates of the expected trends in the markets in
which it operates for years to come (level of competition, price level, regulation and
technological developments).
The revenue forecast is based on discounts regarding the status of Bezeq
International's Internet subscribers and the average revenue per subscriber
(including discounts regarding notification and termination of charges for
subscribers who do not use ISP services) and regarding the effects of the hearing
on examining the split between infrastructure service and access service,
assumptions regarding Bezeq International's activity
international
communications market and assessments regarding its development in the field of
business communications services. Operating, sales, marketing and investing
expenses were adjusted to the scope of the segment's activity, including forecasts
regarding the extent of the decline in Bezeq International's employee base, the
payroll expenses derived from them and assumptions regarding the development of
Internet traffic costs (retail and wholesale rates and the development of Internet
broadcasting in general and the expected migration of DBS from satellite TV
broadcasts to Internet TV broadcasts in particular).
the
in
These assumptions, and especially the expected profound changes in Bezeq
International's Internet operations, have predicted negative operating losses and
negative cash flows in the coming years. The nominal capital price used in the
valuation is 9.7% (after tax) (identical to 2019). In addition, in the absence of
expected increase in losses and negative flows, a permanent growth rate of 0% was
assumed (in September 2020 - 0.8% and in 2019 - 0.7%).
The valuation is sensitive to the net cash flow in the represented year in general,
and the intensity of the changes In the field of Internet activity in particular
(subscribers, ARPU and traffic costs). The sensitivity of the valuation to changes in
the rate of permanent growth and the discount rate is low in light of the expectation
of (negative) low-volume cash flows.
The valuation was conducted by an external valuator. Based on the valuation as
explained above, the value of Bezeq International's activity amounted to a negative
amount of approximately NIS 145 million. In light of the negative value of the
activity, the value of Bezeq International's non-current assets was determined as of
57
Notes to Consolidated Financial Statements as of December 31, 2020
December 31, 2020, as their fair value net of exercise costs or zero, whichever is
higher.
In accordance, the fair of value of Bezeq International net of exercise costs as of
December 31, 2020 Is about NIS 28 million, and in the fourth quarter the Group
recognized an additional impairment loss of approximately NIS 25 million. Since
Bezeq International does not expect future profits in the coming years, no tax asset
has been recognized.
11.6.3. The following is a breakdown of the allocation of loss from the impairment of
the Bezeq International’s assets in 2019 and 2020:
2020
2019
NIS millions
NIS millions
Property, plant and equipment and intangible assets
148
Long-term advance expenses for capacities and additional
advance expenses
Use rights of leased assets
Total recognized impairment
* reclassification.
128
3
279
242 *
111 *
1
354
The Group allocated the impairment loss to its assets on the basis of book value
ratios and limited the allocation to the fair value of each of its assets, as determined
in the valuation conducted on the basis of the net asset value method, as stated
above.
The following is information regarding the manner in which the Group determined
the fair value (at level 3) of the assets net of exercise costs:
Property, plant and equipment - the fair value of property, plant and equipment that
can be sold to a market participant was based on the cost approach which takes into
account the cost of replacing new equipment net of physical wear and tear costs
and technological obsolescence net of costs required to make the sale.
Intangible assets - no material fair value has been attributed to intangible assets
since most of the software and licenses have been uniquely adapted to Bezeq
International and therefore have no material value in the transaction between a
voluntary buyer and a voluntary seller.
International capacity - in light of the nature of the agreements signed, which do
not allow these rights to be transferred except to the Company or sister company of
Bezeq International, which is not considered a market participant (third party) for
the purpose of calculating fair value according to International Accounting
Standard IFRS13, these rights have no fair value.
Short-term and long-term expenses - no material fair value was attributed to
advance expenses for the maintenance of its systems since most of the maintenance
agreements were uniquely adjusted to Bezeq International and therefore have no
material value in the transaction between a voluntary buyer and a voluntary seller.
Rights of use of leased assets - the fair value of the right-of-use assets is affected
by the ability to lease the asset subject to the lease to a third party, the lease fee of
the asset in the market and the exit penalties in the lease.
58
Notes to Consolidated Financial Statements as of December 31, 2020
12. Deferred expenses and non-current investments
December 31, 2020
December 31, 2019
NIS millions
NIS millions
Subscriber acquisition assets, net (see Note 12.3 below)
Long-term investment in bank deposits
Deferred expenses (see Note 12.1 below)
Bank deposit used to provide loans to the Company's employees
(see Note 12.2 below)
Rights of use of capacities (see Note 12.4 below)
Investments in equity accounted investees
165
160
37
36
-
4
402
*reclassified
160
-
30
45
102 *
6
343
59
Notes to Consolidated Financial Statements as of December 31, 2020
12.1. The following is a list of subscriber acquisition assets:
Subscriber acquisition assets
NIS millions
Cost
Balance as of January 1, 2019
Additions
Subtractions
Balance as of December 31, 2019
Additions
Subtractions
Balance as of December 31, 2020
Depreciation and impairment losses
Balance as of January 1, 2019
Depreciation
Subtractions
Balance as of December 31, 2019
Depreciation
Subtractions
Balance as of December 31, 2020
Book value
As of January 1, 2019
As of December 31, 2019
As of December 31, 2020
333
130
(25)
438
137
(98)
477
191
112
(25)
278
132
(98)
312
142
160
165
12.2 The balance of deferred expenses as of December 31, 2020 is presented net of
impairment of assets in the amount of NIS 14 million (see Note 11.6 regarding
impairment of Bezeq International).
12.3 Bank deposit for the provision of loans to Bezeq’s employees without a repayment date.
12.4
Transactions for the purchase of indefeasible right of use ("IRU") in underwater cable
capacities by Bezeq International are treated as service receipt transactions. According
to the contract, Bezeq International has right to use the capacities until 2022 with the
option to extend until 2027, which Bezeq International expects to exercise. The value
of the service provided is amortized by a straight line until 2027. The balance of Bezeq
International's liability in respect of the agreement as of December 31, 2020 is USD 8.4
million. In February 2021, Bezeq International signed an agreement to extend the
periods of use of the capacities until July 2030. In respect of the said rights of use, Bezeq
International pays a payment spread over annual payments throughout the period of the
use of the capacity.
Balance of use rights of capacities as of December 31, 2020 and as of December 31,
2019, is presented net of impairment of assets in the amount of NIS 213 million and NIS
111 million, respectively (see Note 11.6 regarding impairment in Bezeq International).
60
Notes to Consolidated Financial Statements as of December 31, 2020
13. Investee companies
13.1. Subsidiaries
13.1.1. The place of incorporation of the companies directly held by the Company is Israel.
The following is a list of the companies and subsidiaries held by the Company and
the Company's rights in the share capital of the subsidiaries as of December 31,
2020:
Bezeq the Israel Telecommunications Corporation Ltd.
B Communications SP1 Ltd.
B Communications SP2 Ltd.
B Communications 2 Limited Partnership
Companies held by Bezeq:
Pelephone Communications Ltd.
Bezeq International Ltd. (see Note 13.3 below)
DBS Satellite Services (1998) Ltd. (see Note 13.2 below)
Bezeq Online Ltd.
26.72%
100%
100%
100%
100%
100%
100%
100%
* On December 10, 2020, the Company acquired additional shares of Bezeq
and rose to a holding rate of 26.72%, see Note 13.6 below.
** Until December 27, 2020, Bezeq held 100% of the share capital of Walla!
Communications Ltd. For more details, see Note 13.4 regarding the sale of
Walla.
13.1.2. Examination of a plan for structural change in Bezeq's subsidiaries
On March 24, 2021, Bezeq's Board of Directors adopted the decisions of its
subsidiaries' boards of directors to examine the deepening of the synergies and
operational streamlining of the subsidiaries, based on outline principles that will
include a full and statutory merger of Bezeq International with and into DBS
(subject to required regulatory approvals), following the splitting of Bezeq
International's integration activity into a new separate corporation in the Group,
while examining the deepening of the synergy between the subsidiaries by
providing certain headquarters services to the subsidiaries by Pelephone. The
findings of the examination and an implementation plan for the examined change
will be brought to Bezeq’s Board of Directors for discussion and approval (as
required).
13.2. DBS Satellite Services (1998) Ltd.
13.2.1.
Until March 25, 2015, Bezeq held approximately 49.78% of the shares of
DBS and also owned options which gave it a right to approximately 8.6% of
the shares of DBS and which Bezeq refrained from exercising until that date.
The balance of DBS shares was held by Eurocom DBS Ltd. (Bezeq, which
was (indirectly) controlled by the controlling shareholders in the Company
at the time). On March 25, 2015, Bezeq exercised the options granted to it,
free of charge, and on June 24, 2015, Bezeq completed a transaction in which
it acquired the entire holdings of Eurocom DBS in DBS, as well as all the
owner loans that Eurocom provided to DBS (the "Purchase Transaction").
61
Notes to Consolidated Financial Statements as of December 31, 2020
Upon completion, Bezeq transferred to Eurocom DBS the cash consideration
for the Purchase Transaction in the amount of NIS 680 million.
In accordance with the terms of the Purchase Transaction, in addition to the
cash consideration of NIS 680 million, the consideration also included two
additional contingent items of consideration as follows: one additional item
of consideration of up to NIS 200 million to be paid in accordance with the
tax synergy according to the terms defined in the purchase agreement (“First
Contingent Consideration"); And an additional item consideration in the
amount of up to NIS 170 million, to be paid according to DBS’s business
results in the years 2015-2017 ("Second Contingent Consideration ").
Upon completion of the said Purchase Transaction, DBS became a wholly
owned (100%) subsidiary of Bezeq. Bezeq consolidates the financial
statements of DBS as of March 23, 2015.
Most of the First Contingent Consideration was paid after Bezeq entered into
an assessment agreement and a taxation decision with the Tax Authority
regarding financing income, owner loans, DBS losses and a merger (see also
note 7).
in
the
In respect of the Second Contingent Consideration, Bezeq paid advances in
the amount of approximately NIS 119 million. In return, Bezeq joined the
Company as a creditor
liquidation process of Eurocom
Communications. In addition, following Bezeq's demand from Eurocom
DBS to pay the Company the amount of the advance in respect of the Second
Contingent Consideration, plus interest as stipulated in the agreement, after
the objectives entitling Eurocom DBS to this consideration were not
achieved, on April 22, 2018, the Tel Aviv District Court granted, at Bezeq's
request, an order to dissolve Eurocom DBS, and Bezeq’s counsel was
appointed as the liquidator of Eurocom DBS according to Bezeq's estimate
for December 31, 2020, given the solvency of Eurocom DBS, no repayment
of the advances is expected.
13.2.2.
As of December 31, 2020 DBS has an equity deficit of approximately NIS
81 million and a working capital deficit in the amount of approximately NIS
260 million. In accordance with DBS’s forecasts, it expects to continue to
accumulate operating losses in the coming years and therefore will not be
able to meet its obligations and continue to operate as a going concern
without Bezeq's support.
During 2020, Bezeq's Board of Directors approved, once a quarter, the
granting of a non-recurring commitment by Bezeq to DBS to provide a credit
facility or an investment in capital, when the last approval was given in
November 2020 in the amount of up to NIS 150 million for a period of 15
months until December 31, 2021. It should be noted that during 2020 Did
not make any use of this framework by DBS.
In March 2021 Bezeq's Board of Directors approved the issuance of an
irrevocable commitment by Bezeq to DBS to provide a credit facility or an
investment in capital in the amount of up to NIS 150 million, for a period of
15 months, starting on January 1, 20021 And until March 31, 2022, instead
of the commitment from November 2020.
62
Notes to Consolidated Financial Statements as of December 31, 2020
13.2.3.
According to the assessment of DBS’s management, the sources of financing
available to it, which include, inter alia, the working capital deficit and the
credit facility and capital investment framework from Bezeq as stated in
section 13.2.2 above, will meet the needs of DBS’s activity for the coming
year.
13.3. Bezeq international Ltd.
13.3.1. The Ministry of Communications' recommendation to reduce the
phenomenon of inactive subscribers
On September 10, 2020, the Ministry of Communications contacted Bezeq
International (and other telecommunications operators) in a letter in which it
raised concerns that some subscribers to Internet services or other services, such
as email box, do not use them and are not even aware of this. In its request, the
Ministry recommends to take action to inform and stop charging subscribers
who do not use these services, and also requests periodic reports on the matter,
during the next 6 months. On November 8, 2020, another letter was received
from the Ministry of Communications, according to which the Ministry expects
that in the next reporting point (set for December 17, 2020), the data reported
to the Ministry by the communication operators will significantly reduce the
phenomenon and that reference should be made to the manner in which the
licensee acts to prevent the recurrence of the phenomenon. It was also stated
that the Ministry will consider in the future whether to set binding provisions in
the matter, in case proactive actions will not lead to a significant reduction in
this matter. See in this context Note 11.6 regarding impairment in Bezeq
International.
13.3.2. Hearing on examining the split between infrastructure service and access
service (ISP)
On October 4, 2020, a hearing was published on examining the split between a
broadband infrastructure service and Internet access service (ISP) (“the First
Hearing"), according to which the Ministry of Communications intends to take
policy measures that include, inter alia, amending the licenses of infrastructure
owners Bezeq and "Hot Telecom" so that starting from January 1, 2022 they
will be allowed to provide customers with a unified Internet service that
includes the components currently known as "broadband access service to ISP
providers” and “ISP service", under the conditions set forth in the hearing.
On February 24, 2021, a secondary hearing on the same matter was published
on the website of the Ministry of Communications (the "Secondary Hearing"),
which includes substantive amendments to the outline proposed in the First
Hearing. In line with the Ministry’s position, it is adamant that the consolidation
of the retail Internet service into a unified product should continue to be
promoted, along with the existence of a competitive market. See in this context
Note 11 regarding impairment in Bezeq International.
13.4. Walla! Communications Ltd.
On December 27, 2020, Bezeq completed a transaction with the Jerusalem Post Ltd. (“the
Buyer") for the sale of all Bezeq holdings in Walla, in exchange for a total of NIS 65
63
Notes to Consolidated Financial Statements as of December 31, 2020
million, of which NIS 55 million in cash, and the balance through Bezeq's entitlement to
receive from the Buyer and Walla (and entities related thereto) advertising space for a
period of up to 7 years from the date of completion of the transaction, after receiving the
regulatory approvals for the sale. Accordingly, as of the said date, Bezeq stopped
consolidating the financial statements of Walla In the Bezeq Group's reports. It should be
noted that the sale agreement included Bezeq's obligation to indemnify the Buyer in
certain circumstances.
Upon completion of the sale transaction, Bezeq recognized a capital gain before tax of
approximately NIS 22 million.
13.5 The Company's control of Bezeq
The Company Holds the control permit in Bezeq and controls Bezeq on the basis of two
facts: 1) The Company holds significantly more voting rights than any other shareholder,
while the other holdings in Bezeq are highly dispersed. 2) Israeli law and regulation
require the receipt of government approval for the entire body that wants to increase its
holding of over 5% in Bezeq or that wishes take measures together with another
shareholder in favor of appointing a director in Bezeq or to influence ongoing operational
decisions in Bezeq. Through these restrictions and through the Company's representatives
on Bezeq's Board of Directors, the regulatory regime ensures that no individual or entity
will interfere in control of Bezeq except the holder of the control permit.
13.6 Acquisition of additional Bezeq shares by the Company
On December 10, 2020, the Company acquired 10,580,000 ordinary shares of the
subsidiary Bezeq. The Company acquired such shares in exchange for the payment of a
total amount of approximately NIS 40 million and at an average price of NIS 3.78 per
share. Following the said acquisition, the Company holds 26.72% of the issued share
capital and voting rights in the subsidiary
13.7 Non-controlling interests
The table below presents data regarding the investees in the Group, including adjustments to fair value made
on the day of acquisition, except for goodwill, the non-controlling interests in which are material to the group:
As of December 31
Rate of
ownership held
by the non-
controlling
interests
%
Non-current
Current assets
assets
Current
liabilities
Non-current
Book value of
non-controlling
liabilities
Net assets
interests
NIS millions
2020
2019
2018
73.28
73.66
73.66
3,446
3.754
4,450
10,835
10.014 *
12,345
3,559
3,817
4,599
10,091
10,312 *
11,702
631
(361)
494
534
(197)
433
* reclassified
64
Year ended December 31
Notes to Consolidated Financial Statements as of December 31, 2020
Other
Other
comprehensive
Profit (loss)
income (loss)
attributed to non-
attributable to
Net profit
comprehensive
Comprehensive
controlling
non-controlling
Revenue
(loss)
profit
profit (loss)
interests
interests
NIS millions
2020
2019
2018
8,723
8,929
9,321
1,008
(822)
(1,154)
(12)
(32)
42
996
(854)
(1,112)
743
(607)
(850)
732
(630)
(819)
Year ended December 31
Cash flow from
Cash flow from
Cash flow from financing activities
operating
activities
investing
activities
(without dividend to non-controlling
interests)
Dividend
NIS millions
Total increase
(decrease) in
cash and cash
equivalents
2020
2019
2018
3,252
2,924
3,512
(871)
(883)
(2,552)
(1,941)
(2,531)
(1,746)
-
-
(505)
440
(490)
(1,291)
65
Notes to Consolidated Financial Statements as of December 31, 2020
14. Bank loans and debentures
14.1. Composition:
Current liabilities
Current bond maturities
Current loan maturities
Non-current liabilities
Bonds
Loans
Bank loans and debentures
December 31,
2020
December 31,
2019
NIS millions
NIS millions
583
202
785
7,578
1,907
9,485
10,270
590
417
1,007
7,443
2,969
10,412
11,419
Changes in Bezeq's debt composition in 2020:
14.1.1.
Debt Raising
On April 7, 2020, Bezeq published a prospectus of registration for trading
and unblocking and a shelf prospectus by Bezeq dated April 8, 2020.
Following the publication of the prospectus, on April 26, 2020, Series 11 and
12 bonds were delisted from trading on the "Institutional Sequence" list and
began trading on the Stock Exchange's main list on that date. The interest
rate to be paid in respect of the balance of the bond principal as of the date
of their listing for trading on the main list on the Stock Exchange has been
reduced by 0.4%, in accordance with the terms of the debentures.
In May 2020, Bezeq completed an offering according to a shelf offer report
dated May 26, 2020, which was published according to the prospectus (as
stated above), of Bezeq's bonds (Series 11 and 12) by expanding the series
listed for trading on the Stock Exchange's main list. The total (gross)
consideration received in respect of the issue amounted to NIS 724.4 million.
14.1.2.
Early repayments
During the year 2020 Bezeq repaid in early repayment a private loan from
an institutional entity in the amount of NIS 500 million and a loan from a
banking corporation in the amount of NIS 360 million.
As a result of the early repayments, Bezeq recognized financing costs in the
amount of approximately NIS 65 million.
66
Notes to Consolidated Financial Statements as of December 31, 2020
14.2 Terms of bonds and loans
Loans from banking corporations in
Bezeq:
Non-linked loans, bearing fixed interest
rates
Total loans from banking corporations
in Bezeq
Loans from financial institutions in
Bezeq:
Non-linked loans, bearing fixed interest
rates
Non-linked loans, bearing fixed interest
rates
Total loans from financial institutions in
Bezeq
Total loans in Bezeq
Bonds issued to the public by the
Company:
Series C - Non-linked, bearing fixed
interest rates
Series D - Non-linked, bearing fixed
interest rates
Series E - Non-linked, bearing fixed
interest rates
Total bonds issued to the public in the
Company
Bonds issued to the public by Bezeq:
Series 6 - linked to the consumer price
index, bearing fixed interest rates
December 31, 2020
Book
Book balance
balance
NIS millions NIS millions NIS millions
Par value
December 31, 2019
Interest rate
range
Par value
NIS millions
1,118
1,118
1,113
1,113
1,836
1,836
1,823
1,823
6.85% -
3.2%
1,517 th most
common
1,520
4% -3.22%
974
17
991
975
17
992
33
1,550
2,109
2,105
3,386
33
1,553
3,376
1,716
1,856
1,708
1,878
54
100
58
100
53
100
58
100
1,870
2,014
1,861
2,036
1,055
1,000
1,600
1,500
Series 7 - Non-linked, bearing fixed interest
rates
Series 9 - Non-linked, bearing fixed interest
rates
Series 10 - linked to the consumer price
index, bearing fixed interest rates
Series 11 - Non-linked, bearing fixed
interest rates*
Series 12 - linked to the consumer price
index, bearing fixed interest rates *
Total bonds issued to the public in Bezeq
71
71
107
2,186
2,145
2,197
894
841
1,244
6,291
882
835
1,269
6,202
902
605
761
6,172
Total bonds
8,161
8,216
8,033
107
2,145
882
603
799
6,036
8,072
Total loans and bonds
10,270
10,321
11,419
11,448
* Following the publication of Bezeq's prospectus, on April 26, 2020, Bezeq's Series 11 and 12 bonds
were delisted from trading in the "Institutional Sequence" list and began trading on the Stock Exchange's
main list at that time. The interest rate to be paid in respect of the balance of the bonds principal as of the
67
5.25%
3.85%
3.85%
3.85%
3.7%
Short-term
loan for the
year + 1.4%
3.65%
2.2%
3.2%
1.7%
Notes to Consolidated Financial Statements as of December 31, 2020
date of their listing for trading on the main list on the Stock Exchange has been reduced by 0.4%, in
accordance with the terms of the bonds.
14.3. Bonds issued by the Company
14.3.1 Series C Bonds, D and E
On September 18, 2016, the Company issued Series C bonds with a par value of
approximately NIS 1.9 billion to the public. In accordance with the original principal
terms which were valid until the date of the Searchlight-Forer transaction, the bond
principal was due in five installments as follows: four equal annual installments at the
rate of 7.5% of the bond principal to be paid on November 30 of each of the years 2020
to 2023. The last payment at the rate of 70% of the bond principal to be paid on
November 30, 2024. Also, the bonds bore interest at the rate of 3.6% which To be paid
twice a year on May 31 and November 30 of each of the years 2017 to 2024. The bonds
are not indexed.
On January 16, 2017, and January 23, 2018, the Company completed private offerings
to institutional investors in the amount of NIS 118 million par value Series C bonds for
approximately NIS 118 million, and NIS 240 million par value Series C bonds for
approximately NIS 249 million, by way of series expansion. The expansions were made
under the same conditions as set forth in the original offering held in September 2016.
On December 2, 2019 (hereinafter – the Arrangement Date) as part of the Searchlight
Forer transaction, the Company performed the following actions in connection with its
bonds:
1. An early repayment of NIS 614 million par value for Series C bonds, including the
accrued interest up to that date.
2. A private offering of NIS 310 million par value of Series C bonds for Internet Gold.
3. Conversion of NIS 58 million par value from Series C to Series D (new series).
4. Raising the coupon interest rate on Series G bonds 3.85%.
5. Replacement of all previous financial criteria related to credit rating, equity, etc. to
current LTV financial criteria as described below.
6. Granting a second-degree lien on series C and D bonds on 26.34% of Bezeq's share
capital.
7. Completion of a private placement of NIS 100 million par value Series E bonds
(new series).
8. On December 2, 2019, and as part of the arrangement with its bondholders, the
Company issued NIS 58 million in Series D in exchange for NIS 58 million in Series
C.
9. In addition, at the same time, the Company issued NIS 100 million par value Series
E for NIS 100 million.
68
Notes to Consolidated Financial Statements as of December 31, 2020
The series of bonds B, D, and E will be paid in one installment on November 30,
2024. The annual coupon interest on the bond series is NIS 3.85%. The bonds are not
linked to the consumer price index. The interest will be paid once every six months,
on May 31 and November 30 each year from 2020 to 2024.
In accordance with the terms of Series C, D and E Series, the Company undertook to
deposit semiannual interest in respect of the various series of bonds in a trust account
for the benefit of the bondholders. As of December 31, 2020, NIS 39 million are
deposited in a trust account for the benefit of the bondholders.
As of December 31, 2020, the total par value of the C, D, and E bond series that is
not held by the Company is NIS 2,014 million.
The following are the financial criteria that the Company has committed to in
connection with the bond series:
14.3.3 Debt to asset ratio (LTV):
The debt-to-asset ratio will be initially calculated 24 months after the date of the
Searchlight-Forer transaction (December 2, 2019) and will not exceed the
following thresholds for two consecutive quarters:
The ratio will not exceed the 80% threshold by November 30, 2023; and
The ratio will not exceed the 75% threshold from December 1, 2023 until the last
payment of the bond fund.
As of December 31, 2020, the Company complies with the debt-to-asset ratio.
14.3.4 Restrictions on the distribution of a dividend:
The Company undertook to refrain from distributing a dividend to its shareholders
and / or to repurchase its shares and / or other distribution as defined in the Israeli
Companies Law 5769-1999, unless all the conditions listed below are met:
1. The Company is not in breach of any of the financial criteria.
2. There is no ground for immediate repayment when the decision is made to make
the distribution, and there is no such ground as a result of this distribution:
3. The debt to asset ratio after the distribution shall not exceed 65%.
14.3.5 Lien on Bezeq shares:
Series E has an initial lien on 26.34% of the Company's holdings in Bezeq, while
Series C and D have a second-degree lien on the same holdings as stated above.
The Ministry of Communications approved the above lien and granted a lien to the
bond series trustee.
14.3.6 Control of Bezeq:
69
Notes to Consolidated Financial Statements as of December 31, 2020
The Company undertook to directly and / or indirectly hold at least 25% of Bezeq's
issued and paid-up share capital, unless a regulatory approval is obtained in the
form of a permit / approval that allows the aforementioned holding rate to be
reduced.
14.3.7 Company control
Searchlight and the Forer family undertook to refrain from transferring control of
the Company (directly or indirectly) to another entity that had not received in
advance the full regulatory approvals required, should such approvals be required,
at the relevant time.
14.3.8 Profit from change in the terms of the bonds
The Company examined the materiality of the change in the terms of its debt series
following the arrangement with the debtors and came to the conclusion that the
change in the terms is material. As a result, the Company deducted from the books
the bonds from the original C series, and recognized new bond series C and D which
were measured as of the Arrangement Date according to the market price quoted as
of that date. As a result, profit in the amount of NIS 177 million was created for the
Company, which is presented as part of the financing income item in the statement
of income for 2019.
14.3.9 Change in the terms of the Company’s bond series
On September 17, 2020, the meetings of the bondholders (Series C and E) approved
the amendment of the trust deeds of the said series, in a manner that will allow the
Company to raise additional debt that will be secured by a lien on Bezeq shares
pledged in favor of Series C, pari-passu with Series C, under the following
limitations:
a. The additional debt raised by the Company (net of the issue expenses) will first
repay bonds (Series D) and bonds (Series E) in full, so that after its raising and
after completing the conditions required for the release of the proceeds from
issuing the additional series and amending existing liens in favor of Series C,
a first-degree lien will be recorded on the pledged Bezeq shares (as defined in
the trust deed) for the benefit of the bondholders (Series C) instead of the
second-degree lien currently registered in their favor (as long as the bonds
(Series E) are in circulation).
b. After the full repayment of the debt in respect of the bonds (Series D) and the
bonds (Series E), the balance of net proceeds from the issue of the additional
debt will be used for the purpose of repayment of the bonds (Series C), by early
redemption (full or partial), according to the terms of the existing trust deed.
The duration of the new series issued by the Company will be longer than that
of the bonds (Series C) and the payment of the first principal in respect of the
bonds from the new series as aforesaid will be only after full repayment of the
bonds (Series C).
70
Notes to Consolidated Financial Statements as of December 31, 2020
In addition, the amount of early repayment to be paid to the bondholders in the event
of early repayment of the bonds by the Company has been amended as follows:
In relation to the bonds (Series C) - in the case of a partial early repayment of the bonds
(Series C), the price of the partial early repayment will be the par value of the bonds
(Series C) or their market value according to the 30 trading days preceding the early
redemption, whichever is higher.
In relation to bondholders (Series E) - the full early repayment price will be: (1) The
market value of the bonds according to the price of the bonds on the stock exchange
in the 30 trading days preceding the early redemption, the early repayment price, but
not more than 103.5% of the par value, or (2) the par value of the bonds (Series E),
whichever is higher.
14.4. Loans and bonds issued by Bezeq
The following is a list of the terms that Bezeq undertook in relation to the loans
received and the bonds issued:
14.4.1.
In relation to the total Bezeq debt, common reasons for immediate repayment
of the bonds and loans were included, including default incidents, insolvency
proceedings, liquidation or receivership proceedings, etc. In addition, a right
has been established for immediate repayment in the event that a third-party
lender has made payments of Bezeq's debts immediately repayable in an
amount exceeding the determined amount.
In addition, Bezeq undertook not to create additional liens on its assets unless
the consent of the bondholders will be obtained in advance, in a special
decision, which allows the Company to create the lien in favor of the third
party, or if Bezeq simultaneously creates liens for the benefit of all lenders
(negative liens). The lien includes exceptions, inter alia, in the matter of the
lien on assets that will be acquired or expanded by Bezeq, if the obligations
for which the lien was secured were created for the purpose of purchasing or
expanding the said assets and in the matter of a token lien.
In relation to Bezeq's public bonds, for loans from banking corporations the
balance of which as of December 31, 2020 is approximately NIS 1.1 billion,
and in relation to loans from financial institutions the balance of which as of
December 31, 2020, is approximately NIS 1 billion, Bezeq undertook that in
case it commits to any party in an undertaking in connection with
compliance with financial criteria, Bezeq will also commit towards the said
lenders with the same undertaking (subject to certain exceptions).
14.4.2.
14.4.3.
In relation to Bezeq's public bonds, as well as in respect of loans from
financial institutions in the amount of NIS 1 billion, a ground for immediate
repayment was included in the event that the communications sector ceases
to be the Group's main area of activity.
14.4.4. With respect to Bezeq's public bonds, and with respect to loans from
financial institutions in the amount of NIS 1 billion, Bezeq undertook to the
lenders to ensure that, as far as it is under its control, such bonds will be
monitored in terms of rating by at least one rating agency, as long as there
are bonds from that series in circulation or loan balance, respectively.
71
Notes to Consolidated Financial Statements as of December 31, 2020
14.4.5.
14.4.6.
In relation to bonds from series 9-12, as well as in relation to loans from
financial institutions in the amount of NIS 1 billion, a reason for immediate
repayment was included in the event of a change in control as a result of
which Bezeq’s controlling shareholders (as defined in the said agreements)
will cease to have control over it and transfer the control to a third party (“the
Transferee "), except: (1) transfer of control to a Transferee who has received
approval to control Bezeq in accordance with the provisions of the
Communications Law and / or the Communications Order or (2) transfer of
control in which the Transferee has control of Bezeq together with the
controlling shareholders and provided that the shareholding of the
controlling shareholders in the Company in Bezeq shares is not less than
50.01% of the total Bezeq shares held by the controlling shareholders jointly
holding or (3) a change of control approved by the meeting of the
bondholders / lenders.
In addition, in relation to Series 9-12 bonds, and in relation to loans from
financial institutions in the amount of NIS 1 billion, grounds for immediate
repayment of the bonds were included in the event of a "going concern" note
in Bezeq's financial statements for a period of two consecutive quarters, in
case of a material deterioration in Bezeq's business compared to its position
at the time of the issue, and there is a real concern that Bezeq will not be able
to repay the bonds / loans on time (as stated in Article 35H1(a)(1) of the
Securities Law).
As of December 31, 2020 and at the time of the approval of the financial statements,
Bezeq met all its obligations as aforesaid, there were no grounds for granting credit
for immediate repayment and no financial criteria were set as detailed above.
14.5. Reportable credit
The following are details regarding the Group's reportable credit, in accordance with legal
position No. 104-15: Reportable credit incident, published by the Securities Authority on
October 30, 2011 and as amended on March 19, 2017 (in accordance with the Group's data,
series of bonds and loans in excess of 800 million). The bonds were issued by the Group without
a specific purpose. Repayment of the bond principal in equal periodic payments numbered as
specified in the table, and payment of interest on the outstanding principal balance.
The following is a reportable credit in the Group:
Bezeq bonds
Series 6
bonds
Series 9
bonds
Series 10
bonds
Series 11
bonds
Series 12
bonds
7/3/2011
10/15/2015
10/15/2015
10/07/2019
10/07/2019
Company
bonds
Series C
bonds
19/09/2016
12/1/2022 12/1/2025
Shekel
index-
linked with
a fixed
interest rate
Shekel not
linked with a
fixed interest
rate
12/1/2025
1.6.2030
1.6.2030
30.11.2024
Shekel index-
linked at a
fixed interest
rate
Shekel not
linked with a
fixed interest
rate
Shekel index-
linked with a
fixed interest
rate
Shekel with
a fixed
interest rate
Date of issuance of
bonds
Final repayment date
Type of loan
72
Notes to Consolidated Financial Statements as of December 31, 2020
Original loan amount or
par value (NIS millions)
Estimated principal
balance (plus interest
payable) as of December
31, 2020 (NIS millions)
Number of principal
payments in the year
Payment of principal
starting from
Number of interest
payments for the year
Interest rate as of
December 31, 2020
Fair value of the liability
as of December 31, 2020
(NIS millions)
Effective interest
grossing at fair value as
of December 31, 2020
Effective interest
grossing at fair value as
of December 31, 2019
Special conditions
Existence of early
repayment right
3,000
2,145
882
835
1,269
1,878
1,040
2,151
1
2018
2
1
2022
2
885
1
2022
2
837
1,271
1,884
1
2026
2
1
1
2026
2024
2
2
3.70%
3.65%
2.20%
3.20%
1.70%
3.85%
1,089
2,342
956
910
1,350
1,723
0.31%
1.19%
0.04%
1.93%
0.83%
(0.2%)
1.75%
0.52%
2.69%
1.24%
See Note
14.4
See Note
14.4 See Note 14.4 See Note 14.4 See Note 14.4
5.29%
6.78%
See Note
15.3.2
No
No
Yes
Yes
Yes
Yes
14.6
Activity in liabilities arising from financing activities
Bonds
(including
accrued
interest)
Loans
(including
accrued
interest)
NIS millions
NIS millions
8,942
4,738
1,475
(2,156)
(324)
(1,005)
117
8,054
718
(577)
(278)
(137)
268
800
(2,131)
(172)
(1,503)
166
3,401
-
(1,273)
(114)
(1,387)
103
Total
NIS
millions
13,680
2,275
(4,287)
(496)
(2,508)
283
11,455
718
(1,850)
(392)
(1,524)
371
Balance as of January 1, 2019
Changes as a result of cash flows from financing activities
Proceeds from the issuance of bonds and the receipt of loans,
net of transaction costs
Repayment of bonds and loans
Interest paid
Total net cash arising from financing activities
Financing expenses imputed to statement of income
Balance as of December 31, 2019
Changes as a result of cash flows from financing activities
Proceeds from the issuance of bonds and the receipt of loans,
net of transaction costs
Repayment of bonds and loans
Interest paid
Total net cash arising from financing activities
Financing expenses imputed to the income statement
73
Notes to Consolidated Financial Statements as of December 31, 2020
Balance as of December 31, 2020
8,185
2,117
10,302
74
Notes to Consolidated Financial Statements as of December 31, 2020
15. Trade and other payables
Suppliers
Standing debts and expenses payable *
Banknotes repayable
Total suppliers
Current payables including derivatives
Liabilities to employees and other liabilities due to payroll and wages
Deferred income
Current tax liabilities
Institutes
Derivative instruments
Accrued interest
Other
Total current trade payables including derivatives
December 31, 2020 December 31, 2019
NIS millions
NIS millions
940
-
940
397
168
80
66
51
31
33
826
925
2
927
356
136
5
73
55
37
38
700
Total current trade and other payables
1,766
1,627
Non-current trade payables
Frequency payment liabilities
Deferred income in respect of government grants**
Deferred income
Derivative instruments
Other
Total non-current payables
Total current and non-current trade and other payables
86
72
75
66
8
307
2,073
-
-
69
66
4
139
1,766
* Of which the balance of suppliers who are related parties and stakeholders as of December 31, 2020 is NIS 2
million (as of December 31, 2019 - NIS 2 million).
** See Notes 11.1 and 3.14 regarding frequency tender and government grant
16. Provisions
Customer
Claims
NIS millions
Additional
claims
NIS millions
Dismantling and
disposal of
mobile sites and
liability
NIS millions
Total
NIS millions
Balance as of January 1, 2020
Provisions formed
Provisions exercised
Provisions canceled
Balance as of December 31, 2020
Presented in the statement of
financial position as follows:
Current provisions
111
6
(4)
(1)
112
112
75
9
-
(8)
-
1
1
54
3
-
(1)
56
4
174
9
(12)
(2)
169
117
Notes to Consolidated Financial Statements as of December 31, 2020
Non-current provisions
-
112
-
1
52
56
52
169
For details regarding legal claims, see Note 18.
76
Notes to Consolidated Financial Statements as of December 31, 2020
17. Employee benefits
Employee benefits include severance pay, post-employment benefits, other long-term
benefits, and short-term benefits.
17.1. Composition of liabilities in respect of employee benefits
2020
2019
Note
NIS millions
NIS millions
17.4
17.5.1
17.5.2
17.5.3
17.3.3
17.3.3
17.5.2
17.3.1
17.3.2
Current liabilities in respect of:
Vacation
Sick leave
Provision for an early retirement plan at Bezeq
Provision for early retirement for employees
transferred from government employment in Bezeq
Provision for streamlining plan in Pelephone, Bezeq
International and DBS
Current maturity of benefits to pensioners
Total current liabilities in respect of benefits to
employees
Non-current liabilities in respect of:
Liability for benefits to pensioners
Provision for early retirement for employees
transferred from government employment
Severance pay, net (see composition below)
Early notice and pension
Provision for streamlining plan in Pelephone, Bezeq
International and DBS
Total non-current liabilities in respect of employee
benefits
Total liabilities in respect of employee benefits
The following is the composition of the liability in
respect of severance:
Liability in respect of severance pay
Fair value of plan assets
122
161
87
62
43
7
482
140
108
58
29
-
335
817
120
152
139
170
66
7
654
137
94
65
29
31
356
1,010 th most
common
214
(156)
58
230
(165)
65
77
Notes to Consolidated Financial Statements as of December 31, 2020
17.2. Defined deposit plans
17.2.1.
The liability in respect of benefits for employees reaching retirement age in
respect of their period of service in the Company and in the subsidiaries and
in respect of the employees to whom Article 14 of the Severance Pay Law,
5733-1963 ("Severance Pay Law") applies, are fully covered by current
payments to pension funds and insurance companies.
Deposits recognized as an expense in
respect of a defined deposit plan
221
223
232
2020
2019
2018
NIS millions
NIS millions
NIS millions
17.2.2.
In respect of some of the employees, the Group has a liability to complete
severance pay in excess of the amount accumulated in the compensation fund
of the employees (see Article 17.3.1 below).
17.3. Defined benefits plan
Liabilities in respect of defined benefit plans in the Group include the following
liabilities:
17.3.1.
17.3.2.
17.3.3.
Liability for severance pay in respect of the balance of the liability that is not
covered by deposits and / or insurance policies in accordance with existing
employment agreements and the Severance Pay Law. In respect of this part
of the liability, there is a designated allocation that is deposited in the name
of the Group companies in pension funds and insurance companies.
Allocations in pension funds and insurance companies include accrued
linkage differences and interest. Withdrawal of allocation funds is
conditional on compliance with the provisions set forth in the Severance Pay
Law.
Liability under the personal employment agreements of senior employees in
the Group, to pay a benefit in respect of an advance notice upon termination
of the employee-employer relationship. In addition, the Company has a
commitment to a number of senior employees, who are entitled to early
retirement conditions (pension and retirement grants) that are not dependent
on the existing retirement agreements for all employees.
Bezeq pensioners receive, in addition to pension payments, benefits that are
mainly holiday gifts (linked to the dollar exchange rate), financing the
maintenance of pensioners' clubs and social activities. Bezeq's liability for
these costs accrues during the work period. Bezeq includes the liability for
the expected costs in the period after the employment period in its financial
statements.
17.4. Provision for sick leave
The statements include a provision for redemption and exercise of sick days. The
right to accrue sick days was taken into account for all employees of the Group and
78
Notes to Consolidated Financial Statements as of December 31, 2020
the right to redemption of sick days only for eligible employees in accordance with
the conditions set out in the employment agreements. The provision was calculated
on the basis of an actuarial calculation that includes assuming a positive
accumulation of days for most employees and exercising days using the "last-in-
first-out" method (LIFO).
17.5. Early retirement and dismissal benefits
17.5.1.
17.5.2.
17.5.3.
79
According to the collective bargaining agreement between Bezeq and the
employees organization and the New Histadrut from December 2006 and in
accordance with amendment Number 5 to the agreement dated August 2015,
Bezeq was entitled, at its discretion, to terminate the employment of up to
163 permanent and veteran employees in each of the years 2021 - 2015
(Bezeq's right accumulated over the years).
On December 16, 2020, Amendment No. 6 to the agreement was signed,
extending the retirement arrangement in the agreement until December 31,
2020. Subject to amendment, Bezeq will be entitled to, at its discretion,
terminate the work of up to 50 permanent employees each year (in addition
to the retirement quota of about 300 permanent employees remaining from
the previous agreement, the employment of which Bezeq will be able to
terminate at the end of the agreement period).
Bezeq recognizes an expense in respect of early retirement since Bezeq has
clearly undertaken, without any real possibility of cancellation, to lay off
employees before they reach the usual retirement date, according to a defined
plan. The collective bargaining agreement entitles Bezeq to dismiss
employees, but does not create a significant commitment for Bezeq without
a real possibility of cancellation. Therefore, the expenses for early retirement
are recognized in Bezeq's books at the time the plan is approved.
On December 10, 2020 Bezeq's Board of Directors approved, as part of the
implementation of a streamlining plan in Bezeq, the retirement of about 50
permanent employees Veterans in an early retirement route with a total cost
of approximately NIS 68 million. In light of the aforesaid, Bezeq recorded
in its financial statements for the fourth quarter of 2020 an expense in the
amount of approximately NIS 65 million.
On December 16, 2018, an early retirement plan was approved, by the end
of 2021, for all Bezeq employees who were transferred to the Company from
the Ministry of Communications (94 employees). The balance of the
provision in respect of the commitment for the retirement of employees as
aforesaid as of December 31, 2020 is approximately NIS 170 million.
Pelephone, Bezeq International and DBS are bound by collective bargaining
agreements between them and the Histadrut and the employees committees.
The agreements from 2019 determined, inter alia, streamlining and synergy
procedures that include the right of the above companies to terminate the
employment of employees, in accordance with the rules set forth in the
agreements. The balance of the provision for streamlining in respect of these
agreements as of December 31, 2020 is approximately NIS 43 million.
Notes to Consolidated Financial Statements as of December 31, 2020
17.6. Actuarial assumptions
The main actuarial assumptions regarding defined benefit plans as of the reporting
date are:
17.6.1.
17.6.2.
The mortality rates are based on the rates published in the Capital Market
Authority's 2017-3-6 pension circular. Future reductions in mortality rates
are based on the rates published in the 2019-1-10 circular.
The rates of departure were determined on the basis of past experience of
Bezeq and its subsidiaries, with a distinction between the various employee
populations and in accordance with the years of seniority. Departure rates
include a distinction between departures that entitle to full severance pay and
departures that do not confer full severance pay.
17.6.3.
The (nominal) discount rate is based on the yield of high-quality index-linked
corporate bonds that have a duration similar to the duration of the gross
liability.
The following are the main discount rates:
Severance Pay
Benefits for retirees
December 31, 2020
December 31, 2019
Average discount rate
Average discount rate
2.7%
2.8%
2.40%
2.9%
17.6.4. Assumptions regarding salary updates for the purpose of calculating
liabilities were made on the basis of Management’s assessments,
distinguishing between groups of employees. The main assumptions (in
nominal terms) regarding salary updates for major employee groups are:
Permanent and veteran employees of the Company
New permanent employees in the Company
Bezeq employees who are not permanent
Pelephone employees, Bezeq International and DBS
Assuming an annual wage increase
The calculation was based on individual assumptions regarding
expected wage increases for years 2021 until 2026, resulting from
the collective bargaining agreement signed in August 2015 and in
December 2020.
An average update of 3.2% for young employees gradually drops to
1.4% at age 66.
6.4% for young employees gradually decreases to 0.1%, 2% (in real
terms) for senior employees.
The rates of wage increases were determined on the basis of the
collective agreements signed. The average annual wage growth rate
that is 2%.
17.6.5. Details of the weighted duration of liabilities in respect of post-employment
main benefits:
Severance Pay
80
December 31, 2020 December 31, 2019
Years
11.9
Years
10.8
Notes to Consolidated Financial Statements as of December 31, 2020
Benefits for retirees
16.4
16.6
17.7. Sensitivity analysis of major actuarial assumptions
The following is an analysis of the possible impact of the changes in key actuarial
assumptions on employee benefit liabilities. The calculation is made in relation to each
assumption separately, assuming that the rest of the assumptions remain unchanged.
Discount rate - increase of 0.5%
Future wage increases rate - increase of 0.5%
Employee departure rate - an increase of 5%
Mortality rate assumption - 5% Increase
December 31,
2020
December 31,
2019
NIS millions
NIS millions
(35)
34
(20)
(3)
(42)
35
(25)
(4)
18.
Contingent liabilities
18.1 Claims against the Company
18.1.1 On March 30, 2020, the Company reached a settlement regarding the derivative claim
that was filed in July 2016 in the Tel Aviv-Yafo District Court (hereinafter "the
Horev Claim"). As part of the settlement agreement, the Company received during
the third quarter of 2020, a total amount of NIS 22 million (principal plus accrued
interest) of the Company's Series C bonds held by Internet Gold - Gold Lines Ltd.
(hereinafter "Internet Gold"), in exchange for waiving the derivative claim against
Internet Gold. In addition, the derivative plaintiff received an amount of NIS 4.23
million in respect of attorneys' expenses and monetary compensation (which were
paid out of the NIS 22 million that Internet Gold is required to pay). The net amount
received by the Company is charged directly to the Company's shareholders' equity
under the loss balance item.
18.1.2 In addition, on June 2, 2020, the Company and former directors of the Company signed
a settlement agreement as part of the Horev Claim, according to which the directors
will pay NIS 2.5 million (hereinafter "the Directors’ Settlement Amount") to the
Company in order to settle all derivative claims in this matter. During July 2020, the
District Court approved the settlement agreement, and the directors' insurance paid
the Company the full Directors’ Settlement Amount. As part of the settlement, the
Company paid the derivative plaintiff and his attorney a total of NIS 720,000. The
net amount received by the Company is charged directly to the Company's
shareholders' equity under the loss balance item.
18.1.3 On March 4, 2020, the Company signed a settlement agreement that settles the class
action lawsuit filed against the Company with the New York Southern District Court
in the United States that was filed against the Company in 2017. On August 10, 2020,
the final approval was obtained from the court for settlement in respect of which
settlement payments were made. The Company paid a sum of USD 1.2 million,
which was fully covered by the insurance of the directors and officers of the
Company, which absolved the Company from all claims related to the class action
by both the plaintiffs and the members of the arrangement, without any admission of
guilt.
81
Notes to Consolidated Financial Statements as of December 31, 2020
18.1.4 Regarding two motions for approval of a class action lawsuit filed in June 2017 against
the Company and against Bezeq, see Note 18.2(3) below.
18.1.5 In November 2020, a claim was filed with a motion for approval as a class action by
a private person who he claims is a shareholder of Bezeq ("the Applicant") against
the Company, Bezeq, and members of Bezeq's Board of Directors ("the
Respondents"). The matter of the motion is the approval of a class action for
compensation of the Applicant and the members of the represented group for
damages caused to them, according to the motion, "due to Bezeq's failure to report
and disclose on the Tel Aviv Stock Exchange (hereinafter: "TASE") and
concealment of material information from investors. In connection with a report to
the public "on moves by the Ministry of Communications to eradicate the
phenomenon of dual subscribers in the field of ISP Internet services, on the extensive
and substantial scope of the phenomenon of dual subscribers in the Bezeq
International subsidiary (hereinafter: “Bezeq International") and their material
negative impact on the business of the subsidiary and Bezeq". According to the claim
in the motion, the damage caused to the group members as a result of the events that
are the subject of the lawsuit amounts to approximately NIS 55 million to NIS 65
million, based on an expert opinion attached to the motion.
18.1.6 In November 2020, a claim was filed with a motion for approval as a class action by
a private individual ("the Applicant") who claims to be a shareholder of the
Company, who claims to hold shares in the Company and Bezeq, against the
Company, Bezeq and 72 other respondents, including past and present officers in
both companies (“the Respondents"). The matter of the motion is the approval of a
class action for compensation of the Applicant and the members of the represented
group for damages caused to them, as alleged in the motion, as a result of acts and
omissions of the Respondents when they refrained from disclosing to the investing
public allegedly material information that they had to disclose in accordance with
the provisions of the law, in connection with the two companies' report dated
November 9, 2020 that Bezeq International books have unexplained net asset
balances (receivables net of payables) of tens of millions of NIS, a considerable part
thereof originates, allegedly, in past periods of more than 15 years. The amount of
the class action specified in the statement of claim is "over NIS 2.5 million (for the
purposes of substantive authority)" when in accordance with the economic opinion
attached to the motion "the estimate for the decline in the price of the security" for
the information included in the immediate report of November 9, 2020 stands at
5.26%-5.40% I relation to Bezeq and 9.07% - 9.36% in relation to the Company.
18.2 Claims against Bezeq Group
During the day-to-day business, claims have been filed against Bezeq Group companies
or various legal proceedings are pending against it (hereinafter in this section: "Legal
Claims").
In the opinion of the managements of Bezeq Group companies, which is based, among
other things, on legal opinions regarding the probability of Legal Claims, the financial
statements included adequate provisions (as detailed in Note 16), where provisions were
required to cover the exposure as a result of such Legal Claims.
82
Notes to Consolidated Financial Statements as of December 31, 2020
In the opinion of the managements of the Bezeq Group companies, the amount of the
additional exposure (in addition to the aforesaid provisions), as of December 31, 2020,
due to Legal Claims filed against Bezeq Group companies in various matters and whose
probability of realization is not expected, amounted to a total of approximately NIS 3.8
billion. In addition, there is an additional exposure in the amount of about NIS 3.7 billion
in respect of claims whose chances cannot be assessed at this stage.
In addition, requests were filed against the companies of the Bezeq Group to recognize
the claims as class actions that did not specify the exact amount of the claim, for which
the Group has additional exposure beyond the aforementioned.
The additional exposure amounts in this Note are nominal.
The following is a description of the contingent liabilities of Bezeq Group valid as of
December 31, 2020 classified according to groups with similar characteristics:
The
amount
of
exposure
in
respect
of claims
whose
chances
cannot
yet
be
assessed
The
balance
of
the
provision
The
amount of
additional
exposure
Claims group
The nature of the claims
NIS millions
Customer claims
Mainly motions for approval of class actions
(and claims by virtue thereof) that concern
allegations of illegal collection of funds and
harm to the provision of services provided by
Bezeq Group companies.
112
3,126
1,792(1)
Claims of
enterprises and
companies
Claims in which the liability of Bezeq Group
companies' liability is claimed in connection
with their operation and / or their investments.
-
687 (2)
1.873(3)
Claims of
employees and
former employees
of Bezeq Group
companies
State and authority
claims
Mainly individual claims filed by employees
and former employees of Bezeq Group which
concern various payments.
Various legal proceedings by the State of
Israel, various governmental bodies and state
authorities (hereinafter: "the Authorities").
These are mainly procedures in the field of
regulation applied to Bezeq Group companies
and various financial disputes regarding funds
paid by Bezeq Group companies to the
authorities (including property tax payments).
See also Note 6.
Miscellaneous
Other legal claims, including tort claims
(except for claims in which there is no dispute
as to the existence of insurance coverage), real
83
-
-
-
1
-
5
12
-
14
Notes to Consolidated Financial Statements as of December 31, 2020
estate, infrastructure, etc.
Total claims against Bezeq and its subsidiaries
113
3,830
3,679
(1) Including exposure in the amount of NIS 0.9 billion in respect of a motion for
approval of a class action lawsuit filed against Bezeq In May 2020 concerning online
advertising packages through the B144 website (the amount of the exposure was
indicated in handwriting and no explanation or calculation in relation to it was
included).
(2) Disclosure in respect of a class action of a shareholder against Bezeq and Bezeq’s
officers in which reported failures of Bezeq regarding the wholesale market reform
were alleged.
(3) Two motions for approval of a class action lawsuit totaling approximately NIS 1.8
billion filed in June 2017 against Bezeq, Group officers as well as companies from
Bezeq’s controlling group at the time regarding the transaction for the purchase of
DBS shares from Eurocom by Bezeq. In accordance with a court decision, the filing
of a consolidated motion is expected to replace these two motions. The procedure is
delayed in light of the investigation and at the request of the Attorney General until
September 6, 2021 (as described in Note 1.3).
18.3. After the date of the financial statements, two motions for approval of a class action
were submitted against Bezeq Group companies, without specifying an exact
amount. As of the date of approval of the financial statements, the chances of the
motion have not yet been assessed. Also, claims for which the exposure was
approximately NIS 372 million were terminated.
19. Engagements
19.1. DBS is bound by agreements to purchase space segments (As detailed in Note 19.2
below), Content and Copyright, until the end of 2026. Amounts of future contracts
in respect of these contracts per day31/12/2020 Are as follows:
For the year ended December
31
2021
2022
2023
2024
2025 onwards
Space segments
NIS millions
73
60
58
58
67
316
Content and
Copyright
NIS millions
379
262
80
8
-
729
Total
NIS millions
452
322
138
66
67
1,045
19.2. According to an agreement with Space Communications Ltd. ("Space") from 2013,
as amended, DBS leases space segments in satellites from the "Amos" series
("Space Agreement"). In accordance with the provisions of the Space Agreement,
84
Notes to Consolidated Financial Statements as of December 31, 2020
DBS leases a number of space segments on the "Amos 3" satellites (whose
estimated end of life is at the beginning of 2026), as well as the "Amos 7" satellite,
in which Space has the right to lease space segments under an agreement between
it and the rights holder on this satellite, which was leased to DBS until February
2022 (after exercising an extension option).
Under the Space Agreement, Space undertook to make reasonable efforts to place
a new satellite, "Amos 8", by February 2021, in which case DBS will lease space
segments from that date on "Amos 3" and "Amos 8" and starting from the end of
the life of "Amos 3" - in "Amos 8" only. Insofar as "Amos 8" is not installed until
February 2022, DBS would lease space segments in "Amos 3" until the end of its
life, and it would have the right, if it so chooses, to lease space segments in "Amos
8" as well, insofar as it is placed at a later date. According to DBS, noting, among
other things, that Space did not announce an agreement for an engagement to build
"Amos 8" and according to the information provided by Space (according to Space
reports, the agreement to build "Amos 8" was revoked by Space in 2018), placing
"Amos 8” is not expected to materialize until February 2022, if at all. Thus,
although the period of the original Space Agreement is until 2028, in accordance
with the provisions of the Space Agreement, there will be an early termination of
the Space agreement at the end of the life of "Amos 3" satellite, which to the best
of DBS's knowledge is expected to be in early 2026, without payment of
compensation and under the conditions set out in the agreement (subject to
additional early termination options).
The leased space segments - according to the space agreement, during the
engagement period (and subject to unavailability events) DBS will lease 12 space
segments from space, in accordance with the division between the relevant satellites
stipulated in the agreement according to the various periods when the "Amos 7"
satellite lease expires. Ace to lease ten space segments in "Amos 3". The agreement
also regulates the provision of backup segments for the leased space segments
during the term of the agreement, under the terms and restrictions set forth therein.
Early termination of the agreement - the Space Agreement stipulates a right to early
termination without cause, subject to 12 months' prior notice and payment of the
consideration in accordance with the mechanism set forth therein.
19.3. Cellular infrastructure equipment in the UMTS / HSPA and LTE networks and 5G
are manufactured by LM Ericsson Israel Ltd. ("Ericsson"), which serves as
Pelephone's supplier for the deployment of 4G (LTE) and 5G radio networks. In
addition, Erickson is a significant supplier of Pelephone in the field. The Pelephone
has multi-year agreements for maintenance, support and software upgrades for the
UMTS / HSPA network, as well as an agreement for the purchase of 4G (LTE) and
5G equipment with Ericsson, and in its opinion it may depend on it for network
support and expansion. As of December 31, 2020 Pelephone has engagements with
Ericsson for the purchase of end equipment and the receipt of services as
aforementioned in the total amount of approximately NIS 10 million.
85
Notes to Consolidated Financial Statements as of December 31, 2020
19.4. The Bezeq Group companies, as of December 31, 2020, have contracts for the
purchase of end equipment, property, plant and equipment, intangible assets and
additional assets in the amount of approximately NIS 383 million as well as
additional contracts for various services in the future in the amount of
approximately NIS 101 million.
19.5. For information on engagements with related parties, see Note 29.
20. Collateral, liens and guarantees
Bezeq Group’s policy is to provide tender, execution and legal guarantees as provided
by law. Also, Bezeq provides bank guarantees for bank liabilities of subsidiaries as
needed.
20.1. The Bezeq Group companies provided guarantees to the Ministry of
Communications in connection with securing the terms of their licenses in the
total amount of approximately NIS 129 million (of which approximately 52
million are linked to the consumer price index).
20.2. The Bezeq Group companies provided bank guarantees to third parties in the total
amount of approximately NIS 195 million (including guarantees in the amount of
approximately NIS 118 million regarding the Sakia property. For details, see
Note 6.6).
20.3. Restrictions on the creation of liens on the assets of Bezeq Group companies:
20.3.1. According to the Bezeq license, the license and any part of it cannot be
transferred, encumbered or foreclosed. Transfer, encumbrance or
foreclosure of an asset from the license assets that were not expressly
permitted in the license requires the approval of the Minister who may,
in special cases, allow the transfer of a license in the event of structural
changes, if he is convinced that the transferee licensee meets all
conditions as in the transferor. In addition, to the extent that rights to the
assets from the assets used to provide Bezeq services are granted to a
third party, Bezeq must ensure that no situation arises in which the
exercise of the rights in the said asset may impair Bezeq's obligations
under the license.
20.3.2. According to Pelephone's cellular license, it is not authorized to sell, rent
or lease property from the properties used for the execution of the license
without the consent of the Minister of Communications, ("the License
Assets"), unless the consent of the Minister of Communications has been
given, after he has assumed that the exercise of the rights by the third
party will not cause harm to the provision of the services under the
license, except:
A. Pledge of a license property for the benefit of a banking corporation
operating legally in Israel, for the purpose of obtaining bank credit,
provided that it has notified the Ministry of Communications of the
lien it intends to register, according to which the lien agreement
86
Notes to Consolidated Financial Statements as of December 31, 2020
includes a clause guaranteeing that in any case the exercise of the
rights by the banking corporation will not cause any harm to the
provision of the services under the license.
B. Sale of equipment items when performing an upgrade procedure,
including sale of equipment using the trade-in method.
C. Sale, rental, mortgage or transfer of the license assets to the holder of
a mobile radio telephone infrastructure license of which Pelephone is
a customer.
20.3.3. Pursuant to Bezeq International's license, it may not sell, rent or
mortgage any of the assets necessary to secure the licensee's services,
unless the Minister of Communications' consent has been given after he
has assumed that the exercise of the rights by the third party will not
impair the license. Notwithstanding the foregoing, Bezeq International
may pledge an asset from the license assets in favor of a banking
corporation operating legally in Israel, for the purpose of obtaining bank
credit, provided that it gives prior notice of the lien it intends to make,
and the lien agreement includes a clause which ensures that the exercise
of the rights by the banking corporation will not result in a violation of
the provision of services under the license.
20.3.4. With respect to the DBS broadcasting license, the Communications Law
and the license provisions set limits with respect to the transfer,
foreclosure and lien of the license and of assets from the license assets.
The broadcasting license requires the approval of the Minister in relation
to certain changes in the maintenance of means of control in the DBS
and imposes reporting obligations regarding the holders of the means of
control; There are also certain restrictions regarding the license to
perform uplink operations (transferring broadcasts from DBS’s
broadcasting center to the broadcast satellite and performing ancillary
set-up and operation operations).
20.4. Regarding the conditions that the Company undertook in connection with loans
and credit, see Note 15.
21. Capital
21.1
Share capital
Ordinary shares of NIS 0.1 par value each
Number of ordinary shares
2020
2019
Issued and repaid capital as of January 1st
116,316,563
Shares issued during the year
-
29,889,045
86,427,518
87
Notes to Consolidated Financial Statements as of December 31, 2020
Issued and repaid capital as of December 31 116,316,563
116,316,563
Registered capital To the 31st of December
150,000,000
150,000,000
* 19,230 of the Company's shares are held as treasury shares.
** See Note 32.1 regarding the approval of the general meeting of Bezeq shareholders,
after the date of the financial statements, of the increase of Bezeq's registered capital
and regarding the Bezeq Capital Remuneration Plan.
21.1.1. On January 20, 2019, the Company held a private offering of 7,385,600 ordinary
shares at a cost of NIS 0.1 par value to a number of institutional entities and
"qualified" private investors. The gross issue amounted to NIS 118 million, at a
price of NIS 16 per share. .
21.1.2. On December 2, 2019, as part of the Searchlight-Forer transaction, the
Company issued 79,041,918 ordinary shares at NIS 0.1 par value for
Searchlight, the Forer family, Internet Gold and the public in the total amount
of NIS 330 million, at a price of NIS 4.175 per share.
21.1.3. On February 13, 2020, a special meeting of the Company's shareholders was
held at which the terms of employment of the Company's new CEO, Mr. Tomer
Raved, were approved. As part of the terms of his employment, Mr. Raved was
granted options to purchase up to 2,677,362 ordinary shares of the Company,
which constitute 2.25% of the issued and paid-up capital of the Company as of
the date of commencement of his employment. The expense recorded in the
Company's books in respect of the options granted to the CEO in 2020
amounted to approximately NIS 280,000.
21.1.4. On August 26, 2020, the Company announced its intention to delist its shares
from trading on the Nasdaq Stock Exchange and terminate its reporting
obligation to the US Securities and Exchange Commission (SEC). The
documents required for the delisting were submitted on September 9, 2020 and
the Company's share ceased to be traded on the Nasdaq on the same day. The
termination of the Company's reporting liability on the Nasdaq Stock Exchange
began on September 21, 2020, following the submission of a required document
to the US Securities and Exchange Commission In the same day.
21.2
Dividends
21.2.1 Bezeq's dividend distribution policy
Until March 6, 2018, Bezeq had a dividend distribution policy, according to which
Bezeq will distribute to its shareholders, every six months, a dividend at a rate of
100% of the semiannual profit (after tax) (profit for a period attributed to Bezeq's
owners) according to Bezeq’s consolidated financial statements. On March 6, 2018,
Bezeq's Board of Directors decided to update the dividend distribution policy, in a
manner that Bezeq will distribute to its shareholders, every six months, a dividend
88
Notes to Consolidated Financial Statements as of December 31, 2020
of 70% of the semiannual profit (after tax) according to Bezeq's consolidated
financial statements, starting from the distribution following the date of the
decision.
On March 27, 2019, Bezeq's Board of Directors decided to cancel Bezeq's dividend
distribution policy. The decision was made out of a position of clarity and
transparency vis-à-vis the shareholders and in the circumstances created against the
background of the impossibility of distributing a dividend due to expectations of
not meeting the profit test in the two years following the decision. Accordingly, the
Board of Directors has decided that it would not be appropriate to maintain a
dividend policy when in practice it is ineffective.
The repeal of said policy shall not prevent Bezeq's Board of Directors from
examining from time to time dividends to Bezeq shareholders, taking into account,
inter alia, the provisions of the law, Bezeq's business position and capital structure,
while maintaining a balance between Bezeq's financial strength and stability,
including the level of debt and its credit rating, and the continued value
maximization to Bezeq's shareholders through a current dividend distribution, all
subject to the approval of the general meeting of Bezeq's shareholders regarding
each specific distribution as provided in Bezeq's Articles of Association.
21.2.2
The following is a breakdown of distributions that Bezeq made during the years
2018-2020:
Amount per
share
distributed (in
NIS)
0.133
0.115
Date of distribution
October 5, 2018
October 10, 2018
2020
2019
2018
NIS millions
-
-
NIS millions
-
-
-
-
NIS millions
368
318
686
89
Notes to Consolidated Financial Statements as of December 31, 2020
22 Revenue
For the year ended December 31
2020
NIS millions
2019
NIS millions
2018
NIS millions
1,537
981
785
288
222
3,813
1,550
577
2,127
1,286
1,217
280
8,723
1,497
1,017 th most
common
745
273
225
3,757
1,674
642
2,316
1,344
1,283
229
8,929
1,525
1,130
769
260
199
3,883
1,713
688
2,401
1,473
1,338
226
9,321
Interior landline communication - Bezeq Fixed Lines
Internet - Infrastructure
Landline telephony
Transmission and data communication
Cloud and digital services
Other services
Cellular communication - Pelephone
Cellular services and end equipment
Sale of end equipment
Multi-channel TV - DBS
Services
Internet
international
communications and network endpoint – Bezeq
International
(ISP),
Other
23 Operating and general expenses
For the year ended December 31
2020
NIS millions
2019
NIS millions
2018
NIS millions
Connectivity and payments to communications
operators in Israel and abroad
End equipment and materials
Content costs
Marketing and general
Maintenance of buildings and sites
Services and maintenance by subcontractors
Vehicle maintenance *
776
747
589
471
246
303
50
757
806
644
502
271
270
71
789
771
653
570
286
277
82
3,182
3,321
3,428
* Operating and general expenses are presented net of expenses incurred in 2020 in respect of investments in
property, plant and equipment and intangible assets in the amount of NIS 38 million (in 2019 approximately NIS 43
million and in 2018 approximately NIS 46 million).
90
Notes to Consolidated Financial Statements as of December 31, 2020
24 Salaries
Total payroll and related expenses
Deducting payroll attributed to investments in property,
plant and equipment and intangible assets
For the year ended December 31
2020
2019
2018
NIS millions
NIS millions
NIS millions
2,442
(548)
1,894
2,476
539
1,937
2,574
579
1,995
25 Other operating expenses (revenue), net
For the year ended December 31
2020
2019
2018
NIS millions
NIS millions
NIS millions
Capital gain (mainly from exercise of real estate)
Receipts from a compromise agreement
Expenditure due to the termination of an employee-employer
relationship in early retirement in Bezeq (see Note 17.5.1)
Provision for a collective bargaining agreement signing grant
(see Note 17.5.1)
Expenses in respect of the termination of an employer-
employee relationship in early retirement and a streamlining
agreement in Pelephone, Bezeq International and DBS (see
Note 17.5.3)
Provision for claims
Other expenses (revenue)
Profit from the sale of an investee (see Note 13.4)
Other operating expenses (revenue), net
(18)
(9)
64
40
9
11
(2)
(22)
73
(475)
-
109
-
167
10
1
-
(188)
1
-
547
-
12
91
(1)
(15)
635
91
Notes to Consolidated Financial Statements as of December 31, 2020
26 Financing expenses (revenue), net
Interest expenses in respect of financial liabilities
Financing expenses in respect of benefits to employees
Costs due to early repayment of loans and bonds (see Note
14)
Linkage differences and exchange rate
Financing expenses for liabilities in respect of leases
Other financing expenses
Change in the fair value of financial assets measured at fair
value through statement of income
Change in liability for contingent consideration in respect of
a business merger
Total financing expenses
Income from credit grossing in sales
Income from deposits and investments
Income from exchange of bonds (see Note 14)
Other financing income
Change in the fair value of financial assets measured at fair
value through statement of income
Total financing revenue
Financing expenses, net
27 Profit per share
For the year ended December 31
2020
2019
2018
NIS millions
NIS millions
NIS millions
351
8
96
23
30
6
11
-
525
30
-
-
21
-
51
474
458
89
93
46
29
14
9
-
738
29
-
191
46
-
266
472
472
9
-
64
26
6
-
43
620
30
1
-
31
27
89
531
The calculation of the basic and diluted profit per share was based on profit (loss)
attributed to ordinary shareholders and according to the weighted average number of
ordinary shares presented in the calculation as follows:
Net profit (loss) attributed to Company
shareholders (NIS millions)
Number of shares attributed to shareholders
2020
157
2019
(853)
Balance as of January 1
Impact of shares issued during the year
Weighted average of common shares (basic and
diluted) as of December 31
116,316,563
-
29,889
13,297
116,316,563
43,186
2018
(1,066)
29,889
-
29,889
Basic and diluted profit (loss) per share (NIS)
1.38
(19.7)
(36.5)
92
Notes to Consolidated Financial Statements as of December 31, 2020
28 Segment reporting
The Group operates in four different segments in the communications industry in
such a way that each company in the Group operates in one separate business
segment.
Each company provides services in the segment in which it operates through the
property, plant and equipment and infrastructure it owns (see also Note 22). The
infrastructure of each company is used to provide its services. Some Group
companies use infrastructure owned by other companies in the Group.
The main reporting format, according to business segments, is based on the Group's
administrative and internal reporting structure.
The business segments of the Bezeq Group are as follows:
1. "Bezeq" The Israeli Telecommunications Corporation Ltd. – Interior
landline communications;
2. Pelephone Communications Ltd. - Cellular communications;
3. Bezeq International Ltd. - Internet services, international communications
and network endpoint
4. DBS Satellite Services (1998) Ltd. - Multi-channel TV.
The other companies in the Group are listed in the "others" item. Other activities
include customer service centers (Bezeq Online) and Internet content services (via
Walla). These activities are not reported as reportable segments as they do not meet
the quantitative thresholds in the reporting years.
Inter-sectoral pricing is determined according to the price set in transactions in the
regular course of business.
Segment results, assets and liabilities include items that can be allocated directly to
the segment as well as those that can be reasonably allocated. The results of the
cellular communications segment and the multi-channel television segment are
presented net of losses from impairment of assets described in Note 11.5. This is in
accordance with the way in which the Group's chief operating decision maker
evaluates the performance of the segments and makes decisions regarding the
allocation of resources to such segments.
The capital expenditure of a segment is the total cost incurred during the period in
respect of the acquisition of property, plant and equipment and intangible assets.
93
Notes to Consolidated Financial Statements as of December 31, 2020
28.1 Activity segments
For the year ended December 31, 2020
Internet
services
and
internation
al
communic
ations
NIS millions
1,217
54
1,271
Interior
landline
communic
ation
NIS millions
3,813
346
4,159
Cellular
communic
ation *
NIS millions
2,127
59
2,186
Multi-
channel
TV *
NIS millions
1,286
1
1,287
Others
NIS millions
280
6
286
External revenues
Inter-segmental revenue
Total revenue
Depreciation and amortization
877
599
149
310
Segment results - operating
profit (loss)
Financial expenses
Financing revenue
Total financing expenses
(revenue), net
Segment profit (loss) after
financing expenses, net
Share in profits (losses) of
affiliated companies
Segment profit (loss) before
taxes on income
Income taxes
Segment results - net profit
(loss)
Segment assets
Investment in affiliated
companies
Goodwill
Segment liabilities
Investments in fixed and
intangible assets
1,705
419
(16)
403
(84)
18
(66)
(48)
(241)
5
(3)
2
(42)
15
(2)
13
1,302
(36)
(243)
(55)
-
1,302
262
1,040
-
(36)
(11)
(25)
8,471
4,371
-
-
11,764
-
-
1,742
975
437
-
(243)
32
(275)
781
4
-
580
123
-
(55)
2
(57)
1,365
-
-
505
165
14
44
1
-
1
43
-
43
4
39
96
-
-
42
12
Adjustmen
ts
NIS millions
-
(466)
(466)
Consolidat
ed
NIS millions
8,723
-
8,723
(91)
1,858
326
67
36
103
223
-
222
45
178
1,708
525
(51)
474
1,234
-
1,233
334
900
(694)
14,390
-
1,559
893
-
4
1,559
15,526
1,712
* The results of the multi-channel TV segment are presented net of the overall impact of impairment recognized
starting from 2018. This is in accordance with the way in which the Group's chief operating decision maker
evaluates the segment's performance and makes decisions regarding the allocation of resources to the segment. See
also Note 31.3 regarding a summary of selected data from the financial statements of DBS.
94
Notes to Consolidated Financial Statements as of December 31, 2020
For the year ended December 31, 2019
Internet
services
and
internation
al
communic
ations
NIS millions
1,283
56
1,339
Interior
landline
communic
ation
NIS millions
3,757
316
4,073
Cellular
communic
ation *
NIS millions
2,316
46
2,362
Multi-
channel
TV **
NIS millions
1,344
1
1,345
Others
NIS millions
229
9
238
Adjustmen
ts*
NIS millions
-
(428)
(428)
Consolidat
ed
NIS millions
8,929
-
8,929
External revenues
Inter-segmental revenue
Total revenue
Depreciation and amortization
861
633
190
334
14
32
2,064
Segment results - operating
profit (loss)
2,142
(99)
(196)
(135)
Financial expenses
Financing revenue
Total financing expenses
(revenue), net
608
(39)
569
23
(62)
(39)
8
(2)
6
17
(5)
12
Segment profit (loss) after
financing expenses, net
Share in losses of affiliated
companies
Segment profit (loss) before
taxes on income
Income taxes
Segment results - net profit
(loss)
Sector assets
Goodwill
Investment in affiliated
companies
Segment liabilities
Investments in fixed and
intangible assets
1,573
(60)
(202)
(147)
-
1,573
381
1,192
8,091
-
-
12,466
-
(60)
(13)
(47)
4,088
-
-
1,434
914
335
-
-
(202)
(45)
(147)
2
(157)
(149)
1,080
-
4
604
110
1,491
-
-
576
222
1
1
-
1
-
(2)
(2)
-
(2)
149
-
2
79
9
(1,247)
466
81
(158)
738
(266)
(77)
472
(1,170)
-
(6)
(2)
(1,170)
1,127
(8)
1,452
(2,297)
(1,460)
(900)
1,559
-
843
-
13,999
1,559
6
16,002
1,590
* Impairment loss in the cellular communications segment is presented as part of the adjustments.
** The results of the multi-channel TV segment are presented net of the overall impact of impairment recognized
since 2018. This is in accordance with the way in which the Group's chief operating decision maker evaluates the
segment's performance and makes decisions regarding the allocation of resources to the segment. See also note
31.3 regarding a summary of selected data from the financial statements of DBS.
For the year ended December 31, 2018
Interior
Cellular
Internet
Multi-
Others
Adjustmen
Consolidat
95
Notes to Consolidated Financial Statements as of December 31, 2020
landline
communic
ation
communic
ation *
External revenues
Inter-segmental revenue
Total revenue
NIS millions
3,883
313
4,196
NIS millions
2,401
42
2,443
services
and
internation
al
communic
ations
NIS millions
1,338
53
1,391
channel
TV *
ts
ed
NIS millions
1,473
-
1,473
NIS millions
226
15
241
NIS millions
-
(423)
(423)
NIS millions
9,321
-
9,321
Depreciation and amortization
850
655
194
323
21
345
2,388
Operating segment profit (loss)
results
Financial expenses
Financing revenue
Total financing expenses
(revenue), net
Segment profit (loss) after
financing expenses, net
Share in profits (losses) of
affiliated companies
Segment profit (loss) before
taxes on income
Income taxes
Segment results - net profit
(loss)
1,224
502
(32)
470
754
-
754
187
567
(2)
22
(56)
(34)
32
-
32
8
24
77
11
(1)
10
67
1
68
17
51
(56)
16
(27)
(11)
(45)
-
(45)
3
(48)
(36)
-
-
-
(36)
(4)
(40)
-
(40)
(2,656)
69
27
(1,449)
620
(89)
96
(531)
(2,752)
(1,980)
-
(3)
(2,752)
(282)
(1,983)
(67)
(2,470)
(1,916)
* The results of the multi-channel TV segment are presented net of the overall impact of impairment presented in
Note 11.5. This is in accordance with the way in which the Group's chief operating decision maker evaluates the
segment's performance and makes decisions regarding the allocation of resources to the segment. See also Note
31.4 regarding a summary of selected data from the financial statements of DBS.
96
Notes to Consolidated Financial Statements as of December 31, 2020
28.2
Adjustments for reported segments of income, profit and loss, assets and
liabilities
For the year ended December 31
2020
2019
2018
NIS millions
NIS millions
NIS millions
Revenue
Revenue from reportable segments
Revenue from other segments
Elimination of revenue from inter-segmental sales
Consolidated Revenue
Income
Operating profit in respect of reportable segments
Financing expenses, net
Loss (loss write-off) from impairment of assets (see
Note 11.2)
Adjustments for the multi-channel television segment
Share in losses of affiliated companies
Reducing cost overruns
Loss due to activities classified in other category and
other adjustments
Consolidated profit (loss) before taxes on income
8,903
286
(466)
8,723
1,338
(475)
286
81
-
(22)
26
1,234
9,119
238
(428)
8,929
1,712
(472)
9,503
241
(423)
9,321
1,243
(531)
(1,133)
(2,286)
80
(2)
(185)
(8)
(8)
-
(3)
(357)
(49)
(1,983)
December 31,
2020
December 31,
2019
NIS millions
NIS millions
Assets
Reportable segment assets
Assets associated with activities classified in the other category
Goodwill not attributed to the activity segment
Net of loss from impairment of assets (see Note 11), cross-segmental assets
and other adjustments
Assets and cost surpluses that are not attributed to a reportable segment
Consolidated assets
Liabilities
Liabilities of reportable segments
14,992
96
1,559
(2,188)
(1,494)
15,953
14,591
Liabilities associated with activities classified in the other category
42
Deducting cross-segmental liabilities
Liabilities related to non-reportable segments
Consolidated assets
(1,242)
2,135
15,526
14,754
151
1,559
(2,755)
1,355
15,564
15,080
79
(1,236)
2,079
16,002
97
Notes to Consolidated Financial Statements as of December 31, 2020
29 Related parties transactions
29.1 Identity of stakeholder and related parties
The related parties transactions of the Company as defined in the Securities Law and
International Accounting Standard 24 regarding related parties, are mainly Searchlight
and TNR, their related parties (including entities that were related parties of the
Company or of Searchlight and TNR during the reported period, however, are not
related parties of the Company or of Searchlight and TNR as of the date of the report),
affiliates, directors and key management personnel of the Company or of Searchlight
and TNR.
It should be noted that the transactions described below with related parties do not
include a reference to the aforesaid in Note 1.3 regarding investigations by the Securities
Authority and the Israel Police or its possible consequences.
29.2 Related parties balances
As of December 31
2020
2019
NIS millions
NIS millions
Trade receivables - affiliated companies
Related parties, net
Eurocom DBS Ltd. in respect of excess advances paid in respect of
contingent consideration (excluding interest) (see Note 14.2.1)
2
(1)
99
5
(1)
99
29.3 Related parties transactions
For the year ended December 31
2020
2019
2018
NIS millions
NIS millions
NIS millions
Revenue
Related parties
From affiliates
Expenses
To related parties
To affiliates
Property, plant and equipment
Related parties
Update of the balance of excess advances in
respect of the purchase of DBS (see Note
14.2.1)
12
2
28
2
-
-
13
1
20
-
-
-
31
6
54 *
5
1
43 **
* Expenses to related parties also include amounts paid by DBS to Space up to
May 3, 2018. It should be noted that after this date, according to the Company's
position, based on information received by it, Space ceased to be a related party.
For further details on this matter see section 29.3.2 below. The total amount of
DBS’s payments to Space in 2018 amounted to approximately NIS 74 million.
** Update of a contingent consideration liability in respect of a business merger
with DBS and an update of the fair value estimate of the amount expected to be
returned to the Company from the excess of the advances paid in full, as
financing income.
98
Notes to Consolidated Financial Statements as of December 31, 2020
Details regarding related parties transactions
Negligence procedure in Bezeq Group
On March 7, 2011, the Bezeq’s Board of Directors decided to adopt
guidelines and rules for classifying a transaction Bezeq or its subsidiary with
a stakeholder therein as Regulations a negligible transaction as provided in
Regulation 41 (a3) of the Securities (Annual Financial Statements), 5770-
2010 (hereinafter - “Financial Statements Regulations"). These rules and
guidelines, as updated and / or will be updated from time to time, will also
be used to examine the scope of disclosure in the periodic report and
prospectus (including shelf offer reports) regarding a transaction by Bezeq,
a corporation controlled thereby and its affiliate or subsidiary with a
controlling shareholder therein or if a shareholder has personal interest in the
approval thereof as provided in Regulation 22 of the Securities (Periodic and
Immediate Reports) Regulations, 5730-1970 (hereinafter - "Periodic
Reporting Regulations") and Regulation 54 of the Securities Regulations
(details of the prospectus and draft prospectus - structure and form), 5769 -
1969. Types of transactions determined in the provisions of the Financial
Statements Regulations, the Periodic Reporting Regulations and the
prospectus details regulations mentioned above will be referred to below as
"Stakeholder Transactions". These guidelines will also be used by the
Company for the purpose of examining the existence of a Stakeholder
Transaction that is a "non-negligible transaction", within the meaning thereof
in Article 117 (2a) of the Companies Law, 5769-1999.
Bezeq and its subsidiaries enter, from time to time, into non-exceptional
negotiation transactions with stakeholders in the Company and its
controlling shareholder (hereinafter – “Company Stakeholders”) or that the
controlling shareholder has a personal interest therein), of the types and with
characteristics as detailed below:
1. Sales of services and communication products by the Group's
companies - including, inter alia: various basic communication
services (telephony, transmission and - PRI) and hosting on server
farms; Providing cellular services and value-added services and selling
and upgrading cellular end equipment; Internet access services,
international
services and data
telephony
communication services; TV services.
services, hosting
2. Lease agreements, management and purchase of real estate, including,
inter alia: lease of areas used for communication facilities and
warehouses.
In the absence of special quality considerations arising from all the
circumstances of the case, a transaction made in the ordinary course of
business, under market conditions and which has no material effect on the
Company will be considered a negligible transaction if all the following
parameters are met:
a. The scope of the contract specified in it shall not exceed NIS 10 million.
b. Bezeq is not required to report the transaction in an immediate manner
in accordance with Regulation 36 of the Periodic Reports Regulations
or under other law.
c. The transaction does not include terms of office and employment (as
defined in the Companies Law, 5769-1999 (hereinafter - “the
99
Notes to Consolidated Financial Statements as of December 31, 2020
Companies Law") of a stakeholder or a related party, or does not
constitute a contract as stated in Article 270 (4) of the Companies Law
(contract of a public company with its controlling shareholder or with
a relative, directly or indirectly, including through a company under his
control, for the purpose of receiving services from him by the Company
and if he also holds an office therein - as to the terms of his office and
employment, and if he works for the company and does not hold an
office therein).
Subject to the provisions of the Companies Law, as they will be from time
to time, once a year, before the publication of the annual financial statements,
Bezeq’s Audit Committee will examine the parameters listed above and the
need to update them. As a rule, each transaction will be examined separately
for the purpose of examining the above negligence criterion. However,
notwithstanding the above, separate transactions that form part of the same
contract or ongoing transactions or very similar transactions that are
performed frequently and repeatedly, will be examined as a single
transaction on an annual basis for the purpose of examining the negligence
criterion, provided that the above contracts do not exceed NIS 10 million.
Bezeq’s Board of Directors may from time to time and at its discretion,
change the above parameters for a negligible transaction. Such change will
be reported as required by law.
The following are transactions listed in Article 270 (4) of the Companies
Law that are not considered negligible transactions
The date of approval
of Bezeq’s general
meeting (after
receiving the
approval of the Audit
/ Remuneration
Committee and the
Board of Directors of
the Company), unless
otherwise stated
April 3, 2017
Nature of the transaction
Approval of Bezeq’s vote at the general
favor of DBS’s
in
meeting of DBS
engagement with Space Communications
Ltd. ("Space" and the "Parties" respectively)
in the amendment / addition to the existing
the parties dated
agreement between
November 4, 2013 for the lease of satellite
segments
("the
Engagement"), including the refinement of
the Engagement and its execution.
in Space’s
satellites
The
essence
of
personal
interest
Section
A below
Transaction sum
Total nominal cost of
up to approximately
USD 263 million for
the entire engagement
period (until
December 31, 2028)
which reflects an
average annual cost of
approximately USD
21.9 million per year.
See further details
regarding the Space
Agreement in Note
19.1 and 19.2.
a. The Company had a personal interest in the transaction at the time of its approval, in light of the
fact that as of the date of the said transaction, Space was under the control of Eurocom
Communications, which at that time controlled (along the chain) B Communications. To the best
of Bezeq’s knowledge and in accordance with the information provided to Bezeq by Eurocom
100
Notes to Consolidated Financial Statements as of December 31, 2020
Communications, as of May 3, 2018, the connection between Eurocom Communications and
Space was severed and Bezeq ceased to consider Space as a related party.
For transactions listed in Article 270 (4) of the Companies Law, which concern insurance and an
obligation to indemnify directors and officers of the Company, see Note 29.6 below.
29.4 Benefits for the Group’s key executives
Benefits for employing key management personnel in the Group in the years 2018-
2020 include:
For the year ended December 31
2020
NIS thousands
2019
NIS thousands
2018
NIS thousands
Number of key executives *
Payroll **
Grant***
Management fees for the Chairman of the
Board of Directors ****
Remuneration to the former Deputy
Chairman of the Bezeq Board of
Directors
6
8,526
4,995
1,919
-
15,440
6
8,163
3,834
2,400
-
14,397
9
8,949
5,453
2,508
372
17,287
* Key management personnel in the Group in the reporting year include the
Chairman of the Company’s Board and the Company’s CEO (who also serves
as a director in the Company), as well as the former Bezeq Board of Directors,
whose remuneration for his services was paid to a management company in
which 50% of the means of control are held by him, the Company's CEO and
the CEO of Pelephone, Bezeq International and DBS.
Regarding options for the Company's shares granted to the Company's CEO,
see Note 21.1.3.
** In 2020, the changes in other provisions (included in the total payroll) mainly
include a provision for prior notice and for a non-compete period for the
Chairman of Bezeq's Board of Directors in the amount of approximately NIS
0.9 million.
The salary of the CEO of the Company also includes the directors’ remuneration
that he receives as a director in the Company.
In 2019, the changes in other provisions (included in the total payroll) mainly
include an increase in the provision for prior notice, vacation and sick leave to
the Bezeq’s CEO in the amount of approximately NIS 0.6 million.
In 2018, the changes in other provisions (included in the total salary and
management fees) include a decrease in the provision, mainly due to the
payment of advance notice and vacation to the former CEO of Bezeq in the
amount of NIS 1.2 million and to the former DBS CEO in the amount of NIS
2.1 million and on the other hand an increase in respect of the creation of a
provision for prior notice and vacation to Bezeq’s CEO in the amount of
101
Notes to Consolidated Financial Statements as of December 31, 2020
approximately NIS 0.5 million and to the former Chairman of the Bezeq Board
in the amount of approximately NIS 0.5 million.
On May 3, 2019, the former Chairman of the Bezeq Board of Directors notified
the Company of a 20% reduction in management fees in respect of the entire
2019 year.
For information regarding share-based compensation, see Note 32.1.
29.5 Benefits to the Company’s directors
For the year ended December 31
2020
2019
2018
NIS thousands
NIS thousands
NIS thousands
Remuneration to Board members*
Number
of
remuneration**
directors
receiving
the
712
6
937
10
952
6
* The directors’ remuneration of the CEO of the Company who also serves as a
director in the Company and the remuneration of the Chairman of the Company's
Board of Directors in 2020 are presented in section 29.4 above due to their being key
management personnel.
** In 2019, 2 new external directors and a new independent director were appointed
to the Company, and 3 directors were appointed on behalf of the Company's new
controlling shareholders were also appointed.
29.6 Additional benefits for the Company’s directors and officers
Date of approval of the
general meeting (after
receiving approval from the
Company's Board of
Directors), unless otherwise
stated
April 30, 2020
April 30, 2020
November 30, 2020
Approval of the Company's
Board of Directors in
accordance with
Regulation 1b1 of the
Relief Regulations
Nature of the transaction
Approval of the Company's
contract with run-off insurance
policy to cover the liability of
directors and officers of the
Company.
Amendment of the letter of
indemnity and exemption to the
directors and officers of the
Company regarding the
maximum amount of
indemnification.
Approval of the Company's
contract in an insurance policy
to cover the liability of directors
and officers of the Company
and its subsidiaries, in
accordance with the Company's
remuneration policy for the
Transaction sum
Limit of liability of up to USD
10 million per claim and in total
for the entire insurance year
plus reasonable legal expenses.
The total annual premium is
approximately USD 300k. The
deductible amount for the
Company is up to USD 250k
per case.
Up to 25% of the Company's
equity according to the
Company's latest reports
published prior to the actual
indemnification or up to a total
of USD 15 million, whichever is
higher.
Limit of liability of up to USD
20 million per claim and in total
for the entire insurance year
plus reasonable legal expenses.
The total annual premium is
approximately USD 675k. In
addition, the Company
102
Notes to Consolidated Financial Statements as of December 31, 2020
period up to December 31, 2021 purchased an extension of the
disclosure period in the policy
with a liability limit of USD 5
million and a one-time annual
premium of USD 187,500. The
amount of the Company's
deductible is up to USD
100,000 per case for claims
outside the United States and
Canada, up to USD 250k per
case in claims in the United
States and Canada and up to
USD 250k per case in securities
claims in Israel.
103
Notes to Consolidated Financial Statements as of December 31, 2020
30 Financial instruments
30.1 General
The Group is exposed to the following risks arising from the use of financial
instruments:
a. Credit risk
b. Liquidity risk
c. Market risk (including currency risk, interest rate risk and CPI risks).
This note provides quantitative and qualitative information regarding the Group's
exposure to each of the above risks, an explanation of how to manage the risks and
the measurement processes.
30.2 The framework for financial risk management
The comprehensive responsibility for establishing and supervising the Group's
financial risk management framework lies with the Board of Directors. The Group's
financial risk management aims to define and monitor the various risks on an
ongoing basis and to determine the level of exposure to risk that needs to be
complied with and the possible effects arising from this exposure in accordance
with the Board's assessments and expectations.
The Group's policy is to manage, in accordance with rules established by the Board
of Directors, the exposure arising from fluctuations in foreign exchange rates,
changes in interest rates and changes in the consumer price index.
30.3 Credit risk
Management monitors the Group's exposure to credit risks on an ongoing basis.
Cash and investments in deposits and securities are deposited in high-rated banking
corporations.
Other trade receivables
The Group's Management regularly monitors customers' debts and the financial
statements include provisions for loan-loss that adequately reflect, according to
Management's assessment, the loss inherent in debts whose collection is in doubt.
In addition, there is a large distribution of customer balances.
Investments in financial assets
To the extent that investments are made in securities, they are made in liquid,
tradable and low-risk securities. Transactions involving derivatives are conducted
with entities with a high credit rating.
As of the reporting date, there is no significant concentration of credit risks.
30.4 Liquidity risk
The Group's policy for managing its liquidity is to ensure, as far as possible,
sufficient liquidity to meet its existing and expected obligations at the time of their
existence, in a normal business scenario and under extreme conditions, without
causing it undesirable losses or goodwill damage. The cash balances held by the
Group are managed mainly through liquid investment channels, subject to the
financing needs of current operations and the debt service. The Group regularly
examines existing and expected cash needs in the foreseeable future, even in the
event of an unexpected deterioration in its business. These forecasts take into
account, inter alia, debt raising and turnover from banking and non-banking
sources. In accordance with the conclusions, active activity is carried out to
minimize the risk.
104
Notes to Consolidated Financial Statements as of December 31, 2020
Regarding the terms of debentures issued by the Group companies and the loans
received, see Note 14 above.
The Group has a contractual obligation to make purchases, property, plant and
equipment, end equipment and other current services. For further information
regarding the engagements, see Note 19, regarding engagements.
105
Notes to Consolidated Financial Statements as of December 31, 2020
The following are the contractual maturity dates of financial liabilities that were
actually received as of December 31, 2020, including an estimate of interest
payments (based on data from the Consumer Price Index and interest known as of
December 31, 2020):
As of December 31, 2020
Book
value
Contrac
tual
cash
flow
2022
2026
Onwar
ds
2023
to
2025
H1/2021 H2/2021
N I S m i l l i o n s
Non-derivative financial liabilities
Trade and other
payables
Loans
1,548
2,109
Bonds
8,162
1,548
2,451
9,334
1,509
135
109
11,819
13,333
1,753
39
129
685
853
-
147
1,100
1,247
-
948
5,215
6,163
-
1,092
2,225
3,317
Financial liabilities in
respect of derivative
instruments
117
117
8
43
44
12
10
The Group anticipates that it will not be required to repay the liabilities as set forth
above or in various amounts, substantially.
30.5 Market risks
The purpose of market risk management is to manage and monitor exposure to
market risks within accepted parameters to prevent significant exposures to market
risks that will affect the Group's results, liabilities and cash flow.
As part of the Group's exposure management policy, it was decided to establish a
mix of exposure to debt for interest and linkage as well as to reduce exposure to
foreign currency. Accordingly, during its ordinary course of business, the Group
performs full or partial hedging operations and takes into account the effects of the
exposure in its considerations in determining the type of loans it takes out and in
managing its investment portfolio.
30.5.1 Exposure to consumer price index risk and foreign currency
Consumer price index risk
Changes in the inflation rate affect the Group's profitability and its future
cash flows, mainly due to its index-linked liabilities. As part of the
implementation of a policy to reduce index exposure, the Group executes
forward transactions against the index. The hedging transactions are
carried out against the repayment schedules of the hedged debt. The
Company applies hedge accounting to these forward transactions.
A significant portion of the cash balances are invested in shekel deposits
that are exposed to a change in the real value as a result of changes in the
rate of the consumer price index.
Foreign exchange risk
The Group is exposed to foreign exchange risks mainly due to payments
for the purchase of end equipment and property, plant and equipment
denominated or linked in part to the dollar and the Euro. In addition, the
Group provides services to customers and receives services from around
106
Notes to Consolidated Financial Statements as of December 31, 2020
the world in foreign currency, mainly in dollars. The Group's policy is to
minimize foreign exchange purchase agreements as much as possible, as
well as to partially hedge the dollar exposure through forward
transactions against the dollar and manage deposits in dollars.
107
Notes to Consolidated Financial Statements as of December 31, 2020
The following is a report on the financial position according to linkage bases:
As of December 31, 2020
In or
adjacent to
foreign
Without
linkage
NIS
millions
Linked to
the price
index
NIS
millions
currency
Non-
(mainly
dollars)
NIS
millions
monetary
Total
balances
NIS
millions
balances
NIS
millions
815
822
1,592
50
-
-
3,279
323
-
-
-
-
196
-
519
3,798
268
2
1,294
479
115
2,158
6,814
4
286
89
-
52
7,245
9,403
-
-
16
90
-
-
106
191
-
-
-
-
-
-
191
297
517
413
126
-
2
1,058
2,671
1,488
-
66
-
-
4,225
5,283
79
59
13
-
-
-
151
-
-
-
-
-
-
-
-
151
-
-
179
3
-
182
-
-
49
-
-
-
49
231
-
-
-
40
73
10
123
-
67
1,804
6,131
3,268
206
108
11,584
11,707
-
-
167
-
-
167
-
-
-
152
290
-
442
610
894
881
1,621
180
73
10
3,659
514
67
1,804
6,131
3,268
402
108
12,294
15,953
785
415
1,766
482
117
3,565
9,485
1,492
335
307
290
52
11,961
15,526
(5,604)
(4,986)
)80(
11,097
427
Current assets
Cash and cash equivalents
Investments
Trade receivables
Other receivables
Inventory
Assets held for sale
Total current assets
Non-current assets
Trade receivables
Broadcast rights – net of rights exercised
Right-of-use assets
Property, plant and equipment
Intangible assets
Deferred expenses and non-current
investments
Deferred tax assets
Total non-current assets
Total assets
Current liabilities
Bank loans and debentures
Current maturities of liabilities in
respect of leases
Trade and other payables
Employee benefits
Provisions
Total current liabilities
Non-current liabilities
Loans and bonds
Liabilities in respect of leases
Employee benefits
Derivatives and other liabilities
Deferred tax liabilities
Provisions
Total non-current liabilities
Total liabilities
Total exposure in the statement of
financial position
(
Forward transactions
)1,477(
1,215
262
-
-
108
As of December 31, 2019
Notes to Consolidated Financial Statements as of December 31, 2020
In or
adjacent to
foreign
Without
linkage
NIS
millions
Linked to
the price
index
NIS
millions
currency
Non-
(mainly
dollars)
NIS
millions
monetary
Total
balances
NIS
millions
balances
NIS
millions
788
39
1,200
1,636
44
-
-
3,707
304
-
-
-
-
-
45
349
4,056
486
21
1,303
651
33
2,494
7,681
6
307
-
-
49
8,043
10,537
-
-
-
20
251
-
-
271
173
-
-
-
-
-
-
173
444
521
395
76
-
92
1,084
2,731
962
-
66
-
-
3,759
4,843
26
-
41
21
-
-
-
88
-
-
-
-
-
-
-
-
88
-
-
159
3
-
162
-
1
49
-
-
-
50
212
-
-
-
-
47
96
43
186
-
59
5,968*
3,167*
1,217
81
298*
10,790
10,976
-
-
89
-
-
89
-
-
-
73
248
-
321
410
814
39
1,241
1,677
342
96
43
4,252
477
59
5,968
3,167
1,217
81
343
11,312
15,564
1,007
416
1,627
654
125
3,829
10,412
969
356
139
248
49
12,173
16,002
(6,481)
(4,399)
(124)
10,566
(438)
(1,745)
1,555
190
-
-
Current assets
Cash and cash equivalents
Restricted cash
Investments
Trade receivables
Other receivables
Inventory
Assets held for sale
Total current assets
Non-current assets
Trade receivables
Broadcast rights - less rights used
Property, plant and equipment
Intangible assets
Right-of-use assets
Deferred tax assets
Deferred expenses and non-current
investments
Total non-current assets
Total assets
Current liabilities
Bank loans and debentures
Current maturities of liabilities in
respect of leases
Trade and other receivables
Employee benefits
Provisions
Total current liabilities
Non-current liabilities
Loans and bonds
Liabilities in respect of leases
Employee benefits
Derivatives and other liabilities
Deferred tax liabilities
Provisions
Total non-current liabilities
Total liabilities
Total exposure in the statement of
financial position
Forward transactions
* Reclassified
109
Notes to Consolidated Financial Statements as of December 31, 2020
30.5.2 Data on the Consumer Price Index:
In 2020, the known consumer price index decreased by 0.6% (in
2019 an increase of 0.3%, and in 2018 an increase of 1.2%).
30.5.3 Sensitivity analyzes in relation to a change in the consumer price index for
a change in the exchange rate of the dollar
A 1% increase / decrease in the consumer price index at the reporting
date would not materially affect net income and capital.
A 10% increase / decrease in the exchange rate of the dollar at the
reporting date would not materially affect earnings and capital.
30.5.4 Interest rate risk
As of December 31, 2020, the exposure to the risk of interest rates due
to a liability in respect of floating-rate debt instruments is negligible.
a. Type of interest
Below is a breakdown of the interest rate type of interest-bearing
financial instruments of the Group.
Fixed rate instruments
Financial assets (mainly deposits and Trade
receivables)
Financial liabilities (loans and bonds)
Book value
2020
2019
NIS millions
NIS millions
1,919
)10,199(
)8,280(
2,284
(11,312)
(9,028)
Instruments at floating interest rates
Financial liabilities (bonds)
)71(
(107)
b. Analyzing the sensitivity of fair value in respect of fixed-rate instruments
The Group's fixed interest assets and liabilities are not measured at fair value
through the statement of income. Thus, a change in interest rates at the
reporting date will have no effect on the statement of income.
c. Analysis of cash flow sensitivity for instruments at variable interest rates
An increase / decrease of 1% in the interest rates at the time of reporting
would have negligible effect on profit and capital.
30.6 Hedging
110
Notes to Consolidated Financial Statements as of December 31, 2020
30.6.1 Cash flow hedge accounting
Bezeq entered into forward transactions, as detailed in the table below, for the purpose
of reducing the exposure to changes in the consumer price index in respect of index-
linked bonds. These transactions define a specific cash flow of some of the bonds and
are recognized in accounting as a hedge of cash flows. The expiration date of these
transactions is consistent with the repayment schedules of the bonds they were intended
to protect. The fair value of forward transactions is determined by the use of marketable
data (Level 2 in the fair value hierarchy).
Number Par value Fair value
Capital
principal
balance
Hedged item
Repayment dates
Transacti
ons
NIS
millions
NIS
millions
NIS
millions
As of December
31, 2020
Series 6 bonds
Series 10 bonds 12.2025 to 12.2022
Series 12 bonds 6.2030 to 6.2026
12.2021 to 12.202
As of December
31, 2019
Series 6 bonds
12.2020 to 12.2022
Series 10 bonds 12.2022 to 12.2025
Series 12 bonds 6.2026 to 6.2030
30.6.2 Economic hedging
3
4
5
12
4
4
5
13
665
300
250
1,215
1,005
300
250
1,555
(78)
(15)
(10)
(103)
(112)
(5)
(1)
(118)
(9)
(5)
(6)
(20)
(10)
(2)
(1)
(13)
a. During 2020 Bezeq engaged in forward transactions for the purpose of reducing the
exposure to changes in the dollar exchange rate. The net fair value of these transactions
as of December 31, 2020 is a liability of approximately NIS 2 million.
b. DBS is involved in forward transactions for the purpose of reducing exposure to changes
in the dollar exchange rate. The net fair value of these transactions as of December 31,
2020 is a liability of about NIS 12 million (as of December 31, 2019, a liability of
approximately NIS 4 million).
30.7 Financial instruments measured at fair value
111
Notes to Consolidated Financial Statements as of December 31, 2020
30.7.1 The table below presents an analysis of the financial instruments measured at fair
value:
December 31,
2020
December 31,
2019
NIS millions
NIS millions
Level 1 - Investment in marketable securities measured at
fair value through profit or loss (see 30.7.2)
Level 2 - Forward contracts (see 30.7.3)
77
(117)
358
(122)
30.7.2 The fair value of marketable securities is determined with reference to their
suggested selling price quoted at the closing of trading, at the reporting date (Level
1).
30.7.3 The fair value of forward contracts on the consumer price index or foreign exchange
is based on discounting the difference between the price specified in the forward
contract and the price of the current forward contract for the remainder of the
contract period until maturity, using an appropriate interest rate (Level 2). The
assessment is made under the assumption that a market participant takes into
account the credit risks of the parties in pricing such contracts.
30.8 Financial
instruments measured at fair value for
disclosure purposes only
The table below lists the differences between the book value and the fair value of
financial liabilities.
The fair value of bonds issued to the public is determined according to their purchase
price quoted at the close of trading, at the reporting date (Level 1).
The fair value of non-traded loans and bonds is measured on the basis of the present
value of future cash flows in respect of the principal and interest component, discounted
at the market rate corresponding to similar liabilities plus the required adjustments for
risk premium and non-marketability as of the financial statements (Level 2).
As of December 31, 2020
Book
value
(including
accrued
interest)
Fair value
NIS million
Loans from banks and
institutional entities (unlinked)
Bonds issued to the public
(index-linked)
Bonds issued to the public
(unindexed)
Bonds issued to financial
institutions (index-linked)
Bonds issued to financial
institutions (unlinked)
2,118
2,252
3,199
3,394
4,913
5,187
-
-
-
-
As of December 31, 2019
Discount
rate
(weighted
average)
The
value in
the
books
Fair
value
Discount
rate
(weighted
average)
%
1.97
0.44
1.40
-
-
NIS million
%
3,401
3,561
2.39
2,508
2,647
0.05
4,071
4,160
1.00
762
607
855
646
1.24
2.69
10,230
10,833
11,349
11,869
112
Notes to Consolidated Financial Statements as of December 31, 2020
30.9. Offsetting financial assets and financial liabilities
The Group has agreements with various communications companies for the
provision and receipt of communications services. Under some of the agreements,
each party has the right to offset the amounts that each party owes. The table below
shows the book value of balances offset as presented in the statement of financial
position:
December 31,
2020
December 31,
2019
NIS millions
NIS millions
Balance of other trade receivables, gross
Amounts offset
Balance of trade receivables presented in the statement of financial
position
Gross balance of suppliers
Amounts offset
93
(84)
9
102
(84)
Balance of suppliers presented in the statement of financial position
18
90
(81)
9
100
(81)
19
113
Notes to Consolidated Financial Statements as of December 31, 2020
31. Summary of selected data from the financial statements of Bezeq the Israel
Telecommunications Corporation Ltd., Pelephone Communications Ltd.,
Bezeq International Ltd. and DBS Satellite Services (1998) Ltd.
31.1 Bezeq the Israel Telecommunications Corporation Ltd.
Data from the report on the financial position:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total liabilities
Equity
Data from the statement of income:
December 31,
December 31,
2020
2019
NIS millions
NIS millions
2,014
9,600
11,614
2,096
9,668
11,764
(150)
11,614
2,283
9,251
11,534
2,327
10,139
12,466
(932)
11,534
Revenue
Operating expenses
Salaries
Depreciation and amortization
Operating and general expenses
Other operating expenses (revenue), net
Total operating expenses
Operating profit (loss)
Financing expenses (revenue)
Financial expenses
Financing revenue
Financing income, net
Profit after financing expenses, net
Share in profits (losses) of investee
companies, net
Profit (loss) before income taxes
Expenses (revenue) Taxes on income
Profit (loss) for the year
For the year ended December 31
2020
2019
2018
NIS millions
NIS millions
NIS millions
4,159
4,073
4,196
919
877
590
68
2,454
1,705
419
(16)
403
1,302
(244)
1,058
262
796
911
861
565
(406)
1,931
2,142
608
(39)
569
1,573
(2,386)
(813)
381
(1,194)
912
850
596
614
2,972
1,224
502
(32)
470
754
(1,659)
(905)
187
(1,092)
31.2. Pelephone Communications Ltd.
114
Notes to Consolidated Financial Statements as of December 31, 2020
Data from the statement on the financial position:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total liabilities
Equity
December 31,
2020
NIS millions NIS millions
December 31,
2019
899
3,472
4,371
720
1,022
1,742
2,629
4,371
843
3,245
4,088
667
767
1,434
2,654
4,088
Data from the statement of income:
Revenue
Revenue from jobs
Revenue from the sale of end equipment
Total revenue from jobs and sales
Operating expenses
Operating and general expenses
Salaries
Depreciation and amortization
Total operating expenses
Other operating expenses, net
Operating loss
Financing expenses (revenue)
Financial expenses
Financing revenue
Financing revenue, net
Profit (loss) before income taxes
Expenses (revenue) before taxes on income
Profit (loss) for the year
For the year ended December 31
2020
2019
2018
NIS millions NIS millions NIS millions
1,591
595
2,186
1,329
324
599
2,252
18
(84)
18
(66)
(48)
(36)
(11)
(25)
1,709
653
2,362
1,373
373
633
2,379
82
(99)
23
(62)
(39)
(60)
(13)
(47)
1,755
688
2,443
1,402
379
655
2,436
9
(2)
22
(56)
(34)
32
8
24
115
Notes to Consolidated Financial Statements as of December 31, 2020
31.3. Bezeq International Ltd.
Data from the report on the financial position:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total liabilities
Equity
December 31,
2020
NIS millions NIS millions
December 31,
2019
443
342
785
432
148
580
205
785
482
602
1,084
461
143
604
480
1,084
Data from the statement of income:
Revenue
Operating expenses
Operating and general expenses
Salaries
Depreciation and amortization
Other operating expenses, net
Total operating expenses
Operating profit (loss)
Financing expenses (revenue)
Financial expenses
Financing revenue
Financing expenses, net
Share of profits of equity accounted investees
Profit (loss) before taxes on income
Expenses (revenue) before taxes on income
Profit (loss) for the year
For the year ended December 31
2020
2019
2018
NIS millions NIS millions NIS millions
1,271
1,339
1,391
802
248
149
313
1,512
(241)
5
(3)
2
-
(243)
32
(275)
827
261
190
257
1,535
(196)
8
(2)
6
-
(202)
(45)
(157)
812
300
194
8
1,314
77
11
(1)
10
1
68
17
51
116
Notes to Consolidated Financial Statements as of December 31, 2020
31.4. DBS Satellite Services (1998) Ltd.
Data from the report on the financial position:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total liabilities
Capital deficit
Data from the statement of income:
December
2020
31,
December
2019
31,
NIS millions
NIS millions
176
248
424
436
69
505
(81)
424
203
268
471
485
91
576
(105)
471
For the year ended December 31
2020
2019
2018
NIS millions
NIS millions
NIS millions
1,287
1,345
1,473
956
233
323
1,100
17
2,629
(1,156)
16
(27)
(11)
(1,145)
3
(1,148)
923
216
219
-
42
1,400
(55)
17
(5)
12
(67)
2
(69)
Revenue
Operating expenses
Operating and general expenses
Salaries
Depreciation and amortization
Impairment loss
857
203
203
-
Other operating expenses (revenue), net
(15)
Total operating expenses
1,248
Operating profit (loss)
Financing expenses (revenue)
Financial expenses
Financing revenue
Financing expenses (revenue), net
Profit (loss) before taxes on income
Expenses before taxes on income
Net profit (loss) for the year
39
15
(2)
13
26
2
24
117
Notes to Consolidated Financial Statements as of December 31, 2020
32. Significant events after the date of the financial statements
32.1 Share-based remuneration
On December 10, 2020, Bezeq's Board of Directors approved a capital remuneration plan
(“the Plan"). As part of the approval, the allocation of up to 58,735,000 options to up to
117 officers, executives and senior employees of Bezeq and its subsidiaries, including
granting 12,000,000 options to the Chairman of the Bezeq Board of Directors and granting
9,000,000 options to Bezeq’s CEO and granting 9,000,000 options to the CEO of
Pelephone, DBS and Bezeq International were approved.
On January 18, 2021, the general meeting of Bezeq shareholders approved the increase in
Bezeq's registered capital In order to enable future allocation of capital remuneration
under the Plan. In addition, Bezeq’s general meeting approved the granting of options to
the Chairman of the Board of Directors of Bezeq and the CEO of Bezeq as stated above.
The fair value of the options granted, which is estimated by an external valuator while
applying the Monte Carlo model, is approximately NIS 45 million, according to a
maturation period of four years and the terms of exercise and maturity of the options as
set forth in the Plan, in accordance with the terms of exercise and maturity of the options
as set forth in the Plan (the options include four batches with a maturation period of one
to four years). Out of this amount, the fair value at the grant date of the options granted to
the Chairman of Bezeq’s Board of Directors is approximately NIS 9.3 million. The fair
value at the grant date of the options granted to the CEO of Bezeq and the CEOs of
Pelephone, DBS and Bezeq International is approximately NIS 6.9 million each.
32.2 Sale of real estate
On February 25, 2021 Bezeq engaged in an agreement for the sale of a real estate property
in Tel-Aviv ("The Property"). Bezeq is expected to record in its financial statements for
the first quarter of 2021 a capital gain in the amount of approximately NIS 125 million
before tax in respect of the sale of the Property.
32.3 Examination of a plan for structural change in Bezeq's subsidiaries
Regarding the decision of Bezeq's Board of Directors dated March 23, 2021 regarding the
examination of a plan for structural change in Bezeq's subsidiaries, see Note 13.1.2.
118
Separate Financial Information for the Year
Ended December 31, 2020
Separate financial information as of December 31, 2020
Table of Contents
Auditors' report
Separate financial information
Financial position data
Income and comprehensive income data
Cash flows data
Notes to the separate financial information
Page
2
3
4
5
6
2
Somekh Chaikin
KPMG Millennium Tower
17 HaArbaa Street P.O.B. 609
Tel Aviv 6100601
8000 684 03
To:
Shareholders of B Communications Ltd.
Dear Sirs,
Re: Special report of the auditors on separate financial information under Regulation 9C of the
Securities Regulations (Periodic and Immediate Reports), 5730-1970
We audited the separate financial information presented in accordance with Regulation 9C of the
Securities Regulations (Periodic and Immediate Reports), 5730-1970 of B. Communications Ltd.
(hereinafter – “the Company") as of December 31, 2020 and 2019 and for each of the three years the
last of which ended on December 31, 2020. The separate financial information is within the
responsibility of the Company's Board of Directors and Management. It is our responsibility to form an
opinion on the separate financial information based on our audit.
We conducted our audit in accordance with generally accepted auditing standards in Israel. According
to these standards, we are required to plan and perform the audit with the aim to obtain a reasonable
degree of assurance that the separate financial information does not constitute a material misstatement.
Our audit includes a sample examination of evidence supporting the amounts and details contained in
the separate financial information. Our audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by the Company’s Board of Directors
and Management, as well as evaluating the overall adequacy of the presentation of the financial
statements. We believe that our audit and the reports of the other auditors provide an adequate basis for
our opinion.
In our opinion, based on our audit, the separate financial information has been prepared, in all material
respects, in accordance with the provisions of Regulation 9C of the Securities Regulations (Periodic and
Immediate Reports), 5730-1970.
Without limiting our above opinion, we draw attention to what is stated in Note 1 which refers to Note
1.3 in the consolidated reports, regarding the Securities Authority’s investigation of a suspicion of
committing offenses under the Securities Law and the Penal Code concerning, inter alia, transactions
related to the former controlling shareholder and the transfer of the case to the State Attorney's Office,
as well as what is stated in said note regarding the filing of an indictment against the former controlling
shareholder in the Company, for various offenses, including offenses of bribery and intentional
misstatement in an immediate report. As stated in the above note, at this stage, the Company is unable
to assess the effects of the investigations, their findings and results on the Company as well as on the
financial statements and estimates used in the preparation of these reports, if any.
In addition, without limiting our above opinion, we draw attention to what is stated in Note 18 to the
Company’s consolidated financial statements, regarding claims filed against the Group companies and
the exposure in respect of which cannot be assessed or calculated at this stage.
Somekh Chaikin
Certified Public Accountants
March 24, 2021
Somekh Chaikin, Israeli partnership and a member of the KPMG network of independent firms incorporated u n d e r
t h e Swiss entity K P M G I n t e r n a t i o n a l C o o p e r a t i v e ( " K P M G I n t e r n a t i o n a l " )
2
Separate financial information as of December 31, 2020
Financial position as of December 31
Note
NIS millions
NIS millions
2020
2019
Assets
Cash and cash equivalents
Restricted cash
Short-term investments and bank deposits
Other receivable
Total current assets
Long-term deposits
Investment in investee companies
Total non-current assets
Total assets
Liabilities
Trade and other payables
Total current liabilities
Debentures
Total non-current liabilities
Total liabilities
Equity deficit
Total liabilities and equity deficit
3.1
3.2
4
5
55
-
157
23
235
160
1,398
1,558
1,793
7
7
1,893
1,893
1,900
(107)
1,793
413
39
46
1
499
-
1,135
1,135
1,634
14
14
1,861
1,861
1,875
(241)
1,634
Darren Glatt
Chairman of the Board of
Directors
Tomer Raved
CEO
Itzik Tadmor
Chief Financial Officer
Date of approval of the financial statements: March 24, 2021
The notes attached to the separate financial information form an integral part thereof.
3
Separate financial information as of December 31, 2020
Income data for the year ended December 31
Note
NIS millions
NIS millions
2020
2019
Operating expenses
Salaries
Operating and general expenses
7
Total operating expenses
Operating loss
Financing expenses (revenue)
Financial expenses
Financing revenue
Financing expenses (revenue), net
Profit (loss) after financing expenses, net
Share in the profits (losses) in equity accounted
investee, net
Profit (loss) before taxes on income
Tax income
4.1
Profit (loss) for the year
Comprehensive profit for the year ended December 31
Profit (loss) for the year
Loss items including other, net of tax
Total comprehensive profit (loss) for the
year
3
8
11
(11)
110
(6)
104
(115)
265
150
7
157
4
12
16
(16)
111
(188)
(77)
61
(914)
(853)
-
(853)
2020
2019
NIS millions
NIS millions
157
(3)
154
(853)
(9)
(862)
The notes attached to the separate financial information form an integral part thereof.
4
Notes to separate financial information as of December 31, 2020
Data on cash flows for the year ended December 31
2020
2019
NIS millions
NIS millions
Cash flows from operating activities
Profit (loss) for the year
Adjustments:
Share in losses (profits) of investee companies, net
Financing expenses, net
Change in suppliers, trade payables and credit balances
Change in other trade receivables
Net cash used for current activities
Cash flows from investing activities
Investment in subsidiary
Deposit to limited cash
Change in deposits and investments, net
Interest / dividend received from securities
Net cash derived from (used for) investing activities
Cash flows for financing activities
Issuance of bonds and receipt of loans
Repayment of bonds and loans
Receipts from share issue, net
Interest paid
Net compensation for the Horev Claim
Net cash used for financing activities
Net (decrease) in cash and cash equivalents
Cash and cash equivalents as of January 1st
Cash and cash equivalents at the end of the year
157
(265)
106
(7)
(1)
(10)
(40)
-
(229)
2
(267)
-
-
-
(78)
(3)
(81)
(358)
413
55
(853)
914
(81)
-
2
(18)
-
(39)
339
5
305
410
(840)
447
(104)
-
(87)
200
213
413
The notes attached to the separate financial information form an integral part thereof
5
Notes to separate financial information as of December 31, 2020
1. General
The following are financial data from the Group's consolidated financial statements as of
December 31, 2020 (hereinafter - "Consolidated Financial Statements"), which are
published in the periodic reports, attributed to the Company itself (hereinafter - "Separate
Financial Information"), presented in accordance with Regulation 9C (hereinafter - "the
Regulation") and the Tenth Addendum (hereinafter – “the Tenth Addendum") to the
Securities Regulations (Periodic and Immediate Reports), 5730-1970 regarding separate
financial information of the corporation.
The Separate Financial Information should be read in conjunction with the Consolidated
Financial Statements.
In this Separate Financial Information -
"The Company" - "B Communications Ltd."
"Affiliated company", "subsidiary", "group", "investee company", "stakeholder": per the
definition of these terms in the Group's Consolidated Financial Statements for 2020.
For an investigation by the Securities Authority and the Police, see Note 1.3 to the
consolidated financial statements.
2. Note to the main accounting policies applied in the Separate Financial
Information
The accounting policy rules set forth in the Consolidated Financial Statements have been
applied consistently to all periods presented in the Separate Financial Information by the
Company, including the manner in which the financial data in the Consolidated Financial
Statements have been classified as required by the following:
2.1. Presentation of the financial data
The data on the financial position, income, comprehensive income and cash flows
include information contained in the consolidated statements and attributed to the
Company itself. The investment balances and results of operations of investee
companies are treated according to the equity method. Cash flows from operating
activities, investing activities and financing activities in respect of transactions with
investee companies are presented separately in net terms, as part of the relevant
activity in accordance with the nature of the transaction.
2.2. Restatement
At the beginning of November 2020, as part of the preparation of the quarterly
report for September 30, 2020, Bezeq International found that there are
discrepancies between the assets and liabilities listed in its books and the actual
assets and liabilities, resulting, among other things, non-imputation of costs from
previous years in respect of payment of advances to suppliers to the income
statement and improper recognition of advance expenses.
6
Notes to separate financial information as of December 31, 2020
In light of the findings as stated above, the Company republished its financial
statements for 2019 on December 21, 2020, in order to retroactively reflect the
effect of correcting the discrepancies as aforesaid.
Comparative data that are included in these financial statements are the data after
the representation.
2.3. New standards that have not yet been adopted
Regarding new standards that have not yet been adopted, see Note 3.18 to the
Consolidated Financial Statements.
3. Note on financial instruments
3.1. Short-term investments and deposits
Investments in marketable securities (1)
Short-term deposits
(1) The deposits are due for repayment by December 2021.
3.2. Long-term deposits
Long-term deposits (1)
(1) The deposits are due for repayment by December 2021.
3.3. Trade payables and credit balances
Institutes
Interest payable
7
December 31,
December 31,
2020
2019
NIS millions
NIS millions
76
81
157
46
-
46
December 31,
December 31,
2020
2019
NIS millions
NIS millions
160
160
-
-
December 31,
December 31,
2020
2019
NIS millions
NIS millions
-
7
7
7
7
14
Notes to separate financial information as of December 31, 2020
3.4. Debentures
Bonds issued to the public:
Series C bonds
Series D bonds
Series E bonds
Total Bonds
December 31, 2020
Balance
in books
Face value
December 31, 2019
Balance
in books
Face value
NIS millions
NIS millions
NIS millions
NIS millions
1,739
54
100
1,893
1,878
58
100
2,036
1,708
53
100
1,861
1,878
58
100
2,036
On September 17, 2020, the meetings of the holders of the Company’s bonds (Series C
and E) approved the amendment of the trust deeds of the said series, in a manner that will
enable the Company to raise additional debt that will be secured by a lien on Bezeq shares
pledged in favor of Series C, pari-passu with Series C, under the following restrictions:
a) The additional debt that will be raised by the Company (less the expenses of
issuance) will first repay the bonds (Series D) and the bonds (Series E) in full,
so that after the raising thereof and after completing the conditions required
for release in exchange for issuing the additional series and amending existing
liens in favor of Series C, a first level lien will be recorded on the pledged
Bezeq’s shares (as defined in the trust deed) for the benefit of the bondholders
(Series C), in lieu of the second level lien currently registered in their favor
(as long as the bonds (Series E) are in circulation).
b) After the full repayment of the debt in respect of the bonds (Series D) and the
bonds (Series E), the balance of the proceeds from the net issue of the
additional debt will be used for the purpose of repayment of the bonds (Series
C), by early redemption (full or partial), according to the terms of the existing
trust deed.
c) The duration of the new series issued by the Company will be longer than that
of the bonds (Series C) and the payment of the first principal in respect of the
bonds from the new series as aforesaid will be only after full repayment of the
bonds (Series C).
In addition, the amount of early repayment to be paid to the bondholders in the event
of early repayment of the bonds by the Company has been amended as follows:
In relation to the bonds (Series C) - in the case of a partial early repayment of the
bonds (Series C), the price of the partial early repayment will be the highest of the
par value of the bonds (Series C) or their market value according to the 30 trading
days preceding the early repayment.
In relation to bondholders (Series E) - the full early repayment price will be the
highest of: (1) The market value of the bonds according to the price of the bonds on
8
Notes to separate financial information as of December 31, 2020
the stock exchange in the 30 trading days preceding the early repayment, the early
repayment price, but not more than 103.5%, or (2) the par value of the bonds (Series
E).
For further details, see Note 14 to the Consolidated Financial Statements.
3.4. Liquidity risk
The following are the predicted maturities of financial liabilities, including an
estimate of interest payments (based on the known interest data as of December
31, 2020):
Book
value
Contract
ual cash
flow
December 31, 2020
H1/2021 H2/2021
2022
2023-2025
NIS millions
Non-derivative financial liabilities
Suppliers trade payables
Bonds
Total
7
1,893
1,900
7
2,341
2,348
7
32
39
-
39
39
-
78
78
-
2,192
2,192
4. Income taxes
The Company has final tax assessments until 2018. In December 2020, the Company
signed an assessment agreement with the tax authorities for the years 2015-2018,
according to which the Company was not required to pay any tax for these years.
Following the signing of the assessment agreement, the Company wrote off a tax
provision in the amount of approximately NIS 7 million in 2020.
5. Subsidiaries
5.1 Subsidiaries held directly by the Company:
Company rights in
capital
Investment in subsidiaries (according to the equity
method) as of
December 31, 2020
NIS millions
December 31, 2019
NIS millions
Bezeq
26.72%
1,398
1,398
1,135
1,135
Regarding the registration of impairments in investments in the Group companies, see
Notes 11.2-11.5 to the Consolidated Financial Statements.
5.2 Dividends
9
Notes to separate financial information as of December 31, 2020
Details regarding dividends received from subsidiaries:
For the year ended December 31
2020
2019
2018
NIS millions
NIS millions
NIS millions
-
-
-
-
181
181
Bezeq
Total
6. Contingent liabilities
6.1 On March 30, 2020, the Company reached a settlement regarding the derivative
claim that was filed in July 2016 in the Tel Aviv-Yafo District Court (hereinafter
"the Horev Claim"). As part of the settlement agreement, during the third quarter of
2020, the Company received a total amount of NIS 22 million (principal plus
accrued interest) in the Company's Series C bonds held by Internet Gold - Gold
Lines Ltd. (hereinafter "Internet Gold") in exchange for waiving the derivative claim
against Internet Gold. In addition, the derivative plaintiff received an amount of NIS
4.23 million in respect of attorneys' expenses and monetary compensation (which
were paid out of the NIS 22 million that Internet Gold is required to pay). The net
amount received by the Company is imputed directly to the Company's shareholders'
equity under the loss balance item.
6.2
In addition, on June 2, 2020, the Company and the Company's former directors
signed a settlement agreement as part of the Horev Claim, according to which the
directors will pay NIS 2.5 million (hereinafter "the Directors' Settlement Amount")
to the Company to settle all derivative claims in this matter. During July 2020, the
District Court approved the settlement agreement, and the directors' insurance paid
the Company the full Directors' Settlement Amount. As part of the settlement, the
Company paid the derivative plaintiff and his attorney a total of NIS 720,000. The
net amount received by the Company is imputed directly to the Company's
shareholders' equity under the loss balance item.
6.3 On March 4, 2020, the Company signed a settlement agreement that settles the class
action lawsuit filed against the Company in the New York Southern District Court
in the United States that was filed against the Company in 2017. On August 10,
2020, final approval of the settlement was obtained from the Court as part of which
the settlement payments were made. The Company paid a sum of USD 1.2 million,
which was fully covered by the insurance of the directors and officers of the
Company, which absolved the Company from all claims related to the class action
by both the plaintiffs and the members of the settlement, without any admission of
guilt.
6.4 Regarding two motions for approval of a class action lawsuit filed in June 2017
against the Company and against Bezeq, see Note 18.2 (3) to the Consolidated
Financial Statements.
10
Notes to separate financial information as of December 31, 2020
6.5
6.6
In November 2020, a lawsuit was filed with a motion for approval as a class action
by a private individual who claims to be a shareholder of Bezeq ("the Applicant")
against the Company, Bezeq, and members of Bezeq's Board of Directors ("the
Respondents"). The matter of the motion is the approval of a class action for
compensation of the Applicant and the members of the represented group for
damages caused to them, according to the motion, "due to Bezeq's failure to report
and disclose on the Tel Aviv Stock Exchange (hereinafter: "TASE") and concealing
material information from investors, in connection with a public report "on moves
by the Ministry of Communications to eradicate the phenomenon of dual subscribers
in the field of ISP Internet services, on the extensive and substantial scope of the
phenomenon of dual subscribers in the subsidiary Bezeq International (hereinafter:
"Bezeq International") and their material negative impact on the subsidiary and
Bezeq. According to the claim in the motion, the damage caused to the group
members as a result of the incidents that are the subject of the lawsuit amounts to
approximately NIS 55 million to NIS 65 million, based on an expert opinion
attached to the motion.
In November 2020, a claim was filed with motion for approval as a class action by
a private individual ("the Applicant") claiming to be a shareholder of the Company,
who claims to hold the Company's shares and Bezeq shares, against the Company,
Bezeq and 72 other respondents, including former and present officers in both
companies (“the Respondents"). The matter of the motion is the approval of a class
action for compensation of the Applicant and the members of the represented groups
for damages caused to them, as alleged in the motion, as a result of acts and
omissions of the Respondents when they failed to disclose to the investing public
allegedly material information, that they had to disclose in accordance with the
provisions of the law, in connection with the two companies' report dated November
9, 2020 that Bezeq International's books have unexplained net asset balances
(receivables minus payables) of tens of millions of NIS, most of which originate,
probably, from past periods of over 15 years. The amount of the class action
specified in the statement of claim is "over NIS 2.5 million (for the purposes of
substantive authority)" when in accordance with the economic opinion attached to
the motion "the estimate of the fall in the price of the security" for the information
included in the immediate report of November 9, 2020 stands at 5.26%-5.40% in
relation to Bezeq and 9.07% - 9.36% in relation to the Company.
6.7 For more information regarding contingent liabilities, see Note 18 In the
Consolidated Financial Statements.
7. Events during and after the reporting period
7.1 On February 13, 2020, a special meeting of the Company's shareholders was held
at which the terms of employment of the Company's new CEO, Mr. Tomer Raved,
were approved. As part of the terms of his employment, Mr. Raved was granted
options to purchase up to 2,677,362 ordinary shares of the Company, which
constitute 2.25% of the Company’s issued and paid-up capital as of the date of
commencement of his employment. The vesting period of the options granted to the
Company's CEO is 3 years. The expense recorded in the Company's books in
11
Notes to separate financial information as of December 31, 2020
respect of the options granted to the CEO in the year 2020 amounted to approx. NIS
280k.
7.2 On August 26, 2020, the Company announced its intention to delist its shares from
trading on the Nasdaq Stock Exchange and terminate its reporting obligation to the
US Securities and Exchange Commission (SEC). The documents required for the
delisting were submitted on September 9, 2020 and the Company's share ceased to
be traded on the Nasdaq on the same day. The termination of the Company's
reporting obligation on the Nasdaq Stock Exchange began on September 21, 2020,
on the same day of submitting a required document to the US Securities and
Exchange Commission (SEC).
7.3 On December 10, 2020, the Company acquired 10,580,000 ordinary shares of the
Bezeq subsidiary. The Company purchased such shares in exchange for the
payment of a total amount of approximately NIS 40 million and at an average price
of NIS 3.78 per share. Following the said acquisition, the Company holds 26.72%
of the issued share capital and voting rights in the subsidiary. The shares are
purchased when they are clean and free from any pledge, mortgage, lien,
foreclosure or any other right of any third party, including any other obligation to
banks, financial institutions and others.
12
Chapter IV
Additional Details about the Corporation
And Corporate Governance
Questionnaire
For the Period ended December 31, 2020
- 1-
1. Regulation 10a: Condensed statements of consolidated quarterly income for
each of the quarters in the reported year
See section 1.3 of the Board of Directors’ report attached in the second part of this
report.
2. Regulation 10c: Use of proceeds from securities
a. In the reported period, the Company did not offer securities according to a
prospectus.
3. Regulation 11: List of investments in subsidiaries as of the date of the statement
of the financial position
Company
Name
Name of
holder
Share type Number of
shares held
Total par
value
The
Company
Ordinary
NIS 1
738,953,713
738,953,713
Bezeq the
Israel
Telecommunic
ation
Corporation
Ltd. ("Bezeq")
Rate of
holding
of the
issued
capital
and
voting
rights
26.72%
Rate of
holding of
the right
to appoint
directors
Value in the
Company's
separate
financial
statement
(NIS
millions)
26.72%
1,398
4. Regulation 12: Changes in investments in subsidiaries during the reported
period
of
Date
change
Essence of the change
December
10, 2020
Purchase of additional shares
Company
name
Bezeq
Reported
amounts (NIS
millions)
40
5. Regulation 13: Income of subsidiaries and income of corporation therefrom as
of the date of the statement of financial position (NIS millions)
Company name
Bezeq
Profit (loss) for the
period
NIS 796 million
Comprehensive
profit (loss) for
the period
NIS 782 million
Dividend Managemen
t fee
Interest
revenue
6. Regulation 20: Trading on the stock exchange
a. For the best The Company's knowledge, In the reported period, there was no halt in
the trading of the Company’s securities listed for trading.
b. On September 9, 2020, the Company announced its delisting of trading on the
NASDAQ stock exchange.. As of this date, the Company is traded on the Tel Aviv
Stock Exchange Ltd. only.
7. Regulation 21: Remuneration for stakeholders and senior officers
The following is a breakdown of the remuneration for 2020, as recognized in the 2020
financial statements, for each of the most remunerated among the senior officers of
the Company or corporation under its control, and which were given thereto in
connection with his office. It should be emphasized that the amounts indicated in the
table are the amounts recognized in the 2020 financial statements, but some of the
actual payments to some of the officers include amounts recognized in previous
financial statements and some are contingent on the conditions set forth below.
- 2-
Details of remunerated persons
Remuneration (NIS thousands)
Total
(NIS
thousands)
Section
below
Name
Position
Sex
Tomer Raved
CEO and
director
Itzik Tadmor
CFO
Male
Male
Ilan Chaikin
Dudu
Mizrahi
Ran Guron
Internal auditor Male
Male
Bezeq CEO
Pelephone,
Bezeq
International
and DBS CEO
male
Directors
Director
Holding
rate in
the
corporati
on’s
capital
-
-
-
-
-
-
Job
volu
me
Full-
time
Full-
time
Full-
time
Full-
time
Full-
time
Full-
time
Wage1 Bonus2
Share-
based
paymen
t
mther
(Manage
ment fee)
Total
1,421
-
280
2253
1,926
641
56
104
-
2,514
2,695
2,454
2,300
900
-
-
-
-
-
-
-
-
-
-
-
745
56
5,209
4,754
900
A
B
C
D
E
F
The following is a breakdown of the terms of engagement with the stakeholders and officers
listed in the table above:
a. Tomer Raved
Mr. Raved has been the CEO and Director of the Company since January 2020. According
to the employment agreement with him approved at the Company's General Meeting on
February 13, 2020, Mr. Raved is entitled to to an annual salary according to an employer's
cost of NIS 1.4 million, including social and ancillary benefits as customary in the Company
and in accordance with the Company's remuneration policy (convalescence allowance,
study fund, pension, sick pay, car expenses, vacation days, cell phone, business expenses
and social security, except for vehicle expenses).
In addition, in respect of his office as a director, Mr. Raved is entitled to an annual
remuneration and a participation fee in the amount determined by an external expert in
accordance with the Remuneration Regulations, as they will be from time to time and in
accordance with the Company’s classification at the relevant time, and he is also entitled to
directors’ remuneration for his office as a director of Bezeq.
In addition, Mr. Raved will be entitled to be included in the liability insurance for directors
1 Regarding senior executives at Bezeq, wage amounts include the cost of wages (employer cost) and the
ancillary wage components, including benefits and social conditions, such as coverage of telephone
expenses, a personal vehicle of the type customary in the Group (cost of leasing or depreciation expenses
and reimbursement of expenses instead of using a company vehicle), study fund (for some of the managers),
deposit in a pension fund and deposits due to termination of employee-employer relationship (for
employees subject to Article 14 of the Compensation Law), reimbursement of expenses and quota of
vacation days, sick and annual convalescence as customary, expenses for holiday gift to employee
(grossing amount), fees for membership in professional organizations paid for the employee' (outside the
employee's occupation) and also, to the extent that a loan was made to the employee - the value of the
grossing benefit in the interest that the loan bears.
2 Regarding senior executives at Bezeq , the bonus amounts listed in the table are as recognized in the 2020
consolidted statements and include a performance-dependant bonus as well as special bonuses (for details
regarding each of the officers see details in sections A-F after the table below), all in accordance with the
companies’ remuneration policy. The performance-dependent bonus that appears in the table is for the year
2020 (not yet paid to senior executives at Bezeq as of the date of the report) and includes a contingent
portion that will be paid in practice to the aforementioned Bezeq officers according to the distribution
described in the notes to the table. During 2020, bonuses were paid to some of the above officers for 2019,
the amount of which [including a contingent portion not paid in practice in 2020, but paid in practice in
2021 (if any)] is included in the corresponding table in Bezeq’s annual statements for 2019 (as restated on
December 21, 2020).
3 Remuneration for service as a director in the Company and Bezeq.
- 3-
and officers and for indemnification as is customary in the Company, as are all other officers
in the Company.
Mr. Raved was granted 2,677,362 unlisted options, exercisable into the Company's shares,
which as of the date of approval of his employment agreement amount to approximately
2.25% of the issued and paid-up share capital of the Company. The employment agreement
with Mr. Raved can be terminated by the Company upon prior notice of up to 6 months. Mr.
Raved may terminate his employment at any time with 30 days' prior notice.
b.
Itzik Tadmor
As of January 2019, Mr. Tadmor is employed as the Company's CFO. Mr. Tadmor served
as the Company's Chief Financial Officer (Principal Financial Officer) from May 2015 until
January 2019. According to the employment agreement with him, Mr. Tadmor is entitled to
a gross monthly salary of NIS 42 thousand and social and ancillary benefits as customary
(vacation days, executive insurance, study fund, etc.). In accordance with the employment
agreement with him, if he continues to work for the Company until December 2023, he will
be entitled to a retention bonus. He is also entitled to liability insurance for directors and
officers and indemnification as is customary in the Company, as are all other officers in the
Company.
c.
Ilan Chaikin
Ilan Chaikin is employed as the internal auditor of the Company. Mr. Chaikin is entitled to a
fee at a rate of NIS 240 per hour plus VAT. During 2020, Mr. Chaikin was employed in the
volume of 200 hours. For further details, see section 2.4 of the Company's Board of
Directors' report as of December 31, 2020, in Chapter B of te periodic report.
d. Dudu Mizrahi
Employed as CEO of Bezeq as of September 1, 2018, as part of a personal employment
agreement dated October 4, 2018 (in this section: "the Employment Agreement"). His
total monthly salary (gross) is NIS 150,000. The contract is for an unlimited period, with the
right of each party to bring it to an end at any time with 6 months' prior notice by either party
Mr. Mizrahi's bonus targets for 2020 as Bezeq's CEO were set in advance by Bezeq's Board
of Directors in December 2019, following the approval of Bezeq's Remuneration Committee
and included: Adjusted EBITDA target4 for Bezeq (Solo) weighing 50% in the bonus
calculation; Profit after tax target of the Company (solo) weighing 25%; And Coordinated
Free Flow Target (FCF))5 for Bezeq (Solo) weighing 25%. The threshold conditions for the
bonus were that the FFO targets6 for Bezeq (Solo) for 2020 (approximately NIS 1,230.5
million), will not decrease by more than 20% from the target set in Bezeq’s budget (solo)
for 2020 (NIS 1,227.7 million) – this condition was met. The rate of Bezeq's CEO's
compliance with the set of bonus targets for 2020 was approximately 119.04%. Accordingly,
the bonus granted to Bezeq's CEO for 2020 is approximately 119.04% of his annual salary.
Mr. Dudu Mizrahi will be entitled to 40% of the bonus for meeting the adjusted EBITDA
target for Bezeq (Solo) in 2020 only in 2022 (after the date of approval of the financial
statements for 2021) and only if the minimum adjusted EBITDA target for Bezeq (Solo) is
achieved in relation to the 2021 budget. It should be noted that after the year of the report,
Mr. Dudu Mizrahi was approved, in accordance with Bezeq's Remuneration Policy,
3 Adjusted EBITDA for the p[urpose of determining remuneration - calculated as EBITDA minus other
operating expenses / revenue (net), losses / gains from impairment / increase in value (including losses
from ongoing impairment) and the effects of the implementation of International Financial Reporting
Standard IFRS16 "Leases".
4 Adjusted Current Cash Flow (FCF) - calculated as cash arising from current activities less cash for the
purchase / sale of fixed assets and intangible assets (net), minus payments for leases.
5 FFO (funds from operation) Sources from activity - calculated as cash flow from operating activities
(as defined in the Company's annual financial statements) before changes in working capital and before
changes in other assets and liabilities and minus payments in respect of leases
- 4-
payment of a special bonus for 2020 in the amount of NIS 539k (included in the table above
in the bonus component for 2020). This is due to the investment of exceptional and
extraordinary efforts in the promotion and implementation of a number of Bezeq's major
projects and moves in a number of areas, including the promotion of Bezeq’s fiber
deployment project, promoting a number of significant regulatory moves, a project to deal
with the COVID-19 crisis that has been carried out with great success, as well as projects
to recruit and reduce customer churn rates.
On January 18, 2021, Bezeq's general meeting approved, following the approval of Bezeq's
Board of Directors dated December 10, 2020, and Bezeq's Remuneration Committee dated
December 9, 2020, an amendment to Bezeq's remuneration policy and granting 9,000,000
options to Bezeq's CEO. For details regarding the terms of the options, see the amendment
report regarding the outline for granting options to Bezeq employees and the report of a
material private offer from Bezeq dated January 14, 2021 (reference: 20201-01-006340).
The fair value of the options at the date of granting thereof (calculated in accordance with
the Monte Carlo model) is approximately NIS 6.9 million.
e. Ran Guron
As of January 1, 2019, his total monthly salary (gross) for his office as CEO of the three
material subsidiaries of Bezeq: Pelephone, Bezeq International and DBS (in this section,
collectively: "the Subsidiaries"), amounts to a total of of NIS 15k. The contract is for an
unlimited period, with the right of each party to bring it to an end at any time with 6 months'
prior notice by either party.
Mr. Gurion's bonus targets for 2020 as CEO of the subsidiaries were set in advance by
Bezeq's Board of Directors in December 2019, after approval by Bezeq's Remuneration
Committee and included: Adjusted EBITDA target7 for the subsidiaries weighing 70% in the
bonus calculation; Payroll expenses of Subsidiaries (net of disocunts) weighing 10%; Free
cash flow target (FCF)8 adjusted to the Subsidiaries weighing 10%; And a net profit target
for Subsidiaries weighing 10%. The threshold condition for receiving the bonus was that
the adjusted EBITDA results9 for subsidiaries for 2020 (NIS 697 million), will not decrease
by more than 40% of the target determined for this in the Subsidiaries’s budget for 2019
(NIS 785 million) – this condition was met. The rate of compliance of the CEOs of the
Subsidiaries in the set of bonus targets for 2020 was approx. 93.7%. Accordingly, the bonus
to be granted to Mr. Guron for 2020 is approx. 93.7% of his annual salary. Mr. Guron will
be entitled to 40% of the remuneration for meeting the adjusted EBITDA target in 2020 only
in 2022 (after the date of approval of the 2021financial statements) and only if the minimum
adjusted EBITDA target set in relation to the budget year 2021 is achieved. It should be
noted that in the reported year, Mr. Ran Guron was approved, in accordance with Bezeq's
Remuneration Policy, the payment of a special bonus in respect of the implementation of
a synergy and streamlining plan in the subsidiaries ("Alpha Plan 1") for 2020 in the amount
of NIS 603.6k (included in the table above in the bonus component for 2020). This is due
to the implementation of the Alpha 1 plan - an exceptional, unusual and very significant
event involving an investment of exceptional effort by the CEO of the Subsidiaries, and
bringing significant savings in expenses and value to the Group, preserving the CEO of the
Subsidiaries as a key player in the development of the Alpha 1 plan and in order to
incentivize him to continue to make exceptional and extraordinary efforts to promote it. In
addition, the outline of the special bonus is worthy and closely linked to the success of the
Alpha 1 plan.
* In light of the correction of the error in Bezeq International's 2019financial statements,
there has been a change in the rates of meeting the targets for the annual bonus to Mr.
Guron in respect of 2019. The amount of the difference between the amount of the bonus
6 See footnote 3.
7 See footnote 4.
8 See footnote 5.
- 5-
paid in practice for 2019 and the amount of the bonus when calculated according to the
amended 2019 financial statements is up to NIS 160k. The Company is still examining the
calculation of the gap and the manner of handling the bonuses paid for years whose
financial statements have been restated.
On December 10, 2020, Bezeq's Board of Directors and the boards of directors of the
subsidiaries approved, following the approval of Bezeq's Remuneration Committee dated
December 9, 2020, the granting of 9,000,000 options to the CEO of the subsidiaries. On
January 18, 2021, Bezeq's general meeting approved an amendment to the remuneration
policy for Bezeq's officers, which was a condition for granting the options. For details
regarding the terms of the options, see the amendment report regarding the outline for
granting options to Bezeq employees and the report of a substantial private offer of Bezeq
dated January 14, 2021 (reference: 20201-01-006340). The fair value of the options at the
date of their grant (calculated according to the Monte Carlo model ) is about NIS 6.9 million.
f. Directors
Each director (including the Chairman of the Board) is entitled to an annual remuneration
and a participation remuneration for each meeting, in the maximum amount, in accordance
with the Company’s classification under to the remuneration regulations. In addition,
directors with financial accounting expertise, as this term is defined in the Companies
Regulations (Terms and Tests for a Director with Accounting and Financial Expertise and
for a Director with Professional Competence), 5765-2005 are entitled to an annual
remuneration to an external expert director as stated in the Remuneration Regulations. In
addition, the directors are entitled to be included in the arrangement for liability insurance
of directors and officers and indemnification as is customary in the Company, as are all
other officers in the Company. In 2020, remuneration was paid to the directors of the
Company in accordance with the Remuneration Regulations in the amount of NIS 900
thousand.
8. Regulation 21a: The controlling shareholder in the corporation
On December 2, 2019, a debt settlement was completed between the Company and its
bondholders, under which Searchlight II BZQ LP and a corporation controlled by the Forer
family (TNR Investments Ltd.) acquired control of the Company (and consequently, Bezeq).
The company owns Bezeq through a company under its full control (indirectly) B
Communications (SP2) Ltd.10 In this regard, see also Bezeq's immediate report dated
December 2, 2019 regarding the Company's announcement of the completion of the said
transaction, as well as Bezeq's immediate reports dated January 2, 2020 regarding
holdings of stakeholders and those who became stakeholders in the corporation.
As of the date of completion of the debt settlement as aforesaid, the controlling owners of
the Company are Searchlight II BZQ L.P, a limited partnership incorporated in the Cayman
Islands ("Searchlight") and TNR. Investments Ltd. ("TNR"), a private company
incorporated in Israel. The final general partner of Searchlight is Searchlight Capital
Partners II GP, LLC, a limited liability company incorporated in the State of Delaware, which
is held by a number of individuals including Eric Zinterhofer, Erol Uzumeri and Oliver
Harmaann, with the latter being among the only ones to receive the Company's control
permit from the Ministry of Communications. TNR is fully owned and controlled by Mr. David
Forer (50%) and Mrs. Michal Forer (50%). Searchlight and TNR are considered controlling
shareholders in the Company by virtue of a control permit dated November 11, 2019 and
by virtue of a voting agreement between them which confers on them a cumulative holding,
as of the date of publication of this report, of approximately 72% of the voting rights in the
Company.
10 714,169,560 of Bezeq’s shares are owned by B Communications (SP2) Ltd., a private company,
registered in Israel, which is wholly owned and controlled by B Communications (SP1) Ltd., a private
company registered in Israel. B Communications (SP1) Ltd. is wholly owned and controlled by the
Company. In addition to the above, 24,784,153 shares of Bezeq’s shares are directly owned by the
Company .
- 6-
To the best of the Company's knowledge, the shareholders' agreement between
Searchlight and TNR includes, among other things, a provision according to which as long
as the holdings of an "Israeli entity" in Bezeq's controlling shareholder are required,
Searchlight will grant TNR power of attorney in respect of the amount of shares that will
allow TNR to vote at the general meetings of the Company, an amount of shares equal to:
(a) the amount of shares held by TNR on the effective date of the meeting, or (b) the amount
of shares reflecting 19% of the issued capital and voting rights in the Company on the
effective date of the meeting, whichever is highest. To the best of the Company's
knowledge, the shareholders' agreement includes additional provisions, including a
commitment by Searchlight to refrain from voting for the approval of certain issues without
the consent of TNR.
For details regarding the control permit, see section 1.1.4 in Chapter A of the periodic
report.
9. Regulation 22: Transactions with the controlling shareholder
For details, to the best of the Company's knowledge, regarding any transaction with the
controlling shareholder in the Company, or such that the controlling shareholder in the Company
has a personal interest in the approval thereof, which the Company, the companies controlled
thereby or related thereto entered into in the reporting year or after to the end of the reporting
year and until the date of submission of this report, or it is still valid at the date of the report, as
well as for details regarding the Company's negligence procedure, see Note 29 to the financial
statements.
10. Regulation 24: Holdings With Interest And subjects job Senior
Options
Capital and voting
rate
Capital and voting
rate (fully diluted)
The holder
Number of
ordinary
shares
Searchlight
69,994,038
TNR
Investments
13,248,905
-
-
Tomer
Raved
The
Company
-
2,677,362
19,230
-
60.18%
11.39%
-
-
58.81%
11.13%
2.25%
-
It should also be noted that as of December 31, 2020, Michael Clare, a director of the
Company, held 75,000 ordinary shares of Bezeq, which, as of the date of this report,
constitute as 0.003% of the issued and paid-up capital and voting rights in Bezeq.
11. Regulation 24a: Registered capital, issued capital and convertible securities
The registered capital of the Company as of the date of publication of the periodic report is
150,000,000 ordinary shares of NIS 0.1 par value each ("Ordinary Shares"). For details
regarding the convening of a general meeting to increase the Company's registered capital,
see the immediate report dated March 31, 2021 (Reference No. 2021-01-021487).
The issued and paid-up capital of the Company, as of the date of publication of the periodic
report, is 116,316,563 Ordinary Shares (excluding 19,230 Ordinary Shares held by the
Company and which are dormant).
- 7-
12. Regulation 24b: Register of shareholders
Shareholder name
Number of shares
Share type and nominal value
Bank Hapoalim Listing
Company
109,266,213
Ordinary shares of NIS 0.1 par value
each.
American stock transfer
7,050,350
Ordinary shares of NIS 0.1 par value
each.
13. Regulation 25a: Registered address of the corporation
Address: 144 Menachem Begin St., Tel Aviv
Phone 1: 03-6796101 Fax: 03-6796111
Email: tomer@bcomm.co.il
This table lists the directors who serve on the Company's Board of Directors as of the date of
publication of the report, followed by details of directors who served in the year of the report but
ended their office before the date of publication of the report..
- 8-
14. Regulation 26: The directors of the corporation
a. Directors who have served as of the date of publication of the report
Last name and
first name
ID number
Darren Glatt,
Phil Bacal
Ran Forer
Tomer Raved
Michael Clare
Efrat Makov
Stephen Joseph
Chairman
549871770 (foreign
HP037044 (foreign
066522772
036864288
324616648
023044365
551988678
(foreign
passport)
passport)
passport)
Date of birth
November 18, 1975 September
13,
September 2, 1984
April 18, 1985
May 25, 1976
June 17, 1968
April 10, 1980
1985
Address for the
service of court
documents
Citizenship
Education
16 Abba Hillel St.,
16 Abba Hillel St.,
2 Haysur St., Ramat
16 Abba Hillel St.,
68B Herzl
St.,,
118 Tamar Road,
16 Abba Hillel St.,
Ramat Gan (with
Ramat Gan (with
Hasharon
Ramat Gan
(with
Raanana 4335434
Moshav
Ben
Ramat Gan
(with
Meitar Attorneys)
Meitar Attorneys)
Meitar Attorneys)
Shemen, 73115
Meitar Attorneys)
American
Canadian
Israeli
Israeli
Israeli, British
Israeli
British
BACCY, George
MBA Richard Ivey
Degree in Law, IDC
MBA from New York
B.A. In Psychology
B.A.
In Economics
BSc in Business and
Washington
School of Business
Herzliya, B.A.
in
University
- NYU
and Philosophy from
and Accounting from
Financial Economics
University
MBA,
at the University of
Management,
IDC
Stern School
of
the University of
Tel Aviv University.
from
Leeds
Harvard Business
Western Ontario.
Herzliya,LL.M.
Business.
Leeds.
University, KPMG.
School
Commercial
Law
(cum laude), Tel Aviv
University,
M.Sc.
General
Bachelor's degree in
Law and Economics
from
Tel
Aviv
University.
- 9-
Management,
Stanford University,
Semester in Law at
Berkeley University
Occupation
the past
years
for
five
Partner
in
the
Senior Director of
VP
of Business
The Company CEO.
From 2010 to August
Jewelry
Designer
CFO and VP of
Searchlight Capital
Searchlight Capital
Development at the
2019, Senior Equity
(Independent
Operations at Ocean
Partners and head
Partners. Director in
Neopharm Group,
Director and Vice
Analyst (Director) at
Business)
Outdoor Group (LSE:
OOUT).
Outdoor
media and advertising
company.
of
investments
in
Octave
Group,
Business
President
of
the
Citibank Israel Bank
infrastructure,
Roots Corporation.
Development
Telecom
and
communications,
media
and
technology.
Director in Bezeq,
PatientPoint.
Previously, he was
also a director at the
following
companies:
Rackspace, Charter
Communication,
Ocean
Outdoor,
160over90,
MediaMath.
Manager at Celgene
Technology Group at
Investments
(with
Corporation.
RBC
Investment
responsibility for the
Bank in New York
review of companies
from
2016-2020.
in Israel, Greece and
Investment banker at
consumer
UBS between 2013-
companies
in
2016 in New York.
Russia).
CEO and Director of
ABA Science Play
- 10-
Serves as a
director in other
corporations
Bezeq, PatientPoint Octave Group,
Bezeq
Bezeq
Roots Corporation
Israel Ltd.,
Minoti
ABA Science Play
- 11-
Outdoor
Outdoor
Acquisition
Scp
Topco Limited,
Scp Acquisition Midco
Limited,
Scp Acquisition Bidco
Limited,
Ocean Topo Limited,
Ocean Bidco Limited,
Ocean Outdoor UK
Limited,
Signature Outdoor
Limited,
Mediaco
Limited,
Forrest
Media Limited,
Forrest
(Holdings)
Limited,
Forrest
Limited,
DKTD Media B.V,
Ngage Media B.V,
Interbest B.v,
Global
Stockholm AB,
Gudfar& son AB,
Visual Art & Global
Agencies
Sweden
AB,
Visual
Art
International Holding
AB,
Visual Art Sweden
AB,
Media
Limited
Agencies
Media
Has accounting
and
financial
expertise
Is the director an
employee of the
corporation, of
its subsidiary, of
its
affiliated
company or of a
stakeholder
therein
Yes
Yes
Yes
Yes
Yes
Yes, see details of
Yes, see details of
Yes, the director
Yes, the CEO of the
No
occupation in the
occupation in the
serves as VP of
Company
last five years.
last five years.
Business
Visual Art Sweden
Holding AB,
Visual Art Denmark
City Reklame A/S,
Visual Art Norway AS.
Yes
No
Yes
No
Development of the
Neopharm Group,
whose controlling
shareholders, David
and Michal Forer,
are also controlling
shareholders of TNR
Investments Ltd.,
which owns the
controlling interest in
your company, B.
Communications, a
parent company of
- 12-
Is the director a
family member
another
of
stakeholder
in
the corporation
Membership of a
or
committee
of
committees
the board of
directors
No
No
Yes, the director
No
No
No
No
the corporation.
serves as VP of
Business
Development and
officer in Neopharm
Group, of which his
parents, David and
Michal Forer, are the
controlling
shareholders and
TNR Investments
Ltd., which has a
joint controlling
interest in Bee
Communications,
the parent company
of the corporation.
No
No
No
No
The Committee for
The Committee for
The Committee
for
the Examination of
the Examination of
the Examination of
Financial
Financial
Financial Statements;
Statements;
The
Statements;
The
The Audit Committee;
Audit
Committee;
Audit
Committee;
Remuneration
Remuneration
Remuneration
Committee;
- 13-
No
No
No
No
No
No
Committee;
Committee;
Yes
Yes
Yes
Yes
No
Yes
No
this board
an
Is
member
outside director
Does
the
No
company
see
the director as
an
independent
director
- 14-
b. Directors who served in the year of the report but ended their office before the date
of publication of the report:
During the year of the report, the director Shlomo Zohar served in the Company until
October 29, 2020. In addition, the external director, Debbie Safirya, ended her office in the
Company on January 20, 2020.
15. Regulation 26 A: Senior officers
This table lists senior officers who serve in the Company as of the date of publication of the
report, followed by details of senior officers who served in the Company in the year of the report
but ended their office before the date of publication of the report..
a. Senior officers who served in the year of the report and as of the date of publication
of the report
Name of senior officer
Itzik Tadmor
Dudu Mizrahi
Ran Guron
Role in the Company,
subsidiary, affiliate or
stakeholder
Chief Financial
Officer
Date of birth
Education
February 14,
1980
BA in
Accounting and
Economics, Tel
Aviv University.
MBA in
Business
Administration,
Tel Aviv
University.
CEO of Bezeq the
Israel
Telecommunications
Corporation Ltd.
January 28, 1970
B.A. In Economics,
The Hebrew
University of
Jerusalem
Main occupations in the last
5 years and a list of the
corporations in which he
serves as a director
CFO B
Communications
Ltd. and Internet
Gold Lines -
Gold Ltd.
Bezeq CEO, Deputy
CEO and CFO
Tnuva, CFO Partner
and CFO and
Deputy CEO of
Bezeq
CEO of the
subsidiaries
Pelephone,
Bezeq
International
and DBS
December 25,
1968
B.A. In
Economics
and Business
Administration,
The Hebrew
University of
Jerusalem,
MBA -
Business
Administration,
The Hebrew
University of
Jerusalem
Deputy CEO
and VP of
Marketing at
the Company,
CEO of
Pelephone,
Bezeq
International
and DBS
Is he a stakeholder in the
Company or a family member
of another senior official or
of another stakeholder in the
Company
No
Yes, a stakeholder
in the corporation by
virtue of his office
as CEO of Bezeq
No
16. Regulation 27: The accountant of the corporation
Somekh Chaikin, CPA
- 15-
Address: 17 HaArbaa St.,, KPMG Millennium Tower, Tel Aviv 6473917
Tel: 03-6848000
17. Regulation 29 (a): The recommendations and decisions of the directors before the
general meeting and their decisions that do not require the approval of a general meeting
in matters specified in Regulation 29(a)
a. Regarding exceptional transactions, see Note 29.3 to the financial statements.
b. Recommend to the general meeting of shareholders to amend the indemnity letters for the
Company's officers and directors so that the maximum amount of indemnity is equal to 25%
of the Company's equity or USD 15 million, whichever is higher.
18. Regulation 29 (c): Resolutions of a special general meeting
a. Approval of the terms of employment of Mr. Tomer Raved as CEO of the Company
(resolution dated February 13, 2020).
b. Approval of the renewal of the appointments of Darren Glatt, Phil Bacal, Ran Forer, Stefan
Joseph, Tomer Raved and Shlomo Zohar as directors of the Company, from April 30, 2020
until the date of the next annual general meeting (resolution dated April 30, 2020).
c. Approval of amendment of letter of commitment for indemnification and exemption for
directors of the Company who serve on the date of the notice convening the general
meeting of the Company's shareholders from March 25, 2020 and / or who will serve in the
Company from time to time, as specified in the aforesaid notice convening the meeting.
d. Approval of the adoption of an insurance policy for directors and officers in the form
specified in the meeting convening report dated March 25, 2020 (resolution dated April 30,
2020).
19. Regulation 29A (4): Exemption, insurance or obligation to indemnify officers
For details regarding exemption, insurance or indemnification obligation for officers, See Note 29.6
to the financial statements.
March 24, 2021
Date
_______________________________
B Communications Ltd.
Name and role of signatories:
Tomer Raved, CEO and director
Itzik Tadmor, CFO
- 16-
CORPORATE GOVERNANCE QUESTIONNAIRE 1
BOARD OF DIRECTORS INDEPENDENCE
1.
In each reporting year, two or more external directors served in the corporation.
This question can be answered "Correct" if the period of time in which two external directors did not
serve does not exceed 90 days, as stated in Article 363A (b) (10) of the Companies Law, but any answer
(Correct / Incorrect) must state the period of time (days) in which the corporation did not have two or
more external directors in the reporting year (including a term of office approved retrospectively, while
separating between the various external directors):
Director A: 0.
Director B: 0.
The number of external directors serving in the corporation as of the date of publication of this
questionnaire: 2.
Correct
√
Incorrect
1 Published as part of legislative proposals to improve the statements on March 16, 2014.
1
2.
3.
4.
The rate2 of independent directors3 serving in the corporation as of the publication of this
questionnaire: 3/7.
The rate of independent directors determined In the Articles of Association4 of the corporation5:
______.
Irrelevant (not provided for in the Articles of Association).
In the reporting year, an examination was conducted with the external directors (and the independent
directors) and it was found that in the reporting year they complied with the provision of Article 240 (b)
and (f) of the Companies Law regarding the lack of affiliation of the external (and independent)
directors serving in the corporation and they meet the conditions required for serving as an external (or
independent) director.
All directors who served in the corporation during the reporting year are not subordinated6 to the CEO,
directly or indirectly (except for a director who is an employee representative, if the corporation has
employee representation).
If you answered "Incorrect" (namely, the director is subordinated to the CEO as mentioned) – indicate
the rate of directors that do not meet the aforesaid limitation: _____.
_____
_____
√
√
2In this questionnaire, "rate" - a certain number out of the total. For example 3/8.
3 Including "external directors" as defined in the Companies Law.
4 For the purposes of this question - "Articles of Association" including according to a specific legal provision applicable to the corporation (for example in a banking corporation - the
directives of the Supervisor of Banks).
5 A bond company is not required to answer this section.
6 For the purposes of this question - the very office of a director of a holding corporation controlled by the corporation will not be considered "subordinate", on the other hand, the office of a
director of a corporation serving as an officer (other than a director) and / or an employee of the corporation controlled by the corporation will be considered "subordinate".
2
5.
6.
√
√
All the directors who announced the existence of a personal interest in approving a transaction on the
agenda of the meeting, did not attend the discussion and did not participate in such vote (except for
discussion and / or voting in the circumstances under Article 278 (b) of the Companies Law):
If Your answer is "Incorrect"-
Was it for the purpose of presenting a particular subject thereby in accordance with the provisions of
Article 278 (a):
Yes
No (mark x in the appropriate box).
Indicate the rate of meetings at which such directors were present at the discussion and / or
participated in the vote, except in the circumstances as stated in paragraph a: _____.
1.
The controlling shareholder (including his relative and / or someone on his behalf), who is not a director
or other senior officer in the corporation, was not present at the board meetings held in the reporting
year.
If your answer is "incorrect" (i.e., a controlling shareholder and / or relative and / or someone on his
behalf who is not a board member and / or a senior official in the corporation was present at such
board meetings) - indicate the following details regarding the presence of any additional person at
board meetings:
Identity: _____.
Position in the corporation (if any): _____.
3
Details of the affiliation to the controlling shareholder (if the person present is not the controlling
shareholder himself): _____.
Was it for the purpose of presenting a certain subject thereby: Yes No (mark x in the appropriate box)
The rate of presence7 thereof in meetings of the board of directors that took place in the reporting year
for the purpose of presenting a certain subject thereby: _____, Other presence: _____
Irrelevant (there is no controlling shareholder in the corporation).
QUALIFICATIONS AND SKILLS OF THE DIRECTORS
7.
There are no provisions in the corporation's articles of association that restrict the possibility of
immediately terminating the office of all directors in the corporation, who are not external directors (in
this matter - determination by a simple majority is not considered a restriction)8.
If Your answer is "incorrect" (namely, there is a restriction as mentioned) indicate -
Correct
√
Incorrect
7 While separating between the controlling shareholder, his relative and / or someone on his behalf.
8 A bond company is not required to comply with this section.
4
A.
The period of time stipulated in the articles of association for the term of office of a director:
B.
C.
The required majority set forth in the articles of association for the termination of office of the
directors:
A statutory quorum set forth in the articles of association at the general meeting for the purpose
for the termination of office of the directors:
8.
9.
D.
The majority required to amend these provisions in the articles of association:
The corporation prepared a training program for new directors, in the field of the corporation's business
and in the field of law applicable to the corporation and the directors, and also arranged a follow-up
program for the training of incumbent directors, adapted, among other things, to the director's position
in the corporation.
If your answer is "correct" - indicate whether the program was implemented in the reporting year:
Yes
No (mark x in the appropriate box)
√
A
A.
The corporation has a required minimum number of directors on the board of directors who must
have accounting and financial expertise.
√
If your answer is "correct" – indicate the minimum number determined:
5
B.
Number of directors who served in the corporation during the reporting year
With accounting and financial expertise9: 5. See note at the end of the questionnaire.
With Professional qualifications10: 0.
In the event of changes in the number of directors as stated in the reporting year, indicate the
lowest number (except in a time period of 60 days of change) of directors of any type who served
in the reporting year.
_________
_________
10.
A.
Throughout the reporting year, the board of directors included members of both sexes.
√
If your answer is "incorrect" – indicate the period of time (days) in which the aforesaid did not
exist: _____.
This question can be answered "correct" if the period of time in which directors of both sexes did
not serve does not exceed 60 days, however in any answer (correct / incorrect), indicate the
period of time (days) in which directors of both sexes did not serve: _____.
9 After the evaluation of the board of directors, in accordance with the provisions of the Companies Regulations (conditions and tests for a director with accounting and financial expertise and
for a director with professional Qualification), 5765-2005.
10 See Footnote 9.
6
B.
The number of directors of any sex serving on the corporation's board of directors as of the date
of publication of this questionnaire:
_____
_____
Men: 6, women: 1.
BOARD MEETINGS (AND CONVENING A GENERAL MEETING)
11.
A.
Number of board meetings held during each quarter of the reporting year:
First quarter (2020): 7.
Second quarter: 4.
Third quarter: 3.
Fourth quarter: 4.
Correct
Incorrect
_____
_____
B.
Next to each of the names of the directors who served in the corporation during the reporting year,
indicate the rate11 of participation in the meetings of the Board of Directors (in this paragraph - including
the meetings of the committees of the board of directors of which he is a member, and as indicated
_____
_____
7
See H.S. 2.
11
below) that took place during the reporting year (and with reference to term of office): See note at the
end of the questionnaire.
(Add lines according to the number of directors).
Director’s name
Rate of his
participation in
the meetings
of the board of
directors
Rate of
his
participa
tion in
meeting
s of the
Audit
Committ
ee 12
Rate of his participation
in meetings of the
Committee for
Examining the financial
statements 13
Rate of his
participation in
meetings of the
Remuneration
Committee14
Rate of his
participation in
meetings of other
board of directors
committees in which
he is a member
(indicate the name of
the committee)
Darren Glatt
100%
Tomer Raved
100%
12 Regarding the company director in this committee.
13 Regarding the company director in this committee.
14 Regarding the company director in this committee.
8
Phil Bacal
100%
Ran Forer
95%
Stephen Joseph
95%
100%
100%
100%
Michael Clare
100%
100%
100%
100%
Efrat Makov
100%
100%
100%
100%
100%
Shlomo Zohar
(served during the
reporting year
until October 29,
2020)
12.
1.
In the reporting year, the board of directors held at least one discussion regarding the management of
the corporation's business by the CEO and his subordinates, without their presence, and they were given
an opportunity to express their position.
√
9
SEPARATION BETWEEN THE FUNCTIONS OF THE CEO AND THE CHAIRMAN OF THE BOARD
Correct
√
Incorrect
13.
Throughout the reporting year, a chairman of the board served in the corporation.
This question can be answered "correct" if the period of time in which a chairman of the
board did not serve in the corporation does not exceed 60 days as stated in Article 363A (2)
of the Companies Law, but in any answer (correct / incorrect), indicate the period (days) in
which a chairman of the board did not serve in the corporation as aforesaid: [__].
14.
Throughout the reporting year, a CEO served in the corporation.
√
This question can be answered "correct" if the period of time in which a CEO did not serve in
the corporation does not exceed 60 days as stated in Article 363A (2) of the Companies Law,
but in any answer (correct / incorrect), indicate the period (days) in which a CEO did not
serve in the corporation as aforesaid: [__].
10
15.
16.
In a corporation in which the chairman of the board also serves as the CEO of the corporation
and / or exercises his powers, the duplication of office is approved in accordance with the
provisions of Article 121 (c) of the Companies Law15.
Irrelevant (if there is no such dual office in the corporation).
The CEO Is not a relative of the chairman of the board of directors.
If your answer is "incorrect" (i.e., the CEO is a relative of the chairman of the board)-
A.
B.
Indicate the family relation between the parties: _____.
The office was approved in accordance with Article 121 (c) of the Companies Law16:
Yes
No
(mark x in the appropriate box)
17.
A controlling shareholder or his relative does not serve as CEO or senior executive officer in
the corporation, except as a director.
Irrelevant (the corporation has no controlling shareholder).
_____
_____
√
_____
_____
√
15 In a bond company - approval in accordance with Article 121 (d) of the Companies Law.
16 In a bond company - approval in accordance with Article 121 (d) of the Companies Law.
11
AUDIT COMMITTEE
18.
In the reporting year, on the Audit Committee did not serve -
Correct
_____
Incorrect
_____
A.
A controlling shareholder or his relative.
Irrelevant (the corporation has no controlling shareholder).
B.
Chairman of the board of directors.
C.
A director employed by the corporation or by the controlling shareholder of the
corporation or by a corporation under his control.
D.
A director who regularly provides services to the corporation or controlling
shareholder of the corporation or corporation under its control.
E.
A director whose main livelihood depends on the controlling shareholder.
√
√
√
√
√
12
Irrelevant (the corporation has no controlling shareholder).
19.
A person who is not allowed to be a member of the Audit Committee, including a controlling
shareholder or his relative, was not present at the reporting year at the meetings of the Audit
Committee, except in accordance with the provisions of Article 115 (e) of the Companies Law.
20.
A legal quorum for discussion and decision-making at all Audit Committee meetings held in
the reporting year was a majority of committee members, with the majority present being
independent directors and at least one of them being an external director.
If your answer is "incorrect" - indicate the rate of meetings in which the said requirement was
not met: _____.
21.
In the year of the report, the Audit Committee held at least one meeting in the presence of the
internal auditor and the auditor and without the presence of officers of the corporation who are not
members of the committee, regarding deficiencies in the business management of the corporation.
22.
All meetings of the audit committee attended by those who are not allowed to be members of the
committee, were with the approval of the committee chairman and / or at the request of the
committee (regarding the legal advisor and the corporation secretary who is not a controlling
shareholder or his relative).
√
√
√
√
13
23.
In the reporting year, arrangements were established by the Audit Committee regarding the manner in
which the corporation's employees' complaints were handled in connection with deficiencies in the
conduct of its business and regarding the protection to be given to the employees who complained as
aforesaid.
24.
The Audit Committee (and / or the Committee for the Examination of the Financial Statements) was of
the opinion that the scope of the auditor's work and his fees in relation to the financial statements in
the reporting year were adequate for carrying out proper audit and review work.
√
√
FUNCTIONS OF THE COMMITTEE FOR EXAMINING THE FINANCIAL STATEMENTS (HEREINAFTER - THE COMMITTEE) IN ITS
PRELIMINARY WORK FOR THE APPROVAL OF THE FINANCIAL STATEMENTS
25.
A.
Indicate the period of time (in days) determined by the Board of Directors as a reasonable
time to submit the Committee's recommendations prior to the discussion of the board of
directors for approval of the financial statements: 3 days when approving the periodic
statements and 2 days when approving the quarterly statements.
Correct
_____
Incorrect
_____
14
The number of days that have actually elapsed between the date of the transfer of the
_____
_____
B.
recommendations to the board of directors and the date of the board's discussion:
First quarter statements (year 2020): 3 Days.
Second quarter statements: 3 Days.
Third quarter statements: 0 Days.
Annual statements: 4 days.
C.
The number of days that have elapsed between the date of submission of the draft financial
statements to the directors and the date of the discussion of the board of directors of the
approval of the financial statements:
First quarter statements (year 2020): 5 Days.
Second quarter statement: 3 Days.
Third quarter statements: 5 Days.
Annual statements: 6 Days.
15
26.
The corporation's auditor attended all meetings of the Committee and the board of directors, at which
the corporation's financial statements relating to the periods included in the reporting year were
√
discussed.
If your answer is "incorrect", indicate the participation rate: ______
27.
In the Committee, all the conditions listed below were met throughout the reporting year until the
publication of the annual statements:
_____
_____
A.
The number of its members was not less than three (at the time of the discussion in the
Committee and the approval of the statements as aforesaid ).
B.
C.
D.
E.
It complied with all the conditions set out in Article 115 (b) and (c) of the Companies Law
(regarding the office of members of the Audit Committee).
The chairman of the Committee is an external director.
All its members are directors and most of its members are independent directors.
All its members have the ability to read and understand financial statements and at least one
of the independent directors has accounting and financial expertise.
F.
Committee members gave a statement prior to their appointments.
√
√
√
√
√
√
16
G.
The legal quorum for discussion and decision-making in the Committee was the majority of its
members, provided that the majority of those present were independent directors, including
at least one external director. .
√
If your answer is "incorrect" regarding one or more of the subsections of this question, indicate in relation
to which statements (periodic / quarterly) the said condition was not met and the condition that was not
_____
_____
met.
17
REMUNERATION COMMITTEE
Correct
Incorrect
28.
The committee consisted of, in the reporting year, at least three members and the external
directors constituted a majority (at the time of the committee's deliberations).
Irrelevant (No discussion took place).
29.
The terms of office and employment of all members of the Remuneration Committee in the
reporting year are
in accordance with the Companies Regulations (Rules regarding
Remuneration and Expenses for an External Director), 5769-2000.
√
√
30.
In the reporting year, on the Remuneration Committee did not serve -
_____
_____
A.
The controlling shareholder or his relative
Irrelevant (the corporation has no controlling shareholder).
B.
Chairman of the board of directors.
√
√
18
C.
A director employed by the corporation or by the controlling shareholder of the
corporation or by a corporation under his control.
D.
A director who regularly provides services to the corporation or to the controlling
shareholder of the corporation or to a corporation under his control.
E.
A director whose main livelihood depends on the controlling shareholder.
Irrelevant (the corporation has no controlling shareholder).
The controlling shareholder or his relative were not present in the reporting year at the
meetings of the Remuneration Committee, unless the chairman of the committee determined
that either of them was required to present a particular subject.
The Remuneration Committee and the board of directors did not exercise their authority under Articles
267A (c), 272 (c) (3) and 272 (c1) (1) (c) to approve a transaction or remuneration policy, despite the
opposition of the general meeting.
If your answer is "incorrect" indicate -
Type of transaction approved as stated: ______
The number of times their authority was used in the reporting year: ______
√
√
√
√
√
31.
32.
19
INTERNAL AUDITOR
33.
The chairman of the board or the CEO of the corporation is the organizational supervisor of the internal
auditor of the corporation.
34.
The chairman of the board or the Audit Committee approved the work plan in the reporting year.
In addition, indicate the audit topics that the internal auditor dealt with in the reporting year: Bezeq
supervision and enforcement / internal audit.
(mark x in the appropriate box).
Correct
Incorrect
√
√
35.
Scope of employment of the internal auditor in the corporation in the reporting year (in hours17): 200
_____
_____
hours.
In the reporting year, a discussion took place (in the audit committee or on the board of directors) of the
√
internal auditor's findings.
17 Including working hours invested in investee corporations and audits outside Israel, and as appropriate, both by the Company's internal auditor and by the internal auditors of the
Company's subsidiaries.
20
36.
The internal auditor is not a stakeholder in the corporation, a relative of such, an auditor or anyone on
his behalf, nor does he maintain material business relationships with the corporation, its controlling
shareholder, or a relative or corporations under their control.
√
STAKEHOLDER TRANSACTIONS
Correct
Incorrect
√
37.
The controlling shareholder or his relative (including a company under his control) is not employed by
the corporation or provides it with management services.
If your answer is "incorrect" (namely, the controlling shareholder or his relative is employed by the
corporation or provides it with management services) indicate -
- Number of relatives (including the controlling shareholder) employed by the corporation (including
companies under their control and / or through management companies):
- Have the employment agreements and / or the management services as aforesaid been approved
by the organs established by law:
Yes
No
21
(mark x in the appropriate box)
Irrelevant (In a corporation nothing husband control). _____.
38.
To the best of the corporation's knowledge, the controlling shareholder has no other business in the
√
corporation's field of activity (in one or more fields). See note at the end of the questionnaire.
If your answer is "incorrect" - indicate whether an arrangement has been established to delimit
activities between the corporation and its controlling shareholder.
Yes
No
(there is to mark x In the box Appropriate)
No relevant (the corporation has no controlling shareholder).
22
Closing notes to the questionnaire:
1. Meetings of the board of directors (and convening a general meeting)
Section 11B - It should be noted that in the column on the participation rate in meetings of additional board committees, the reference is to
permanent board committees only and does not include non-permanent committees established on an ad hoc basis for certain issues. It should
be noted that in the number of meetings of the board of directors and its committees, the meetings held during the reporting year were taken
into account, with reference to the term of office of each of the directors on the board and in each of the committees, as the case may be.
2. Qualification and skills of the directors
Section 9B - It should be noted that Shlomo Zohar, who served during the year of the report until October 29, 2020, has accounting and
financial expertise.
3. Stakeholder transactions
Section 38- Searchlight Group, which owns the company, has holdings in many communications companies around the world (mainly in
the United States). As stated in section 1.8 of Chapter A of this report, Bezeq Group's strategy as of this date is leading the communications
market in Israel.
Chairman of the Board of Directors: ___________
Chairman of the Audit Committee: ___________
Chairman of the Committee for Examining the Financial Statements: ___________
23
Chapter E
Report on the Effectiveness of Internal
Control over Financial Reporting and
Disclosure for the Year ended December
31, 2020
- 1-
(1) Report on the internal control over financial reporting and disclosure:
Annual report on the effectiveness of internal control over financial reporting
and disclosure pursuant to Regulation 9 (b) a of the Securities Regulations
(Periodic and Immediate Reports), 5730-1970:
Management, under the supervision of the Board of Directors of B Communications
Ltd. (hereinafter - "the Corporation" or "the Company"), is responsible for
determining and maintaining adequate internal control over the financial reporting
and disclosure in the Corporation.
For this purpose, the members of Management are:
1. Tomer Raved, General Manager;
2.
Itzik Tadmor, VP of Finance;
In addition to the said members of Management, serving in the Company are:
1. Ilan Chaikin, Internal Auditor;
2. Yuval Snir, Comptroller;
Internal control over financial reporting and disclosure includes controls and
procedures existing in the Corporation, designed by or under the supervision of the
CFO and CEO in the field of finance, or by the person actually performing the said
functions, supervised by the Corporation's Board of Directors, which are intended
to provide a reasonable degree of assurance regarding the reliability of the financial
reporting and the preparation of the reports in accordance with the provisions of the
law, and to ensure that information that the Corporation is required to disclose in
reports it publishes under the provisions is collected, processed, summarized and
reported.
Internal control includes, inter alia, controls and procedures designed to ensure that
information the disclosure of which by the Corporation is required, is accumulated
and transmitted to the Corporation's Management, including the CEO and senior
executives in the field of finance or to those actually performing the said functions,
- 2-
in order to enable decisions with regard to the disclosure requirement to be made
at the appropriate time.
Due to its structural limitations, internal control over financial reporting and
disclosure is not intended to provide absolute assurance that misrepresentation or
omission of information in the reports will be avoided or discovered.
Management, under the supervision of the Board of Directors, performed an audit
and evaluation of the internal control over the financial reporting and disclosure in
the Corporation and its effectiveness;
The evaluation of the effectiveness of the internal control over the financial reporting
and disclosure carried out by Management under the supervision of the Board of
Directors included:
1. Mapping and identifying the relevant business units, accounts and processes
which the Corporation considers to be highly material for financial reporting
and disclosure;
2. Examination and updating of reporting and disclosure risks;
3. Updating the documentation of the controls that address the identified risks as
well as documenting new controls;
4. Testing and evaluating the effectiveness of the performance of such controls;
5. Overall assessment of the effectiveness of internal control
The model of evaluating the effectiveness of the internal control over financial
reporting and disclosure was based on the following components:
1. Entity Level Controls, including controls on the process of preparing and closing
reports;
2. Controls over cash process and debt management.
Based on the evaluation of the effectiveness carried out by Management under the
supervision of the Board as detailed above, the Board and Management of the
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corporation concluded that the internal control over the financial reporting and
disclosure in the corporation as of December 31, 2020 is ineffective due to material
vulnerabilities identified in the controls at the organization level and in the process
of preparing and closing the reports, which led to failure in the proper recognition of
expenses, as detailed below.
The following is a detail regarding the material vulnerabilities that exist in internal
control:
As part of the preparation of the quarterly report for September 30, 2020 and as
part of the controls of the process of preparing and closing the financial statements,
Bezeq International Ltd., a subsidiary of the Company ("Bezeq International"),
found that there are discrepancies between the assets and liabilities listed in its
books and the actual assets and liabilities, which result, among other things, from
non-imputation of costs from previous years in respect of the payment of advances
to suppliers to the income statement and the improper recognition of advance
expenses.
Bezeq International's Management began an immediate investigation into the
matter, including through Bezeq International's Internal Auditor.
In November 2020, Bezeq's Board of Directors was updated on the preliminary
findings of Bezeq International's Internal Auditor, who conducted his examination
in collaboration with Bezeq International's Security Division and accompanied by
an independent external expert. The interim findings revealed, among other things,
that over the years there have been professional errors (incorrect handling and
accounting records and failures in the manner in which the controls are performed)
as well as poor conduct, possibly intentional, on the part of Bezeq International
employees.
The total effect of the corrections of the discrepancies discovered in Bezeq
International as part of the examinations as of December 31, 2019 was as follows:
1. Errors that occurred until 2010 affected the balance of goodwill recognized
at the time of gaining control of Bezeq. The correction of the goodwill balance
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affected subsequent impairments of cash-generating units recognized by the
Group.
2. The reduction of the Group's capital as of January 1, 2018 in the amount of
approximately NIS 103 million in respect of past balances from the years
2002-2017, with most of the amount (approximately NIS 80 million)
originating in the years 2002-2003.
3. The reduction of the Group's profits (net tax) in the cumulative amount of
approximately NIS 133 million in respect of the period between January 1,
2018 and December 31, 2019.
4. Following the findings of the examination, Bezeq International updated its
forecasts for the coming years and performed an updated valuation as of
December 31, 2019, following which an additional impairment loss of NIS 54
million (NIS 43 million net of tax) was recognized in 2019 as a result of the
update of the value of the activity and the book value of Bezeq International
as of December 31, 2019.
In light of the findings of the aforesaid examinations, the Company carried out
adjustment of its financial statements as of December 31, 2019 and the year ended
on the same date by way of restatement, in order to retroactively reflect in them the
effect of the aforesaid.
On November 23, 2020, Bezeq's Board of Directors appointed an independent
external auditor (hereinafter: "the External Auditor") for the purpose of an in-depth
investigation of the issue, including the circumstances that led to the discrepancies
and the processes and controls that were supposed to prevent them.
On February 4, 2021, the External Auditor presented his findings to the Bezeq
Board of Directors, as part of the audit report prepared by him (hereinafter: "the
Audit Report"). The following are the main findings and conclusions as they
emerged in the Audit Report:
1. Suppliers’ debit balances that were created as a result of direct debit payments
that were not recorded as expenses in the years 2001-2003 but accumulated
under a general accounting card. Most of the suppliers’ debit balances found
are with the parent company Bezeq as a related party.
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Due to the non-recognition of expenses as aforesaid, expenses were recorded
during the accounting period based on an estimated and partial cumulative
calculation, which did not necessarily correspond to the actual payments made.
This record was made against the expenses payable card which also served
as a kind of general accounting card.
As part of the examination, it was found that during all the years that were the
subject of the examination, the manner of presentation and analysis of the
suppliers’ item by Bezeq International's Finance Division was performed in net
terms, thus making it difficult for the Company to control the suppliers' accounts
payable, as aforesaid.
In addition, it was found that some of the employees of the Finance Division at
Bezeq International knew about the existence of the unexplained accounts
payable but did not act to find out their source and deal with them in real time.
In addition, said employees did not notify Bezeq International's Management
and the Auditor of the issue
2. Non-recognition of expenses in parallel to revenue in service agreements with
customers between the years 2018-2019: Registration of expenses in arrears
due to mistakes made in distinguishing between the components of the
agreements and in the manner of recording the expenses.
3. Disruption of data presented to the Auditor: Throughout several years, the
composition of the suppliers item was presented to the Auditor in net terms,
without detailing any of the balances created in the accounts in the general
ledger that made up the net suppliers item. In this way the unexplained debit
balances were blurred before the Auditor. In addition, throughout several years,
a deliberate omission of rows (reflecting invoices) was performed on one of the
supplier accounting cards in order to reflect an alleged adjustment to the net
supplier balance item presented.
As part of the investigation, it was found that some of the employees of the
Finance Division at Bezeq International knew and took part in disrupting the
data provided to the Auditor.
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It should also be noted that from the test report and from the samples prepared by
the External Auditor, no indications were identified that raise suspicion of the
occurrence of an embezzlement incident during the test period1.
Bezeq International's Management, Bezeq International's Board of Directors and
Bezeq's Board of Directors performed compensatory actions, tests and procedures,
investing considerable effort and resources, as detailed below, to ensure that
despite the material vulnerability in internal control, the reports are prepared in
accordance with the law:
1. Bezeq International recalculated certain balances in the reports on its financial
position for the years 2016-2019 and for the interim periods for the years 2019
and 2020 without relying on past records and the existing processes in
accounting in relation to the balance sheet items in which the errors were
discovered.
2. In order to carry out the work of correcting and restating the reports, the staff of
the Finance Division at Bezeq International will be added with employees and
managers from the finance divisions of the subsidiaries in Bezeq Group. In
addition, Bezeq International conducted tests and controls on the recalculation
of balances with the assistance of an independent external expert.
3. As part of the preparation of Bezeq International's financial statements for 2020,
all controls performed by Bezeq International employees and managers who
were found to be involved in the incidents subject to the examination were
mapped. Such controls were reviewed by employees and managers in
subsidiaries of the Bezeq Group, as well as by independent parties with relevant
professional skills,
including,
inter alia, various external professional
consultants.
4. Bezeq’s Board of Directors and the Board of Directors of Bezeq International
have decided to adopt the deficiency correction plan that Bezeq International's
1 It should be noted that according to the Audit Report, due to the number of accounting entries, lack of
documentation and completeness in the documents and lack of full explanations on the subject by
employees of the Finance Division in those years who still work at Bezeq, an embezzlement incident can
not be ruled out unequivocally.
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Management has begun
to
implement, which also
includes
the
recommendations of the External Auditor in the Audit Report.
5. The Management of Bezeq International and the Company's Board of Directors
have hired the services of various professional consultants to assist them in the
process of correcting the deficiencies.
6. Bezeq’s Board of Directors authorized the Audit Committee of the Bezeq Board
of Directors to continue to discuss the findings of the Audit Report and its
recommendations,
including monitoring
the
implementation of
the
recommendations, discussing the implications of audit and control issues and
examining the need to draw conclusions and take further steps.
7. It should be emphasized that the process of correcting the deficiencies has not
yet been completed. The Audit Committee, Bezeq International's Board of
Directors and Bezeq's Board of Directors frequently monitor the program for
correcting deficiencies and the status of the plan’s progress. Bezeq's Board of
Directors instructed Bezeq International's Management to continue working to
correct the material vulnerability as early as possible, and in any case no later
than the date of the financial statements for Q1/2021.
Main points of the deficiency correction plan:
1. Control environment:
• The Board of Directors of Bezeq International has decided to act in
accordance with the law to terminate the employment of a number of
employees in the Finance Division at Bezeq International who were involved
in the incidents subject to the examination (who are not its officers).
• Bezeq International's Management has decided on changes in the
organizational structure of the Finance Division.
• Bezeq International is working to fill the jobs of the employees whose
employment is expected to end. As of the date of approval of the 2020
statements, some of the new employees have begun their employment with
the Company, but the recruitment process has not yet been completed.
• Bezeq International will provide employees of the Finance Division with a
dedicated periodic refresher training on the subject of the Code of Ethics.
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• Bezeq
International will work
to
improve
its anonymous reporting
mechanism.
2. Processes:
• The work processes in which the deficiencies were identified were mapped.
• Bezeq International has begun updating the work procedures in which the
deficiencies have been identified, including strengthening and expanding
existing controls and creating new controls.
• Bezeq International has begun developing new system reports and is
expected to make developments in existing reports in order to support the
updated work processes.
• General accounting cards at Bezeq International were canceled and, at the
same time, dedicated accounting cards were opened. In addition, Bezeq
International is in the midst of a process of improving all accounting cards.
• Bezeq International updates the working methods and procedures of the
Company's accounting system.
Disclosure regarding the material discrepancies between the assets and liabilities
listed in Bezeq International's books and the actual assets and liabilities was
provided for the first time by the Company in an immediate report dated November
9, 2020. The Company continued to update on the subject as part of additional
immediate reports released in November and December 2020 and February 2021.
****
Regarding the investigations of the Securities Authority and the Israel Police in
connection with Bezeq, as detailed in section 1.1.7 of the chapter describing the
business of the corporation in this report, the corporation does not have complete
information regarding these investigations, plans, materials and evidence in the
hands of the law authorities in the matter. Accordingly, the corporation is not yet
able to assess the effects of the investigations, their findings and results on Bezeq
and the corporation as well as the financial statements and estimates used in the
preparation of these reports, if any. Upon removal of the restriction on conducting
examinations and inspections related to issues that arose in the course of the
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investigations, the examinations will be completed as necessary with regard to
matters that arose in the framework of those examinations.
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(2) Executive statements:
a) Statement of the CEO pursuant to Regulation 9B (d) (1) of the Securities
Regulations (Periodic and Immediate Reports), 5730-1970:
I, Tomer Raved, declare that:
(1)
I examined the periodical report of B Communications Ltd. (hereinafter – the
Corporation) for 2020 (hereinafter - "the Reports");
(2) To my knowledge, the Reports do not include any misrepresentation of a
material fact and do not lack a presentation of a material fact necessary so that the
presentations included in them, in light of the circumstances in which those
representations were included, will not be misleading with respect to the reported
period;
(3) To my knowledge, the financial statements and other financial information
contained in the Reports adequately reflect, in all material respects, the financial
position, results of operations and cash flows of the Corporation for the dates and
periods to which the statements relate;
(4)
I revealed to the Corporation's Auditor, the Board of Directors, the Audit
Committee and the committee for examining the Corporation's financial statements,
based on my most recent assessment of the internal control over financial reporting
and disclosure:
(A) Any significant deficiencies and material vulnerabilities
in
the
determination or exercise of internal control over the financial reporting and
disclosure that are likely to adversely affect the Corporation's ability to collect,
process, summarize or report financial information in a manner that casts doubt
on the financial reporting reliability and preparation of financial statements; and-
(B) Any fraud, whether material or immaterial, involving the CEO or his
subordinates directly or involving other employees who have a significant role
in the internal control over financial reporting and disclosure;
(5)
I, alone or with others in the Corporation:
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(A) Have established controls and procedures, or have verified
the
determination and existence of controls and procedures under my supervision,
designed to ensure that material information relating to the Corporation,
including its subsidiaries as defined in the Securities Regulations (Annual
Financial Statements), 5770-2010, is brought to my attention by others in the
Corporation and its subsidiaries, in particular during the preparation period of
the Reports; -
(B) Have established controls and procedures, or verified the determination
and existence of controls and procedures under my supervision, designed to
reasonably ensure the reliability of the financial reporting and the preparation
of the financial statements in accordance with the provisions of the law,
including in accordance with generally accepted accounting principles;
(C) Have assessed the effectiveness of the internal control over the financial
reporting and disclosure, and presented in this report the conclusions of the
Board of Directors and Management regarding the effectiveness of the internal
control as of the date of the Reports.
Nothing in the foregoing shall derogate from my liability or the liability of any other
person, under any law.
Date: March 24, 2021
_______________________
Tomer Raved, CEO
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b) Statement of the most senior officer in the field of finance pursuant to
Regulation 9B(d)(2) of the Securities Regulations (Periodic and Immediate
Reports), 5730-1970:
I, Itzik Tadmor, declare that:
(1)
I examined the periodical report of B Communications Ltd. (hereinafter – the
Corporation) for 2020 (hereinafter - "the Reports");
(2) To my knowledge, the Reports do not include any misrepresentation of a
material fact and do not lack a presentation of a material fact necessary so that the
presentations included in them, in light of the circumstances in which those
representations were included, will not be misleading with respect to the reported
period;
(3) To my knowledge, the financial statements and other financial information
contained in the Reports adequately reflect, in all material respects, the financial
position, results of operations and cash flows of the Corporation for the dates and
periods to which the statements relate;
(4)
I revealed to the Corporation's Auditor, the Board of Directors, the Audit
Committee and the committee for examining the Corporation's financial statements,
based on my most recent assessment of the internal control over financial reporting
and disclosure:
(A) Any significant deficiencies and material vulnerabilities
in
the
determination or exercise of internal control over the financial reporting and
disclosure that are likely to adversely affect the Corporation's ability to collect,
process, summarize or report financial information in a manner that casts doubt
on the financial reporting reliability and preparation of financial statements; and-
(B) Any fraud, whether material or immaterial, involving the CEO or his
subordinates directly or involving other employees who have a significant role
in the internal control over financial reporting and disclosure;
(5)
I, alone or with others in the Corporation:
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(A) Have established controls and procedures, or have verified
the
determination and existence of controls and procedures under my supervision,
designed to ensure that material information relating to the Corporation,
including its subsidiaries as defined in the Securities Regulations (Annual
Financial Statements), 5770-2010, is brought to my attention by others in the
Corporation and its subsidiaries, in particular during the preparation period of
the Reports; -
(B) Have established controls and procedures, or verified the determination
and existence of controls and procedures under my supervision, designed to
reasonably ensure the reliability of the financial reporting and the preparation
of the financial statements in accordance with the provisions of the law,
including in accordance with generally accepted accounting principles;
(C) Have assessed the effectiveness of the internal control over the financial
reporting and disclosure, and presented in this report the conclusions of the
Board of Directors and Management regarding the effectiveness of the internal
control as of the date of the Reports.
Nothing in the foregoing shall derogate from my liability or the liability of any other
person, under any law.
Date: March 24, 2021
_______________________
Itzik Tadmor, Chief Financial Officer
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