B Communications Ltd.
Annual Report 2021
Chapter A – Description of the Corporation’s Business
Chapter B – Report of the Board of Directors on the State of Affairs of the Corporation Business
Chapter C – Financial Statements
Chapter D – Additional details on the Corporation and Corporate Governance Questionnaire
Chapter E – Report on the Effectiveness of Internal Controls
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 2021 (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
IS NOT REVIEWED BY ANY
SECURITIES AUTHORITY AND
REGULATORY AUTHORITY.
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Chapter A
(Description of the Corporation's Business)
2021 Periodic Report
ב
Chapter A (Description of the Corporation's Business) for the 2021 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 ..................................................................................... 10
1.3.
Investments in the corporation's capital and transactions in its shares .. 10
1.4. Dividend distribution............................................................................... 11
1.5. Financial information regarding the areas of activity of the Group ......... 12
1.6. Forecast in relation to the Group .......................................................... 18
1.7. General environment and the influence of external factors on the group's
activities ................................................................................................. 19
1.8. Bezeq Group business strategy ............................................................. 32
1.9.
Incident outside the scope of the corporation's business ....................... 34
1.10. Corporate accountability (ESG) ............................................................. 35
2. Bezeq – Interior landline communications
36
2.1. General information about the field of activity ........................................ 36
2.2. Products and services ............................................................................ 41
2.3. Products and services revenue segmentation ....................................... 44
2.4. Customers ............................................................................................. 44
2.5. Marketing, distribution and service......................................................... 44
2.6. Competition ............................................................................................ 45
2.7. Property, plant and equipment and facilities .......................................... 51
2.8.
Intangible assets .................................................................................... 56
2.9. Human capital ........................................................................................ 56
2.10. Equipment and suppliers ....................................................................... 59
2.11. Working equity ....................................................................................... 60
2.12. Investments ........................................................................................... 60
2.13. Funding .................................................................................................. 60
2.14. Taxation ................................................................................................. 62
2.15. Environmental risks and their ways of management .............................. 62
2.16. Restrictions and supervision of Brezeq’s operations ............................. 63
2.17. Material agreements .............................................................................. 83
2.18. Legal Proceedings ................................................................................. 85
2.19. Targets and Business Strategy .............................................................. 92
2.20. Discussion of risk factors ....................................................................... 93
3. Pelephone - Mobile radio (cellular telephony)
99
3.1. General information about the field of activity ........................................ 99
3.2. Services and products ......................................................................... 102
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
3.3. Products and services revenue segmentation ..................................... 103
3.4. Customers ........................................................................................... 104
3.5. Marketing, distribution and service....................................................... 104
3.6. Competition .......................................................................................... 104
3.7. Property, plant and equipment and facilities ........................................ 105
3.8.
Intangible assets .................................................................................. 107
3.9. Human capital ...................................................................................... 110
3.10. Suppliers .............................................................................................. 112
3.11. Working equity ..................................................................................... 112
3.12. Taxation ............................................................................................... 113
3.13. Environmental risks and their ways of management ............................ 113
3.14. Restrictions and supervision of Pelephone’s operations ...................... 114
3.15. Material agreements ............................................................................ 119
3.16. Legal proceedings................................................................................ 119
3.17. Targets and business strategy ............................................................. 121
3.18. Expected development in the coming year .......................................... 121
3.19. Discussion of risk factors ..................................................................... 121
4. Bezeq International - Internet, international communications and network
endpoint services
128
4.1. General ................................................................................................ 128
4.2. Products and services .......................................................................... 129
4.3. Revenue .............................................................................................. 130
4.4. Customers ........................................................................................... 119
4.5. Marketing, distribution and service....................................................... 119
4.6. Competition .......................................................................................... 119
4.7. Property, plant and equipment and facilities ........................................ 121
4.8. Human capital ...................................................................................... 134
4.9. Suppliers .............................................................................................. 136
4.10. Taxation ............................................................................................... 137
4.11. Restrictions and supervision of Bezeq International's activities ........... 138
4.12. Legal proceedings................................................................................ 139
4.13. Targets, business strategy and development prospects ...................... 128
4.14. Discussion of risk factors ..................................................................... 140
5. DBS - Multi-channel TV
145
5.1. General information about the field of activity ...................................... 132
5.2. Products and services .......................................................................... 135
5.3. Revenue from products and services ................................................... 150
5.4. Customers ........................................................................................... 150
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
5.5. Marketing and distribution .................................................................... 151
5.6. Competition .......................................................................................... 151
5.7. Production capacity.............................................................................. 153
5.8. Property, plant and equipment, real estate and facilities ...................... 153
5.9.
Intangible assets .................................................................................. 154
5.10. Broadcasting rights .............................................................................. 155
5.11. Human capital ...................................................................................... 156
5.12. Suppliers .............................................................................................. 157
5.13. Financing ............................................................................................. 158
5.14. Taxation ............................................................................................... 158
5.15. Restrictions and supervision of DBS .................................................... 158
5.16. Material agreements ............................................................................ 161
5.17. Legal proceedings................................................................................ 162
5.18. Targets and strategy ............................................................................ 164
5.19. Discussion of risk factors ..................................................................... 165
6. Appendix A - The Company
172
6.1. Financing ............................................................................................. 172
6.2. Legal proceedings................................................................................ 172
7. Appendix A - Definitions
8. Appendix B - Financial Indices and Key Performance Indicators
175
180
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 a double listing arrangement. On
December 2, 2019, the transaction with Searchlight II BZQ LP and a corporation controlled
by the Forer 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, 5728-1968. ("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 equity 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 for the first quarter of 2010, the Company consolidates Bezeq's financial
statements in its own financial statements.
As of the date of this report, the Company holds approximately 26.72% of Bezeq's issued
and paid-up equity.
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, the Company 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 this report (March 22, 2022):
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
CThe
ompany
(*)
26.72
Bezeq Israel Telecommunications Corporation Ltd.
Bezeq
Online
100%
DBS
100%
Bezeq
International
Pelephone
100%
100%
(*) 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. Control of the Company
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
Forer 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 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 gives them
a cumulative holding, as of the date of publication of this report, of approximately 72% of
1 As of October 11, 2021, and in accordance with the amendment of the control permit signed on August 22, 2021, 738,953,713 of
Bezeq’s shares are held directly by the Company, after on that day all the Company's shares held by B. Communications (SP2) Ltd.
(a company wholly owned and controlled by Bi Communications (SP1) Ltd. which is wholly owned and controlled by the company)
were transferred to the Company for direct holding. Following the transfer of Bezeq’s shares to the Company, the companies B
Communications (SP2) Ltd. and B Communications (SP1) Ltd. were closed.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 equity 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 Company 2, 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 Forer, David Forer, 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:
"3.1. The Articles of Association of BCOM, Bezeq and its subsidiaries
2 B Communications (SP1) Ltd. and B Communications (SP2) Ltd. It should be noted that as of the date of the report, the Company holds Bezeq
shares directly.
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 Forer 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 Forer and David Forer 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
Forer and David Forer 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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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
therein,
the
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;
42 b.
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."
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
On November 11, 2019, Resnik Paz Nevo Trust Ltd. was granted, as a trustee for
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 debentures in the framework of which debentures 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, the Company 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 2021 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 12.2 to the 2021 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 Section 2.20.5 and Note
12.2 to the 2021 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.
Structural change in the subsidiaries
Following on from previous resolutions adopted by Bezeq as well as Bezeq's subsidiaries
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.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
- Bezeq International and DBS (in this Section: “the subsidiaries") regarding a structural
change plan in which Bezeq International's private activities were to merge with and into
DBS, and the spin-off of Bezeq International’s ICT activities into a new company wholly
owned by Bezeq (“the merger / spin-off plan"). On March 16, 2022, Bezeq's Board of
Directors decided, following the resolutions adopted that day by the Boards of Directors of
Bezeq's subsidiaries, to approve the cancellation of the merger / spin-off plan, and to
approve an alternative plan for Bezeq's subsidiaries to be presented within 60 days,
according to which Bezeq International's ISP activity in the private segment will be reduced
following the abolition of the separation between broadband infrastructure service and
Internet access service (ISP) (as described in Note 12.3 below), and ISP activity will be
established in DBS for the purpose of selling "triple" packages to customers (“the
alternative outline"), while striving to achieve, as far as possible, the strategic, business
and economic purposes that formed the basis for the resolution to promote structural
change, which were, among other things, adapting the activity to the structure of the
industry and the changing regulation, focusing on increasing revenues and growth, and
increasing the operational synergy and streamlining.
According to this alternative outline, the business purposes that were at the basis of the
spin-off / merger plan will be achieved, as DBS is expected to become a "triple" sales arm
that combines fiber and television, and at the end of the move Bezeq International will
become a growth-focused ICT company. In addition, this alternative outline has the
potential for a significant reduction in Bezeq International's expenses and investments in
the ISP field in parallel with an accelerated reduction in this activity.
Bezeq and its subsidiaries of Bezeq are unable to assess, at this stage, whether all the
conditions required for the implementation of the alternative outline will be met, and when
they would be met, if they are met, and accordingly there is no certainty that the alternative
outline will materialize in the manner described above or at all.
Plan to repurchase the Company's shares
On November 29, 2021, the Company's Board of Directors approved a plan to repurchase
the Company's shares in the amount of up to NIS 30 million, which began on December 1,
2021. For further details, see the Company's report dated November 30, 2021 (Ref.: 2021-
01-104413).
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 former 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 former 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
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
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.
7
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 1.1.6.3b).
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.
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.
Subsequently, on July 8, 2021, Bezeq and Walla submitted a written argument
for the hearing. On August 12, 2021, a hearing was held for companies with the
Deputy State Attorney (Criminal Enforcement) and with the team of attorneys
handling the case. As of the date of publication of the report, a decision has not
yet been made by the State Attorney's Office and the Attorney General regarding
the filing of an indictment following the allegations raised at the hearing, and the
companies have not been given an expected date for the decision.
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
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).
8
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
1.1.7.3
1.1.7.4 Bezeq does not yet have complete
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 section 1.1.6.2). 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
2021 statements.
information
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 section 2.18.
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 2021 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 Telehpone")
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 section 3 of this report.
1.2.3. Bezeq International - Internet, international communications, network endpoint
services and ICT solutions (“Bezeq International services”)
Internet access services (ISP), international communication services, network endpoint
services and the provision of ICT solutions. Bezeq International's activities are described
in section 4 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 section 3 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).
1.3. Investments in the corporation's equity 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 1.1.2 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-
9
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
up share equity and of the voting rights in Bezeq.
No investments were made in the Company's equity in the reporting year, and the Company is not
aware of any other material transactions made in Bezeq shares by a related party outside the Stock
Exchange.
1.4. Dividend distribution
1.4.1. Dividend policy in the company
The Company has not distributed dividends to its shareholders in the last three years
(2019-2021) and as of the date of this report, the Company does not have a valid dividend
distribution policy.
1.4.2. Dividend policy at Bezeq
on March 22, 2022, Bezeq's Board of Directors decided to approve a new dividend
distribution policy for Bezeq, according to which Bezeq will distribute to its shareholders,
every six months, a cash dividend of 50% of Bezeq's consolidated financial statements.
This is starting from the next distribution (for the second half of 2021). The implementation
of the dividend distribution policy is subject to the provisions of any law, including the
distribution tests set forth in the Companies Law, all taking into account the expected cash
flow, Bezeq needs and liabilities, Bezeq's cash balances, plans and position, as they will
be from time to time, and subject to the approval of the General Meeting of Bezeq's
shareholders regarding any specific distribution, as provided in Bezeq's Articles of
Association.
The approval of Bezeq's dividend policy does not obligate Bezeq to distribute a dividend
to Bezeq's shareholders, and any specific distribution will be examined in accordance
with the terms of implementation of the dividend distribution policy as stated above. In
addition, the approval of the aforesaid policy does not prevent Bezeq's Board of Directors
from periodically reviewing the policy of distributing dividends to Bezeq shareholders,
taking into account, inter alia, the provisions of the law, Bezeq's business situation and its
equity structure and balance, its level of debt and credit rating, and the ongoing
maximization of value to Bezeq's shareholders through the regular distribution of
dividends.
Bezeq's Board of Directors considers it important to maintain the balance between
ensuring Bezeq's financial strength and stability, while maintaining Bezeq's current rating
group [AA] over time, and continuing to maximize value for its shareholders through
regular dividend distribution.
Bezeq's Board of Directors was presented with, among other things, analysis and results
of professional work as performed by Professor Aharon (Roni) Ofer, Bezeq's and the
Bezeq Group's forecasts, as well as sensitivity analyzes for unforeseen deterioration in
Bezeq's and Bezeq Group businesses. After Bezeq's Board of Directors examined all of
the above, the Board of Directors determined that this decision reflects the correct balance
between these needs as described above.
1.4.2.1 Distribution of dividends in Bezeq - Bezeq has not distributed dividends in
the last three years (2019-2021). As of the date of the report, the balance of
distributable profits of Bezeq is NIS 1,979 million. Regarding Bezeq's Board of
Directors' recommendation to the general meeting of Bezeq shareholders
regarding the distribution of dividends, see Note 20 to the 2021 statements.
For this section, see Bezeq's immediate report dated March 23, 2022 regarding
the dividend policy and the distribution of dividends included in this report by way
of reference.
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. 2021
10
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Lnadline
interior
communi
cation
Cellular
communic
ation
(mobile
radio
telephone)
Bezeq
Internatio
nal
services
Multi-
channel
TV (3)
Other
Consolida
ted
Consolida
tion
adjustme
nts (2)
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, 2021
Total liabilities attributed to the
area of activity as of December
31, 2021
3,845
2,249
1,186
1,270
337
4,182
40
2,289
51
1,237
-
1,270
369
982
2,065
1,265
723
492
369
942
2,434
2,389
2,247
2,153
1,215
944
1,311
1,291
271
6
277
215
35
250
246
-
8,821
)434(
)434(
-
8,821
)506(
)72(
6,951
6,951
45
94
271
20
4
)434(
-
2,434
2,247
1,215
1,311
250
)506(
6,951
1,748
42
22
)41(
27
72
1,870
9,245
4,452
783
1,293
100
(
1,939
)
13,934
11,415
1,753
566
474
37
(
1,407
)
12,838
(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 division was made for the purposes of this
report only. Variable costs are costs that companies have flexibility in managing and controlling in the short term,a s well as their effect
on direct output, compared to fixed costs that are not flexible in the short term and do not directly affect output (in this regard, up to
one year). The variable costs included non-recurring expenses (revenue) that were included in the item of other expenses (revenue)
of each company.
(2) Details of the adjustments to consolidated - transactions between areas of activity.
(3) See Notes 10 and 28 in the 2021 statements regarding the neutralization of the impairment loss in the multi-channel television
segment. The impairment loss in this segment is shown in the adjustments.
11
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
1.5.2. 2020
Lnadline
interior
communi
cation
Cellular
communic
ation
(mobile
radio
telephone)
Bezeq
Internatio
nal
services
Multi-
channel
TV (3)
Other
Consolida
ted
Consolida
tion
adjustme
nts (2)
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 (loss) 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
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
(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 division was made for the purposes of this
report only. Variable costs are costs that companies have flexibility in managing and controlling in the short term,a s well as their effect
on direct output, compared to fixed costs that are not flexible in the short term and do not directly affect output (in this regard, up to
one year). The variable costs included non-recurring expenses (revenue) that were included in the item of other expenses (revenue)
of each company.
(2) Details of the adjustments to consolidated - transactions between areas of activity.
(3) See Notes 10 and 28 in the 2021 statements regarding the neutralization of the impairment loss in the multi-channel television
segment. The impairment loss in this segment is shown in the adjustments.
12
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
1.5.3. 2019
Lnadline
interior
communi
cation
Cellular
communic
ation
(mobile
radio
telephone)
Bezeq
Internatio
nal
services
Multi-
channel
TV (3)
Other
Consolida
ted
Consolida
tion
adjustme
nts (2)
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 (loss) 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
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 Notes 10 and 28 in the 2021 statements regarding the neutralization of the impairment loss in the multi-channel television segment.
The impairment loss in this segment is shown in the adjustments.
For explanations about the developments in the financial data presented In sections 1.5.1 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").
13
Chapter A (Description of the Corporation's Business) for the 2021 Periodic 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 2020 and 2021.
1.5.4.1 Bezeq Fixed Lines (Bezeq’s activity as NIO)
Revenue (NIS millions)
Operating profit (NIS millions)
Depreciation and amortization (NIS millions)
Operating profit before depreciation and
amortization (EBITDA) (NIS millions) (1)
Net profit (NIS millions)
Cash flow from operating activities (NIS millions)
Payments for investments in property, plant and
equipment and intangible assets and other
investments (NIS millions)
Receipts from the sale of property, plant and
equipment and intangible assets (NIS millions)
Lease payments
Free cash flow (NIS millions) (2)
Number of active subscribers at the end of the
period (thousands) (3)
Average monthly revenue per telephony
subscriber (NIS) (ARPL) (4)
Outgoing usage minutes (millions)
Incoming usage minutes (millions)
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 revenue per Internet subscriber
(NIS) - retail (ARPU)(8)
Average plan speed for Internet subscriber –
retail (Mbps) (5)
Churn rate of telephony subscribers (6)
2021
2020 Q4/
2021
Q3/
2021
Q2/
2021
Q1/
2021
Q4/
2020
Q3/
2020
Q2/
2020
Q1/
2020
4,182
1,748
4,159
1,705
938
877
2,686
2,582
1,063
2,024
1,155
1,040
2,106
910
1,052
1,037
1,039
1,054
1,055
1,042
1,044
1,018
358
390
407
593
356
446
464
439
245
603
206
593
244
239
629
219
567
314
231
638
238
354
285
223
816
400
510
312
225
581
216
600
237
222
668
300
561
272
218
682
229
334
201
212
651
295
611
200
273
146
87
4
-
182
119
1
19
7
116
111
1,026
1,231
32
404
31
226
24
45
29
351
27
455
26
264
26
126
32
386
1,583
1,639
1,583
1,602
1,615
1,630
1,639
1,653
1,675
1,693
47
50
46
46
47
49
50
51
51
48
3,385
4,627
1,524
3,985
5,107
1,556
811
782
827
965
1,004
1,019
1,079
883
1,096
1,152
1,095
1,284
1,326
1,368
1,293
1,120
1,524
1,524
1,529
1,540
1,556
1,565
1,571
1,566
501
557
501
510
520
539
557
570
580
584
1,023
999
1,023
1,014
1,009
1,001
999
995
991
982
106
99
109
107
106
103
102
100
98
98
129.6
74.2
129.6
104.2
87.8
77.7
74.2
71.6
70.4
69.1
10.6%
12.5%
2.8%
2.4%
2.6%
2.8%
3.2%
3.4%
2.7%
3.2%
(1) Operating profit before depreciation and amortization (EBITDA) is a financial index that is not based on generally
accepted accounting principles. The Company presents this index as another index for evaluating its business
results since it is an accepted index in the Company’s area of activity which neutralizes aspects resulting from
variability in capital structure, various taxation aspects and manner and period of amortization of property, plant
and equipment 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 the Company’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. The Company’s EBITDA is calculated as operating profit before depreciation, amortization and
ongoing losses from impairment of property, plant and equipment and intangible assets. For the purpose of
adequate presentation of economic activity, the Company presents ongoing losses from impairment of property,
plant and equipment and intangible assets in DBS and Bezeq International 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 10 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 property, plant and
14
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
equipment. The Company presents free cash flow as an additional index to evaluate business results and cash
flows, since the Company 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 property, plant and
equipment and other intangible assets. For this matter see section 8 of the chapter on the description of the
corporation's business in the 2021 periodic report.
(3) Inactive subscribers are subscribers whose Bezeq lines have been physically disconnected (excluding a
subscriber who has not paid his debt to the Company 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 2021 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 2021 periodic report.
(7) Total number of Internet subscribers including retail and wholesale subscribers. Retail – the Company’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 2021 periodic
report.
1.5.4.2 Pelephone
Revenue from services (NIS millions)
Revenue from the sale of end equipment (NIS
millions)
2021
2020
1,642
1,591
Q4/
2021
424
Q3/
2021
417
Q2/
2021
409
Q1/
2021
392
Q4/
2020
396
Q3/
2020
396
Q2/
2020
394
Q1/
2020
405
647
595
178
124
167
178
137
149
141
168
Total revenue (NIS millions)
2,289
2,186
602
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 property, plant and
equipment, 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)
42
577
619
64
425
253
219
)47(
)84(
599
515
)25(
697
318
230
149
8
147
155
13
19
54
54
)89(
541
22
144
166
23
185
68
52
65
576
15
144
159
20
149
60
53
36
570
)3(
142
139
8
72
71
60
)59(
533
)36(
151
115
)12(
412
80
48
113
545
)27(
147
120
)12(
143
100
67
)24(
535
)8(
151
143
1
149
73
48
28
573
)13(
150
137
)2(
164
65
67
32
2,096
2,044
2,096
2,074
2,050
2,030
2,0
04
671,9
1,9
48
1,9
28
480
438
480
473
471
462
843
420
417
428
2,576
2,442
2,576
2,547
2,521
2,492
2,4
42
2,
396
2,3
65
2,3
56
54
56
55
55
54
53
55
65
65
58
Subscriber churn rate (Churn Rate) (4)
22.9%
26.9%
5.8%
5.5%
5.8%
5.8%
5.9%
%07.
6.8%
%27.
(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
15
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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
average income from which is significantly lower than the rest of the subscribers.
(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 2021 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 2021 periodic
report.
1.5.4.3 Bezeq International
2021
2020
Q4/
2021
Q3/
2021
Q2/
2021
Q1/
2021
Q4/
2020
Q3/
2020
Q2/
2020
Q1/
2020
Revenue (NIS millions)
1,237
1,2
71
328
287
310
312
Operating profit (loss) (NIS millions)
Depreciation and amortization (NIS
millions)
Operating profit (loss) before
depreciation and amortization
(EBITDA) (NIS millions) (1)
Net profit (loss) (NIS millions)
Cash flow from operating activities (NIS
millions)
Payments for investments in property,
plant and equipment and intangible
assets and other investments, net (NIS
millions) (2)
Lease payments
Free cash flow (NIS millions) (1)
Subscriber churn rate (3)
22
173
)412(
914
195
)92(
1
40
41
8
131
)752(
302
)5(
)52(
98
116
14
33
0
30
84
7
)73(
13
38
51
10
96
27
9
60
16
46
62
11
26
27
9
)10(
)8(
49
41
)8(
61
30
8
23
532
)22(
26
315
)275(
42
4
)233(
)13(
75
21
7
47
)305(
47
28
7
12
314
317
27
38
65
21
48
33
8
7
29
43
72
22
60
34
8
18
25.3%
30.2%
5.9%
5.5%
6.0%
7.9%
10.2%
7.2%
6.1%
6.7%
(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.
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 2021.
16
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
1.5.4.4 DBS
2021
2020
Q4/
2020
Q3/
2020
Q2/
2020
Q1/
2021
Q4/
2021
Q3/
2021
Q2/
2021
Q1/
2021
Revenue (NIS millions)
338
319
313
Operating profit (loss) (NIS millions)
Depreciation, amortization and ongoing
impairment (NIS millions)
Operating profit before depreciation,
amortization and ongoing impairment
(EBITDA) (NIS millions) (1)
Net profit (loss) (NIS millions)
Cash flow from operating activities (NIS
millions)
Payments for investments in property, plant
and equipment 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)
Of which are IP subscribers (3)
Of which are StingTV subscribers
Average monthly income per subscriber
(ARPU) (NIS) (3)
Subscriber churn rate (4)
9
44
53
14
41
37
7
)3(
23
50
73
18
39
40
7
)8(
18
50
68
16
69
38
6
25
556
557
556
53
44
72
48
94
56
195
190
187
317
)11(
59
48
)24(
14
26
6
)18(
557
120
64
186
315
315
318
322
1,287
1,270
)6(
61
55
0
62
43
6
13
22
45
67
18
56
42
7
7
30
45
75
29
73
38
6
29
559
560
560
147
70
187
173
74
186
198
79
188
)14(
52
39
203
32
203
38
242
235
)17(
42
24
30
163
233
55
141
178
7
)20(
563
226
84
190
26
)4(
26
29
557
563
120
64
190
226
84
188
5.9%
4.8%
5.4%
4.9%
4.3%
3.7%
3.7%
3.4%
21.0%
15.1%
(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 number of DBS subscribers using Yes+ and STINGTV services transmitted via the Internet (as stated in
Sections 5.2.2.1 and 5.2.2.2 of the chapter describing the corporation's business in the periodic report for 2021)
as of the date of publication of the report, is about 250K subscribers (of which, 88K are STINGTV subscribers),
whioch constitute 44% of all DBS subscribers. This rate also includes subscribers who also use satellite services
at the same time.
(4) 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 2021 periodic report.
(5) 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 2021 periodic report.
17
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
1.6. Forecast and short-term ambitions in relation to the Bezeq Group
1.6.1. The following is the Group's forecast for 2022 based on the information currently
known to the Bezeq Group:
a. Adjusted net profit10 for shareholders is expected to be in the range between NIS
1-1.1 billion.
b. Adjusted EBITDA11 It is expected to be in the range between NIS 3.6-3.7 billion.
c. CAPEX12 It is expected to be in the range between NIS 1.7-1.8 billion.
Bezeq will report, as required, deviations of ± 5% or more from the ranges specified in the
forecasts above.
d. The scope of the Company's fiber network deployment - reaching about 1.4
million households.
e. Financial stability - maintaining high credit rating in the AA group.
1.6.2. Medium-term ambitions
a. Adjusted EBITDA - Stability while maintaining an adjusted EBITDA rate in
revenue in the range of 41%-43%.
b. CAPEX - until 2024 - stability in CAPEX and in relation to CAPEX's revenues;
Gradual decline thereafter
c. Free cash flow13 - average annual growth (in CAGR terms) at a medium single-
digit rate
d. The scope of the Company's fiber network deployment - reaching about 2.1
million households
e. Financial stability - maintaining high credit rating in the AA group
The Company does not undertake to update on a regular basis or otherwise its ambitions
or such or other changes that will apply to the ambitions or actual results in relation to the
ambitions.
1.6.3. Forward-looking information
The Company’s forecasts and ambitions detailed in this section are forward-looking
information, as defined in the Securities Law. The forecasts and ambitions are based on
Bezeq's assessments, assumptions and expectation, and 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 2022 and in the
medium-term, as applicable, 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 2021
periodic report materialize. There is also no certainty that the forecast or ambitions will
fully or partially materialize, among other things, in the face of the COVID-19 pandemic
and the uncertainty as a result thereof.
Also, with respect to Bezeq ambitions, given that it is a reference to the medium term and
the difficulty of predicting Bezeq results and actual market performance in the medium
term, there is no certainty that Bezeq ambitions will fully or partially materialize, and the
deviation between Bezeq results and actual performance may be significant. Moreover,
ambitions, by nature, do not purport to be predictions and should not be read as such.
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 the capital remuneration plan. It should be noted that the adjusted EBITDA
and the adjusted net profit for 2021 were approximately NIS 3.659 billion and approximately NIS 1.154 million, respectively.
11 See footnote 10.
12 CAPEX - Payments (gross) for investment in property, plant and equipment and intangible assets. It should be noted that the
CAPEX for 2021 was approximately NIS 1.69 billion.
13 For a definition of free cash flow, see Section 7.2.2.
18
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 section 1.7.3 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)14.
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.
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. On this matter and on
approvals received by Hot see section 2.6.3.5.
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
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
14
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.
19
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
combinations of several different communication services. Communication groups market
communication service packages 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). Following the decision of the Minister of Communications dated
June 20, 2021 regarding the abolition of the obligation to separate infrastructure service
and Internet access service, as of April 3, 2022, infrastructure owners Bezeq and Hot will
be able to provide private customers with Internet access service, together with their
infrastructure service.
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.
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 section 1.8).
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 The 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 subsidiaries 15. 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
services to subscribers through the use of wholesale services. In addition,
the limitations of structural separation cause high overheads.
1.7.2.2 Abolition of structural separation
15 Pelephone, Bezeq International, DBS and Bezeq Online.
20
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
On February 24, 2021, a petition was submitted by Bezeq to the High Court
of Justice against the Ministry of Communications for immediate cancellation
of the structural separation in Bezeq Group. The petition was filed after the
Ministry did not respond to Bezeq's inquiries on the subject, even though, in
Bezeq's opinion, all the conditions that required the cancellation of the
structural separation were met in accordance with the policy document dated
May 2, 2012 regarding the expansion of competition in the landline
communications field - wholesale market ("the Policy Document"). As part
of the procedure, the state submitted an interdepartmental report for
examining the update of the structural separation obligations in the Bezeq
and Hot groups (“the Report"), in which the Minister was advised not to
cancel the structural separation obligation in the Bezeq and Hot groups at
this time. The team also found that certain changes can be made to the
overall regulation that have the potential to improve the service to the public
and that will affect the structural separation, including examining a change
in the separation used in Israel between the infrastructure service and the
ISP service (for the abolition of separation, see Section 1.7.2.4).
1.7.2.3 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). As of April 3, 2022 (see Section 1.7.2.4), the
Company will be able to offer private customers infrastructure services in
addition to the Internet infrastructure service, and will not be able to
market a basket that includes Internet access service with access service
of a subsidiary or another licensee.
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 on marketing a shared basket of
Hot-Net and other companies
the Hot Group. The Ministry of
Communications has been reducing these restrictions lately). 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.
from
On May 23, 2021, the Ministry of Communications notified the Company of the
rejection of its request dated April 4, 2021 for the marketing of a common basket
of services that will allow it, among other things, to provide the Company's
Internet infrastructure services and DBS content services based on landline
broadband access. In the opinion of the Ministry, in light of the recent
comprehensive competitive analysis, which is reflected in the recommendations
of the inter-departmental team to examine the update of the structural separation
obligations in Bezeq and Hot, it is not yet time to approve a joint basket of services
as requested by the Company. Earlier, on February 15, 2018, the Company
responded to the Company's announcement regarding the intention to send
interested customers a link to the DBS website and expressed its position that
the marketing of the DBS television on the Internet ("Sting") by the Company is
21
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
not in accordance with the structural separation provisions set forth in the
Company's license, and the Company does not market DBS’s “Sting” service in
accordance with the aforesaid.
1.7.2.4 Marketing a joint basket of Internet infrastructure services along with ISP
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 bundle16
marketing format, and especially the elimination of the obligation to split the
bundle after one year and the Company’s ability to contact customers and renew
the bundle at any time, will be permanently valid.
Abolition of the separation between broadband infrastructure service and Internet
access service (ISP):
Following the hearing that took place on the subject, on June 20, 2021, the
Minister of Communications made a decision at the hearing according to which
the separation in relation to private customers between broadband infrastructure
service and Internet access service (ISP) will be abolished, in the outline as
follows:
A. Approval of an agreement that will constitute a shelf offer and regulate key
performance indices (KPIs) and agreed compensation arrangements in the
infrastructure cost (Bezeq and Hot) with a requester of access with an ISP
license and at least 10,000 active customers in the wholesale market. On
September 19, 2021, the Director General of the Ministry of Communications
decided that the agreement regulating the key performance indicators (KPIs)
transferred by Bezeq would constitute a "shelf offer" according to the
Minister's decision, and would apply to any requester of access without
discrimination.
B. A "calibration period" of 3 months during which the infrastructure companies
and requester of access will submit the main performance indices to the
Ministry every month. On January 3 ,2022, the Director General of the
Ministry of Communications announced that for Bezeq, the calibration period
had ended and the preparation period had begun.
C. At the end of the preparation period, the restriction on infrastructure
providers offering Internet access service to private customers (the
"Effective Day") will be lifted. In accordance with the announcement of the
Director General of the Ministry of Communications on April 3, 2022, the
Effective Day will apply to Bezeq, so that from that date the Bezeq will be
able to offer a unified end-to-end Internet service that includes Internet and
ISP infrastructure (at this time, the restriction on the sale of infrastructure
and ISP products separately to new private customers who use Bezeq's
broadband infrastructure will take effect, and only customers who receive
service on a Effective Day in a split / semi-split configuration who wish to
continue consuming the Internet services will continue to do so).
Subsequently, on March 22, 2022, an amendment was made to Bezeq’s
license that implements the resolution regarding subscribers in the private
service.
Bezeq continues to prepare for the provision of an infrastructure service and a
unified ISP by it from the Effective Day.
In Bezeq's opinion, the implementation of the move according to which the
Company will offer a unified Internet service from end to end, is expected to have
a positive effect on its business. As far as Bezeq International is concerned, the
move is expected to harm its results. The total impact on the Group in the coming
years is expected to be positive.
1.7.2.5 Amendment of the terms of the merger of Bezeq and DBS
16 See Section 4.2.1.
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For the decision of the Commissioner of Competition dated April 12, 2021
regarding the amendment of the terms of the merger between Bezeq and DBS
allowed Bezeq's subsidiaries to sell communication packages that include
Internet infrastructure, Internet provider and television services without having to
sell the television services at a detachable price. Purchasing packages - see
Section 2.16.8.3.
1.7.2.6 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 section 5.15.2.
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..
1.7.3. Regulatory supervision and changes in the regulatory environment - wholesale market
Starting from 2015, a model of "wholesale market" has been implemented in Israel, in which
the owners of the nationwide landline access infrastructures in Israel (Bezeq and Hot) have
been required to allow other communications operators to use their infrastructures 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
companies 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. A wholesale BSA
service also exists on Bezeq's fiber infrastructure.
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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 sections 2.1.8, 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 section 2.7.2.
The maximum rates that Bezeq may charge for the provision of services are regulated in
the regulations.
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 section 2.16.4.
1.7.4. Additional regulatory aspects that are relevant to the whole Group or to a number of
companies in it
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.
in
the
regime
regarding a change
On September 13, 2021, a hearing was published by the Ministry of
Communications
regarding
rates
interconnectivity payments (“intrerconnect”) between
the communication
networks, according to which there is an intention to transfer the completion
segment in calls ending in the networks to a regime according to which each party
will bear its own costs and no more interconnectivity payments will be transferred
between the operators regarding call minutes and that there will be no change in
interconnectivity rates for SMS messages. In order to prevent a shock in the
affected markets, as is customary in the world and in Israel during a significant
change in interconnectivity rates, and in order to give companies affected by it a
sufficient preparation time, the Ministry considers to carry out the change in the
rates regime after a gradual reduction outline which will last for three years. With
regard to the international call market - the segment of international outgoing calls
will be attached to the reduction plan as stated in accordance with the network in
which the call was made (NIO or cellular) and with regard to international calls
coming in from abroad, supervision of the completion segment in Israel will be
removed with the entry into force of the amendment of the relevant regulations.
On Novemebr 11, 2021, Bezeq submitted its response to the hearing, according
to which in order to allow fair competition in the market, it is necessary to
immediately cancel the interconnectivity rates to the cellular operator for
forwarding a short message message that currently stands at 0.14 Agorot. A
change in the interconnectivity rates regime, as detailed in the hearing, is not
expected to have a material effect on the Group.
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 and
DBS) 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
17. Cellular
benefit he would have received if he had not terminated the contract1
operators (including Pelephone) - are not allowed to charge exit fees from
6 F
17 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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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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, a judgment was rendered in the Tel Aviv-
Yafo District Court dismissing motions for approval of class actions against
certain communication companies, when due to the Ministry of Communications'
changing position over time and ambiguity on their part, it was determined that a
class action is not the effective way to resolve the issues. The ruling further stated
that a number of major flaws (lack of factual infrastructure, lack of consultation
with the Competition Authority, lack of reasoning, incoherence and failure to hold
a hearing) have occurred in the method of the Ministry of Communications'
decision (as described above). The verdict was appealed. For further details, see
Sections 3.16.1b and d, as well as Section 5.17.2a.
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. In January 2021,
the Ministry of
Bezeq
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.
Further to Bezeq International’s response, in which it challenged the
financial sanction and the manner of measuring the deviations, the amount
of the sanction was reduced to NIS 166,000 and it was paid.
received a notification
International
from
On June 30, 2021, the licenses of Bezeq, Pelephone, Bezeq International
and the licenses of other communications operators were amended. The
amendment stipulates that the call center for handling subscriber inquiries
regarding the licensee's services (which are not inquiries regarding a
malfunction in receiving Bezeq services and loss of cellular equipment) will
be staffed for 45 hours a week. It is also stipulated that the licensee will
operate a digital means of communication such as texting or chat, in order
to receive inquiries regarding the licensee's services, which are not inquiries
regarding malfunctions and loss of cellular end equipment. This amendment
does not apply to 24/7 call centers (fault handling centers, etc.) the activity
of which continues unchanged. On September 2, 2021 the DBS license was
similarly amended.
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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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).
Bezeq is in the process of transitioning to the IPv6 protocol in accordance
with the established milestones, and it does not anticipate a material
expense in respect thereof. Regarding holders of mobile radio telephone
licenses (such as Pelephone), it was determined that the proactive transfer
will reach 100% within 24 months. Pelephone has completed the process of
transferring subscribers in its systems in support of the new protocol (except
for business subscribers who are receiving enterprise network services, for
which a dedicated solution will be implemented).
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. 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 Authority has published draft regulations for the implementation of the
amendment to the law, according to which, among other things, resellers will
contact twice a month with a list of customer numbers they are interested in
contacting and will receive in return the numbers from the list included in the
database. On January 13, 2022, Bezeq submitted its comments on the draft,
including the frequency of referrals to the database. The Group companies are
unable to assess at this stage the effect of the amendment on their marketing
and sales ability. The Consumer Protection Authority has issued a memorandum
of law requesting that it be postponed to October 31, 2022.
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.
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 recent 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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 the
authority to supervise and issue notices of intent to impose financial sanctions on
Bezeq in current regulatory matters (including the implementation of the
wholesale market BSA service). For the financial sanction imposed by the
Competition Authority in the matter of passive infrastructure, see Section
2.16.8.5..
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, the Company 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 the Company did not supply thousands of
consumers who purchased a browsing package of the type TOP 100 with this
speed. The Company submitted its response to the notification and requested
that the notification be canceled, since they do not give rise to 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 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
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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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.
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. In January 2022, the Ministry wrote to Bezeq that the approval
to provide a service not through wired deployment is given only in certain
localities, that the approval given by the Spectrum Division is for frequency use
and not approval to provide service by wireless means, and that insofar as Bezeq
intends to provide service through non-wired infrastructure to other localities, the
advisory committee should be contacted . Bezeq responded that its license allows
service to be provided via wireless infrastructure, such as millimeter waves.
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 dated February 10, 2022 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. On June 20, 2021, the Ministry added
a detailed periodic
information requirement regarding accessibility and
connection to optical fibers applicable to all license holders deploying fibers
(general and special), in accordance with uniform parameters and the number of
subscribers to the service on optical fibers divided into statistical areas. In its
decision, the Ministry stated that it intends to create an updated database that will
allow it to monitor developments and changes in the deployment of fiber
infrastructure in Israel.
1.7.4.10 Changing the format of the regulation of the provision of Bezeq services
On January 10, 2022, the Knesset's Economics Committee approved in a second
and third instances, Communications Bill (Bezeq and Broadcasting) (Amendment
No. 75) (Change in the Format of Bezeq Regulation), 5781-2020. 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 Minister may prescribe
in the general permit regulations conditions, restrictions and obligations that will
apply to those who are registered, all or some, in accordance with the types of
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
services and their characteristics. In this way, the amendment of the law allows
any person interested in providing a Bezeq service, to know in advance what the
conditions are for its activities, and to start operating without requesting and
without obtaining a license. In addition, the Minister may issue an administrative
order to a person registered in the registry in matters in the authority of whom it
is to determine in the general permit regulations if he finds that there are special
reasons that justify giving an individual instruction to the person registered in the
registry, provided he has given an opportunity to make his claims. In addition, the
definition of "Bezeq service" subject to the regulation will be changed, to reduce
the services subject to the regulation. "Bezeq service" is defined as a service
provided to the general public or part of it through the Bezeq network, which is
one of the following: a data transmission service; Internet access service;
Telephony service; Another service listed in the first addendum (no detail in the
bill).
It is further proposed in the bill that the obligation to obtain a license will
nevertheless apply in the case of (a) Bezeq service provided through a mobile-
phone radio system for the purpose of which in accordance with the Order, a radio
frequency in the field of frequencies presecribed in the Second Schedule is
assigned to the service provider; (B) Bezeq service provided through a Bezeq
network in which the number of users or subscribers or the number of network
end points or terminals exceeds a number determined by the Minister, except for
a Bezeq service provided through a Bezeq network by another authorized
provider; In this section "use" as defined in Article 5 (a) of the Law; (C) Bezeq
service provided through a Bezeq network, in which one of the following is met:
(1) It includes a landline or mobile ground station in Israel for communication with
satellite; (2) It includes a satellite located at or using the orbit, registered in the
name of the State of Israel in the International Telecommunication Association
(ITU). (D) Performance of a Bezeq operation at a land Bezeq facility that connects
a point in Israel and a point outside Israel (except in Judea and Samaria). Also, a
local authority (including a municipal company or a municipal subsidiary) will not
provide a Bezeq service whether it requires a license or registration,, unless it
has a license and in accordance with the terms of the license; The Minister has
the authority to determine, with the approval of the Knesset Economics
Committee, additional Bezeq services that will require a license, as well as
additional service providers who will be subject to licensing (for certain services
or for all services they provide), if he sees that in the circumstances, regulation
by registration is not sufficient to meet one or more of the following considerations:
(a) Maintaining state security or public peace; (B) Efficient utilization of a scarce
resource; (c) Promotion of competition. In addition, the Minister may, due to one
or more of the considerations listed above, order a Bezeq service provider
registered in the registry that the provision of a Bezeq service by it will be subject
to the receipt of a license for any Bezeq service that it provides or regarding a
Bezeq service of the type that decided thereby.
1.7.4.11 Data demand hearing - Consumption of communication services
On January 17, 2021, 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
high in volume 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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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
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 targets 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 Decision by hearing regarding licensing for new operators for the provision
of Internet access infrastructure services – for this matter, see Section 2.6.3.6.
1.7.4.13 Inactive subscribers
On September 10, 2020, the Ministry of Communications contacted the
(including Bezeq, Pelephone and Bezeq
telecommunications operators
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 and Note 10.6 to the 2021 statements. 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.
1.7.4.14 Hearing - Preparations for the management of cyber defense
On August 11, 2021, the Ministry of Communications issued a hearing regarding
the amendment of the licenses of the communications companies (including
licenses of Group companies) and the determination of instructions regarding
preparations for the management of cyber defense. The main points of the
proposed amendment deal, among other things, with the protection of the
communications network; Maintaining the relevance and up-to-dateness of
systems; Dealing with the licensee with cyber incidents; And situations in which
the licensee is required to report and share information. Bezeq, Pelephone and
Bezeq International submitted their position as part of the hearing procedure.
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 2021 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.18, 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
18 The assets needed to ensure the provision of services by the licensee.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 sections 2.16.3.7, 3.14.2 and 5.15.1.7.
1.7.5.2 Restrictions under agreements- Bezeq undertook to certain financiers in
an undertaking not to encumber its assets unless, at the same time, it creates in
favor of those financing bodies a lien of the same type, rank and amount (negative
lien), subject to certain exceptions. see also Note 13.3 to the 2021 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
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
section 2.20.10), 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. The effects of the COVID epidemic on the Group's activities in 2021 were
mainly reflected in the damage to Pelephone's revenues from roaming services, as a result
of the effects of the epidemic's spread to the aviation and international tourism segments,
without significant negative effects in other areas of activity. Although the distribution of the
vaccine and the reduction of restrictions on travel abroad supported a certain recovery in
Pelephone's revenues from roaming services during the year, these have not yet returned
to the level of activity that characterized them before COVID. In addition, the global chip
shortage and disruptions in the supply chain cause, among other things, shortages and
difficulties in the supply of, and sometimes price increases in, equipment from the Group's
main suppliers,. The Group companies are taking various meaures in light of the aforesaid
to reduce the harm to their activities.
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.
Bezeq’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.
For the purposes of this section, see also section __ of the Board of Directors’ Report and
Note 1.4 to the 2021 statements.
For this matter, see also the description of the risk factors in all areas of activity in sections
2.20.13, 3.19.1.2, 4.14.5 and 5.19.1.4.
1.7.7. Additional regulatory developments during the reporting period and the main
restrictions that apply to the Group's areas of activit – for a description on such
matters, see Sections 2.16, 3.14, 4.11 and 5.15.
1.8. Bezeq Group Business Strategy
Group vision
Bezeq Group – the largest, leading telecommunications group in Israel, will lead and promote the
digital revolution in Israel, through advanced infrastructure and services for the private and business
segments, and strive for continuous improvement in its business results.
Group strategy
1.8.1. Strategic focus - focus on building infrastructure and growth engines
A. Accelerated deployment of fiber optics and the transition to a unified Internet package will
constitute a growth engine in Bezeq Fixed Lines.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
B. Bezeq International's private segment Internet activity will be reduced, and ISP activity will
be established in DBS, which will become the "triple" sales arm that combines fiber and
television.
C. Pelephone will leverage the transition to 5G to increase revenue and ARPU.
D. Bezeq International will become a growth-focused ICT company.
1.8.2. Focusing growth strategy by theaters
A. Communication, information and content services for households - investing and focusing
efforts on growing and strengthening the competitive position in the theater, by offering as
wide a basket of services as possible and deepening the penetration of households.
B. Business communication services - maintaining and strengthening the leading position in
the theater through offering value-added to customers, based on quality service and
advanced products.
C. Cellular services - maintaining and strengthening the competitive status, while striving to
increase revenues and improve profits.
D. ICT services for businesses - investment in building capabilities that will enable significant
growth.
1.8.3. Additional strategic moves
The Group will work to locate investments in areas that are tangent and complementary to the
Group's activities and its competitive capabilities. Initiated investment and acquisition activity
will enable shareholders to increase their return by entering areas of higher growth than that of
the activity in the Group's traditional core areas. The diversification of the portfolio will allow for
the diversification of risk, and the reduction of dependence on regulatory risks.
Beyond the strategic moves, the Group strives to strengthen the foundations that will enable
continued growth in the medium term - striving for operational excellence through expanding
the digital transformation, streamlining the cost base, improving market response times and
flexibility for changes, realizing synergies in subsidiaries and striving to eliminate structural
separation.
Optimal cash flow management – maximizing value to shareholders, while maintaining an AA
Group credit rating - the Group aims to maintain high credit rating in the AA group while
adjusting the debt repayment burden to self-generating cash flow and maintaining significant
liquidity, while returning dividends to shareholders.
In addition, the Bezeq Group strives to be one of the leading companies in the field of ESG.
This section includes forward-looking information, within the meaning thereof under the
Securities Law, including forecasts, targets, business strategy, assessments, aspirations and
estimates, both regarding the activities of Bezeq and the companies held by it and the markets
in which they operate, as well as any other information relating to future events or matters
whose materialization is uncertain and not under the control of the Company ("forward-
looking information"). Although the Company believes that the information is forward-looking
based on reasonable estimates, the said information is subject to certain risks and
uncertainties. Forward-looking information is inherently subject to risks of non- materialization
and is uncertain, and the Company does not in any way guarantee that its assessments,
expectations, aspirations and objectives will be materialize in practice. Accordingly, forward-
looking information should not be construed as a promise that it will actually materialize.
Implementation and / or other changes in forward-looking information depend on factors that
are not necessarily known in advance, and are not necessarily under the Company's control,
including risk factors and the nature of its operations, developments in the general environment
and external factors and regulation affecting its activities and other factors. The results and
achievements of the Bezeq Group in the future may differ materially from those presented in
the forward-looking information presented in this section.
1.8.4. Streamlining moves and promoting the assimilation of synergies between subsidiaries
Bezeq’s 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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 sections
2.19, 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
section 5.19.
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 in 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 examiner19 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. After
rediscussing 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.
Accordingly, at the request of Bezeq's Audit Committee, the external examiner presented
complementary work findings to the Audit Committee, and subsequently received the Bezeq Board's
recommendations from the Audit Committee, mainly in implementing period controls and analyzes
that Bezeq International must perform as part of the financial statements. Adoption of a professional
standard for executives engaged in controls, and their work, in Bezeq and in each of its material
subsidiaries, as well as conferring supervisory and control powers on Bezeq Accounting Division on
the work of finance and accounting employees in each of the subsidiaries' financial statements;
Adoption of certain tests for the purpose of increasing the effectiveness of super-controls (entity-level
19 An investigation team from the firm of Fahn Kanne & Co. headed by CPA Mickey Blumenthal.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
controls) in Bezeq as well as in each of its significant subsidiaries; As well as recommendations for
examining and improving Bezeq and Bezeq International's contracts with external service providers.
For further details on this matter, including the details of the effect of the discrepancy corrections on
the Group's equity 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. Also, regarding legal proceedings related to this matter see Section 2.18.2.
Up to the date of the current report, Bezeq International's Management, Bezeq International's Board
of Directors and Bezeq's Board of Directors have carried out various operations, inspections and
compensatory procedures, while investing many efforts and resources to strengthen Bezeq's internal
control. The deficiency correction plan, which was adopted by Bezeq's Board of Directors and Bezeq
International's Board of Directors, also includes the recommendations of the external examiner. For
some of the actions, the companies used the services of various professional consultants. The
process of strengthening internal control at Bezeq International is still ongoing.
For this section, see also Chapter E of the 2021 statements.
1.10. Corporate accountability (ESG)
On February 24, 2022, Bezeq's Board of Directors approved the expansion of its activity in the field
of corporate accountability (ESG), following Bezeq's existing activity in the field. In this context, the
Board of Directors approved a sustainability vision for Bezeq - "Bezeq connects Israel to a
sustainable future", as well as setting ESG targets, including long-term targets that include reducing
net greenhouse gas emissions to zero by 2050 (Net zero 2050); Increasing the rate of representation
of women in the management ranks of Bezeq employees to 50% by 2030 (in Bezeq's Board of
Directors - at least 40%); Increasing the rate of diversified populations to 20% by 2030. Bezeq's
Board of Directors also approved the establishment of Bezeq's corporate responsibility policy
documents on various issues that will be brought individually for discussion and approval by Bezeq's
Board of Directors.
Bezeq sees great importance in further promoting and expanding its activities in the field of ESG,
and it will continue to operate in this field from a corporate-social-environmental perspective that
promotes the use of Bezeq's areas of activity and capabilities for a sustainable future.
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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 section 2.16.4).
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 section 1.7.2 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 section 2.16.8.
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 section 2.16.8).
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 section 2.15.2), 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 2020 and 2021, 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 period20:
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 2021, the
number of wholesale Internet subscribers on the Company’s network was
approximately 501K subscribers, constituting approximately 33% 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 the Company’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 section 2.16.4.
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
20 For details of the data as well as subscrber definitions and average revenue, see the notes to the table in Section 1.5.4.1.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
call packages that cellular companies have marketed extensively in recent years
and a decrease in prices in the field (Bezeq estimates that 86% 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 2021, there was a decrease of about 3%
in the number of Bezeq subscribers compared to 2020.
Diagram - Rate of households without a landline telephone line21
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 2021, Bezeq estimates that there
will be a 2% increase in the number of landline Internet subscribers in Israel
compared to 2020. In 2021, there was a 2% decrease in the number of Bezeq
Internet subscribers (retail and wholesale) compared to 2020. In 2021, there was
an increase in Internet subscribers through fiber optic infrastructures of competing
companies. Bezeq began marketing the 200Mb speed in November 2020 to
potential customers using VDSL35B technology. In March 2021, Bezeq also
began marketing fiber services at rates of up to 600 Mbs, 1 Gb, 2.5 Gb in
statistical areas. (See section 2.7.2.2).
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 shift to the
21 The data were taken from the publications of the Central Bureau of Statistics (press releases, preliminary findings from the
Household Expenditure Survey 2018) dated November 26, 2019 and October 29, 2020. In relation to the data for the years
2019-2021 - in accordance with Bezeq’s assessment 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 2021 Periodic Report
use of the telecommunications providers' own infrastructure, including within the
wholesale market. For this matter see section 2.16.4.3.
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 section 1.7.1. 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.), cloud services and
services on the cloud. 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 section 2.7.2. 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 section 2.6.2).
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
at the expense of the use of the Bezeq network exists and may increase with the
establishment of 5G (see section 3.1.5), 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, while Bezeq began marketing broadband services on fiber after
them in March 2021.
Bezeq also develops and provides services based on wireless technologies for
IoT (Internet of Things) solutions, including for smart homes, businesses and
complexes. See Section 2.2.5.
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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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
licenses. For a memorandum of understanding of the bill regarding a change in the format
of the regulation and transfer to the issuance of communication services through
registration in the registry only, 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 sections 2.7.2 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
technology
telephony services over another operator's broadband
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
debentures and 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 section
2.6.2), and in the field of the Internet (see sections 2.6.2 and 2.6.3), transmission and data
communication. Technological developments (such as 4G and 5G in cellular, fiber-optic-
based infrastructure, millimeter waves and advanced cable Internet protocols) enable the
provision of new services at high speeds and at competitive prices.
2.1.8. The structure of competition in this field of activity and changes that apply thereto
The field of interior landline 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
indebted for deployment, so that at the end of 5 years from March 7, 211, 1.7 million
households in Israel will be accessible to the network22. 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 other NIO infrastructure, so that in fact the competition could be
through physical infrastructure of another licensee, and in practice, mainly on Bezeq's
infrastructure (see Section 2.16.4.4 in this regard).
The companies Cellcom and Partner, which have unique NIO licenses (which do not
require universal deployment), are deploying an independent fiber network, including
Bezeq's physical infrastructure (regarding Cellcom and Hot joining IBC, see Section
2.6.3.5).
22 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 2021 Periodic Report
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 Section 2.1.4).
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
section 2.16.4.
For the decision on the elimination of the separation between the Internet infrastructure
service and the access service (ISP) - see Section 1.7.2.2.
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 Section 2.16.4).
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 section 1.7 and 2.6.
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.
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 center23, 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 section
2.16.4.4.
2.2.3. Internet access infrastructure services
Bezeq provides broadband Internet access infrastructure services using xDSL technology
over VBAND as well as over the fiber network in statistical areas, subject to milestones in
its license.
For details regarding changes in the number of Bezeq Internet subscribers and the average
23
"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.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
monthly income per Internet subscriber, see section 1.5.4. For details regarding Bezeq's
market share in this field, see section 2.6.3.
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 subscribers24 At the end of 2021
amounted to about 129.6Mbps, compared to an average package speed of 74.2Mbps at
the end of 2020. The minimum package provided in the service to new customers is usually
at a maximum speed of 15Mbps. In December 2021, the minimum package rate for sale
was updated to 100Mbps.
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 section 2.16.4.
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
connecting communication networks to the Internet and remote business access services.
Bezeq offers transmission services, including at high speeds, to communications
operators, international parites and its business customers in a variety of interfaces (see
Section 2.6.4).
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.
24 Including revenue from service providers in wholesale service..
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 section 1.7.3. 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 and bad debt. 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.
Following an investigation by the Ministry of Communications and a hearing it
published on the subject, on March 25, 2021, the Ministry decided to establish a
procedure for dealing with the issue, stating, among other things, that the staff
handling complaints in the Ministry of Communications can recommend to the
authorized factor within the Ministry that the Ministry will not prevent the affected
licensees from taking steps such as stopping the provision of service, not
connecting new subscribers and more, depending on the circumstances and the
severity of the case. Despite this, there are still operator debts in legal
proceedings.
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 section 2.15.
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
broadcasting companies, cellular operators,
international communications
operators, local authorities, municipalities and government bodies).
2.2.6.4 Electricity supply license
On September 1, 2021, Bezeq received a license from the Electricity Authority to
supply electricity without means of production. Bezeq intends to examine in the
first phase of a pilot supply and sale of electricity to various consumers in
accordance with the terms of the license.
2.2.7. Sale of end equipment and devices
As of 2019, Bezeq has been selling smartphones (in addition to other end equipment sold
thereby). Bezeq has expanded its offering to additional equipment and devices.
2.3. Revenue segmentation of products and services
The following is data about the distribution of Bezeq’s revenues according to the main products and
services in its field of activity in the years 2019-2021 (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
41
2021
1,624
38.83%
2020
622
1,
%0.93
913
21.83%
008
1,
%24.24
2019
1,578
38.74%
1,039
25.50%
1,087
1,011
948
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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
26.0%
%31.24
23.27%
318
7.6%
288
%926.
274
6.73%
240
230
234
5.74%
%535.
5.74%
4,182
4,
159
4,073
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%).25. 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
2021
2,071
2,111
4,182
2020
2,
033
2,
126
4,
159
2019
2,029
2,044
4,073
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.
Bezeq has independent service and sales channels on its website, in a dedicated application (My
Bezeq), and through a computerized voice answering service.
The Company's infrastructure is also included in packages marketed by Internet providers (ISPs)
most of which, with the establishment of a wholesale market, market mainly end-to-end service
packages based on Bezeq's BSA wholesale service, and as of April 3, 2022 will not be able to market
Internet infrastructure to private customers outside the wholesale market.
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)
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 section 2.1.3.2). Bezeq estimates that in 2021 the entire
telephony market continued to erode at a similar rate to 2020 and at a higher rate compared
to previous years. For this matter, see also section 2.3.In Bezeq's estimation, as of the end
25
Including revenue from wholesale service providers.
42
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
of 2021, its market share in the landline telephony market was about 54% in the private
market and about 70% in the business market, unchanged compared to 2020 in the private
market and unchanged compared to 2020 in the business market26.
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 by Hot Group
as well as the marketing of service baskets by Bezeq Group, See Section
1.7.2.3). 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 the wholesale
telephony service, see Section 2.16.4.
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 section 2.1.3).
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 2021, its market share in the Internet
infrastructure market (retail and wholesale customers) amount to about 57% (compared to
approx. 61% at the end of 2020). In addition, Bezeq estimates that its market share in terms
of retail customers as of the end of 2021 amount to approx. 38%27.
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
26 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.
27 Bezeq's assessment of its market share in the field of Internet infrastructure services at the end of 2021 is based on the number
of customers consuming services on Bezeq infrastructure (retail and wholesale) and on publications regarding the number of
Partner and Cellcom subscribers. It should be noted that HOT and smaller companies operating in the market are not reporting
corporations and their data are not public, and accordingly, it is difficult to give accurate data regarding market shares, and these
are only estimates.
43
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
the HOT network has been marketed since the middle of 2018. For that matter,
see also Section 2.6.1.
According to media reports, during the months of March-April 2021, Hot
announced the launch of its new fiber network. Hot and Cellcom have holdings in
IBC (see Section 2.6.3.5).
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 Section 2.16.4.2), 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 Section 1.7.2.1.
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 Section 2.6.3.2, 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. In addition, service providers
may provide a BSA service over Bezeq's fiber infrastructure as well.
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.
2.6.3.5 Competition from IBC - IBC is setting up a fiber infrastructure to provide
Internet over the electricity grid (and has started commercial operations). In
accordance with the decision of the Minister of Communications dated August 8,
2018, the deployment duty 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 (of three and a half years), the new licensee will be required to
make at least one household accessible in the periphery for every household
accessible in the center (for this matter, see also Section 2.1.8).
IBC’s license enables the provision of services to licensees.
IBC is held by the Israel Electric Corporation (30%) and by Hot, Cellcom and the
Israel Infrastrcure Fund, 23.3% each, to the best of Bezeq's knowledge, after 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, and 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 the infrastructure to be established by IBC, at the beginning of
2021 the approvals of the Competition Commissioner and the Ministry of
44
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Communications were received. In addition, the Ministry of Communications
made an amendment to Hot’s 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
2.6.3.7 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. For this matter, see also
Section 1.7.4.10, and regarding the possibility of allowing these licensees to use
the Company's passive infrastructure in incentive areas, see Section 2.16.12.4.
According to Draft Amendment 76 to the Communications Law, the provision of
communications services wil be allowed through registration in the registry in
accordance with general permit regulations or the directives of the Ministry's
General Manager, and this will be the basic regulation format in which broadband
infrastructure services can also be provided. Certain services will still be subject
to a license, including a Bezeq service provided through a Bezeq network in which
the number of users or subscribers or the number of end points or terminals in
the network exceeds a number determined by the Minister, except for a Bezeq
service provided through a Bezeq network by another authorized provider (see
Section 1.7.4.10).
On the Minister of Communications' decision regarding the abolition of the
separation between broadband infrastructure service and Internet access service
(ISP), see Section 1.7.2.4.
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 Section 2.16.4.3)28, 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 and Hot (in a national but not
complete deployment). These
infrastructure owners may use Bezeq's physical
infrastructure. In this matter see Sections 2.16.4.3 and 2.6.5.
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 infrastructures29
In addition, there are currently a number of infrastructures in Israel that have the potential
28 Unified license owners eligible to provide NIO services are also eligible to receive wholesale service for the use Bezeq’s physical
infrastructure.
29 Beyond Hot and IBC infrastructure.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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
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 option for consumption of content, leisure
and entertainment applications (see also sections 2.2.3 and 2.7.2). In March
2021, the Company launched the fiber service on an advanced network deployed
in the statistical areas (see Sections 2.7.2.2 and 2.16.12). Bezeq also has service
over VBAND, and a browsing package up to 200 MB, over 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 (until
April 2022) (see Section 2.16.1.4), 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 and Cyber protection. The router and services are
managed by a dedicated app. As of the end of 2021, Bezeq's customer base
using the Be router is approximately 666K customers (approximately 65% of
Bezeq's retail Internet customers). Bezeq also markets products to improve the
reception range of the Be spot and Be mesh home Internet networks, while as of
the end of 2021, about 357K units of these products were marketed by Bezeq.
With the advent of Internet services on the fiber, a router was launched that
improves the reception range that is compatible with the fiber network at ultra-fast
speeds.
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.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
d. Technological innovation.
e. High positive cash flow, financial resilience and access to financing sources
f. Extensive service infrastructure and diverse customer interfaces.
g. Professional, experienced and skilled personnel.
2.6.7.2 Negative factors
a. 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:
Wholesale market (see section 2.16.4) - 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 the decision by hearing
regarding setting maximum prices for the Company's retail telephony
services, see also Section 2.16.1.
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
section 1.7.2.
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), except in relation to advanced network
(fiber) for private customers. 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 section 2.7.22.16.12. 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. These companies has carried out and are
carrying 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 section
2.16.4).
e. Restrictions on the marketing of shared service packages by Bezeq and
Group companies
See section 1.7.2.1.
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. Property, plant and equipment and facilities
2.7.1. General
Bezeq's property, plant and equipment include, mainly: infrastructure and equipment for
interior communications, real estate assets (land and buildings), computer systems,
vehicles and office equipment.
2.7.2. Infrastructure and stationary interior communications equipment
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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
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, and
through the use of 35B technology (extension of xDSL technology), through which
rates of up to 200Mbps can be provided in part of the Bezeq network, depending
on the quality of the copper infrastructure, as well as innovative value-added
services. Additional benefits of this network are simplification of network structure
and improved management capability.
2.7.2.3 Ultra-broadband fiber infrastructure
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), the
Company’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.
Following Bezeq's above-mentioned decision of the Board of Directors, Bezeq
began deploying fiber to buildings, including the deployment of vertical GPON
equipment in buildings, and on March 14, 2021, Bezeq announced the launch of
services to its customers over its fiber optic network.
For the amendment to Bezeq's license and the selection of areas for the
deployment of the fiber network by Bezeq, see Section 2.16.12.
As of the date of publication of the report, Bezeq has completed the physical
deployment of the fiber network to approximately 1.174 million households
throughout the country that are available for commercial connection, and as of
the date of publication of the report, about 120K subscribers were connected to
the Bezeq network.
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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
2.7.4.1 General
Bezeq has real estate assets from four sources: assets transferred to Bezeq by
the State in 1984 as part of the asset transfer agreement (see Section 2.17.2.1),
assets in which rights were acquired or received by Bezeq after this date, assets
that it leases from third parties, and communication-only assets in which Bezeq
has a right-of-use for a limited period.
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 owned or
leased, are assets with potential for improvement.
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.
302
Lot area
(sqm.
thousand
s)
Approx.
834
Built-up
area (sqm.
thousands)
Approx. 181
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.
2,510
Approx. 31 Approx. 64
Irrelevant
Approx. 27
(based on
an estimate)
Notes
From this, approx.. 300 field assets in the area
approx. 815k thousand sqm. of plots, approx. 71k
sqm. built-up are assets for communication needs
and the rest are for administrative needs.
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. 314 assets, of which a built-up area of about
16k sqm. are for communication needs and the rest
for administrative needs. Approx. 2k sqm. built-up of
which are sublet.
These are cable
rooms and
neighborhood communication needs.
As for most of the properties, this is a right-of-use
the
granted
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
2.7.4.2 Registration
As of the date 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
the State ("Settlement
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 discounted
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.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 Bezeq’s 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
Bezeq’s Board of Directors from time to time.
In recent years, Bezeq has sold real estate that was inactive or could have been
vacated relatively easily and without significant expenses, and / or for which the
consideration justifies providing another worthy alternative, while recording
capital gains on these sales, which in some years were significant (during 2021,
Bezeq sold real estate for a total of approximately NIS 273 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
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 (“the Improvement Plan”) that was 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
50
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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. Subsequently, on June 27, 2021, Bezeq filed a lawsuit with the Tel Aviv
District Court against the Israel Land Authority for the return of the full amount it
paid as a permit fee and improvement levy in the total amount of NIS 217 million
and for declaratory relief according to which the Israel Land Authority must pay
Bezeq any amount foreclosed, if any, from the bank guarantee in the amount of
NIS 75 million provided by Bezeq to the Or Yehuda Local Planning and
Construction Committee to secure the balance of the improvement levy . As part
of the lawsuit, Bezeq claimed that it was not liable to pay the permit fee and
improvement levy because in accordance with the provisions of the settlement
agreement signed between Bezeq and the Israel Land Authority and the State of
Israel, it was entitled to receive the lease contract that refers to the property in
Sakia when it is improved in accordance with the plan and without payment of a
permit fee to the Israel Land Authority, and that in accordance with the provisions
of the settlement agreement, the liability to pay an improvement levy in respect
of the plan applies to the Israel Land Authority.
On January 17 ,2022, the Israel Land Authority filed a letter of defense in which
it argued that the lawsuit should be dismissed for the following reasons: (1) The
payment of the permit fee, which Bezeq demands to be returned, was lawfully
imposed on Bezeq, since the Improvement Plan deviated from the limited rights
granted to Bezeq in the settlement agreement; (2) With regard to Bezeq's claim
to receive from the Authority the improvement levy that Bezeq paid to the Local
Committee, the Authority's obligation in the settlement agreement to pay the
improvement levy, on which the Company bases its claim, was in relation to the
above limited rights, and today it is not possible to set aside the replacement of
the improvement levy and separate it from the charge for the Improvement Plan.
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 2021 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 the Company’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
time of signing the agreement. Bezeq recorded in its financial statements for the
first quarter of 2021 a capital gain in the amount of NIS 125 million before tax for
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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).
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 section 2.16.2).
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 as well
as two samples. The main trademarks are Bezeq – Bezeq’s name, and "B" – Bezeq’s logo.
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,
2021:
Board of
Directors
CEO
Management
(without
directors)
)32(
Internal
Auditor*
Corporate
Communi
cation
Legal
Advisor
Group
Secretary and
Internal
Compliance
Office
Headquarter
s Division
(
540
)
Regulatio
n Division
Finance
Division
Marketing
and
Innovation
Division
Operation
s and
Logistics
Division
Human
Resources
Division
Technolog
y and
Network
Division
(
1564
)
Business
Division
Private
Division
(
2553
)
2.9.2. Number of Bezeq employees and employment frameworks
The number of employees at Bezeq as of December 31, 2021 was 5,475 employees
(compared to 5,408 employees at the end of 2020). About 93% of Bezeq employees are
employees employed under collective agreements (of which approximately 57% of Bezeq’s
employees are permanent employees and the rest are non-permanent employees). The
rest of Bezeq’s employees (approximately 7%) 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 Section 2.9.4.
2.9.3. Early retirement plans for employees
During 2021, 125 permanent Bezeq employees retired in accordance with the retirement
52
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
plan in Bezeq.
In this sframework, the retirement of all Bezeq employees that were transferred to Bezeq
from the Ministry of Communications), except for a few individual employees whose
retirement was postponed during 2022 due to Bezeq's administrative needs).
On November 29, 2021, as part of the implementation of Bezeq's streamlining plan and
under the collective agreement in Bezeq of the retirement of approximately 50 veteran
permanent employees in the early retirement track at a total cost of approximately NIS 71
million (the cost includes a reserve of 5% of the estimated retirement costs). In light of the
aforesaid, Bezeq recorded in its financial statements for the fourth quarter of 2020 an
expense in the amount of NIS 67.5 million.
For this matter see also Note 16.5 to the 2021 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.
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. 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 in this section as: "the Agreement"):
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 Directors30 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).
30 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 2021 Periodic Report
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 employees that were transferred from the Ministry of Communication) 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 2.17.3.
2.9.5. Officers and employees of Bezeq's senior management
As of the date of publication of the periodic report, Bezeq has 9 directors (out of a
composition of 9 directors decided by Bezeq’s Board of Directors), of which three 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.
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 2021 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 equity
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 2,580,000 additional options
by virtue of the Outline to 4 officers and / or employees in Bezeq and in the subsidiaries.
Also on January 18, 2021, the general meeting of Bezeq shareholders approved:
Increasing Bezeq's registered share equity by 24,485,753 ordinary shares of NIS
A.
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.
On April 22, 2021, the General Meeting of Bezeq's shareholders approved an amendment
to Bezeq's remuneration policy, according to which the limit of liability in the officers'
insurance policy was limited to a maximum ceiling of US USD 250 million (replacing the
liability limit of US USD 100-250 million), and the inclusion of the possibility of renewing the
54
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
insurance policy by extending or entering into a new policy at any time.
On March 22, 2022, Bezeq's Board of Directors approved the convening of a general
meeting, the agenda of which includes, among other things, the approval of an updated
remuneration policy for a period of three (3) years, effective from January 1, 2022, which
includes, among other things, clarifying amendments regarding the return of remuneration
given on the basis of incorrect financial information, adjusting the remuneration policy in a
manner that allows for variable remuneration depending on performance to the Chairman
of the Bezeq Board of Directors, as well as drafting amendments and other technical
amendments..
For the capital remuneration plan - see Note 26 to the 2021 statements.
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.
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 2021, 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 NGN network access
systems
GPON equipment for the fiber project.
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 equity
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
For details regarding Bezeq's working equity, see Section 1.4 of the Board of Directors' Report.
For information on investments in investee companies, see Note 12 to the 2021 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, 2021, Bezeq is not financed by short-term credit (less than a year).
The following is the distribution of long-term loans (including current liabilities):
Average
interest
rate
3.43%
2.13%
Effective
interest rate
Interest
rate range
in 2021
%3.36
2.20%
%3.20
-
%.304
2.13%
The
principal
amount
(NIS
millions)
711
300
Loan
period
Source of
funding
Banks
Banks
Long-
term
loans
Non-
banking
sources
36
Currency
or linkage
type
NIS
unlinked
NIS
unlinked
NIS
unlinked
Type of
interest rate
and change
mechanism
Fixed
Variable on
the basis of
the short-
term loan
interest rate
per year *
Variable on
the basis of
the short-
term loan
interest rate
per year **
4,073
NIS
unlinked
Fixed
%063.
%153.
%381.
%571.
%381.-
%43.1
%2.79
-
%.004
Non-
banking
sources
Non-
banking
sources
CPI-
linked
NIS
* Prime interest rate - 1.60% (as of March 2022)
** Short-term loan annual yield for the year (223) - minus 0.38200% (average of the last 5 trading days of
-
%0.58
.70%3
%1.76
%1.72
Fixed
2,916
February 2022) for the interest period that began on March 1, 2022.
For more details about Bezeq loans, see Note 13 to the 2021 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 publication of the
statements and as of the date publication of 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, 2021, Bezeq's reportable credit, in accordance with legal position 104-
15 of the Securities Authority (reportable credit incident) is Bezeq's debentures from series
6, 9, 10, 11 and 12, all as specified Note 13 to the 2021 statements and in section 4 of the
Board of Directors’ report.
2.13.4. Amounts of credit received during the reporting period
56
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
On April 7, 2020, Bezeq published a prospectus of registration for trading and unblocking
of Bezeq debentures (Series 11 and 12) and a shelf prospectus (dated April 8, 2020) (“the
Prospectus").
On December 23, 2021, Bezeq completed a placement of new debentures (Series 13 and
14) according to a shelf offer report from December 21, 2021, which was published
according to the Prospectus. In this framework, 200,000,000 debentures (Series 13) were
issued in exchange for an amount of approximately NIS 200,000,000, and 200,000,000
debentures (Series 14) in exchange for an amount of approximately NIS 200,000,000 were
issued. For further details regarding these debentures, see Bezeq's off-the-shelf offer
report dated December 21, 2021, Bezeq's immediate report dated December 22, 2021
regarding the issuance results included in this report by way of reference. In addition, on
December 1, 2021, Bezeq took out a loan in the amount of NIS 300 million from a banking
corporation.
On Jnuary 23, 2021, Bezeq made a partial early repayment, on its own intiative, of Bezeq’s
debentures (Series 9) in the amount of approx. NIS 370 million par value.
For the purposes of this section, see also Section 4 of the Board of Directors' Report and
Note 13 to the 2021 statements.
2.13.5. Bezeq's debentures
For details regarding the debentures issued by the Company and by Bezeq see Note 13 to
the 2021 statements and Section 4 of the Board of Directors' Report. Also, see section
2.13.4.
2.13.6. Credit rating
Bezeq's debentures 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 May 2, 2021, Midroog issued
the rating of Bezeq's debentures (which had negative consequences) and approved the
Aa3.il rating of Bezeq's debentures, with a stable rating horizon, and on December 1, 2021
Midroog announced the granting of the same rating to Series 13-14 debentures, which
Bezeq will issue in the amount of up to NIS 400 million par value. On May 12, 2021, Maalot
confirmed Bezeq's ilAA-/Stable rating and its debentures. In addition, on November 30,
2021, Maalot announced the granting of the same rating for the issuance of debentures in
the amount of up to NIS 400 million par, through the issuance of two new series, 13 and
14.
For details regarding the history of Bezeq ratings in the last two years, see Bezeq's
immediate reports dated May 4, 2020, May 26, 2020, May 12, 2021 and November 30,
2021 (Standard & Poors Maalot Ltd.), as well as from April 22, 2020, May 26, 2020,
December 22, 2020, May 2, 2021 and December 1, 2021 (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 (2022) and the
sources of raising
During 2022, Bezeq is expected to repay a total of NIS 1.55 billion for the principal and the
interest on its loans, including debentures (this amount includes an early repayment of
Series 9 debentures executed as specified in Section 2.13.4).
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.
2.13.8. Liens and collateral
For information regarding Bezeq's liens and collateral, see Note 19 to the 2021 statements.
2.14. Taxation
For information on taxation, including losses carried forward for tax purposes in DBS, see Note
7 to the 2021 statements.
On December 26, 2021, Bezeq received a letter from the Tax Authority extending, at Bezeq's
request, the validity of the taxation decision for one year, i.e., until December 31, 2022. It
should be noted that the Tax Authority's letter states that in light of the fact that there were no
material developments regarding the abolition of the structural separation between Bezeq and
57
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
DBS from the date of the taxation decision until the date of this extension, and in light of the
long time elapsed from the taxation on the subject, the Tax Authority will consider not
extending the validity of the taxation decision beyond December 31, 2022, as long as there
are no significant developments in 2022 regarding the abolition of the structural separation
between Bezeq and DBS. According to Bezeq's position, it is entitled to an extension of the
Tax Authority's approval in accordance with the terms of the tax decision, according to which
the Tax Authority will extend the validity of this tax decision annually in writing each year,
subject to the companies' declaration that there has been no material change in their business
and the terms of this tax decision and subject to the interpretation given to the law, provided
that such interpretation is published in writing". Furthermore, even if the validity of the taxation
decision is not extended, this does not prevent Bezeq from requesting from the Tax Authority
at any relevant time in the future a new taxation decision instead of the said taxation decision.
It should also be noted that Bezeq continues to work with the various regulatory bodies to
abolish the structural separation.
2.15. Environmental risks and their ways of management
2.15.1. General
Some Bezeq facilities, such as broadcasting facilities, wireless communication facilities, or
high-voltage facilities31 are sources of electromagnetic radiation which are included in the
definition of "radiation source" in the Non-Ionizing Radiation Law.
2.15.2. 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,
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 section 2.16.10.
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
31The 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 2021 Periodic Report
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), and from time to
time, Bezeq is exposed to significant changes in its rate structure and rate level. 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) (until April 1, 2022) - 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. On December 12, 2021, the Communications Regulations (Bezeq and
Broadcasting) (Calculation and Linkage of Payments for Bezeq Services), 5767-
2007, where the formula for the update was determined, as part of the decision
at the hearing regarding the determination of maximum rates for Bezeq's retail
telephony services. The cancellation will take effect on April 1, 2022 (see Section
2.16.1.4).
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 the hearing on rates and
interconnectivity accounting, see Section 1.7.4.1.
2.16.1.4 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
of the Communication Law, 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 be made, inter alia, in accordance with the parameters as
stated in section 2.16.1.1(1), and the Minister may examine the payment based
on what is stated in section 2.16.1.1(2).
2.16.1.5 On December 30, 2021, the Minister of Communications issued a decision
at a hearing (a hearing dated December 15, 2020 regarding the determination of
maximum rates for Bezeq's retail telephony services) to reduce Bezeq's
telephony rates as detailed below (“the Decision"). The following are the main
points of the Decision.
59
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
a. Amend the relevant regulations so that the maximum payments for a
subscription line32 and for calls from a subscription line will be reduced in a
graded manner on two dates: April 1, 2022 (the day the regulations come into
force) and July 1, 2023..
b. The following is a breakdown of the rates in accordance with the
aforementioned dates (in NIS):
Two
stages
April 1,
2022
until
July 1,
2023
Starting
from
July 1,
2023
Service
Monthly usage fee per telephone line
Rate for call minutes to landline
networks33
Rate for call minutes to mobile
networks 34
Monthly usage fee per telephone line
Rate for call minutes to landline
networks 35
Rate for call minutes to mobile
networks 36
Maximum rate
Net of VAT
29.91
Peak
Low
0.035
0.0857
VAT
included
35
0.041
0.100
Peak
Low
0.1093
20.82
0.0142
0.074
0.128
24.36
0.017
0.086
c. Upon the transition to a mechanism of maximum payments, the existing
alternative payment baskets that Bezeq markets in accordance with the
provision of Article 15A of the Communications Law will be eliminated. At the
same time, Bezeq will be able to market telephony service packages that
include a telephone line and call minutes, at rates set by it in accordance with
Article 17 of the Communications Law, provided that the payments in these
packages are lower than the payments derived from the maximum rates set.
Starting from April 1, 2022 and until July 1, 2023, the maximum payment of
subscribers who paid for a group of services on the eve of the entry into force
of an alternative payment basket, will be according to the conditions set in
that alternative payment basket or according to the regulations after the
amendment, whichever is lower. The Ministry of Communications estimates
that such a change in rates is expected to reduce telephony expenses of
Bezeq's discrete line subscribers and reduce Bezeq's landline telephony
consumers' expenses by NIS 370 million per year from July 1, 2023 onwards
(including VAT).
d. The Minister of Communications' decision also states that in view of the
expected technological changes, in particular the transition to advanced
networks, the decrease in the number of subscribers to the landline telephony
service and changes in the competitive situation, whatever the situation, the
Minister of Communications intends to Bezeq's landline telephony service.
Bezeq estimates that the reduction of rates in accordance with the decision is
expected to have a material adverse effect on Bezeq's financial results. At the
same time, Bezeq estimates that the decrease in its revenues is expected to be
lower than that stated in the Ministry of Communications' estimates.
According to Bezeq estimates, if the number of telephony lines and call minutes
in the Bezeq network had remained at their level as of the date of this report, the
reduction in rates would have led to a decrease in Bezeq’s revenues in 2022 of
NIS 70 million; a decrease in Bezeq's revenues in 2023 in the amount of
32 "Subscription line" - up to three lines that connect terminal equipment to the Company’s network, provided that the terminal
equipment is not connected to an extension in a private hub, unless the terminal equipment is connected to an extension in a private
hub that is not connected to the Company’s network through the active dial-up service.
33
Including interconnectivity rate to landline destinations.
34
Including interconnectivity rate to mobile networks.
35 Including interconnectivity rate to landline destinations .
36 Including interconnectivity rate to mobile networks .
60
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
approximately NIS 150 million; and from 2024 onwards, to a decrease in Bezeq's
revenues in the amount of approximately NIS 200 million per year. However, in
light of the continuing declining trend in both the number of Bezeq telephony lines
and the number of call minutes, which led to an erosion in Bezeq's revenues from
telephony services37, the impact of the decision alone on Bezeq's revenues is
expected to be smaller compared to this section.
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 demands for Bezeq services and the behavior of
various communications operators. Accordingly, the information may not
materialize or materialize differently from what is stated depending on the
materialization of the above assessments.
Upon the entry into force on April 1, 2022 of maximum payments (instead of FIX
payments) for telephony services as determined by the Ministry, Bezeq will not
market alternative payment baskets under Article 15A (a) of the Law, as they are
relevant when no maximum or minimum rates have been set. However, 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 services for which payment has not bee determined
under Articles 5 or 15 of the Communications Law, insofar as the Ministers do not
object.
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.
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.
On November 29, 2020, Communication Notice (Bezeq and Broadcasting) (Use
of an NIO’s Public Bezeq Network) was published, as part of which, the demand
forecast indices for 2021 were updated (the demand forecast indices for a
landline connection to a traditional network in the Bezeq network, for data
capacity at the core of the network used by the traditional network, and Bezeq's
managed broadband access service through a traditional network), from which
the rates of use of the Bezeq network for Bezeq's wholesale services are derived
in accordance with the formulas in the Bezeq network usage rates regulations for
Bezeq wholesale services. Bezeq's revenues in respect of said services are
affected by both the rates and the extent of the actual use of the Bezeq network,
which depends on the behavior of the various communications operators. The
updated rates had a material adverse effect on Bezeq's results for 2021. On
December 30, 2021, Communication Notice (Bezeq and Broadcasting) (Use of
an NIO’s Public Bezeq Network) (No. 2), 2021 was published, in which the
37 Except in 2020 which was affected by the consequences of the COVID crisis.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
wholesale rates for use were updated. In Bezeq's traditional network, due to
changes in the index and the above demand forecast indices for 2022 and in
accordance with the formulas in the regulations for the use as in force since
January 1, 2022.
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 the Company’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 section 2.16.4.
On February 21, 2022, a hearing was published by
the Ministry of
Communications to set a maximum rate for passive infrastructure access service
(barrel access service) and dark fiber service, in accordance with the provisions
of Article 14D (i) of the Communications Law, which stipulates that the Minister
may set a reduced rate for the use of Bezeq's passive infrastructure in the
incentive areas38 and in the use areas39. According to the hearing documents, in
order to lower barriers and encourage suppliers to submit bids in the incentive
tenders and to encourage the provision of service in the incentive areas, the
Minister of Contracting considers setting maximum supervised rates in the
incentive areas and use areas for the following services: Passive infrastructure
access service – NIS 195 per km per month (compared to a rate of NIS 409); dark
fiber service - NIS 195 per km per month (compared to a rate of NIS 501).
According to what is stated in the hearing documents, as part of a new pricing
process for all wholesale rates planned for 2022, the determination of the above
supervised tariffs will also be examined. From an initial point of view of the hearing
documents, Bezeq estimates that the direct financial impact as a result of
determining the reduced tariffs is not expected to be material. Bezeq continues to
examine the hearing documents and its implications.
2.16.2. Bezeq's NIO license
Bezeq operates, among other things, under the NIO license40. 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 section 1.7.3. Regarding
the deployment and universal service obligation in connection with advanced
infrastructure (fibers), see Section 2.7.2.
2.16.2.2 Rules of structural separation
For a description of the structural separation rules applicable to Bezeq, see
Section 1.7.2.
2.16.2.3 Rates
Bezeq will provide a service or package of services for which no rate has been
set (and from April 1, 2022 - for which no maximum rate has been set) under
Articles 15 or 15A of the Communications Law at a reasonable price, under
Aarticle 17 of the Law, and will offer it to everyone, throughout Israel and in the
matter of an advanced network in the service area determined in Appendix K-
1,without discrimination, and at a uniform rate, according to the types of services.
See also Section 2.16.1.
38 Areas where Bezeq has chosen not to deploy an advanced network and where it will be deployed by other licensees.
39 Other areas that are not Bezeq's deployment areas, and which are not used by Bezeq for the deployment of an advanced network
and the use of the service in them for the purpose of deployment in the incentive areas.
40 A copy of the NIO license is published on the Ministry of Communications' website at - www.moc.gov.il.
62
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
As of April 1, 2022, Bezeq will be entitled to determine telephony packages
according to the quota of minutes included in the packages. Bezeq was entitled
to provide telephony packages for which no tariff was set under Article 15 or 15A
of the Law, would demand a reasonable price for them under Article 17 of the
Law and would offer them to any claimant without discrimination on equal terms
and at a uniform tariff according to types of services. The price for such a
telephony package will not exceed the maximum payment under the Payments
for a Telephone Line Regulations, plus the maximum payment for call minutes
under the Payments Regulations. The telephony package will be subject to Article
9.7A of the License, according to which Bezeq will allow the subscriber to
separately purchase each service or package of services included in the shared
service basket with other licensees under the same conditions as the service or
package of services in the shared service basket (detachability).
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 1.7.2.1.
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 section 1.7.4.4 a).
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
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
63
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
entities that have an affiliation with another material NIO41 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).
to
it by
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
the Ministry of
license granted
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).
the competent bodies
in
For the wholesale market and wholesale service portfolios see section 2.16.4.
Regarding the amendment of Bezeq’s license regarding the determination of advanced
network deployment obligations - see Section 2.16.12
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
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)42.
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
41 NIO with a market share of 25% or more.
42 For the minimum holding rate in Bezeq Group's control permit, see Section 8 of Chapter D of this periodic report..
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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
published by
the
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.
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
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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 1.7.2.2) 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 service43. 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.
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
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.
For service rates BSA on fibers, see Section 2.16.12.2.
2.16.4.3 Wholesale service use of physical infrastructure
43 It should be noted that in the first days of the service, the Ministry conducted a supervisory procedure at Bezeq that led to the
imposition of sanctions in the amount of NIS 8.5 million paid by Bezeq. After Bezeq's Board of Directors rejected the applicant's
motion to file a derivative claim in the matter against Bezeq's officers, and ruled that in the circumstances of the case, Bezeq does
not have a good cause of action against officers and other officials who served during the relevant periods, and that conducting
legal proceedings will not promote Bezeq's benefit. In February 2022, the applicant submitted a motion for approval of a derivative
claim against Bezeq's officers (all but one are former executives) in the amount of the financial sanction plus interest and linkage
differences.
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The "Use of Physical Infrastructure" service portfolio 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,
Maximum rates for this in the regulations of use. Subsequently, the obligation to
provide use of Bezeq's passive infrastructure (with the exception of dark fiber and
optical wavelength service) was extended in relation to infrastructure owners -
IBC and Hot. At the same time, NIO licensees were required to allow other NIO
licensees to use their passive infrastructure44, and then a service portfolio was
established for "mutual use" of passive infrastructure, in which the obligation
imposed in the original service portfolio on an operator using infrastructure
infrastructure to establish a passive infrastructure facility near Bezeq's passive
infrastructure facility was abolished.
The mutual service portfolio does not include provisions for the dark fiber rental
service and optical wavelength service, which remain in the original service
portfolio used only by holders of a unique general national interior operator
license.
As part of Draft Amendment 76 to the Communications Law (see Section 1.7.4.8),
it is intended to allow those registered in the registry to also use Bezeq's passive
infrastructure for the purpose of providing any Bezeq service in accordance with
the general permit regulations or an administrative directive issued to it.
For the decision regarding the use of holders of special licenses for broadband
infrastructure in Bezeq infrastructure in the incentive areas, see Section
2.16.12.4.
The Minister has the authority to reduce the tariffs for the use of Bezeq
infrastructure in mainly incentive areas, and for a hearing on the matter - see
Section 2.16.12.
For the notice of the Competition Authority in the matter of infrastructure and for
the appeal by Bezeq, see section 2.16.8.5, 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 2.18.1(h).
2.16.4.4 Wholesale telephony service
This service enables service providers who do not have the infrastructure to offer
their customers telephony service at wholesale rates through the Bezeq network.
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 and lack of
authority.
The temporary arrangement was valid until August 2018, according to which
Bezeq offered the service in a resale format, a format in which the service
provider purchases a Bezeq line and call minutes and receives a package of
services (including technician services) from Bezeq. According to the Ministry of
Communications' announcement, as of August 2018, Bezeq is obligated to
provide the service in a "wholesale" format, i.e., a service format in which the
service is provided via Bezeq's switch, but the call also passes through the
service provider's switch, both as a discrete service and as an additional service
to the BSA service. As of August 2018, Bezeq was prepared to provide resale
services at wholesale rates (excluding technician services) - although in this
service the call does not pass through the service provider switch, and from the
beginning of 2019 Bezeq is prepared to provide a wholesale telephony service
solution through the service provider switch, and is based on both Bezeq's
44 Except for the passive NIO infrastructure, which is held by the IEC and is required for its activities as a holder of an essential service
provider license.
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subscription switch and an additional component external to the switch, and
currently on Bezeq's new subscription switch (see also Sections 2.1.8 and 2.7.2).
As it became clear after discussions that took place, among other places, in the
Ministry of Communications, the service providers are not prepared to act
according to the format of the service portfolio. On May 27, 2020, Bezeq received
a letter from the Ministry of Communications regarding the minutes of a telephony
service, including a settlement of a dispute between Bezeq and the service
providers Partner and Cellcom regarding the interpretation of the service portfolio
on the provision of ancillary services. The Ministry accepted Bezeq's position on
the matter, and determined that the telephony service that Bezeq will offer to the
service providers is a service that will allow the service provider to receive
incoming calls and create outgoing calls, and will enable the provision of all
services that are ancillary to the basic telephony services provided by the
infrastructure owner to its customers, while the ancillary services under the
service portfolio will be provided through the service provider's switch45.
According to the Ministry's announcement, after performing all the actions
required to provide the telephony service, Bezeq is required to update the Ministry
on the date when it will be prepared to provide the service as required in the
service portfolio. As Bezeq noted in its reports, as of the beginning of 2019, Bezeq
is prepared to provide a wholesale telephony service in a manner consistent with
the firm's decision in its announcement. Bezeq is also prepared to provide the
service over its new switch in the format of the service portfolio.
The wholesale telephony service in all the formats described above had no actual
demand, and had no customers at all (except for few, and tests).
2.16.5. Powers in respect of 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
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
45 It should be noted that the Ministry's letter states that the Ninistry's decision does not express a position regarding the Company's
compliance with the service portfolio's provisions regarding the telephony service, and does not prevent the Ministry from taking
supervision and enforcement measures in this matter.
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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 services,
and transmission and transmission services of public broadcasts46.
b. Providing fast-access services through subscriber access network47.
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
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
46 Announcement dated 30.7.1995.
47 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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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 April 12, 2021, the Competition Authority published a decision of the
Competition Commissioner regarding the amendment of the terms of the merger.
According to the amendment, the Commissioner decided to allow Bezeq's
subsidiaries: Pelephone, Bezeq International and DBS (and not Bezeq), to sell
communication packages that include Internet infrastructure, Internet provider
and TV services without the obligation to sell the TV services, at a separate price
that will be uniform for package buyers and for those who are not package
buyers. In addition, the Commissioner decided to allow greater flexibility with
regard to the purchase of foreign content, so that the condition stipulating the
cancellation of exclusivity arrangements between Bezeq and DBS regarding non-
original TV content, and the prohibition on being parties to such exclusivity
arrangements will not apply to foreign content purchase (excluding sports
content).
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
the final consumer. The violations alleged against Bezeq are the blocking of
access to private areas and placing a demand for fiber cutting.
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,
the
2019, Bezeq received a determination ("the Determination")
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.
Bezeq's response to the Commissioner's response was submitted on February 1,
2022. Regarding the motion for approval of a class action and requirements for
exhaustion of rights before filing a derivative claim, further to this determination,
see Section 2.18.1H.
from
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.
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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).
2.16.10.1 National Outline Plan 36 - Communication facilities within the Green Line
NOP 36 was divided into two parts according to the classification of the
transmission facilities, made in accordance with the technical variables and
physical dimensions of the facilities, which ultimately affect the determination of
safety ranges for protection against radiation effects and the degree of prominence
of the facilities in the landscape. Part A of the NPA, which has been approved by
the Government and is in force, deals with guidelines for the construction of small
and micro broadcasting facilities, while Part B, which was not approved by the
Government and is not in force, deals with guidelines for the construction of large
broadcasting facilities. As a result, there are currently no special guidelines
regarding Bezeq's large transmission facilities, most of which were established by
the state before Bezeq was established.
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).
2.16.10.2 National Outline Plan 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 vast majority of the facilities located in the
Territories and which are owned by Bezeq (there are a few additional sites that
have not been regulated).
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.
In addition, Bezeq also arranged with
2.16.10.3 Radiation permits
Regarding radiation permits for communication and transmission facilities, see
section 2.15.
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).
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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:
a. Obligation to deploy and provide service to non-general public throughout
Israel:
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.
"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;
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.
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.
The Minister may permit, in Bezeq licenses and 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.
b.
Incentives for deployment in the incentive areas
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").
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.
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.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
c. Tenders for the allocation of incentive fund money
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.
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.
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.
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 is a holder of 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.
d. Prohibitions on Bezeq and an affiliated corporation in relation to the incentive
areas
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.
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.
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.
e.
Internal threading
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.
f. Sanctions
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.
On May 25, 2021, Bezeq's Board of Directors approved Bezeq's plan for the
deployment of fibers and its submission to the Ministry of Communications in
accordance with Article 14B (a) of the Communications Law. Under Bezeq’s
plan, Bezeq is expected to retire and operate an ultra-fast fiber network that
will cover about 76% of Israel’s population (Bezeq estimates that about 80%
of households), and on May 31, 2021, Bezeq submitted to the Ministry of
Communications the list of statistical areas where it chose to deploy as
aforesaid.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
On June 15, 2021, following a hearing on April 13, 2021, the Company
received an amendment to Bezeq’s license regarding the determination of
advanced network deployment obligations ("the Amendment to the
License"). The Amendment to the License includes changes to the existing
provisions in the license in aspects in which there is a distinction between
Bezeq's traditional network and its advanced network, and the addition of an
appendix that includes Bezeq's advanced network deployment obligation,
including the list of statistical areas selected by Bezeq, as well as milestones
for completing the advanced network deployment as follows:
a. Completion of deployment for buildings in which the cumulative
proportion of households is 60% of the total number of households in the
service area (all statistical areas selected by Bezeq) - no later than the
end of two years from the determining date (March 14, 2021);
b. Completion of deployment for buildings in which the cumulative rate of
households is 80% of the total number of households in the service area
- no later than the end of three years from the Effective Day;
c. Completion of deployment for buildings in which the cumulative rate of
households is 95% of the total number of households in the service area
- no later than the end of five years from the Effective Day;
b. Completion of deployment for all buildings in the service area no later
than the end of six years from the Effective Day.
in
the
i.e.,
On October 13, 2021, the Ministry of Communications issued a tender "for the
extension of a license to deploy an advanced network and to receive financial
grants to encourage the deployment of advanced landline networks in areas with
no economic viability",
incentive areas. Subsequently, an
announcement by the Ministry was published on the Ministry of Communications
website on March 7, 2022, including the names of the areas in which
communications companies that won the tender for an advanced fiber-based
network will be deployed. According to the announcement, the winning areas
constitute about 60% of the incentive areas and the winning companies in the
tender will be given a period of one year and three months from the date their
license is amended, to complete the deployment obligations and provide services
to anyone who wants them in these areas.
2.16.12.2 Rates in service over ultra-broadband fiber infrastructure
The usage regulations set the maximum rates for an ultra-broadband access
service managed on Bezeq's fiber network, as the maximum rates for
accessibility and data transfer services at a cumulative rate of up to 550 megabits
/ second and over 550 megabits / second and up to 1,100 megabits / second.
The regulations do not set a supervised rate for the initial installation of an internal
cable to the subscriber's premises, and Bezeq may demand a reasonable
payment for this service. The rates will be updated once a year on January 1,
starting in 2021 in accordance with changes in the consumer price index.
According to the recommendation of the professional staff in the Ministry, which
formed the basis for the decision regarding the tariffs, the said rates will be valid
for a period of three years and will then be replaced by a fixed rate.
Regarding the determination of a uniform price for fiber-optic-based Internet
services (FTTP) - in providing fiber-optic Internet access services to the
residential building (FTTH) for private subscribers, licensees are prohibited from
offering subscribers offers on different terms or at different rates, depending on
In the proposed infrastructure, and the type of infrastructure offered would
constitute a reasonable characteristic justifying the differentiation of one
subscriber group from another in respect of non-fiber internet access services to
the residential building.
2.16.12.3 Joint use of fiber optic infrastructure in existing residential buildings
On July 27, 2020, a decision of the Ministry of Communications was issued,
according to which 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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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.
On October 31, 2021, the Ministry issued an update to the Director's directive
dated July 27, 2020 regarding the sharing of fiber optic infrastructure in existing
residential buildings, as part of which a section will be added to the directive
according to which the co-operator and the other NIO will each develop an API
for the transmission of information about the existence or non-existence of an
internal thread, which is a fiber-optic infrastructure up to the user's apartment, as
well as information regarding the date of its deployment (before January 1, 2021
or after this date). This is in accordance to the schedule specified in the section.
Bezeq forwarded its response to the hearing according to which it opposes the
possibility of requiring that it or any other company share such sensitive and
detailed business information when there is an effective and less offensive
alternative proposed in the response.
With regard to deployment in new residential buildings, on June 8, 2021, an
amendment to the Planning and Construction Regulations (Application for Permit,
Conditions and Fees) was published, on provisions regarding the installation of
communications infrastructure in new buildings.
Within the framework of the Economic Plan Law (Amendments to Legislation for
the Implementation of Economic Policy for Budget Years 2021 and 2022) (5721-
2021) approved on November 4, 2021 ("the Arrangements Law"), the provisions
of the Communications Law were amended regarding the conditions for laying an
advanced network in a shared residential building, even in the absence of
consent of the majority of the apartment owners.
2.16.12.4 Hearing
infrastructure.
to amend
the arrangement
for mutual use of passive
On February 6, 2022, the Ministry of Communications decided at a hearing to
amend the arrangement for mutual use of passive infrastructure, according to
which it will also be possible for holders of special broadband infrastructure
licenses (in addition to general licensees) to use the passive infrastructure of a
general NIO (including Bezeq) only in incentive areas (areas in which Bezeq has
chosen not to deploy an advanced network and in which, for the purpose of
financing deployment, funds will be allocated from the incentive fund). Keep in
mind that holders of general licenses may use Bezeq's passive infrastructure
outside the incentive areas as well. This decision is further to the Minister of
Communications' decision of October 13, 2020, in which the threshold
requirements for obtaining a license enabling the provision of broadband
infrastructure services were reduced, following which the Ministry began granting
special broadband infrastructure licenses (see also Section 2.6.3.6). A service
portfolio was attached to the decision regarding the manner in which the passive
infrastructure of a NIO was used, and the Minister of Communications was
the Communications Regulations (Bezeq and
recommended
Broadcasting) (Use of an NIO’s Bezeq Public Network), 5774-2014.
to amend
Allowing special license holders of broadband infrastructure to make use of
Bezeq's passive infrastructure may increase the rate of deployment of broadband
infrastructure by special licensees and the transfer of customers to them in the
incentive areas. On the other hand, the use of Bezeq's passive infrastructure by
the special licensees will involve a fee to Bezeq (even if reduced, see Section
2.16.1.8). Accordingly, Bezeq is unable to assess at this stage the overall effect
of amending the said arrangement.
2.16.12.5 Hearing on the amendment of the BSA and telephony wholesale service
portfolio
On February 10, 2022, the Ministry of Communications decided at a hearing
regarding the amendment of the BSA wholesale service portfolio and telephony,
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
which included the addition of a chapter in the service portfolio regarding the
provision of BSA service on an advanced network and the draft license
amendments for unified general licensees and special licensees in providing
Internet access and broadband infrastructure services. In accordance with the
decision, the said amendment to the service portfolio was approved. The
amendment of the service portfolio is not expected to have a material effect on
Bezeq.
2.16.12.6 Obligation to provide service and supervised maximum rates for the BSA
service through fiber
On October 12, 2021, a hearing was published according to which the Minister of
Communications is considering stipulating in the Regulations an obligation to
provide service as well as supervised maximum rates for the BSA service using
fiber to be provided in the incentive areas by the tender winner (which are identical
to those determined for BSA service based on Bezeq's advanced network), and
that the difference between the retail prices and the maximum BSA rate to be
determined will be required to meet the margin reduction test in a way that will
allow for a retail margin of 20% of its national retail price.
The regulations for use set maximum fees for the use and ancillary service for the use
of a deployer’s network in the incentive areas. The maximum payment that a deployer
in an incentive area may require another licensee for a broadband access service
managed at a nationwide connection level is identical to that which Bezeq may require
.
2.16.12.7 Hearing to determine maximum rate for passive infrastructure access
service (barrel access service) and dark fiber service
For this matter see section 2.16.1.8.
2.17. Material 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. The trust deeds in respect of debentures (Series 6, 7, 9, 10, 11, 12, 13, 14) issued by
Bezeq.
For this matter, see details in Note 13 to the 2021 statements and in Section 4 of the
Board of Directors' Report.
2.17.2. Real estate
2.17.2.1 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.
2.17.2.2 Settlement agreement dated May 15, 2003 between Bezeq and the State
and the Israel Land Administration regarding the rights relating to the land. See
section 2.7.4.3.
2.17.2.3 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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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.
2.17.3. Labor agreements
2.17.3.1 Special collective agreement from December 2006
For this agreement and amendments thereto, see Section 2.9.4.
2.17.3.2 Agreements with alternative entities instead of a comprehensive fund in
everything related 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") to regulate pension payments for early retirement of Bezeq
employees, as well as the differences in old-age and survivors' pension
payments, to employees who retire from Bezeq under a special collective
agreement for retirement which was signed between Bezeq, the employees’
representation and the Histadrut on February 12, 2014. The insurance policy was
approved by the Supervisor of Insurance and it entered into force 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 three times) is
until the end of 2024.
2.18. Legal Proceedings
reporting policy
is based on qualitative considerations and quantitative
Bezeq's
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 average adjusted
net profit (as defined in Section 1.6) according to Bezeq's consolidated annual statements
from the past three years (2019-2022). Therefore, in the absence of relevant qualitative
considerations, this section describes legal proceedings to the extent of NIS 70 million or
more48, 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)49. 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.
Date
a.
January
2015
2.18.1. Procedures are pending
Type of
procedur
e
Court
Sides
Details
Shareholder
vs. Bezeq
and former
Bezeq
executives
District
(Tel Aviv
-
Economi
cs
Departm
ent)
Motion for
approval
of a class
action
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 from the
investing public" regarding 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
Claim
amount
(NIS
millions)
687
48
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.
49 In view of the update of the materiality threshold, as of the date of approval of this periodic report, no legal proceedings are
described in the periodic report for 2020 that do not reach the current materiality threshold as follows: Section 2.18.1 (12) (section
number in the Periodic Report for 2020).
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Date
Sides
Court
Type of
procedur
e
Details
Claim
amount
(NIS
millions)
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.
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 Company 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
78
502
b.
March
2015
Shareholde
r vs. Bezeq
and former
Bezeq
executives
District
(Tel Aviv
-
Economi
cs
Departm
ent)
Motion for
approval
of a claim
as a
derivative
claim
together
with a
derivative
claim
statement
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Date
Sides
Court
Type of
procedur
e
Details
Claim
amount
(NIS
millions)
c.
November
2015
And March
2018
Customer
against
Bezeq
Central
District
Court
Two
claims
together
with
motions
for
approval
as class
actions
556 in the
motion
from
November
2015
and 258 in
the motion
from
March
2018
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 the applicant, which includes additional allegations relating, inter
alia, to the independence of the entities that advised Bezeq, alleged
defects in the work of 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
Section 1.1.6) 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 July 10, 2022, in light of the Securities Authority's
investigation and indictments filed later in it (see Section 1.1.7).
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 Subsection H.
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.
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 its claims. It should be noted that in
the same announcement, Bezeq informed the Court that on
February 25, 2019, it filed an administrative petition against the
decision of the Director General 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.
On November 1, 2021, the Attorney General announced his
appearance in this proceeding and asked for an order of stay of
proceedings in this proceeding until July 20, 2022.
The Attorney General will then update on the need to further delay
the proceedings, in view of the conduct of criminal proceedings
("4,000 Case ") related to this proceeding.
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 position, inter alia, by
preventing competition in the communications market, thereby
harming the Israeli public and gaining unreasonable profits as a
result of abusing its monopoly power. While in the motion from
November 2015 the remedies and damages claimed related to the
79
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Date
Sides
Court
Type of
procedur
e
Details
Claim
amount
(NIS
millions)
indictments
investigation and
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
filed
subsequently, the Court approved a motion on behalf of the Attorney
General to continue the stay in the proceedings in the case until July
10, 2022.
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 H) 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.
June 2017
Two
motions
for
approval
of class
actions
In the
District
Court
(Econo
mic
Departm
ent) in
Tel Aviv
Bezeq
shareholder
s
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
application
also
against the
former
CEO of
Bezeq and
the former
CEO and
CFO of
DBS)
About
1,240 in
the first
application
and-568 in
the second
application
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 violation of
other legal provisions, causing Bezeq's securities holders heavy
financial damages, amounting to hundreds of millions of NIS, if not
more than that.
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 to the applicant,
a 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 announced in
2017 his appearance in the proceedings regarding the delay of the
proceedings and not the body of the proceedings), the proceedings
80
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Date
Sides
Court
Type of
procedur
e
Details
Claim
amount
(NIS
millions)
are delayed at this stage until July 20, 2022 in light of the Securities
Authority investigation and indictments filed further thereto (see
section 1.1.7)
Various
motions
for
disclosure
of
document
s before
submitting
a motion
for
approval
of a
derivative
claim in
accordanc
e with
Article
198A of
the
Companie
s Law
Motion for
approval
of a
derivative
claim
e.
June -
August
2017 and
June 2018
Tel Aviv
District
Court
Bezeq
shareholder
s against
Bezeq and
DBS
f.
February
2018
Tel Aviv
District
Court -
Economi
c
Departm
ent
Bezeq
shareholder
s
against
Bezeq as a
formal
respondent,
as well as
against
Bezeq
directors at
times
relevant
to
the motion
and against
Bezeq's
controlling
shareholder
s
at
times
relevant
to
the motion,
Shaul
Mr.
Elovich and
Mr.
Yosef
Elovich (the
"Responden
ts").
the
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
beginning of 2017 (in this section: "DBS-Space Transaction")50.
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 July 20, 2022, in light of the Securities Authority's investigation
and indictments filed later in it (see section 1.1.6).
65
Minimum
threshold
219
Maximum
threshold
in
to
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 in the
agreement for the 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
the
the petitioners, Bezeq's engagement
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 the Company’s benefit 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
liability and contingent
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.
to Bezeq
(tax
50
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 July 20, 2022.
81
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Date
Sides
Court
Type of
procedur
e
Details
Claim
amount
(NIS
millions)
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 July 20, 2022, in light of the
Securities Authority's investigation and indictments filed later there
(see section 1.1.6).
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 applicant, the controlling
shareholder of Bezeq, the 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 the 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 Section
2.18.1b). 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 July 20, 2022, in light of
the Securities Authority's investigation and the indictments filed
thereafter (see Section 1.1.6). 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 following the determination dated September 4,
2019 of the Competition Commissioner regarding the abuse of
Bezeq's status ("the 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 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.
400
Two motions (unified) for the disclosure of documents under Article
198A of the Companies Law for the purpose of examining the
submission of a motion for approval of a derivative claim regarding
the exercise of Bezeq's rights against officers in connection with the
Determination. It is alleged 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 that were caused and that will be caused to it. On
June 23, 2020, Bezeq submitted a request to delay the proceedings
in the motions for disclosure, until the work of the Claims Committee
its
established
recommendations to Bezeq's Board of Directors. On July 19, 2020,
the submission of
the purpose and
for
82
g.
June 2018 Shareholder
against
Bezeq, DBS,
Mr.
Shaul
Elovich, and
Or
Mr.
Elovich
Tel Aviv
District
Court
(Econo
mic
Departm
ent)
Motion for
disclosure
and
review of
document
s under
Article
198A of
the
Companie
s Law
h.
(1)
Septembe
r 2019
Customers
against
Bezeq
Tel Aviv
District
Court
Applicatio
n for
approval
of a class
action
(2) March
2020
Shareholder
s
Bezeq
against
Haifa
District
Court
Consolidat
ed request
for
disclosure
of
document
s prior to
request for
approval
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Type of
procedur
e
of a
derivative
claim
Motion for
disclosure
and
review of
document
s prior to
filing a
derivative
claim
Motion for
approval
of a class
action
Date
Sides
Court
i.
November
2020
Shareholder
of
Bezeq
against
Bezeq and
Bezeq
International
The
Jerusale
m
District
Court
j.
November
2020
Tel Aviv
District
Court -
Economi
c
Departm
ent
Against
the
Bezeq
shareholder
s
Bezeq,
Company,
Bezeq's
CEO
and
members of
Bezeq's
board
directors
of
k.
January
2021
Bezeq
shareholder
s v Bezeq et
al.
Motion for
approval
of a class
action
Tel Aviv
District
Court -
Economi
c
Departm
ent
Details
Claim
amount
(NIS
millions)
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 deterrmination that the petitioners claim constitutes the
damage caused to Bezeq, may be a derivative proceeding as long
as the above decision is not final.
On April 4, 2021, the plaintiffs accepted the Court's proposal to
delay the proceedings until after the completion of the work of the
Claims Committee established by Bezeq and a decision on Bezeq's
request to delay the proceedings. Subsequently, on October 13,
2021, Bezeq's Board of Directors decided to adopt the Claims
Committee's recommendation of October 7, 2021, according to
which in the circumstances Bezeq does not have a good cause of
action against officers and other officials who served during the
relevant periods, and that conducting legal proceedings will not
promote Bezeq benefit. The Committee came to this conclusion
after examining the implications, benefits, damages, costs and
gains involved in conducting such legal proceedings, and came to
the conclusion that their conduct would harm Bezeq. Bezeq
submitted a notice to the Court.
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.
55-65
"Over NIS
2.5 million
(for the
purposes
of
substantive
authority)"
"about
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
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
Bezeq’s subsidiary Bezeq
International (hereinafter: “Bezeq
International") and their significant negative impact on Bezeq's
subsidiary and Bezeq's business". The definition of the group
according to the application is anyone who purchased the Bezeq
shares from August 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,
the Company 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 the Company included misleading details in their reports.
In accordance with the provisions of the law, in connection with
Bezeq’s and the Company’s report dated November 9, 2020,
according
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 Company’s shares 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
motion, it was alleged that following the publication of the immediate
report dated November 9, 2020 published by Bezeq and BCOM, the
Company’s share price decreased by 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 the Company’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
to which Bezeq
83
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Date
Sides
Court
Type of
procedur
e
Details
the shares of Bezeq and the Company.
l
April 2021 Customer
VS Bezeq
Central
District
Court
Motion for
approval
of a class
action
It was alleged that Bezeq caused pecuniary and non-pecuniary
damages to the class members who paid an increased amount for
a higher level of browsing speed than they could actually use, for
upgrading the modem so that they could browse at this rate, as well
as for harassment, inconvenience, mental distress and impaired
autonomy. According to the motion, the class of plaintiffs must
include anyone who used Bezeq's Internet infrastructure in the
seven years prior to the date of submission of the motion for
approval until the date of its approval of the class action, and paid
for a certain speed level, while the infrastructure in his home is
capable of providing speed that matches a lower speed level.
m May 2021
Customers
VS Bezeq
Tel Aviv
District
Court
Motion for
approval
of a class
action
A motion for approval of a class action lawsuit replacing a similar
motion from May 2020 was filed and ended (see section 2.18.2). It
was alleged that Bezeq misled customers who joined an online
business advertising service through B144 ("the Service") into
thinking that the cost of the service depends on actual use,, up to a
billing ceiling, while in fact Bezeq charged its customers the amount
of the billing ceiling even if in practice a lower amount was used.
Accordingly, the new motion is required to include in the definition
of the class of plaintiffs, on whose behalf the class action will be
conducted, all Bezeq customers and / or subscribers who have
registered and joined service packages of all kinds since Bezeq
began marketing the service, and was overcharged.
n
August
2021
Customer
VS Bezeq
Tel Aviv
District
Court
Motion for
approval
of a class
action
It was alleged that during the COVID crisis Bezeq charged its
telephony customers in excess of the amounts determined and
approved by the Ministry of Communications under arrangements
established in view of the increase in landline telephone use during
the COVID crisis, which were valid for two periods (March 1, 2020
to June 14, 2020 and September 21, 2020 to June 30, 2021).
According to the motion, the class of plaintiffs must include "all
Bezeq customers in landline telephony who were charged excess
amounts in violation of the binding arrangements during the COVID
period as determined by the Minister of Communications". The
applicant estimates that the size of the class is over one million of
the Company’s landline telephony subscribers (subscribers who
use alternative payment baskets).
84
Claim
amount
(NIS
millions)
any
*
The
amount of
the
class
action
cannot be
estimated.
It
was
stated that
these are
damages
amounting
to
NIS
million,
fall
which
within
the
jurisdiction
of
the
Court.
*
The
amount of
the
personal
claim
is
"NIS 8,112
per
applicant
and
future
amount
that will be
formed
for
all
members
of
the
class". The
total
amount of
the claim is
not
specified,
is
it
but
stated that
it
is
assessed
in
the
substantive
jurisdiction
of
the
Court.
*
The
amount of
aggregate
damage is
estimated
at
more
than NIS
2.5 million.
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
2.19. Targets 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
2.19.2.1 Vision and purpose
Bezeq has set itself the target 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 targets:
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.
2.20. 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
85
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 Section 1.7.3 and SectioN 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 Section 2.6). 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 Section 1.7.2 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.
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 Section 2.16. 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 Section 1.7.4.6).
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 section 2.16.4. For possible restrictions under the
Centralization Law on the renewal of licenses and the allocation of new licenses, see
section 1.7.4.7.
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 section 2.16.1). 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 sections
2.16.1 (Including regarding a hearing on the determination of maximum rates for Bezeq's
retail telephony services) and 2.16.4. 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 section
2.16.4.2). 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).
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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 sections 2.9.3 and 2.17.2.
Also, as described in section 1.8, 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
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 section 2.18.
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
2021 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
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The field of communications is characterized by frequent technological changes and the
shortening of the economic life of new technologies - see section 2.1.4. 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
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.
In this context, Bezeq received three ISO standards related to information security
(standards that define and test the principles of establishing, managing and maintaining
information security in the organization), and as part of implementing the requirements of
Bezeq standards ensures the availability, integrity, reliability and confidentiality of its
databases.
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
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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
2021 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 section 2.20.10.
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 Communications51
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
Exposure to legal proceedings
Special risks for Bezeq
X
X52
X
X
X
51
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.
52 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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The extent of the impact of the
risk factor on Bezeq's operations
Low effect
Medium
effect
X
High
effect
X
Labor relations
Restrictions regarding the relationship between
Bezeq and companies in the Bezeq Group
Failure of Company 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
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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 section 3.2. 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 section 3.14.2).
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 1.5.4.2 and 3.3.
Revenue from services
The cellular industry is characterized by fierce competition. Competition in the industry (see
section 3.6) 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 in recent years have caused another
significant erosion of the average revenue per subscriber. The growth in the number of
postpaid subscribers in the past few years has partially compensated for the erosion of
prices. In 2021, the volume of mobilizations between companies has decreased compared
to recent years, and a certain recovery was recorded in revenue from roaming services,
after the decline that applied in 2020 due to the effects of the COVID-19 crisis on travel and
stay abroad (see Section 3.19.1.2). In addition, at the end of 2020, companies in the market
began to offer packages with a higher browsing volume that allow subscribers to browse
with 5G technology, and whose prices are higher than 4G packages.
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 2021,
fierce competition continued in this area, which was exacerbated due to the consequences
of the COVID virus crisis, as well as due to the global chip crisis that led to damage to the
supply of some of the leading models of the various manufacturers in the market. 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.
A signifant part of all end equipment is 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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rate53. The estimated penetration rate as of September 30, 2021 is approximately 120%.
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 operates additional network features that include CARRIER
AGGREGATION and MIMO8x8 in 5G.
Pelephone offers technology-based services IMS54: 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 section 3.8.2.
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 Growth in the number of subscribers to 5G routes, with a larger browsing
volume.
3.1.6.4 Competitive price level.
3.1.6.5 Wide and varied distribution channels.
3.1.6.6 A variety of service channels, including digital channels, that provide
efficient and quality support and service to a large variety of customers.
3.1.6.7 Adjusting the cost structure and implementing operational streamlining
that make it possible to cope with increased competition.
53 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).
54 IMS - IP Multimedia Sub System - A system at the core of the network that is used, among other things, for switching calls made
over IP networks (for example: Voice over LTE, Voice over Wifi). These two services are provided in combination to provide
coverage within homes and to reduce traffic over the 3G network. The infrastructure will be used for additional services, such
as One Number, Rich Call Services and more.
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3.1.6.8 A brand that represents a quality, reliable and advanced network.
3.1.6.9 High quality and skilled personnel.
3.1.7. The main barriers to entry and exit55
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 section 3.7.1.3).
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 in the
past few years, rates 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).
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 (who holds Golan Telecom) 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.
3.1.8.4 Public appeal on private networks
On December 1, 2021, the Ministry of Communications issued a public appeal
regarding private networks, in which it seeks to hear the public's position,
including for the purpose of understanding the needs of companies and
enterprises that will enter this field, and emphasizing the issue of allocating
frequencies to this service model (possibility to tender dedicated frequencies
among the cellular companies as well as to other private entities that will choose
55 Some of the above entry and exit barriers apply in a partial and limited manner to virtual operators.
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to enter the field). Pelephone submitted its response to the public appeal.
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:
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 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.
3.2.1.4 Private cellular networks with LTE (Long Term Evolution) or 5G
technology - Pelephone offers business customers the installation and
maintenance of a private cellular network in the business customer's complex. A
private network provides the business customer with various benefits, including:
business continuity, bandwidth management between the customer's end users,
low latency, connection to IoT devices, contribution to securing the customer's
networks and systems, and more.
3.2.1.5 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.
3.2.1.6 Additional services
a.
IoT (Internet of Things) services - Pelephone offers its customers advanced
IoT solutions such as smart building networks with command and control
systems, and more.
b. PTT (Push to Talk) services - Pelephone offers its business customers some
of the most advanced PTT services in the world, which enable fast and
secure corporate communication at the push of a button.
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)
2021
1,642
71.7%
647
2020
1,591
72.8%
595
2019
1,709
72.4%
653
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Products and services
Rate of Pelephon’s total revenue
Total revenue
2021
28.3%
2,289
2020
27.2%
2,186
2019
27.6%
2,362
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
2021
1,361
928
(*) Revenue from customers in business tracks includes revenue from hosting agreements, which
2019
2020
1,194
992
2018
2019
1,334
1,028
were received mainly from Rami Levy.
At the end of 2021, the number of Pelephone subscribers was approximately 2.6 million, including
approximately 2.1 million postpaid subscribers and approximately 0.4 million prepaid subscribers.
Pelephone markets packages with an increased volume of use that are also adapted to the needs of
5G, and as of the date of publication of the report, Pelephone has about 550,000 subscribers in such
packages.
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 in recent years. This
competition is reflected in the transition of subscribers between operators and in 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 section 3.17).
Below is data, to the best of Pelephone's assessment, about the number of subscribers of
Pelephone and its competitors over the years 2020 and 2021 (thousands of subscribers,
approximately):
Pelephon
e
2,442
Cellcom
(includin
g Golan
Telecom)
(3)
3,204
Partner(3
)
Hot
Mobile(2
)
MVNO
And other
operators(
1)
Total
subscriber
s in the
market
2,836
1,653
803
22.3%
29.3%
25.9%
15.1%
2,547
3,246
3,019
1,674
7.3%
791
22.6%
28.8%
.8%62
14.8%
7.0%
10,938
11,277
As of
December
31, 2020
As of
Septembe
r 30,
2021
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.
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(2) Hot Mobile's Q3/2021 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, 2021, based on Cellcom
and Partner reports to the public.
3.6.2. Infrastructure sharing and granting network use right agreements
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.
3.6.3. Positive and negative factors that affect Pelephone's competitive position
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, especially against the
background of the progress of the deployment of the 5G 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. Property, plant and equipment and facilities
Pelephone's property, plant and equipment 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
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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
transferred from one end device to another. On December 10, 2020, 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. It should be noted
that Pelephone's 2G network has been shut down by it. Following a
secondary hearing published by the Ministry on this issue, on June 27, 2021,
the Ministry of Communications made a decision at a hearing according to
which 2G and 3G networks will be shut down on December 31, 2025 (or
earlier, at Pelephone's request, while meeting the set conditions), as well as
setting schedules for stopping the import and connection to the network of
devices that do not support new technology. Pelephone is preparing in
accordance with the above decision to close its 3G network, according to the
schedules set in the decision..
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 2,500 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 section 3.1.5).
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 is acting to implement 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 section 3.14.3.
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. On January 19, 2022, the
decision of the Israel Lands Administration to extend the period of the roof
agreement from December 31, 2019 to December 30, 2024 was amended, with
various changes. An addendum regarding the extension and implementation of
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various changes to the roof agreement has not yet been signed.
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 Shortage IN Radio frequencies
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
Pelephone has the right to use frequencies by virtue of the mobile radio telephone
license and the Telegraph Order in the ranges of 850 MHz56 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
section 3.1.5) 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 September 30, 2022, 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).
For frequencies in the 800 MHz range allocated to Pelephone instead of the 850
MHz frequencies (see Section 3.8.2.3), Pelephone intends to use LTE technology
for network deployment towards the end of 2022, and to operate it during 2023.
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.
56 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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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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. On June 27, 2021,
a decision was made by the Ministry of Communications regarding an extension
of the allocation of frequencies in 850 MHz and 2100 MHz ranges that Pelephone
holds, until December 31, 2030 (it is clarified that the extension of the 850 MHz
frequency is subject to description above, regarding the exchange of frequencies
in the first giga field).
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.
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:
a. 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.
b. 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 section 3.19.3.10.
The following are the conditions under which Pelephone won the allocation of
such frequencies:
a. 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.
b. 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 (the discount depends on the Company's compliance
with graded annual engineering targets, which will be examined by the
Ministry of Communications every year). On October 27, 2021, the Ministry
of Communications announced that Pelephone was entitled to a grant in the
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
amount of NIS 74 million for the deployment of 5G sites.
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 enables supporting 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, and will allow, among other things, expanding a variety
of advanced cellular uses, such as smart cities, IoT services, mission critical
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 2021 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
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,
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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:
Number of employees
20
31.12.
31.12.
202
1
Division
and
and
Management
administration divisions
Private
customer divisions
Engineering and Information
Systems Divisions
Total
business
192
1,190
386
1,768
20
210
1,
290
400
900,1
The number of employees included in the table above includes employees employed part-
time. The total number of jobs57 in Pelephone as of December 31, 2021, was 1,572 (as of
December 31, 2020 - 1,619).
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.
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.
On the announcement dated June 23, 2021 on behalf of the new General Workers’
Histadrut - the Internet and High-Tech Cellular Workers’ Union on the declaration of a labor
dispute, among other things, regarding the refusal of the joint management of Pelephone,
Bezeq International and DBS to negotiate on various matters that was received at
57The 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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Pelephone’s offices, see Section 4.8. On August 2, 2021, the employees' representations
at Pelephone and Bezeq International began taking a variety of organizational sanctions,
which according to the employees' representations have a direct connection to the
synergies between Pelephone, Bezeq International and DBS. On Pelephone and Bezeq
International's announcement of the protective shutdown in the companies, see Section
4.8. On November 1, 2021, the subsidiaries reached agreements in principle with the
Histadrut and the employees representatives on the cessation of sanctions and the entry
into negotiations. For more information on this matter, see Section 4.8.
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, with whom there is an agreement that requires
defined procurement targets and is valid until March 2024, 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 2021 was
approx.14.4% and approx.12.4% (respectively) of Pelephone’s total purchases from all of
Pelephone’s suppliers58. 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.
It should be noted that a global chip shortage caused, among other things, a shortage and
difficulties in the supply of end equipment from Bezeq's main suppliers.
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 equity
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).
58 All suppliers - All of Pelephone’s suppliers, including suppliers who are not suppliers of end equipment and electronic devices. The
rate of purchases from suppliers Apple and Samsung out of the total purchases of the Bezeq Group from all its suppliers is
approximately 7.2% and 5.8% (respectively).
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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
3.12. Taxation
See Note 7 to the 2021 statements.
Credit volume
in NIS millions
Average credit
days
539
221
228
260
42
32
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
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
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possible carcinogens in humans (Group 2B)59.
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 section 3.19.2.5.
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
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
section 3.14.2.
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
59
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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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
9, 202260.
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.
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 72 million.
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.
60 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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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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. On January 1, 2022, a series of legislative amendments came into force within the
framework of the Arrangements Law, which defined the cellular infrastructure as a national
infrastructure and created a self-licensing route for certain cellular antennas and for making
adjustments in the various transmission facilities, as detailed below.
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 targets 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 have reached agreements regarding the
extension of the agreement, and on January 19, 2022, the decision of the Israel Land
Council was published to extend the period of the roof agreement from December 31, 2019
to December 30, 2024, with various changes. An addendum has not yet been signed
regarding the extension and implementation of various changes to the roof agreement.
f. 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 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.
g. Access Facilities exempt from building permits:
The second route in which Pelephone has deployed broadcast sites so far 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. However, in view of the amendment to the Planning and
Construction Law set forth in the Arrangements Law and the self-licensing route according
to it (see below), the route of the Access Facilities becomes redundant.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
As of the date of the report, Pelephone operates about 460 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
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. This
provision will also be repealed in light of the amendment to the Planning and Building Law
set forth in the Arrangements Law (see details below).
As part of the Arrangements Law, which entered into force on January 1, 2022, an
amendment was received to the Planning and Construction Law, which includes the
removal of regulatory barriers regarding the establishment of sites. The main amendment
is the granting of an exemption from licensing procedures for placing and using facilities up
to 6m on the roof of a building, an exemption for replacing a transmission facility, an
exemption for adding an antenna to a transmission facility established under the Planning
and Building Law and an exemption for replacing masts up to 18m high. The amendment
to the Planning and Construction Law also includes a new classification of "transmission
facilities for communications using the Thai method", as defined in Article 202B of the
Planning and Construction Law, as "national infrastructure", and a new classification of
NAP 36A as "a detailed national master plan for national infrastructure". The amendment
to the Planning and Building Law facilitates the replacement of antennas, the addition of
an antenna to existing sites, and the strengthening of masts. All, under the technical and
practical conditions set out in the amendment. These facilities will continue to meet all the
conditions of NAP 36 and spatial guidelines of the local committees, with the actual
meaning of the amendment being the possibility of a "self-licensing" route - that is,
performing a self-licensing and control procedure in the above cases, and submitting
documents to the Planning and Construction Committee retrospectively (after the
completion of the construction of the sites). Simultaneously with this amendment, an
amendment was also established to the definition of "wireless access facility" in Article 27A
of the Communications Law. As part of the aforesaid amendment, a "transmission facility
for communication in the cellular method as defined in Article 266C2 of the Planning and
Building Law" was removed from the definition of a "wireless access facility". This means
that the wireless access facilities that were set up with an exemption from a permit continue
to exist, but it is no longer possible to set up new mobile sites in the "access facilities" route,
which is listed above).
As part of the report of the inter-ministerial committee that served as the infrastructure for
amendments to the Arrangements Law, it was also recommended to update NPA 36A,
which came into force about twenty years ago.
At this stage it is not possible to estimate the future consequences as a result of the
amendments.
On November 14, 2021, Pelephone signed a framework agreement to expand the local
collaboration in the establishment of passive infrastructure on joint mobile sites together
with Cellcom and PHI Networks (2015) Limited Partnership. This agreement may help
establish joint mobile sites. To the extent that regulatory approvals are required for this
agreement, Pelephone will work to obtain them.
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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 the Company, various restrictions are
anchored regarding cooperation between the companies (see section 2.16.8.4).
For the amendment to the terms of the Competition Commissioner in connection with the
merger of the Company and DBS dated April 2021, see Section 2.16.8.
3.15. Material 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 Proceedings61
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:
Date
Parties
Instanc
e
Proceedin
g type
Details
a.
May
2012
Custom
er vs.
Pelepho
ne
District
(Tel
Aviv)
Class
action
lawsuit
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
Amount of
the claim
(NIS millions)
About 124
61 For reporting policy and materiality thresholds, see section 2.18.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Date
Parties
Instanc
e
Proceedin
g type
Details
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 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.
b.
Novem
ber
2013
Custom
er vs.
Pelepho
ne
District
(Tel
Aviv)
Monetary
claim and a
motion to
recognize it
as a class
action
c.
July
2014
d.
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 millions)
About 300
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
e.
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.
f.
April
2017
Custom
er vs.
Pelepho
ne
District
(Tel
Aviv)
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
About 80
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Date
Parties
Instanc
e
Proceedin
g type
Details
g.
October
2017
h.
April
2018
i.
April
2019
Central
District
District
(Tel
Aviv)
Central
District
Custom
er vs.
Pelepho
ne and
Partner
Custom
er vs.
Pelepho
ne
Customer
vs.
Pelephon
e, Bezeq
Internatio
nal and 6
other
companie
s
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
Amount of
the claim
(NIS millions)
About 850
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,
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
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.
The amount
of the lawsuit
is not
specified, but
in the motion
it is estimated
at tens of
millions of
NIS
j.
January
2020
Customer
vs.
Pelephone
District
(Tel Aviv)
Monetary
claim and a
motion to be
recognized
as a class
action
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.
The amount
of the action
is not
specified
3.16.2. Legal proceedings concluded during the reporting period
Details
Instance Proceeding
Parties
Claim
filed
a.
August
2016
Customers
vs. Bezeq
Tel Aviv
District
Court
type
A claim with
a motion for
approval as
a class
action
Original
claim
amount (NIS
millions)
* Claim in
unknown
amount
* No exact
estimate,
estimated at
tens of
millions of
NIS
A motion alleging that Bezeq illegally and without
consent charges a monthly fee for "support and
/ or warranty" services as part of the use of its
Internet infrastructure, and unlawfully charges
customers for this service, that Bezeq charged
for Internet access services even after the end of
the "bundle" package, and that Bezeq has added
to the track a browsing speed that is not suitable
for the existing infrastructure. On March 24,
2021, the motion was denied. In the ruling that
dismissed the motion, the Court ruled, among
other things, that the applicant did not bear the
burden of proving, even at the apparent level of
things, the existence of violations and / or
injustices by Bezeq that would justify approval of
the class action. Moreover, given
the
circumstances, there is no homogeneous class
that has been harmed.
A motion which claims that Bezeq charged some
of its customers for "antivirus service" while in
practice it does not provide them with the
service, and also that it begins to charge for the
provision of the service from the conclusion of
the agreement with the customers and not from
the in fact provision of service. Accordingly, the
applicant seeks to compel 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. On May 26, 2021, a
110
b.
February
2017
Customers
vs. Bezeq
Central
District
Court
Motion for
approval as
a class
action
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Claim
filed
Parties
Instance Proceeding
Details
type
c.
April 2017
and May
2017
Customers
vs. Bezeq
Tel Aviv
District
Court
2 motions
for approval
as a class
action
d.
December
2019
Customer
vs. Bezeq
Tel Aviv
District
Court
Motion for
approval as
a class
action
e.
May 2020 Customers
vs. Bezeq
Tel Aviv
District
Court
Motion for
approval as
a class
action
in
in
the proceeding between
judgment was rendered confirming a settlement
agreement
the
parties. The settlement agreement includes
compensation for service customers in the
amount of NIS 30 million (this amount includes
compensation to the applicant and fees), as well
as benefits
for service subscribers at an
estimated cost of an additional NIS 5 million.
The matter of the motions is Bezeq's B144
service, a service that allows advertising to
business owners via the Internet (“the Service"),
and according to the applicant, the respondents
illegally charged the subscribers for the service.
On January 25, 2018, the Court decided,
following motions filed by Bezeq and other
respondents, to dismiss the first motion in limine
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 April 4, 2021, a judgment was rendered
confirming a settlement
the case. The
settlement arrangement is an insignificant cost
to Bezeq of approximately NIS 2 million and
includes partial compensation to the members of
the plaintiffs' class for the collection of exit fees
from the Service.
It was alleged that Bezeq attached the applicant,
when ordering a regular telephone line, also to
another service (voicemail and caller ID) without
his knowledge and without
it.
Accordingly, the applicant seeks to include in the
definition of the class of plaintiffs in whose name
the class action is sought all those charged by
Bezeq for ancillary service to telephone service
without Bezeq receiving his request and / or
express consent to order the ancillary service, in
the seven years prior to approval. On May 18,
2021, the Court issued a ruling ordering the
striking out of the motion for approval following
the applicant's motion, after the applicant was
found unsuitable to serve as a representative
plaintiff in the proceedings. That ended the
procedure.
It is alleged that Bezeq misled customers who
joined
the B144 online business service
(advertising for businesses online through the
B144 website) (“the Service") into thinking that
the cost of the service depends on actual usage
up to a billing ceiling, while actually charging its
customers the ceiling even if they actually used
less. Accordingly, it is requested to include in the
definition of the class of plaintiffs, in whose name
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
who were charged in excess. 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 motions that "these are thousands or tens of
thousands of consumers." In addition, non-
pecuniary damage was generally claimed.
On May 8, 2021 a decision was given by the
Court that the applicant's request to amend the
motion for approval of a class action by way of
requesting
111
Original
claim
amount (NIS
millions)
* The amount
of the claim
cannot be
estimated
Cannot be
estimated at
this stage,
and is over
NIS 2.5
million
"NIS 27,537
per applicant
and any
future amount
to be
crystallized
for all
members of
the class"
(Next to
which is
handwritten
"NIS
908,721,000")
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Claim
filed
Parties
Instance Proceeding
Details
type
Original
claim
amount (NIS
millions)
f.
October
2020
Jerusalem
District
Court
Bezeq
Shareholder
VS. Bezeq
and Bezeq
International
Motion for
disclosure
and review
of
documents
prior to filing
a derivative
claim
replacing the representative plaintiff in the
motion was denied (especially after the applicant
was found unsuitable to serve as a class action
plaintiff) and thus ended the proceeding.
It should be noted that in May 2021 a new motion
was filed for approval of a class action in the
same matter which was
filed by another
applicant with the Tel Aviv District Court (see
Section 2.18.1).
A motion in the framework of which an order
addressed to the respondents for disclosure and
review of
regarding
various documents
collection from Bezeq International customers
was requested. According to the clains in the
false
motion,
representations that led to an inflation of Bezeq
International by
reports
including
"dormant subscribers" who do not use Bezeq
International's services but continue to pay it a
subscription fee. For this matter, see also
Section 4.4. On December 29, 2021, the Court
dismissed the claim in light of the applicant's
notice of withdrawal.
respondents made
their
the
in
3.17. Targets and business strategy
Pelephone's strategic targets are continued growth in its customer base while promoting a variety of
packages and solutions to customers and promoting services based on the 5G network, continuing
to develop innovation and network technologies and providing excellent service and improvement in
the cost structure.
3.18. Expected development in the coming year
In 2022, 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 2022, 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 2022, Pelephone is expected to continue to promote a number of services and products
that will enable increased revenue and image advantage over competitors: private
networks, 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, and increasing the marketing of service packages based on the 5G network, the
trend of increasing the consumption of data communication volume on the network will
continue.
3.18.4. Digital transformation
In 2022, 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 2021, Pelephone continued to implement synergy processes with the Group's
subsidiaries. For details, see section 1.8. These processes are expected to continue in
2022.
3.18.6. 5G network
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In 2022, 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
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. Also, changes in price indices may affect site rental costs.
3.19.1.2 Epidemic and supply chain - 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. In 2022 there was a partial
recovery from this impairment, given the mitigation of the consequences of
COVID-19. 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 2022 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 in relation to the
same revenues in the period before the pandemic, 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 and the supply chain.
3.19.1.3 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.
3.19.2. 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,
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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 – a significant portion of the sales of end equipment is
done 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 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
encountered by Pelephone in setting up and licensing websites, see section
3.14.3. These difficulties can impair the quality of the existing network and even
more so the deployment of a new network.
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.
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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).
An additional risk is posed by information leaking out of the organization by a
Pelephone employee, accidentally or maliciously. Pelephone implements strict
internal corporate information security policies and procedures in order to reduce
the risk of information leakage.
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
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 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.
3.19.3.4 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.
3.19.3.5 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 Section 3.10.2.
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3.19.3.6 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. Regarding labor disputes at Pelephone, see Section 3.9.5.
3.19.3.7 Loss of knowledge and information - the changes that are taking place in
the labor market in Israel and around the world, along with organizational
changes, entail a risk of losing key employees, loss of knowledge as a result of
employee turnover, difficulty in recruiting employees, etc.
3.19.3.8 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
Section 2.20.12.
3.19.3.9 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
3500MHz 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.
3.19.3.10 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
Small
effect
High
effect
Macro risks
Exposure to changes in exchange rates
Epidemic and supply chain
Damage due to force majeure, war, disaster
Industry risks
Infrastructure
changes
Competition
Customer credit
Regulatory developments
Electromagnetic radiation
investments and
technological
X
X
X
X
X
X
X
X
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X
X
X
X
X
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
Epidemic malfunctions in devices
Legal proceedings
Substantial suppliers and customers
Labor relations
Loss of knowledge and information
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
X
X
X
X
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).
Regarding regulatory changes in the Internet services market for private customers, 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 sections 1.5.4.3 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 multiplicity of free
apps that allow calls over the Internet. The erosion trend in the international call market
continued in 2021.
4.1.5. In the field of ICT services, there was an increase in 2021 in demand for hosting
services in server farms, as well as for the public cloud services of international
companies.
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
in NIO or cellular infrastructure), affected by frequent
the
investments
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technological changes. In IPV technology in this area, the impact of these barriers
is significantly reduced.
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)
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 based on DSL, transmissions or cables infrastructure, Internet access services
are provided by Bezeq International in the following configurations: (a) "Retail market"
services: Internet access service, without infrastructure services; (B) "Wholesale Market"
services: an integrated package that includes an Internet access service together with the
Internet infrastructure service of the infrastructure companies included in the wholesale
market reform; (C) "Bundle" or "Reverse Bundle" packages: a combined package that
includes an Internet access service together with Bezeq's Internet infrastructure service,
provided by Bezeq International (in the case of a bundle) or by Bezeq (in the case of a
reverse bundle); And (d) packages that include Bezeq International's Internet access
services, Bezeq's infrastructure services and DBS’s STING TV brand - 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.
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, and through underwater cables owned by other companies, from which
Bezeq International acquires capacities (see details in Section 4.9). Among the largest 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.
It should be noted that revenues from Internet services are expected to be materially
harmed as a result of the Ministry of Communications' decision to abolish the separation
between broadband infrastructure service and Internet access service (ISP) (see Section
4.11.5.4).
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
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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.
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
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
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 hosting services, maintenance and technical support services
for IT and communication systems, networking and system services, security & risk
management solutions, IP-based managed services, Cloud computing services, licensing
for Microsoft Public Cloud services, online backup and disaster recovery services, setting
up wireless networks at the customer site 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").
4.2.5. PBX Services (swithcboards)
Bezeq International markets and maintains communication systems that include
exchanges, telephony networks and IP communications 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
Rate of total Bezeq International revenues
International communication
Rate of total Bezeq International revenues
VOICE and Business Communication services
(PBX, ICT, DATA)
Rate of total Bezeq International revenues
Equipment, licensing and service contracts for
businesses
Rate of total Bezeq International revenues
Total revenue
4.4. Customers
2021
683
55%
177
14%
142
11%
235
19%
1,237
2020
710
57%
181
14%
131
10%
249
20%
1,271
2019
746
56%
198
15%
106
8%
289
22%
1,339
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)62:
2021
2020
2019
62 The data are after changing the classification of small customers (SOHO) from private customers to business customers carried
out in 2019.
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Revenue from private customers
Revenue from business customers
Total revenue
372
865
1,237
401
708
1,2
71
441
898
1,339
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 as redundant 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 a
letter to the carriers 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 it. The Ministry recommended
in its application 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 written that the
Ministry will consider in the future whether to set binding provisions in the matter, should and initiated
actions will not lead to a significant reduction in this matter. On November 8, 2020, another letter was
received from the Ministry of Communications, according to which the Ministry expects that the next
reporting point (set for December 17, 2020), the reported data will reflect the reduction of the
phenomenon in a significant manner, that a date should be provided at this time on how the licensee
acts to prevent the recurrence of the phenomenon, and, like its previous letter, that as long as the
phenomenon is not significantly reduced, the Ministry will take various actions, including establishing
binding provisions in this regard. In Bezeq International's assessment, the abolition of the separation
of infrastructure provider will lead to a significant reduction in the scope of the phenomenon.
For this matter, see also Note 10.6 to the 2021 reports. On 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 Section 1.7.2.3), and Bezeq International services are sold by
DBS, as part of the marketing of "TRiple" packages (see Section 4.2.1).
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, 2021 at about 34%63.
4.6.1.2 Competition in 2021 is characterized by a decrease in the number of retail
market package subscribers, along with an increase in the "reverse bundle"
package subscribers sold by Bezeq.
4.6.1.3 The following are developments in 2021:
a. Continued
trend of selling service baskets, especially against
the
backgroundThe activity of a wholesale sales model (supplier + infrastructure)
in 2021.
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. In 2021, Bezeq International began offering its customers
packages with high browsing speeds
fiber
infrastructure.
the Company's
through
63 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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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
c. a decrease in customers joining the retail market services was recorded, and
on the other hand there was an increase in joining "reverse bundle"
packages.
d. 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 continues.
4.6.2. International telephony services
4.6.2.1 As of the end of 2021, 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, 2021 is approximately 22.6%64.
4.6.2.2 General characteristics of the competition in 2020:
a.
In 2021, 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 2021, 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.
4.6.3.3 Hosting services - In 2021, there was an increase in demand for hosting
services in server farms, partly as a result of the trend in the business market to
move to managed services (as a service) and services in cloud environments,
and in view of the intention of giant companies to establish points of Presence in
Israel.
4.6.3.4
Public Cloud Services - In recent years there has been a growing demand
for public cloud services offered by companies such as Amazon, Microsoft,
Google and Oracle. Bezeq International serves both as a marketer (selling
directly to customers) and as a distributor (selling through sub-marketers) of
licensing Microsoft's cloud services to customers in Israel, and implementing
these service solutions for customers.
4.6.4. Unique characteristics
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.
The fact that Bezeq International does not own interior access infrastructures is a
competitive disadvantage compared to competitors that control such infrastructures.
4.7. Property, plant and equipment and facilities
Bezeq International's property, plant and equipment include switching and Internet equipment,
underwater cable, central equipment and routers for rent, office equipment, computers, software
64 Based on publications from the Ministry of Communications regarding the number of minutes spent in the second quarter of
2021.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 that house its
offices. 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 2023 (with two equal options for extension until 2027).
Bezeq International has a lease agreement for a building with a server farm. The lease period is until
August 2026, followed by two additional options for extension until 2036.
Bezeq International has additional lease agreements in connection with warehouses (including the
logistics center), 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 years 2020 and 2021:
Administrative employees
Service and sales representatives
Total
31.12.2021
31.12.2020
758
363
1,121
827
484
1,311
The number of employees included in the table includes employees employed part-time. Total jobs 65
Bezeq International as of December 31, 2021 was 1,047 compared to 1,228 as of December 31,
2020.
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
65 Total monthly working hours divided by the monthly working hours quota.
Audit
*
Technologie
s
informatio
n Division
Business
Custome
rs
Division
Global
Busniess
es and
Business
Solutions
Division
Finance
and
Econom
ics
Division
122
Custo
mer
Divisi
on**
Marke
ting
Divisi
on
Public
Relatio
ns
Legal
advice
and
regulatio
n
Engine
ering
Divisio
n
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
(*) 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
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 Employees’ 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. According to the
Notice, the issues in the dispute are: Unilateral intention to make changes in the communications
market and allow the Company 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.
On March 24, 2021, Bezeq International was notified by the New General Workers’ Histadrut - the
Internet and High-Tech Mobile Workers' Union, of a declaration of a labor dispute in accordance with
the Labor Disputes Resolution Law, 5717-1957 and a strike starting on April 7, 212 onwards.
According to the announcement, the issues in the dispute are: Unilateral intention of Management to
make organizational and structural changes in Bezeq International, including a merger, consolidation
of activities, synergy, etc. with DBS and / or Pelephone, which, if implemented, will critically affect
the employees, including working conditions, rights, status, job security, injury to the organizational
force and the bargaining unit.
On June 23, 2021, the Bezeq International offices received a notification from the New General
Workers' Histadrut - the Internet and High-Tech Cellular Workers' Union, declaring a joint labor
dispute at Bezeq International and Pelephone in accordance with the Labor Disputes Resolution
Law, 5717-1957, and a strike from July 7, 2021 onwards. According to what is stated in the
announcement, among others, are: the refusal of the joint management of Pelephone, Bezeq
International and DBS (“the Joint Management") to conduct negotiations regarding the change of
the bargaining unit in connection with the change in the corporate structure; The refusal of the Joint
Management to enter into negotiations to regulate the rights of Bezeq International employees and
their job security due to the said change in corporate structure, and an action in bad faith of the Joint
Management, including foreign and improper considerations in the corporate and structural change
plan. On July 1, 2021, Bezeq International filed a petition with the Tel Aviv Regional Labor Court for
a collective dispute, as well as an urgent motion for remedies for the prevention of organizational
measures, regarding the notice. The motion alleges that the notice is invalid because it was submitted
in a combined and unified manner in Bezeq International and Pelephone, in an attempt to produce a
unilateral and unanimous change of collective bargaining units and the establishment of a joint
employees’ committee known as the "Alpha Committee" for the subsidiaries, including DBS. At a
hearing held on July 4, 2021, it was agreed that (1) Pelephone and DBS, which were formal
respondents in the proceedings, will be attached as petitioners in the proceedings; (2) Both Bezeq
International and Pelephone will negotiate with their employees’ committees regarding the sale of
control of Bezeq; (3) Until a different decision is made, the respondents (the General Employees’
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Histadrut and the Employees’ committees at Pelephone and Bezeq International) will not strike due
to the dispute over the sale of control. Regarding the bargaining unit, it was determined that the
tribunal will give a decision, after submitting all the responses and providing an opportunity to
question the makers of the affidavits.
On July 7, 2021, a decision was made by the tribunal on the consolidation of the hearing in the two
disputes (sale of control and the bargaining unit). At a hearing held in the court on July 27, 2021,
Bezeq International withdrew its request for interim relief, and it was agreed that the negotiations
between the parties would continue under certain auspices of the Court. The main proceedings will
continue to be clarified. In the meantime, the parties submitted additional statements of claim on their
behalf, but the hearing of the motion was delayed by agreement in view of the negotiations and the
mediation procedure between the parties as detailed below.
On August 2, 2021, the employee representations of Pelephone and Bezeq International began
taking a variety of organizational sanctions, which according to the employee representatives'
announcement have a direct connection to the synergies between Pelephone Bezeq International
and DBS. On August 30, 2021, Bezeq International and Pelephone filed a motion as a party to a
collective dispute and an urgent motion for temporary remedies against certain strike measures by
the employees’ representatives. On August 30, 2021, a decision was issued preventing a strike in
control rooms, support centers, call centers and server farms and other issues specified in the
motion. In another decision dated September 9, 2021, this order was extended until a different
decision is made. The employees’ representation continued to run other organizational measures.
In view of the continuation of the sanctions, on October 19, 2021, Pelephone and Bezeq International
(each separately) (in this section: "the Subsidiaries") submitted to the Chief Labor Relations
Commissioner in the Ministry of Economy a notice of protective shut-down under Article 5A of the
Labor Disputes Law, 5717-1957. The notices explained that the continued sanctions in the
subsidiaries may result in no economic reason and / or operational possibility for certain processes
to take place in the Subsidiaries. The date of commencement of the protective shut-down and the
number of employees whose work will be suspended as part of the said shut-down, insofar as it is
taken in each of the Subsidiaries, depends on the organizational measures and sanctions to be taken
by the employees.
On November 1, 2021, the Subsidiaries, as part of a mediation procedure conducted in parallel
between the parties, reached agreements in principle with the Histadrut and the employees’
representatives, subject to the signing of collective agreements, as well as an agreement that all
organizational measures (including all sanctions) will cease immediately, and intensive negotiations
will begin for signing collective agreements to regulate employees’ rights as part of the
implementation of the planned structural change at Bezeq International and DBS. The following are
the main principles of the outline that was formulated:
a. A collective agreement will be signed between the new integration company to be established and
the Histadrut.
b. Bezeq International activities that are not transferred to the new integration company will be merged
into DBS and the employees will be absorbed as DBS employees under a collective agreement that
will be signed with the Histadrut for three years. The Histadrut and the Chairman of the Bezeq
International’s Employees’ Committee will continue to represent the employees moving to DBS and
the integration company, for the period of the agreement, including for the purpose of signing
collective agreements.
c. Permanent employees at Bezeq International who are not interested in moving to DBS will be offered
retirement conditions as agreed between the Histadrut and Bezeq International's management.
d. An agreement was reached with Pelephone’s employees’ representation to maintain the cellular
network owned by Pelephone for the period of the agreement.
e. Employees of the Subsidiaries will be entitled to a special grant to be paid to them at the beginning
of 2022 in a total amount that is not material at the group level. This section is not subject to the
signing of collective agreements. In parallel with this agreement, the Histadrut and the employees'
representatives of the subsidiaries waive their financial demands in the context of the labor dispute
declared regarding the sale of the controlling shares of the Company to the new owners.
As of the date of publication of the report, no further collective agreements have been signed.
The collective agreements reached following the agreements in principle will be brought for approval
by the boards of directors of the Subsidiaries. Bezeq cannot assess at this stage whether, at the end
of the negotiations, the collective agreements will be signed as expected, or the total cost that will be
involved.
It should be noted that on March 16, 2022, decisions were made by Bezeq's Board of Directors as
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
well as Bezeq International's and DBS 'boards regarding the cancellation of the plan to change the
organizational structure and approval of an alternative plan as specified in Section 1.1.5, which is
expected to influence the continuation of conflict management and negotiations between the parties
regarding structural change.
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 engagement 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, and continued capacity over the Company's ground infrastructure to a number
of communication nodes in 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 its engagement with CYTA, Bezeq International has acquired indefeasible right-
of-use, in an undefined part and with a non-specific attribution, in the communication
capacity transmitted through the underwater cable system operated by CYTA between
Cyprus and Europe. The period of use is at least until May 2022, with an option of extending
the period.
In addition, Bezeq International acquired indefeasible right-of-use of the non-residential
parts in an unspecified part and no specific attribution can be attributed to the
communication capacity transmitted through terrestrial infrastructure in Europe from GTT
Communications Inc., for the purpose of bridging Bezeq International's submarine cable to
communications nodes in Europe. The period of use of these infrastructures is at least until
2026, with the possibility of extending the period.
4.9.3. Hosting service providers
Bezeq International acquires hosting services in long-term agreements with a number of
server farm facility operators, mainly for the purpose of providing hosting services to
business customers:
As part of an agreement signed in 2011, Bezeq International purchases Bezeq’s hosting
services at Bezeq's server farm facility. These services are mostly used to provide hosting
services to business clients. The agreement is valid until 2024 for certain parts of the
facility, and for other parts until 2033.
As part of an agreement signed in 2019 with Edgar Investments and Development Ltd.,
Bezeq International acquires hosting services at this Bezeq server farm facility. The
agreement is valid until 2041, with an option to terminate early in 2034. These services are
used to provide hosting services to business customers.
As part of an agreement signed in 2021 with CerberPharm Bnei Zion Limited Partnership,
Bezeq International will purchase hosting services at a server farm facility under
construction by this partnership. The agreement is valid until 2039, with options for
extension until 2047. These services are expected to be used to provide hosting services.
For business customers.
4.10. Taxation
See Note 7 to the 2021 statements.
4.11. Restrictions and supervision of Bezeq International's activities
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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.
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 refrain from preferring the provision of infrastructure
services to a licensee who is an affiliated company (as defined in the license)
over another licensee.
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. Real estate authority - 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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 1.7.2.3.
4.11.5.4 Also, regarding the decision of the Ministry of Communications at a
hearing dated June 20, 2021 on the abolition of the separation between
broadband infrastructure service and Internet access service (ISP), see Section
1.7.2.3. The changes in the communications market, which are expected to be
caused as a result of this decision, are expected to have a material impact on its
subscriber base, and on Bezeq International's revenues in the field of the Internet.
Bezeq International is preparing for its possible effects on its business and its
manner of operation.
4.12. Legal proceedings66
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
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
District
(Central)
Monetary
claim
together with
a motion to
recognize it
as a class
action
things,
is alleged, among other
that Bezeq
It
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.
Unspecifi
ed
66 For reporting policy and materiality thresholds, see section 2.18.
127
b.
March
2016
c.
April
2019
d.
October
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
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
e. Novembe
r 2020
District
(Central)
Client
against
Bezeq
Internatio
nal
Monetary
claim
together with
a motion to
recognize it
as a class
action
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
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 2.18.1i.
4.12.2. Legal proceedings completed during the reportedperiod or until the date of publication
of the report – None.
4.13. Targets, business strategy and development prospects
Bezeq International intends to perform a full statutory merger with DBS, when Bezeq International's
integration activities will be spun-off and transferred to a new separate corporation to be established
in the Group (see Section Error! Reference source not found) in order to achieve the following
targets:
In light of the abolition of the separation between infrastructure provider and Internet
access provider (ISP), Bezeq International intends to reduce ISP activity in the private
segment, and focus on developing integration activities and services for the business
segment, in order to become a growth-focused ICT company. This will allow managerial
focus and dedication of resources to integration activities and cloud services, which is
growing due to the trend of the business segment moving to a model of cloud services.
Bezeq International will continue to acquire capabilities and knowledge both through the
recruitment and training of personnel, and through the acquisition of companies in
complementary fields. Bezeq International will maintain collaborations with partners in
Israel and abroad in order to provide a full service envelope to its customers. Bezeq
International anticipates that the main growth engines will be in the areas of hosting
services, cloud services and information security services. For further details see Sections
1.1.5 and 1.8. These processes depend in part on the cooperation of employee
representatives.
Bezeq International cannot assess whether the above objectives may materialize or
partially materialize and when. In addition, the targets may be affected by changes and
developments in the relevant markets, 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.
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. Exposure to changes in exchange rates
Bezeq International is exposed to risks due to changes in exchange rates, especially in the
field of equipment sales and integration, as well as in international data services, since
most purchases of equipment and services in these areas are made in US dollars, while
Bezeq International's revenue is shekels. Erosion of the shekel against the dollar could
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
harm Bezeq International's profitability if it is not possible to adjust selling prices in the short
term..
4.14.4. 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.
4.14.5. Epidemic
At the beginning of 2020, an outbreak of the COVID-19 virus began worldwide.
Subsequently, Bezeq International monitors developments in connection with this outbreak
and epidemic aincidents in general and examines potential consequences for its business
activities, with some of the consequences already being reflected in Bezeq International.
These consequences may be manifested, and some of them are already manifested,
among other things, in the customer service system, as well as damage to the supply chain
and delays in the purchase of equipment, which may affect Bezeq International's revenues
and ability to meet business obligations. According to Bezeq International's estimates, as
of the date of the report, no material 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
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.
4.14.6. Serious malfunctions in information systems and engineering systems
Bezeq International 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"). Bezeq International's
business has a high dependence on these Systems. Some Bezeq International 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 physical damage to infrastructure and due to
malicious damage (such as the introduction of viruses and cyber attacks as detailed below),
significant difficulties may be caused in the provision of services, including in the event that
Bezeq International is unable to quickly return the Systems to normal.
4.14.7. Information security, protection of customer data and cyber risks
Bezeq International is the target of cyber-attacks, the purpose of which is to harm the use
of the information systems or the information itself. This type of assault activity or intrusion
incident can cause business disruption, information / money theft, damage to reputation,
damage to systems and information leakage.
Bezeq International operates information security systems to protect against the intrusion
of an unauthorized person into the network and / or critical systems. Bezeq International
monitors the implementation of its protection policy, which includes an examination of its
level of effectiveness and readiness. In this context, Bezeq International conducts tests and
assault exercises for various scenarios (including through external companies that
specialize in the field).
An additional risk is posed by information leaks from the organization by Bezeq
International employees, inadvertently or maliciously. Bezeq International implements strict
intra-organizational information security policies and procedures in order to reduce the risk
of information leakage.
Despite Bezeq International's investments in measures to reduce such risks, it cannot
guarantee that these measures will succeed in preventing damage and / or disruption to
the systems and information related to them.
4.14.8. Damage caused by nature, war, disaster
Damage to the server farms on which Bezeq International concentrates its core activity
may adversely affect Bezeq International's business and its results.
4.14.9. Legal Proceedings
4.14.10. 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
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actions can reach large sums, since a substantial part of Israel’s residents are Bezeq
International’s customers, 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 or a significant part of the consumers. In addition, in certain contracts,
mainly in the government and public sector contracts, Bezeq International sometimes
enters into contracts for the provision of services subject to a partial liability limit, or no
liability limit at all. Given the sensitivity of the services provided by Bezeq International to
these customers, in the event that the customer is harmed in such a contract, this may lead
to legal proceedings in large amounts. For legal proceedings to which Bezeq International
is a party, see Section 4.12.
4.14.11. 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 Section 1.8, Bezeq International
implements 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.
Regarding labor disputes at Bezeq International, see Section 4.8.
4.14.12. Loss of knowledge and information
The changes that are taking place in the labor market in Israel and around the world, along
with organizational changes, entail a risk of losing key employees, loss of knowledge as a
result of employee turnover, difficulty in recruiting employees, etc.
4.14.13. 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 1.7.2.3) 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.
4.14.14. Impairment of Bezeq International's assets
Bezeq International conducts, in accordance with the accounting standards, a periodic
examination of the impairment of assets in respect of which indicators of impairment have
been identified. For details regarding the risk factor regarding the recognition of impairment
losses, see Section 2.20.12. Changes in the regulation of the Internet services market (see
section 1.7.2.4) 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.
4.14.15. 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, change in the business model
and 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
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factors appear above and below is not necessarily according to the degree of risk67:
Risk factors summary table - international communications, Internet and network endpoint
services
The extent of the impact of
the risk factor on Bezeq
International's operations
Low
Medium
High
effect
effect
effect
X
X
X
X
X
X68
Macro risks
Exposure to changes in exchange rates
Epidemic
Industry risks
Growing competition
Investments in infrastructure and technological
changes
Governmental supervision and regulation
Serious malfunctions in information systems and
engineering systems
Information security, customer data protection
and cyber risks
Special risks for Bezeq International
Damage due to the forces of nature, war, disaster
Legal proceedings
Labor relations and streamlining procedures
Loss of knowledge and information
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
X
67 See footnote 51.
68 The extent of the impact of this risk factor on Bezeq International's activities was classified as medium, assuming that the incident
would be limited in scope and time. Otherwise, the degree of impact may be large.
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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 Company 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 section 5.15.
DBS and Hot provide both linear channel broadcasts (also referred to in this
chapter as "channels") and VOD services (on regulation in the field of DBS’s
VOD services, see Section 5.15.2).
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 end devices (including mobile
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 Yes+ and
Sting TV services, for details, see Sections 2.25.2.2.1 and 5.2.2.1), 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)
69
.
d. The DTT array
A digital distribution system for digital television (DTT), known as "Idan+",
70.
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.
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.
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
69 DBS is one of the shareholders of Zira Ltd., which works to prevent copyright infringement in video content on the Internet.
70 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 14, 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. 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 financed by subscription fees or
commercials.
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72
part of the "open broadcasts" (i.e., television channels distributed through the
71 consent to
digital stations), will give each "registered content provider"
broadcast its linear 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
, the commencement of the said arrangement was postponed for five
channels
years, which was extended in January 2022 for another nine months (until
October 2022)73, 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.
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 communication groups, see Section 1.7.1. For the offer of baskets of
communication services by DBS and the restrictions thereon, see Section 1.7.2.3.
In the year of the report, the high level of competition continued to prevail, 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 Section 5.6. 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.
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 July 2021, a report was published on the recommendations of the committee for the
examination of the underlying regulation in the field of broadcasting, headed by former MK
Roy Folkman ("Folkman Committee"). The committee's report includes, inter alia,
recommendations on the following issues:
A. Abolition of the Council and the Second Authority Council, and the establishment of
the Commercial Broadcasting Authority in their place.
B. Application of regulation to all audiovisual content providers (whose main activity is
the transfer of content to subscribers) including the various OTT providers. In relation
to local content providers – application of regulation in accordance with the ranking
to be determined according to the scope of their activity, on the basis of their total
annual revenue. In relation to international content providers - application of limited
71
72
"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. On this matter, see Section
5.15.1.4.
73 The Minister of Communications, with the approval of the Knesset's Economics Committee, may extend this period by a single
period of six months.
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and voluntary regulation in part.
C. Determining provisions regarding the promotion of original productions of the elite
genre only and determining a graded investment obligation that will apply to the
various content providers, while reducing the existing provisions in relation to the
obligation to invest in original productions.
E. Determining provisions regarding the prohibition of exclusivity in the field of sports
broadcasts that will apply to all local content providers, and additional provisions
regarding the broadcasting and purchase of sports content.
F. A mechanism for determining provisions regarding consumerism in the field of
broadcasting, as well as recommendations regarding the cancellation of base
packages for cable and satellite.
According to the Committee's report, there are issues on which the Committee has not
reached a final conclusion, including the issue of the economic models of the broadcasting
market (for which the Committee recommends gradually abolishing the separations and
restrictions that exist today, including the free transmission of commercial channels, see
Section 5.15.1.4), the obligation to allocate channels, and the prohibition of broadcasting
advertisements on the traditional platforms of DBS, while offering two outlines for the
implementation of this recommendation) and the possibility of multi-channel platforms to
hold news entities. Accordingly, the Committee allowed for reference to be made to its
recommendations for further examination.
In September 2021, a decision was made by the Minister of Communications regarding the
reform of the broadcasting market. In the decision, among other things, the Minister
announced the adoption in principle of the committee's recommendations subject to
changes and adjustments as specified in the decision, and ordered staff work in relation to
some of the recommendations. The Minister stated that the decision on the issue of the
economic models of the broadcasting market will be made after receiving public comments
and recommendations from the professional staff. In addition, the Minister instructed the
professional echelon in the Ministry of Communications to begin staff work to anchor the
recommendations in legislation and guidelines 74, while completing staff work on the issues
specified in the decision. The Minister further stated that he intends to act to complete the
reform within a period of about a year at most. The effects of the decision on DBS’s
business depend, among other things, on the Minister's decisions on matters for which a
final decision has not yet been made; Since this is an economic decision and staff work is
required regarding the recommendations contained therein; And since legislative
proceedings are still required for the implementation of the committee's recommendations
and their implementation, it is difficult to assess the extent of the impact on DBS’s business
of the said legislative amendments or other regulations, insofar as they are adopted and in
the wording and manner as 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, the decision in
question of the Minister of Commnication 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
legislative
amendments, if further regulation is formulated therefrom. For possible impacts on OTT
services see Section 5.15.2.
the Minister's decisions and subsequent
implementation of
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 to various target audiences.
74 In recent years, a number of legislative initiatives have been initiated regarding a change in the format of the aforesaid regulation,
including the Memorandum of the Communications Law (Bezeq and Services) (Regulation of Content Providers) (Amendment
No. _), 5778-2018, which the Folkman Committee was instructed to take into account.
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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).
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 Section 5.1.1.
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.
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.
For more details on the competition in the field see Section 5.6.
5.2. Products and services
DBS services through satellite include lienar channel broadcasts, 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 Section 5.18.1.
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5.2.1. Satellite broadcasts and related services
Satellite DBS broadcasts include linear channel broadcasts, as well as radio, music and
interactive channels.
For the purpose of receiving DBS services via satellite, reception plates are installed in the
buildings and decoders of different types with different features are installed in the
subscriptions' houses, which allow a variety of services to be received depending on the
converter's features.
In accordance with DBS’s 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 section 5.15.2.
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).
5.2.2. OTT Services
DBS offers a number of OTT services:
5.2.2.1 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 compatible streamer and other
end devices including laptops. The service can be used on its own or in parallel
with the satellite service.
5.2.3. 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.
5.3. Revenue from products and services
The following are data regarding the distribution of DBS revenues (in NIS millions):
Revenue from multi-channel TV broadcasts
and services for subscribers
Rate of total revenue
2021
1,252
2020
1,254
2019
1,316
Approx. 99%
Approx. 97%*
Approx. 98%*
* 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.
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
obligations in their relationship with DBS. With respect to the subscription agreement with the satellite
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subscribers, the approval of the council is required, which was received.75
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 services76 and holds the largest market share, as well as
Cellcom, Partner and Netflix.
Below is data on subscription numbers and market shares77 of DBS, to the best of its
knowledge, as of December 31, 2020 and 202178:
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 1.7.2.3), in access and connection to international content providers 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:
75 According to the broadcasting license, the approval of the Uniform Contracts Court is also required for the subscription agreement (approval
previously granted and expired). DBS has applied to the Council for amendments to the subscription agreement and for the amendment of the
license, as part of which DBS requested, inter alia, 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's requests has
not yet been received.
76 To the best of DBS's knowledge, in the second half of 2021, Hot appealed to the Competition Commissioner to cancel its declaration as a monopoly
as stated.
77
78
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 2020 and 2021 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 2021), as well as of Hot, which does 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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a. The quality and variety of content that DBS broadcasts to its subscribers.
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 section
5.2.2. 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 5.15.3.
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 the wholesale market arrangement, as stated in section
1.7.3, 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.
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 Section 5.2.2).
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. 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. Property, plant and equipment, real estate and facilities
The following are the main components of DBS's property, plant and equipment:
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 between about a year and a half and about three
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 and leases them to its subscribers.
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.
5.8.6. Computerized customer management system
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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 2024. 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 5.1579).
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 5.9.1.1.80
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 2022. 81 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 satellite subscribers' homes.
5.9.2. Trademarks
DBS has registered trademarks, the main ones of which are intended to protect its trade
name (Yes) and the key brands it uses (Yes, Yes+, StingTV).
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
79 In July 2021, DBS submitted an application for renewal of the broadcasting license, which is being examined.
80 In July 2021, an application was made to the Head of the Judea and Samaria Administration for the renewal of this license.
81 After an extension made in January 2022.
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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
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. Major content providers and dependency on a single content portfolio
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.
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5.11.2. DBS employee base by divisions:
Administration
Customer Division
Total
20
Number of employees
31.12.20
347
747
1,094
31.12.20
382
847
1,229
21
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, 2021 was 999.
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, as detailed below, and apply 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 representative organization of DBS’s
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.
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.
In August 2021, DBS signed a collective agreement between it and the Histadrut and the
Employees’ Committee, which included, among other things, amendments to the said
collective agreements and the said collective arrangement. The new collective agreement
is valid from January 1, 2022 until December 31, 2024. According to the new collective
agreement, among other things, wage increases and grants will be provided, wage
conditions will be improved, a retirement plan will be agreed on and a labor dispute
declared by the National Workers' Histadrut will be resolved in December 2019, while
clarifying the intention of the DBS’s Management to merge Bezeq International into DBS,
it was agreed that the parties would maintain industrial silence during the period of validity
of the agreement in all matters regulated therein.. The collective agreements applicable to
DBS employees (as amended above) regulate, inter alia, 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 the termination of
employment of permanent employees, as well as annual wage increases and additional
financial benefits to be provided by DBS to employees, during the term of the agreement.
The collective agreements and the arrangement mentioned above are valid until December
31, 2024. 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.
Regarding an announcement from June 2021 on behalf of the new General Workers’
Histadrut - the Internet and High-Tech Cellular Workers' Union announcing a labor dispute,
among other things, regarding the refusal of the joint management of Pelephone, Bezeq
International and DBS to negotiate various matters, which was also received at DBS
offices, and a legal proceeding initiated by Bezeq International in July 2021 following the
announcement and being conducted in the Tel Aviv Regional Labor Court - Dee section
4.8.
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 targets 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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5.12. Suppliers
For engagement with Space, see section 5.16.
For engagement with Cinmedia, see section 5.8.5.
For engagement with NetCracker and Salesforce, see Section 5.8.6.
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 November 2021, Bezeq approved a credit facility or investment in DBS’s equity in the total amount
of up to NIS 40 million, for a period of 15 months starting on October 1, 2021. This approval is in lieu
of a similar approval given in August 2021 (and not in addition to it).
5.14. Taxation
For more details, see Note 7 to the 2021 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), as well as, inter alia, Council
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
Chairman of 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 82
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
82 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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Council may also interfere with promotions or discounts offered by DBS, if he
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 2021 and 2022, DBS must invest
an amount of not less than 8% of its revenues from the subscription fees of
satellite subscribers83 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 2021, the Council decided to postpone for 2023 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 2022 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.84
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%
83 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.
84 According to the provisions of the Communications Law, DBS is exempt from payment to the commercial channels included in the
mandatory channels due to the transmission of their broadcasts with it.
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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
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
by
the Ministry of
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 Section 5.2.1) are not
subject to such regulation. However, from various decisions of the Council (see also
Section 5.2.1), 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 OTT field.
These assessments by DBS are forward-looking information, as defined in the Securities
Law, based, inter alia, on the conclusions of the Folkman Committee, the decision in
quesiton by the Minister of Communications 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 Minister's decisions and in legislative amendments, if
further regulation is formulated as a result thereof.
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 1.7.2.3). 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
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5.16. Material 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:
Agreement for the lease of space segments85
According to an agreement with Space, since 2013, as amended (including an amendment from July
2021), 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"
satellite (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 in which space segments are leased to DBS until February
2024 (or until the end of his life, whichever is earlier), while DBS may extend it for an additional six
months.
Period of the agreement - until the end of the life of the "Amos 3" satellite (subject to the exceptions
set forth in the agreement), but in any case the agreement will expire no later than February 2026 86.
The leased space segments - according to the Space Agreement (and subject to unavailability
events), until the end of the Amos 7 DBS lease period, DBS will lease 12 space segments from
Space, in accordance with the division between the relevant satellites stipulated in the Agreement
according to the different periods, and then DBS will lease 10 space segments in Amos 3. The
Agreement also regulates the provision of backup segments to space segments leased by Space
during the term of the Agreement, so that in the event of space segments not available on one of the
satellites, Space will place alternate segments on the other satellite so that the number of segments
is not less than 10 segments, subject to the terms and conditions set forth in the Agreement.87
Cost - the average annual cost until the end of the lease in Amos 7 is approximately USD 25 million,
and thereafter approximately USD 18 million, subject to the discount and reimbursement
mechanisms set forth in the Space Agreement.
Early termination of the agreement - according to the Space Agreement, DBS may announce an
early termination without cause, of a Space Agreement subject to 12 months' prior notice and
payment of the lease in "Amos 7" plus payment of parts of the lease balance in the space segments
in "Amos 3".
The usage fee in 2021 amounted to about NIS 75 million.
DBS has a substantial dependence on Space, as the sole owner and sole supplier of the space
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 Section 5.19.3.4. For Space dependence, see Section
5.19.3.5 .
85
The assessments in this section regarding the activity and end of the useful lives of the satellites, 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 the start of satellite operation, 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.
86 In some cases, DBS may announce the continued use of the "Amos 3" satellite even after the end of its life.
87 In addition, according to the space agreement, it holds spare tubes on the "Amos 7" satellite, and must make every reasonable effort to locate
alternative satellite segments in other satellites under the terms and conditions set forth in the Agreement, including maximum amounts and rates
of Space’s participation in additional expenses.
146
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
5.17. Legal Proceedings88
5.17.1. Legal proceedings are pending
Date
Sides
Court
Type of
procedure
Details
Amount
of claim /
remedies
a.
Dece
mber
2020
b.
June
2017
c.
July -
Augus
t 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
shareh
olders
against
Bezeq
and
DBS
Tel Aviv
District
Court
Tel Aviv
District
Court
(Econo
mic
Depart
ment)
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 section 1.1.6.
Motion for
approval of
class
actions
things,
For details regarding a motion for
approval of a class action lawsuit filed
against, among other
the
former CEO of DBS and its former
in connection with a 2015
CFO,
transaction in which Bezeq acquired
the remaining shares of the DBS
shares held thereby from Eurocom
DBS, see section 2.18.1D.
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
amended in 2017 (Space Agreement) See
Section 2.18.1 Subsection E.
Tel Aviv
District
Court
Motion for
disclosure of
documents
before
submitting a
motion for
approval of
a derivative
claim in
accordance
with Article
198A of the
Companies
Law
d.
June
2018
Bezeq
shareho
lders
against
The
Compan
y, DBS
and the
former
Tel
Aviv
District
Court
(Econo
mic
Depart
ment)
Request for
disclosure
and review
of
documents
under
section 198A
of the
Companies
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, the
former 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,
88
For reporting policy and materiaityl threshold, see Section 2.18.
147
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Amount
of claim /
remedies
Over NIS
2.5
million.
Date
Sides
Court
controlli
ng
shareho
lders of
Bezeq
תוחוקל
דגנ
סא.יב.יד
e.
ינוי
2021
Type of
procedure
Law
Details
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.
רושיאל השקב
תיגוציי
עיבת
ה
תיב
טפשמ
יזוחמ
זכרמ
It ais alleged, among other things, that DBS
customers who order a paid channel near the
time of closing the invoice, and cancel it
shortly thereafter (so that they are supposed to
pay at a daily rate), are allegedly overcharged,
due to a system malfunction. The definition of
the class according to the motion is all DBS
customers who were overcharged for ordering
a paid channel as a result of a fault in D’sBS
system, during the 7 years prior to submitting
the motion for approval and until it is
approved. The amount of the personal damage
claimed
for
overcharging and NIS 100 for non-pecuniary
damage). Please note that at this stage the
applicant does not have the data required to
assess the damage to the class members, At
more than NIS 2.5 million. In November 2021,
an motion was filed with consent for the
applicant
paying
to withdraw while
compensation and expenses to the applicant .
is NIS 126.9
(NIS 26.9
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
a
June
2015
District
(Center)
Custo
mers
vs.
DBS
Type of
procedure
Details
Monetary
claims in
conjunction
with motions
to recognize
as class
action
to
all
license and
the
sought
against
in which
Claim regarding discrimination against new
returning
DBS customers compared
customers who were previously DBS
customers, this is allegedly contrary to the
the
provisions of
law.
Applicants
non-pecuniary
compensation for members of the represented
class as well as to allow each subscriber to
receive the terms received by returning
subscribers (“the First Motion”).
After the parties to the proceedings submitted
summaries on their behalf to the Court, in July
2018 a hearing was held on all motions for
approval
communication
the Court advised
companies,
applicants to consider a rewarded withdrawal
from the motions for approval, and ruled that
as long as the recommendation is not accepted
by September 2018, a decision will be made by
the Court in the motion for 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 applications for
approval.
In January 2020, the petitioners in the First
Motion filed an appeal against the judgment to
the High Court.
In February 2021 as part of a hearing on appeal,
the High Court recommended that the appeal
be withdrawn on their behalf, without an order
148
Original
claim
amount
(NIS million)
The
amount of
the claim
that is the
subject of
the motion
was
estimated
by
the
applicants
at NIS 13
million
plus non-
pecuniary
damage as
will
be
decided by
the Court.
The
applicant
in
the
additional
motion
does
not
specify the
amount of
the claim,
but
estimates
the extent
of
the
damage in
the tens of
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Date
Sides Court
of
filing
the
claim
Type of
procedure
Details
b Octob
er 2021
Custo
mer
vs.
DBS
Jerusale
m
District
Court
Claim in
conjunction
with motion
to recognize
as class
action
for costs. Following this, the first applicant
announced the withdrawal of the appeal on her
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 costs.
The motion concerns the fact that DBS is
acting unlawfully in that when a customer
orders a more advanced (new) converter from
it, it provides the customer with the new
converter without removing the old converter,
while continuing to charge the customer
monthly rent for the old converters in his
home. The applicant claims that in doing so,
DBS is acting, among other things, in bad
faith, by deception and with a misleading
presentation of invoices. The amount of
personal damage claimed is NIS 193 (NIS 183
for overcharging and NIS 10 for violation of
autonomy).
On January 19, 2022, the Court approved an
agreed motion to withdraw from the request,
from which it emerged that the applicant was
convinced that an exceptional fault had
occurred in his case which did not reflect
DBS’s policy, and ordered its striking out.
Original
claim
amount
(NIS million)
millions of
NIS.
The
motions
states that
it
is not
possible to
quantify
the
damage
estimate to
the
class
members
at
stage.
this
5.18. Targets and strategy
5.18.1. DBS's targets 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 up to 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 regularly monitors market
conditions, competition and the technological environment, and frequently examines 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 as stated will be completed. 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 sections 5.2.2.1 and 5.2.2.2
above) is about 40%89 of all DBS subscribers.
5.18.2. In order to achieve the aforementioned targets, along with actions to reduce
89 This rate also includes subscribers who also use satellite services.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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.
5.18.3. For the structural change plan and for the establishment of ISP activity in DBS, see
Section 1.1.5.
5.18.4. 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
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 Epidemic - 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
150
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 section 5.1.1 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,
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 Section 1.7.4.5).
5.19.2.3 Fierce competition - the field is characterized by fierce competition with a
variety of different competitors (see Section 5.1.7), which are also expected to
increase in the future in the face of the entry of additional local and international
factors, as well as a change in consumer preferences, that requires DBS to
constantly and continuously invest in recruiting and retaining customers and
dealing with high transfer rates of subscribers between companies, and may even
require a change in DBS’s business model . For the characteristics of competition,
see Section 5.6.
DBS’s estimate, as stated in this paragraph above in relation to the possibility of
the entry of local and international factors, is forward-looking information. This
assessment is based on DBS's assessments of the state of the industry and
possible changes in it. This assessment may not materialize or partially or
otherwise materialize in view of the materialization or non-materialization of plans
by various factors to enter into the industry, the manner in which they are actually
implemented and the conditions of competition that will prevail.
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 Section 5.1.1).
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 legal proceedings - DBS is a party to legal proceedings,
including requests for approval of class actions, which may result in a charge of
material amounts which cannot be assessed, and for which no provision has been
made in its statements. These class actions can amount to large sums, as a
substantial portion of Israel’s residents are DBS subscribers, and a claim relating
to a small damage to a single subscriber may become a material claim to DBS, if
recognized as a class action applicable to all subscribers or to a substantial
portion thereof.
5.19.3. Special risks to DBS
5.19.3.1 Limitations as a result of the ownership structure - DBS is limited in its
151
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 5.15.3).
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, 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 equity
deficit and the credit and Bezeq’s investment framework in equity as stated in
section 5.13, will meet the needs of DBS activity for the coming year.
5.19.3.4 Failure, damage, unavailability or termination of service in 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 satellite intended to replace a 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,
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 channels broadcast by DBS (all or almost all)
(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 2024, and from that period onwards, DBS will operate with
one satellite - see Section 5.16. 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 substantial 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 contracts in relation
to them, and possible termination of lease of segments of space. 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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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 Section
5.16 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 5.10.5) 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 provider, 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,
as well as all VOD broadcasts. Each transmission center has the same satellite
encryption system, and therefore there is full backup for the encryption system in
case of damage to one of the transmission centers. In the event of a cessation of
activity of the Kfar Saba site, OTT services will not be possible at all, and in the
event of a cessation of activity of the secondary site only, the main activity of the
OTT services will be possible through the Kfar Saba site, including broadcasting
some channels and VOD service. Damage to the DBS logistics center may also
disrupt its operations, and 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.
However, DBS has a remote backup site designed primarily for storing
information and providing an internal computing service limited to failures in such
a way that in the event of a failure of the DBS site's computer systems in Kfar
Saba, it will be possible to reactivate the central systems through the backup site.
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.
5.19.3.9 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 information leakage, which may also be caused by an intentional or
inadvertent internal factor. 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 and
protection from cyber attacks operated in a configuration that combines effective
153
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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.
5.19.3.10 Technical limitation that prevents the offering of integrated services –
DBS’s satellite 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.
5.19.3.11 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 satellite subscribers’ 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.
5.19.3.12 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.
5.19.3.13 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
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.
5.19.3.14 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, In addition, disruptions in labor
relations at DBS, and possibly also at other Bezeq subsidiaries, could cause
damage to DBS's day-to-day operations.
5.19.3.15 Loss of knowledge and information - The changes that are taking place in
the labor market in Israel and around the world, along with organizational
changes, entail risks for the loss of key employees, loss of knowledge as a result
of employee turnover and difficulty in recruiting employees, etc.
5.19.3.16 Delay in improving internet browsing speeds - as BDS’s outline for the
transition to OTT broadcasting (see Section 5.18.1) 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 the Company 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
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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.90:
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 legal proceedings
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
Loss og knowledge and information
Delay in improving internet browsing rates
The degree of influence
Medium Small
High
X
X91
X
X
X
X
X
X
X
X
X
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.
90 See footnote 51.
91 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.
155
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
6.
The Company
6.1. Financing
6.1.1. The Company's debentures
For details about the debentures issued by the Company See Note 14 to the 2021
statemtns and Section 4 of the Board of Directors' Report.
6.1.2. Credit rating
As of August 13, 2020, the Company's debentures are not rated in any rating. On the eve
of the termination of the rating, the rating of the Company's debentures (Series C) by
Midroog was Caa2.il, with a stable rating horizon.
6.2. Legal proceedings
6.2.1. On March 30, 2020, the Company reached a settlement regarding the derivative claim
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 debentures 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' fees 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.
6.2.2. On March 4, 2020, the Company signed a settlement agreement that settles the class
action lawsuit filed against the Company in the Southern District of New York in the
United States, which was filed against the Company in 2017. On August 10, 2020, the
final approval was received from the Court for a settlement, during 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, who
exempted the Company from all claims relating to the class action by both the plaintiffs
and the members of the settlement, without any admission of guilt.
6.2.3. In June 2017, two motions for approval of a class action lawsuit, in the total amount
of NIS 1.8 billion, were filed against the Company, Bezeq, officers in the Group and
companies from the then controlling group in Bezeq regarding the purchase of DBS
shares by Bezeq from Eurocom. According to the decision of the Court, a consolidated
motion is expected to be filed in lieu of these two motions.The said procedure has
been delayed at the request of the Attorney General several times, when as of this
date, the procedure has been delayed till July 2022.
6.2.4. 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 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.
6.2.5. 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).
6.2.6. 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 debentures (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.
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
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. In December 2021, the Company filed a motion for in limine dismissal
of the motion for approval against it, inter alia, because the motion for approval does
not specify claims against the Company and because for most of the relevant period
the Company was a dual company so the law applied to it is US law, and because the
motion is not supported by the opinion of an expert on foreign law. In July 2021, the
respondents filed a response claiming that the motion for approval was unbased, inter
alia, due to the fact that the information alleged in the motion for approval that was
required for publication did not meet the standards set by law for the purpose of
establishing a reporting obligation, accompanied by an arrangement procedure and
in combination with professional consultants and under the supervision of the Board
of Directors, and hence, the appropriate means to comply with the provisions of the
law were performed, and these findings contradict the applicant's contention. After
several hearings for responses and a pre-trial hearing in February, a decision was
made in which the parties were asked to update whether they wished to hold a
mediation, an additional preliminary hearing or to coordinate a hearing. The parties
have announced that they are working to coordinate deadlines for evidentiary
hearings.
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
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.
6.2.7. In January 2021, the Company submitted a motion for in limine dismissal of the motion
for approval and a request for an extension. In April 2021, a hearing was held on the
motion for dismissal, in which it was determined that only after a date has been set
for the hearing of the request for disclosure of documents, a date will be set for
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Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
submitting answers to the motion and another hearing will be scheduled. As of this
date a hearing for the disclosure of documents is scheduled for April 2022, and a date
for a hearing is expected to be scheduled for May 2022.
__________________________________
B Communications Ltd.
Date
Names and roles of the signatories:
Darren Glatt, Chairman of the Board
Tomer Raved, CEO
158
Chapter A (Description of the Corporation's Business) for the 2021 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 an NIO’s
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 report92
Internet Gold
Bezeq Online
Bezeq
International
-
-
-
Internet Gold Gold Lines
Bezeq online Ltd.
Bezeq International Ltd
92
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.
159
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
BAP
Golan telecom
2021 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
-
Cellcom
Pelephone
Fiber project
-
-
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, 2021
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 Israel Ltd. and corporations under its control
Pelephone Communications Ltd.
The Company's plan for the deployment of ultra-broadband landline
infrastructure that includes a massive deployment of fiber optics
across the country on a large scale that will enable the offer of ultra-
160
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
Partner
Interconnectivity
Mobile phone
radio
Unified general
license / unified
license
NIO license
Mobile Radio
license
Broadcasting
license
ILA
Rami Levy
Bezeq services
Transmission
services
Data
communication
services
Reporting period
Bitstream Access
(BSA)
xDSL
DTT
GSM
HD
HSPA
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
fast Internet services.
Partner Communications Ltd. and corporations under its control
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 Bezeq International 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
Twelve months ended December 31, 2021
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
High Speed Packet Access - Cellular
technology that is a
continuation of the UMTS standard that enables data transfer at high
161
Chapter A (Description of the Corporation's Business) for the 2021 Periodic Report
IBC
IP
IPVPN
ISP
LTE
MVNO
NGN
UMTS
VoB
VoC
VOD
VoIP
Wi-Fi
-
-
-
-
-
-
-
-
-
-
-
-
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
162
Chapter A (Description of the Corporation's Business) for the 2021 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 Bezeq’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
financing expenses (revenue), 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
property, plant and equipment and intangible assets. The Company's EBITDA is calculated as
operating profit before depreciation, amortization and impairment (ongoing losses from impairment
of property, plant and equipment 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 property, plant and equipment 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 property, plant and equipment 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.
163
Chapter B
Report of the Board of Directors on the
State of Affairs of the Corporation for
the Year Ended December 31, 2021
Report of the Board of Directors on the state of affairs of the corporation for the year
ended December 31, 2021
The Board of Directors of B Communications Ltd. (“the Company") is honored to submit the
Board of Directors' report on the State of the Company and consolidated for all Group Companies
(the Company and the Subsidiaries will be collectively referred to hereinafter as: "the Group"),
for a period of twelve months ended December 31, 2021 (“the Report Date") in accordance with
the Securities Regulations (Periodic and Immediate Reports), 5730-1970 ("the Reporting
Regulations").
General - a summary of the Company's business
As detailed in the report on the corporation's business (Part I of this periodic report), the Company
operates, through a number of investee companies, in the field of communications.
For further details about the Group's businesses, see the report on the corporation's business
(Part A of this periodic report).
For the investigation by the Securities Authority and the Police, see Note 1.3 to the Company’s
financial statements for the year ended December 31, 2021 (“the Statements").
The auditors referred to this in their opinion on the Statements.
Regarding the effects of COVID-19 crisis, see Section 1.8 below.
The Group reports on four main operating segments in its financial statements as follows:
1. Fixed line communication
2. Cellular communication
3.
Internet, international communications, network endpoint services and ICT solutions
(“hereinafter: “Bezeq International Services”).
4. Multi-channel TV
For further information, see Note 28 to the Statements.
The following are consolidated results of the Group:
2021
2020
Increase
NIS millions NIS millions NIS millions
%
Net profit
EBITDA*
Adjusted EBITDA*
996
3,745
3,695
900
3,566
3,647
96
179
48
10.7
5
1.3
* Financial indices that are not based on generally accepted accounting principles, see below
The increase in net profit in 2021 compared to 2020 was mainly due to an increase in capital
gains from the sale of assets in the Fixed line communications segment, as well as an increase
in profit in the cellular communications segment.
For more information see Chapter 1.2 below.
1
Report of the Board of Directors on the state of affairs of the corporation for the year
ended December 31, 2021
* Financial indices that are not based on generally accepted accounting principles
As of the Report Date, 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
Defined as profit before financing expenses (income), taxes,
depreciation and 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 property, plant and equipment and intangible
assets. The Group's EBITDA is calculated as operating profit before
depreciation, amortization and impairment (including ongoing
losses from impairment of property, plant and equipment and
intangible assets as described in Note 3.10.2 and 10.5 and 10.6 to
the Statements).
Calculated as an EBITDA index net of other operating expenses /
income, net and one-off losses / profits from impairment / increase
in value and expenses in respect of a capital remuneration plan.
The index allows comparisons of operational performance between
different periods while neutralizing one-off effects of exceptional
expenses / income.
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.
Operating profit
Depreciation, amortization and impairment
EBITDA
Other operating expenses (income), net
Impairment loss
Expenses in respect of a capital remuneration plan
2021
2020
NIS millions
1,856
1,889
3,745
(77)
-
27
NIS millions
1,708
1,858
3,566
73
8
-
Adjusted EBITDA
3,695
3,647
2
Board of Directors report for the year ended December 31, 2021
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 - Assets
December
31, 2021
December
31, 2020
Increase
(decrease)
NIS millions
NIS
millions
NIS
millions
%
2,132
1,775
357
20.1
2,572
2,315
257
11.1
74
-
60
1,828
6,312
73
10
67
1,804
6,131
1
(10)
(7)
24
181
1.4
-
(10.4)
1.3
3.0
3,251
3,268
(17)
(0.5)
Explanation
The increase was due to an increase in cash balances and current
investments in the Fixed line communications segment, due in part to the
issuance of debentures in December of the current year (Series 13 and
14). For further information, see Chapter 1.4 below.
The increase was mainly due to an increase in customer balances in the cellular
communications segment as well as in the Bezeq international services segment,
mainly due to the effect of the employee sanctions taken during the months of August-
November in 2021, which led to delays in billing and collection from customers.
The increase was due to the Fixed line communications segment, due in part to the
progress of the fiber network deployment project, see Note 9.4 in the Statements.
306
402
(96)
(23.9)
The decrease in 2021 is mainly due to the classification of long-term deposits in the
Company as short-term.
24
108
(84)
(77.8)
In 2021, a deferred tax asset of NIS 37 million was exercised, which was recognized in
2020 in respect of a loss for tax purposes from the sale of Walla, see Note 7.5 in the
Statements.
Cash and current
investments
Current and non-current
trade receivables
Inventory
Assets held for sale
Broadcasting rights
Right-of-use assets
Property, plant and
equipment
Intangible assets
Deferred expenses and
non-current investments
Deferred tax assets
Total assets
16,559
15,953
606
3.8
3
Board of Directors report for the year ended December 31, 2021
1.1. Financial position (Cont.) – Liabilities and capital
Debt to financial institutions
and bondholders
Leases Liabilities
Trade payables
Employee benefits
Provisions
Deferred tax liabilities
Other liabilities
December
31, 2021
NIS millions NIS
December
31, 2020
millions
Increase
(decrease)
NIS
millions %
10,048
10,270
(222)
(2.2)
1,977
1,755
753
118
296
142
1,907
70
3.7
1,766
(11)
(0.6)
817
169
290
307
(64)
(7.8)
(51)
6
(30.2)
2.1
(165)
(53.8)
Total liabilities
Non-controlling interests
Total capital (capital deficit)
attributed to the Company's
shareholders
Total capital
Total liabilities and capital
15,089
1,454
15,526
534
(437)
920
(2.8)
172.3
16
(107)
123
-
1,470
16,559
427
15,953
1,043
606
244.3
3.8
Explanation
The decrease in debt was due to the repayment of bonds and repayment
(including early repayment) of loans, offsetting the issuance of Series 13 and
14 Series bonds by Bezeq and Series F bonds in the Company, as well as
receiving loans in the Fixed line communications segment, see Note 13 to
the Statements.
For further information, see Note 8 to the Statements.
For further information, see Note 4 to the Statements.
The decrease was due to payments for the retirement of employees and
streamlining plans in the Group, offsetting the increase in the provision for
the termination of the employee-employer relationship in early retirement,
see Note 16.5 and 24 in the Statements.
The decrease was mainly due to a decrease in provisions for claims in the
Fixed line communications segment, see Note 15 to the Statements.
The decrease was mainly due to the classification of an obligation to pay for
the cost of 5G frequencies in the cellular communications segment for
current
line
communications segment.
liabilities and a decrease
in derivatives
the Fixed
in
The capital constitutes approximately 0.1% of the total balance sheet,
compared with a deficit in capital which constituted approximately 0.6% of
the total balance sheet on December 31, 2020.
4
Board of Directors report for the year ended December 31, 2021
1.2. The results of operations
1.2.1. Results summary
2021
2020
Increase
(decrease)
Explanation
NIS millions
%
Revenue
8,821
8,723
99
1.1
Operating and general
expenses
3,265
3,182
81
2.6
Salaries
1,888
1,894
(6)
(0.3)
Depreciation,
amortization and
impairment
1,889
1,858
31
1.7
Impairment loss, net
-
8
(8)
Other operating
expenses (income), net
(77)
73
(150)
-
-
Operating Profit
1,856
1,708
151
8.7
Financing expenses, net 478
474
4
0.8
Income taxes
Profit in the year
382
996
334
900
48
96
14.4
10.7
The increase in revenues was mainly due to the cellular communications
segment, as well as the Fixed line communications segment, offset by a
decrease in the revenues of the Bezeq International segment and in the multi-
channel television segment.
The increase was mainly due to the Fixed line communications sector as well as
the cellular communications segment, offset by a decrease mainly in DBS
expenses. There is an increase in the Group's expenses, among other things,
due to the recognition of an expense for the incentive fund regarding the
deployment of the fiber optic network, see Notes 9.4 and 18.7 to the Statements.
The increase in salary expenses in the Fixed line communications segment and
in the "other" segment was offset by a decrease in the other main segments of
the Group due to a decrease in the number of jobs.
In the current year, the Group recognized salary expenses in respect of share-
based payment, see Note 26.4 to the Statements.
The increase was mainly due to the Fixed line communications sector as well as
the Bezeq International services segment, offset by a decrease in the cellular
communications segment.
The change was mainly due to an increase in capital gains in the Fixed line
communications segment, offset by an increase in expenses due to the
termination of the employee-employer relationship in early retirement in the
Group, see Notes 24 and 16.5 to the Statements.
The increase was mainly due to the early repayment of Series D and E series as
well as the partial early repayment of Series C debentures, offset by a decrease
in financing expenses in the Fixed line communications segment. See Notes 13
and 25 to the Statements.
For further information, see Note 7 to the Statements.
5
the of
Report
December
Board
1
202 31,
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:
2021
NIS
millions
% of total
revenue
2020
NIS
millions
% of total
revenue
Revenue by operating
segments
Fixed line communication
Cellular communication
Bezeq International services
Multi-channel TV
Others and adjustments
Total
4,182
2,289
1,237
1,270
(157)
8,821
47.5
25.9
14
14.4
(1.8)
100.00
4,159
2,186
1,271
1,287
(180)
8,723
47.7
25.1
14.6
14.7
(2.1)
100.00
Year 2021
NIS
million
% of
segment
revenue
Year 2020
NIS
million
% of
segment
revenue
Operating profit (loss) by
operating segment
Fixed line communication
Cellular communication
Bezeq International services
Multi-channel TV
Others and adjustments
Consolidated operating profit /
percentage of Group revenue
1,748
42
22
(41)
85
41.8
1.8
1.8
(3.2)
-
1,705
(84)
(241)
)42(
370
41.0
(3.8)
(19.0)
(3.3)
-
1,856
21
1,708
19.6
* 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 31.4 to the
Statements regarding a summary of selected data from the financial statements of DBS.
6
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2021
1.2.2. Activity segments (Cont.)
b. Fixed line communications segment
2021
2020
Increase (decrease)
NIS millions
Internet infrastructure
1,624
1,622
2
Fixed line telephony
913
1,008
(95)
Transmission, data
communication and other
1,327
Cloud and digital services 318
Total
4,182
1,241
288
4,159
Operating and general
expenses
667
590
Salaries
Depreciation and
amortization
934
938
919
877
86
30
23
77
15
61
Other operating expenses
(income), net
(105)
68
(173)
%
0.1
(9.4)
6.9
10.4
0.6
13.0
1.6
7
-
Operating profit
1,748
1,705
43
2.5
Financing expenses, net 342
403
(61)
(15.1)
Income taxes
Segment profit
343
1,063
262
1,040
81
23
30.9
2.2
Explanation
There has been an increase in the average revenue per retail subscription, mainly from complementary end
equipment and the launch of customer services on the fiber network, starting in March 2021, as well as an
increase in the number of Internet lines in retail. The increase was offset by a decrease in wholesale Internet
service rates and a decrease in the number of wholesale Internet lines.
The decrease was due to a decrease in the average revenue per telephone line, mainly due to the moderation
of the effect of the COVID epidemic on the consumption of calls, as well as a decrease in the number of lines.
The increase was due, among other things, to an increase in revenues from transmission services to Internet
providers and businesses and from paid jobs.
The increase was mainly due to virtual exchange services as well as business directory services (B144) and
business services.
The increase was mainly due to an increase in expenses of subcontractors and costs of end equipment and
materials due to, among other things, the deployment of the fiber network and paid jobs, as well as recognition
of the expense for the incentive fund as part of the amendment to the Company's license regarding the
deployment of the fiber optic network (see Notes 9.4 and 18.7 to the Statements), to offset a decrease in
connectivity expenses for communications operators in parallel with a decrease in telephony revenues.
The increase was mainly due to employee absorption, wage increases and recognition of share-based payment
expenses (see Note 26 to the Statements), offsetting employee retirement and increasing salary attributed to
investment.
The change in other net operating income was due to an increase in capital gains from the sale of real estate,
an update of the provision for legal claims and also due to one-off grant expenses for employees included in the
corresponding year. On the other hand, there was an increase in expenses recognized in respect of the
termination of the employee-employer relationship in early retirement, and in the corresponding year capital
gains from the sale of Walla were included, see Note 16.5 to the Statements.
The decrease in net financing expenses was mainly due to a decrease in the costs of early repayment of loans
and a decrease in interest expenses due to loan and debentures repayments, offset by an increase in linkage
differences in respect of debentures due to the rise in the index, see Note 25 in the Statements.
In the current year, a deferred tax asset was exercised, which was recognized in the corresponding year as a
loss for tax purposes from the sale of Walla.
7
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2021
1.2.2. Activity segments (Cont.)
c.
Cellular communications segment
2021
NIS
millions
2020
NIS
millions
Growth (decrease)
NIS
millions
%
Explanation
The increase was mainly due to some recovery from the effects of the COVID crisis
which was reflected in an increase in roaming revenue and was partially offset by a
decrease in revenue from incoming airtime. In addition, there is growth in the number
of postpaid subscribers, including subscribers in 5G plans.
The increase was mainly due to an increase in the number of sales due to the timing
of the launches of devices of new models.
The increase was mainly due to an increase in the cost of selling end equipment in
parallel with revenues, the registration of the implementation of a cloud computer
system and the initial registration of expenses for the incentive fund for fiber
deployment. The increase was partially offset by a decrease in call completion fees
as a result of a certain recovery from the COVID crisis that led to a decrease in
consumption as well as a continued reduction and streamlining of operating
expenses.
The decrease was mainly due to a continued decrease in the number of jobs as part
of an streamlining plan, offsetting the sending of employees on unpaid leave against
the background of the COVID crisis in the corresponding year.
Services
1,642
1,591
51
Sale of end equipment to
customers
647
595
Total revenue
2,289
2,186
52
103
3.2
8.7
4.7
Operating and general
expenses
1,346
1,329
17
1.3
Salaries
Depreciation and
amortization
Other operating expenses,
net
Operating profit (loss)
Financing income, net
Income taxes
Segment profit (loss)
315
577
9
42
42
20
64
324
599
18
(84)
48
(11)
(25)
(9)
(22)
(9)
126
(6)
31
89
(2.8)
(3.7)
(50)
-
(12.5)
-
-
8
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2021
1.2.2. Activity segments (Cont.)
d. Bezeq International services
2021
NIS
millions
2020
NIS millions NIS
Increase
(decrease)
%
millions
Revenue
1,237
1,271
(34)
(2.7)
Operating and general
expenses
799
802
(3)
(0.4)
Salaries
237
248
(11)
(4.4)
Depreciation and
amortization
173
149
24
16.1
Other operating expenses
Operating profit (loss)
Financing expenses, net
Income taxes
6
22
2
12
313
(241)
2
(307)
263
-
(98.1)
-
-
32
(20)
(62.5)
Segment profit (loss)
8
(275)
283
-
Explanation
The decrease was mainly due to a decrease in Internet revenues as well as a decrease
in revenues from the sale of equipment and licensing to businesses as a result of delays
in the global supply chain, the impact of the COVID crisis and the sanctions taken in the
segment during August-November 2021. In addition, there is a decrease in revenue from
international talks. The decline was partially offset by an increase in revenue from
business services.
The decrease was mainly due to a decrease in expenses for the sale of equipment and
licensing to businesses in parallel with a decrease in revenue, as well as a decrease in
expenses for loan-loss. The decrease was offset by an increase in expenses for
communications and computing services for businesses, local capacity expenses and
professional consulting expenses. In addition, there has been an increase in expenses
for the incentive fund for fiber deployment starting from the current year.
The decrease was mainly due to a continued decrease in the number of employees as
part of the streamlining plan.
The increase was mainly due to impairment of assets in 2021 (loss from impairment of
assets recognized in 2020 was classified in the segment under the item "Other operating
expenses"), as well as an increase in depreciation expense. The increase was partially
offset by a decrease in current depreciation expenses as a result of a decrease in the
value of assets last year.
In 2020, an impairment loss of approximately NIS 307 million was recognized (see Note
10.2 to the statements).
In 2021, tax expenses were recorded for previous years due to an assessment
agreement.
In 2020, a tax asset was written off due to failure to anticipate future profits for tax
purposes in the coming years.
9
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2021
1.2.2. Activity segments (Cont.)
e. Multi-channel TV *
2021
NIS
millions
20120
NIS
millions
Increase (decrease)
NIS
millions
%
Explanation
Revenue
1,270
1,287
(17)
Operating and general
expenses
825
Salaries
Depreciation and
amortization
Other operating
expenses (income)
Operating loss
Financing expenses,
net
Income taxes
Segment loss
182
292
12
)41(
1
1
)43(
838
195
310
)14(
)42(
13
2
)57(
)13(
)13(
)18(
26
1
)12(
)1(
14
(1.3)
)1.6(
)6.7(
)5.8(
)2.4(
)92.3(
)50(
)24.6(
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 and a decrease in
revenue from the sale of content to external entities.
The decrease was mainly due to a decrease in content expenses.
The decrease was due to a continued decrease in the number of jobs as part of the
streamlining plan.
The decrease was mainly due to a decrease in property, plant and equipment investments.
In 2021, an expense was recorded in respect of a new collective agreement, while in
2020, revenue was included in respect of a settlement agreement with a supplier and an
update of an estimate in respect of an arrangement for the retirement of employees.
The decline was mainly due to the impact of the change in the exchange rate of the dollar
on hedging transactions.
* The results of the multi-channel television segment are presented net of the overall impact of impairment recognized since 2018, see income "Proforma". Below.
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 Notes 10.5 and 28 to the Statements. In addition, see Note 31.4 for a summary of selected data from the
financial statements of DBS.
10
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2021
1.2.2. Activity segments (Cont.)
f. Multi-channel TV (Cont.) - Comparison between accounting income and proforma income
2021
Accounting income Proforma income Accounting
income
NIS millions
2020
Proforma
income
Revenue
1,270
1,270
1,287
1,287
Operating and general expenses
Salaries
Depreciation and amortization
Other operating expenses
Operating profit (loss)
Financing expenses, net
Income taxes
Profit (loss)
835
188
203
12
32
1
1
30
825
182
292
12
)41(
1
1
)43(
857
203
203
)15(
39
13
2
24
838
195
310
)14(
)42(
13
2
)57(
11
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2021
1.3.
Main data from the consolidated quarterly statements of income (NIS millions)
Q1-2021 Q2-2021 Q3-2021 Q4-2021 2021
Explanation
Revenue
2,187
2,155
2,178
2,203
8,723
Operating expenses
1,638
1,734
1,685
1,908
6,965
Operating profit
Financing expenses,
net
Profit after financing
expenses, net
583
75
466
110
457
146
350
147
1,856
478
508
356
311
203
1,378
Income taxes
127
91
75
89
382
Profit for the period
381
265
236
114
996
The fourth quarter includes revenues due to the launch of a new model
iPhone device in the cellular communications segment.
The first quarter includes a capital gain from the sale of a real estate
property in the amount of NIS 125 million and a decrease in the provision
for claims in the Fixed line communications sector.
The fourth quarter includes expenses in respect of the termination of
employee-employer relationship in early retirement in the Group, including
an expense of NIS 67.5 million in the fixed domestic communications
sector, see Note 16.5 to the 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.
The second median includes early repayment costs of Series D and E series
debentures, as well as partial early repayment of Series C debentures. In
addition, the third quarter includes early repayment costs of a loan in the
amount of NIS 15 million in the Fixed line communications segment.
12
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2021
1.4. Cash Flow
2021
NIS
millions
2020
NIS
millions
Change
NIS
millions
%
Explanation
Net cash flow from
operating activities
2,826
3,209
(383)
(11.9)
The decrease in net cash flow from current operations was due
to changes in working capital, mainly due to an increase in
customer balances as a result of delays in billing and collection
from customers due to employee sanctions in the cellular
communications segment and
international
communication and network endpoint services, Bezeq
International, employee benefits as well as an increase in taxes
paid in the Fixed line communications segment.
Internet,
in
Net cash flow used for
Investing operations
(1,578)
(1,067)
(511)
Net cash flow used for
financing operations
(1,144)
(2,062)
918
(47.9) The decrease in the net cash flow used for financing operations
was mainly due to a decrease in loan repayment, interest paid
and costs due
line
communications segment.
the Fixed
repayment
to early
in
44.5 The increase in net cash flow used in investing activities was
mainly due to a decrease in net proceeds from the repayment of
deposits in banks and others in the Fixed line communications
segment, as well as an increase in investments in property, plant
and equipment.
Net increase in cash
104
80
24
30
Average volume in the reported year
Long-term liabilities (including current liabilities) to financial institutions and bondholders: approx. NIS 10,048 million.
Credit providers: approx. NIS 905 million. Short-term customer credit: approx. NIS 1,680 million. Long-term customer credit: approx. NIS 252 million.
13
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2021
Working capital
The Group's consolidated working capital as of December 31, 2020 amounted to
approximately NIS 565 million, compared with working capital of approximately NIS 94
million as of December 31, 2020.
The Company's working capital (according to the "Solo” Statements) as of December 31,
2021 amounted to approximately NIS 212 million, compared with working capital of
approximately NIS 228 million as of December 31, 2020.
Bezeq (according to the financial statements "Solo") has a working capital surplus as of
December 31, 2020 in the amount of NIS 161 million, compared with a deficit in working
capital of NIS 82 million as of December 31, 2020.
The change in Bezeq's working capital was mainly due to an increase in current and cash
investment balances, offsetting an increase in current maturities of bonds.
In addition, there is an increase in working capital in the other companies in the Bezeq
Group.
14
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2021
1.5. Disclosure regarding the Company's projected cash flow
The Company's Board of Directors reviewed the Company's consolidated financial statements
and separate (Solo) financial statements as of December 31, 2021, including sources for
repayment of the Company's liabilities, including the Company's debentures (Series C and F). In
addition, the Company's Board of Directors examined the warning signs set forth in Regulation
10(b)(14)(a) of the Securities Regulations (Periodic and Immediate Reports), 5730-1970 and
determined that despite the existence of a continuing negative cash flow from current operations
in the separate (Solo) financial statements of the Company, in the opinion of the Company's Board
of Directors, after receiving explanations for its opinion from the Company's Management, the
continuing negative cash flow from current activities in the Company's separate (Solo) financial
statements does not indicate a liquidity problem in the Company, and the Company has sufficient
financial resources to continue its operations and meet its obligations, inter alia, taking into
account the Corporation's cash balances in the solo report.
1.6. Issuance and expansions of the Company's debentures against repayment of
the Company's debentures
During the reporting period, the Company issued to institutions and the public approximately NIS
1,040 million in Series F debentures for a total of approximately NIS 1,040 million. Company used
from the issuance of Series F debentures to make a full early repayment of the Series D
debentures principal (plus accrued interest as of the vesting date), full early repayment of the
Series E debentures principal (plus accrued interest as of the vesting date and an early repayment
penalty, as defined in the trust deed of the Series E debentures) and for the partial early
repayment of Series C debentures (plus accrued interest as of the vesting date and an early
repayment penalty, as defined in the trust deed of the Series C debentures).
On January 10, 2022, the Company exchanged approximately NIS 417 million in Series C
debentures for approximately NIS 432 million in Series F debentures.
For details regarding such issuances, see Regulation 20 of the report of the Company's Board of
Directors attached to this report.
1.7. Plan to purchase the Company's shares
On November 29, 2021, the Company's Board of Directors approved a plan to repurchase the
Company's shares in the amount of up to NIS 30 million, which began on December 1, 2021,
and ends: (1) upon purchase in the amount of NIS 30 million; or (2) on March 1, 2022, whichever
is earlier.
As of the date of the report, in accordance with the said repurchase plan, the Company
purchased shares in the total amount of approximately NIS 27 million.
For further details, see the Company's report dated November 30, 2021 (Ref. No.: 2021-01-
104413).
1.8. Epidemic – Outbreak of COVID-19
At the beginning of 2020, an outbreak of the Coronavirus (COVID-19) began worldwide, which
is an event with many consequences, including macroeconomic. Following the epidemic, many
countries, including Israel, are taking significant measures 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 event
and the actions taken as aforesaid have significant implications for many economies as well as
for the capital markets in the world.
15
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2021
The effects of the COVID epidemic on the Bezeq Group's activities in 2021 were mainly reflected in
damage to Pelephone's revenues from roaming services, as a result of the effects of the epidemic's
spread on the aviation and international tourism segments, without significant negative effects in other
areas of operations. Although the distribution of the vaccine and the reduction of restrictions on travel
abroad supported a certain recovery in Pelephone's revenues from roaming services during the year,
these have not yet returned to the pre-COVID level of activity. Rising prices of equipment from the
main suppliers of Bezeq Group companies Bezeq Group companies are taking various measures in
light of the aforesaid to reduce the damage to their operations.
It should be noted that in terms of Bezeq Group companies, it appears that at this stage, the COVID
crisis did not have a material effect on the ability of the Company and the Bezeq Group companies to
meet liabilities, measurement 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 Report Date, the Bezeq Group's working assumption regarding the continued spread of the
COVID epidemic is that the eradication of the epidemic will be characterized by a gradual decline that
may be accompanied by waves of recurrent outbreaks and mutations in the virus. Accordingly, and
subject to the above assumptions, the Bezeq Group anticipates that the effects of the COVID epidemic
on its operations will be mainly reflected in harming Pelephone's revenues from roaming services, as
a result of the epidemic's effects on aviation and international tourism, without significant adverse
effects in other areas. The Bezeq Group also anticipates that the global chip shortage and disruptions
in the global supply chain will affect commodity prices in the short term and increase the need for
Bezeq Group companies to stock up. In addition, it is possible that the impact of the epidemic will
cause a prolongation of projects that require technological equipment or other equipment.
At the same time, this is a changing event that is not under the Bezeq Group’s control, and therefore
the duration of the crisis or its exacerbation beyond the Bezeq Group's assumptions as detailed
above, if any, may materially adversely affect Bezeq Group's results. These effects may be reflected,
inter alia, in damage, beyond the estimates as stated above, in revenues from roaming services, and
in damage to Bezeq Group companies' revenues from the business segment, revenues from the sale
of cellular end equipment, employee availability, customer service and technicians, supply chain, and
amounts and dates of collection from Bezeq Group customers.
Bezeq Group’s estimates as aforesaid may vary depending on various developments regarding the
COVID epidemic and its effects, in particular the duration and extent of the event, the nature and
extent of the economic and other restrictions that accompany it, as well as the intensity and duration
of the economic slowdown.
For more information, see the analysis of the results of operations in the cellular communications
segment, Fixed line communications segment and the Bezeq International Services segment in
Chapter 1.2.2, Sections B, C and D above.
16
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2021
2. Corporate governance aspects
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, education and community issues. In the reported year, the Company
donated a lot of equipment to the Ichilov Hospital, to the Reut Rehabilitation Hospital and to additional
associations, 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 2021 Bezeq Group contributed a total of approx. NIS 3.6 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 in respect of the accountants of the main subsidiaries in the Group in
respect of audit services and audit-related services:
Company name
Auditor
Details
2021
2020
B. Communications Ltd.
Somekh
Chaikin
the
Bezeq
-
Telecommunications
Corporation Ltd.
Israel
Somekh
Chaikin
Pelephone
Communications Ltd.
Somekh
Chaikin
Bezeq International Ltd
Somekh
Chaikin
DBS Satellite Services
(1998) Ltd.
Somekh
Chaikin
Total
Audit and ancillary to audit
(including audit-related tax
services)
Other services1
Audit and ancillary to audit
(including audit-related tax
services)
Other services
Audit and ancillary to audit
(including audit-related tax
services)
Other services1
Audit and ancillary to audit
(including audit-related tax
services)
Other services1
Audit and ancillary to audit
(including audit-related tax
services)
Other services1
380
130
515
166
1,530
1,700
684
642
366
1,483
519
671
83
6,488
951
670
520
1,166
122
680
52
6,542
1 "Other services" provided to the Group's main companies in the years 2021 and 2020 including, among other things, consulting
services on tax and accounting matters and special approvals.
17
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2021
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.
18
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2021
2.3.
Directors with accounting and financial skills and independent directors
As of the date of this report, all seven of the Company's current directors have accounting and
financial expertise; For details on the directors with accounting and financial expertise who hold office
at the Company as of the Report Date, see Regulation 26 in the report of further details on the
Company (Part D of this Periodic Report) and in sections 2 and 9 of the Corporate Governance
Questionnaire.
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 the 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
Method
appointment
of
The Organizational
Commissioner of
The internal auditor
Work plan
Hourly fee, according to the number of hours determined at the beginning of each
year by the Audit Committee.
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 2021 is derived from the Company's multi-year work plan
determined for the years 2021-2024.
The considerations in determining the work plan of the internal audit
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
19
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2021
Concentration of
details
internal audit referred to the risk survey conducted by it, as well as other sources
that influenced the risk assessment in these processes, such as discussions with
Management, findings of previous audits 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.
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.
Concentration of
details
The audit's treatment
of material investee
corporations
Performing the audit
Access to information
Auditor's report
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.
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
20
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2021
Concentration of
details
The Board's
assessment of the
Internal Auditor's
activities
Remuneration
Internal Auditor for the second quarter of 2021 on August 9, 2021. In addition, the
report on the implementation of the supervision procedure by the Internal Auditor
for the fourth quarter of 2020 and an audit on the implementation of the
supervision procedure by the Company 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 2021, the volume of the
hours invested in the audit by the Internal Auditor was approximately 240 hours,
noting that the said hours volume is sufficient for the Internal Auditor to complete
the audit work properly.
In 2021, the Internal Auditor was paid compensation in the amount of NIS 84,240,
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.
21
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2021
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.
A highly material valuation of Bezeq Fixed Lines as of December 31, 2021 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 -
Material valuation as of
December 31, 2021
Highly material valuation as
of December 31, 2021
See Section 3.1.4 below
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.
Highly material valuation as of
December 31, 2021
(Attached to Bezeq’s
Statements as of December 31,
2021).
Highly material valuation as
of December 31, 2021
(Attached to Bezeq’s
Statements as of December
31, 2021).
See Sections 3.1.1 and 3.1.1
below.
See section 3.1.3 below
Recoverable amount of DBS
Satellite Services (1998) Ltd. for
the purpose of examining the
impairment of non-current assets.
Value in use of Bezeq
International for examination of
impairment of non-current
assets.
December 31, 2021
The valuation was signed on
March 10, 2022
December 31, 2021
The valuation was signed on
March 22, 2022
December 31, 2021
The valuation was signed on
March 22, 2021
September 30, 2021
The valuation was signed on
March 22, 2021
NIS 1,613 million book value
of the net operating assets of
Pelephone (*) (including cost
surplus balance net of
Approx. NIS 10 billion book
value of the net operating
assets of
A negative total of approx. NIS.
(16) million
Approx. NIS 95 million.
22
Identification of
subject of
valuation
Timing of the
valuation
Value of the
subject of the
valuation close
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2021
Pelephone -
Bezeq Fixed Lines -
DBS -
Bezeq International -
Material valuation as of
December 31, 2021
Highly material valuation as
of December 31, 2021
See Section 3.1.4 below
Highly material valuation as of
December 31, 2021
(Attached to Bezeq’s
Statements as of December 31,
2021).
Highly material valuation as
of December 31, 2021
(Attached to Bezeq’s
Statements as of December
31, 2021).
See Sections 3.1.1 and 3.1.1
below.
See section 3.1.3 below
to the date of
the valuation
goodwill at the Company
level).
Bezeq Fixed Lines (including
cost surplus balance net of
goodwill at the Company
level).
Value of the
subject of the
valuation
determined in
accordance
with the
valuation
Approx. NIS 2,798 million
Approx. NIS 19,186 million.
Total negative: NIS (109) million.
Total of NIS 70 million.
The Company has concluded
that there is no impairment
that requires a reduction in
the amounts of surplus costs
recorded in the Company's
books.
The Company has concluded
that there is no impairment
that requires a reduction in
the amount of goodwill
recorded in the Company's
books.
Identification
characterization
of the valuator
The valuation was performed by Prof. Hadas Gelander, Partner, Director of Valuations and Economic Models in the Economic
Department of Ernest Young (Israel) Ltd. Prof. Gelander holds a bachelor's degree in accounting from the College of
Management, Rishon LeZion; A master's degree in business administration from the Hebrew University of Jerusalem; And a
Ph.D. cum laude from Ben-Gurion University, Beer-Sheva, and is also a certified public accountant in Israel.
As part of her role, Prof. Gelander accompanies projects with leading companies in Israel and around the world, in various fields
of activity and industries such as: technology, finance, pharmaceuticals, energy, infrastructure, real estate and industry. In
addition, during her role accompanying and advising companies in the areas of valuations for business needs (valuations and
fair opinions) and accounting needs (allocation of acquisition costs, valuation of intangible assets, valuation of options for
employees, etc.), she provided economic opinions as a court-appointed expert witness. The valuator has no dependence on
Bezeq or the Company. Bezeq undertook to indemnify the valuator for damages in excess of three times her fee, unless she
acts maliciously or through gross negligence.
23
Report of the Board of Directors on the state of affairs of the corporation for the year ended December 31, 2021
Pelephone -
Bezeq Fixed Lines -
DBS -
Bezeq International -
Material valuation as of
December 31, 2021
Highly material valuation as
of December 31, 2021
See Section 3.1.4 below
Highly material valuation as of
December 31, 2021
(Attached to Bezeq’s
Statements as of December 31,
2021).
Highly material valuation as
of December 31, 2021
(Attached to Bezeq’s
Statements as of December
31, 2021).
See Sections 3.1.1 and 3.1.1
below.
See section 3.1.3 below
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
Discount rate - 9% (after tax).
Discount rate - 7% (after tax).
Discount rate - 8.5% (after tax).
Discount rate – 8.5% (after tax).
Permanent growth rate -
1.5%.
The percentage of scrap
value from the total value
determined in the valuation is
approximately 77.1%.
Permanent growth rate - 1%.
Permanent growth rate - 1%.
Permanent growth rate - 1%.
The percentage of scrap
value from the total value
determined in the valuation is
approximately 76.9%.
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 - not relevant
In addition, assumptions were
made regarding fair value net of
cost of sale of the DBS’s assets.
In addition, assumptions were
made regarding fair value net of
cost of sale of Bezeq
International’s assets.
(*) 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
24
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2021
3.1. Disclosure regarding valuations (Cont.)
3.1.1. Despite the negative value of DBS' operations, Bezeq supports DBS by approving credit
facilities or investing in DBS's 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.
3.1.2.
In the Company's consolidated financial statements as of December 31, 2021, 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, the valuator 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 valuator as required
under the Staff Position, see the valuations attached to Bezeq's financial statements.
3.1.3.
Information under Regulation 10(b)(8) of the Securities Regulations
a. Regarding the valuation of Pelephone for December 31, 2020, which was attached to
Bezeq’s 2020 annual report, Bezeq examined the performance data in 2021 regarding
Pelephone's free cash flows compared to the 2021 forecast included in the aforesaid
valuation and found that Pelephone's free cash flows, according to its financials
reports for 2021, are lower than the forecast in the said valuation. The gap was due
to an increase in the Company's customers balance as a result of organizational
sanctions that caused a delay in the amounts and dates of collection from customers.
This effect was partially offset by a high level of revenue relative to the forecast
(positive deviation in the number of subscribers and in ARPU), streamlining beyond
planning in salary expenses and timing gaps in investment flows.
b. Regarding the valuation of DBS as of December 31, 2020, which was attached to
Bezeq’s financial statements of 2020, the Group examined the actual data in 2021
regarding the free cash flows compared to the 2021 forecast included in the said
valuation and found that the free cash flows of DBS, according to its financial
statements for 2021, are significantly higher than the forecast in the said valuation.
The gap was due to high revenues relative to the forecast (higher than forecast mix
of premium and ARPU subscribers), low operating expenses relative to planning
(mainly salary and content expenses), and changes in working capital. For further
information, see Appendix H in the attached valuation of DBS as of December 31,
2021, which was attached to Bezeq's financial statements.
c. Regarding the valuation of Bezeq International as of September 30, 2020, which was
attached to the quarterly report as of September 30, 2020, the Company examined
the actual data in 2021 regarding Bezeq International's free cash flows compared to
the 2021 forecast included in the valuation as aforesaid, and found that Bezeq
International's free cash flows, according to its financial statements for 2021, are
similar to the forecast in the aforesaid valuation. It should be explained that the gap
was due to an increase in the balance of Bezeq International's customers as a result
of organizational sanctions that caused delays in the amounts and collection dates
from customers, mainly offset by lower-than-predicted investment flows (increased
streamlining and timing gaps).
3.1.4. For further information, see Note 10 to the Statements.
25
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2021
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 subsequent events
Regarding material incidents after the date of the financial statements - see Note 32 to the
financial statements.
26
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2021
4. Details related to a series of liability certificates
The following is data about the Company's debentures in circulation, as of December 31, 2021:
A
B
Issue date (no extensions)
15.09.2016
06.07.2021
Series C debentures
Series F debentures
Total value denominated at
the date of issue (par value)
NIS 1,882,265,000
NIS 393,973,000
C Nominal value (par value) as
NIS 1,009,998,772
NIS 1,040,155,000
D
E
of the Report Date
The amount of interest
accrued as of the Report
Date
Fair value as included in the
financial statements
NIS 3,302,558
NIS 3,224,481
NIS 950,742,340
NIS 1,034,940
F Stock market value
NIS 1,058,377,714
NIS 1,069,487,371
G
Type of interest
Fixed at a rate of 3.85%
Fixed at a rate of 3.65%
H
Principal payment dates
November 30, 2024
November 30, 2026
I
Interest payment dates
On May 31 and November 30
of each year, from May 31,
2020 to 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, 2021 to November 30,
2026.
Not linked
Material
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 debentures are not rated
N
Compliance with the terms of
the trust deeds
O
Liens
P
Q
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 act to exercise the
lien granted in their favor
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
debentures
The Company issued to the trustees of Series C and F
debentures certificates regarding its compliance with the
terms of the trust deeds for 2021.
Unlimited amount first-degree lien (pari-passu) on
728,373,713 ordinary Bezeq shares of NIS 1 par value each
held directly by the Company and on the rights attached to
these shares.
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 debentures.
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 and F).
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).
27
Report of the Board of Directors on the state of affairs of the corporation for the year ended
December 31, 2021
Financial clauses of the Company's debentures
In accordance with the Company's obligation in debentures Series C and F 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, 2021 was 55.2%.
The Company's net debt balance as of December 31, 2021 is approximately NIS 1,772 million, and
consists of a principal balance and accrued interest as of the balance sheet date in respect of its
debentures in the amount of NIS 2,056 million (net of approximately NIS 13.6 million par value held
by a partnership held by the Company) net of cash balances and investments in the amount of NIS
284 million.
5.
Miscellaneous
For information regarding the statement of liabilities of the reporting corporation and the subsidiaries
in its financial statements as of December 31, 2021, see the Company’s report dated March 23,
2022.
Darren Glatt
Chairman of the Board of Directors
Tomer Raved
CEO
Date of signing: March 23, 2022
28
Chapter C
Consolidated Financial Statements
for the Year Ended December 31, 2021
Consolidated Financial Statements as of December 31, 2021
Table of contents
Auditors' reports
The financial statements
Consolidated statements of financial position
Consolidated statements of profit
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
30
31
32
General
Basis of preparation of the financial statements
Accounting policy principles
Cash and cash equivalents
Investments
Trade receivables
Income taxes
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
Equity
Revenue
Operating and general expenses
Salaries
Other operating expenses (income), net
Financing expenses (income), net
Share-based payment
Profit per share
Segmental reporting
Related parties transactions
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
Page
3
6
8
8
9
10
11
15
17
33
33
33
35
38
41
43
49
50
55
62
62
63
66
70
71
73
74
74
75
75
76
76
78
78
83
88
96
100
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.
We audited the consolidated financial statements of B Communications Ltd. (hereinafter – “the
Company”) as of December 31, 2021 and 2020 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, 2021. 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 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 provides an adequate basis for our opinion.
In our opinion, the following consolidated financial statements adequately reflect, in all material respects,
the financial position of the Company and its subsidiaries as of December 31, 2021 and 2020 and the
results of their operations, changes in equity and cash flows for each of the three years in the period
ended December 31, 2021 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, 2021, and our report of March
23, 2022 included an unreserved opinion on the effective existence of said components.
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 17 regarding
claims filed against the Group and the exposure in respect of which cannot be assessed or calculated
at this stage.
Somekh Chaikin
Certified Public Accountants
March 23, 2022
2
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.
and subsidiaries (hereinafter, jointly – “the Company") as of December 31, 2021. 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.
In our opinion, from all relevant aspects, the Company has effectively maintained the audited
control components as of December 31, 2021.
3
As described in the report regarding the effectiveness of the internal control over the financial
reporting and disclosure as of December 31, 2021 of B Communications Ltd. (hereinafter - "the
Corporation"), regarding the investigations by the Israel Securities Authority and the Israel
Police, as specified in Note 1.1.7 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 Corporation 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, 2021 and 2020 and for each
of the three years ended December 31, 2020 and our report, dated March 23, 2022, 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 17
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 23, 2022
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 " )
4
Consolidated financial statements as of December 31, 2021
Consolidated financial statements of financial position as of December 31
Assets
Cash and cash equivalents
Investments
Trade receivables
Other receivables
Inventory
Assets held for sale
Total current assets
Long-term trade and other 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
2021
2020
Note
NIS millions
NIS millions
4,3.3
5,3.3
,6
3.3
,6
3.3
3.9
,6
3.3
3.4
,8
3.7
,9
3.5
,10
3.6
11
,7
3.16
998
1,134
1,859
280
74
-
894
881
1,621
180
73
10
4,345
3,659
433
60
1,828
6,312
3,251
306
24
514
67
1,804
6,131
3,268
402
108
12,214
12,294
Total assets
16,559
15,953
6
Separate financial information as of December 31, 2021
Consolidated financial statements of financial position as of December 31 (cont.)
Debentures and loans
Current maturities of lease liabilities
Trade and other payables
Employee benefits
Provisions
Total current liabilities
Debentures and loans
Lease liabilities
Employee benefits
Derivatives and other liabilities
Deferred tax liabilities
Provisions
Total non-current liabilities
Note
NIS millions
NIS millions
2020
2019
,13
3.3
,8
3.7
14
,16
3.11
,15
3.12
,13
3.3
,8
3.7
,16
3.11
,7
3.16
,15
3.12
980
466
1,755
510
69
3,780
9,068
1,511
243
142
296
49
785
415
1,766
482
117
3,565
9,485
1,492
335
307
290
52
11,309
11,961
Total liabilities
15,089
15,526
Equity (deficit):
20
Attributable to the shareholders of the Company
Non-controlling interests
Total equity
16
1,454
1,470
)
107
(
534
427
Total liabilities and equity (equity deficit)
16,559
15,953
Darren Glatt
Chairman of the Board of Directors
Tomer Raved
CEO
Itzik Tadmor
CFO
Date of approval of the financial statements: March 23, 2022.
The notes attached to the consolidated financial information form an integral part thereof.
7
Consolidated financial statements as of December 31, 2021
Consolidated statements of income for the year ended December 31
Note
NIS millions
NIS millions
NIS millions
2021
2020
2019
,21
3.13
8,821
8,723
8,929
3,265
1,888
1,889
-
(77 )
6,965
1,856
533
(55 )
478
3,182
1,894
1,858
8
73
7,015
1,708
525
(51 )
474
1,378
1,234
-
1,378
382
996
129
867
996
-
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
(
)
853
(
)
607
(
)
1,460
(
1.11
1.35
)
19.7
(
Revenue
Operating expenses
Operating and general expenses
Salaries
Depreciation, amortization and
impairment
Impairment loss
Other operating expenses (income), net
Total operating expenses
Operating profit
22
23
8,9,10,11
11
24
Financing expenses (income)
,25
3.15
Financing expenses
Financing income
Financing expenses, net
Profit after financing expenses, net
Share of losses of equity accounted
investee
Profit (loss) before income taxes
Income taxes
,7
3.16
Net profit 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
Basic and diluted profit (loss) per
share (NIS)
8
Consolidated statements of comprehensive profit for the year ended December 31
Profit (loss) for the year
Reassessment of 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
2021
2020
2019
NIS millions
NIS millions
NIS millions
996
(1)
37
1,032
139
893
1,032
900
(9)
(5)
886
154
732
886
)
1,460
(
(33 )
1
)
1,492
(
)
862
(
)
630
(
)
1,492
(
The notes attached to the consolidated financial information form an integral part thereof.
9
Consolidated financial statements as of December 31, 2021
Consolidated statements of changes in equity for the year ended December 31
Share
capital
Share
Premium
Treasury
shares
Other
reserves
Retained
earnings
(Deficit)
Non-
controlling
interests
Total
NIS
millions
NIS
millions
NIS
millions
NIS
millions
NIS
millions
NIS
millions
NIS
millions
Balance as of January 1, 2019
Issuance of shares
Loss for the year 2019
Other comprehensive loss for
the year, net of tax
Total comprehensive loss for the
year 2019
3
9
-
-
-
1,057
438
-
-
-
-
-
-
(*)
-
-
-
-
(853)
(853)
(607)
(1,460)
(9)
(9)
(23)
(32)
(862)
(862)
(630)
(1,492)
(*)
(38)
(848)
174
447
433
-
-
Total
NIS
millions
607
447
Balance as of December 31,
2019
Acquisition of non-controlling
interests
Net compensation for the Horev
Claim (See Note 17)
Profit for the year 2020
Other comprehensive loss for
the year, net of tax
Total comprehensive profit for
the year 2020
Balance as of December 31,
2020
Share based payment
Shares buyback (see Note 20)
Profit for the year 2021
Other comprehensive profit for
the year, net of tax
Total comprehensive profit or the
year 2021
Balance as of December 31,
2020
12
1,495
(*)
(38)
(1,710)
(241)
(197)
(438)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(39)
(39)
(1)
(40)
19
157
19
157
-
743
19
900
(1)
(2)
(3)
(11)
(14)
(*)
(1)
155
154
732
886
12
1,495
-
-
-
-
-
-
-
-
-
-
)*(
-
(16 )
-
-
-
-
-
-
10
10
(39 )
)
1,575
(
)
107
(
-
-
129
-
(16 )
129
534
27
-
867
427
27
(16 )
996
-
10
26
36
129
139
893
1,032
12
1,495
(16 )
(29 )
)
1,446
(
16
1,454
1,470
(*) An amount of 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, 2021
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
Share-based payment
Income tax expenses
Change in trade and other 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
Purchase of property, plant and equipment
Investment in intangible assets and deferred
expenses
Investment activity, net
Income from the sale of property, plant and
equipment
Deposit to restricted cash
Tax payments for 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 debentures and receipt of loans
Acquisition of non-controlling interests
Repayment of debentures and loans
Leasing rincipal and interest payments
Net compensation in respect of the Horev Claim
Receipt from issue of shares, net
Buyback of shares
Interest paid
Early repayment fees of loans and debentures
Payment for expired hedging transactions
Miscellaneous
2021
2020
2019
Note
NIS millions NIS millions NIS millions
996
900
)
1,460
(
8,9,10,11
10
10
24
25
26
7
6
14
15
16
9
10,11
1,889
-
-
(
)
175
-
498
27
382
)
229
(
(19 )
(41 )
(47 )
(65 )
(5)
385
(
)
2,
826
1,3 )
(28
(633 )
(416 )
278
-
-
-
(1)
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
)
1,133
(
)
366
(
)
1,095
(
)
382
(
222
148
-
-
44
18
569
404
(39 )
(69 )
-
35
13
12
13
8
17
20
13
13
)
1,
578
(
)
1,067
(
)
577
(
1,730
-
)
2,072
387
)
(
(
-
-
(16 )
333
(
)
(34 )
(30 )
(2)
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 activities
)
1,144
(
)
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
10410
104
894
998
82
80
814
894
)
290
(
(
)
290
1,104
814
10
The notes attached to the consolidated financial information form an integral part thereof.
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, 2021, 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, 2021, 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 has held
60.18% and the Forer Family has held 11.39% of the Company's ordinary and
issued shares.
As of December 31, 2021, Searchlight holds a rate of 61.25% and the Forer
family holds a rate of 11.59% of the Company's ordinary and issued shares. Their
holdings increased following a repurchase of the Company's shares made by the
Company during December 2021 (see Note 21).
For details regarding the holding rates of Searchlight and the Forer family after
the balance sheet date, see Note 32.
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 Satellite
Services 1998 Ltd (“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 former Prime Minister Binyamin Netanyahu, to promote
issues related to Elovitch’s business and his and Bezeq Group's
economic interests. ("Case 4000"). Following the investigations,
indictments were filed and notices were received as follows:
11
Notes to consolidated financial Statements as of December 31, 2021
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
former Prime Minister Binyamin Netanyahu,
power by
promoting issues related to Elovitch’s business and his and
Bezeq Group's economic interests.
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 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.
12
Notes to consolidated financial Statements as of December 31, 2021
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.
f. Subsequently, on July 8, 2021, Bezeq and Walla submitted
a written argument for the hearing. On August 12, 2020, a
hearing was held for the companies with the Deputy State
Attorney (Criminal Enforcement) and the team of attorneys
handling the case. As of the date of publication of the
report, a decision has not yet been made by the State
Attorney's Office and the Attorney General regarding the
filing of an indictment following the allegations raised at the
hearing, and the companies have not been given an
expected date for making the decision.
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.
13
Notes to consolidated financial Statements as of December 31, 2021
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 note).
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.
1.3.2
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 17.
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 hearing on this matter as detailed in
the above note 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.
1.4
Pandemic - Outbreak of COVID-19
implications,
is an event with many
The beginning of 2020 saw a worldwide outbreak of the Coronavirus
(COVID-19) which
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.
14
Notes to consolidated financial Statements as of December 31, 2021
The effects of the COVID pandemic on the Group's operations in 2021 were
mainly reflected in the damage to Pelephone's revenues from roaming
services, as a result of the effects of the pandemic’s spread on the aviation
and international tourism sectors, without significant negative effects in
other areas of operations. Although the distribution of the vaccine and the
reduction of restrictions on travel abroad supported a certain recovery in
Pelephone's revenues from roaming services during the year, these have
not yet returned to the pre-COVID level of activity. In addition, the global
chip shortage and disruptions in the supply chain cause, among other
things, shortages and difficulties in the supply of, and sometimes price
increases in, equipment from the main suppliers of the Bezeq Group
companies. The Bezeq Group companies are taking various measures in
light of the aforesaid to reduce the harm to their operations.
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 ability
of the Group companies, including the Company, 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 the eradication of the pandemic is characterized by a
gradual decline that may be accompanied by repeated waves of outbreaks
and mutations in the virus.. 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.
Bezeq Group also expects that the global chip shortage and disruptions in
the global supply chain will affect commodity prices in the short term and
increase the need for Bezeq Group companies to stock up. In addition, it is
possible that the impact of the pandemic will cause a prolongation of
projects that require technological equipment or other equipment.
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 systems, the supply
chain, and the amounts and dates of collection from the Group's customers.
15
Notes to consolidated financial Statements as of December 31, 2021
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.
No effect on the Company's ability to meet its debt service is expected.
1.5
Definitions
In these financial statements:
The Company B Communications Ltd.
The Group
Bezeq
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 12.
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, 5728-1968
CPI
The Consumer Price Index published by the Central Bureau
of Statistics
16
Notes to consolidated financial Statements as of December 31, 2021
2. Basis for the 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 23, 2022.
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.
17
Notes to consolidated financial Statements as of December 31, 2021
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 of the next fiscal year:
Topic
Measuring the
recoverable
amounts of cash-
generating units
Duration of
property, plant
and equipment,
intangible assets
and other long-
term assets
Determining the
lease period
Uncertain tax
positions
Provisions and
contingent
liabilities, including
levies
Main assumptions
Assuming the expected cash
flows from the cash-generating
units
Possible consequences
Recognition of impairment
loss or cancellation of
impairment loss
Reference
Note 10
Assumptions regarding the useful
duration of a group of property,
plant and equipment, intangible
assets and other assets
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
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
Notes 9,
10,11
Note 8
Change in the value of
property, plant and
equipment and intangible
assets and other assets
and in depreciation and
amortization expenses
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
Recognition or cancellation
of income taxes expenses
Note 7
Note 15
and Note
17
Cancellation or creation of
a provision in respect of a
claim, recognition of
revenue / expenses and
recognition of revenue in
respect of such a change,
respectively
The Company's assumption of
the estimated payment to the
authorities in respect of levies on
Change in capital gain
from the sale of a real
estate asset in the "Sakia"
Note 6.6
18
Notes to consolidated financial Statements as of December 31, 2021
real estate in the "Sakia"
complex
Employee benefits Actuarial assumptions such as
Deferred taxes
Existence of
effective control
over Bezeq
discount rate, future wage
increase rate and departure rate
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
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
complex
An increase or decrease in
employee benefits
liabilities and early
retirement liabilities
Recognition of deferred tax
asset
Note 16
Note 7
Note 12.5
Consolidation of Bezeq's
financial statements or
treatment of an investment
in Bezeq using the equity
method
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.
19
Notes to consolidated financial Statements as of December 31, 2021
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 equity in a subsidiary that cannot be
attributed, directly or indirectly, to the parent company and include
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 equity 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 equity
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.
20
Notes to consolidated financial Statements as of December 31, 2021
3.3. Financial Instruments
3.3.1. Non-derivative financial assets
Non-derivative financial assets mainly include investments in deposits,
customers and 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 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.
21
Notes to consolidated financial Statements as of December 31, 2021
Customers, trade receivables and deposits
The Group has balances of customers, 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
minus 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
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 minus
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 under
financing income or expenses item.
The terms differ materially if the discounted present value of the cash flows
under the new terms, including any commissions paid, minus 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 (income)".
22
Notes to consolidated financial Statements as of December 31, 2021
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 profit or loss from subtraction /
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
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 debentures 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 income or expenses.
23
Notes to consolidated financial Statements as of December 31, 2021
3.4.Broadcasting rights
The broadcasting rights are presented according to cost, minus
exercised rights 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 rights to the broadcast and costs of original
productions. The broadcasting rights are reduced in a straight line
according to the period of the rights agreement or the economic duration,
whichever is shorter.
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 minus 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.
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 property, plant and equipment 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.
24
Notes to consolidated financial Statements as of December 31, 2021
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, which it
considers likely to materialize) and the useful life of the lease improvements,
whichever is shorter.
The estimate of the useful duration 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
2-10
12-33
1-17
4-8
6-7
5-10
3-7
4-10
Until December
31, 2037
25
10-25
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 minus
accumulated impairment losses. Reputation is reviewed at least once a year for
impairment examination. See also Note 10.
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 salary 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 minus amortization and
impairment losses.
25
Notes to consolidated financial Statements as of December 31, 2021
3.6.3.
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.
3.6.4.
Embedding costs of cloud computing arrangements
Embedding costs of cloud computing arrangements are discounted for the asset as
long as the asset meets the definition of an intangible asset, and in particular to the
extent that the Group controls the asset. To the extent that the Group does not
recognize an intangible asset, the Group examines whether the services received
are differentiated from the cloud computing service. To the extent that the services
the Group receives are differentiated from the cloud computing services or provided
by a third-party provider that is not the cloud computing provider, the Group
recognizes the expense with the provision of the implementation services. To the
extent that the services are not differentiated, the implementation costs are
recognized as an expense in the rate of consumption of cloud computing services.
3.6.5.
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. 3G frequencies (UMTS / HSEA)
depreciate until the end of 2030. 4G frequencies (LTE) and 5G frequencies will
depreciate until September 2032.
Amortization of rights in frequencies is attributed to the depreciation and
amortization item in the statement of income.
3.6.6. Other intangible assets
Other intangible assets acquired by the Group, with a defined useful life, are
measured at cost minus 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 examined at least once a year for impairment.
The estimated useful life for the current period is:
Property type
Reduction period
3G frequencies - until December 2030
Frequency use rights
4G and 5G frequencies - until August 2032
Computer software and software use
throughout the estimated duration of use of the
licenses
software
1-7 years depending on the license period or
26
Notes to consolidated financial Statements as of December 31, 2021
Estimates of the depreciation method and useful duration are reviewed at least
once every reporting year and adjusted as necessary.
3.7.Leasing
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.
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.
27
Notes to consolidated financial Statements as of December 31, 2021
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, minus cumulative depreciation And after
deducting cumulative losses from impairments and adjusted for re-
measurements of the liability in respect of the lease. Amortization is
calculated on a straight-line basis over the useful duration or the
contractual lease period, whichever is earlier, as follows:
Asset type
Weighted average of the agreement period as of
December 31, 2021 (years)
Cellular communication sites
Structures
Vehicles
6
15
2
3.7.6.
Subleases
In leases in which Bezeq Group leases the underlying asset in a sublease,
Bezeq Group examines the classification of the sublease as a finance or
operating lease in relation to the right-of-use obtained in the main lease.
Bezeq Group examined existing leases at the date of initial application in
accordance with the balance of their contractual terms as of that date.
3.8. Rights of use of capacities
Transactions for the purchase of an indefeasible right of use (IRU) in
underwater cable capacities were
treated as service acceptance
transactions. The amount of the prepaid expense is amortized as part of the
depreciation expenses, in a straight line, in accordance with the period
specified in the agreement and no more than the estimated useful life of
those capacities. The payment for the right to use the capacities is
presented in cash flow from investment operations.
Capacities which identifiable and used exclusively by the Group are
presented in the property, plant and equipment item. Capacities that cannot
be specifically identified are shown in Other long-term assets. The asset is
amortized in accordance with the period specified in the agreement,
including an extension option that the Company expects to exercise and for
no longer than the estimate or the expected useful life of those capacities.
Capacity use rights are presented minus accumulated impairment losses.
The amortization in respect of capacities is presented in the Depreciation,
amortization and impairment item.
28
Notes to consolidated financial Statements as of December 31, 2021
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 minus 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 customers and trade receivables in an amount
equal to the contractual credit losses throughout the duration 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
well as analysis, based on the Group's past experience and includes
forward-looking information.
29
Notes to consolidated financial Statements as of December 31, 2021
3.10.2. Non-financial assets (see also Note 10)
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 goodwill, or more frequently, if there are indications of impairment.
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 10.
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, minus 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).
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 minus 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 minus 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 the nature of the
expense and is also more suitable for understanding the Group's
business.
30
Notes to consolidated financial Statements as of December 31, 2021
Accordingly, the statement of income shows the continuing impairment of
broadcasting rights as part of "Operating and general expenses" while the
continuing impairment of property, plant and equipment, intangible assets
and Rights-of-use of capacities is presented as part of "Depreciation,
amortization and impairment" expenses. See also Note 10.
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.
31
Notes to consolidated financial Statements as of December 31, 2021
The Group chose to present the interest costs imputed to
income, as part of the financing expenses item.
Recalculation of the net liability in respect of a defined benefit includes
actuarial income and the return on plan assets (excluding interest).
through other
Re-measurements are
comprehensive profit directly to surplus.
immediately,
imputed
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
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 / income item,
while the remaining differences are imputed to salary expenses.
terms. Actuarial changes are recognized
in
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 (income). 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 (income).
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.
32
Notes to consolidated financial Statements as of December 31, 2021
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.
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.
3.11.5. Share-based payment transactions
The fair value at the date of grant of options to employees for the
purchase of the Company's shares is charged as a salary expense in
parallel with the increase in equity over the period in which the
employees' entitlement to the options is obtained. The Group
presents the increase in equity as part of the non-controlling interests.
For share-based payment grants conditional on performance
conditions that constitute market conditions, the Group takes these
conditions into account when estimating the fair value of the equity
instruments granted, and therefore the Group recognizes an expense
for these grants regardless of the fulfillment of these conditions.
The amount imputed as an expense is adjusted to reflect the number
of stock options that are expected to mature.
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 liability.
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
in
accordance with the areas of probability for the realization of the risk
exposures as detailed below:
to groups with similar characteristics,
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%.
33
Notes to consolidated financial Statements as of December 31, 2021
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 17 provides 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. Revenues
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 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:
34
Notes to consolidated financial Statements as of December 31, 2021
a.
b.
c.
d.
e.
Identifying the contract with the customer
Identifying separate performance obligations in the contract
Determining the transaction price
Assigning the transaction price to separate performance
obligations
Recognition of revenue upon fulfillment of performance
obligations
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.
35
Notes to consolidated financial Statements as of December 31, 2021
Existence of a significant financing component
For the purpose of measuring the transaction price, Bezeq 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, Bezeq Group examines, inter alia, the expected
length of time between the date on which Bezeq 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,
Bezeq 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, Bezeq Group applies the practical relief provided by
the standard and does not separate a significant financing
component.
3.13.5. Existence of performance obligation
Revenue is recognized when Group maintains a performance
obligation by transferring control of a customer or service promised to
the customer.
3.13.6. 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 to 4 years).
36
Notes to consolidated financial Statements as of December 31, 2021
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, minus 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.
3.13.7. 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 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
A government grant in respect of a frequencies tender is initially recognized
at fair value when there is reasonable assurance that it 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 revenue in the statement of financial position
and are unfrozen in the statement of income throughout the useful
duration of the asset. Thawing of revenue is recognized in the item
Other operating revenue in the income statement.
3.15. Financing income and 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 debentures 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.
37
Notes to consolidated financial Statements as of December 31, 2021
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 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 practice 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 tax liabilities
The Group offsets deferred and current tax assets and liabilities 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.
38
Notes to consolidated financial Statements as of December 31, 2021
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" (hereinafter: “the Amendment”)
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
is possible. The Amendment will be applied
application
retrospectively, including an amendment to comparative figures. The
Group is examining the implications of applying the amendment,
including an additional proposal to amend the standard published in
November 2021, on the financial statements.
3.18.2. Amendment to Standard IAS37 "Provisions, contingent liabilities and
contingent assets" in respect of onerous contracts (hereinafter: “the
Amendment”)
According to the Amendment, when examining whether a contract is
onerous, the costs of performing a contract that must be taken into
account are costs that relate directly to the contract, which include the
following costs:
- Additional costs; and
- Allocation of other costs directly related to the performance of a
contract (such as depreciation expenses of property, plant and
equipment used both to fulfill the contract in question and other
additional contracts).
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 of contracts for which the Company
has not fulfilled its full obligations as of this date.
In accordance with the provisions of the Standard, the reporting entity
is required to examine the existence of onerous contracts during each
reporting period. As of the date of approval of the statements, in
accordance with an examination performed by the Company and the
Group companies to identify onerous contracts in accordance with the
guidelines of the Amendment and based on the profit forecasts of the
Group companies known as of this date, no material effect is expected
on the balance of surpluses at the date of initial adoption of the
Amendment to the Standard on January 1, 2022.
39
Notes to consolidated financial Statements as of December 31, 2021
3.18.3. Amendment to IAS 12 "Income taxes" in the matter of deferred tax relating
to assets and liabilities arising from a single transaction (hereinafter: "the
Amendment")
The amendment reduces the applicability of the exemption from recognition
of deferred taxes as a result of temporary differences created at the time of
the initial recognition of assets and / or liabilities, so that the said exemption
will not apply to transactions that create equal and offsetting timing
differences. As a result, entities will be required to recognize an asset or
deferred tax liability in respect of these temporary differences at the date of
initial recognition of transactions that create equal and offsetting timing
differences, such as leasing transactions and provisions for liquidation and
rehabilitation.
The Amendment will be implemented starting from annual reporting periods
beginning on January 1, 2023 by amending the opening equity balance.
Early application is possible. The Group is examining the consequences of
the implementation of the Amendment and in its assessment as of the date
of approval of the statements, the implementation of the Amendment is not
expected to have a material effect on the statements.
4. Cash and cash equivalents
Cash balance and cash value as of December 31, 2021 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
December 31,
2021
December 31,
2020
NIS millions
1,035
NIS millions
804
99
1,134
77
881
(1) Bank deposits in NIS and USD, due for repayment by December 2024.
40
Notes to consolidated financial Statements as of December 31, 2021
6. Trade and other receivables
6.1. Composition of trade and other receivables:
Customers *
Open debts and checks for collection
Credit cards
Revenue receivable
Long-term customer maturities
Related parties and stakeholders
December 31,
2021
December 31,
2020
NIS millions
NIS millions
498
473
238
297
2
656
405
224
332
4
1,859
1,621
Other trade receivables and current tax assets*
Current tax assets
Other receivables and authorities (mainly in respect of real
estate sales)
Advance expenses
Frequencies grant receivable (see Note 10.1)
Long-term trade and other receivables*
Customers - open debts
Long-term trade receivables and authorities (in respect of real
estate sales) **
Frequency grant receivable (see Note 10.1)
56
114
36
74
280
256
177
-
433
42
105
33
-
180
256
185
73
514
* Customer balances and trade receivables are presented minus provision for predicted
2,572
2,315
credit losses.
** 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 2021 are 2.49% -
4.38% (in 2020: 3.26%-8.5%).
6.3. Expected exercise dates for long-term customers and trade receivables:
Expected repayment dates
2023
2024
2025 onwards
41
December 31,
2021
NIS millions
230
73
130
433
Notes to consolidated financial Statements as of December 31, 2021
6.4. Aging of customer debts as of the reporting date:
December 31, 2021
Gross
customer
balance
Provision for
predicted
credit losses
December 31, 2020
Gross
customer
balance
Provision for
predicted
credit losses
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
1,922
175
56
30
2,183
(4)
(21)
(20)
(23)
(68)
1,732
165
30
30
1,957
(5)
(37 )
(15 )
(23 )
(80 )
6.5. The activity in the provision for predicted credit losses during the year is as
follows:
Balance as of January 1
Impairment loss recognized
Loan-loss
No longer consolidated
Balance as of December 31
2021
2020
NIS millions
NIS millions
80
6
(18)
-
68
80
26
(22 )
(4)
80
6.6 The balance of long-term receivables and authorities includes a receivable
balance in the amount of NIS 106 million in respect of permit fees and
improvement levies, paid by Bezeq to the Israel Land Authority and the Or
Yehuda Local Authority for the sale of the Sakia complex in 2019. In
addition, Bezeq provided guarantees in the amount of NIS 120 million,
according to the requirements of the Israel Land Authority and the Or
Yehuda Local Authority, to pay the balance of the permit fee and the
improvement levy:
Bezeq recognized in its financial statements for 2019 a capital gain from the
sale of the Sakia complex in the amount of NIS 403 million before tax. 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.
The parties are in litigation since 2021.
42
Notes to consolidated financial Statements as of December 31, 2021
7.
Income taxes
7.1. Corporate tax rate
Current taxes for the reported periods and deferred tax balances as of
December 31, 2021 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 the Company 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 the Company, in accordance with Article 103B of the Income Tax
Ordinance. According to the approval, DBS’ 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 revenue of the absorbing company in the same tax year
before offsetting the loss from previous years, whichever is lower.
The approval is given in accordance with the tax laws applicable at the time
it is given. Without derogating from the amount of losses stipulated in the
assessment agreement, in the event of a change in the applicable tax law,
the Tax Authority will re-examine the taxation decision in accordance with
the tax law that will apply at the time of the merger. However, it was clarified
that the approval is valid until December 31, 2019. The Tax Authority will
extend the validity of the approval for an additional year each year subject
to the Company and DBS' declaration that there has been no material
change in their business and the terms of the taxation decision, and subject
to interpretation given to tax law, provided such interpretation is published
in writing. A change in tax law that does not require a change in the approval
will not result in a change therein. The validity of the taxation decision has
been extended twice since then, the first time until December 31, 2020 and
the second time until December 31, 2021.
The balance of DBS losses for tax purposes, as of December 31, 2021,
amounts to approximately NIS 5.2 billion. See Note 7.6 below regarding
deferred taxes that were not recognized as carried forward losses.
7.2.3. Pelephone has final tax assessments up to and including 2018.
7.2.4. Bezeq International has final tax assessments up to and including
2019.
7.2.5. DBS has final tax assessments up to and including 2016.
7.2.6. Bezeq Online has final tax assessments up to and including 2017.
43
Notes to consolidated financial Statements as of December 31, 2021
7.3. Income tax expenses components
For the year ended December 31
2021
2020
2019
NIS millions
NIS millions
NIS millions
Current tax expenses
Expenses for the current year
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)
Creation and reversal of other temporary
differences
Creation of deferred taxes in respect of losses for
tax purposes from the sale of a subsidiary
Total deferred tax expenses
Income tax expenses
289
14
303
-
42
37
79
382
273
50
323
-
48
(37)
11
334
391
(11 )
380
1,259
)
187
(
-
1,072
1,452
7.4. Correlations between the theoretical tax on profit before income taxes and
tax expenses
For the year ended December 31
2021
NIS millions
2020
NIS millions
2019
NIS millions
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 10.2)
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 taxes 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 10.4)
Income tax expenses
1,378
23%
317
-
-
-
65
-
-
-
-
382
1,234
23%
284
-
-
47
16
(37 )
(7)
31
-
334
(8)
23%
(2)
1,259
160
(31 )
69
-
-
-
(3)
1,452
44
Notes to consolidated financial Statements as of December 31, 2021
7.5. Deferred tax assets and liabilities recognized
Deferred
tax
liabilities in
respect of
property,
plant and
equipment
and
intangible
assets
Tax asset in
Deferred
respect of
tax assets
loss for tax
in respect
purposes
of
from the
employee
sale of a
benefit
plans
subsidiary
NIS millions NIS millions NIS millions NIS millions NIS millions
268
Other
deferred
taxes
(640)
Total
903
16
-
(36 )
(1)
261
(11 )
1
251
(31 )
-
)
538
(
(9)
-
)
547
(
37
-
37
(37 )
-
-
19
(3)
58
(22 )
(12 )
24
(11 )
(4)
)
182
(
(79 )
(11 )
)
272
(
Balance as of January 1, 2019
Changes imputed to income:
Creation and reversal of temporary
differences
Changes that were imputed to equity
Balance as of December 31, 2020
Changes imputed to income:
Creation and reversal of temporary
differences
Changes that were imputed to equity
Balance as of December 31, 2021
Book value
As of December 31
Deferred tax assets
Deferred tax liabilities
Balance as of December 31
2021
NIS millions
24
)
296
)
272
(
(
As of December 31
2020
NIS millions
108
)
290
)
182
(
(
7.6. Unrecognized deferred tax assets and liabilities
Following the acquisition of control by Bezeq of DBS in 2015 (as described in
Note 12.2.1 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 in each year 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 were recognized in respect of loss from
impairment of assets in DBS and Bezeq International (see Note 10). Is not
expected in accordance with the Group’s estimate for the date of the financial
statements.
45
Notes to consolidated financial Statements as of December 31, 2021
In addition, the taxes that would have applied in the event of the exercise of the
investment in subsidiaries are not recognized in calculating the deferred taxes,
since it is the intention and within the ability of the Group to hold these
investments. Also, deferred taxes for the distribution of profits in subsidiaries and
affiliates are not recognized, because the dividends are not taxable. Also, the
Company does not create deferred taxes in respect of its carried forward losses.
8. Leases
Under the lease agreements, the Group leases mainly cellular communication sites,
buildings (including offices, warehouses, communication rooms and points of sale) and
vehicles.
8.1. Right-of-use assets
Communicati
on sites
Structures
Vehicles
Total
NIS millions
NIS millions NIS millions
NIS millions
Cost
Balance as of January 1, 2020
Additions *
Deductions in respect of
agreements or cancelled agreements
No longer consolidated
Balance as of December 31, 2020
Additions *
Deductions in respect of
agreements or cancelled agreements
Balance as of December 31, 2020
Depreciation and impairment
losses
Balance as of January 1, 2020
Amortization for the year
Deductions in respect of
agreements or cancelled agreements
Changes in agreements and others
No longer consolidated
Impairment loss (loss write-off)
Balance as of December 31, 2020
Amortization for the year
Deductions in respect of
agreements or cancelled agreements
Changes in agreements and others
Impairment loss
Balance as of December 31, 2021
Book value
As of January 1, 2020
As of December 31, 2020
1,041
200
(51 )
-
1,190
155
(83)
1,262
367
179
(45 )
(4)
-
(82 )
415
168
(68)
(5)
-
510
674
775
646
609
(
146
)
(14 )
1,095
149
(50)
1,194
237
116
)
121
(
(2)
(3)
(9)
218
106
(27)
1
-
298
409
877
As of December 31, 2021
* Additions in respect of new agreements and changes in existing agreements
752
896
287
118
(80 )
-
325
126
(120)
331
153
102
(83 )
(2)
-
3
173
118
1,974
927
(
277
)
(14 )
2,610
430
(253)
2,787
757
397
)
249
(
(8)
(3)
(88 )
806
392
(118)
(213)
(23)
1
151
134
152
180
(27)
1
959
1,217
1,804
1,828
46
Notes to consolidated financial Statements as of December 31, 2021
8.2. Leasing liabilities
Communication
sites
Structures
Vehicles
Total
NIS millions
NIS millions
NIS millions
NIS millions
Balance as of January 1, 2020
Additions *
Deductions
Financing expenses in respect of
lease liabilities
Lease payments
Balance as of December 31,
2020
Additions *
Deductions
Financing expenses in respect of
lease liabilities
Lease payments
No longer consolidated
Balance as of December 31,
2021
Book value as of December 31,
2021
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, 2021
790
203
(9)
18
(169)
-
833
162
(14)
17
(164)
834
230
603
833
250
584
834
428
607
(23)
10
(117)
(10)
895
145
(24)
21
(102)
935
97
798
895
113
822
935
167
117
(2)
2
(105)
-
179
150
(2)
2
(121)
208
88
91
179
103
105
208
1,385
927
(34)
30
(391)
(10)
1,907
457
(40)
40
(387)
1,977
415
1,492
1,907
466
1,511
1,977
* Additions in respect of new agreements and changes in existing agreements
47
Notes to consolidated financial Statements as of December 31, 2021
8.3. 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
December 31,
2021
NIS millions
485
928
816
2,229
8.4. Options for termination or extension of a 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.
8.5. Information regarding material lease agreements that have
not yet been included in the lease liability measurement
On October 7, 2021, a hosting services agreement was signed between
Bezeq International and ServerFarm IIF Bnei Zion Limited Partnership
(hereinafter: "ServerFarm"), according to which ServerFarm International
will provide hosting services to Bezeq International in a server farm facility
established by it. The delivery date is divided into two phases, with the first
phase expected to be delivered in March 2023 and the second phase
expected to be delivered in March 2024. The agreement period is 15 years,
and there are options for extension until 2047. The cost of the agreement
for the first period (without exercise of options) is about 250 million, which
applies equally to both phases (except for the period between the date of
delivery of the first phase and the date of delivery of the second phase).
The server farm is expected to be used to provide hosting services to
business customers.
48
Notes to consolidated financial Statements as of December 31, 2021
9. Property, plant and equipment
Cables and
Cellular
Landline
landline
network
and
and
internationa
internation
l network
al network
equipment
communic
(switching,
ations
Equipmen
t and
infrastruc
ture for
multi-
Office
equipment,
computers
Land and
transmissio
infrastruct
channel
Subscriber
and
buildings
n, power)
ure
television
NIS millions
equipment
vehicles
Total
779
808
76
)
126
805
35
(59)
(20 )
21
47
Cost
Balance as of January 1,
2020
Additions
Subtractions *
Unconsolidation
Transfer from assets
held for sale
Balance as of December
31, 2020
Additions
Subtractions *
Transfer from assets
held for sale
Balance as of December
31, 2020
Depreciation and
impairment losses
Balance as of January 1,
2020
Depreciation for the year 28
Subtractions *
No longer consolidated
Transfer from held
assets for sale
Impairment loss (loss
reversal) (Note 10)
Balance as of December
31, 2020
Depreciation for the year 22
(39 )
Subtractions
Transfer to assets held
for sale
Impairment loss (loss
reversal) (Note 10)
Balance as of December
31, 2021
Book value
13
13
20
(4)
(32)
(15 )
520
504
514
3,141
233
(181)
-
6,010
222
(119)
-
3,518
181
(2)
-
1,551
120
(61)
-
2,243
360
(67)
-
1,165
97
(40)
(53 )
18,433
1,248
(529)
(73 )
-
-
-
-
-
-
47
3,193
248
)
185
(
6,113
426
(29 )
3,697
136
(2)
1,610
115
)
301
(
2,536
332
)
336
(
1,169
71
(66 )
19,126
1,404
)
1,045
(
(
-
-
-
-
-
-
21
3,256
6,510
3,831
1,424
2,532
1,174
19,506
1,864
230
174
)
-
(
-
8
1,928
229
)
185
(
-
9
3,251
180
(119)
-
-
1
3,313
182
(29 )
-
(1)
2,913
167
(1)
-
1,424
36
(54)
-
-
-
(63 )
101
1,521
258
(51)
-
-
26
3,016
177
(1)
1,507
45
)
301
(
1,754
278
)
317
(
-
-
-
77
-
8
978
69
(38)
(51 )
-
15
973
60
(65 )
-
17
12,465
968
(469)
(66 )
13
84
12,995
993
)
937
(
20
123
1,981
3,465
3,192
1,328
1,723
985
13,194
As of January 1, 2020
291
1,277
2,759
605
127
722
187
5,968
As of December 31,
2020
As of December 31,
2021
49
304
1,265
2,800
681
103
782
196
6,131
259
1,275
3,045
639
96
809
189
6,312
Notes to consolidated financial Statements as of December 31, 2021
9.1.
9.2.
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 237 million as of
December 31, 2021 and NIS 191 million as of December 31, 2020.
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. Following the findings of the depreciation
committees, insignificant changes were made in the estimate of the useful life of
certain assets. Such a change did not have a material effect on the Group's
depreciation expenses
9.3. 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.
9.4. 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.
On May 25, 2021, Bezeq's Board of Directors approved Bezeq's plan for the
deployment of fiber and its submission to the Ministry of Communications in
accordance with the Communications Law. As part of Bezeq’s plan, an ultra-fast
fiber network is expected to be deployed and operated, covering about 76% of
Israel’s population (according to Bezeq’s estimate, about 80% of households).
On May 31, 2021, Bezeq submitted to the Ministry of Communications the list of
statistical areas in which it chose to deploy as aforesaid, and on June 15, 2021,
Bezeq received an amendment to Bezeq’s license regarding the determination of
advanced network deployment duties (“the License Amendment"). The License
Amendment includes, among other things, the milestones for completing the
network deployment within six years from the effective date (March 14, 2021). In
this regard, see also Note 18 for the Group companies' obligation to pay into the
incentive fund.
50
Notes to consolidated financial Statements as of December 31, 2021
9.5. Pursuant
to
the Communications Order
(Telecom and Broadcasting)
(Determination of Essential Service Provided by Bezeq,
Israel
Telecommunications Corporation Ltd.), 5757-1997, the approvals of the Prime
Minister and the Minister of Communications were required to grant rights to
certain Bezeq assets (including switches, cable network, transmission network
and databases and information).
the
9.6.
9.7.
For liens in connection with loans and credit, see Note 13. For additional liens,
see Note 19.
For engagements for the purchase of property, plant and equipment, see Note
18.
51
Notes to consolidated financial Statements as of December 31, 2021
10. Intangible assets
Right to
use
cellular
communic
ation
frequencie
s (see 10.1
below)
NIS
millions
Computer
software
and
licenses
NIS
millions
Goodwill
NIS
millions
Customer
relations
and brand Other
NIS
millions
NIS
millions
Total
NIS
millions
3,079
2,409
480
7,479
200
13,647
-
-
(10 )
220
(36 )
(11 )
86
-
-
-
-
-
-
-
)
119
(
306
(36 )
)
140
(
3,069
2,582
566
7,479
81
13,777
-
-
237
(40 )
-
-
-
-
-
-
237
(40 )
3,069
2,779
566
7,479
81
13,974
1,520
2,029
330
6,403
198
10,480
-
-
153
(36 )
(10 )
-
1,510
-
-
(6)
89
2,229
141
(40 )
21
-
-
(20 )
331
22
-
-
-
-
(45 )
6,358
-
-
-
91
-
-
1,510
2,421
353
6,358
1,559
380
1,559
353
150
235
1,076
1,121
1,559
358
213
1,121
2
-
176
(36 )
)
119
(
)
135
(
-
81
-
-
-
81
2
-
-
24
10,509
163
(40 )
91
10,723
3,167
3,268
3,251
Cost
Balance as of January
1, 2020
Self-developed
acquisitions or
additions
Subtractions
No longer consolidated
Balance as of
December 31, 2020
Self-developed
acquisitions or
additions
Subtractions
Balance as of
December 31, 2021
Depreciation and
impairment losses
Balance as of January
1, 2020
Amortization for the
year
Subtractions
Impairment loss (loss
cancellation) (see
Notes 11.2, 11.4 and
11.5 below)
Balance as of
December 31, 2020
Amortization for the
year
Subtractions
No longer consolidated
Impairment loss (loss
cancellation) (see
Notes 11.2, 11.4 and
11.5 below)
Balance as of
December 31, 2021
The value in the
books
As of January 1, 2020
As of December 31,
2020
As of December 31,
2021
52
Notes to consolidated financial Statements as of December 31, 2021
10.1.
Right to use cellular communication frequencies
In 2020, Pelephone won a collection of frequencies in a tender for advanced
bandwidth cellular services, at 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 September 2020, upon the receipt of the frequencies, Pelephone began
to activate the frequencies. In addition, Pelephone won a NIS 5 million
deployment grant in accordance with the tender rules. The grant is expected
to be received during the fourth quarter of 2022 and after the 5G license fee
is paid on the date specified in the license. The amount of the grant is
presented in the statement of financial position under the Trade receivables
item.
10.2. Cash-generating units impairment examination
10.2.1. For the purpose of impairment testing, goodwill was attributed to the Group's
operating segments as follows:
Fixed line communications (Bezeq) (See Note
10.4)
December 31, 2021 December 31, 2020
NIS millions
NIS millions
1,559
1,559
1,559
1,559
10.2.2. The following is the composition of the impairment loss recognized by the Group
during the years 2019-2021:
Impairment loss in the Bezeq International
segment (see Note 10.6 below)
Impairment loss (loss cancellation) in respect of
Walla
Impairment loss (loss cancellation) in the cellular
communication segment (see Note 10.3), net
2021
2020
2019
NIS millions NIS millions NIS millions
-
-
-
-
279
)14(
)257(
8
354
-
975
1,329
53
Notes to consolidated financial Statements as of December 31, 2021
10.3. Cellular communications goodwill
impairment
test
(Pelephone)
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, 2021.
The value of use of the Cellular communication cash-generating unit as of
December 31, 2021 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
(representative year). 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 Pelephone’s revenues from roaming services in 2022. The forecast also
assumes some damage to roaming revenue in later years and a return to
“pre-COVID” situation in 2026, 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 9% (after tax) (in 2020 –
10.3%). In addition, a permanent growth rate of 1.5% was assumed (in 2020
– 2.5%).
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 (and in the terminal year) 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 345 million, a change of 100K
subscribers throughout the forecast years (and in the terminal year) leads to
a change in the value of the activity in the amount of approx. NIS 580
million).
54
Notes to consolidated financial Statements as of December 31, 2021
The valuation was conducted by an external valuator. Based on the
valuation as explained above, Pelephone’s recoverable amount amounted
to NIS 798 million, compared with a book value in the Company's books of
NIS 613 million. Accordingly, the Company was not required to perform
amortization in accordance with the cancellation of impairment loss
attributable to the cellular communications cash generating unit.
10.4. Fixed line communications goodwill impairment test
(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, 2021.
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
(representative year).
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 market in the coming years (level of competition, price levels in
retail and wholesale, regulatory aspects and technological developments).
The main assumptions underlying the forecast are: decrease in revenues
from telephony (resulting from a decrease in the number of lines, erosion in
consumption of call minutes per line and the effect of the decision by the
Ministry of Communication regarding setting maximum rates for the
Company's retail telephony), growth in Internet revenues (supported by
market growth, the establishment of Internet services over the fiber network
and the abolition of the separation between broadband infrastructure
service and Internet access service), erosion in data communications and
transmission revenues (due to expected declines in transmission revenues
from ISPs and despite expected consistent growth in revenues from data
communications services) and moderate growth in cloud and digital
revenues. Operating, sales, marketing and investment expenses were
adjusted to the scope of the segment's activities, including assumptions
regarding the Company's employee base and the salary and retirement
expenses derived from them, and assumptions regarding the rate of
deployment of the fiber infrastructure.
The nominal capital price used in the valuation is 7% (after tax) (in 2020 -
7.5%). In addition, a permanent growth rate of 1% (in 2020 - 0%) was
assumed.
The valuation was conducted by an external valuator. Based on the
valuation as explained above, the Group was not required to perform
amortization
the of Fixed Line
communications cash-generating unit.
impairment of
in respect of
the
55
Notes to consolidated financial Statements as of December 31, 2021
10.5. Multi-channel TV (DBS) goodwill impairment
Bezeq Group’s value-in-use of the multi-channel television cash-generating
unit as of December 31, 2021 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 (representative year). The
nominal cost of capital used in the valuation is 8.5% (after tax) (in 2020 –
8.5%). In addition, a permanent growth rate of 0% was assumed (in 2020 –
0%).
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. The cash flow forecast used for the purpose of
preparing the valuation did not result in any changes that may result from
the decision to implement the alternative outline, which is set forth in Note
12.1.2 below.
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 replaced over time by the IP product (TV broadcasts via the Internet)
due to the technological gap between satellite and IP, customer experience,
and the lower operation and maintenance costs of IP. 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 throughout the forecast period and a relatively rigid
expenditure structure, led to significant operating losses and negative cash
flows in some of the forecast years. It should be noted that the actual
implementation of the outline is carried out and will be carried out while
the
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, 2021 is negative in the amount of approx. NIS 271 million (as of
December 31, 2021, total negative activity value of 145 NIS million).
The valuation is sensitive to the net cash flow in the representative year in
general, and to the valuation of the ARPU level (average revenue per
subscriber) and the subscriber base at the end of the forecast range in
particular. A change of NIS 1 in ARPU throughout the forecast years (and
in the terminal year) leads to a change in enterprise value in the amount of
NIS 106 million and a change of 5 thousand subscribers throughout the
forecast years (and in the terminal year) leads to a change in enterprise
value of approx. NIS 79 million).
56
Notes to consolidated financial Statements as of December 31, 2021
In light of the negative value of the activity, as of December 31, 2021, the
value of DBS's non-current assets was determined to be their fair value or
zero, whichever is higher, similar to the end of 2020 and the end of 2019.
The fair value of DBS’s assets net of exercise costs as of December 31,
2021 is negative in the amount of NIS 109 million.
in accordance, in 2021, the Group recognized loss due to impairment in the
amount of approx. NIS 288 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 DBS’s assets:
2021
2020
2019
NIS millions NIS millions NIS millions
Broadcast rights – minus rights exercised * 146
Property, plant and equipment **
Intangible assets
Deferred expenses **
Rights to use leased assets **
Total recognized impairment
91
48
4
(1)
288
170
112
29
13
-
324
202
117
44
-
(1)
362
* The expense was presented as operating and general expenses
** The expense was presented as depreciation, amortization and impairment expenses
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 minus 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.
57
Notes to consolidated financial Statements as of December 31, 2021
Other receivables (advance expenses) - No material fair value was
attributed to the advance expenses of DBS in respect of the maintenance of
its systems, since most of the maintenance agreements were uniquely
adjusted to DBS and therefore have no material value in the transaction
between a voluntary buyer and a voluntary seller.
10.6.
Impairment of the Bezeq International services segment
ICT
(Internet, communication, network endpoint and
solutions segment
At the end of 2021, Bezeq International updated its forecasts for the coming
years, taking into account trends and changes in its operating environment.
The value in use of the Bezeq International cash-generating unit was
calculated as of December 31, 2021, 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 2021 plus scrap value (representative
year).
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
cash flow forecast used for the purpose of preparing the valuation did not
take into account changes that may result from the decision to implement
the alternative outline, described in Note 12.1.2 below.
The revenue forecast is based on assumptions that Bezeq International's
Internet subscriber base, and its revenues from these subscribers, will be
significantly affected as a result of the Ministry of Communications' decision
to abolish the separation between broadband and Internet access (ISP)
services, as detailed in Note 12.3 below, including assumptions regarding
users not using ISP services, assumptions regarding Bezeq International's
activity in the 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 salary 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).
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 8.5% (after tax) (in 2020 – 9.7%). In addition,
a permanent growth rate of 1% was assumed (in 2020 - 0%).
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 operations
in particular (subscribers, ARPU and traffic costs).
58
Notes to consolidated financial Statements as of December 31, 2021
The valuation was conducted by an external valuator. Based on the
valuation as explained above, Bezeq International's enterprise value
amounted to a negative amount of approximately NIS 196 million (as of
December 31, 2020, total negative enterprise value in the amount of NIS
145 million). In light of the negative enterprise value, the value of Bezeq
International's non-current assets was determined as of December 31,
2021, as their fair value minus exercise costs or zero, whichever is higher.
The fair of value of Bezeq International’s assets minus exercise costs as of
December 31, 2021 Is about NIS 70 million. Accordingly, in 2021 the Group
recognized a loss due to impairment in the amount of approximately NIS
122 million.
The following is a breakdown of the allocation of loss from the impairment
of the Bezeq International’s assets in 2020 and 2021:
2021
2020
NIS millions
NIS millions
Property, plant and equipment and intangible assets
**75
Long-term and short-term advance expenses
Long-term advance expenses for capacities
Rights-of-use of leased assets
Total recognized impairment
*28
*17
**2
122
148
18
110
3
***279
* The expense was presented as operating and general expenses
** The expense was presented as depreciation, amortization and impairment expenses
*** Presented under the item "Impairment loss" in the income statement for 2020
The following is information regarding the manner in which the Group
determined the fair value (at level 3) of the assets minus 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
minus physical wear and tear costs and technological obsolescence minus
costs required to make the sale.
Intangible assets - no material fair value has been attributed to intangible
assets, since most of Bezeq International’s 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 Bezeq International’s 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.
59
Notes to consolidated financial Statements as of December 31, 2021
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.
11. Deferred expenses and non-current investments
December 31,
2021
December 31,
2020
NIS millions
NIS millions
Subscriber acquisition assets, net (see Note 11.3 below)
151
Long-term investment in bank deposits
Deferred expenses (see Note 11.1 below)
Bank deposit used to provide loans to the Company's
employees (see Note 11.2 below)
Derivative instruments
Investments in equity-held investee companies
80
18
36
16
5
630
165
160
37
36
-
4
402
11.1. The following is a list of subscriber acquisition assets:
Subscriber
assets
NIS millions
acquisition
Cost
Balance as of January 1, 2020
Additions
Subtractions
Balance as of December 31, 2020
Additions
Subtractions
Balance as of December 31, 2021
Depreciation and impairment losses
Balance as of January 1, 2020
Depreciation
Subtractions
Balance as of December 31, 2020
Depreciation
Subtractions
Balance as of December 31, 2021
Book value
As of January 1, 2020
As of December 31, 2020
As of December 31, 2021
60
438
137
(98)
477
131
(129)
479
278
132
(98)
312
145
(129)
328
160
165
151
Notes to consolidated financial Statements as of December 31, 2021
11.2. The balance of deferred expenses as of December 31, 2021 is presented net of
impairment of assets. See Note 10.6 regarding impairment of Bezeq International.
11.3. Bank deposit for the provision of loans to Bezeq employees without a repayment
date.
11.4. Transactions for the purchase of indefeasible right of use ("IRU") in underwater
cable capacities by Bezeq International are treated as ongoing service receipt
transactions. Balance of rights-of-use of capacities is presented net of losses from
the impairment of assets. See Note 10.6 regarding impairment of assets in Bezeq
International.
61
Notes to consolidated financial Statements as of December 31, 2021
12. Investee companies
12.1. Subsidiaries
12.1.1. 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 equity of the
subsidiaries as of December 31, 2021:
Bezeq the Israel Telecommunications Corporation Ltd.
B Communications 2 Limited Partnership
Bezeq subsidiaries:
Pelephone Communications Ltd.
Bezeq International Ltd. (see Note 12.3 below)
DBS Satellite Services (1998) Ltd. (see Note 12.2 below)
Bezeq Online Ltd.
26.72%
100%
100%
100%
100%
100%
12.1.2. As of October 11, 2021, all Bezeq shares held by the Company are held
directly by the Company, after on that day all Bezeq shares held by B
Communications (SP2) Ltd. (a company wholly-owned and controlled by B
Communications) were
the direct holding of B
Communications (SP1) Ltd., which is wholly-owned and controlled by the
Company). Following the transfer of Bezeq’s shares to the Company, the
companies B Communications (SP2) Ltd. and B Communications (SP1) Ltd.
were closed.
transferred
to
12.1.3. Structural change in Bezeq's subsidiaries
Following on from previous resolutions adopted by Bezeq as well as
Bezeq's subsidiaries - Bezeq International and DBS (“the Subsidiaries")
regarding a structural change plan in which Bezeq International's private
activities were to merge with and into DBS, and the spin-off of Bezeq
International’s ICT activities into a new company wholly owned by Bezeq
(“the merger / spin-off plan"). On March 16, 2022, Bezeq's Board of
Directors decided, following the resolutions adopted that day by the Boards
of Directors of Bezeq's subsidiaries, to approve the cancellation of the
merger / spin-off plan, and to approve an alternative plan for Bezeq's
subsidiaries to be presented within 60 days, according to which Bezeq
International's ISP activity in the private segment will be reduced following
the abolition of the separation between broadband infrastructure service
and Internet access service (ISP) (as described in Note 12.3 below), and
ISP activity will be established in DBS for the purpose of selling "triple"
packages to customers (“the alternative outline"), while striving to achieve,
as far as possible, the strategic, business and economic purposes that
formed the basis for the resolution to promote structural change, which
were, among other things, adapting the activity to the structure of the
industry and the changing regulation, focusing on increasing revenues and
growth, and increasing the operational synergy and streamlining.
62
Notes to consolidated financial Statements as of December 31, 2021
According to this alternative outline, the business purposes that were at the
basis of the spin-off / merger plan will be achieved, as DBS is expected to
become a "triple" sales arm that combines fiber and television, and at the
end of the move Bezeq International will become a growth-focused ICT
company. In addition, this alternative outline has the potential for a
significant reduction in Bezeq International's expenses and investments in
the ISP field in parallel with an accelerated reduction in this activity.
Bezeq and its subsidiaries of Bezeq are unable to assess, at this stage,
whether all the conditions required for the implementation of the alternative
outline will be met, and when they would be met, if they are met, and
accordingly there is no certainty that the alternative outline will materialize
in the manner described above or at all.
12.2. DBS Satellite Services (1998) Ltd.
12.2.1. 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
to DBS (the "Purchase
Transaction").
that Eurocom provided
loans
Upon completion, Bezeq
the cash
consideration for the Purchase Transaction in the amount of NIS 680 million.
to Eurocom DBS
transferred
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).
63
Notes to consolidated financial Statements as of December 31, 2021
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, 2021, given the solvency of Eurocom DBS, no repayment
of the advances is expected.
12.2.2. As of December 31, 2021, DBS has accumulated a loss balance of NIS
8,251 million since its inception, an equity deficit of NIS 48 million and a
deficit in working capital of NIS 198 million. Also, as of December 31, 2021,
DBS has an off-balance sheet liability in the cumulative amount of
approximately NIS 1,058 million for the purchase of space segments,
content, property, plant and equipment and other assets up to and including
2026 (see Note 18 for details).
Based on the valuation conducted as of December 31, 2021, DBS’s total
enterprise value is negative in the amount of NIS 271 million (compared with
a negative enterprise value of NIS 145 million as of December 31, 2020)
(see Note for details. 10.5), which stems, among other things, from DBS’s
forecasts to continue to accumulate operating losses in the years 2023
onwards.
On November 29, 2021, the Company's Board of Directors approved the
issuance of an irrevocable commitment by the Company to DBS to provide
a credit facility or investment in equity, in the amount of approximately NIS
40 million until December 31, 2022 (which has not yet been exercised as of
the date of approval of these Statements).
In the opinion of DBS's Management, the sources of funding available to it,
which include, inter alia, the continuation of the existing policy of working
capital deficit, credit facility and capital investment framework from the
Company, will satisfy the needs of DBS's operations until December 31,
2022.
12.2.3. For the assessment of Note 10.5 regarding impairment of assets recognized
by DBS in the financial statements as of December 31, 2021.
12.3. Bezeq international Ltd.
12.3.1. Separation between Broadband Infrastructure Service and Internet Access
Service (ISP):
On June 20, 2021, a decision by hearing by the Minister of Communications
was received regarding the separation between broadband infrastructure
service and Internet access service (ISP) will be abolished, including iun
relation to the private customers. According to the decision, starting from the
effective date, the restriction on infrastructure owners to offer Internet
access service to private customers will be lifted. Also, it is no longer
possible to sell services in a split format, but customers who receive a
service in a split / semi-split configuration will be able to continue to consume
64
Notes to consolidated financial Statements as of December 31, 2021
the Internet services in this way. It should be noted that the abolition of said
separation is expected to reduce the phenomenon of subscribers who do
not use ISP services, as also stated in the Ministry of Communications'
publication.
The move, which is expected to harm Bezeq International's results, was
taken into account in the cash flow forecast, which was used to examine
impairment as described in Note 10.6 above.
12.3.2. See Note 10.6 below regarding impairment of assets recognized by Bezeq
International in the statements as of December 31, 2021.
12.4.
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.
12.5. 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 equity and
voting rights in the subsidiary
12.6. Bezeq's dividend distribution policy
After the date of the financial statements, on March 22, 2022, Bezeq's Board
of Directors decided to approve a new dividend distribution policy for Bezeq,
according to which Bezeq will distribute to its shareholders, every six
months, a cash dividend of 50% of Bezeq's consolidated financial
statements. This is starting from the next distribution (for the second half of
2021). The implementation of the dividend distribution policy is subject to
the provisions of any law, including the distribution tests set forth in the
Companies Law, all taking into account the expected cash flow, Bezeq
needs and liabilities, Bezeq's cash balances, plans and position, as they will
be from time to time, and subject to the approval of the General Meeting of
Bezeq's shareholders regarding any specific distribution, as provided in
Bezeq's Articles of Association.
12.6.1.
65
Notes to consolidated financial Statements as of December 31, 2021
The approval of Bezeq's dividend policy does not obligate Bezeq to
distribute a dividend to Bezeq's shareholders, and any specific distribution
will be examined in accordance with the terms of implementation of the
dividend distribution policy as stated above. In addition, the approval of the
aforesaid policy does not prevent Bezeq's Board of Directors from
periodically reviewing the policy of distributing dividends to Bezeq
shareholders, taking into account, inter alia, the provisions of the law,
Bezeq's business situation and its capital structure and balance, its level of
debt and credit rating, and the ongoing maximization of value to Bezeq's
shareholders through the regular distribution of dividends.
Bezeq's Board of Directors considers it important to maintain the balance
between ensuring Bezeq's financial strength and stability, while maintaining
Bezeq's current rating group [AA] over time, and continuing to maximize
value for its shareholders through regular dividend distribution.
Bezeq's Board of Directors was presented with, among other things,
analysis and results of professional work as performed by Professor Aharon
(Roni) Ofer, Bezeq's and the Bezeq Group's forecasts, as well as sensitivity
analyzes for unforeseen deterioration in Bezeq's and Bezeq Group
businesses. After Bezeq's Board of Directors examined all of the above, the
Board of Directors determined that this decision reflects the correct balance
between these needs as described above.
12.6.2. Following the decision regarding Bezeq's dividend distribution policy as
detailed in Note 12.6.1 above, on March 22, 2022, Bezeq's Board of
Directors decided to recommend to the General Meeting of Bezeq
shareholders to distribute a cash dividend to Bezeq shareholders in the total
amount of NIS 240 million. The said dividend has not yet been approved by
the General Meeting of Bezeq's shareholders. The Company's expected
share in the dividend to be distributed by Bezeq, subject to the approval of
the General Meeting of Bezeq's shareholders, is approximately NIS 64
million.
66
Notes to consolidated financial Statements as of December 31, 2021
12.7. Non-controlling interests
The table below presents data regarding the investee companies 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
%
Current
assets
Non-current
Current
Non-current
Book value of
non-
controlling
assets
liabilities
liabilities
Net assets
interests
NIS millions
2021
2019
73.28
73.28
4,138
3,447
10,837
10,835
3,773
3,559
9,323
10,091
1,878
632
1,
454
534
Year ended December 31
Other
Other
comprehensive
Profit (loss)
income (loss)
attributed to
attributable to
Net profit
comprehensive
Comprehensive
non-controlling
non-controlling
Revenue
(loss)
profit
profit (loss)
interests
interests
NIS millions
2021
2020
2019
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
2021
2020
2019
2,
839
3,220
2,924
1,)
(646
)
(839
)
(883
)
1,060
(
)
1,941
(
)
2,531
(
-
-
-
133
440
)
(490
67
Notes to consolidated financial Statements as of December 31, 2021
13. Debentures and loans
13.1. Composition:
Current liabilities
Current maturities of debentures
Current loan maturities
Non-current liabilities
Debentures
Loans
December 31,
2021
December 31,
2020
NIS millions
NIS millions
897
83
980
7,245
1,823
9,068
583
202
785
7,578
1,907
9,485
Total debentures, loans and credit
10,048
10,270
68
Notes to consolidated financial Statements as of December 31, 2021
13.2. Terms of debentures and loans
December 31,
2021
Book
balance
NIS
millions
Par
value
NIS
millions
December 31, 2020
Book
balance
NIS
millions
Par
value
NIS
millions
Interest rates
range
Loans from banking corporations in Bezeq:
Non-linked loans, bearing fixed interest rates
Non-linked loans, bearing variable 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
712
300
1,012
894
-
894
711
300
1,011
894
-
894
1,118
-
1,118
974
17
991
1,113
-
1,113
975
17
992
6.85%
3.2%
-
P+0.53%
4%-
3.22%
5.25%
1,906
1,905
2,109
2,105
Total loans in Bezeq
Debentures 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
Series D - Non-linked, bearing fixed interest rates
Total debentures issued to the public in the
Company
951
-
-
1,035
1,010
-
-
1,040
1,716
54
100
-
1,986
2,050
1,870
Debentures issued to the public by Bezeq:
Series 6 - linked to the consumer price index,
bearing fixed interest rates
540
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 *
Series 13 - Non-linked, bearing fixed interest rates
Series 14 - linked to the consumer price index,
bearing fixed interest rates
Total debentures issued to the public in Bezeq
36
2,17
6
291
839
1,25
7
198
198
6,156
36
2,145
882
835
1,269
200
200
6,067
1,055
71
2,186
894
841
1,244
-
-
6,291
Total debentures
8,142
8,117
8,16
1
3.85%
3.85%
3.85%
3.65%
3.7%
Annual avg.
duration+0.4%
3.65%
2.2%
3.2%
1.7%
2.79%
0.58%
1,856
58
100
-
2,014
1,000
71
2,145
882
835
1,269
-
-
6,202
8,216
Total loans and debentures
10,048
10,022
10,270
10,321
* After the date of the financial statements, on January 23, 2022, Bezeq made a partial early redemption on
the initiative of Bezeq's debentures (Series 9) in the amount of approximately NIS 370 million par value.
69
Notes to consolidated financial Statements as of December 31, 2021
13.3. Debentures issued by the Company
13.3.1. Debentures Series C, D, E and F
On September 18, 2016, the Company issued Series C debentures 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 debenture principal was due in five installments as follows: four
equal annual installments at the rate of 7.5% of the debenture 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 debenture principal to be paid on November 30, 2024.
Also, the debentures 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
debentures 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 debentures for approximately NIS 118 million, and NIS 240 million par
value Series C debentures 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 debentures:
1. An early repayment of NIS 614 million par value for Series C debentures,
including the accrued interest up to that date.
2. A private offering of NIS 310 million par value of Series C debentures 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 debentures 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 debentures on 26.34% of
Bezeq's share equity.
7. Completion of a private placement of NIS 100 million par value Series E
debentures (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.
70
Notes to consolidated financial Statements as of December 31, 2021
The series of debentures 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 debentures 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.
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 debentures from the original C series, and recognized new
debentures 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.
On July 6, 2021, the Company held a tender for the purchase of Series F
debentures, in the framework of which approximately NIS 394 million par value
was issued to institutional entities and the public in exchange for approximately
NIS 394 million from Series F. The annual interest rate (unlinked) determined in
the tender is 3.65%. The interest on the Series F debentures will be paid in two
semi-annual installments on May 31 and November 30 of each year from
November 2021 to November 2026. The debenture principal will be repaid in
one installment on November 30, 2026. The Company used the net
consideration from the issuance of Series F debentures to make early
repayments of its existing debentures as of the same date as detailed below.
On July 19, 2021, the Company made a full early repayment of the Series D
debentures principal (plus accrued interest up to the due date) and a full early
repayment of the Series E debentures principal (plus accrued interest up to the
maturity date and an early repayment penalty as defined in the series of series
E). In addition, the Company made a partial early repayment of approximately
NIS 226 million in respect of the Series C debentures (plus accrued interest up
to the due date). Following the early repayments, Series D and E were repaid
in full and delisted from trading on the Tel Aviv Stock Exchange.
On December 7, 2021, the Company issued to institutions and the public
approximately NIS 485 million in Series F debentures for approximately NIS 488
million in Series E. The Company used the net consideration from the issuance
of Series F debentures to make a partial early repayment of approx. NIS 471
million in respect of its existing Series C debentures for that date (plus accrued
interest up to the due date and an early repayment penalty as defined in the
trust deed of the Series C debentures).
On December 9, 2021, the Company held a private placement of approximately
NIS 161 million in Series F debentures for approximately NIS 161 million. The
Company used the net consideration from the issuance of Series F debentures
to make a partial early repayment of approximately NIS 157 million in respect of
Series C debentures existing on that date (plus accrued interest up to the due
date and an early repayment penalty as defined in the trust deed of the C series
debentures).
71
Notes to consolidated financial Statements as of December 31, 2021
On January 10, 2022, the Company exchanged approximately NIS 417 million
in Series C debentures for approximately NIS 432 million in Series F
debentures.
In accordance with the terms of the C and F debenture series, the Company
undertook to deposit semi-annual interest in respect of the various debenture
series in a trust account for the benefit of the bondholders. As of December 31,
2021, approximately NIS 39 million is deposited in the trust accounts for the
benefit of the holders of Series C and F debentures.
As of December 31, 2021, the nominal value of Series C debentures that are
not held by the Company is NIS 1,010 million and the nominal value of Series F
debentures that are not held by the Company is NIS 1,040 million.
The following are the financial criteria that the Company has committed to in
connection with the debenture series:
13.3.2.
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 debenture fund.
As of December 31, 2021, the Company complies with the debt-to-asset ratio.
13.3.3.
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 will not exceed 65% for Series
C debentures and will not exceed 70% for Series F debentures.
The debt to asset ratio after the distribution will not exceed 65% for Series
C debentures and will not exceed 70% for Series F debentures.
13.3.4.
Lien on Bezeq shares:
Series C and E have a first-class pari-passo lien on 728,373,713 Bezeq
shares held by the Company.
72
Notes to consolidated financial Statements as of December 31, 2021
13.3.5. Control of Bezeq:
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 performance lower
than the aforementioned holding rate.
13.3.6. Control of the Company
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.
Change in the terms of the Company’s debenture series
13.3.7. 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 (minus the issue expenses)
will first repay debentures (Series D) and debentures (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 debentures
(Series E) are in circulation).
b. After the full repayment of the debt in respect of debentures (Series D)
and debentures (Series E), the balance of net proceeds from the issue
of the additional debt will be used for the purpose of repayment of the
debentures (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 debentures (Series C) and the payment of the first
principal in respect of the debentures from the new series as aforesaid
will be only after full repayment of the debentures (Series C).
In addition, the amount of early repayment to be paid to the bondholders in the
event of early repayment of the debentures by the Company has been
amended as follows:
73
Notes to consolidated financial Statements as of December 31, 2021
In relation to the debentures (Series C) - in the case of a partial early
repayment of the debentures (Series C), the price of the partial early
repayment will be the par value of the debentures (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 debentures according to the price of the debentures
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 debentures (Series E), whichever is higher.
74
Notes to consolidated financial Statements as of December 31, 2021
13.4.
13.4.1.
Loans and debentures issued by Bezeq
The following is a list of the terms that Bezeq undertook in relation to the
loans received and the debentures issued:
In relation to the total Bezeq debt, common reasons for immediate
repayment of the debentures 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 Bezeq 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 debentures, for loans from banking
corporations the balance of which as of December 31, 2021 is
approximately NIS 1 billion, and in relation to loans from financial
institutions the balance of which as of December 31, 2021, is approximately
NIS 0.9 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).
13.4.2.
13.4.3.
In relation to Bezeq's public debentures, as well as in respect of loans from
financial institutions in the amount of NIS 0.9 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.
13.4.4. With respect to Bezeq's public debentures, and with respect to loans from
financial institutions in the amount of NIS 0.9 billion, Bezeq undertook to
the lenders to ensure that, as far as it is under its control, such debentures
will be monitored in terms of rating by at least one rating agency, as long
as there are debentures from that series in circulation or loan balance,
respectively.
In relation to debentures from series 9-14, as well as in relation to loans
from financial institutions in the amount of NIS 0.9 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
the
together with
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.
the controlling shareholders and provided
that
13.4.5.
75
Notes to consolidated financial Statements as of December 31, 2021
13.4.6.
In addition, in relation to Series 9-12 debentures, and in relation to loans
from financial institutions in the amount of NIS 1 billion, grounds for
immediate repayment of the debentures 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 debentures / loans on
time (as stated in Article 35H1(a)(1) of the Securities Law).
As of December 31, 2021 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.
76
Notes to consolidated financial Statements as of December 31, 2021
13.5. Activity in liabilities arising from financing activities
Balance as of January 1, 2020
Changes as a result of cash flows from financing
activities
Proceeds from the issuance of debentures and the
receipt of loans, minus transaction costs
Repayment of debentures and loans
Interest paid
Total net cash arising from financing activities
Financing expenses imputed to income statement
Balance as of December 31, 2020
Changes as a result of cash flows from financing
activities
Proceeds from the issuance of debentures and the
receipt of loans, minus transaction costs
Repayment of debentures and loans
Interest paid
Total net cash arising from financing activities
Financing expenses imputed to the income statement
Balance as of December 31, 2021
Debentures
(including
accrued
interest)
Loans
(including
accrued
interest)
NIS millions
NIS millions
8,054
3,401
Total
NIS
millions
11,455
718
)
577
(
)
278
(
)
137
(
268
8,185
1,430
)
1,572
(
)
265
(
)
407
(
387
8,165
-
)
1,273
(
)
114
(
)
1,387
(
103
2,117
300
)
500
(
(68 )
)
268
(
63
718
)
1,850
(
)
392
(
)
1,524
(
371
10,302
1,730
)
2,072
(
)
333
(
)
675
(
450
1,912
10,077
77
Notes to consolidated financial Statements as of December 31, 2021
14. Trade and other payables
Trade payables
outstanding debts and expenses payable *
Total suppliers
Current payables including derivatives
Liabilities to employees and other liabilities due to salary and wages
Deferred income
Commitment to payment for frequencies **
Institutions
Derivative instruments
Accrued interest
Current tax liabilities
Other
Total current trade payables including derivatives
December
2021
31,
December
2020
31,
NIS millions
NIS millions
955
955
352
158
87
110
35
29
5
24
800
940
940
397
168
-
66
51
31
80
33
826
Total current trade and other payables
1,755
1,766
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 suppliers and trade payables
65
69
-
-
8
142
1,897
72
75
86
66
8
307
2,073
* Of which the balance of suppliers who are related parties and stakeholders as of December 31, 2021
is NIS 4 million (as of December 31, 2020 - NIS 3 million).
** See Notes 10.1 and 3.14 regarding frequency tender and government grant
78
Notes to consolidated financial Statements as of December 31, 2021
15. 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, 2021
112
Provisions formed
Provisions exercised
Provisions canceled
Balance as of December 31,
2021
Presented in the statement of
financial position as follows:
Current provisions
Non-current provisions
6
(23)
(31)
64
64
-
64
For details regarding legal claims, see Note 17.
1
1
(2)
-
-
-
-
-
56
3
(1)
(4)
54
5
49
54
169
10
(26)
(35)
118
69
49
118
79
Notes to consolidated financial Statements as of December 31, 2021
16. Employee benefits
Employee benefits include severance pay, post-employment benefits, other
long-term benefits, and short-term benefits. See also Note 26 regarding share-
based payment.
16.1. Composition of liabilities in respect of employee benefits
2021
2020
Note
NIS millions NIS millions
16.4
16.5.1
16.5.2
16.5.3
16.3.3
16.3.3
16.5.2
16.3.1
16.3.2
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
126
150
98
100
29
7
510
139
-
60
33
11
243
753
122
161
87
62
43
7
482
140
108
58
29
-
335
817
223
(163)
60
214
(156)
58
80
Notes to consolidated financial Statements as of December 31, 2021
16.2. Defined deposit plans
16.2.1. 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
218
219
223
2021
2020
2019
NIS millions
NIS millions
NIS millions
16.2.2.
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 note 16.3.1 below).
16.3. Defined benefits plan
16.3.1.
16.3.2.
Liabilities in respect of defined benefit plans in the Group include the
following liabilities:
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.
16.3.3. 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.
81
Notes to consolidated financial Statements as of December 31, 2021
16.4. 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 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).
16.5. Early retirement and dismissal benefits
16.5.1. 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 6 to the agreement dated December
2020, Bezeq was entitled, at its discretion, to terminate the employment of
up to 50 permanent and veteran employees in each of the years 2021 - 2026
(the Company’s right accumulates over the years), which is in addition to the
retirement quota of about 300 permanent employees remaining from the
previous agreement, the employment of whom the Company will be able to
terminate at the end of the current 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 November 11, 2021, Bezeq's Board of Directors approved, as part of the
implementation of a streamlining plan in the Company, the retirement of
about 50 permanent employees Veterans in an early retirement route with a
total cost of approximately NIS 71 million. In light of the aforesaid, Bezeq
recorded in its financial statements for the fourth quarter of 2021 an expense
in the amount of approximately NIS 67 million, and is due for repayment in
2022.
16.5.2. 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, 2021 is NIS 100 million.
16.5.3. Pelephone, Bezeq International and DBS are bound by collective bargaining
agreements between them and the Histadruyot and the employees
committees. The balance of the provision for streamlining and grant
payments in respect of these agreements as of December 31, 2021 is
approximately NIS 43 million.
82
Notes to consolidated financial Statements as of December 31, 2021
16.6.
Actuarial assumptions
The main actuarial assumptions regarding defined benefit plans as of the
reporting date are:
16.6.1. 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.
16.6.2. 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.
16.6.3. 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, 2021
December 31, 2020
Average discount rate Average discount rate
3%
3.3%
2.7%
2.8%
16.6.4. 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 2022 until 2026,
resulting from the collective bargaining agreement signed in
August 2015 and in December 2020.
An average update of 5.8% for young employees gradually
decreases to 2.7% at age 66. (In 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 1% to 2.95%.
83
Notes to consolidated financial Statements as of December 31, 2021
16.6.5. Details of the weighted duration of liabilities in respect of post-
employment main benefits:
Severance Pay
Benefits for retirees
December 31,
2021
December 31, 2020
Years
Years
12
16
12
16
16.7. 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.
December 31,
2021
December 31,
2020
NIS millions
NIS millions
(32)
33
(14)
(3)
(35)
34
(20)
(3)
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
17.
Liabilities
17.1. Claims against the Company
17.1.1 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
debentures 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.
17.1.2 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
84
Notes to consolidated financial Statements as of December 31, 2021
received by the Company is charged directly to the Company's shareholders'
equity under the loss balance item.
17.1.3 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.
17.1.4. In June 2017, two motions for approval of a class action lawsuit in the total
amount of NIS 1.8 billion were filed against the Company, Bezeq, group
officers and companies from Bezeq’s then controlling group regarding the
purchase of DBS’s shares by Bezeq from Eurocom. In accordance with a
court decision, the filing of a unified motion is expected to replace these two
motions. The said procedure was delayed at the request of the Attorney
General several times, while as of this date, the procedure was delayed until
July 2022. According to the assessment of the Company's legal counsel, at
this preliminary stage, it is not possible to assess the chances of acceptance
of the motion, see also note 17.2 below.
17.1.5 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.
17.1.6. In July 2021 the respondents filed a response alleging that the motion for
approval was unfounded, inter alia, due to the fact that the information
alleged in the motion for approval as required for publication did not meet the
statutory standards
reporting obligation and was
accompanied by an arrangement procedure and professional consultants
and supervised by the Board of Directors, and therefore all appropriate
measures have been taken to comply with the provisions of the law and that
these findings contradict the applicant's contention.
for establishing
85
Notes to consolidated financial Statements as of December 31, 2021
In December 2021 the Company filed a motion for in limine dismissal of the
motion for approval against it, inter alia, because the motion for approval
does not specify claims against the Company, and because for most of the
relevant period the Company was a dual company, so the law applicable to
it is US law, and because the motion is not supported by an opinion of an
expert on foreign law.
After several hearings for responses and a pre-trial hearing in February 2022,
a decision was made in which the parties were asked to update whether they
wished to hold a mediation, an additional preliminary hearing or to coordinate
a hearing. The parties have announced that they are working to coordinate
deadlines for evidentiary hearings.
At this stage, the opinion of the Company's legal counsel is that the chances
of dismissal of the claim on its merits are higher than its chances of
acceptance.
17.1.7. 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 minus 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.
In January 2021, the Company submitted a motion for in limine dismissal of
the motion for approval and a motion for extension. In April 2021, a hearing
was held on the motion for dismissal, in which it was determined that only
after a date has been set for the hearing of the request for disclosure of
documents, a date will be set for submitting answers to the request and
another hearing will be scheduled. As of this date, a hearing for the disclosure
of documents is scheduled for April 2022 and a date for a hearing is expected
to be scheduled for May 2022. The opinion of the Company's legal counsel
is that at this early stage, in which claims have not yet been filed on behalf of
the Company, they are unable to assess the chances of acceptance of the
motion for approval.
86
Notes to consolidated financial Statements as of December 31, 2021
17.2. 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
note: "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 15),
where provisions were required to cover the exposure as a result of such Legal
Claims.
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, 2021, 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 3.6 billion. In addition, there is an additional
exposure in the amount of about NIS 2.5 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.
For updates regarding subsequent changes, see Note 17.3 below.
87
Notes to consolidated financial Statements as of December 31, 2021
The following is a description of the contingent liabilities of Bezeq Group valid as
of December 31, 2021 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 the
Group companies.
Claims of
enterprises and
companies
Claims in which the liability of the
Group companies' liability is claimed in
connection with their operation and / or
their investments.
Claims of
employees and
former
employees of the
Group
companies
State and
authority claims
Miscellaneous
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 the Group companies and
various financial disputes regarding
funds paid by the Group companies to
the authorities (including property tax
payments). See also Note 6.6.
Other legal claims, including tort claims
(except for claims in which there is no
dispute as to the existence of
insurance coverage), real estate,
infrastructure, etc.
Total claims against Bezeq and its subsidiaries
64
2,787
663
-
752
)1(1,813
-
1
-
-
-
7
-
113
23
64
23
3,563
88
Notes to consolidated financial Statements as of December 31, 2021
(1) The total includes 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 DBS Ltd. 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 criminal proceedings that follow the investigation of the Securities
Authority (as described in Note 1.3) and at the request of the Attorney General
at this stage, until September 6, 2021 (as described in Note 1.3).
17.3. After the date of the financial statements, a motion for approval of a class
action without a financial estimate was submitted against Bezeq Group
companies. As of the date of approval of the statements, the chances of the
motion have not yet been assessed. Also, three claims without monetary
valuation as well claims for which the exposure was approximately NIS 501
million were terminated.
18. Engagements
18.1. 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
2022
2023
2024
2025
2026 onwards
Space segments
NIS millions
77
78
60
56
9
280
Content and
Copyright
NIS millions
394
175
38
-
-
607
Total
NIS millions
471
253
98
56
9
887
18.2. According to an agreement with Space Communications Ltd. ("Space")
from 2013, as amended (including amendment dated July 2021), DBS
leases space segments in satellites from the "Amos" series ("Space
Agreement").
In accordance with the provisions of the Space Agreement, 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 is leased to DBS
until February 2024, while DBS may extend the lease period by an
additional six months.
89
Notes to consolidated financial Statements as of December 31, 2021
The leased space segments - according to the Space Agreement, subject
to unavailability events and until the end of the “Amos 7” satellite leasing
period, 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 after which DBS will 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 - According to the Space Agreement,
DBS may announce an early termination without cause of the Space
agreement, subject to 12 months' prior notice and payment of the lease in
"Amos 7" plus payment of parts of the lease balance in the space segments
in "Amos 3" ".
18.3. 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, 2021 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 22 million.
18.4. In April 2021, a new contract agreement entered into force, between
Pelephone and International Distribution Apple (“Apple") for the purchase
and distribution of iPhones, according to which Pelephone undertook to
purchase a minimum annual amount of devices for an additional three years
at prices that will be valid at the time of actual purchase.
18.5. For the purpose of its activities, Bezeq International procures irrevocable
rights-of-use in capacities (IRU) from service providers. During the first
quarter of 2021, Bezeq International signed an agreement to extend the
periods of use of the capacities until July 2030 with the supplier. In respect
of the rights-of-use, Bezeq International pays payments spread over annual
payments throughout the period of use of the capacities. The balance of the
liability under the agreement as of December 31, 2021 is USD 10.1 million.
18.6. The Bezeq Group companies, as of December 31, 2021, have contracts for
the purchase of end equipment, property, plant and equipment, intangible
assets and additional assets in the amount of approximately NIS 449
million.
90
Notes to consolidated financial Statements as of December 31, 2021
18.7. Further to the aforesaid in Note 9.4 above regarding the deployment of a
fiber optic network by Bezeq, in accordance with the provisions of Article
14C of the Communications Law, with the amendment of the Bezeq license,
the communications companies including Bezeq and its subsidiaries
Pelephone, DBS and Bezeq International are required to pay 0.5% of their
annual revenue during the deployment period to the incentive fund. The
incentive fund will be managed by the Accountant General in the Ministry of
Finance, for the benefit of encouraging fiber deployment while participating
in its financing in statistical areas that are not included in the deployment
areas chosen by Bezeq. The Minister of Communications, with the consent
of the Minister of Finance and with the approval of the Economy Committee,
may change this rate.
18.5. For information on engagements with related parties, see Note 29.
19. 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.
19.1. 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 132 million (of which
approximately 55 million are linked to the consumer price index).
19.2. The Bezeq Group companies provided bank guarantees to third parties in
the total amount of approximately NIS 199 million (including guarantees
in the amount of approximately NIS 120 million in respect of the Sakia
complex. For details, see Note 6.6).
19.3. Restrictions on the creation of liens on the assets of Bezeq Group
companies:
19.3.1. 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.
91
Notes to consolidated financial Statements as of December 31, 2021
19.3.2. 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 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.
19.3.3. 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.
19.3.4. With
to
respect
license,
the DBS broadcasting
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).
92
Notes to consolidated financial Statements as of December 31, 2021
19.4. Regarding the conditions that the Company undertook in connection with
loans and credit, see Note 13.
20. Equity
20.1. Share capital
Ordinary shares of NIS 0.1 par value each
Number of ordinary shares
2021
2020
Issued and paid up capital as of January 1 116,316,563
116,316,563
Shares issued during the year
)
1,457,573
(
-
Issued and paid up capital as of December
31
Registered capital as of December 31
114,858,990
116,316,563
300,000,000
150,000,000
* As of December 31, 2021, 1,476,803 of the Company's shares are held as
treasury shares.
20.2. 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 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.
20.3. On March 31, 2021, the General Meeting of the Company approved the
increase of the registered share equity of the Company so that after the
said increase of registered equity, the registered equity of the Company
will be NIS 30,000,000, divided into 300,000,000 ordinary shares of NIS
0.1 each, and accordingly, an amendment to the Company's Articles of
Association was approved.
93
Notes to consolidated financial Statements as of December 31, 2021
20.4. On November 30, 2021, the Company's Board of Directors approved
the repurchase of its shares in the amount of up to NIS 30 million from
December 1, 2021 until: (1) the purchase of shares of the Company in
the amount of NIS 30 million; Or (2) March 1, 2022, whichever is earlier.
As of December 31, 2021, the Company purchased a total of 1,457,573
of its shares as part of the acquisition plan for approximately NIS 16
million.
See Note 32 on the purchase of the Company's shares after the
balance sheet date and the completion of the repurchase plan.
On March 23, 2022, the Company's Board of Directors approved a
repurchase of its shares in the amount of up to NIS 20 million from March
24, 2022 until the earliest of: (1) the purchase of shares of the Company in
the amount of NIS 20 million; Or (2) May 12, 2022.
21. Revenues
For the year ended December 31
2021
NIS millions
2020
NIS millions
2019
NIS millions
Fixed Line 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
Internet (ISP), international communications,
network endpoint services and ICT solutions–
Bezeq International
Other
Total revenues
1,562
891
844
318
230
3,845
1,606
643
2,249
1,270
1,186
271
8,821
1,537
981
785
288
222
3,813
1,550
577
2,127
1,286
1,217
280
8,723
1,497
1,017
745
273
225
3,757
1,674
642
2,316
1,344
1,283
229
8,929
94
Notes to consolidated financial Statements as of December 31, 2021
22. Operating and general expenses
For the year ended December 31
2021
NIS millions
2020
NIS millions
2019
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 *
717
803
553
546
238
348
60
776
747
589
471
246
303
50
757
806
644
502
271
270
71
3,265
3,182
3,321
* Operating and general expenses are presented minus expenses incurred in 2021 in respect of
investments in property, plant and equipment and intangible assets in the amount of NIS 49
million (in 2020 approximately NIS 38 million and in 2019 approximately NIS 43 million).
23. Salaries
Total salary and ancillary expenses
Share-based payment
Deducting salary attributed to investments in
property, plant and equipment and intangible assets
For the year ended December 31
2021
2020
2019
NIS millions
NIS millions
NIS millions
2,416
27
)
555
(
1,888
2,442
-
)
548
(
1,894
2,476
-
)
539
(
1,937
24. Other operating expenses (income), net
For the year ended December 31
2021
2020
2019
NIS millions NIS millions
NIS millions
Capital gain (mainly from sale of real estate)
)175(
Receipts from a compromise agreement
Termination of an employee-employer relationship in
early retirement in Bezeq (see Note 16.5.1)
Provision for a collective bargaining agreement signing
grant in Bezeq (see Note 16.5.1)
Termination of an employer-employee relationship in
early retirement and a streamlining agreement in
Pelephone, Bezeq International and DBS (Note 16.5.3)
Provision for claims
Other expenses (income)
Profit from the sale of an investee (see Note 12.4)
Other operating expenses (income), net
)5(
95
-
37
)23(
)6(
-
)77(
(18 )
(9)
64
40
9
11
(2)
(22 )
73
)
475
(
-
109
-
167
10
1
-
)
188
(
95
Notes to consolidated financial Statements as of December 31, 2021
25. Financing expenses (income), net
For the year ended December 31
2021
2020
2019
NIS millions NIS millions NIS millions
Interest expenses in respect of financial liabilities
395
Financing expenses in respect of benefits to employees 7
Costs due to early repayment of loans and debentures
(see Note 13)
34
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
Total financing expenses
Income from credit grossing in sales
49
40
8
-
533
28
Income from change in debentures terms (see Note 13)
-
Other financing income
Change in the fair value of financial assets measured at
fair value through statement of income
Total financing income
Financing expenses, net
* Reclassified
26. Share-based payment
26.1.
Plan terms
16
11
55
478
*
382
8
65*
23
30
6
11
525
30
-
15*
6*
51
474
458
89
93
46
29
14
9
738
29
191
32*
14*
266
472
During 2021, Bezeq allocated options to officers, managers and senior
employees in Bezeq and its subsidiaries. The options were allocated to
each offeree in three grants, each grant at a rate of one-third of the total
options allocated to the offeree. Each grant will mature in four annual
installments, with a different exercise price set for each grant. Exercise
of each option is subject to the condition that after the maturity of the
option, the price conditions for the exercise of the option were met (the
average closing price of a Bezeq share in a period of at least thirty 30
consecutive trading days prior to the examination is equal to the price
that is a condition for the exercise or higher). The following is a list of
exercise prices and share price targets for exercise:
Exercise price
NIS 3.72
NIS 4.46
NIS 5.35
price
exercise
Share
condition
NIS 5
NIS 5.75
NIS 7
Grant 1
Grant 2
Grant 3
96
Notes to consolidated financial Statements as of December 31, 2021
26.2.
Change in the number of option deeds
Options granted throughout the year
Options canceled during the year due to the departure of the offerees
Balance in turnover at the end of the period
Can be exercised at the end of the period (subject to meeting the
conditions of the share exercise price)
Number of options
2021
Millions
62
(2)
60
15*
* As of the date of approval of the Statements, approximately 5 million options met the terms
of the share price and are exercisable.
26.3.
Details regarding the measurement of the fair value of a share-
based payment plan
The fair value of the options granted, which was estimated by an external
valuator while applying the Monte Carlo model, is approximately NIS 46
million, in accordance with the vesting period and the exercise conditions
as detailed above. The following are the main parameters used to
assess the value:
Bezeq
Chairman of
the Board of
Directors
Bezeq CEO
CEO of
Pelephone,
Bezeq
Internationa
l and DBS
Executives
and senior
employees of
Bezeq
Number of options (millions)
The fair value at the time of the
grant (NIS million)
12
9.3
9
6.9
9
6.9
32
23
Share price
Predicted volatility
NIS 3.43
29.82%
NIS 3.43
29.82%
NIS 3.43
29.82%
Risk-free interest rate
Dividend yield
Predicted
early
coefficient
Duration of options
Churn rate after vesting
exercise
0.54%
A zero
dividend
yield was
2.8
assumed
6.9 years
0%
0.54%
A zero
dividend
yield was
2.8
assumed
6.9 years
0%
0.54%
A zero
dividend
yield was
2.8
assumed
6.9 years
0%
0.54%
NIS 3.3-3.45
29.79%
-
29.83%
0.79%
-
A zero
dividend yield
was assumed
2.2
7-8 years
0%
26.4.
Salary expenses recognized by the Bezeq Group in respect of
share-based payment
רבמצדב 31 םויב המייתסהש הנשל
2021
2020
2019
NIS millions
NIS millions
NIS millions
Salary expenses
27
-
-
97
Notes to consolidated financial Statements as of December 31, 2021
26.5. Options granted to the CEO of the Company
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
General Manager, 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
and 2021 amounted to approximately NIS 280,000 in each of the years.
27. Profit (loss) per share
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
Balance as of January 1
Impact of shares issued during the year
Weighted average of common shares (basic
and diluted) as of December 31
2021
129
116
-
116
2020
157
116
-
116
2019
)
853
(
30
13
43
Basic and diluted profit (loss) per share
(NIS)
1.11
1.35
)
19.75
(
98
Notes to consolidated financial Statements as of December 31, 2021
28. Segmental 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 21). 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 Israel Telecommunications Corporation Ltd. – Fixed
Line communications;
2. Pelephone Communications Ltd. - Cellular communications;
3. Bezeq International Ltd. - Internet, international communications,
network endpoint services and ICT solutions) (hereinafter - "Bezeq
International services segment");
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 (in 2019-2020). These activities are not reported as
reportable segments as they do not meet the quantitative thresholds in the
reporting years.
Inter-segmental 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 multi-channel television segment are presented net of
losses from impairment of assets described in Note 10.5. 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.
99
Notes to consolidated financial Statements as of December 31, 2021
28.1.
Activity segments
For the year ended December 31, 2021
Fixed
Line
communi
cation
NIS
millions
3,845
337
4,182
Cellular
communi
cation *
NIS
millions
2,249
40
2,289
Bezeq
Internatio
nal
Services
NIS
millions
1,186
51
1,237
Multi-
channel
TV *
NIS
millions
1,270
-
1,270
Others
NIS
millions
271
6
277
Adjustme
nts
Consolida
ted
NIS
millions
-
)
434
)
434
(
(
NIS
millions
8,821
-
8,821
938
577
173
292
4
(95 )
1,889
External revenues
Inter-segmental revenue
Total revenue
Depreciation, amortization
and impairment
Segment results - operating
profit (loss)
Financial expenses
Financing income
Total financing expenses
(income), net
1,748
357
(15 )
342
42
23
(65 )
(42 )
Segment profit (loss) after
financing expenses, net
Share in profits (losses) of
equity-held investee
companies
Segment profit (loss) before
income taxes
Income taxes
Segment results - net profit
(loss)
Segment assets
Investment in affiliated
companies
Goodwill
Segment liabilities
Investments in property,
plant and equipment,
intangible assets and
deferred expenses
1,406
84
-
1,406
343
1,063
-
84
20
64
9,245
4,452
-
-
11,415
-
-
1,753
22
5
(3)
2
20
-
20
12
8
778
5
-
566
(41 )
4
(3)
1
(42 )
-
(42 )
1
(43 )
27
-
-
-
27
-
27
6
21
1,293
100
-
-
474
-
-
37
58
414
13
175
1,856
533
(55 )
478
)
117
(
1,378
-
-
(
117
)
-
)
117
(
)
874
(
-
1,560
844
1,378
382
996
14,994
5
1,560
15,089
1,197
289
111
188
5
-
1,790
* 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 for a summary of selected data from the financial
statements of DBS.
100
Notes to consolidated financial Statements as of December 31, 2021
For the year ended December 31, 2020
Fixed
Line
communi
cation
NIS
millions
3,813
346
4,159
Cellular
communi
cation *
NIS
millions
2,127
59
2,186
Bezeq
Internatio
nal
Services
NIS
millions
1,217
54
1,271
Multi-
channel
TV *
NIS
millions
1,286
1
1,287
Others
NIS
millions
280
6
286
877
599
149
310
1,705
419
(16 )
403
1,705
(84 )
18
(66 )
(48 )
(84 )
(
241
)
5
(3)
2
)
241
(
(42 )
15
(2)
13
(42 )
1,302
(36 )
)
243
(
(55 )
-
1,302
262
1,040
8,471
-
-
11,764
-
(36 )
(11 )
(25 )
4,371
-
-
1,742
-
(
243
)
32
)
275
(
781
4
-
580
-
(55 )
2
(57 )
1,365
-
-
505
14
44
1
-
1
44
43
-
43
4
39
96
-
-
42
Adjustme
nts
Consolida
ted
NIS
millions
-
)
466
)
466
(
(
NIS
millions
8,723
-
8,723
(91 )
1,858
326
67
36
103
326
1,708
525
)51(
474
1,708
223
1,234
-
223
45
178
(
)
694
-
1,559
893
-
1,234
334
900
14,390
4
1,559
15,526
975
437
123
165
12
-
1,712
External revenues
Inter-segmental revenue
Total revenue
Depreciation, amortization
and impairment
Segment results - operating
profit (loss)
Financial expenses
Financing income
Total financing expenses
(income), net
Segment profit (loss) after
financing expenses, net
Share in losses of equity-
held investee companies
Segment profit (loss) before
income taxes
Income taxes
Segment results - net profit
(loss)
Segment assets
Goodwill
Investment in affiliated
companies
Segment liabilities
Investments in property,
plant and equipment,
intangible assets and
deferred expenses
* 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 for a summary of selected data from the financial statements of DBS.
101
Notes to consolidated financial Statements as of December 31, 2021
For the year ended December 31, 2019
Fixed
Line
communi
cation
NIS
millions
3,757
316
4,073
Cellular
communi
cation *
NIS
millions
2,316
46
2,362
Bezeq
Internatio
nal
Services
NIS
millions
1,283
56
1,339
Multi-
channel
TV *
NIS
millions
1,344
1
1,345
Others
NIS
millions
229
9
238
Adjustme
nts
Consolida
ted
NIS
millions
-
)
428
)
428
(
(
NIS
millions
8,929
-
8,929
861
633
190
334
14
32
2,064
2,142
608
(39 )
569
(99 )
23
(62 )
(39 )
(
196
)
8
(2)
6
(
135
)
17
(5)
12
1,573
(60 )
)
202
(
)
147
(
-
1,573
381
1,192
8,091
-
-
12,466
-
(60 )
(13 )
(47 )
4,088
-
-
1,434
1
-
(
)
202
(45)
(
)
147
2
)
157
(
)
149
(
1,080
-
4
604
1,491
-
-
576
1
1
-
1
-
(4)
(2)
-
(2)
149
-
2
79
(
1,247
)
81
)
158
(
(77 )
)
1,170
(
-
466
738
)
266
(
472
(6)
(3)
(
)
1,170
1,127
(8)
1,452
)
2,297
(
)
1,460
(
)
900
(
1,559
-
843
13,999
1,559
6
16,002
914
335
110
222
9
-
1,590
External revenues
Inter-segmental revenue
Total revenue
Depreciation, amortization
and impairment
Operating segment profit
(loss) results
Financial expenses
Financing income
Total financing expenses
(income), 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
Goodwill
Investment in affiliated
companies
Segment liabilities
Investments in property,
plant and equipment,
intangible assets and
deferred expenses
* Impairment loss in the cellular communications segment is shown as part of the adjustments.
** 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 for a summary of selected data from the financial statements of DBS.
102
Notes to consolidated financial Statements as of December 31, 2021
28.2. Adjustments for reported segments of revenue, income, assets and
liabilities
For the year ended December 31
2021
2020
2019
NIS millions
NIS millions
NIS millions
Revenue
Revenue from reportable segments
Revenue from other segments
8,978
277
Elimination of revenue from inter-segmental sales
)
434
(
Consolidated Revenue
8,821
Income
Operating profit in respect of reportable segments
1,771
Financing expenses, net
Loss (loss write-off) from impairment of assets
(see Note 10.2)
Adjustments for the multi-channel television
segment
Share in losses of affiliated companies
Reducing cost overruns
Profit (loss) due to activities classified in other
category and other adjustments
)
478
(
-
72
-
-
13
8,903
286
)
466
(
8,723
1,338
)
475
(
286
81
-
(22 )
26
Consolidated profit (loss) before income taxes
1,378
1,234
9,119
238
)
428
(
8,929
1,712
)
472
(
)
1,133
(
80
(2)
)
185
(
(8)
(8)
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 10), 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
Liabilities associated with activities classified in the other category
37
Deducting cross-segmental liabilities
Liabilities related to non-reportable segments
Consolidated assets
)
1,407
(
2,251
15,089
103
December 31,
2021
December 31,
2020
NIS millions
NIS millions
15,773
100
1,560
14,992
96
1,559
)
2,280
(
)
2,188
(
1,406
16,559
14,208
1,494
15,953
14,591
42
)
1,242
(
2,135
15,526
Notes to consolidated financial Statements as of December 31, 2021
29. Transactions with stakeholders and related parties
29.1. Identity of stakeholder and related parties
The stakeholders and related parties 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 stakeholders and
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. Balances With stakeholders and related parties
As of December 31
2021
2020
NIS millions
NIS millions
Customers and trade receivables - affiliated company
Related parties, net
Eurocom DBS Ltd. in respect of excess advances paid in
respect of contingent consideration (excluding interest) (see
Note 12.2.1)
1
(2)
99
2
(1)
99
29.3. Transactions with stakeholders and related parties
Revenue
Related parties
From affiliates
Expenses
To related parties
To affiliates
For the year ended December 31
2021
2020
2019
NIS millions
NIS millions
NIS millions
1
(2)
99
1
(2)
2
(1)
99
2
(1)
1
(2)
99
1
(2)
29.3.1. Negligibility procedure in Bezeq Group
Bezeq's Audit Committee decided to adopt guidelines, criteria and
rules for classifying a transaction by Bezeq or its subsidiary with
Company officers or in which an officer of Bezeq has a personal
interest (hereinafter - "transaction with an officer") and a transaction
with Bezeq’s controlling shareholder or in which the controlling
shareholder has a personal interest (hereinafter - "transaction with a
controlling shareholder") as a negligible transaction.
104
Notes to consolidated financial Statements as of December 31, 2021
The criteria set forth in the procedure, as will be updated from time to
time in accordance with its instructions, may be used by Bezeq, inter
alia, for the following purposes:
A. For the classification of the transaction as a negligible transaction
as provided in Regulation 41 (a3) of the Securities Regulations
(Annual Financial Statements), 5771-2010.
B. To examine the scope of disclosure in the periodic report and
prospectus (including shelf offer reports) regarding a transaction
of Bezeq, a corporation controlled by it and its subsidiary or
affiliate with a controlling shareholder, or in which the controlling
shareholder has a personal interest as provided in Regulation 22
of the Securities Regulations, 5730-1970 (hereinafter - "Periodic
Reporting Regulations") and in Regulation 54 of the Securities
Regulations (Prospectus and Draft Prospectus - Structure and
Form), 5729-1969.
C. In addition, the criteria for examining the negligibility of a
transaction specified in this procedure may be used as a tool to
examine the negligibility of other business relationships, such as:
the business relations with a candidate for office as an external
director or independent director being negligible relations as
stated in the Companies Regulations (Matters that Do Not
Constitute an Affiliation), 5767-2006 and as stated in Article 240(f)
of the Companies Law, 5769-1999 ("Companies Law").
Bezeq and its subsidiaries, from time to time, enter into transactions
with Bezeq's officers and controlling shareholders,
including
transactions of the types and with characteristics as detailed below.
1. Sales of services and communication products by Bezeq Group
companies - including various basic communication services
(infrastructure, 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 telephony services,
hosting services and data communication services; TV services.
2. Lease agreements, management and purchase of real estate,
including, inter alia: lease of areas used for communication
facilities and warehouses.
3. Receipt of consulting and training services for Bezeq Group
companies or their employees.
4. Purchase of goods and services used by Bezeq Group
companies in their activities, such as the purchase of fuels and
energy products, repair services, financial / banking services
and more.
105
Notes to consolidated financial Statements as of December 31, 2021
In the absence of special quality considerations arising from all the
circumstances of the case, a transaction will be considered a
negligible transaction if all the following parameters are met:
A. The transaction is not an exceptional transaction (that is, a
transaction made in the ordinary course of business, under
market conditions and which may not materially affect
Bezeq's profitability, property or liabilities, all in accordance
with Bezeq’s procedures).
B. The scope of the engagement specified in it for Bezeq (solo,
and not on a consolidated basis) (or in any of the
subsidiaries) will not exceed NIS 10 million.
C. Bezeq is not required to report the transaction in an
immediate manner in accordance with Regulation 36 or
Regulation 37(a) of the Periodic Reports Regulations or
under other law.
D. The transaction does not include terms of office and
employment (as defined in the Companies Law, 5769-1999)
of a stakeholder or a related party, or does not constitute a
contract as stated in the last part of 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 Bezeq receiving services from him, 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).
As a rule, each transaction will be examined separately for the
purpose of examining its compliance with the conditions for
classification of a transaction as negligible as detailed above.
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 or with the same entity
and with corporations under its control, or transactions between which
there is a dependency or stipulation, will be examined as a single
transaction on an annual basis for the purpose of their examination.
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, the Audit Committee will examine the parameters listed
above and the need to update them, and will approve them or approve
updates therein.
The Audit Committee may from time to time and at its discretion,
change the above parameters to classify a negligible transaction.
The following are transactions listed in Article 270 (4) of the
Companies Law that are not considered negligible transactions:
106
Notes to consolidated financial Statements as of December 31, 2021
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
with
Nature of the transaction
Approval of Bezeq’s vote at the general
favor of DBS’s
meeting of DBS
in
engagement
Space
Communications Ltd. ("Space" and the
"Parties" respectively) in the amendment
/ addition to the existing agreement
between the parties dated November 4,
2013 for the lease of satellite segments in
Space’s satellites ("the Engagement"),
including
the
Engagement and its execution.
refinement
the
of
The
essence
of
personal
interest
Note 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
18.1 and 18.2.
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 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.
107
Notes to consolidated financial Statements as of December 31, 2021
29.4.
Benefits for the Group’s key executives
Benefits for employing key management personnel in the Group in the
years 2019-2021 include:
For the year ended December 31
2021
NIS thousands
2020
NIS thousands NIS thousands
2019
Number of key executives *
Salary **
Grant***
Management fees for the Chairman of
the Board ****
Share-based payment
5
8,163
7,780
-
13,530
30,713
6
8,246
4,995
1,919
280
15,440
6
8,163
3,834
2,400
-
14,397
* 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 served as a director in the Company until November 29, 2021), as
well as the former Bezeq Board of Directors, 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 20.1.3.
** In 2021, the changes in other provisions in Bezeq (included in the total
salary) mainly include provisions for vacation and sick leave in the
amount of approximately NIS 0.2 million. The salary of the Company's
CEO in 2021 also includes the remuneration of directors he received as
a director of the Company until November 29, 2021, as well as a special
grant in the amount of approximately NIS 2.3 million for the year 2020
and for the year 2021..
In 2020, the changes in other provisions in Bezeq (included in the total
salary) mainly include a provision for prior notice and for the non-
compete period for the Chairman of Bezeq's Board of Directors in the
amount of NIS 0.9 million.
In 2019, the changes in other provisions (included in the total salary)
mainly include an increase in the provision for prior notice, vacation and
sick leave to the CEO of Bezeq in the amount of approximately NIS 0.6
million.
For information regarding share-based compensation, see Note 26.
108
Notes to consolidated financial Statements as of December 31, 2021
29.5.
Benefits to the Company’s directors
For the year ended December 31
2021
NIS
thousands
2020
NIS
thousands
2019
NIS
thousands
Remuneration
members*
Number
remuneration**
of
to Board of Directors
directors
receiving
the
635
6
712
6
937
10
* The directors’ remuneration of the CEO of the Company who also served as
a director in the Company until November 29, 2021 and the remuneration of
the Chairman of the Company's Board of Directors in 2021 are presented in
note 29.4 above due to their being key executives.
In 2021, a new director was appointed on behalf of the Company's controlling
shareholders, an external director has retired, a new external director was
appointed by the General Meeting after the balance sheet date.
**
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 29, 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
period up to December 31,
2022.
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 598K. The amount of
the Company's deductible is
up to USD 150,000 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 325K
per case in securities claims
in Israel.
109
Notes to consolidated financial Statements as of December 31, 2021
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.
Customers and 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.
110
Notes to consolidated financial Statements as of December 31, 2021
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.
Regarding the terms of bonds issued by the Group companies and the loans
received, see Note 13 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 18 on engagements.
The following are the contractual maturity dates of financial liabilities that
were actually received as of December 31, 2021, including an estimate of
interest payments (based on data from the Consumer Price Index and
interest known as of December 31, 2021):
As of December 31, 2021
Book
value
Contrac
tual
cash
flow
H1/2021
H2/2021
2023
N I S m i l l i o n s
2024 to
2026
2027
onwards
Non-derivative financial liabilities
Trade and other
payables
Loans
1,566
1,906
1,566
2,194
1,542
85
Debentures
8,142
9,158
105
11,614
12,918
1,732
24
50
997
1,071
-
141
1,135
1,276
-
1,04
2
4,70
5
5,74
7
-
876
2,216
3,092
Financial liabilities
in respect of
derivative
instruments
35
35
6
29
-
-
-
111
Notes to consolidated financial Statements as of December 31, 2021
The table above does not include early repayment of Bezeq's 9 bonds,
which were executed in January 2022 in the amount of NIS 370 million. In
addition, the table above does not include the replacement of the
Company's Series C bonds with the Company's Series F bonds, which was
executed in January 2022 in the amount of NIS 417 million. Other than that,
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 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.
112
Notes to consolidated financial Statements as of December 31, 2021
The following is a report on the financial position according to linkage bases
as of December 31, 2021:
As of December 31, 2021
In forex or
forex-
linked
currency
(mainly
dollars)
NIS
millions
31
21
11
-
-
63
-
-
-
-
-
-
-
-
63
Without
linkage
NIS
millions
967
1,078
1,833
131
-
4,009
Linked to
the price
index
NIS
millions
-
35
15
112
-
162
254
179
-
-
-
-
117
-
371
4,380
-
-
-
-
16
-
195
357
359
621
-
6
1,317
507
69
2,258
6,773
23
199
-
-
49
7,044
9,302
460
44
-
-
1,125
2,295
1,488
-
-
-
-
3,783
4,908
-
240
3
-
243
-
-
44
-
-
-
44
287
Non-
monetary
balances
NIS
millions
Total
balances
NIS
millions
-
-
-
37
74
111
998
1,134
1,859
280
74
4,345
-
433
60
1,828
6,312
3,251
173
24
11,648
11,759
-
-
154
-
-
154
-
-
-
142
296
-
438
592
60
1,828
6,312
3,251
306
24
12,214
16,559
980
466
1,755
510
69
3,780
9,068
1,511
243
142
296
49
11,309
15,089
)4,922(
)4,551(
)224(
11,167
1,470
Current assets
Cash and cash equivalents
Investments
Trade receivables
Other receivables
Inventory
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
Debentures and loans
Current maturities of liabilities in
respect of leases
Trade payables
Employee benefits
Provisions
Total current liabilities
Non-current liabilities
Debentures and loans
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
)1,096(
880
216
-
-
113
Notes to consolidated financial Statements as of December 31, 2021
The following is a report on the financial position according to linkage bases
as of December 31, 2020:
As of December 31, 2020
In forex or
forex-
linked
currency
(mainly
dollars)
NIS
millions
Linked to
the price
index
NIS
millions
-
-
16
90
-
-
106
191
-
-
-
-
-
79
59
13
-
-
-
151
-
-
-
-
-
-
Non-
monetary
balances
NIS
millions
Total
balances
NIS
millions
-
-
-
40
73
10
123
894
881
1,621
180
73
10
3,659
-
514
67
1,804
6,131
3,268
206
67
1,804
6,131
3,268
402
Without
linkage
NIS
millions
815
822
1,592
50
-
-
3,279
323
-
-
-
-
196
-
519
3,798
-
191
297
-
-
151
108
11,584
11,707
108
12,294
15,953
268
517
-
2
1,294
479
115
2,158
6,814
4
286
89
-
52
7,245
9,403
413
126
-
2
1,058
2,671
1,488
-
66
-
-
4,225
5,283
-
179
3
-
182
-
-
49
-
-
-
49
231
-
-
167
-
-
167
-
-
-
152
290
-
442
610
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
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
Debentures and loans
Current maturities of liabilities in
respect of leases
Trade payables
Employee benefits
Provisions
Total current liabilities
Non-current liabilities
Debentures and loans
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
-
-
114
Notes to consolidated financial Statements as of December 31, 2021
30.5.2. Data on the Consumer Price Index:
In 2021, the known consumer price index decreased by 2.4%
(in 2020 a decrease of 0.6%, and in 2019 - an increase of
0.3%).
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 profit and equity.
A 10% increase / decrease in the exchange rate of the dollar at
the reporting date would not materially affect earnings and
equity.
30.5.4. Interest rate risk
As of December 31, 2021, 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
The following 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 debentures)
Instruments at floating
interest rates
Financial liabilities
(debentures)
Book Value
2021
NIS millions
1,964
)9,712(
)7,748(
2020
NIS millions
1,919
)
10,199
(
)8,280(
)336(
)71(
b.
c.
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.
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 net profit and equity.
115
Notes to consolidated financial Statements as of December 31, 2021
30.6. Hedging
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 debentures. These transactions define a specific cash
flow of some of the debentures 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 debentures 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).
Par value
Fair value
Capital
principal
balance
Hedged item
Repayment
dates
Transactions
NIS
millions
NIS
millions NIS millions
As of December
31, 2021
Series 6
debentures
Series 10
debentures
Series 12
debentures
As of December
31, 2020
Series 6
debentures
Series 10
debentures
Series 12
debentures
12.2022
12.2022
12.2025
6.2026
6.2030
12.2020
12.2022
12.2022
12.2025
6.2026
6.2030
to
to
to
to
to
1
4
5
330
)29(
300
3
250
13
10
880
)13(
3
4
5
665
(78)
300
(15)
250
(10)
4
9
16
29
(9)
(6)
(5)
12
1,215
(103)
(20)
116
Notes to consolidated financial Statements as of December 31, 2021
30.6.2 Economic hedging
a. During 2021, 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, 2021 is a liability of approximately NIS 4 million
(as of December 31, 2020 - 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, 2021 is a liability of about NIS 2 million (as of December 31,
2020, a liability of approximately NIS 12 million).
30.7. Financial instruments measured at fair value
30.7.1 The table below presents an analysis of the financial instruments measured
at fair value:
December 31,
2021
December 31,
2020
NIS millions
NIS millions
Level 1 - Investment in marketable securities
measured at fair value through income (see 30.7.2)
Level 2 - Forward contracts (see 30.7.3)
99
(19 )
77
)
117
(
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.
117
Notes to consolidated financial Statements as of December 31, 2021
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 debentures 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 debentures 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
As of December 31, 2021
Book
value
(including
accrued
interest)
Fair
value
Discount
rate
(weighted
average)
The
value in
the
books
Fair
value
Discount
rate
(weighted
average)
%
NIS million
%
NIS million
Loans from banks and
institutional entities
(unlinked)
Debentures issued to the
public (index-linked)
Debentures issued to the
public (unindexed)
1,612
1,713
1.93
2,118
2,252
1.97
2,913
3,249
)1.25(
3,199
3,394
0.44
5,215
9,740
5,543
1.76
4,913
5,187
2.8
10,505
10,230
10,833
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,
2021
December 31,
2020
NIS millions
NIS millions
Balance of trade and other receivables, gross
Amounts offset
Balance of customers and trade receivables presented in the
statement of financial position
Gross balance of suppliers
Amounts offset
Balance of suppliers presented in the statement of financial
position
97
)87(
10
104
)87(
17
93
)84(
9
102
)84(
18
118
Notes to consolidated financial Statements as of December 31, 2021
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 statement on the financial position:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total liabilities
Equity
December 31,
December 31,
2021
2020
NIS millions
NIS millions
2,554
9,957
12,511
2,393
9,022
11,415
1,096
12,511
2,014
9,600
11,614
2,096
9,668
11,764
)
150
(
11,614
Data from the statement of income:
Revenue
Operating expenses
Salary
Depreciation and amortization
Operating and general expenses
Other operating expenses (income), net
Total operating expenses
Operating profit
Financing expenses (income)
Financial expenses
Financing income
Financing expenses, net
Profit after financing expenses, net
Share in profits (losses) of equity-held
investee companies, net
Profit (loss) before income taxes
Income taxes
Profit (loss) for the year
For the year ended December 31
2021
2020
2019
NIS millions
NIS millions
NIS millions
4,159
4,073
4,196
934
938
667
)105(
2,434
1,748
357
(15 )
342
1,406
120
1,526
343
1,183
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)
119
Notes to consolidated financial Statements as of December 31, 2021
31.1. Pelephone Communications Ltd.
Data from the statement on the financial position:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total liabilities
Equity
December
31, 2021
NIS millions NIS millions
December
31, 2020
1,121
3,331
4,452
837
916
1,753
2,699
4,452
899
3,472
4,371
720
1,022
1,742
2,629
4,371
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
Salary
Depreciation and amortization
Total operating expenses
Other operating expenses, net
Operating profit (loss)
Financing expenses (income)
Financial expenses
Financing income
Financing income, net
Profit (loss) before income taxes
Expenses (income) before taxes on income
Profit (loss) for the year
For the year ended December 31
2020
2019
2018
NIS millions NIS millions NIS millions
1,642
647
2,289
1,346
315
577
2,238
9
42
23
)65(
)42(
84
20
64
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)
120
Notes to consolidated financial Statements as of December 31, 2021
31.2. 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, 2021
NIS millions NIS millions
December
31, 2020
472
311
783
409
157
566
217
783
443
342
785
432
148
580
205
785
from
Data
income:
the statement of
Revenue
Operating expenses
For the year ended December 31
2021
2020
2019
NIS millions NIS millions NIS millions
1,237
1,271
1,339
Operating, general and impairment expenses 799
Salary
Depreciation, amortization and impairment
expenses
Other operating expenses, net
237
173
6
802
248
149
313
827
261
190
257
Total operating expenses
1,215
1,512
1,535
Operating profit (loss)
Financing expenses (income)
Financial expenses
Financing income
Financing expenses, net
Profit (loss) before taxes on income
22
5
)3(
2
20
Expenses (income) before taxes on income 12
Profit (loss) for the year
8
(241)
(196)
5
(3)
2
(243)
32
(275)
8
(2)
6
(202)
(45)
(157)
121
Notes to consolidated financial Statements as of December 31, 2021
31.3. 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
Equity deficit
December
2021
31,
December 31,
2020
NIS millions
NIS millions
196
230
426
394
80
474
)48(
426
176
248
424
436
69
505
(81)
424
Data from the statement of income:
For the year ended December 31
2021
2020
2019
NIS millions
NIS millions
NIS millions
Revenue
Operating expenses
1,270
1,287
1,345
Operating, general and impairment
expenses
Salary
Depreciation, amortization and
impairment expenses
Other operating expenses (income),
net
Total operating expenses
835
188
203
12
1,238
Operating profit (loss)
Financing expenses (income)
Financial expenses
Financing income
Financing expenses, net
32
4
(3)
1
Profit (loss) before income taxes 31
Expenses before income taxes
Net profit (loss) for the year
1
30
857
203
203
(15)
1,248
39
15
(2)
13
26
2
24
923
216
219
42
1,400
(55)
17
(5)
12
(67)
2
(69)
122
Notes to consolidated financial Statements as of December 31, 2021
32. Subsequent events
32.1. On January 10, 2022, the Company exchanged Series C bonds for Series F
bonds. For details, see Note 13.3.1.
32.2. On January 23, 2022, Bezeq made a partial early redemption on its own
initiative of bonds (Series 9) in the amount of approximately NIS 370 million par
value.
32.3. After the date of the statements, and until March 1, 2022, the date on which the
repurchase plan for the Company's shares came to an end, the Company
acquired a total of 820,360 of the Company's shares for approximately NIS 11
million. At the end of the acquisition plan, Searchlight holds a 61.38% interest
and the Forer family holds a 11.62% interest of the Company's ordinary and
issued shares.
32.4. Regarding the resolution by Bezeq's Board of Directors, after the date of the
Statements, regarding the cancellation of a structural change plan in the Bezeq
Group and regarding the alternative outline, see Note 12.1.3.
32.5. Regarding the resolution by Bezeq's Board of Directors dated March 22, 2022
regarding Bezeq's dividend distribution policy and the resolution by Bezeq's
Board of Directors to recommend to the General Meeting of Bezeq
shareholders a dividend distribution, and the Company's expected share in the
said dividend, see Note 12.6.
32.6. For details regarding another acquisition plan approved by the Company's
Board of Directors on March 23, 2022, see Note 20.4.
123
Separate Financial Information for the
Year Ended December 31, 2021
Separate financial information as of December 31, 2021
Table of Contents
Auditors' report
Separate financial information as of December 31, 2021
Statement on financial position
Statement of income and comprehensive income
Statement on cash flows
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
03 684 8000
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, 2021, and 2020 and for each of the three years the
last of which ended on December 31, 2021. 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 statements, 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 17 to the
Company’s consolidated financial statements, regarding claims filed against Group companies and the
exposure in respect of which cannot be assessed or calculated at this stage.
Somekh Chaikin
Certified Public Accountants
March 23, 2022
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, 2021
Financial position data as of December 31
Note
NIS millions
NIS millions
2021
2020
Assets
Cash and cash equivalents
Short-term investments and bank deposits
Other receivables
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
3
4
5
6
7
9
25
180
14
219
79
1,724
1,803
2,022
7
7
1,999
1,999
55
157
23
235
160
1,398
1,558
1,793
7
7
1,893
1,893
2,006
1,900
16
2,022
)
107
(
1,793
Darren Glatt
Chairman of the Board of
Directors
Tomer Raved
CEO
Itzik Tadmor
CFO
Date of approval of the financial statements: March 23, 2022
The notes attached to the separate financial information form an integral part thereof.
3
Separate financial information as of December 31, 2021
Statement on income for the year ended December 31
Note
NIS millions
NIS millions
2021
2020
Operating expenses
Salaries
Operating and general expenses
Total operating expenses
Operating loss
Financing expenses (income)
Financing expenses
Financing income
Financing expenses, net
Loss after financing expenses, net
Share of the profit in equity accounted
investee, net
Profit before tax income
Income tax
Profit for the year
10
5
8
13
(13 )
184
(10 )
174
)
187
(
316
129
-
129
3
8
11
(11 )
110
(6)
104
)
115
(
265
150
7
157
Comprehensive profit for the year ended December 31
Profit for the year
Profit (loss) items including other, net of tax
Total comprehensive profit for the year
2021
2020
NIS millions
NIS millions
129
10
139
157
(3)
154
The notes attached to the separate financial information form an integral part thereof.
4
Notes to separate financial information as of December 31, 2021
Data on cash flows for the year ended December 31
Cash flows from operating activities
Profit for the year
Adjustments:
Share of profit of equity accounted investee, net
Financing expenses, net
Change in trade payables and credit balances
Change in other trade receivables
Net cash used for operating activities
Cash flows from investing activities
Investment in subsidiary
Change in deposits and investments, net
Interest / dividend received in cash
Net cash generated from (used in) investing activities
Cash flows used for financing activities
Issuance of debentures
Repayment of debentures
Repurchase of shares
Interest paid
Costs for early repayment of debentures
Net compensation for the Horev Claim
Net cash used for financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents as of January 1
Cash and cash equivalents as of December 31
2021
2020
NIS millions
NIS millions
129
)316(
174
-
10
(3)
-
66
1
67
1,035
)
1,015
(
(16 )
(79 )
(19 )
-
(94 )
(30)
55
25
157
)
265
(
106
(7)
(1)
(10 )
(40 )
(229)
2
)
267
(
-
-
-
(78 )
-
(3)
(81 )
)
358
(
413
55
The notes attached to the separate financial information form an integral part thereof
5
Notes to separate financial information as of December 31, 2021
1. General
The following are financial data from the Group's consolidated financial statements as of
December 31, 2021 (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 2021.
For an investigation by the Securities Authority and the Police, see Note 1.3 to the
Consolidated Financial Statements.
2. Note on 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 Financial 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. 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.
6
Notes to separate financial information as of December 31, 2021
3. Short-term investments and deposits
Investments in marketable securities (1)
Short-term deposits
(1) The deposits are due for repayment by December 2022.
4.
Long-term deposits
Long-term deposits (1)
December 31,
December 31,
2021
2020
NIS millions
NIS millions
99
81
180
76
81
157
December 31,
December 31,
2021
2020
NIS millions
NIS millions
79
79
160
160
(1) The deposits are due for repayment by December 2024.
5. Subsidiaries
Subsidiaries directly held by the Company:
Company rights
in capital
Investment in subsidiary
(according to the equity method) as of
December 31, 2020
NIS millions
December 31, 2021
NIS millions
Bezeq
26.72%
1,724
1,724
1,398
1,398
5.1. On December 10, 2020, the Company acquired 10,580,000 ordinary shares of the
subsidiary Bezeq. The Company purchased shares as aforesaid in exchange for
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 free and free from any pledge, mortgage, lien, foreclosure or any other
right of any third party, including, from any other obligation to banks, financial
institutions and others.
5.2. As of October 11, 2021, all Bezeq shares held by the Company are held directly by
the Company, after on that day all Bezeq shares held by B Communications (SP2)
Ltd. (a company wholly-owned and controlled by B Communications) were
transferred to the direct holding of B Communications (SP1) Ltd., which is wholly-
owned and controlled by the Company). Following the transfer of Bezeq’s shares to
the Company, the companies B Communications (SP2) Ltd. and B Communications
(SP1) Ltd. were closed.
7
Notes to separate financial information as of December 31, 2021
5. Subsidiaries (Cont.)
5.1. After the date of the financial statements, on March 22 ,2022, Bezeq's Board of
Directors decided to approve a new dividend distribution policy for Bezeq,
according to which Bezeq will distribute to its shareholders, every six months, a
cash dividend of 50% of the semi-annual profit (after tax) according to Bezeq's
consolidated financial statements. This is starting from the next distribution (for the
second half of 2021). The implementation of the dividend distribution policy is
subject to the provisions of any law, including the distribution tests set forth in the
Companies Law, all taking into account the expected cash flow, Bezeq needs and
liabilities, Bezeq's cash balances, plans and position as from time to time, and
subject to the approval of the general meeting of Bezeq's shareholders regarding
any specific distribution, as provided in Bezeq's Articles of Association.
The approval of Bezeq's dividend policy does not obligate Bezeq to distribute a
dividend to Bezeq's shareholders, and any specific distribution will be examined in
accordance with the terms of implementation of the dividend distribution policy as
stated above. In addition, the approval of the policy as aforesaid does not prevent
Bezeq's Board of Directors from periodically reviewing the policy of distributing
dividends to Bezeq shareholders, taking into account, inter alia, the provisions of
the law, Bezeq's business situation and its capital structure and balance, the level
of debt and its credit rating, and the ongoing maximization of value to Bezeq's
shareholders through the distribution of current dividends.
Bezeq's Board of Directors considers it important to maintain the balance between
ensuring Bezeq's financial strength and stability, while maintaining Bezeq's current
rating group [AA] over time and continuing to maximize value for its shareholders
through regular dividend distribution.
Bezeq's Board of Directors was presented with, among other things, analysis and
results of professional work as performed by Professor Aharon (Roni) Ofer,
Bezeq's and the Bezeq Group's forecasts, as well as sensitivity analyzes for
unforeseen deterioration in Bezeq's and Bezeq Group businesses. After Bezeq's
Board of Directors examined all of the above, the Board of Directors determined
that this resolution reflects the correct balance between these needs as described
above.
5.2. On March 22, 2022, following the resolution regarding Bezeq's dividend distribution
policy as detailed above, Bezeq's Board of Directors decided to recommend to the
general meeting of Bezeq's shareholders to distribute a cash dividend to Bezeq
shareholders in the total amount of NIS 240 million. As of the date of approval of
the statements, the said dividend has not yet been approved by the general
meeting of Bezeq's shareholders. The Company's expected share in the dividend
to be distributed by Bezeq, subject to the approval of the general meeting of
Bezeq's shareholders, is approximately NIS 64 million.
8
Notes to separate financial information as of December 31, 2021
6. Trade and other payables
Trade payables
Interest payable
7. Debentures
December 31,
December 31,
2021
2020
NIS millions
NIS millions
1
6
7
1
6
7
Debentures issued to the public:
Series C debentures
Series D debentures
Series E debentures
Series F debentures
Total debentures
December 31, 2021
December 31, 2020
Balance
in books
Face value
Balance
in books
Face value
NIS millions
NIS millions
NIS millions
NIS millions
951
-
-
1,035
1,986
1,010
-
-
1,040
2,050
1,739
54
100
-
1,893
1,878
58
100
-
2,036
On September 17, 2020, the meetings of the holders of the Company’s debentures
(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 debentures (Series D) and the debentures
(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 debentures (Series E) are in
circulation).
b) After the full repayment of the debt in respect of the debentures (Series D)
and the debentures (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
debentures (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 debentures (Series C) and the payment of the first principal in
respect of the debentures from the new series as aforesaid will be only after
full repayment of the debentures (Series C).
9
Notes to separate financial information as of December 31, 2021
In addition, the amount of early repayment to be paid to the bondholders in the event
of early repayment of the debentures by the Company has been amended as
follows:
In relation to the debentures (Series C) - in the case of a partial early repayment of
the debentures (Series C), the price of the partial early repayment will be the highest
of the par value of the debentures (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 debentures according to the price of the
debentures on 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 debentures (Series E).
On July 6, 2021, the Company held a tender for the purchase of Series F
debentures, in the framework of which approximately NIS 394 million par value was
issued to institutional entities and the public in exchange for approximately NIS 394
million from Series F. The annual interest rate (unlinked) determined in the tender is
3.65%. The interest on the Series F debentures will be paid in two semi-annual
installments on May 31 and November 30 of each year from November 2021 to
November 2026. The bond principal will be repaid in one installment on November
30, 2026. The Company used the net consideration from the issuance of Series F
debentures to make early repayments of its existing debentures as of the same date
as detailed below.
On July 19, 2021, the Company made a full early repayment of the Series D
debentures principal (plus accrued interest up to the due date) and a full early
repayment of the Series E debentures principal (plus accrued interest up to the
maturity date and an early repayment penalty as defined in the series of series E).
In addition, the Company made a partial early repayment of approximately NIS 226
million in respect of the Series C debentures (plus accrued interest up to the due
date). Following the early repayments, Series D and E were repaid in full and
delisted from trading on the Tel Aviv Stock Exchange.
On December 7, 2021, the Company issued to institutions and the public
approximately NIS 485 million in Series F debentures for approximately NIS 488
million in Series E. The Company used the net consideration from the issuance of
Series F debentures to make a partial early repayment of approx. NIS 471 million in
respect of its existing Series C debentures for that date (plus accrued interest up to
the due date and an early repayment penalty as defined in the trust deed of the
Series C debentures).
On December 9, 2021, the Company held a private placement of approximately NIS
161 million in Series F debentures for approximately NIS 161 million. The Company
used the net consideration from the issuance of Series F debentures to make a
partial early repayment of approximately NIS 157 million in respect of Series C
debentures existing on that date (plus accrued interest up to the due date and an
early repayment penalty as defined in the trust deed of the C series debentures).
On January 10, 2022, the Company exchanged approximately NIS 417 million in
Series C debentures for approximately NIS 432 million in Series F debentures.
For further details, see Note 13 to the Consolidated Financial Statements.
10
Notes to separate financial information as of December 31, 2021
8. Contingent liabilities
8.1. 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 debentures 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.
8.2. 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.
8.3. 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.
8.4. In June 2017, two motions for approval of a class action lawsuit totaling
approximately NIS 1.8 billion were filed against Bezeq, Group officers and
companies from the then controlling group in Bezeq regarding the purchase of DBS
shares by Bezeq from Eurocom. In accordance with a court decision, the filing of
a unified motion is expected to replace these two motions. The said procedure was
stayed at the request of the Attorney General several times, while as of this date,
the procedure was delayed until July 2022.
8.5. 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
11
Notes to separate financial information as of December 31, 2021
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 July 2021 the respondents filed a response alleging that the motion for approval
was unfounded, inter alia, due to the fact that the information alleged in the motion
for approval as required for publication did not meet the statutory standards for
establishing reporting obligation and was accompanied by an arrangement
procedure and professional consultants and supervised by the Board of Directors,
and therefore all appropriate measures have been taken to comply with the
provisions of the law and that these findings contradict the applicant's contention.
In December 2021 the Company filed a motion for in limine dismissal of the motion
for approval against it, inter alia, because the motion for approval does not specify
claims against the Company, and because for most of the relevant period the
Company was a dual company, so the law applicable to it is US law, and because
the motion is not supported by an opinion of an expert on foreign law. After several
instances for responses and holding a pre-trial hearing in February 2022, a decision
was made in which the parties were asked to update whether they wished to hold
a mediation, an additional preliminary hearing or to coordinate a hearing. The
parties have announced that they are working to coordinate deadlines for
evidentiary hearings. At this stage, in the opinion of the Company's legal counsel,
the chances of the claim being dismissed are higher than its chances of
acceptance.
8.6. 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.
8.7. In January 2021, the Company submitted a motion for in limine dismissal of the
motion for approval and a motion for extension. In April 2021, a hearing was held
on the motion for dismissal, in which it was determined that only after a date has
been set for the hearing of the request for disclosure of documents, a date will be
set for submitting answers to the request and another hearing will be scheduled.
As of this date, a hearing for the disclosure of documents is scheduled for April
2022 and a date for a hearing is expected to be scheduled for May 2022. In the
opinion of the Company's legal counsel, at this early stage, in which claims have
not yet been filed on behalf of the Company, they are unable to assess the chances
of acceptance of the motion for approval.
12
Notes to separate financial information as of December 31, 2021
9. Equity
Ordinary shares 0.1 NIS par value each
Issued and paid-up capital as of January 1
Purchase of treasury shares
Issued and paid-up capital as of December 31
Registered capital as of December 31
Number of ordinary shares
2021
2020
116,316,563
(1,457,573)
116,316,563
-
114,858,990
116,316,563
300,000,000
150,000,000
* As of December 31, 2021, 1,476,803 of the Company's shares are held as treasury
shares.
9.1. 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
respect of the options granted to the CEO in the years 2020 and 2021, and
amounted to approx. NIS 280K in each of the years.
9.2. 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).
9.3. On March 31, 2021, the General Meeting of the Company approved the increase
of the registered share capital of the Company so that after the said increase of
registered capital, the registered capital of the Company will be NIS 30,000,000,
divided into 300,000,000 ordinary shares of NIS 0.1 each, and accordingly, an
amendment to the Company's Articles of Association was approved.
9.4. On November 30, 2021, the Company's Board of Directors approved the
repurchase of its shares in the amount of up to NIS 30 million from December 1,
2021 until: (1) the purchase of shares of the Company in the amount of NIS 30
million; Or (2) March 1, 2022, whichever is earlier.
13
Notes to separate financial information as of December 31, 2021
9.5. On March 23, 2022, the Company's Board of Directors approved the repurchase
of its shares in the amount of up to NIS 20 million from March 24, 2022 until: (1)
the purchase of shares of the Company in the amount of NIS 20 million; Or (2) May
12, 2022, whichever is earlier.
10. Note on taxes on income
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.
11. 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, 2021):
Book
value
7
1,986
1,993
December 31, 2021
Contractual
cash flow H1/2022 H2/2022
2023
2024-2026
NIS millions
7
2,351
2,358
7
32
39
-
39
39
-
77
77
-
2,203
2,203
Non-derivative financial liabilities
Trade and other payables
Debentures
Total
12. Events during the reporting period and subsequent events
12.1. On January 10, 2022, the Company exchanged Series C debentures for Series F
debentures. For further information, see Note 13.3.1 in the consolidated financial
statements.
12.2. After the date of the financial statements, and until March 1, 2022, the date on
which the repurchase plan for the Company's shares came to an end, the
Company acquired a total of 820,360 of the Company's shares for approximately
NIS 11 million. At the end of the acquisition plan, Searchlight holds a 61.38%
interest and the Forer family holds a 11.62% interest of the Company's ordinary
and issued shares.
12.3. For details on another acquisition plan approved by the Company's Board of
Directors on March 23, 2022, see Note 9.5.
12.4. Regarding the decision of Bezeq's Board of Directors dated March 22, 2022
regarding Bezeq's dividend distribution policy and the decision of Bezeq's Board
of Directors to recommend to the General Meeting of Bezeq shareholders a
dividend distribution, and the Company's expected share in the said dividend, see
Notes 5.3 and 5.4.
14
Chapter D (Additional details on the corporation) for the periodic report for 2021
Chapter IV
Additional Details about the Corporation
and Corporate Governance Questionnaire
for the Period ended December 31, 2021
- 1-
Chapter D (Additional details on the corporation) for the periodic report for 2021
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.
Regulation 10c: Use of proceeds from securities
On July 6, 2021, the Company held a tender for the purchase of Series F debentures, in
the framework of which approximately NIS 394 million were issued to institutional
entities and the public in exchange for NIS 394 million from Series F. The Company
used the net proceeds of the issue of the Series F debentures to make early repayments
of its existing debentures for that date.
In accordance with the shelf offer report published by the Company on December 5,
2021, the Company issued to institutions and the public approximately NIS 485 million
in exchange for approximately NIS 488 million from Series F. The Company used the
net proceeds of the issue of the Series F debentures to make a partial early redemption
of approximately NIS 471 million in respect of its existing Series C debentures at that
date.
On December 9, 2021, the Company held a private placement of approximately NIS 161
million in Series F debentures for approximately NIS 161 million. The Company used
the net proceeds of the issue of the Series F debentures to make a partial early repayment
of approximately NIS 157 million par value in respect of its existing Series C debentures
for that date (plus accrued interest for the due date and an early repayment penalty as
defined in the trust deed of the Series C debentures).
For further details regarding the Company's debentures in the year of the report, see
Regulation 20 below..
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%
1,724
Regulation 12: Changes in investments in subsidiaries during the reported period
There were no changes in investments in the subsidiaries during the reporting period.
Regulation 13: Revenue of subsidiaries and revenue of the corporation therefrom
as of the date of the statement of financial position (NIS millions)
Company name
Profit for the period Comprehensive
Dividend Management
fee
Interest
revenue
Bezeq
NIS 796 million
profit for the
period
NIS 1,219 million
- 2-
Chapter D (Additional details on the corporation) for the periodic report for 2021
Regulation 20: Trading on the stock exchange
To the best of the Company's knowledge, during the reporting period, there was no
cessation of trading in the Company's securities listed for trading.
On July 6, 2021, the Company held a tender for the purchase of Series F debentures, in
the framework of which approximately NIS 394 million were issued to institutional
entities and the public in exchange for NIS 394 million from Series F. The Company
used the net proceeds of the issue of the Series F debentures to make early repayments
of its existing debentures for that date.
On July 19, 2021, the Company made a full early repayment of the Series D debentures
principal (plus accrued interest as of the repayment date) and a full early repayment of
the Series E debentures principal (plus accrued interest as of the repayment date and an
early repayment penalty as defined in the trust deed of Series E debentures). In addition,
the Company made a partial early repayment of approximately NIS 226 million in
respect of the Series C debentures (plus accrued interest as of the repayment date).
Following the early repayments, Series D and E were repaid in full and delisted from
trading on the Tel Aviv Stock Exchange.
On December 7, 2021, the Company issued to institutions and the public approximately
NIS 485 million in Series F debentures in exchange for NIS 488 million in Series F. The
Company used the net proceeds of the issue of the Series F debentures to make a partial
early repayment of approx. NIS 471 million in respect of its existing Series C debentures
for that date (plus accrued interest as of the repayment date and an early repayment
penalty as defined in the series of debentures of the Series C debentures).
On December 9, 2021, the Company held a private placement of approximately NIS 161
million in Series F debentures for approximately NIS 161 million. NIS in respect of its
existing Series C debentures for that date (plus accrued interest for the repayment date
and an early repayment penalty as defined in the trust deed of Series C debentures).
As of December 31, 2021, approximately NIS 39 million is deposited in the trust accounts
for the benefit of the holders of Series C and F debentures.
As of December 31, 2021, the nominal value of Series C debentures that are not held by
the Company is NIS 1,010 million and the nominal value of Series F debentures that are
not held by the Company is NIS 1,040 million.
On January 10, 2022, the Company exchanged approximately NIS 417 million in Series
C debentures for approximately NIS 432 million in Series F debentures.
Regulation 21: Remuneration for related parties and senior officers
The following is a breakdown of the remuneration for 2021, as recognized in the 2021
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 2021 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.
- 3-
Chapter D (Additional details on the corporation) for the periodic report for 2021
Details of remunerated persons
Remuneration (NIS thousands)
Total
(NIS
thousands)
Section
below
Name
Position
Sex
Tomer Raved3
Itzik Tadmor
Ilan Chaikin
Dudu Mizrahi
Ran Guron
CEO
CFO
Male
Male
Internal auditor Male
Male
Bezeq CEO
Pelephone,
Bezeq
International and
DBS CEO
Male
Directors
Director
Holding
rate in
the
corporati
on’s
equity
-
-
-
-
-
-
Job
volu
me
Full-
time
Full-
time
Full-
time
Full-
time
Full-
time
Full-
time
Salary1 Bonus2
Share-
based
payment
mther
(Manag
ement
fee)
Total
1,449
2,3434
280
2905
4,362
642
84
208
-
-
-
2,469
2,599
3,975
2,472
2,838
3,975
802
-
-
-
-
-
-
-
850
84
9,043
,9285
802
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 employee-
employer 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 in Bezeq, 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
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 2021
statements and include a performance-dependant bonus as well as special bonuses (for details regarding
each of the officers see details in sections A-E after the table below in Bezeq’s report), all in accordance
with Bezeq’s remuneration policy. The performance-dependent bonus that appears in the table is for the
year 2021 (not yet paid to senior executives 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 the above officers for 2020, the amount of which
[including a contingent portion not paid in practice in 2021, but paid in practice in 2022 (if any)] is included
in the corresponding table in Bezeq’s annual statements for 2020 (as published on March 25, 2021).
3 Tomer Raved, CEO of the company served as a director of the company until November 29, 2021.
4 This amount reflects a grant given to Mr. Tomer Raved, the Company's CEO for the year 2020 and
for the year 2021.
5 This is a remuneration given to Mr. Tomer Raved, the Company's CEO, for his pffice as a director in
Bezeq and for his office as a director in the Company until the date of his resignation from being a
director in the Company on November 29, 2021 .
- 4-
Chapter D (Additional details on the corporation) for the periodic report for 2021
accordance with Bezeq’s classification at the relevant time.
In addition, Mr. Raved will be entitled to be included in the liability insurance for directors
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.
Following the immediate report published by the Company on November 11, 2021
regarding the results of a General Meeting of the Company's shareholders in which it was
decided not to approve the granting of an annual grant for 2020 and for 2021 (in this section:
"the Special Grant") to the Company's CEO, Mr. Tomer Raved. On November 29, 2021,
the Company's Board of Directors decided to reconsider the Special Grant, and in light of
the recommendation of the Company's Remuneration Committee, the Company's Board of
Directors decided to approve the grant of the Special Grant in the Company's maximum
annual grant amount (i.e., 12 monthly salaries) for each of the years 2020 and 2021, and
in a total amount of NIS 2,343,600 (NIS 1,171,800 for each of the years).
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 2021, Mr. Chaikin’s fee amounted to
approximately NIS 84K. For further details, see Section 2.5 of the Company's Board of
Directors' report as of December 31, 2021, in Chapter B of the 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 approx. NIS 150,000, linked to the CPI. 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 2021 as Bezeq's CEO were set in advance by Bezeq's Board
of Directors in December 2020, following the approval of Bezeq's Remuneration Committee
and included: Adjusted EBITDA target6 for Bezeq (Solo) weighing 50% in the bonus
calculation; Profit after tax target of Bezeq (solo) weighing 25%; And Coordinated Free Flow
Target (FCF)7 for Bezeq (Solo) weighing 25%. The threshold conditions for the bonus were
that the Adjusted EBITDA results for 2021 – (NIS 2,512.1 million) would not decrease by
6 Adjusted EBITDA for the purpose of determining remuneration - calculated as EBITDA minus other operating
expenses / revenue (net), losses / gains from impairment / increase in value (including losses from ongoing
impairment), effects of the implementation of International Financial Reporting Standard IFRS16 "Leases" and
expenses on share-based payments.
7 Adjusted Free Cash Flow (FCF) - Calculated as cash arising from current activities minus cash for the purchase /
sale of property, plant and equipment and intangible assets (net), and minus leasing payments.
- 5-
Chapter D (Additional details on the corporation) for the periodic report for 2021
more than 40% from the Adjusted EBITDA results in 2020 (NIS 2,563.0 million). This
condition was met. The rate of Bezeq's CEO's compliance with the set of bonus targets for
2021 was approximately 118.5%. 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 2021 only in 2023
(after the date of approval of the 2022 statements) and only if the minimum adjusted
EBITDA target for Bezeq (Solo) is achieved in relation to the 2022 budget. It should be
noted that after the year of the report, Mr. Dudu Mizrahi was approved, in accordance with
Bezeq's Remuneration Policy, a special grant conditional on targets of up to 4 gross monthly
salaries for the year 2021, which included: A target for deployment of fiber infrastructure
(households) weighing 25%; A target for joining fiber customers weighing 25% and a target
scope for the financial impact of reducing telephony rates on the year 2021, which weighs
50%. The rate of Bezeq's CEO's compliance with the set of special grant targets for 2021
was approximately 75% and, accordingly, the amount of the special grant is approximately
NIS 450,000 (included in the table above in the grant component for 2021).
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 employees and the report of a material
private offer dated January 14, 2021 (reference: 2021-01-006340). 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: Pelephone, Bezeq International and DBS (in this section, collectively:
"the Subsidiaries"), amounts to a total of of approx.NIS 150,000, linked to the CPI. The
contract is for an unlimited period, with each party entitled to bring it to an end at any time,
with 6 months' prior notice by either party.
Mr. Guron's bonus targets for 2021 as CEO of the Subsidiaries were set in advance by
Bezeq's Board of Directors in December 2020, after approval by Bezeq's Remuneration
Committee and the boards of directors in the Subsidiaries, and included: Adjusted EBITDA
target8 for the subsidiaries weighing 60% in the bonus calculation; EBITDA minus
coordinated CAPEX target for subsidiaries (CAPEX in cash terms) weighing 15%; Adjusted
EBITDA target by company - a combined target weighing 15%9; And a manager evaluation
target weighing 10%10. The threshold condition for receiving the bonus was that the
Adjusted EBITDA results for the Subsidiaries for 2021 (NIS 799 million) would not decrease
by more than 40% from the Adjusted EBITDA results in 2020 (NIS 697 million) - this
condition was met. The rate of compliance of the CEO of the Subsidiaries with the set of
bonus targets for 2021 was approximately 123.4%. Accordingly, the bonus to be granted
to the CEO of the subsidiaries for the year 2021 is approximately 123.4% of his annual
salary. Mr. Ran Guron will be entitled to 40% of the bonus for meeting the weighted
Adjusted EBITDA target in 2021 only in 2023 (after the date of approval of the 2022
statements) and only if the minimum Adjusted EBITDA target set in relation to the 2022
8 Adjusted EBITDA for the purpose of determining remuneration - calculated as EBITDA minus other operating
expenses / revenue (net), losses / gains from impairment / increase in value (including losses from ongoing
impairment), effects of the implementation of International Financial Reporting Standard IFRS16 "Leases" and
expenses for share-based payments.
9 Pelephone 40%, DBS 30%, Bezeq International 30%.
10 See Footnote 8 above
- 6-
Chapter D (Additional details on the corporation) for the periodic report for 2021
budget year 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 in respect of the cumulative savings in 2019-2021 in the amount of NIS 603.6k
(included in the table above in the bonus component for 2021). This is due to the
implementation of the synergy and streamlining plan - an exceptional, unusual and very
significant event involving an investment of exceptional effort by the CEO of the material
Subsidiaries, bringing significant savings in expenses and value to the Group and
preserving the CEO of the Subsidiaries as a key player in the companies.
* In light of the correction of the error in Bezeq International's 2019 statements, there has
been a change in the rates of meeting the targets for the annual bonus to Mr. Guron in
respect of 2019.
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 employees and the report of a substantial private offer dated January
14, 2021 (reference: 2021-01-006340). 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 2021, remuneration was paid to the directors of the
Company in accordance with the Remuneration Regulations in the amount of NIS 802K.
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.11 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
11 As of October 11, 2021, and in accordance with the amendment to the control permit signed on August 22,
2021, 738,953,713 of Bezeq’s shares are held directly by the Company, after on that day all the Company's shares
held by B. Communications (SP2) Ltd. (a company wholly owned and controlled by B Communications (SP1)
Ltd. which is wholly owned and controlled by the Company) were transferred to the Company for direct holding.
Following the transfer of Bezeq’s shares to the Company, the companies B Communications (SP2) Ltd. and B
Communications (SP1) Ltd. were closed.
- 7-
Chapter D (Additional details on the corporation) for the periodic report for 2021
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 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 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.
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 Bezeq’s neglibility procedure, see Note 29 to the
statements.
Regulation 24: Holdings of related parties and senior executives
As of the date of the report, holdings of related parties and senior officers in the Company are
as set forth below:
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
2,297,163
-
61.38%
11.62%
-
-
59.97%
11.35%
2.29%
-
Regulation 24a: Registered capital, issued capital and convertible securities
The registered equity of the Company as of the date of publication of the periodic report is
300,000,000 ordinary shares of NIS 0.1 par value each ("Ordinary Shares"). For details
regarding the approval of the Company’s General Meeting to increase the Company's
registered equity, see the immediate report dated March 31, 2021 (Reference No. 2021-01-
052569).
The issued and paid-up equity of the Company, as of the date of publication of the periodic
report, is 114,038,630 Ordinary Shares (excluding 2,297,163 Ordinary Shares held by the
Company which are dormant).
- 8-
Chapter D (Additional details on the corporation) for the periodic report for 2021
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.
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.
- 9-
Chapter D (Additional details on the corporation) for the periodic report for 2021
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
Efrat Duvdevani
Ajit V. Pai
Efrat Makov
Stephen Joseph
Chairman
549871770 (foreign
HP037044 (foreign
066522772
23824873
536841734
023044365
551988678
(foreign
passport)
passport)
passport)
(Foreign passport)
Date of birth
November 18, 1975 September
13,
September 2, 1984
JUNE 10, 1968
January 10, 1973
June 17, 1968
April 10, 1980
1985
Address for the
service of court
documents
Citizenship
Education
144
Menachem
144
Menachem
2 Haysur St., Ramat
48 Hanasi Ben Zvi
144
Menachem
118 HaTamar Road,
144 Menachem Begin
Begin Road, Tel
Begin Road, Tel
Hasharon
St., Herzliya
Begin Road, Tel Aviv
Moshav
Ben
Road, Tel Aviv (at B.
Aviv
(at
B.
Aviv
(at
B.
Communications)
Communications)
(at
B.
Shemen, 73115
Communications)
Communications)
American
Canadian
Israeli
Israeli
American
Israeli
British
BACCY, George
MBA Richard Ivey
Degree in Law, IDC
Degree
in
BA, Social Studies,
B.A.
In Economics
BSc in Business and
Washington
School of Business
Herzliya, B.A.
in
International
Harvard University;
and Accounting from
Financial Economics
University
MBA,
at the University of
Management,
IDC
Relations
and
Tel Aviv University.
from
Leeds
Harvard Business
Western Ontario.
Herzliya,LL.M.
English, The Hebrew
School
Commercial
Law
University; Degree in
(cum laude), Tel Aviv
Public
Policy
-
University,
M.Sc.
Management
and
J.D Law Studies,
University
of
Chicago Law School
University, KPMG.
- 10-
Chapter D (Additional details on the corporation) for the periodic report for 2021
General
Finance, Tel Aviv
Management,
University
Stanford University,
Semester in Law at
Berkeley University
Occupation
the past
years
for
five
Partner
in
the
Partner
in
VP
of Business
CEO of the Peres
Partner
in
Jewelry
Designer
CFO and VP of
Searchlight Capital
Searchlight Capital
Development at the
Center
for Peace
Searchlight Capital
(Independent
Operations at Ocean
Partners and head
Partners. Director in
Neopharm Group,
and Innovation.
Partners.
Business).
Outdoor Group (LSE:
of
investments
in
TouchTunes,
Business
infrastructure,
Roots,
Care
Development
communications,
Advantage
Manager at Celgene
media
and
Corporation.
technology.
Deputy
Director,
Director in Bezeq,
Bezeq
All
Points
Broadband, Adams
Outdoor
Advertising.
Previously, he was
also a director at the
following
companies:
Rackspace, Charter
Communication,
- 11-
Chairman of the FCC
Director
in
the
OOUT).
Outdoor
media and advertising
FCC Commissioner
following companies:
company.
BioLight
Life
Sciences Ltd. (2011-
2020);
Anchiano
Therapeutics
Ltd.
(2018-2020);
Kamada Ltd. (2018-
2019); iSPAC 1 Ltd.
(2021-present); Allot
Ltd.
(2021-present)
iSPAC 1 Ltd; Allot
Ltd.
Chapter D (Additional details on the corporation) for the periodic report for 2021
Ocean
Outdoor,
160over90,
MediaMath, Charter
Communications,
PatientPoint,
Veritable Maritime
Bezeq, All Points
Broadband,
Adams Outdoor
Advertising
Serves as a
director in other
corporations
Octave Group,
Bezeq, LessTests
Future Initiatives,
Roots Corporation,
Care Advantage
Special Olympics.
- 12-
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,
Media
Limited
Agencies
Outdoor
Outdoor
Media
Chapter D (Additional details on the corporation) for the periodic report for 2021
Has accounting
and
financial
expertise
Is the director an
employee of the
corporation, of
its subsidiary, of
affiliated
its
company or of a
stakeholder
therein
Yes
Yes
Yes
Yes
Yes
Yes
Yes, see details of
Yes, see details of
Yes, the director
No
Yes, see details of
No
occupation in the
occupation in the
serves as VP of
last five years.
last five years.
Business
occupation in the last
five years.
Development of the
Neopharm Group,
whose controlling
shareholders, David
and Michal Forer,
are also controlling
shareholders of TNR
- 13-
Gudfar& son AB,
Visual Art & Global
Agencies
Sweden
AB,
Visual
Art
International Holding
AB,
Visual Art Sweden
AB,
Visual Art Sweden
Holding AB,
Visual Art Denmark
City Reklame A/S,
Visual Art Norway AS.
Yes
No
Chapter D (Additional details on the corporation) for the periodic report for 2021
Is the director a
family member
another
of
stakeholder
in
the corporation
Membership in a
or
committee
committees
of
the Board of
Directors
Investments Ltd.,
which owns the joint
controlling interest in
the Company.
No
No
Yes, the director
No
No
No
No
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 owns the
joint controlling
interest in the
Company.
No
No
No
The Committee for
No
The Committee for
The Committee
for
the Examination of
Financial
Statements; The
Audit Committee;
- 14-
the Examination of
the Examination of
Financial
Financial Statements;
Statements;
The
The Audit Committee;
Audit
Committee;
Remuneration
Chapter D (Additional details on the corporation) for the periodic report for 2021
No
No
No
Is this member of
the Board of
Directors
an
outside director
Remuneration
Committee;
Yes
Does
the
No
No
No
Yes
Remuneration
Committee;
Committee;
Yes
No
Yes
Yes
No
No
Company
see
the director as
an
independent
director
- 15-
Chapter D (Additional details on the corporation) for the periodic report for 2021
b. Directors who served in the year of the report but ended their office before the date
of publication of the report:
During the reporting year, the directors Tomer Raved and Michael Clare served in the
Company until November 29, 2021 and December 8, 2021 (respectively).
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
Ilan Chaikin
Role in the Company,
subsidiary, affiliate or
related party
Date of birth
Education
Chief Financial
Officer
CEO of the
Company
Internal Auditor
February 14,
1980
BA in
Accounting and
Economics, Tel
Aviv University.
MBA in
Business
Administration,
Tel Aviv
University.
April 18, 1985
Double major in
Law and
Economics from
the Tel Aviv
University; MBA
- NYU Stern
School of
Business
November 21,
1954
Bachelor's
degree in
Economics and
Accounting, Tel
Aviv University.
Main occupations in the
last 5 years and a list of
the corporations in
which he serves as a
director
CFO of B
Communications
Ltd. and Internet
Gold Lines -
Gold Ltd.
The Company's
CEO and
director in
Bezeq.
Managing
partner at CPA
Chaikin Cohen
Rubin & Co.
Director and Vice
President of the
Telecom and
Technology
Group at RBC
Investment Bank
in New York.
No
No
No
Is he a related party in
the Company or a family
member of another
senior official or of
another related party in
the Company
Regulation 27: Independent authorized signatory
The Company's CEO, Mr. Tomer Raved, is an independent signatory authorized by the
Company, as this is term defined in the law.
Without derogating from the above, for the purpose of making money transfers in any amount
from the Company's accounts in banks, the signatures of Mr. Tomer Raved, the Company's
CEO, and Mr. Itzik Tadmor, the Company's CFO, are required.
- 16-
Chapter D (Additional details on the corporation) for the periodic report for 2021
Regulation 27: The accountant of the corporation
Somekh Chaikin, CPA
Address: 17 HaArbaa St.,, KPMG Millennium Tower, Tel Aviv 6473917
Tel: 03-6848000
Regulation 28: Amendment of the Company's Articles of Association
On March 3, 2021, the shareholders' meeting of the Company approved the increase of the
registered share equity of the Company, so that the registered equity of the Company after
the approval of the meeting was increased to NIS 30,000,000 divided into 300,000,000
ordinary shares of NIS 0.1 each, and amending the Company's Articles of Association so that
they reflect the increase in registered equity as aforesaid.
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)
Regarding exceptional transactions, see Note 29 to the financial statements.
A. On November 29, 2021, the Company's Board of Directors approved a plan to
repurchase the Company's shares in the amount of up to NIS 30 million, which begins
on December 1, 2021 and ends: (1) upon repurchase in the amount of NIS 30 million;
Or (2) on March 1, 2022, whichever is earlier. As of the date of the report, in accordance
with the said repurchase plan, the Company purchased shares in the total amount of
approximately NIS 27 million. For further details, see the Company's report dated
November 30, 2021 (Ref. No.: 2021-01-104413), which is generally presented in this
report by way of reference.
B. Liability Insurance of Directors and Officers - On November 29, 2021, the Company's
Board of Directors approved (after the approval by the Debt Remuneration Committee),
in accordance with Regulation 1B1 of the Companies Regulations (Easements in
Transactions with Related Parties), 5760-2000, the engagement in a liability insurance
policy of directors and officers of the Company, in relation to all directors and officers
of the Company, including officers who are the controlling shareholders and including
the CEO, for a period beginning on December 2, 2021, and ending on December 1,
2022. For further details, see the Company's report dated November 30, 2021
(Reference No.: 2021-01-104446), which is presented in this report in general by way
of reference.
C. For details regarding the repayment of the Company's debentures, see Regulation 20
above.
Regulation 29 (c): Resolutions of a special general meeting
a. Approval of the increase of the registered share equity of the Company and amendment of
the Company's Articles of Association (March 3, 2021)
b. Approval of a grant program for the Company's CEO, Mr. Tomer Raved (November 11,
2021);
c. Non-approval of the payment of an annual grant to the Company's CEO, Mr. Tomer Raved,
for the year 2020 and for the year 2021 (November 11, 2021). It is noted that on November
29, 2021, following the recommendation of the Company's Remuneration Committee, the
Company's Board of Directors decided, in accordance with the provisions of Article 272
(c1) (1) (c) of the Companies Law, to discuss and approve the Company's CEO, Mr. Tomer
Raved, Annual grant for the year 2020 and for the year 2021;
d. Approval of the first appointment of Mrs. Efrat Duvdevani, as an external director of the
Company for a initial term of three years (January 24, 2022);
e. Approval of the issuance of letters of commitment for indemnification and a letter exempting
liability from Mrs. Efrat Duvdevani (January 24, 2022).
- 17-
Chapter D (Additional details on the corporation) for the periodic report for 2021
2. 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 statements.
March 23, 2022
Date
_______________________________
B. Communications Ltd.
Name and role of signatories:
Tomer Raved, CEO
Darren Glatt, Chairman of the Board of Directors
- 18-
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: 23 days.
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: _____.
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:
D.
The majority required to amend these provisions in the articles of association:
8.
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)
9.
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: 6. 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: 5, women: 2.
BOARD MEETINGS (AND CONVENING A GENERAL MEETING)
11.
A.
Number of board meetings held during each quarter of the reporting year:
First quarter (2021): 3.
Second quarter: 4.
Third quarter: 3.
Fourth quarter: 6.
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
(served during the
reporting year
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
until November
29, 2021)
Phil Bacal
100%
Ran Forer
100%
Stephen Joseph
95%
100%
100%
100%
100%
100%
100%
100%
Michael Clare
(served during the
reporting year
until December 8,
2021)
Efrat Makov
100%
100%
100%
100%
Ajit Pai
100%
9
12.
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.
√
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,
10
15.
16.
but in any answer (correct / incorrect), indicate the period (days) in which a CEO did not
serve in the corporation as aforesaid: [__].
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)-
Indicate the family relation between the parties: _____.
A.
B.
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.
√
√
√
√
12
E.
A director whose main livelihood depends on the controlling shareholder.
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 (2021): 2 Days.
Second quarter statements: 3 Days.
Third quarter statements: 4 Days.
Annual statements: 3 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 (2021): 5 Days.
Second quarter statement: 5 Days.
Third quarter statements: 6 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.
Correct
√
Incorrect
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).
√
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 Tomer Raved, who served during the reporting year until November 29, 2021, and Michael Clare, who
served during the reporting year until December 8, 2021, have accounting and financial expertise. Ajit Pai joined the Board of Directors as a
director with accounting expertise on May 4, 2021. Efrat Duvdevani joined the Board of Directors as an external director with accounting
expertise after the end of the reporting year on January 24, 2022.
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 focusing on the domestic
communications market in Israel only.
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, 2021
- 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. Lital Aharoni, 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 and Information Technololgy General Controls (ITGC);
2. Controls over cash process and debt management
3. Process of preparing and closing the reports
- 3-
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
corporation concluded that the internal control over the financial reporting and
disclosure in the corporation as of December 31, 2021 is effective.
A list of material vulnerabilities in the internal control that were corrected during the
reporting year up to the reporting date, including the date on which they were initially
reported:
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 June 30, 2020 was the reduction of
the Group’s equity according to the following detail:
- 4-
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
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
122 million (NIS 100 million net of tax) was recognized 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:
- 5-
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.
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 2017-2019: 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, in 2019, 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.
- 6-
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.
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. Accordingly, at the
request of Bezeq's Audit Committee, the External Auditor presented to Bezeq's
Audit Committee findings of complementary work performed and subsequently
received Bezeq's Board of Directors recommendations from the Audit Committee,
mainly in the implementation of periodic controls and analytical analyzes that Bezeq
International must perform as part of the process of closing the financial statements
(in addition to the existing controls); Adoption of a professional standard for
executives engaged in controls, and their occupations, at Bezeq and each of its
substantial subsidiaries, as well as conferring supervisory and control powers on
the employees of Bezeq's Accounting Division on the work of the finance and
accounting employees in each of Bezeq's subsidiaries with regard to the financial
statements of each subsidiary;.
Adoption of certain tests for the purpose of increasing the effectiveness of entity-
level controls at Bezeq, and at each of its significant subsidiaries; As well as
recommendations regarding the examination and improvement of Bezeq and Bezeq
International's contracts with external service providers.
It should also be noted that the test report and the samples prepared by the External
Auditor did not identify any indications of suspicion of embezzlement in the period
under review and in particular the incident that occurred between 2001-20031 and
1 It should be noted that according to the examination report, due to the amount of accounting entries,
lack of documentation and completeness in supporting documents and lack of full explanations
regarding some of the accounting entries made by employees from Bezeq International’s Finance
Division in those years, the suspicion of embezzlement in 2001-2003 cannot be completely ruled out.
- 7-
clarified by the External Auditor that in relation to the incident between 2017-2019
there was no concrete suspicion of embezzlement - therefore, it was decided not to
extend the examination of the suspicions of an embezzlement incident beyond the
actions performed and the findings and conclusions that emerged from them by the
External Auditor.
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,
as well as in its periodic reports.
As part of the effectiveness assessment for September 30, 2020 and December 31,
2020,
the Company reported
ineffective
internal control 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 inadequate recognition of
expenses. It will be clarified that the material vulnerabilities identified in such
controls are with respect to Bezeq International.
In the quarterly report as of March 31, 2021, the Company concluded that the
internal control was effective as of the date of publication of the report, and also
reported in detail on actions taken to correct the material vulnerabilities.
It should be noted that Bezeq International continues to strengthen its internal
control, inter alia, by improving the automation of work procedures in which failures
have been identified, as well as performing additional operations. Improving the
automation of work procedures is carried out as part of a multi-year plan, some of
which is accompanied by external professional consultants.
****
Regarding the investigations of the Securities Authority and the Israel Police, 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
- 8-
investigations, plans, materials and evidence in the hands of the law authorities in
the matter (although in January 2021 Bezeq received the core of the investigation
material in connection with the 4000 Case, following Bezeq's summons to a hearing
on this matter as detailed in Section 1.1.7.2 of the chapter describing the
corporation's business). Accordingly, the Corporation is not yet able to assess the
effects of the investigations, their findings and results on the Corporation and on
the financial statements and estimates used in the preparation of these statements,
if any.
- 9-
(1) 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 2021 (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;
- 10-
(5)
I, alone or with others in the Corporation:
(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 23, 2022
_______________________
Tomer Raved, CEO
- 11-
(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 2021 (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
- 12-
disclosure;
(5) I, alone or with others in the Corporation:
(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 23, 2022
_______________________
Itzik Tadmor, CFO
- 13-