UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 20–F
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2011
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________
 
OR

o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report....................................
 
Commission file number 001-33271
 
 
CELLCOM ISRAEL LTD.
(Exact name of Registrant as specified in its charter
and translation of Registrant’s name into English)
 
ISRAEL
(Jurisdiction of incorporation or organization)
 
10 Hagavish Street, Netanya 42140, Israel
(Address of principal executive offices)
 
Liat Menahemi Stadler, 972-52-9989595 (phone), 972-98607986 (fax), LIATME@cellcom.co.il , 10 Hagavish Street, Netanya 42140, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
Title of each class
Name of each exchange on which registered
Ordinary Shares, par value NIS 0.01 per share
New York Stock Exchange ( “ NYSE ” )
 
Securities registered or to be registered pursuant to Section 12(g) of the Act.
 
None
(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
 
None
(Title of Class)
 
 
 
 
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2011, the Registrant had outstanding 99,481,487 Ordinary Shares, par value NIS 0.01 per share.

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  [X]  Yes    [  ]  No

If this report is an annual or transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.   [  ]  Yes    [X]  No

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [X]  Yes    [  ]  No

Indicate by check mark whether the Registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)  [  ]  Yes    [  ]  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  [X ]
Accelerated filer  [  ]
Non-accelerated filer  [  ]
 
Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:

U.S. GAAP [  ]

International Financial Reporting Standards as issued by the International Accounting Standards Board  [ X ]

Other [  ]

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant elected to follow.
 
Item 17 [  ]

Item 18 [  ]

If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [  ]  Yes    [X]  No
 
 
2
 
 
 
TABLE OF CONTENTS
 
   
Page
     
    PART I  
Item 1.
5
Item 2.
5
Item 3.
5
Item 4.
32
Item 4A
94
Item 5.
94
Item 6.
119
Item 7.
139
Item 8.
143
Item 9.
146
Item 10.
149
Item 11.
163
Item 12.
164
 
PART II
Item 13.
165
Item 14.
165
Item 15.
165
Item 16A.
166
Item 16B.
166
Item 16C.
167
Item 16D.
167
Item 16E.
167
Item 16F.
168
Item 16G.
168
 
PART III
Item 17.
169
Item 18.
169
Item 19.
169
Financial Statements
F-1
 
 
3
 
INTRODUCTION
 
In this annual report, “Cellcom,” the “Company,” “we,” “us” and “our” refer to Cellcom Israel Ltd. and its subsidiaries.  The terms “NIS” refers to new Israeli shekel, and “dollar,” “USD” or “$” refers to U.S. dollars.
 
Presentation of Financial and Share Information
 
We prepare our consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board   (“IASB”). Until and including our financial statements for the year ended December 31, 2007, we prepared our consolidated financial statements in accordance with Israeli GAAP. Following the Company’s adoption of IFRS, as issued by the IASB, the Company is no longer required to reconcile its financial statements prepared in accordance with IFRS to U.S. GAAP.
Unless we indicate otherwise, U.S. dollar translations of the NIS amounts presented in this annual report are translated for the convenience of the reader using the rate of NIS 3.821 to $1.00, the representative rate of exchange as of December 31, 2011 as published by the Bank of Israel. The translation is for the convenience of the reader only, and it does not represent the fair value of the translated assets and liabilities.
 
Trademarks
 
We have proprietary rights to trademarks used in this annual report which are important to our business. We have omitted the “®” and “™” designations for certain trademarks, but nonetheless reserve all rights to them.  Each trademark, trade name or service mark of any other company appearing in this annual report belongs to its respective holder.
 
Industry and Market Data
 
This annual report contains information about our market share, market position and industry data.  Unless otherwise indicated, this statistical and other market information is based on statistics prepared by the Ministry of Communications of Israel, the Ministry of Finance of Israel, the Central Bureau of Statistics of Israel, the Bank of Israel, Merill Lynch, , Brandman Research (survey institute), Strategy Analytics and Geocartography Group (survey institute). Industry publications generally state that the information they contain has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed.  We have not independently verified the accuracy of market data and industry forecasts contained in this annual report that were taken or derived from these industry publications.
 
Special Note Regarding Forward-Looking Statements
 
We have made statements under the captions “Item 3.D - Risk Factors,” “Item 4 – Information on the Company,” “Item 5 - Operating and Financial Review and Prospects,” and in other sections of this annual report that are forward-looking statements.  In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms and other comparable terminology.  These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business.  These statements are only predictions based on our current
 
 
4
 
expectations and projections about future events.  There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Item 3.D - Risk Factors.”  You should specifically consider the numerous risks outlined under “Item 3.D - Risk Factors.”
 
Although we believe the expectations reflected in the forward-looking statements contained in this annual report are reasonable, we cannot guarantee future results, level of activity, performance or achievements.  Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements.  We assume no duty to update any of these forward-looking statements after the date of this annual report to conform our prior statements to actual results or revised expectations, except as otherwise required by law.
 
PART I
 
ITEM 1.
 
Not applicable.
 
ITEM 2.
 
Not applicable.
 
ITEM 3.
 
A.
SELECTED FINANCIAL DATA
 
You should read the following selected consolidated financial data in conjunction with the section of this annual report entitled “Item 5 - Operating and Financial Review and Prospects” and our consolidated financial statements and the notes thereto included elsewhere in this annual report.
 
The selected data presented below under the captions “Income Statement Data,” and “Balance Sheet Data” for, and as of the end of, each of the years in the five-year period ended December 31, 2011, are derived from the consolidated financial statements of Cellcom Israel Ltd. and subsidiaries, which financial statements have been audited by Somekh Chaikin, an independent registered public accounting firm and a member firm of KPMG International. The consolidated financial statements as of  December 31, 2009, 2010 and 2011, and for each of the years in the three-year period ended December 31, 2011, and the report thereon, are included elsewhere in this annual report. The selected data should be read in conjunction with the consolidated financial statements, the related notes, and the independent registered public accounting firm’s report and the convenience translation of the consolidated financial statements as of and for the year ended December 31, 2011 into U.S. dollars solely for the convenience of the reader.
 
The figures for the years 2007 and 2008 have been adjusted to give the retrospective application effect of the change in our accounting policy with respect to subscriber acquisition and retention costs, applied in June 2009, retrospectively from January 1, 2007. See note 2.H to our consolidated financial statements for the year ended December 31, 2009 (included in our annual report on Form 20-F for the year ended December 31, 2009).
 
On August 31, 2011, we completed the acquisition of 100% of the share capital of Netvision Ltd., or Netvision. Therefore, the consolidated results for the year ended December 31, 2011, included elsewhere in this annual report, include Netvision’s results for the months of September through December 2011 only.
 
The information presented below under the caption “Other Data” contains information that part of it is not derived from the financial statements.
 
For your convenience, the following tables also contain U.S. dollar translations of the NIS amounts presented at December 31, 2011, translated using the rate of NIS 3.821 to $1.00, the representative rate of exchange on December 31, 2011 as published by the Bank of Israel.
 
   
Year Ended December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011(1)
   
2011(1)
 
   
(In NIS millions, except per share data)
   
(In US$ millions)
 
Income Statement Data:
                                   
                                                 
Revenues
    6,050       6,417       6,483       6,662       6,506       1,703  
Cost of revenues
    3,315       3,396       3,333       3,322       3,408       892  
Selling and marketing expenses
    685       701       716       756       990       259  
General and administrative expenses
    653       659       660       641       685       179  
Other (income) expenses, net
    3       (29 )     6       5       1       -  
Operating income
    1,394       1,690       1,768       1,938       1,422       373  
Financing expense, net
    (147 )     (310 )     (219 )     (230 )     (293 )     (77 )
Income tax
    328       391       367       417       304       80  
Net income
    919       989       1,182       1,291       825       216  
Basic earnings per share
    9.42       10.12       12.01       13.04       8.28       2.17  
Diluted earnings per share
    9.34       9.96       11.90       12.98       8.28       2.17  
Weighted average ordinary shares used in calculation of basic earnings per share
    97,500,000       97,721,339         98,432,757       98,979,544       99,476,671          
Weighted average ordinary shares used in calculation of diluted earnings per share
    98,441,260       99,279,924         99,306,714       99,480,791       99,511,433          
                                                 
Other Data:
                                               
EBITDA(2)
    2,187       2,482       2,529       2,667       2,167       567  
Capital expenditures
    651       633       663       735       520       136  
Dividends declared per share
    13.90       11.23       11.91       13.85       7.88       2.06  
Net cash provided by operating activities
    1,820       1,745       2,080       2,380       1,332       349  
Net cash used in investing activities
    (560 )     (528 )     (774 )     (889 )     (1,656 )     (433 )
Net cash provided by (used in) financing activities
    (405 )     (1,853 )     (678 )     (1,861 )     715       187  
Cellular Subscribers (in thousands)(3)
    3,073       3,187       3,292       3,394       3,349          
Cellular Period churn rate(4)
    16.3 %     18.9 %     19.6 %     20.5 %     25.1 %        
Cellular ARPU (in NIS)(5)
    150       149       144       144       106       27.7  
                                                 
Balance Sheet Data:
                                               
                                                 
Cash
    911       275       903       533       920       241  
Working capital
    716       461       1,254       924       679       178  
Total assets
    6,294       5,488       6,379       5,996       8,557       2,239  
Total equity
    881       390       374       341       187       49  

(1)
The consolidated financial results for the year 2011 include the results of Netvision Ltd., or Netvision, our recently acquired wholly owned subsidiary, for the months September through December 2011. We consummated the acquisition of Netvision on August 31, 2011. For further details regarding the Netvision acquisition, see Item 4. A – “Significant Developments during 2011”. For further details regarding the effect of Netvision’s financial results on our consolidated financial results, see Item 5. A - “Operating and Financial Review and Prospects”.
 
(2)
EBITDA is a non-IFRS measure and is defined as income before financing income (expenses), net; other income (expenses), net; income tax; depreciation and amortization; share based payments.  We present EBITDA as a supplemental performance measure because we believe that it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structure (most particularly affecting our interest expense given our significant debt), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) the age of, and depreciation expenses associated with fixed assets.  EBITDA should not be considered in isolation or as a substitute for operating income or other statement of operations or cash flow data prepared in accordance with IFRS as a measure of our profitability or liquidity.  EBITDA does not take into account our debt service requirements and other commitments, including capital expenditures, and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses.  In addition, EBITDA, as presented in this annual report, may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated.
 
 
The following is a reconciliation of net income to EBITDA:
 
   
Year Ended December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011
   
2011
 
   
(In NIS millions)
   
(In US$ millions)
 
                                     
Net income
    919       989       1,182       1,291       825       216  
Financing expense (income), net
    147       310       219       230       293       77  
Other expenses (income), net
    3       (29 )     6       5       1       -  
Income taxes
    328       391       367       417       304       80  
Depreciation and amortization
    790       821       755       724       738       193  
Share based payments
    -       -       -       -       6       1  
EBITDA
    2,187       2,482       2,529       2,667       2,167       567  
 
(3)
Cellular subscriber data refers to active subscribers.  We use a six-month method of calculating our cellular subscriber base, which means that we deduct subscribers from our subscriber base after six months of no revenue generation or activity on our network by or in relation to both the post-paid and pre-paid subscriber.  The six-month method is, to the best of our knowledge, consistent with the methodology used by other cellular providers in Israel. During the fourth quarter of 2011, we have removed approximately 52,000 subscribers from our subscribers base, following the shutdown of our TDMA network as of December 31, 2011, since such subscribers have not requested a transfer to our other networks as of that date, and following a change to our previous policy which allowed subscribers to change from post to prepaid subscription as a result of the reduction of Early Termination Fees in the cellular market in early 2011, as we found this change to be futile since most of these subscribers ceased using our services. These changes affected other key performance indicators. We have not restated prior subscriber data to conform with these changes.  
 
(4)
Churn rate is defined as the total number of voluntary and involuntary permanent deactivations of cellular subscribers in a given period expressed as a percentage of the number of cellular subscribers at the beginning of the period.  Involuntary permanent deactivations relate to cellular subscribers who have failed to pay their arrears for the period of six consecutive months.  Voluntary permanent deactivations relate to cellular subscribers who terminated their use of our cellular services.
 
(5)
Average monthly revenue per cellular subscriber (ARPU) is calculated by dividing revenues from cellular services for the period by the average number of cellular subscribers during the period and by dividing the result by the number of months in the period.  Revenues from inbound roaming services are included even though the number of cellular subscribers in the equation does not include the users of those roaming services.  Inbound roaming services are included because ARPU is meant to capture all service revenues generated by a cellular network, including roaming services.  Revenues from sales of extended warranties are included because they represent recurring revenues generated by cellular subscribers, but revenues from sales of handsets, repair services and other  services are not.  We and industry analysts treat ARPU as a key performance indicator of a cellular operator because it is the closest meaningful measure of the contribution to service revenues made by an average subscriber.
 
 
We have set out below the calculation of ARPU for each of the periods presented:
 
   
  Year Ended December 31,
   
   
2007
   
2008
   
2009
   
2010
   
2011
   
2011
 
   
(In NIS millions, except number of subscribers and months)
   
(In US$ millions)
Revenues
    6,050       6,417       6,483       6,662       6,506       1,703  
less revenues from equipment sales 
    635       745       751       802       1,747       457  
less other revenues*
    93       135       162       124       484       127  
Revenues used in cellular ARPU calculation
    5,322       5,537       5,570       5,736       4,275       1,119  
 
 
Average number of cellular subscribers
    2,955,855       3,105,022       3,215,492       3,322,891       3,361,803       3,361,803  
Months during period
    12       12       12       12       12       12  
Cellular ARPU (in NIS, per month)
    150       149       144       144       106       28  
* 
Other revenues include revenues from repair services and other communication services such as ISP, transmission services and local and international landline services.
 

Exchange Rate Information
 
The following table shows, for each of the months indicated, the high and low exchange rates between the NIS and the U.S. dollar, expressed as NIS per U.S. dollar and based upon the daily representative rate of exchange as published by the Bank of Israel:
 
Month
 
High (NIS)
   
Low (NIS)
 
September 2011
    3.725       3.574  
October 2011
    3.763       3.602  
November 2011
    3.800       3.650  
December 2011
    3.821       3.727  
January 2012
    3.854       3.733  
February 2012
    3.803       3.700  
 
On March 2, 2012 the daily representative rate of exchange between the NIS and U.S. dollar as published by the Bank of Israel was NIS 3.791 to $1.00.
 
The following table shows, for periods indicated, the average exchange rate between the NIS and the U.S. dollar, expressed as NIS per U.S. dollar, calculated based on the average of the representative rates of exchange on the last day of each month during the relevant period as published by the Bank of Israel:
 
Year
 
Average (NIS)
 
2007
    4.085  
2008
    3.568  
2009
    3.927  
2010
    3.732  
2011
    3.582  
 
 
The effect of exchange rate fluctuations on our business and operations is discussed in “Item 5 - Operating and Financial Review and Prospects—Quantitative and Qualitative Disclosures about Market Risk.”
 
B.
CAPITALIZATION AND INDEBTEDNESS
 
Not applicable.
 
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
 
Not applicable.
 
D.
RISK FACTORS
 
We believe that the occurrence of any one or some combination of the following factors could have a material adverse effect on our business, financial condition or results of operations.
 
Risks Related to our Business
 
We operate in a heavily regulated industry, which can harm our results of operations.
 
A substantial part of our operations is subject to the Israeli Communications Law, 1982, the Israeli Wireless Telegraph Ordinance (New Version), 1972, the regulations promulgated thereunder and the licenses for the provision of different telecommunications services that we received from the Ministry of Communications in accordance with the Communications Law.  The interpretation and implementation of the Communications Law, Wireless Telegraph Ordinance and regulations and the provisions of our general licenses, as well as our other licenses, are not certain and disagreements have arisen and may arise in the future between the Ministry of Communications and us. The Communications Law and regulations thereunder grant the Ministry of Communications extensive regulatory and supervisory authority with regard to our activities, as well as the authority to impose substantial sanctions in the event of a breach of our licenses or the applicable laws and regulations. In January 2012, a bill proposing to set gradually increasing financial sanctions on communication operators, for breach of their licenses, the amount  of which will be calculated as a percentage of the operator’s income and based on the gravity of the breach, passed a preliminary legislative stage in the Israeli Parliament. Such bill, if adopted,  is expected to substantially increase the Ministry of Communications’ usage of such sanctions. Substantial sanctions would negatively affect our results of operations and reputation.  Further, in the event that we materially violate the terms of our licenses, the Ministry of Communications has the authority to revoke them.
 
Our operations are subject to the regulatory and supervisory authority of other Israeli regulators which also includes the authority to impose criminal and administrative sanctions against us including, among others, the Ministry of Environmental Protection;  the Anti Trust Commissionaire; the Ministry of Justice and the Law, Information and Technology Authority at the Ministry of Justice - in charge of issues such as data bases and privacy protection; the Ministry of Industry and Commerce (including the Fair Trade Authority) in charge of labor and consumer protection. We have witnessed increased activity by some of these regulators in recent years and expect this trend to continue. Substantial sanctions by any of these regulators would negatively affect our results of operations and our reputation. Increased supervision and regulation of our activities could limit our freedom to conduct our business and harm our results of operations.
 
Our general cellular license is valid until February 2022. It may be extended for additional six-year periods upon our request to the Ministry of Communications and confirmation from the Ministry of Communications that we have complied with the provisions of our license and the applicable law, have continuously invested in the improvement of our service and network and have demonstrated the ability to do so in the future. Netvision’s Internet Service Provider, or ISP license and International Long Distance, or ILD license, are valid until April 2012 and May 2025, respectively and may be extended for additional five and eight year periods, respectively, on terms similar to those provided in our cellular license. Our other licenses are also limited in time.  Our licenses may not be extended when necessary, or, if extended, the extensions may be granted on terms that are not favorable to us.  In addition, the Ministry of Communications has modified and may modify our licenses without our consent and in a manner that could limit our freedom to conduct our business and harm our results of operations. Possible changes to our licenses and legislation which would require us to change our pricing plans and information systems frequently or on
 
a timetable we cannot meet, can increase the risk of noncompliance with our licenses or violation of such legislation and our exposure to lawsuits and regulatory sanctions.
 
Further, our business and results of operations could be materially and adversely affected by new legislation and decisions by our regulators that:
 
 
·  
reduce tariffs, including roaming tariffs, or otherwise intervene in the pricing policies for our products and services, including by: completely annulling early termination fees in cellular pricing plans which include a commitment to a predefined period, or Early Termination Fees, intervening in pricing of bundles of services, intervening in our ability to offer airtime rebates or refunds for end user equipment, or the scope thereof, requiring us to offer a “limited credit” service to our post-paid customers, by requiring us to offer “data only” services and intervening in pricing and terms of such services, or by prohibiting subscription fees for certain services. The reduction of interconnect tariffs that came into force in January 1, 2011, and the reduction of Early Termination Fees in cellular pricing plans to a negligible amount as of February 1, 2011, had a material adverse effect on our results of operations and are expected to continue to adversely affect our results of operations in the future. See “Item 4. Information on the Company – B. Business Overview – Government Regulations – Tariff Supervision” and “Item 4. Information on The Company – B. Business Overview – Netvision”. for additional details;
 
 
·  
set unfavorable national roaming tariffs or Mobile Virtual Network Operator, or MVNO, hosting tariffs or tariffs that are lower than the tariffs that we would otherwise be willing to offer. According to the Telecommunication Law, the MOC is required to set the national roaming tariffs until February 1, 2012, however, to date, no such tariffs were set yet. See “Item 4. Information on the Company – B. Business Overview - Government Regulations - Additional UMTS Operators”;
 
 
·  
increase the number of competitors in the cellular market, including by awarding cellular licenses  to additional  MVNOs, and licenses for the use of our network by competing technologies, such as Voice over Broadband over Cellular, or VoC; awarding new competitors certain benefits and leniencies not available to existing cellular operators, including through requiring us to allow usage of our network by such competitors and on unfavorable terms to us; limit our ability to compete, including by limiting our ability to develop our network and by preferring new and/or small competitors in the allocation of frequencies, including those designated to the 4G of cellular services. See “Item 4. Information on the Company – B. Business Overview” under “Competition” and under “Government Regulations – Mobile Virtual Network Operator” and “- Additional UMTS Operators” for additional details;
 
 
·  
impose new safety or health-related requirements;
 
 
·  
impose additional restrictions or requirements with respect to the construction and operation of cell sites or the network, including as a result of MVNO hosting services, national roaming and site sharing;
 
 
·  
impose restrictions on the provision of services or products we currently provide or regulate or otherwise intervene with the terms under which we advertise and market them and provide them to our subscribers, including in respect of existing agreements;
 
 
·  
impose restrictions on the provision of cellular internet services, including by providing customers their choice of ISP;
 
 
·  
limit or otherwise intervene with the services or products that we may sell;
 
 
·  
set higher service standards; or
 
 
·  
impose a stricter policy with respect to privacy protection, such as with regard to data protection, collection, amelioration or usage of data for marketing activities. An initial proposal of the Information and Technology Authority regarding cellular operators recently received, proposes imposing strict limitations on such collection and usage, including the requirement to receive a positive consent of the customer to do so (other than with regards to basic data); or
 
 
·  
impose structural or operational separation between our and Netvision’s operations (partial or full) or between the different services within each company - see “Item 4. Information on the Company – B. Business Overview - Government Regulations – Long Distance Services;  or set unfavorable regulation regarding the wireline wholesale market - see “Item 4. Information on The Company – B. Business Overview – Competition”.
 
See “ Item 4. Information on the Company – B – Business Overview – Government Regulations ― Our Principal License ” and “Other Licenses”.
 
If we fail to compensate for lost revenues, increased expenses or additional investments resulting from past or future legislative or regulatory changes with alternative sources of income or otherwise, our results of operations may be materially adversely affected.
 
We may not be able to obtain permits to construct and operate cell sites.
 
We depend on our network of cell sites to maintain and enhance  network coverage for our subscribers. In addition, where necessary, we provide certain subscribers with bi-directional amplifiers, also known as “repeaters,” to remedy weak signal reception in indoor locations. Some of these repeaters are located outdoors on rooftops. We also deploy and operate microwave sites as part of our transmission network.  The construction and operation of these various facilities are highly regulated and require us to obtain various consents and permits. See “Item 4.B – Business Overview - Government Regulations - Permits for Cell Site Construction” for additional details.
 
We have experienced difficulties in obtaining some of these consents and permits, particularly in obtaining building permits for cell sites from local planning and building authorities. As of December 31, 2011, we operated a small portion of our cell sites without building permits or applicable exemptions. Although we are in the process of seeking to obtain building permits or to modify our cell sites in order to satisfy applicable exemptions, we may not be able to obtain all the necessary permits or make the necessary modifications.
 
Approximately 32% of our cell sites operate without building permits in reliance on an exemption from the requirement to obtain a building permit, mainly for radio access devices. Our reliance on the exemption for radio access devices had been challenged and is currently awaiting ruling by the Israeli Supreme Court. Under an interim order issued by the Supreme Court in September 2010, we are unable to further construct radio access devices in cellular networks in reliance on the exemption, until regulations limiting our reliance on the exemption are enacted or a different decision by the court is made. A further decision of the Supreme Court in February 2011, states that the order will not apply to the replacement of existing radio access devices under certain conditions.
 
Additionally, in November 2008, the District Court of Central Region, in its capacity as court of appeals, ruled that the exemption does not apply to radio access devices, if the rooftop, on which those devices are located, is at the same level as a residence or other building that is regularly frequented by people.
 
Following the Attorney General’s conclusion that the application of the exemption does not balance properly the different interests involved and therefore cannot continue unchanged, the Israeli Minister of Interior Affairs submitted draft regulations for approval by the Economy Committee of the Israeli Parliament in March 2010. The draft regulations include significant limitations on the ability to construct radio access devices based on the exemption, which will render the construction of radio access devices based on the exemption practically impossible.
 
Other appeals relating to the exemption, including as to the requirement to obtain an extraordinary usage permit, are still under consideration in the District Court and other similar challenges, as well as other claims asserting that those cell sites and other facilities do not meet other legal requirements continue.
 
In addition, we may be operating a significant number of our cell sites in a manner that is not fully compatible with the building permits issued for these cell sites which may, in some cases, also constitute grounds for termination of their lease agreements or claims for breach of such agreements. Our rooftop microwave sites and repeaters operate in reliance upon an exemption from the requirement to obtain a building permit.  Substantially all of our outdoor microwave sites are rooftops. It is unclear whether other types of repeaters require a building permit.
 
An annulment of or inability to rely on or substantial limitation of the exemption could adversely affect our existing networks and networks build-out, particularly given the objection of some local planning and building authorities to grant due permits where required. This could have a negative impact on our ability to obtain environmental permits for these sites, and could negatively affect our ability to continue to market our products and services effectively. This may have a material adverse effect on our results of operations and financial condition. See “Item 4. Information on the Company – B.  Business Overview - Government Regulations— Permits for Cell Site Construction” for additional details regarding the exemption.
 
Operation of a cell site or other facility without a building permit or not in accordance with the permit or other legal requirements may result in the issuance of a demolition order for the cell site or other facility or the bringing of criminal charges against us and our officers and directors. Certain of our cell sites have been subject to demolition orders. In addition, criminal charges have been brought against us and our officers and directors in connection
 
with cell sites that were alleged to have been constructed or used without the required permits or not in accordance with the permits granted. As of December 31, 2011, 18 criminal and administrative proceedings are outstanding; a demolition order has been granted with respect to three cell sites while the remaining 15 proceedings are pending further litigation.
 
Pursuant to the Israeli Non-Ionizing Radiation Law, 2006, the granting or renewal of an operating permit by the Commissioner of Environmental Radiation at the Ministry of Environmental Protection of Israel for a cell site or other facility is subject to the receipt of a building permit or the facility being exempt from the requirement to obtain a building permit. Should we fail to obtain building permits for our cell sites or other facilities, including in the event that our reliance upon an exemption from the requirement to obtain building permits for these cell sites and other facilities is found invalid, the Commissioner of Environmental Radiation at the Ministry of Environmental Protection will not grant or renew our operating permits for those cell sites and other facilities. Since October 2007, the Commissioner of Environmental Protection took the position that he will not grant or renew operating permits to radio access devices, where the local planning and building committee’s engineer objected to our reliance upon the said exemption for radio access devices. For reasons not related to radiation hazards, we have not received environmental permits for a few cell sites, primarily due to building and planning issues, such as objections by local planning and building committee’s engineers to our reliance on the exemption from obtaining building permits for radio access devices. Operating a cell site or a facility without an operating permit could subject us and our officers and directors to criminal, administrative and civil liability.
 
The Non-Ionizing Radiation Law further grants the Commissioner authority to issue eviction orders if a cell site or other facility operates in conflict with its permit, and it imposes criminal sanctions on a company and its directors and officers for violations of the law. Failure to comply with the Non-Ionizing Radiation Law or the terms of a permit can lead to revocation or suspension of the permit, as well as to withholding the grant of permits to additional cell sites of that operator.
 
Should any of our officers or directors be found guilty of an offence, although this has not occurred to date, they may face monetary penalties and a term of imprisonment.  Our cell sites may be the subject of demolition orders, we may be required to relocate cell sites to less favorable locations or stop operation of cell sites, which could negatively affect the extent, quality and capacity of our network coverage, all of which may have a material adverse effect on our results of operations and financial condition.
 
Certain proposed amendments to the Non-Ionizing Radiation Law and Regulations which have passed the preliminary stages of enactment, propose setting additional restrictions in relation to the operation of cell sites and other facilities, such as setting larger distance requirements between cell sites locations and residences or certain institutions). If such changes are subsequently adopted, they will, among other things, limit our ability to construct new cell sites (and if applied to existing cell sites, they will also limit our ability to renew operating permits for many of our existing cell sites), adversely affect our existing networks and networks build out, specifically in urban areas, and could adversely affect our results of operations. See “Item 4. Information on the Company – B.  Business Overview - Government Regulations— Permits for Cell Site Construction” for an additional amendment proposing to cancel the requirement to obtain the Minister of Communications’ approval to the Non-Ionizing Radiation Regulations, where such regulations may have a substantial and direct effect on the monetary burden imposed on the communication market.
 
The Israeli National Zoning Plan 36, or the Plan, which regulates cell site construction and operation is in the process of being changed. Current proposed changes impose additional restrictions and requirements on the construction and operation of cell sites. In June 2010, the proposed changes were approved by the Israeli National Council for Planning and Building and submitted for the approval of the Government of Israel. If the proposed changes are approved by the Israeli Government they will harm our ability to construct new cell sites, make the process of obtaining building permits for the construction and operation of cell sites more cumbersome and costly, could adversely affect our existing network and may delay the future deployment of our network and could negatively affect the extent, quality and capacity of our network coverage and our ability to continue to market our products and services effectively, all of which could have a material adverse effect on our results of operations and financial condition.
 
Several local planning and building authorities are claiming that Israeli cellular operators may not receive building permits, in reliance on the current Plan, for cell sites operating in frequencies not specifically detailed in the frequencies charts attached to the Plan. In a number of cases, these authorities have refused to provide a building permit for such new cell sites, arguing that the Plan does not apply to such cell sites and that building permits for such cell sites should be sought through other processes (which are longer and cumbersome), such as an application for extraordinary usage or under existing local specific zoning plans. Since June 2002, following the approval of the Plan, building permits for our cell sites (where required) have been issued in reliance on the Plan. The current proposed draft amendment to the Plan covers all new cell sites requiring a building permit, independently of the frequencies in which they operate. Most of our cell sites and many cell sites operated by other operators operate in frequencies not specifically detailed in the Plan.
 
If we are unable to obtain or rely on exemptions from obtaining or to renew building or other consents and permits for our existing cell sites or other facilities, we will be required to demolish or relocate these cell sites and facilities. Our inability to relocate sites or other facilities in a timely manner or to construct and operate new sites or other facilities (if we are unable to obtain the necessary consents and permits or rely on the exemption from the requirement to obtain a building permit), could adversely affect our existing network, result in the loss of subscribers, prevent us from meeting the network coverage and quality requirements contained in our license (which may lead to its revocation) and adversely impact our network build-out, all of which may have a material adverse effect on our results of operations and financial condition.
 
In July 2011, an inter-ministry team of the Ministries of Communications, Finance, Interior, Environmental Protection and the Anti-Trust Commissionaire, published its recommendations regarding cell site sharing. The recommendations include compulsory cell sites sharing in the construction of new cell sites or for modification to existing cell sites which require a building permit (the Ministry of Communications may exempt sharing for reasons related to technological or engineering   difficulties), while providing preference and leniencies to the new UMTS operators, as well as the reduction of the existing non shared cell sites quantity. These recommendations or similar recommendations, if enacted, will further burden the construction of new cell sites and modifications to existing cell sites, and may adversely affect our existing cellular network, the network build-out and our results of operations.
 
We may be required to indemnify certain local planning and building committees in respect of claims against them.
 
Under the Israeli Planning and Building Law, 1965, by approving a building plan, local planning and building committees may be held liable to compensate for depreciation of properties included in or neighboring the approved plan.
 
In January 2006, the law was amended to require an applicant, as a precondition to obtaining a cell site construction permit from a planning and building committee, to provide a letter to the committee indemnifying it for possible depreciation claims.  As of December 31, 2011, we have provided approximately 340 indemnification letters to local planning and building committees. Calls upon our indemnification letters may have a material adverse effect on our financial condition and results of operations. We may also decide to demolish or relocate existing cell sites to less favorable locations and to construct new cell sites in alternative, less suitable locations or not at all, due to the obligation to provide indemnification.  As a result, our existing service may be impaired or the expansion of our network coverage could be limited.
 
In addition, local planning and building committees have sought to join cellular operators, including us, as defendants in depreciation claims made against them even though indemnification letters were not provided.  We have been joined as defendants in a small number of cases.
 
In February 2007, the Israeli Minister of Interior Affairs extended the limitation period within which depreciation claims may be brought under the Israeli Planning and Building Law from three years from approval of a building plan, to the later of one year from receiving a building permit for a cell site under National Zoning Plan 36 and six months from the construction of a cell site. The Minister retains the general authority to extend such period further. This extension of the limitation period increases our potential exposure to depreciation claims. In addition, should the Planning and Building Law be construed or amended to allow a longer period of limitation for depreciation claims than the current limitation period set in that law, our potential exposure to depreciation claims would increase.
 
Alleged health risks relating to non-ionizing radiation generated from cell sites and cellular telecommunications devices may harm our prospects.
 
Handsets, accessories and various types of cell sites are known to be sources of non-ionizing radiation emissions and are the subject of a public debate and growing concern in Israel. While, to the best of our knowledge, the handsets that we market comply with the applicable legislation that relate to acceptable “specific absorption rate,” or SAR, levels, we rely on the SAR levels published by the manufacturers of these handsets and do not perform independent inspections of the SAR levels of these handsets. As the manufacturers’ approvals refer to a prototype handset, we have no information as to the actual level of SAR of the handsets throughout the lifecycle of the handsets, including in the case of handset repair. See also “Item 4. Information on the Company – B. Business Overview - Government Regulations - Handsets”. In July 2008, the Israeli Ministry of Health published recommendations to take precautionary measures when using cellular handsets, which has increased the concerns of the Israeli public. In May 2011, the International Agency for Research on Cancer, an agency of the World Health Organization, or WHO, issued a press release classifying radiofrequency electromagnetic fields as possibly carcinogenic to humans (Group 2B), based on an increased risk for glioma, a malignant type of brain cancer,
 
associated with wireless phone use.  In June 2011, the WHO publication noted that to date, no adverse health effects have been established as being caused by mobile phone use and while an increased risk of brain tumors is not established, the increasing use of mobile phones and the lack of data for mobile phone use over time periods longer than 15 years warrant further research of mobile phone use and brain cancer risk, particularly given recent popular use by younger people with potentially longer periods of exposure. Several bills, aimed at increasing awareness of the possible risks of cellular phones usage, reducing usage thereof and introducing precautionary measures are awaiting deliberation by the Israeli Parliament.
 
Health concerns regarding cell sites have already caused us difficulties in obtaining permits for cell site construction and obtaining or renewing leases for cell sites and even resulted in unlawful sabotage of a small number of cell sites and have further prompted legislation aimed at increasing the minimum distance permitted between cell sites and certain institutions. See “We may not be able to obtain permits to construct and operate cell sites” above for additional details. In July 2009, the Ministries of Interior Affairs and Environmental Protection adopted a position (as part of the recommendations made by an inter-ministry committee established to examine the appropriateness of future application of the exemption from obtaining building permits for radio access devices) that, with respect to radiation safety, cell sites constructed pursuant to a building permit are preferable to radio access devices and that utilizing a cellular network to provide advanced services which can be provided through a landline network,  is unjustified in light of the preventive care principle set forth in the Israeli Non-Ionizing Radiation Law. Further,  in November 2011, in response to a petition to hold a public debate regarding 4G service in Israel and prevent 4G spectrum allocation until such debate is held, the State of Israel informed the Supreme Court, hearing the petition, that it is conducting an inter-Ministry (including the Ministries of Communications, Interior Affairs, Justice, Health and Environmental Protection) examination of the various aspects of  the provision of 4G services in Israel to be followed by a public hearing. The State also informed the Supreme Court that such examination shall not prevent implementation of governmental procedures necessary for the provision of 4G services in Israel, provided that no irreversible steps or steps creating third party reliance upon them,  shall be taken.
 
If health concerns regarding non-ionizing radiation increase further, or if adverse findings in studies of non-ionizing radiation are published or if non-ionizing radiation levels are found to be higher than the standards   set for handsets and cell sites, consumers may be discouraged from using cellular handsets and regulators may impose additional restrictions on the construction and operation of cell sites or handset usage. As a result, we may experience increased difficulty in constructing and operating cell sites and obtaining leases for new cell site locations or renewing leases for existing locations (although so far, in total we have experienced renewal problems with approximately 7% of our cell site leases each year); we may be exposed to property depreciation claims; we may lose revenues due to decreasing usage of our services; we may be subject to increased regulatory costs; and we may be subject to health-related claims for substantial sums. We have not obtained insurance for these potential claims. See “Item 8. Financial Information - A. Consolidated Statements and Other Financial Information – Legal Proceedings—Purported class actions” for additional details on three purported class actions filed against us in that respect, and an additional purported class action filed against us for not obtaining such insurance. An adverse outcome or settlement of any health-related litigation against us or any other provider of cellular services could have a material adverse effect on our results of operations, financial condition or prospects.
 
We face intense competition in all aspects of our business
 
The Israeli cellular telephone market is highly competitive. We compete for subscribers with three other established cellular operators and as of December 2011, with one additional MVNO operator – Rami Levy Hashikma Communications Marketing Ltd., or Rami Levy. While we enjoy the largest market share, estimated to be 33.6% as of December 31, 2011, two of our competitors, Partner and Pelephone, enjoy estimated market shares of 31.9% and 29.6% respectively, with MIRS Motorola Communications Ltd., or MIRS, estimated to have a market share of 4.8% and Rami Levy with less than 1%. The current competitive pressure in the Israeli cellular market results primarily from the highly penetrated state of the market.  See also “Item 4. Information on the Company - B. Business Overview - The Telecommunications Industry in Israel”. This means that market growth is limited and cellular operators compete intensely to retain their own subscribers and attract those of their competitors. The competition in our market has intensified following various regulatory and other changes in the market, specifically the compulsory reduction of Early Termination Fees to a negligible amount in the cellular market as of February 1, 2011, as it eliminated the transfer barrier between operators and led to the offering of packages at lower average revenue per minute, which resulted in accelerated price erosion,  materially increased churn rate, and increased subscriber acquisition and retention costs due to materially increased gross recruitment of subscribers. The competition was also impacted by the expected entry of additional competitors, which benefit from the reduction of interconnect tariffs as well as the reduction of Early Termination Fees. Further, competition also increased  following relaxation of regulatory restrictions on the ability to consummate acquisitions in the Israeli communications market, as cellular operators become part of communications groups in the Israeli communication market (as detailed below), enabling the offering of bundles of services, which entails ongoing price erosion. The annulment of Early Termination Fees in the other communications markets in November 2011, has also contributed to the increased competition in other communications services, increased churn rate and gross recruitment of subscribers and price erosion. These trends are expected to continue to affect the communications market and the level of competition. Any of the following developments in our market is expected to increase competition further and the increasing competition may result in a material increase in churn rate, loss of market share, increased subscriber acquisition and retention costs, further price erosion and ultimately reduced profitability for us:
 
 
·  
the launch of a UMTS network by Mirs and Golan Telecom Ltd., or Golan and additional MVNO operators commencing operations could increase competition and thus may have a material adverse effect on our revenues. Mirs and Golan were awarded UMTS licenses in April and December 2011, respectively, and were awarded certain leniencies in the deployment of their networks, including the usage of national roaming (both have signed national roaming agreements - Golan with us and Mirs with Pelephone). Mirs is expected to launch its UMTS network during the first half of 2012 and Golan during the second half of 2012. To date nine entities were granted MVNO licenses (of which five have entered into hosting agreements (including Rami Levy which, commenced operation in the market in December 2011) the others are expected to commence operations in 2012), and the Ministry of Communications may grant additional MVNO licenses. For additional details see “Item 4.
 
Information on the Company - B. Business Overview – The Communications Market in Israel - Cellular Services”. See “Item 4. Information on the Company – B. Business Overview” under “Competition” and under “Government Regulations – Mobile Virtual Network Operator” and “Additional UMTS Operators” for additional details;
 
 
·  
the sale of bundles of services by operators, including cellular services, as it is expected to entail further price erosion, more so if offered by either the Bezeq or Hot groups (the only operators owning full landline infrastructure in Israel and offering internet infrastructure services to ISP operators, as well as to end-users) or the offering of services by the Bezeq and Hot groups at tariffs significantly lower than prevailing market tariffs, such as by cross subsidizing with other services in which they have the capacity to monopolize the market; in 2011 three additional communications groups were formed in the Israeli communications market, in addition to the Bezeq group: Partner-012 Smile, Cellcom–Netvision and Hot-Mirs. This change together with the regulatory changes relaxing the structural separation imposed on each of the Bezeq and Hot groups (Bezeq being the incumbent landline operator and Hot the incumbent multichannel television provider, both monopolies in their incumbent market), will allow each of the groups to offer a bundle of services, in some cases quadruple and even quintuple service bundles, to existing customers in each of their previously separated platforms as well to new customers. Bundles offerings are expected to blur boundaries among services and lead to price erosion with each of the groups having an interest not to erode the prices of its core business, but rather that of its competitors. Although Pelephone and Bezeq do not currently offer a bundle that includes both cellular and wireline services, such a bundle was already approved for the Bezeq group in 2010 under certain conditions, in relation to private customers and is currently being considered by the Ministry of Communications for business customers as well. The offering of a bundle of services, including cellular services by another group, will relax the conditions under which Bezeq may provide a similar bundle. Further, a public committee appointed by the Ministry of Communications recommended in October 2011 to annul structural limitations currently imposed on Bezeq and its subsidiaries when a wireline wholesale market of landline services is available to the other operators and to replace Bezeq’s regulated fixed tariffs with maximum tariffs. If such recommendations are adopted by the Ministry of Communications, they will allow Bezeq and its subsidiaries, including Pelephone, to offer bundles of services (other than multichannel television services) without limitation. Although the Hot group is also under structural separation limitations between its broadcasting landline, ISP and cellular services, the Ministry of Communications is currently considering to annul the structural separation limitations between Mirs and Hot, after already lifting certain limitations in 2011, allowing Hot and Mirs to sell and market each other’s services and transfer information. The Hot group was previously allowed to offer a bundle of multi-channel television, landline and  internet infrastructure services and include ISP services in a bundle of services, under certain conditions. Both Bezeq and Hot currently offer  bundles of services excluding cellular services. Bundle offerings are expected to accelerate price erosion in each of the services included. In February 2012, Hot began offering ISP services and has done so at tariffs significantly lower than prevailing market prices and Bezeq also significantly lowered its internet infrastructure services
 
tariffs to end-users. See “Item 4. Information on The Company –B. Business Overview – The Communications Market in Israel - Communications Groups – Structural Separation”, “Competition”, “Nevision - ISP Business - Competition” and “Nevision - Telephony Business – Competition”.
 
 
· 
increased usage of competing technologies, applications and services, allowing usage of our network with or without an operator, such as VoC or voice over IP, or VoIP (including applications such as Viber, WhatsApp and free SMS among iPhone holders) or other technologies, such as WiFi, more so following the increased usage of smart phones, tablets and laptops. To date, VoC services are available under two trial licenses granted by the Ministry of Communications and using VoC based software on smart phones. The Ministry of Communications has published in December  2010, a hearing in relation to VoC license, under which  cellular operators will be required to provide data only services, including at lower speed rates and price them by speed rate. Under an amendment to the Communication Law enacted in December 2010, any limitation or blocking of internet based services or applications is forbidden, including by differentiating pricing.
 
 
·  
the expansion of the “Open Garden” content provision offerings, as it is  transforming the cellular operator, previously the provider of content to its subscribers, into one of many content providers competing to provide content to the operator’s own subscribers; The Open Garden international trend is facilitated by technological changes allowing high speed internet surfing and supporting handsets and the entry of international media providers and handsets manufacturers into the cellular content provision market.  Further, expansion of arrangements such as that introduced by Apple and Android, in which subscribers can purchase content only through their handset manufacturer’s store, has and is expected to continue to adversely affect our content revenues . See “Item 4. Information on the Company – B. Business Overview” under “Competition”.
 
 
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Pursuant to an amendment to the Israeli Restrictive Trade Practices Law, 1988, if the Director General decides that the Israeli cellular market is oligopolistic,  the Director General will have the authority to give instructions to all or some of the participants in our market, in order, among others, to maintain or increase the competition level among the participants, including the authority to issue orders to remove or to ease entry or transfer barriers, to cease a participant’s activity, or otherwise regulate the activities of the market.
 
We could be subject to legal claims due to the inability of our information systems to fully support our pricing plans.
 
In order to attract and retain the maximum number of subscribers in our highly competitive market, we design specific pricing plans to suit the preferences of various subscriber groups. We require sophisticated information systems to accurately record subscriber usage pursuant to the particular terms of each subscriber’s plan as well as accurate database management and operation of a very large number of pricing plans.  From time to time, we have detected some discrepancies between certain pricing plans and the information processed by our internal information systems, such as applying an incorrect rebate or applying an incorrect tariff to a service resulting in a higher charge. We have invested
 
substantial resources to refine and improve our information and control systems and ensure that our new pricing plans are appropriately processed by our information systems; we have also taken steps to remedy the identified discrepancies and have established reserves where the discrepancies are quantifiable. Despite our substantial investments, we may experience discrepancies in the future due to the multiplicity of our plans and the scope of the processing tasks. Further, while we invest substantial efforts in monitoring our employees and third-party distributors and dealers that market our services, it is possible that some of our employees, distributors or dealers may offer terms and make (or fail to make) representations to existing and prospective subscribers that do not fully conform to applicable law, our licenses or the terms of our pricing plans. As a result of these discrepancies, we may be subject to subscribers’ claims, including class action claims, and substantial sanctions for breach of our licenses or the applicable laws and regulations that may materially adversely affect our results of operations. Further, frequent and multiple changes to our general license and relevant legislation require ongoing changes to our operations, pricing plans and supporting information systems. Such changes increase the risk that our employees, distributors and dealers and our information systems will not fully support such changes.
 
We are exposed to, and currently are engaged in, a variety of legal proceedings, including class action lawsuits.
 
We provide services to millions of subscribers on a daily basis. As a result of the scope and magnitude of our operations we are subject to the risk of a large number of lawsuits, including class action suits by consumers and consumer organizations, with respect to billing and other practices, such as customer care practices, marketing, including mass media marketing as well as sending commercial messages to customers, collecting and data collection and usage practices, offering practices of products and services, including third parties’ products and services. These actions are costly to defend and could result in significant judgments against us. Recent years were characterized by a substantial increase in the number of requests for certification of class actions filed and approved in Israel. In December 2011, a class action was decided against us (we appealed the decision to the Supreme Court in January 2012 and the execution of the judgment was stayed until  the appeal is decided). The number of purported class actions filed against us in the last two years amounts to approximately 45% of all purported class actions filed against us since our inception, thereby increasing our legal exposure and our legal costs in defending against such suits, which as a result may materially and adversely affect our financial results. This trend is expected to continue, encouraged also by amendments to the Consumer Protection Law, stricter policy by regulators, amendments to the Communications Law such as regulating “spam” as well as the growing tendency of adopting comprehensive and burdensome regulation for the telecommunications market. Currently, we are engaged in dozens of purported class action suits as a defendant, many of which are for substantial amounts.  Should these requests to certify lawsuits against us as class actions are approved and succeed, this may have a material adverse affect on our financial results. For a summary of certain material legal proceedings against us, see “Item 8 – Financial Information - A. Consolidated Statements and Other Financial Information –Legal Proceedings”.
 
We employ thousands of employees and are therefore subject to the risk of employee lawsuits, including class action suits by employees. Recent years were characterized by a substantial increase in the number of employment lawsuits, as well as purported class actions, filed against employers in Israel. We have also witnessed an increase in the number of lawsuits and amount claimed from us by former employees.
 
We are subject to the risk of intellectual property rights claims against us, including in relation to music, music-related or other content services we purchase from third party content providers. These claims may require us to initiate or defend protracted and costly litigation, regardless of the merits of these claims.  If any of these claims succeed, we may be forced to pay damages or may be required to obtain licenses for the infringing product or service.  If we cannot obtain all necessary licenses on commercially reasonable terms, we may be forced to stop using or selling the products and services.
 
We rely on interconnecting telecommunications providers and could be adversely affected if these providers fail to provide these services without disruption and on a consistent basis.
 
Our ability to provide commercially viable telephone services depends upon our ability to interconnect with the telecommunications networks of landline, cellular telephone and international operators in Israel in order to complete calls between our subscribers and parties on a landline or other cellular telephone network, as well as third parties abroad. All landline, cellular telephone and international operators in Israel are required to provide interconnection to, and not to discriminate against, any other licensed telecommunications operator in Israel.  We have no control over the quality and timing of the investment and maintenance activities that are necessary for these entities to provide us with interconnection to their respective telecommunications networks. The implementation of number portability requires us to rely further on other providers, since our ability to implement number portability, provide our services and our basic ability to port numbers between operators are dependent on the manner of number portability implementation by interconnecting local operators. The failure of these or other telecommunications providers to provide reliable interconnections to us on a consistent basis could have an adverse effect on our business, financial condition or results of operations.
 
Our operations are dependent on complex technology and information systems
 
Our operations are dependent on a number of complex technological systems. The occurrence of malfunctions in such complex and ever changing and expanding systems is inevitable. A malfunction in any of our systems which severely impacts our ability to provide products and services to our customers, may result in loss of revenues to us, may adversely impact our brand perception and expose us to legal claims, all of which may adversely affect our results of operations. In December 2010 we suffered a major network malfunction, following which we decided to grant our subscribers a substantial refund and were also sued for damages in nine purported class actions for substantial amounts (eight of which were dismissed during 2011 and the ninth is still pending).
 
Our operations are dependant on various information systems. The unauthorized entry to or disruption of operation of these information systems, including due to cyber attacks, may result in damage to us and our customers, including due to inability to provide certain services or provide them with disruptions or inability to bill for services rendered or loss of data, all of which may expose us to legal claims and liabilities.
 
There are certain restrictions in our license relating to the ownership of our shares.
 
Our license restricts ownership of our ordinary shares and who can serve as our directors as follows:
 
 
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our founding shareholder, Discount Investment Corporation Ltd., or DIC (or its transferee or transferees, if approved in advance by the Ministry of Communications as “founding shareholders”), must own at least 26% of each of our means of control;
 
 
·  
Israeli citizens and residents among our founding shareholders (or their approved transferees) must own at least 20% of our outstanding share capital and each of our other means of control (DIC has agreed to comply with this requirement);
 
 
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a majority of our directors must be Israeli citizens and residents;
 
 
·  
at least 20% of our directors must be appointed by Israeli citizens and residents among our founding shareholders; and
 
 
·  
we are required to have a committee of our Board of Directors that deals with matters relating to state security, which must be comprised of at least four directors (including an external director) having the requisite security clearance by Israel’s General Security Service.
 
If these requirements are not complied with, we could be found to be in breach of our license and our license could be changed, suspended or revoked.
 
In addition, our license provides that, without the approval of the Ministry of Communications, no person may acquire or dispose of shares representing 10% or more of our outstanding share capital.  Further, our directors and officers and any holder of ordinary shares representing 5% or more of our outstanding share capital may not own 5% or more of Bezeq or any of our competitors or serve as a director or officer of such a company, subject to certain exceptions which require the prior approval of the Ministry of Communications.
 
To ensure that an unauthorized acquisition of our shares would not jeopardize our license, our articles of association provide that any shares acquired without approval required under our license will not be entitled to voting rights.
 
If our service is to be determined by the Israeli Government to be an “essential service”, the Prime Minister and the Ministry of Communications could impose additional limitations including a heightened requirement of Israeli ownership of our ordinary shares.
 
Although our articles of association contain certain provisions that are aimed at reducing the risk that holdings or transfers of our ordinary shares will contravene our license, we cannot entirely control these and other matters required by our license, the violation of which could be a basis for suspending or revoking our license.  Our other licenses and Netvision’s licenses contain similar restrictions. See also “ Item 4. Information on the Company – B. Business Overview – Government Regulations ― Our Principal License ” and “Other Licenses” and “Item 4. Information on The Company – B. Business Overview – Netvision”.
 
We may be adversely affected by the significant technological and other changes in the cellular communications industry.
 
The telecommunications market is known for rapid and significant technological changes and requires ongoing investments in advanced technologies in order to remain
 
competitive. In recent years we have witnessed a growing demand for Internet, content and data through advanced third generation cellular phones, smartphones, modems, tablets and other devices using cellular data that resulted in a rapid growth of data traffic on cellular networks and required cellular operators to upgrade their networks to accord such demand.   We estimate that data traffic will grow even faster in the future and some operators have taken steps aimed at reducing data usage by their subscribers, including by transferring traffic to free alternative networks. MVNO hosting services and national roaming on our network, when materialized, would further increase such demand. Our strategy to grow   and develop our Internet, content and data services has proven to be successful and contributed positively to our results of operations. To answer the growing demand for cellular data traffic, we would be required, among others, to continue our investment in upgrading both our cellular and our transmission network as well as invest in advanced technologies such as 4G cellular technologies (Long Term Evolution, or LTE), which will allow larger capacity and higher data speed rates. Although we have completed a substantial portion of our networks upgrade and have been building our LTE readiness, should we decide to build an LTE network, it would require additional substantial investments and the allocation of frequencies for an LTE network. Such allocation to us is not guaranteed, when required or at all (including in light of prior preference given by the Ministry of Communications to new and small competitors in the allocation of additional UMTS frequencies at the September 2010 tender and the limited amount of available frequencies as well as the uncertainties relating to the government’s position with respect to the provision of 4G services in Israel), and there is no certainty as to the cost of frequencies, if and when allocated to us. Inability to receive additional frequencies in a timely manner to meet our needs or at all and specifically if LTE frequencies are allocated to our competitors and not to us or allocated to us under less favorable terms than to our competitors could impair our ability to compete and may require us to cease offering certain products and/or services we currently offer and/or change their terms and conditions and/or make substantial unplanned investments, which may have an adverse effect on our results of operations.
 
If we cannot obtain or maintain favorable roaming arrangements, our services may be less attractive or less profitable.
 
We rely on agreements to provide roaming capability to our subscribers in many areas outside Israel. As of December 31, 2011, we had roaming arrangements with 545 cellular providers in 179 countries around the world.  However, we cannot control the quality of the service that they provide and it may be inferior to the quality of service that we provide.  Equally, our subscribers may not be able to use some of the advanced features that they enjoy when making calls on our network.  Some of our competitors may be able to obtain lower roaming rates than we do because they may have larger call volumes.  Competition is expected to intensify further, when new operators, including MVNOs or Mirs and Golan, begin providing roaming services as well. If our competitors’ providers can deliver a higher quality or a more cost effective roaming service, then subscribers may migrate to those competitors and our results of operation could be adversely affected.  Further, we may not be able to compel providers to participate in our technology migration and enhancement strategies.  As a result, our ability to implement technological innovations could be adversely affected if these overseas providers are unable or unwilling to cooperate with the further development of our network or if they cease to provide services comparable to those we offer on our network.
 
Following European Union regulation of roaming tariffs, which reduced tariffs for calls made by members of the European Union among themselves, several European Union
 
member operators have raised roaming tariffs for calls to and from non-European Union member operators, resulting in higher roaming tariffs for our subscribers. In addition, in August 2008, the Israeli Government adopted a resolution to negotiate a reduction of inbound and outbound roaming tariffs with the European Union and/or members of the European Union or countries frequently visited by Israelis. In January 2012 the Ministry of Communications requested us to provide information in relation to our roaming services. If roaming tariffs are reduced as a result of the proposed negotiation or otherwise and/or if additional European Union member operators raise their tariffs and/or if we are not able to raise our tariffs or otherwise compensate for the higher roaming expenses, this could adversely affect our profitability and results of operations.
 
Our substantial debt increases our exposure to market risks, may limit our ability to incur additional debt that may be necessary to fund our operations and could adversely affect our financial stability; Regulatory change may affect our possibilities to raise debt from institutional investors.
 
As of December 31, 2011, our total indebtedness was approximately NIS 6,145 million ($1,608 million). The indentures governing our debentures currently permit us to incur additional indebtedness. Our substantial debt could adversely affect our financial condition by, among other things:
 
 
·  
increasing our vulnerability to adverse economic, industry or business conditions, including increases in the Israeli Consumer Prices Index, or CPI;
 
 
·  
limiting our flexibility in planning for, or reacting to, changes in our industry and the economy in general;
 
 
·  
requiring us to dedicate a substantial portion of our cash flow from operations to service our debt, thus reducing the funds available for operations and future business development; and
 
 
·  
limiting our ability to obtain additional financing to operate, develop and expand our business or to refinance existing debt.
 
In October 2010, the Commissioner of Capital Markets, Insurance and Savings in the Ministry of Finance published a circular instructing institutional investors to follow certain procedures and requirements before investing in non-governmental debentures, including a requirement to verify that certain contractual provisions are included in the indentures of the invested debentures, and to establish a policy for investment in such debentures which will relate among other matters to repayment acceleration rights . These procedures and requirements may adversely affect our possibilities of raising debt from Israeli institutional investors as well as the terms and price of such debt raising and have already adversely affected the terms under which we plan to raise debt in the near future. See “Item 5. Operating and Financial Review and Prospects.  – B . Liquidity and Capital resources – Shelf Prospectus”   for additional details.
 
See also the Centralization Committee’s recommendations under “Risks Relating to Our Ordinary Shares” below, which if adopted and implemented, may adversely affect our possibilities of raising debt from Israeli institutional investors.
 
Our business results may be affected by currency fluctuations, by our currency hedging positions and by changes in the Israeli Consumer Price Index.
 
A portion of our cash payments are incurred in, or linked to, foreign currencies, mainly U.S. dollars.  In particular, in 2009, 2010   and 2011, payments in U.S. dollars or linked to the U.S. dollar represented approximately 36%, 33% and 39%, respectively, of total cash outflow (including payments of principal and interest on our debentures, but excluding one time payments associated with the acquisition of Netvision). These payments included capital expenditures, some of our operating lease payments and payments to equipment suppliers including handset suppliers. As almost all of our cash receipts are in NIS, any devaluation of the NIS against those foreign currencies in which we make payments, particularly the U.S. dollar, will increase the NIS cost of our foreign currency denominated or linked expenses and capital expenditures.
 
Furthermore, since the principal amount of and interest that we pay on our Series A, B, C and D debentures, are linked to the Israeli CPI, any increase in the Israeli CPI will increase our financing expenses and could adversely affect our results of operations. See “Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Debt Service – Public Debentures” for details.
 
We purchase derivative financial instruments in order to hedge part of the foreign currency risks, CPI risks deriving from our operations and indebtedness. Derivatives are initially recognized at fair value. Changes in the fair value are accounted for such that: Changes in the fair value of derivative hedging instruments designated as a cash flow hedge are recognized directly as a component of our shareholders’ equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognized in our income statement as the hedged item affects earnings. The amount recognized in shareholders’ equity is transferred to our income statement in the same period that the hedged item affects our earnings. Notwithstanding the above, hedge accounting is not applied to derivative instruments that economically hedge monetary assets and liabilities denominated in foreign currencies. Changes in the fair value of such derivatives are recognized through our income statement upon occurrence. These differences in the derivative instruments’ designation could result in fluctuations in our reported net income on a quarterly basis.
 
We may not be able to fulfill our dividend policy in the future; implementation of our dividend policy will significantly reduce our future cash reserves.
 
In February 2006, we adopted a dividend policy targeting a payout ratio of at least 75% of our net income in each calendar year, subject to any applicable law, our license and contractual obligations and provided that such distribution would not be detrimental to our cash needs or to any plans approved by our Board of Directors.  In 2009, 2010 and 2011, our Board of Directors declared dividends constituting as much as 95% of our net income and in some cases, part of our retained earnings from earlier periods as well, and may declare dividends as much as 95% of our net income, in the future.   See “Item 8. Financial Information - A. Consolidated Statements and Other Financial Information - Dividend Policy”. Our license requires that we and our 10% or more shareholders maintain at least $200 million of combined shareholders’ equity. Dividend payments are not guaranteed and
 
our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends or to pay dividends at a ratio to net income that is less than that paid in the past.
 
Our dividend policy, to the extent implemented, will significantly reduce our future cash reserves and may adversely affect our ability to fund unexpected capital expenditures as well as our ability to make interest and principal repayments on our debentures.  As a result, we may be required to borrow additional money or raise capital by issuing equity securities, which may not be possible on attractive terms or at all.
 
If we are unable to fulfill our dividend policy, or pay dividends at levels anticipated by investors in our shares, the market price of our shares may be negatively affected and the value of our investors’ investment may be reduced.
 
We rely on a limited number of suppliers for key equipment and services.
 
We depend upon a small number of suppliers to provide us with key equipment and services. For example, Nokia Siemens Israel provides our network system based on GSM/GPRS/EDGE technology, our UMTS/HSPA core system, part of our radio access network and related products and services, and our landline New Generation Network system, or NGN system; LM Ericsson Israel supplies part of our radio access network and related products and services based on UMTS/HSPA technology; Amdocs Israel provides us with services with respect to the operating of, and the implementation of developments to our billing system; Alcatel Lucent provides our Carrier Ethernet network and SDH equipment for our transmission network; and Be’eri Printers provides our printing supplies and invoices as well as the distribution, packaging and delivery of invoices and other mail to the postal service distribution centers.  In addition, we lease a small portion of our transmission capacity from Bezeq, the incumbent landline operator. Bezeq has experienced labor disputes, including stoppages, during the privatization process and liberalization of the landline market, and additional disruptions, stoppages and slowdowns may be experienced in the future. If these suppliers fail to provide equipment or services to us on the requisite standards of quality and on a timely basis, we may be unable to provide services to our subscribers in an optimal manner until an alternative source can be found and our license may be at risk of revocation for failure to satisfy the required service standards.
 
We are a member of the IDB group of companies, one of Israel’s largest and highly regulated business groups.  This may limit our ability to expand our business, to acquire other businesses or raise debt.
 
We are an indirect subsidiary of IDB, one of Israel’s largest and highly regulated business groups. An adverse change to IDB's financial condition could have an adverse effect on our debentures rating and our ability to raise additional debt or the terms of such debt raise. In addition, pursuant to the “Guidelines for Sound Bank Administration” issued by the Israeli Supervisor of Banks, the amount that an Israeli bank may lend to one group of borrowers and to each of the six largest borrowers of such banking corporation is limited.  Since we are a member of IDB’s group of borrowers, these guidelines may limit the ability of Israeli banks to lend money to us.
 
Due to the limited size of the Israeli market and due to the high level of regulation of the Israeli market, in particular in the communications market, our being a member of the IDB group of companies may limit our ability to expand our business in the future, to form joint ventures and strategic alliances and conduct other strategic transactions with other participants in the Israeli communications market. See also the Centralization Committee’s recommendations under “ Risks Relating to Our Ordinary Shares” below, which if adopted and impl e mented, may have an adverse effect on our business.
 
 
We are controlled by a single shareholder who can significantly influence matters requiring shareholders’ approval.
 
As of December 31, 2011, DIC held, directly and indirectly, approximately 43.61%  of our outstanding share capital. Pursuant to shareholders agreements among DIC and certain of our minority shareholders, who in the aggregate own approximately 3.43% of our ordinary shares, DIC has been granted the voting rights in respect of those shares. In addition to DIC’s shareholdings and such additional voting rights, it has the right to appoint the 20% of our directors that we are required by our license and articles of association to have appointed by Israeli citizens and residents among our founding shareholders. Accordingly, subject to legal limitations, DIC has control (as the term “control” is defined in the Israeli Securities Law; namely the ability to direct a company’s activities) over all matters requiring shareholder approval, including the election and removal of our directors and the approval of significant corporate transactions. This concentration of ownership could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our ordinary shares that might otherwise give our shareholders the opportunity to realize a premium over the then-prevailing market price for our ordinary shares.
 
Further, as a foreign private issuer, we are exempt from the application of the NYSE rules requiring the majority of the members of our Board of Directors to be independent and requiring our Board of Directors to establish independent nomination and compensation committees. Accordingly, our minority shareholders and debenture holders are denied the protection intended to be afforded by these corporate governance standards.
 
Risks Related to our wholly owned subsidiary Netvision
 
Integration of Netvision’s business may cause us operating difficulties and expenditures.
 
The process of integrating Netvision’s business into our operations may result in unforeseen operating difficulties and large expenditures and may require significant management attention that would otherwise be available for our ongoing business. These risks may be further intensified due to a number of potential factors, including, among others: changes in the regulatory environment in the Israeli telecommunications market, unanticipated costs or liabilities, multiplicity of information and engineering systems, some of which we may have to replace, loss of key employees of Netvision and unrealistic goals or projections for the Netvision business or the merged group, whether due to regulatory changes or otherwise. In addition, changes in the financial condition, business or operations of Netvision may significantly affect our financial condition and results of operations.
 
Changes in the regulatory environment could adversely affect Netvision’s business .
 
Netvision is subject to regulation of its ongoing operations and could therefore be significantly impacted by decisions of regulators, changes in laws, regulations or government policy affecting its business activities.  The uncertainties and risks surrounding the regulatory framework of the Israeli telecommunications market, some of which we are currently unable to foresee or assess, could negatively affect Netvision’s business and prospects. Netvision’s
 
operations in ISP services, landline telephony and international calling services are highly regulated. A change in the competitive structure of the market or a change in the regulation on structural separation of different types of services may adversely affect Netvision’s results of operations and its ability to compete with other large players in the market, such as Bezeq and Hot. The annulment of Early Termination Fees in the other communications markets in November 2011 has increased competition as it has eliminated transfer barriers. This resulted in increased churn rate and gross recruitment of subscribers and price erosion and is expected to continue to affect Netvision’s results of operations.
 
The current policy of the Ministry of Communications is to encourage new entrants into the telecommunications market in order to increase competition and reduce fees and prices paid by consumers. See “Item 3. Key Information – D. Risk Factors – Risks related to our Business – We face intense competition in all aspects of our business” as well as under “Item 4. Information on the Company - Competition”  regarding the recommendations of a public committee appointed by the Ministry of Communications to examine Bezeq’s tariffs structure, tariffs for wireline wholesale services and review the possible annulment of the structural limitations currently imposed on Bezeq and its subsidiaries, published in October 2011.
 
Opening the market to additional competition, permitting telecommunications companies to offer bundled services, the recommendations regarding the structural separation and Bezeq’s tariffs supervision may have a material adverse effect on Netvision’s results of operation by enabling increased competition in the markets in which Netvision operates. Moreover, it could specifically give competitive edge to Bezeq and Hot, whose existing infrastructure and ability to offer bundled services may significantly harm Netvision’s competitive position, to provide its customers with landline telephony, ISP services and international telephony. Bezeq and Hot have the advantage of owning their own infrastructure and the ability to offer landline, international telephony and ISP services, as well as multichannel television independently of any third party support. If they are allowed to bundle these services, they will have an advantage over other service providers such as Netvision that do not own their own infrastructure. Further, the offering of services by the Bezeq and Hot groups at tariffs significantly lower than prevailing market tariffs or at prices even lower than our costs for these services, such as by cross subsidizing with other services in which they have the capacity to monopolize the market, could also significantly harm Netvision’s competitive position as it could decrease demand for Netvision’s services or lead Netvision to offer its services at  a loss.  Further, as Netvision is dependant on Bezeq and Hot’s infrastructure to provide its services on the one hand, and is competing with them on the provision of ISP, ILD and landline services to end-users, on the other hand, price erosion of ISP services would lead to increased demand for greater bandwidth and would require Netvision to significantly increase the capacity it purchases, significantly increasing its expenses in purchasing capacity from Bezeq and Hot, while its revenues would be decreasing. This   could also have a material adverse effect on Netvision’s results of operations.   In February 2012, Hot began offering ISP services and has done so at tariffs significantly lower than prevailing market prices or at prices which would be lower than our costs and Bezeq also significantly lowered its internet infrastructure services tariffs to end-users. Netvision believes there is cause for regulatory intervention and has appealed to the regulators to intervene, but cannot predict the outcome of such appeals. See “Item 4. Information on The Company –B. Business Overview – The Communications Market in Israel - Communications Groups – Structural Separation”, “Competition” and “Nevision - ISP Business - Competition” and “Nevision - Telephony Business – Competition”.
 
In addition, the Ministry of Communication has published a hearing on November 2011 in relation to proposed regulation of the underwater international telecommunications connection from Israel, proposing certain limitations on the agreements with Mediterranean Nautilus Ltd. and Mediterranean Nautilus (Israel) Ltd., or collectively Med Nautilus , Netvision’s provider, which would, among others, limit the discounts and capacity Med Nautilus may provide. Further, Bezeq International, one of Netvision’s main competitors in the ILD and ISP markets has recently deployed an underwater cable. Adoption of such changes and the deployment of such cable by a Netvision competitor may harm Netvision’s results of operations and competitive position as it would force Netvision to purchase capacity at less favorable prices, and more so in comparison to its Bezeq affiliate competitor.
 
Netvision is exposed to risks relating to network infrastructure and information systems and is dependent on services it receives from its external suppliers.
 
Netvision does not own an independent network for providing the services it offers to its customers. Therefore, Netvision is dependent on its infrastructure providers, such as Med Nautilus, which provides underwater international telecom connections, Bezeq and Hot, which provide broadband connectivity and wireline infrastructure. In some cases, these providers are virtually the sole providers of such infrastructure and cannot be replaced. Netvision is also dependent on foreign telecommunications operators for its international ISP and telephony communications. Therefore, termination or amendment of terms of an agreement with any of the infrastructure providers or with some of the foreign operators at once, disruption in or refusal to provide such infrastructure services, as well as regulatory changes affecting the terms of infrastructure services that Netvision receives, may have a material adverse affect on Netvision’s ability to provide its services to customers or the profitability of providing such services.
 
Netvision’s operations are dependant on various information systems. The unauthorized entry to or disruption of operation of these information systems, including due to cyber attacks, may result in damage to Netvision and its customers, including due to inability to provide certain services or provide them with disruptions or inability to bill for services rendered, loss of data of Netvision or that of its customers stored with Netvision, all of which may expose Netvision to legal claims and liabilities. Further, any successful attacks on Netvisions’ customers’ information systems, protected by Netvision’s data security products, may also expose Netvision to legal claims and liability.
 
Alternate technology may cause a decline in Netvision’s international calling services.
 
In recent years there has been a decline in use of international calling services through international operators such as Netvision. This is due to, among other things, the development of alternate technologies, such as VoIP, which enable international calls without the services of an international operators. These technologies also pose an alternative to landline communications. If this trend continues and alternate technologies improve or if new ones are developed, the competition in the market will increase, which may have a material adverse effect on Netvision’s results of operations.
 
Risks Relating to Operating in Israel
 
We conduct our operations in Israel and therefore our results may be adversely affected by political, economic and military instability in Israel.
 
Our operations, our network and some of our suppliers are located in Israel.  Accordingly, political, economic and military conditions in Israel may directly affect our business.  Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect our operations and could make it more difficult for us to raise capital.  Since September 2000, there has been a high level of violence between Israel and the Palestinians. Hamas, an Islamist movement responsible for many attacks, including missile strikes, against Israelis, won the majority of the seats in the Parliament of the Palestinian Authority in January 2006 and took control of the entire Gaza Strip, by force, in June 2007. Hamas has launched hundreds of missiles from the Gaza Strip against Israeli population centers, disrupting day-to-day civilian life in southern Israel. This led to an armed conflict between Israel and the Hamas during December 2008 and January 2009 and a continued sporadic missile launching from the Gaza strip to Israel, thereafter. A substantial part of our network and information systems is located within range of missile strikes from the Gaza Strip and Lebanon. Any damage to our network and/or information systems would damage our ability to provide service, in whole or in part, in the southern or northern part of Israel or otherwise damage our operation and could have an adverse effect on our business, financial condition or results of operations.
 
More generally, any armed conflicts, terrorist activities or political instability in the region would likely negatively affect business conditions and could harm our results of operations, including following termination of such conflicts, due to a decrease in the number of tourists visiting Israel.  At the end of 2010 and during 2011 several countries in the region, including Egypt and Syria, have been experiencing increased political instability, which led to change in government in some of these countries (including Egypt), the effects of which are currently difficult to assess.
 
In addition, in the event that the State of Israel relinquishes control over certain territories currently held by it to the Palestinian Authority, we will not be able to provide service from our cell sites located in Israeli populated areas and on connecting roads in these territories. This may result in the loss of subscribers and revenues and in a decrease in our market share.
 
Our freedom and ability to conduct our operations may be limited during periods of national emergency.
 
The Communications Law grants the Prime Minister of Israel the authority, for reasons of state security or public welfare, to order a telecommunications license holder to provide services to security forces, to perform telecommunication activities or to establish a telecommunications facility as may be required for the security forces to carry out their duties. Further, the Israeli Equipment Registration and IDF Mobilization Law, 1987, also permits the registration of engineering equipment and facilities and the taking thereof for the use of the Israel Defense Forces. This law further sets the payment for use and compensation for damages caused to the operator as a result of such taking. Our general license also permits the Israeli Government, during national emergencies or for reasons of national security, to
 
take all necessary actions in order to ensure state security, including taking control of our network, and requires us to cooperate with such actions. If national emergency situations arise in the future and if we are to be subject during such time to any of the foregoing actions, this could adversely affect our ability to operate our business and provide services during such national emergencies and adversely affect our business operations. Our other licenses and Netvision’s licenses (excluding its ISP license) contain similar restrictions. See also “ Item 4. Information on the Company – B. Business Overview – Government Regulations ― Our Principal License ” and “Other Licenses” “Item 4. Information on The Company – B. Business Overview – Netvision”.
 
Provisions of Israeli law and our license may delay, prevent or impede an acquisition of us, which could prevent a change of control.
 
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions.  For example, a merger may not be completed unless at least 50 days have passed from the date that a merger proposal was filed by each merging company with the Israel Registrar of Companies and at least 30 days from the date that the shareholders of both merging companies approved the merger. In addition, a majority of each class of securities of the target company is required to approve a merger.  Further, the provisions of our license require the prior approval of the Ministry of Communications for changes of control in our Company.
 
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when the time expires, tax then becomes payable even if no actual disposition of the shares has occurred.
 
These provisions could delay, prevent or impede an acquisition of us, even if such an acquisition would be considered beneficial by some of our shareholders.
 
Risks Relating to Our Ordinary Shares
 
A substantial number of our ordinary shares could be sold into the public market, which could depress our share price. Our largest shareholder, DIC, holds approximately 43.61% of our outstanding ordinary shares, as of December 31, 2011. The market price of our ordinary shares could decline as a result of future sales by DIC or other existing shareholders or the perception that these sales could occur. DIC sold 16,385,870 ordinary shares, or approximately 16.47% of our outstanding shares in a number of transactions outside the United States in 2007, 2008 and 2011. Sales may be made pursuant to a registration statement, filed with the U.S. Securities and Exchange Commission, or the SEC pursuant to the terms of a registration rights agreement or otherwise, or in reliance on an exemption from the registration requirements of the Securities Act, including the exemptions
 
provided by Rule 144 or Regulation S. Any decline in our share price could also make it difficult for us to raise additional capital by selling shares.

In addition, in February 2012, a public committee for the enhancement of competition and the maintenance of the financial stability of the Israeli economy, or Centralization Committee, nominated by the Israeli Prime Minister, published its final recommendations, including recommendations to: (1) impose limitations on the control or holding of a substantial real corporation and its controlling entities over a financial corporation; (2) impose limitations on the control over public corporations through a pyramid structure by imposing a limitation on the number of layers in such pyramid to three for existing corporations and two for new corporations; (3) strengthen the corporate governance applicable to public companies in Israel, and in particular strengthen the independence of  board of directors of public companies held through pyramid structure; (4) limit the exposure of institutional bodies to issuers, borrowers groups and the largest borrowers and issuers groups; and (5) require the entities responsible for the allocation of rights and public assets in certain cases to consider competitive and control centralization considerations regarding essential infrastructure. In relation to certain recommendations the committee recommended transition periods of between one and four years from their adoption. The adoption of such recommendations, if implemented, could have a material effect on us, given our being held as a fourth layer company in the IDB group.

In addition, under our option plan, options are subject to vesting schedules but vesting will be accelerated upon certain events including any sale or other disposition, of all or substantially all, of the outstanding shares of  us. As of December 31, 2011 we have 1,056,896 shares reserved for issuance upon the exercise of options. See “Item 6. Directors, Senior Management and Employment – E. Share Ownership – 2006 Share Incentive Plan”.
 
ITEM 4.
 
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
 
  Our History
 
Cellcom Israel Ltd. was incorporated in 1994 in Israel. Our principal executive offices are located at 10 Hagavish Street, Netanya 41240, Israel and our telephone number is (972) -52-999-0052 . Our authorized U.S. representative, Puglisi & Associates, is located at 850 Library Avenue, Suite 204 Newark, Delaware 19711 and our agent for service of process in the United States, CT Corporation System, is located at 111 Eighth Avenue, New York, NY 10011.
 
We hold one of the five general licenses to provide cellular telephone services in Israel, one of the five cellular services providers has not commenced operations yet and is expected to do so in the second half of 2012. To date, nine MVNO licenses have been awarded, one of which was returned to the Ministry of Communications, and one MVNO operator commenced operation in December 2011. Our cellular license was granted by the Ministry of Communications in 1994 and is valid until 2022.
 
In February 2007 we listed our shares on the NYSE and in July 2007 we dual listed our shares on the Tel Aviv Stock Exchange, or TASE and began applying the reporting leniencies afforded under the Israeli Securities Law to companies’ whose securities are listed both on the NYSE and the TASE.
 
DIC, a subsidiary of IDB, currently directly and indirectly holds approximately 43.61% of our share capital and the voting rights in respect of an additional approximately 3.43% of our share capital.
 
As of the date of this Annual Report on Form 20-F, there has been no indication of any public takeover offer by any third party, in respect to our ordinary shares, or by us, with respect to another company’s shares, other than as detailed under “ - Significant Developments During 2011”.
 
Significant Developments During 2011
 
Acquisition of Netvision Ltd.
 
On August 31, 2011, we completed the acquisition of 100% of the share capital of Netvision for a total consideration of approximately NIS 1.57 billion ($411 million) pursuant to a merger agreement dated June 15, 2011, by and among our Company, Netvision and a wholly owned subsidiary of our Company, which we formed solely for effecting the merger transaction. Following the consummation of the merger transaction, Netvision became a wholly owned subsidiary of our Company.
 
Prior to being acquired by us, Netvision was a public company traded on the TASE, indirectly controlled by the IDB Group through direct holdings in Netvision by: (1) DIC, (approximately 38%), and (2) Clal Industries and Investments Ltd., or Clal (approximately 29.7%). DIC is also our direct controlling shareholder. DIC and Clal are direct subsidiaries controlled by IDB Development, which is a wholly owned subsidiary of IDB, a public company traded on the TASE.
 
Since prior to the merger transaction, the IDB Group controled both Netvision and us, the merger transaction was approved as a related party transaction under Israeli law. For further details, see Item 7. B “Related Party Transactions”.
 
Netvision is a leading company in the Israeli telecommunications market and is engaged in two primary businesses: provision of internet connectivity and related services (ISP); and provision of telephony services consisting mainly of international calling services, operator services, teleconferencing services and landline telephony services). Netvision’s ISP and ILD licenses were granted by the Ministry of Communications in 2002 and 1997, respectively and are valid until 2012 and 2025, respectively. In addition, Netvision is engaged in other areas such as internet content services and custom internet applications. For further details, see Item 4.B - “Business Overview - Netvision”.
 
Netvision has several subsidiaries, some are wholly owned, some are controlled or jointly held by Netvision,   and also holds minority stakes in certain other entities. We refer to Netvision and its subsidiaries as “Netvision”.
 
We funded the acquisition of Netvision through a combination of available cash and issuance of additional debentures from our existing Series D and Series E debenture series on the TASE. The offerings described above were made in Israel to residents of Israel only. For further details, see “Item 5. B – Operating and Financial Review and Prospects – Liquidity and Capital Resources”.
 
Principal Capital Expenditures
 
Our accrual capital expenditure in 2009, 2010 and 2011 amounted to NIS 663 million, NIS 735 million and NIS 520 million, respectively. Accrual capital expenditure is defined as
 
investment in fixed assets and intangible assets, such as spectrum licenses, rights of use of communication lines, UMTS networks’ enhancement and expansion and development of new products and services during a given period. The amount of capital expenditure for 2010 includes NIS 108 million for the acquisition of assets and operations of Dynamica, one of our major dealers.
 
B.
BUSINESS OVERVIEW
 
  General
 
We are the largest provider of cellular communications services in Israel with approximately 3.349 million cellular subscribers for the year ended December 31, 2011. Upon launch of our services in 1994, we offered significantly lower prices for cellular communications services than the incumbent provider and transformed the nature of cellular telephone usage in Israel, turning it into a mass market consumption item. We surpassed the incumbent cellular operator and became the market leader in terms of number of subscribers in 1998 and, despite the entry of additional competitors, we have continued since then to have the highest number of subscribers.  As of December 31, 2011, we provided services to approximately 3.349 million subscribers in Israel with an estimated of 33.6%. Our closest competitors have estimated market shares of 31.9% and 29.6 %, respectively. In the year ended December 31, 2011, we generated revenues of NIS 6,506 million ($1,703 million), EBITDA of NIS 2,167  million ($567 million), and operating income of NIS 1,422  million ($373 million).  See note 2 to the table in “Item 3. Key Information – A. Selected Financial Data” for a definition of EBITDA. In 2011, our results of operations were adversely affected by regulatory changes, mainly the reduction of interconnect fees and the reduction of Early Termination Fees to a negligible amount in the cellular market and the intensified competition leading to accelerated price erosion and we estimate that the intensified competition will continue to adversely affect our results in the future  . See “Item 5. A. – Operational Review”.
 
We offer a broad range of cellular services through our cellular networks covering substantially all of the populated territory of Israel. These services include basic and advanced cellular telephone services, text and multimedia messaging services and advanced cellular content and data services. We also offer international roaming services in 179 countries as of December 31, 2011. We offer our subscribers a wide selection of handsets from various leading global manufacturers, as well as extended warranty and repair and replacement services to most handsets we offer.  We also offer landline transmission and data services to business customers and telecommunications operators and, since July 2006, we offer landline telephony services and since 2009 ISP services to selected businesses, using our advanced inland fiber-optic infrastructure.
 
Following the completion of the acquisition of Netvision in 2011, we expanded the range of our telecommunications services and we now also offer, through Netvision, ISP services to private and business customers and additional telephony services, such as international calling services, landline telephony services to the business and the private sectors and teleconferencing services. We also provide through Netvision additional services such as internet content services, design of software and internet applications. For further details on Netvision’s business and operations, see “NETVISION” in this Item 4.B below.
 
The following table presents our number of cellular subscribers and revenues for each of the last five years:
 
   
Year Ended December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011
 
Cellular subscribers (end of period) (in thousands)(1)
    3,073       3,187       3,292       3,394       3,349  
Revenues (in NIS millions)
    6,050       6,417       6,483       6,662       6,506  
                                         
(1)
Subscriber data refers to active cellular subscribers.  We use a six-month method of calculating our cellular subscriber base, which means that we deduct subscribers from our cellular subscriber base after six months of no revenue generation or activity on our network by or in relation to both the post-paid and pre-paid subscriber.  The six-month method is, to the best of our knowledge, consistent with the methodology used by other cellular providers in Israel. During the fourth quarter of 2011, we have removed approximately 52,000 subscribers from our subscribers base, following the shutdown of our TDMA network as of December 31, 2011, since such subscribers have not requested a transfer to our other networks as of that date, and following a change to our previous policy which allowed subscribers to change from post to prepaid subscription as a result of the reduction of Early Termination Fees in the cellular market in early 2011, as we found this change to be futile since most of those customers ceased using our services. These changes affected other key performance indicators. We have not restated prior subscriber data to conform with these changes.
 
The Telecommunications Industry in Israel
 
The following table sets forth selected macro statistics about Israel at and for the year ended December 31, 2011:
 
Population (millions, at end of year)
7.8
GDP ($ billions) (1)
239
GDP per capita ($ 000) (1)
31
Exports of goods & services ($ billions) (1)
88
CPI change
2.2%
Long-term local currency sovereign credit rating by S&P
A+(Stable)
Unemployment rate (average for nine months ending September 2011)
5.7%
(1)
2011 forecast , translated to USD based on the  average representative rate of exchange for the year
 
  Source:  Central Bureau of Statistics,  and Ministry of Finance of Israel, , Bank of Israel.
 
The size of Israeli telecommunications services revenues in 2010 was approximately NIS 30 billion.  Telecommunications services consist of several segments, which are highly competitive. Of the total telecommunications services revenues in 2010, approximately 57% was comprised of cellular services, approximately 25% was local landline voice and Internet access services, approximately 5% was international voice services, approximately 13% was multichannel television services, and approximately 1% was Network Ending Point. These figures have changed substantially  in 2011, reflecting a downsizing of the overall revenues in the cellular  market, as a result of the reduction of interconnect tariff. For additional details, see “Item 4. Information on the Company – B. Business Overview – Government Regulations – Tariff Supervision”. Cellular spending in 2011 was approximately 1.4% of GDP, in line with developed European economies and the United States.
 
Israel has high penetration rates across all telecommunications services that are in line with developed economies such as in the European Union and the United States.  These levels of penetration can be attributed to the rapid adoption rate of new technologies, high expenditures on telecommunications services by consumers and businesses and a relatively young population.
 

Communications Groups – Structural Separation
 
Since 2009, the Israeli telecommunications market underwent several ownership changes. Recent acquisitions resulted in the creation of three additional communications groups in the Israeli communications market, in addition to the Bezeq group: Partner-012 Smile, Cellcom–Netvision and Hot-Mirs. See “Cellular Services” below for additional details. Each of the Bezeq and Hot groups are subject to certain structural separation requirements as a result of being the incumbent and monopoly in their respective core business – landline and multichannel television services. That structural separation was relaxed in 2010, allowing Bezeq and its subsidiaries to offer a bundle of services under certain conditions to private customers (including the condition that each of the services in the Bezeq bundle will be available for sale separately under the same terms as in the bundle; and the requirement that Bezeq allows its competitors to participate in a similar bundle  - if includes ISP, VOB or ILD services - under the same terms and equally markets such bundles as its own bundle – the second requirement does not apply to the sale of the bundle by a subsidiary of Bezeq), and is currently being considered by the Ministry of Communications with respect to business customers as well. The offering of a bundle of services, including cellular services by another group, will relax the conditions under which Bezeq may provide a similar bundle.  Further, a public committee appointed by the Ministry of Communications recommended in October 2011 to annul the structural limitations currently imposed on Bezeq and its subsidiaries when a wholesale market of wireline services becomes available to other operators, and to replace Bezeq’s regulated fixed tariffs with maximum tariffs. If such recommendations are adopted by the Ministry of communications, they will allow Bezeq and its subsidiaries (including Pelephone), to offer bundles of services (other than multichannel television services) without limitation. Although the Hot group is also subject to structural separation limitations between its multi-channel television, ISP, cellular and landline services, it was allowed to offer a bundle of landline, multichannel television and internet infrastructure services and the Ministry of Communications is currently considering whether to annul the structural separation limitations between Mirs and Hot, after already lifting certain limitations in 2011, allowing Hot and Mirs to sell and market each other’s services and transfer information. The Hot group was previously allowed to sell a bundle including ISP services under certain conditions (similar to the ones imposed on the Bezeq bundle of services, in relation to the ISP component only) . Both Bezeq and Hot offer bundles of services excluding cellular services. Bundle offerings by Hot and Bezeq are expected to accelerate price erosion in each of the services included.  See “Item 4. Information on The Company – B. Business Overview – Competition” and “Nevision - ISP Business - Competition” and “Nevision - Telephony Business - Competition”.
 
Cellular Services
 
Cellular telephone services were first introduced in Israel in 1986.  For the first nine years of cellular operations there was only one operator, Pelephone, a subsidiary of Bezeq, and growth of cellular telephone services, as well as penetration rates, were limited.  After the commercial launch of Cellcom in December 1994, cellular penetration rates and cellular phone usage increased significantly. This is mainly due to the fact that our license was awarded to us based upon, among other things, our commitment to offer our services at low prices during the first five years of our operation.
 
The Israeli cellular market is highly penetrated. The market reached an estimated penetration rate (the ratio of cellular subscribers to the Israeli population) at December 31, 2011, of approximately 128%, representing approximately 10 million cellular subscribers.
 
The following table sets forth the growth in the total number of cellular subscribers in Israel and the penetration rate over the last five years:
 
   
December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011
 
Total subscribers (millions)
    9.0       9.2       9.5       9.8       10  
Cellular penetration (%)
    124 %     124 %     127 %     128 %     128 %
Source:
Reported by Cellcom, Partner and Pelephone.  Mirs data as reported by Hot on July 25, 2011 in the valuation of Mirs performed by TASC , an Israeli consulting firm.
 
There are currently four active cellular operators in Israel: Cellcom, Partner, Pelephone, and MIRS and one active MVNO operator: Rami Levy. We estimate that the distribution of cellular subscribers among these operators as of December 31, 2011 was: Cellcom 33.6%, Partner 31.9%, Pelephone 29.6%, MIRS 4.8% and Rami Levy with less than 1% . Subscriber data is based on public information as of September 30, 2011, other than MIRS, which is based on its estimate for year end, as published by Hot in its valuation for Mirs and except for Rami Levy, which is based on our estimate. However, there is no uniform method of counting subscribers. Mirs and Golan were granted a UMTS license in April and December 2011 respectively and are expected to commence their UMTS operation in the first half of 2012 and second half of 2012, respectively. An additional eight entities have received MVNO licenses during 2010 and 2011 and to date have not commenced operating: Free Telecom Ltd., or Free Telecom, Ituran Cellular Communications Ltd., or Ituran, Bynet Semech Outsourcing Ltd., or Bynet, Home Cellular Ltd., or Home Cellular, T2T Communications Ltd., or T2T, Gali Phone Ltd., or Gali Phone, and Alon Cellular Ltd., or Alon Cellular. The ninth MVNO licensee has returned its license. Free Telecom, Ituran, Alon Cellular and Home Cellular are expected to commence operations in the first half of 2012.
 
We are controlled by DIC, a subsidiary of IDB, and started operations at the end of 1994. In August 2011, we completed the purchase of all outstanding shares of Netvision. Until 2009, Partner was majority-owned by Hutchinson Whampoa Ltd. and started operations in 1998. In October 2009, Scailex Corporation Ltd., or Scailex, an Israeli company listed on the TASE and indirectly controlled by Israeli businessman Mr. Ilan Ben-Dov, purchased the controlling stake in Partner. Scailex is also the official importer of Samsung cellular phones to Israel.  Pelephone is a wholly-owned subsidiary of Bezeq, the landline incumbent operator and started operations in 1986.  The major controlling shareholder of Bezeq following its privatization in 2005 was F.Sab.Ar Holdings Ltd. (controlled by Saban Capital Group (controlled by the media entrepreneur Haim Saban), Apax Partners (the international private equity firm) and Arkin Communications (controlled by the Israeli businessman Mori Arkin)). In April 2010, Bezeq announced that F.Sab.Ar Holdings Ltd. completed the sale of its holdings in Bezeq to B Communications Ltd., or B Communications, (formerly named 012 Smile Communication Ltd., or Smile). B Communications is an Israeli company traded on the NASDAQ and the TASE and controlled by Internet Gold Golden Lines Ltd., or Internet Gold. Both B Communications and Internet Gold form part of the Eurocom Communication Group, or Eurocom, which includes Eurocom Cellular Communication Ltd. - the official representative of Nokia cellular phones in Israel. In January 2010, Ampal-American Israel Corporation, or Ampal, a company traded on the NASDAQ and TASE completed the purchase of Smile’s on-going business, through its indirect wholly owned subsidiary – 012 Smile Telecom Ltd, or Smile Telecom. In March 2011, Partner announced the completion of the purchase of all outstanding shares of Smile Telecom. MIRS, previously wholly owned by Motorola, had its license upgraded from push-to-talk to a cellular license in February 2001. In
 
2010, Motorola completed the sale of its holding in MIRS to Altice Securities S.A.R.L, owned by the French businessman Mr. Patrick Derhy. Mr. Derhy has also purchased the controlling stake in Hot Telecom, or Hot, which provides multichannel pay-TV services and Internet, data and landline telephony services. In September 2011, Hot acquired all the outstanding shares of MIRS.
 
Golan is owned by Xavier Niel, founder and controlling shareholder of the French telecom company Iliad- Free, Patrick and Gerard Pariente, founders and former owners of Naf Naf, a European fashion brand and Michael Golan, the CEO of Golan and former CEO of the French telecom company Iliad – Free.
 
Free Telecom (also in possession of a VoC trial license) is controlled by Shlomo Shmeltzer, who also controls Tadiran Telecom, a telecom integrator, and Shlomo Sixt, a car rental and leasing company; Ituran sold its mobile business in 2011 to the CEO of its mobile business , Yehiel Ben-Shoshan ; Rami Levy is a subsidiary of a major Israeli discount supermarket chain; Bynet belongs to the Rad Bynet group, a leading Israeli manufacturer and integrator of communications products and services; Home Cellular is a subsidiary of a leading ‘do it yourself’ stores chain; T2T is owned by three private entrepreneurs ; Alon Cellular is owned by Alon holdings which also controls a leading retail chain and a gas stations chain and Ellomay Capital ,   an investment company and Gali Phone is owned by Avigdor Tamir, who also owns Sipme, one of the companies conducting a VoC services trial.
 
The following listing sets forth the key milestones in the history of the Israeli cellular services:
 
1986
Bezeq and Motorola create a joint venture called “Pelephone”, which becomes Israel’s first cellular operator.  Pelephone launches N-AMPS services
1994
Cellcom awarded a license and launches TDMA services
1997
Cellcom introduces first pre-paid plan to the market
1998
Partner awarded a license and launches GSM services
1998
Pelephone launches CDMA services
2001
Ministry of Communications allocates additional 2G and 3G cellular frequencies for existing cellular operators and for the licensing of a new operator
2001
MIRS becomes Israel’s fourth cellular operator with iDEN services
2002
Cellcom launches GSM/GPRS services
2003
Cellcom launches EDGE services
2004
Partner launches UMTS services
Pelephone launches EVDO services
2006
Cellcom launches full scale UMTS/HSDPA services
2007
Partner launches HSDPA services
2008
Cellcom launches HSUPA services
2009
Pelephone launches UMTS/HSPA services
2010
Ministry of Communications provides MVNO licenses; Cellcom and Pelephone launch HSPA+ services
2011
Mirs and Golan awarded UMTS operator licenses
Rami Levy , MVNO operator, commences operations
Cellcom stops operating  its TDMA network

Key characteristics of the Israeli cellular services market
 
The following paragraphs describe the key characteristics of the Israeli cellular services market:
 
High cellular telephone penetration.   The estimated penetration rate in Israel as of December 31, 2011 was 128%.  Penetration rate is calculated by dividing the total number of
 
subscribers by the Israeli population. The Israeli population does not include foreign workers and Palestinian subscribers who are included in the number of subscribers.  The number of subscribers also includes subscribers with more than one subscription to a cellular network (including data only subscriptions alongside a cellular subscription) and may also include subscribers to more than one network including those in the process of switching networks. As a result, the effective penetration rate after adjustment for these factors is likely to be lower than 128%. The regulatory reduction of Early Termination Fees to a negligible amount in the cellular market, has reduced the number of subscribers with more than one subscription.
 
Favorable demographics.   Population growth is generally high and the population is relatively younger than in other developed economies.
 
Favorable geography and high population density around a few urban centers.   Israel covers a small area of territory of approximately 8,000 square miles (20,700 square kilometers).  In addition, Israel is relatively flat and dry.  Moreover, the population tends to be concentrated in a small number of geographical locations.  These characteristics facilitate efficient network roll out and maintenance.
 
High cellular voice usage.   The average cellular voice usage per subscriber in Israel is well over 300 minutes per month, which is higher than the average cellular voice usage per subscriber in most developed economies using the pricing model of “calling party pays”.
 
Low average voice revenue per minute. Cellular operators in Israel have lower average voice revenues per minute than in most developed calling party pay economies.  This is a consequence, among other things, of the strong competition and a heavily regulated environment. Following the reduction of Early Termination Fees in the cellular market and the intensified competition, the average voice revenue per minute further declined in 2011 as a result of the offering of packages which led to further price erosion (together with higher MOU).
 
High percent of Postpaid customers. The Israeli cellular market has a high percent of Postpaid customers (71%) compared to other developed countries.

High potential for mobile data.   The contribution of non-voice revenues to total revenues in the Israeli cellular market is below the level of other developed markets. This characteristic is attributable in part to the relatively late launch of advanced data services and smartphones in Israel. We believe that there is a potential for narrowing this gap by increasing marketing efforts of new data devices (such as tablets and laptops) to increase usage of data together with the growth in our existing 3G subscriber base.
 
Calling party pays. In Israel, as in most of the world, the party originating the call pays for the airtime.  Cellular telephone network operators do not charge subscribers for calls received on their handsets, except while roaming abroad.
 
Annual churn rates.   The average annual churn rate in Israel in 2011 is estimated to be approximately 25%, which is in line with the churn rates in other developed economies. This churn rate reflects a material increase in churn rate attributed to the regulatory changes implemented in 2011 such as the regulatory reduction of Early Termination Fees to a negligible amount in the cellular market in February 2011.
 
Wireline Services
 
Landline Services
 
Bezeq operates approximately 2.3 million lines (at the end of September 2011) and provides local services. The second largest competitor in landline telephony services is Hot, a provider of cable TV services, which started landline operations in late 2003. Hot’s network has been upgraded to offer Internet, data and voice services.
 
In recent years, Bezeq has experienced a significant drop in its traffic volume.  Bezeq is a monopoly and thus subject to enhanced regulatory scrutiny, including supervision of tariffs.
 
We, Netvision (our wholly owned subsidiary) and Hot entered this market in 2006. Partner entered this market in 2007, Smile Telecom entered this market in 2008 and Bezeq International (VOB only) entered this market in 2009, bringing to a total of seven players. Following the acquisition of Smile Telecom by Partner in March 2011, Partner announced it will transfer its landline telephony business to Smile Telecom.
 
Broadband and Internet services
 
The Israeli broadband market is characterized by a regulatory structural separation between the providers of the internet infrastructure and the internet access service. Based on Bezeq and Hot reports, at the end of September 2011, there were approximately 1.864 million subscribers, and the household penetration rate was approximately 85%. The only providers of infrastructure in the market are Bezeq through ADSL technology and Hot through cable. ADSL services were launched by Bezeq in 2000 and currently represent a 59% share of broadband connections.  Cable modems, which account for the rest of the market, have been available since 2002.
 
Hot announced in 2010 it has completed the upgrade of its network to UFI (Ultra Fast Internet) network and Bezeq announced it will complete upgrading its network to high speed NGN in 2012. In December 2011, Bezeq announced it will start a limited trial to test a Fiber to the Building (FTTB) and Fiber to the home (FTTH) network. In February 2010, the Ministry of Communications provided a trial license to the Israeli Electric Company, allowing it to use its fiber optic infrastructure to provide transmission services to other operators. In March 2011, the Israeli government  approved the establishment of a new communications company that will be granted the exclusive right to use the Israeli Electric Company’s optic fiber infrastructure for the provision of broadband transmission services. The new company will be controlled by a private investor (51%) which may not hold any means of control in another communications company, and the Israeli electric Company (49%).
 
Transmission and landline data services are provided by Bezeq, Hot, Partner (who acquired Med-1’s operation in 2006) and us. These services are provided to business customers and to telecommunications operators.
 
Internet access is currently provided by three major Internet service providers, or ISPs: Netvision (our wholly owned subsidiary), Bezeq International, Smile Telecom (a subsidiary of Partner), and some other niche players. Hotnet, a subsidiary of Hot, began providing ISP services in February 2012. We estimate the market share of the three largest ISPs to be similar, with each holding around one third of the market, with Netvision
 
(including its controlled subsidiary) holding the leading position. All three major providers are also suppliers of international voice services. Partner entered this market in December 2008 and following its acquisition of Smile Telecom in March 2011, announced it will transfer its ISP business to Smile Telecom. We have offered ISP services to selected business customers since 2009 and Hot was awarded an ISP license in December 2010.
 
Until 2011, the Israeli ISPs were connected to the World Wide Web through an underwater communications cable owned and operated by Mediterranean Nautilus Ltd., a subsidiary of Telecom Italia SpA. In January 2012, Bezeq International announced that its own underwater communications cable was operational and in February 2012, the Tamares Group’s underwater communications cable, owned by the British businessman Poju Zabloudowicz commenced operations. We expect that these additional underwater cables will increase the effective bandwidth of international data connectivity and reduce costs for ISPs. However, proposed regulation published for public comments by the Ministry of Communication in November 2011, proposes certain limitations on the terms of agreements with Med Nautilus, which would, among others, limit the discounts and capacity Med Nautilus may provide and force ISP providers (other than Bezeq International) to purchase capacity on less favorable terms and prices.
 
International voice services
 
International voice services in Israel have been open for competition since December 1996.  Until then, Bezeq International, was the only supplier of such services.  There are currently six players in this market. The three major players are: Bezeq International, Netvision (our wholly owned subsidiary) and Smile Telecom. The fourth player is Xfone Communications, fifth operator, Telzar International Communications Services Ltd., commenced operating in February 2011 and a sixth operator, Hilat Ltd., commenced operations in January 2012. We estimate the market share of the three major players to be similar, with each having approximately 31-32% market share. Entry barriers to this market are low, technological alternatives such as Skype are commonly used and competition is intense.
 
Multichannel television
 
The multichannel pay-TV market is also highly penetrated with levels above those of most developed economies.  Multichannel pay-TV services are provided by Hot and by YES, a subsidiary of Bezeq. Regulatory change allowing digital terrestrial television (DTT) broadcasting was commercially launched in 2010, and may affect the level of competition in this market and attract additional players, that may use the DTT as a basic service to be bundled with additional IPTV or Over the Top (OTT) channels. In February 2011, the Israeli government  decided to enlarge the DTT service from the current 5 channels to 16 channels in two years.
 
See “Item 4. Information on the Company – B. Business Overview – Government Regulations – Competition” for recommendations to annul structural limitations in the communications market and create a wholesale market for wireline services.
 

Competitive Strengths
 
We believe that the following competitive strengths will enable us to maintain and enhance our position as a leading communications group in Israel:
 
·  
Combination of leading operators. The combination of our market leading position in the cellular market, as reflected by our market share, , coupled with Netvision’s leading position in the ISP market and significant market share in the  ILD services, and the recent combination   of these two leading companies, enables us to leverage synergies and create a rich portfolio of services which further strengthens our competitive abilities.
 
·  
Leading brands . Our established brands, Cellcom and Netvision, enjoy strong public recognition in Israel. We consider the enhancement of our image among consumers a top priority and continually invest substantial resources to maintain Cellcom and Netvision as leading brands in the Israeli communications market. Globes, a leading financial magazine in Israel, ranked Cellcom as the leading and strongest brand of Israel’s telecommunications market in 2011 and Israel’s 4th strongest brand in the Israeli market overall, after three prestigious global brands. We believe that the acquisition of Netvision will strengthen the Cellcom brand and the combination of the two leading brands will create an even stronger communications brand. Furthermore, Cellcom is not only considered a leading brand for consumers, it is also considered an attractive workplace. According to BDI, Cellcom is the 5th most desirable work place among graduating students in Israel. According to the same survey, Cellcom is number 6 most desirable workplaces in Israel. In addition to being a leading brand for both consumers and employees, Cellcom also leads the mobile communications market in terms of customer care. According to the two leading consumer organizations (Emun Hatzibur and the Israeli Consumers Council), Cellcom has the lowest rate of customer complaints while possessing the largest customer base in the market. According to an external survey conducted by Geocartography Group (a survey institute and one of the leading applied-research institutes in Israel (in November 2011, Netvision’s brand is also one of the leading brands in the Israeli telecommunications market. According to that survey, Netvision is the most recognized ISP provider, with the highest score both in terms of retention and unaided awareness and also has the highest rate of promoters among its customers.
 
·  
Large market share across our core lines of business. We hold a large market share in each of our core lines of business – cellular, ISP and ILD services, providing us with economies of scale in a business characterized by significant fixed costs. In addition, partial customer overlap between our core businesses provides us with ample cross-selling opportunities.
 
·  
Transmission infrastructure . We have an advanced fiber-optic transmission infrastructure that consists of approximately 1,600 kilometers of inland fiber-optic cable, which, together with our complementary microwave-based infrastructure, connects the majority of our cell sites and provides for substantially all of our backhaul services. Our transmission infrastructure significantly reduces our operational reliance on Bezeq, the incumbent landline operator in Israel, and saves us substantial infrastructure-leasing cash costs. As our transmission network has
 
transmission and data capacity in excess of our own backhaul needs and covers the majority of Israel’s business parks, we offer transmission and data services to business customers and other telecommunications providers and landline telephony services to selected landline business customers. Following the acquisition of Netvision, this infrastructure will also be used to benefit Netvision’s landline services for business customers, which are currently provided using external infrastructure.   This advantage is expected to be less meaningful if and when the Israeli Electric Company commences to provide transmission to operators, and if and when landline operators who hold general licenses (such as Bezeq) will be required to permit usage of their infrastructure by other operators, as recommended by a public committee appointed by the Ministry of Communications.
 
·  
Strategic relationship with one of Israel’s largest business groups . Our ultimate parent company, IDB, is one of the largest business groups in Israel. We enjoy access through our management services agreement to the senior management of the IDB group, who are some of the most experienced managers in Israel. These managers, including veterans of the Israeli telecommunications market, provide us with financial, managerial and strategic guidance.
 
·  
Strong management team . Our management team includes seasoned managers with significant experience and solid track records in previous managerial positions. Our Chairman, Mr. Ami Erel, is a veteran of the Israeli communications market and previously served as the Chief Executive Officer of Bezeq. Our Chief Executive Officer, Mr. Nir Sztern, has extensive experience in wireline and cellular services, having previously been Chief Executive Officer of Netvision and Deputy Chief Executive Officer of Pelephone.   Mr. Heen, our Chief Financial Officer, previously held a variety of positions within our finance division, including head of our economic department, responsible for our budget, financial analysis, cost accounting and control over our performance. We believe that under the leadership of   Messrs. Erel, Sztern and Heen, we are well positioned to execute our business strategy and maintain our leading position in the rapidly changing Israeli telecommunications market.
 
·  
Cash flow generation . Our cellular business is characterized by high cash flow generation though substantially lower following the regulatory changes regarding the compulsory reduction of interconnect tarrifs and Early Termination fees to a negligible amount. This allows us to invest in our business and deploy advanced network technology, enabling us to offer advanced services and applications, as well as distribute dividends to our shareholders.   Further, Netvision also contributes to our financial results of operations and to our free cash flow. This contribution is significant in light of the adverse effects of several regulatory changes on our results of operations.
 
Business Strategy
 
Our goal is to strengthen our position as a leading Israeli telecommunications group. The principal elements of our business strategy are as follows:
 
·  
Formation of a leading Israeli telecommunications group - Following the acquisition of Netvision, we commenced the integration of Netvision’s business with our existing business, in order to create a leading, strong and efficient Israeli telecommunications group. This includes the merger of our and Netvision’s headquarters and our and Netvision’s business customers operations to create a one stop shop for the group’s
 
portfolio of services, in both customer service and sales. The operation of our and Netvision’s private customers will remain separate, maintaining a distinct focus in each market, in light of the increasing competition in the cellular market and the challenges in the landline market. We expect that the formation of a telecommunications group will enhance our ability to successfully compete with our main competitors, who are also part of or are in the process of forming major telecommunications groups, and will enable us to offer comprehensive packages of telecommunications services as are offered or expected to be offered by our competitors.
 
·  
Offering our customers comprehensive mobile and wireline solutions. Following the acquisition of Netvision, we are now able to offer our customers a wide range of mobile and wireline telecommunications services, while maximizing the synergies between the two entities, both in terms of revenue generation and cost efficiencies. This includes identifying the potential synergies between the two businesses, such as integrating the operations of the business customers of both businesses. In addition, we intend to leverage our leading position and large market share in those businesses  for cross-sales and the offering of new services which are found to be synergetic to those businesses, in order to increase our overall revenues and market share.
 
·  
Maximize customer satisfaction, retention and growth. Our growth strategy is focused on retaining our subscribers, expanding the selection of services and products we offer to our subscribers, and tailoring offers to our customers’ needs in order to enhance customer satisfaction and increase average revenues per user. We strive to be proactive at every service interaction with our customers, to offer service and service terms which are as clear, simple and methodical as possible, and to continually improve and enhance the flexibility of our customer service. In addition to providing quality customer service, we also strive to retain our subscribers and attract new subscribers by offering them comprehensive service packages and advanced handsets and services.
 
·  
Growing and developing of our Mobile Data and Value Added Services . We view Mobile Data as a significant growth engine for our business. Accordingly, during 2010 and 2011, we continued to build our Carrier Ethernet network in order to enable the provision of data services at high speeds and capacity. We intend to continue to invest in the improvement and upgrade of our high speed UMTS/HSPA+ network, to enhance its capacity and increase its speed , as well as enhance our readiness towards a 4G technology, in order to permit higher-quality and higher-speed multimedia content transmission. In 2012 we also plan to continue our efforts in expanding data services usage and revenues, focusing on increasing sales of data-enabled devices such as tablets and smartphones while enhancing the focus on data sales and marketing at our points of sales.
In Value Added Services, we intend to utilize our momentum to expand our content and data services, products and capabilities through our in-house expertise and strategic relationships with leading cellular content providers. We put special emphasis on original Israeli culture themes and on usage enhancing content and applications in the cellular and complementary media. In 2011 we launched a new “Cellcom Volume” music-streaming service, that contributed positively to our revenues, brand identity and popularity among users in general and youth in particular.

·  
Growing in wireline services. We intend to continue to expand our landline business with both private and business customers. For private customers, we provide ISP, VOB services (via Bezeq’s and Hot’s infrastructure) as well as ILD services. The possible
 
development of wholesale wireline services as recommended in October 2011 by the public committee appointed by the Ministry of Communications, if and when made available, will enhance our ability to offer such services and compete with the incumbents, Bezeq and Hot as well as other competitors in these markets, specifically in relation to residential landline services which is currently non-material and generating negative net-income. For details of these recommendations see also “Item 4. Information on the Company – Government Regulations – Competition”. For business customers, following the merger with Netvision, we provide a wide range of telecommunications services, including cellular, ISP, ILD, landline telephony services, as well as hosting and data security services.  These, combined with approximately 1,600 kilometer inland fiber-optic network, our microwave infrastructure, and Netvision’s high penetration in business parks and industrial centers, provide us with the ability to selectively offer cost-efficient landline telecommunications solutions to business customers and integrated offerings.
 
·  
Further develop and strengthen the Cellcom brand.   External market surveys that we have commissioned indicate that brand recognition is an important factor in subscriber selection of, and loyalty to, a cellular operator and more so in the increasingly intensifying competitive market and given the additional competitors joining the market.  We plan to continually enhance our brand through maintaining our high network quality, the provision of innovative products and services, quality customer service and investments in advertising and promotional campaigns. We believe these enhancements are key to maintaining our competitive advantage, differentiating our services from those of our competitors and establishing and maintaining a successful relationship with our subscribers.

·  
Offer new services that will complete our offering as a telecommunications group and provide us with growth engines that are synergetic to our core businesses . We are constantly looking for new, innovative ways to deliver new services to our customers. We continue to develop new complementary businesses which leverage our varied capacities and are synergetic to our core business. We have identified television services over the internet (known as Over the Top TV, or OTT TV) as a potential source of growth which is both synergetic and complementary to our core business. We are exploring the possibility of developing the OTT TV market as an attractive alternative to the traditional cable and satellite television services currently offered in Israel by Hot and Bezeq.

·  
Optimization of cost structure . We continue our efforts to control costs and improve our efficiency while improving the quality of our services. One area which we plan to focus on is to utilize the synergies created by the acquisition of Netvision, including the merger of our and Netvision’s headquarters and our and Netvision’s business customers operations and the transfer of Netvision’s employees to our headquarters’ facilities in Netanya, aimed at optimizing the associated costs and improving  the service to our business customers by providing them a ‘one stop shop’ service. In addition, having already built our own fiber-optic and microwave infrastructure, we continue to reduce our operating costs, as our network maintenance costs and microwave spectrum fees are lower than the lease costs to rent backhaul capacity from Bezeq.

Cellular Services and Products
 
As of December 31, 2011, we provide cellular communications services to approximately 3.349 million subscribers, including basic cellular telephony services and value-added services as well as handset sales. We regularly evaluate, including through
 
discussions with potential partners, ways to add additional communications and other services to our portfolio. Not all services are supported by all handsets or by all of our networks. In addition, we offer transmission and data services to business customers and telecommunications operators. Since July 2006, we have offered our landline telephony service to selected businesses.
 
We offer our cellular subscribers a variety of pricing plans, designed to adapt to their particular characteristics and changing needs. We adapt our pricing plans for the different types of usage – personal or business – and the number of users associated with the subscriber.  For example, we offer different packages of air time services, packages with special tariffs for weekends, packages of surfing services at varying speeds, Israeli music services to youth and discounted rates on calls among members of immediate families. We offer two methods of payment: pre-paid and post-paid. Pre-paid services are offered to subscribers who pay for our services prior to obtaining them, usually by purchasing our “Talkman” pre-paid cards or “virtual” Talkman cards. Post-paid services are offered to subscribers who are willing to pay for our services through banking and credit arrangements, such as credit cards and direct debits. Following the regulatory reduction of Early Termination Fees to a negligible amount in the cellular market, as of January 2011, the majority of our new pricing plans do not include a commitment to purchase our services for a predefined period.
 
Basic cellular telephony services
 
 
·  
Our principal cellular service is basic cellular telephony. In addition we offer many other services with enhancements and additional features to our basic cellular telephony service. These services include voice mail, cellular fax, call waiting, call forwarding, caller identification, conference calling, “Talk 2” (two handsets sharing the same number, thus allowing our subscribers to own both a handset and a car phone), additional number service (enabling our subscribers to add a second phone number to their handset) and collect call service.
 
 
·  
We also offer both an outbound roaming service to our subscribers when traveling outside of Israel and an inbound roaming service to visitors to Israel who can “roam” into our network. Roaming allows cellular subscribers, while using their own cell phone number (and handset, in most cases) and being billed by their provider, to place and receive calls and text messages while in the coverage area of a network to which they do not subscribe. Where available, subscribers can also benefit from other cellular services such as advanced data and content services. As of December 31, 2011, we had commercial roaming relationships with 545 operators in 179 countries based on the standard agreements of the GSM organization (an umbrella organization in which all the cellular operators operating with GSM technology are members).  This enables our subscribers to enjoy our services in almost the entire world.  Most of our GSM subscribers who use these roaming services abroad can use their own handset and others can borrow or rent, depending upon the period of time, a suitable handset from us.  In addition, as of December 31, 2011, we had 3G roaming arrangements with  260  of these operators, enabling our 3G roamers to participate in video calls and use high-speed data, video and audio content services in 106 countries.
 
Value-added services
 
 
·   
In addition to basic cellular telephony services, we offer many value-added services. Value-added services are important to our business as they enable us to differentiate ourselves from our competitors, strengthen our brand and increase subscriber usage, ARPU and subscriber satisfaction. We offer those services that we believe are likely to be popular with subscribers and benefit our business. Some of the value-added services that we offer are available only to subscribers who have supporting handset models and some are offered only to business subscribers. The principal advanced value-added services that we currently offer are:
 
Cellcom Volume .  This social music service offers a monthly subscription to a large offering of music items provided in streaming through mobile handsets and computers. The service provides a full music experience, featuring lyrics, playlists, albums, reviews, show schedules and recommendations incorporating also certain social network capabilities.
 
SMS and MMS services .  These messaging services enable subscribers to send and receive text (SMS), photos, multimedia and animation (MMS) messages.  Additional applications enable our subscribers to send SMS messages to a large number of handsets simultaneously.
 
Access to third party application providers.   We provide our subscribers with access to certain services offered by third party application providers.  These services include, among others: a service that allows subscribers to receive notification of roadway speed detectors in their vicinity; a service (using a cellular modem) that provides a comprehensive system for the management of vehicle fleets and a service that enables subscribers to remotely manage and operate time clocks and various controllers for industrial, agricultural and commercial purposes.
 
Video calls .  This service enables our 3G users, using supporting 3G handsets, to communicate with each other through video applications.
 
Location-based services .  We offer a number of location-based services. For example: “Cellcom Navigator” is a service provided through a third party that enables our subscribers to receive real-time travel directions, that take account of the traffic condition and visual data regarding their position using global positioning system, or GPS, technology; “Cellcom Radar” is a service that enables our subscribers to locate services such as restaurants, shops and entertainment centers in the proximity of their location and “Cellcom Taxi” enables our subscribers to call for a taxi located nearby.
 
Other information and content services .  We also provide other information and content services, some provided directly by us and some by third party content providers.  For example, we provide voice-based information services through interactive voice response platforms, or IVR, including interactive information services and radio and TV programs. We also provide text-based information services and interactive information services including news headlines, sports results, and traffic and weather reports. Some of these
 
 
services are provided through our MMS or video-based technologies, and are offered to subscribers with supporting handsets.
 
Data services. We offer our subscribers a variety of channels to facilitate their access to data services, including handsets (in supporting models), cellular modems, laptops and tablets. We provide our customers with a variety of “internet surfing packages”, including “unlimited surfing package” (with no volume limitation) and “surfing packages” for various speed rates and various capacities.

We have established relationships with content providers to provide us content for our value-added services, including Logia Development and Content Management Ltd., or Logia, to manage and develop cellular content in Israel exclusively for us. For further details about the content and other services provided by Netvision see below in this Item 4. B. under the caption “Netvision – Additional Activities”.
 
Handsets
 
We sell a wide selection of handsets designed to meet individual preferences.  Prices of handsets vary based on handset features and special promotions. In most cases, handsets are to be paid in 36 monthly installments. We offer a variety of handsets from world-leading brands such as Apple, LG, Motorola, Nokia, Samsung, Sony-Ericsson, HTC and RIM. The handset models we sell offer Hebrew language displays in addition to English, Arabic and Russian (in most of the models). We are also required to provide cellular phone services to subscribers who did not purchase their handsets from us, provided that the handset model has been approved for use by the Ministry of Communications. We offer our subscribers an extended handset warranty as well as repair and replacement services for most handsets, in approximately 80 locations, including through our wholly owned dealer. See also “Customer Care” below.
 
We also sell modems, tablets and laptops to promote our data services.
 
Landline services
 
In addition to our cellular services, we provide landline telephony, transmission and data services, using our approximately 1,600 kilometers of inland fiber-optic infrastructure and complementary microwave links. We have offered transmission and data services since 2001. We received a license to offer landline telephone service in April 2006 and, since July 2006, have been offering this service to selected businesses. Through our NGN system, we were the first landline operator in Israel to provide advanced, voice and data services, to selected business customers, as of February 2008.. In addition, Netvision also offers landline services to both private and business customers, focusing on the private sector. For further details, please see below in this Item 4. – B. under the caption “NETVISION”.
 
A wireline wholesale market, if and when made available, will facilitate our and Netvision’s growth and allow us (as well as our competitors) to provide a wider selection of services at low cost; annulment of the structural limitations in the Bezeq group and change of the supervision on Bezeq tariffs from fixed to maximum tariffs, could adversely affect our ability to compete with Bezeq. See “Item 4. Information on the Company – Government Regulations – Competition” for additional details regarding these recommendations by a public committee nominated by the Ministry of Communications and the establishment of a new communications company that shall be granted the exclusive right to use the Israeli Electric Company’s optic fibers infrastructure for the provision of broadband transmission services.
 
Network and Technology
 
General
 
Our network has developed over the years since we commenced our operations in 1994 and we now have dual cellular and wireline capabilities.
 
Our “third generation” UMTS/HSPA+, or high-speed downlink packet data access, technology, offers full interactive multimedia capabilities with current data rates of up to 15 Mbps on the downlink path and up to 4 Mbps on the uplink path. In 2012 we intend to further increase the downlink path speed up to 84 Mbps in selected urban areas. This network, considered to be a “3.9/4G” technology, is a network that uses the same core as our GSM/GPRS/EDGE network. Our UMTS/HSPA+ network covers substantially all of the populated territory in Israel. Moreover, our UMTS/HSPA+ network supports new types of services that require higher throughput and lower delay, such as video conferencing.
 
Our “second generation” GSM/GPRS/EDGE 1800MHz network allows for voice calls, data transmission and multimedia services, like video streaming and video live (using the EDGE technology), although at slower speeds than our UMTS/HSPA+ network. Our GSM/GPRS/EDGE technology is an advanced second-generation technology and considered to be a “2.75G” technology.  It enables us to deliver multimedia and services at speed rates that are higher than the rates offered through regular “second generation” digital cellular technology.  Packet data rates vary from 50 Kbps to 200 Kbps, depending mainly on handset capabilities. In addition, in the case of coverage gaps and for services supported by our GSM/GPRS/EDGE technology, the network provides an adequate fallback and capacity relief for our UMTS/HSPA+ network by means of smart features and network load sharing.  As of January 2012, all of our traffic uses our GSM/GPRS/EDGE and UMTS/HSPA+ networks, with most of the Voice traffic using the GSM/GPRS/EDGE network and most of the data traffic using the UMTS/HSPA+  networks.
 
Until December 31, 2011 we also had a separate network using our initial TDMA 850MHz wireless technology, which was a “second generation” technology, at which time we discontinued its operation.
 
Our transmission network is comprised of approximately 1,600 kilometers of inland advanced fiber-optic cables that, together with our microwave infrastructure, enable us to provide our customers with telephony and high speed and high quality transmission and data services. Our transmission network is strategically deployed in order to cover the major portion of Israel’s business parks and permits us to provide our own backhaul services while reducing our need to lease capacity from Bezeq, the incumbent landline operator in Israel.
 
Our NGN system by Nokia Siemens, allows the provision of advanced voice and data services to our landline customers.
 
Infrastructure
 
We have built an extensive, durable and advanced cellular network system, enabling us to offer high-quality services to substantially the entire Israeli populated territory. Since maintaining a high-quality network is a basic element in our business strategy, we seek to satisfy quality standards that are important to our subscribers, such as high voice quality, high data rate packet sessions, low “blocked call” rate (calls that fail because access to the network is not possible due to insufficient network resources), low “dropped call” rate (calls that are involuntarily terminated) and deep indoor coverage. Therefore, we have made substantial capital expenditures and expect to continue to make capital expenditures on our network system. As of December 31, 2011, we had invested an aggregate of NIS 8.796 billion ($2.302 billion) on our network infrastructure since our inception in 1994 (not including investments made by Netvision).
 
We cover substantially all of the populated areas of Israel with both our UMTS/HSPA+ network and our GSM/GPRS/EDGE network. Our UMTS/HSPA+ network is mostly co-located with our GSM/GPRS/EDGE network. The suppliers of our UMTS/HSPA+ network are Ericsson Israel (for part of our 3G radio access network) and Nokia Siemens Israel (for our core network and part of our radio access network). The supplier of our GSM/GPRS/EDGE network is Nokia Siemens. Ericsson and Nokia Siemens, each with respect to the network supplied by it to us, provide us with maintenance services.
 
Since 2010 we are selectively enhancing and expanding both our UMTS/HSPA+ network and our GSM/GPRS/EDGE network, primarily in urban areas, by adding infrastructure to improve outdoor and indoor coverage including through UMTS/HSPA 850 MHz sites. We expect to substantially complete our UMTS/HSPA 850 MHz enhancement deployment by mid 2012.
 
Our SDH transmission network launched in 1999, which is based on Alcatel Lucent and Nortel technology and covers substantially all of the populated areas in Israel is maintained by Alcatel Lucent and Ciena Corporation (which purchased Nortel’s relevant business). Our Carrier Ethernet network launched in 2010, which is based on Alcatel Lucent technology, and covering substantially all of the populated areas in Israel, is maintained by Alcatel Lucent.
 
Pursuant to the requirements of our license (as well as the licenses of the other telephony service providers in Israel), our network is interconnected, either directly or indirectly, to the networks of all other telephony service providers in Israel. Our network monitoring system provides around-the-clock surveillance of our entire network. The network operations center is equipped with sophisticated systems that constantly monitor the status of all switches and cell sites, identify failures and dispatch technicians to resolve problems. Operations support systems are utilized to monitor system quality and identify devices that fail to meet performance thresholds.  These same platforms generate statistics on system performance such as dropped calls, blocked calls and handoff failures. Our network operations center is located in our Netanya headquarters. In addition, we have a partial duplicate backup center in Kiryat Gat, located approximately 80 kilometers south of Netanya. In 2012 we intend to complete implementation of a full scale disaster recovery plan, or DRP, for all of our engineering systems.
 
Network design
 
We have designed our GSM/GPRS/EDGE and UMTS/HSPA+ networks in order to provide high quality and reliability well beyond the requirements set forth in our license while using a cost-effective design, utilizing shared components for our networks, where applicable.
 
During 2010 and 2011, we have completed a substantial part of our DRP project, aimed at increasing our network’s survivability in case of damage to any of its elements, which we intend to complete in 2012. The project also provides our network with additional advantages including increased capacity and advanced qualities.
 
Our primary objective going forward is to improve and upgrade our high speed UMTS/HSPA+ network, mainly by enhancing its capacity and increasing its speed, in order to permit higher-quality and higher-speed multimedia content transmission. At the same time we intend to continue to perform extensive optimization work to provide our subscribers with maximum capability to support video and other broad-bandwidth content, complete our DRP program and enhance our readiness to 4G technology.
 
Network performance
 
We continually optimize our entire network in order to meet the key performance indicators for our services, including dropped calls, voice quality, accessibility, availability and packet success rate.  We use advanced planning, monitoring and analyzing tools in order to achieve our performance goals efficiently and with minimum faults.
 
The two main indicators that we use to measure network performance for voice and packet data are the “blocked call” rate and the “dropped call” rate.  Our levels of blocked and dropped calls are better than those required by our license.
 
Spectrum allocation
 
Spectrum availability in Israel is limited and is allocated by the Ministry of Communications through a licensing process. We have been allocated 2x10 MHz in the 850 MHz frequency band used by our TDMA network (until its shutdown in December 31, 2011) and currently by our UMTS/HSPA 850 MHz base stations, deployed for coverage improvement, and 2x17 MHz in the 1800 MHz frequency band used by our GSM/GPRS/EDGE network. In addition, the Ministry of Communications awarded us 2 x 10 MHz and 1 x 5 MHz in the 1900 - 2200 MHz frequency band for our UMTS third generation FDD and TDD spectrums, respectively. In December 2008, we returned the TDD spectrum to the Ministry of Communications, after not being able to use that spectrum since it was awarded to us in 2004, due to unavailability of supporting equipment. We believe that our available spectrum is sufficient for our current needs. However, in light of the growing demand for data consumption and 4G technology, we will be required to purchase additional spectrum in the future. We were not allowed to participate in the UMTS spectrum tender published in September 2010 by the Ministry of Communications and there is no assurance that additional spectrum will be made available to us in the future to satisfy our needs and plans or at all.
 
Cell site construction and licensing
 
We construct cell sites based on our strategy to expand the geographical coverage and improve the quality of our network and as necessary to replace cell sites that need to be removed. Our acquisition teams survey the area in order to identify the optimal location for the construction of a cell site.  In urban areas, this would normally be building rooftops.  In rural areas, masts are usually constructed. Our transmission teams also identify the best means of connecting the base station to our network, based on our independent transmission network, either by physical optical fiber, microwave link or Bezeq landlines. Once a preferred site has been identified and the exact equipment configuration for that site decided, we begin the process of obtaining all necessary consents and permits. The construction of cell sites requires building permits from local or regional authorities, or an applicable exemption, as well as a number of additional permits from governmental and regulatory authorities, such as construction and operating permits from the Ministry of Environmental Protection in all cases, permits from the Civil Aviation Authority in most cases and permits from the Israeli Defense Forces in some cases. In special circumstances, additional licenses are required. See “Item 4. Information on the Company – B. Business Overview – Government Regulations—Permits for Cell Site Construction.”
 
Suppliers
 
We entered into an agreement with LM Ericsson Israel Ltd., or Ericsson Israel, in September 2005 for the purchase of UMTS radio access network and ancillary products and services. We committed to purchase maintenance services for five years from the launch of the system (until 2011).  We have an option to purchase additional maintenance services on an annual basis for 20 years from the launch of the system (until 2026). In December 2011, we entered into an addendum to the agreement for the purchase of upgraded UMTS /HSPA products and related services, under similar terms. Under the agreement, the parties generally have limited liability for direct damages of up to 40% of the value of the agreement.
 
We entered into an agreement with Nokia Israel Communications Ltd., in July 2001 for the purchase of our GSM/GPRS system (the agreement was assigned to Nokia-Siemens Networks Israel Ltd., or Nokia Siemens, in 2007). We were also granted an option to purchase GSM 800, EDGE, UMTS and ancillary systems. In 2002, we exercised our option to purchase an EDGE system, and in 2005, we purchased a UMTS core system, under similar terms.  In May 2011, we entered into an addendum to the agreement for the purchase of UMTS/HSPA radio access network and related   products and services in addition to the purchase of UMTS /GSM core system. Nokia Siemens is obligated to offer us maintenance services for 15 years from execution of the addendum (until 2026).  Under the agreement, the parties generally have limited liability for direct damages of up to 10% of the value of the agreement.
 
We use   Telcordia’s intelligent platform,   or “IN,” to provide services to our GSM/GPRS/EDGE and UMTS networks, allowing us, at minimal cost, to internally develop sophisticated services with a short time-to-market that are customized to local market requirements.  We have also deployed Comverse’s Intelligent Peripheral, which enables us to develop services with rich voice interaction, such as Caller Name Announcement, Call Back and Fun Dial.  Our IN platform supports all relevant IN protocols, which allows us to provide (subject to applicable roaming agreements) advanced roaming services, including Virtual
 
Home Environment, abbreviated dialing, unified access to voice mail, VPN, local number format from subscribers’ phone book and call screening.
 
In addition, we have agreements with several Israeli engineering companies for the construction of our cell sites. We also purchase certain network components from other suppliers.
 
Transmission Network
 
Our transmission network provides us with wireline connectivity for our cellular and landline network in substantially all of the populated territory of Israel.  It is based on our fiber-optic network and complementary microwave infrastructure.  Our transmission network includes links to our internal network and to our landline and transmission subscribers.
 
Our optical transmission network is deployed from Nahariya in the north to Beer Sheva in the south and Afula and Jerusalem in the east, consisting of approximately 1,600  kilometers.  The fiber-optic network reaches most of the business parks in the country and is monitored by a fault-management system that performs real-time monitoring in order to enable us to provide our subscribers with high quality service. In order to efficiently complete our transmission network’s coverage to substantially the entire country, we use a microwave network as a complementary solution in those areas that are not served by our fiber-optic network.  As of December 31, 2011, we had deployed approximately 3,000 microwave links to both our cell sites and subscribers. In 2011 we upgraded our transmission network to support a downlink path speed up to 40 Mbps and intend to continue to upgrade it up to 84 Mbps in selected urban areas in 2012.
 
In February 1999, we entered into an agreement with Alcatel SEL AG (later assigned to Alcatel Lucent Israel Ltd., or Alcatel Lucent), for the purchase of SDH transmission network. Alcatel Lucent is obliged to offer us maintenance services for 15 year from the effective date (until March 2014). Under the agreement, Alcatel Lucent has generally limited liability for direct damages of up to the higher of the sum collected from its insurer less US $1,000,000 per year or US $1,000,000 per each calendar year.
 
In November 2009, we entered into an agreement with Alcatel Lucent for the purchase of our Carrier Ethernet network. We also agreed to purchase from Alcatel Lucent at least 51% of the equipment and services that we purchase for such network until the lapse of 7 years from final acceptance (until February 2017). Alcatel Lucent is obligated to offer us maintenance services for 12 years from conditional acceptance (until January 2022).  Under the agreement, the parties generally have limited liability for direct damages of up to the value of the agreement.
 
To supplement our transmission network, we lease a limited amount of transmission capacity from Bezeq, the incumbent landline operator. Netvision owns a small transmission network and leases most of the transmission capacity it requires from us, Bezeq, Hot and Partner.
 
Information technology
 
We maintain a variety of information systems that enable us to deliver superior customer service while enhancing our internal processes.
 
In July 2010, we entered into an agreement with Amdocs (Israel) Limited, or Amdocs Israel, for the provision of operation, maintenance, management and development services for our billing and customer care system, which were previously performed partly by Amdocs UK and Amdocs Israel and partly by our employees.  Amdocs Israel is obligated to provide us with such services for a period of eight years (until August 2018), and after 30 months from entering into this agreement we have the option to terminate the agreement subject to the provision of a prior written notice and payment of certain amounts. Under the agreement, the parties generally have limited liability for direct damages of up to the value of the agreement for each year subject to certain additional exceptions to the limitation. Netvision uses a billing system supported  internally and by Intech and a customer care system provided by PeopleSoft and supported by Matrix for Oracle.
 
We use Nortel’s CTI system for the management of incoming calls to our telephonic call centers.
 
Our customer care system presents our customer care employees with a display of a subscriber’s profile based on various usage patterns. This enables us to provide a service based upon information for that particular subscriber. We also use a knowledge management system relating to our various services and products by Blue Phoenix, branded “Cellcopedia”.
 
We use ERP solutions provided by SAP, and Netvision uses ERP solutions provided by Priority.  We use a data warehouse based on an Oracle data base system and various data mining tools, ETL by Informatica and reports generated by Cognos. The data warehouse contains data on our subscribers’ usage and allows for various analytical segmentation of the data.
 
Sales and Marketing
 
Sales
 
As part of our strategy to fully penetrate every part of the Israeli market, we are committed to making the purchase of our services as easy and as accessible as possible.  We offer pricing plans, value-added services, end user equipment, accessories and related services through a broad network of direct and indirect sales personnel. We pay our independent dealers commissions on sales, while our direct, employee sales personnel, receive base salaries plus performance-based incentives. We focus on subscriber needs and conduct extensive market surveys in order to identify subscribers’ preferences and trends.  Based on these findings, we design special pricing plans and promotional campaigns aimed at attracting new subscribers and enhancing our ability to provide new services to existing subscribers. We offer our subscribers rebates and other benefits for handset purchases. All of our, and our dealers’, sales and other customer-facing stuff, go through extensive training prior to commencing their work.   Our distribution and sales efforts for subscribers are conducted primarily through five channels:
 
Points of sale .  We distribute our products and services through a broad network of physical points of sale providing us with nationwide coverage of our existing and potential subscriber base.
 
We operate directly, using our sales force and service personnel, in approximately 30 physical points of sale and service, mostly located in shopping centers and other frequently visited locations to provide our subscribers with easy and convenient
 
access to our products and services. We record approximately 230,000 subscriber applications per month at our direct points of sale and service.
 
We also distribute our products and services indirectly through a chain of dozens of dealers (including our own wholly owned dealer – Dynamica) who operate in approximately 100 points of sale throughout Israel. Our dealers are compensated for each sale based on qualitative and quantitative measures. We closely monitor the quality of service provided to our subscribers by our dealers. In our efforts to penetrate certain sectors of our potential subscriber base, we select dealers with proven expertise in marketing to such sectors.
 
Telephonic sales .  Telephonic sales efforts target existing and potential subscribers who are interested in buying or upgrading handsets and services. Our sales representatives (both in-house and outsourced) offer our customers a variety of products and services, both in proactive and reactive interactions.
 
Door-to-door sales .  The door-to-door sales team target the door-to-door subscribers based on market surveys that we regularly conduct and database analysis. All information derived from our market surveys is uploaded into a database. Once a potential customer is identified, we contact the potential customer and schedule a meeting with a member of our door-to-door sales team.
 
Account managers.   Our direct sales force for our business customers maintains regular, personal contact with our large accounts, focusing on sales, customer retention and tailor-made solutions for the specific needs of such customers (including project planning and management of external subcontractors), including advanced data services. Sales to larger business customers or governmental and local authorities sometimes involve participation in the customer’s tender process.
 
Internet Shop – Launched in 2009, our website includes four “zones”: Shop - a virtual shop allowing easy purchase of various products and services, including roaming services; Offers - special offers, discounts and loyalty rewards; Content - our content services, including music, games, video clips etc. and a Service zone. Our website also includes three additional designated websites: sites in Arabic and in Russian featuring the content and service zones and a site for our business customers.
 
Marketing
 
Our marketing strategy emphasizes our market leader position, dynamic nature and personal touch, the quality of our network and services and our innovation. Our marketing activities are based on the principle of focusing on subscribers’ characteristics and needs and then adapting the service packages and prices that we offer to subscribers based on these characteristics and needs. From 2011, we put greater focus on customers loyalty and changed our new pricing plans so that the majority of which do not include a commitment to a predefined period. In addition, our customers can choose a “surfing” package which suits their needs from among our “surfing” packages and pay accordingly. We constantly invest efforts in providing our customers a comprehensive quality experience through the various means of communication that they use, including their  mobile handset, tablet and computer.
 
From surveys that we conduct from time to time, we learn that subscribers base their choice of cellular provider primarily on the following parameters: general brand perception; perceived price of services and handsets; level of customer service; and selection of handsets
 
and their compatibility with their needs. Our marketing activities take into consideration these parameters and we invest efforts to preserve our subscriber base, enhance usage and attract new subscribers.  We utilize a system that allows the management of complex one-to-one marketing campaigns, such as tailoring our marketing activities to customers based on their unique profile of needs and usage patterns, thus improving customer loyalty and increasing ARPU.
 
Our marketing strategy is focused on our role as facilitators of interpersonal communication and our ability to foster relationships between people, as well as a general spirit of youthful exuberance and the strong local roots of our brand.
 
We leverage our extensive interactions with our customers, which we estimate to be approximately 630,000 unique customer applications per month, to provide the requested services and also to cross- and up-sell cellular and wireline products and services according to customer needs usage trends and profitability, mostly by using advanced CRM models, to increase customer satisfaction, loyalty and revenues.
 
We regularly advertise in all forms of media, in promotional campaigns and in the sponsorship of major entertainment events. In 2010 we also used “one to one” promotional campaigns such as advertisements in our subscribers’ monthly bill. Our marketing and branding campaign has been very successful and highly acclaimed among the Israeli public, and our “Cellcom Media” initiative in particular has provided us with a high visibility association with mobile content services.
 
Cellcom was ranked by Globes, a leading financial magazine in Israel, as the leading and strongest brand of Israel’s communication market in 2011 and Israel’s 4th strongest brand among all the brands in the Israeli market, after 3 prestigious global brands. According to an annual survey conducted in 2011 by ‘The-Marker’, an Israeli business newspaper, we were the only cellular operator to improve its ranking compared with previous year’s results and were placed in the leading position in the cellular sector. According to BDI, Cellcom is the 5th most desirable place to work for among graduating students in Israel and the  number 6 most desirable workplaces in Israel. According to an external survey conducted in November 2011 by Geocartography Group (a survey institute and one of the leading applied-research institutes in Israel)   Netvision’s brand is also one of the leading brands in the Israeli telecommunications market. According to the same survey, Netvision is the most recognized ISP provider, with the highest score both in terms of retention and unaided awareness and also has the highest rate of promoters among its customers. We believe that our strong brand recognition gives us the high level of market exposure required to help us achieve our business objectives.

Customer Care
 
Our customer service unit is our main channel for preserving the long-term relationship with our subscribers. We focus on customer retention through the provision of quality service and customer care. In order to achieve this goal, we systematically monitor and analyze our subscribers’ preferences, characteristics and trends by developing and analyzing sophisticated databases. We then adopt services that are aimed to respond to subscribers’ needs and preferences. In addition, subscribers are encouraged to subscribe to additional value-added services, such as mobile data and content services as well other communications services such as ISP, landline and ILD services, in order to enhance customer satisfaction and increase ARPU. We continually strive to improve our service to our
 
customers. Our customer care representatives receive extensive training before they begin providing service and thereafter regularly undergo training and review of their performance. We continuously invest in improving our training process. We provide our customer care representatives with a continually updated database, thus shortening the interaction time required to satisfy the customer’s needs and preventing human errors and closely monitor the service provided by them, in order to assure its quality. We constantly review our performance by reviewing customers applications and conducting surveys among our subscribers in order to ensure their satisfaction with our services and to improve them as necessary. In addition, we constantly apply preventive and preemptive measures aimed at reducing churn.
 
According to the leading Israeli consumer organizations “Public Trust” and the Israeli Consumers Council reports for each of the years 2009, 2010 and 2011, we provide the best quality of customer care in the Israeli cellular market and received the lowest rate of customer complaints although we have the highest number of subscribers in the Israeli cellular market.
 
In order to better respond to subscribers’ needs in the most efficient manner, our customer support and service network offers several channels for our subscribers:
 
Call centers .  In order to provide quick and efficient responses to the different needs of our various subscribers, our call-center services are divided into several sub-centers: general services; technical services; billing; sales; international roaming; and data and internet. As of January 2012, we have a designated sub-call center for small businesses as well. The call center services are provided in four languages: Hebrew, Arabic, English and Russian. We regularly monitor the performance of our call centers. We currently operate call centers in eight locations throughout Israel, three of which are outsourced. In 2011 we witnessed a substantial increase in calls to our calls centers, following the regulatory changes implemented at the beginning of the year and responded, on average, to 1 million calls every month. During peak hours our call centers have the capability to respond to 1000 customer calls simultaneously.
 
Walk-in centers .  As of December 31, 2011, we independently operated 30 service and sales centers with approximately 100 additional sale and service points operated by our dealers (including our wholly owned dealer - Dynamica), covering almost all the populated areas of Israel. These centers provide a walk-in contact channel and offer the entire spectrum of products and services that we provide to our subscribers and potential subscribers (the majority of which are provided in our dealers’ sale and service points as well), including handsets and accessories sales, upgrades and other services, such as bill payment, pricing plan changes and subscriptions to new services. These stores are mostly located in central locations, such as popular shopping malls. Our walk-in centers also serve as a contact point for our subscribers who need repair services. Our subscribers deposit their handsets for repair in our walk-in centers and receive the repaired handset after two business days in the same center or at a location of their choice by a courier. Our subscribers may borrow a substitute handset, free of charge, in order to continue to enjoy our cellular phone services while their handset is being repaired. The repair services are conducted in a central lab. We also offer installation services of car phones and other hands free devices for cars.
 
Self-services .  We provide our subscribers and potential subscribers with various self-service channels, such as interactive voice response, or IVR, web-based services and
 
service using SMS. These channels provide general and specific information, including pricing plans, account balance, billing-related information and roaming tariffs. They also provide subscribers information regarding trouble shooting and handset-operation, and enable subscribers to activate and deactivate services and to download content. Our website also includes information on our various services, products and the monthly bill and further includes three additional designated service sites: in Arabic, in Russian and a site for our business customers.
 
Our business sales force and back office personnel also provide customer care to our business customers. We offer our business customers repair services by a dispatch service collecting and returning the repaired handset within two business days, during which time, the customer is provided with a substitute handset, free of charge.
 
All of our service channels are monitored and analyzed regularly in order to assure the quality of our services and to identify areas where we can improve.
 
We constantly invest time and efforts making our services compatible to persons with disabilities. We provide customers with disabilities convenient accessibility to our premises and adapted products and services, well beyond the requirements of the law, including sign language customer care at our walk-in services, free dispatch services, and the option to receive sales and support services in the customer’s home. We work closely with Accessibility Israel, a leading Israeli non-profit organization advancing accessibility for persons with disabilities in Israel and train our representatives to provide accessible service to all our customers.
 
Be’eri Printers provides our printing supplies and invoices as well as the distribution, packaging and delivery of invoices and other mail to the postal service distribution centers.  We entered into an agreement with Be’eri Printers - Limited Partnership and with Be’eri Technologies (1977) Ltd., or together Be’eri, for printing services in August 2003.  Under the terms of the agreement, we committed to purchase from Be’eri a minimum monthly quantity of production and distribution services which may be reduced if we modify our printed invoice delivery policy.  The agreement is valid until December 2013.
 
  Competition
 
There is intense competition in all aspects of the cellular communications market in Israel and we expect this to continue and further intensify in the future, due to the highly penetrated state of our market, the expected entry of additional competitors and the alleviation of transfer barriers between operators. We currently compete for market and revenue share with four other cellular communication operators: Partner, Pelephone, MIRS and Rami Levy (an MVNO which commenced operations in December 2011). For details of changes of ownership in the Israeli communication market since 2009, see “Item 4. Information on The Company - Business Overview - The Telecommunications Industry in Israel - Cellular Services”.
 
Our estimated market share based on number of subscribers was approximately 33.6% as of December 31, 2011. Estimated market shares at such time of Partner, Pelephone and MIRS were approximately 31.9%, 29.6% and 4.8%, respectively and Rami levy’s market share is estimated to be less than 1%.
 
The competition in the cellular communications market increased following the launch of Pelephone's UMTS/HSPA network in 2009 and regulatory and other changes in our market. The competition has further intensified following the compulsory reduction of cellular Early Termination Fees to a negligible amount in February 2011 and expectations of entry of additional operators in 2011 and 2012, including the entry of Rami Levy. Competition is expected to intensify further as a result of the occurrence of any of the following events:
 
· 
the entry into the market of additional competitors  and specifically the entry of additional MVNOs and UMTS operators, more so if hosting services to MVNOs and national roaming services for UMTS operators will be at unfavorable terms for us. Mirs is expected to commence its UMTS operations (using national roaming on Pelephone's network) in the first half of 2012 and Golan is expected to commence operating (using national roaming on our network) in the second half of 2012. An additional three MVNO operators are also expected to commence operations in the first half of 2012;
 
· 
the sale of bundles of communications services, including cellular services, as it is expected to entail further price erosion, more so if offered by either the Bezeq or Hot groups; the formation of three additional communications groups in the Israeli communications market in 2011, together with the regulatory changes relaxing the structural separation imposed on each of the Bezeq and Hot groups, will allow each of the groups to offer a bundle of services, in some cases quadruple and even quintuple service bundles to existing customers in each of their previously separated platforms, as well as to new customers. Bundles offerings are expected to blur boundaries among services and lead to price erosion, with each of the groups having an interest not to erode the prices of its core business, but rather of the core services of its competitors. Both Bezeq and Hot currently offer bundles of services, excluding cellular services. Bundle offerings by Hot and Bezeq, including cellular services, are expected to accelerate price erosion in the cellular market. See “Item 3. Key Information – D. Risk Factors – Risks related to our Business – We face intense competition in all aspects of our business” and " Item 4. Information on The Company - Business Overview - The Telecommunications Industry in Israel – Communications Groups – Structural Seperation " for additional details;
 
· 
increased usage of competing technologies, applications and services, allowing usage of our network, such as VoC or VoIP and applications such as Viber, WhatsApp and free SMS among iPhone holders, or other services, such WiFi, more so following the increased usage of smart phones; and
 
As of February 1, 2011, the compulsory reduction of Early Termination Fees to a negligible amount in the cellular market, which eliminated the transfer barrier between operators, led to the offering of packages at lower average revenue per minute and has resulted in accelerated price erosion and a materially increased churn rate and increased subscriber acquisition and retention costs due to materially increased rate of gross recruitment of subscribers. In August 2011,   the Communications Law was amended to annul Early Termination Fees in all other communication markets and a bill, expected to be enacted during the first half of 2012, is proposing such annulment for certain new customers in the cellular market.
 
 
We believe that full and comprehensive mobile and wireline solutions would benefit our competitive standing, mainly for our business customers. The principal competitive factors in the cellular market include general brand perception, perceived price, customer service and handset selection. In addition, mobile data and other value-added services constitute a potential growth engine for increasing revenues from subscribers and are also an important factor in selecting a cellular provider.
 
In the content provision market, we compete also with international media providers and handsets manufacturers, such as Apple, Google and Nokia, who have opened their own content enabling stores and are changing the traditional role of the cellular operator from the content provider into one of many content providers, competing to provide content to the operator's subscribers. The "Open Garden" international trend is facilitated by technological changes allowing high speed internet surfing and supporting handsets and is rapidly changing customers' consumption habits from surfing and downloading content mainly through the cellular operator's portal, to an off-portal surfing and content downloading as well as growing demand for internet surfing and content in general. Expansion of this trend, known as the "Open Garden", will enlarge the content market but will further increase competition in the content provision arena. Expansion of arrangements introduced by Apple, in which subscribers using an Apple handset can only purchase content through the Apple store, could adversely affect our content revenues.
 
In the wireline communications market – In October 2011, the public committee appointed by the Ministry of Communications in March 2010 to examine Bezeq's tariffs structure and tariffs for wireline wholesale services and to review the possible annulment of the structural limitations currently imposed on Bezeq and its subsidiaries, published its recommendations. The recommendations include: (1) The creation of an effective wholesale telecommunications access markets in Israel- Bezeq and Hot will allow other operators which do not own an infrastructure, to use their infrastructure in order to provide services to end users. The terms of such services will be agreed by the operators, or by the regulator, if no wholesale market has evolved within a certain period. (2)  Annulment of structural separation in the communication market -  Structural separation imposed on the holders of landline general licenses, would be annulled, other than as to multichannel television (which will be annulled only after internet based TV market is available),  within 6 months from the earlier of the execution of a wholesale agreement or the provision of wholesale services, or upon the setting of wholesale tariffs by The  Ministry of Communications, and replaced by accounting separation and restrictions on information transfer between the retail and wholesale divisions of the landline general license holders. If no wholesale market is established within 2 years, the regulator will resume structural separation between infrastructure and end-user services of landline general license holders. (3) Change of the supervision on Bezeq retail tariffs to setting maximum tariffs rather than the current setting of fixed tariffs. (4) Wholesale tariffs to be set by the regulators would be maximum tariffs, based on a cost plus basis in order to induce investments in the wholesale wireline market and shall be reviewed by the regulator every 3 years. Until such tariffs have been be set, the tariff shall be fixed, regardless of customer's traits and amount to 75% of Bezeq's average retail price for private customers, during July to September 2011. This tariff will be in place for 6 months, with a maximum extension of additional 6 months (5) Landline operators who hold general licenses (such as Bezeq and Hot)  will deposit autonomous bank guarantees in substantial amounts to guarantee the existence of a wholesale market. (6) The provision of broadband access by Israel Electric Corporation, or IEC, should be promoted in order to increase competition and should be regulated in the same manner as Bezeq and Hot. The implementation of the
 
 
recommendations, in whole or in part, is subject to the adoption thereof by the Minister of Communications and further legislative proceedings.
 
In February 2010, the Ministry of Communications provided a trial license to the IEC, allowing it to use its fiber optic infrastructure to provide transmission services to other operators. In March 2011, the Israeli government approved the establishment of a new communications company that will be granted the exclusive right to use the IEC's optic fibers infrastructure for the provision of broadband  services to operators only but the Ministry of Communications may allow it to offer its services directly to certain large business customers. The new company will be controlled by a private investor (51%), which may not hold any means of control in another communications company, and the IEC (49%). This initiative would increase our and our competitors capabilities to compete in the wireline market with Bezeq and Hot, and would increase competition in the wireline market.
 
While an effective wholesale wireline market will enhance our ability (including through Netvision) to compete and extend our service offering, the recommendations regarding the structural separation and Bezeq's tariffs supervision may have a material adverse effect on Netvision's results of operation. For further details see below in this Item 4. B. under the "NETVISION".
 
In response to the enhanced competition in our market and in the Israeli telecommunications market in general, we have implemented various steps and strategies, including
 
· 
acquiring Netvision to create a competitive communication group; we believe that our acquisition of Netvision in 2011 strengthens our competitive position vis-à-vis other communications groups in the Israeli market, as it allows us to offer our customers a comprehensive mobile and wireline solutions.
 
· 
marketing and branding campaigns aimed at enhancing market leadership, perceived value, perception of the fairness and value of our pricing, brand recognition and loyalty among our existing and potential subscriber base;
 
· 
investing significant resources in improving customer service and retention, as well as supporting information technology systems;
 
· 
introducing innovative value-added services and identifying popular niches among various subscriber groups;
 
· 
taking efficiency  measures in order to reduce costs and improve our agility;
 
· 
investing in improving our network technology to ensure our ability to offer quality services and advanced services, both cellular and wireline services;
 
· 
using innovative sales campaigns for attracting new subscribers by offering loyalty rebates;
 
· 
offering attractive pricing plans to subscribers, adapted to their needs and preferences and innovative pricing models, including cross sale and up sale of our and Netvision's services; and
 
 
· 
identifying new opportunities to maximize our advantages as an operator, in order to expand our share in the "Open Garden" market place and the recent launch of certain financial services.
 
Our ability to compete successfully will depend, in part, on our ability to anticipate and respond to trends and events affecting the industry, including: the introduction of new services and technologies, changes in consumer preferences, demographic trends, economic conditions, pricing strategies of competitors and changes to the legal and regulatory environment.  We believe that we are well positioned for the competition in our market.
 
  Intellectual Property
 
We are a member of the GSM Association, together with other worldwide operators that use GSM technology. As a member of the association, we are entitled to use its intellectual property rights, including the GSM logo and trademark.
 
We have registered approximately 30 domain names and approximately 120 trademarks, the most important of which are the star design, “Cellcom”, “Talkman” and “Cellcom Volume”. Netvision has registered approximately 105 domain names and approximately 90 trademarks, the most important of which are "Netvision" and "013 Netvision".   We are also the proprietor of a few registered patents and patent applications.
 
Government Regulations
 
The following is a description of various regulatory matters which are material to our operations, including certain future legislative initiatives which are in the process of being enacted.  There is no certainty that the future legislation described here will be enacted or whether it will be subject to further change before its final enactment.
 
General
 
A significant part of our operations is regulated by the Israeli Communications Law, 1982, the regulations promulgated under the Communications Law and the provisions of our licenses, which were granted by the Israeli Ministry of Communications pursuant to the Communications Law.  We are required by law to have a general license in order to provide cellular communications services in Israel. The Ministry of Communications has broad supervisory powers in connection with the operations of license holders and is authorized, among other things, to impose financial penalties for violations of the Communications Law, the regulations and our licenses. For a description of the principal licenses held by Netvision see below in this Item 4.B under the caption "NETVISION".
 
Our Principal License
 
 The establishment and operation of a cellular communications network requires a license pursuant to the Communications Law for telecommunications operations and services and pursuant to the Israeli Wireless Telegraph Ordinance (New Version), 1972, for the allocation of spectrum and installation and operation of a cellular network.
 
We provide our cellular services under a non-exclusive general license granted to us by the Ministry of Communications in June 1994, which requires us to provide cellular services in the State of Israel to anyone wishing to subscribe.  The license expires on January
 
 
31, 2022, but may be extended by the Ministry of Communications for successive periods of six years, provided that we have complied with the license and applicable law, have continuously invested in the improvement of our service and network and have demonstrated the ability to continue to do so in the future.  The main provisions of the license are as follows:
 
· 
The license may be modified, cancelled, conditioned or restricted by the Ministry of Communications in certain instances, including: if required to ensure the level of services we provide; if a breach of a material term of the license occurs; if DIC (or a transferee or transferees, if approved by the Ministry of Communications), in its capacity as our founding shareholder, holds, directly or indirectly, less than 26% of our means of control; if our founding shareholders who are Israeli citizens and residents  hold, directly or indirectly, less than 20% of our means of control (DIC, as founding shareholder, has undertaken to comply with this condition); if at least 20% of our directors are not appointed by Israeli citizens and residents from among our founding shareholders or if less than a majority of our directors are Israeli citizens and residents; if any of our managers or directors is convicted of a crime of moral turpitude and continues to serve; if we commit an act or omission that adversely affects or limits competition in the cellular communications market; or if we and our 10% or greater shareholders fail to maintain combined shareholders’ equity of at least $200 million. For the purpose of the license, “means of control” is defined as voting rights, the right to appoint a director or general manager, the right to participate in distributions, or the right to participate in distributions upon liquidation;
 
· 
It is prohibited to acquire (alone or together with relatives or with other parties who collaborate on a regular basis) or transfer our shares, directly or indirectly (including by way of creating a pledge which if foreclosed, will result in the transfer of shares), in one transaction or a series of transactions, if such acquisition or transfer will result in a holding or transfer of 10% or more of any of our means of control, or to transfer any of our means of control if as a result of such transfer, control over our company will be transferred from one party to another, without the prior approval of the Ministry of Communications.  For the purpose of the license, “control” is defined as the direct or indirect ability to direct our operations whether this ability arises from our articles of association, from written or oral agreement or from holding any means of control or otherwise, other than from holding the position of director or officer;
 
· 
It is prohibited for any of our office holders or anyone holding more than 5% of our means of control, to hold, directly or indirectly, more than 5% of the means of control in Bezeq or another cellular operator in Israel, or, for any of the foregoing to serve as an office holder of one of our competitors, subject to certain exceptions requiring the prior approval of the Ministry of Communications;
 
· 
We, our office holders or interested parties may not be parties to any arrangement whatsoever with Bezeq or another cellular operator that is intended or is likely to restrict or harm competition in the field of cellular services, cellular handsets or other cellular services.  For the purpose of the
 
 
license, an “interested party” is defined as a 5% or greater holder of any means of control;
 
· 
We are subject to the guidelines of Israel’s General Security Services, which may include requirements that certain office holders and holders of certain other positions be Israeli citizens and residents with security clearance. For example, our Board of Directors is required to appoint a committee to deal with matters concerning state security. Only directors who have the requisite security clearance by Israel’s General Security Services may be members of this committee.  In addition, the Minister of Communications is entitled under our license to appoint a state employee with security clearance to act as an observer in all meetings of our Board of Directors and its committees;
 
· 
 Prior to operating a network, we are required to have agreements with a manufacturer of cellular network equipment for the duration of its intended operating period,  which must include, among other things, a know-how agreement and an agreement guaranteeing the supply of spare parts for our network equipment for a period of at least seven years; –
 
· 
We are required to interconnect our network to other public telecommunications networks in Israel, on equal terms and without discrimination, in order to enable subscribers of all operators to communicate with one another; we are also required to provide national roaming services to new UMTS operators;
 
· 
We may not give preference in providing infrastructure services to a license holder that is an affiliated company over other license holders, whether in payment for services, conditions or availability of services or in any other manner, other than in specific circumstances and subject to the approval of the Ministry of Communications;
 
· 
The license sets forth the general types of payments that we may collect from our subscribers, the general mechanisms for setting tariffs, providing cellular services related benefits, limitations on raising tariffs (for non-business subscribers under obligation to purchase our services for a predefined period, during such period), and on the duration of a non-business subscriber's obligation to purchase our services, the reports that we must submit to the Ministry of Communications and the obligation to provide notice to our customers and the Ministry of Communications prior to changing tariffs. The Ministry of Communications is authorized to intervene in setting tariffs in certain instances;
 
· 
The license requires us to maintain a minimum standard of customer service, including, among other things, establishing call centers and service centers, maintaining a certain service level of our network, collecting payments pursuant to a certain procedure, protecting the privacy of subscribers; using a specific format for our agreement with our customers; obtaining an explicit request from our subscribers to purchase services, whether by us or by third parties, as a precondition to providing and charging for such services, including specific requirements as to format and a default blockage of the customer's ability to purchase certain services; maintaining a specific form of
 
 
evidence of customers' request to purchase our services as a precondition to charging our customers  for those services, notifications we must provide them regarding the services ordered and the procedures for handling subscribers' objections as to billing and repayment of overcharged sums;
 
· 
The license or any part thereof may not be transferred, pledged or encumbered without the prior approval of the Ministry of Communications. The license also sets forth restrictions on the sale, lease or pledge of any assets used for implementing the license;
 
· 
We are required to obtain insurance coverage for our cellular activities. See “Item 8 – Financial Information - Legal Proceedings” for details of a purported class action filed against us in that regard in March 2010. In addition, the license imposes statutory liability for any loss or damage caused to a third party as a result of establishing, sustaining, maintaining or operating our cellular network. We have further undertaken to indemnify the State of Israel for any monetary obligation imposed on the State of Israel in the event of such loss or damage.  For the purpose of guaranteeing our obligations under the license, we have deposited a bank guarantee in the amount of $10 million with the Ministry of Communications, which may be forfeited in the event that we violate the terms of our license.
 
In the event that we violate the terms of our license, we may be subject to substantial penalties, including monetary sanctions.  In 2007, the Communications Law was amended  to include an increase in the financial sanctions that may be imposed on us by the Ministry of Communications for a breach of our licenses.  Following the increase, the maximum amount per violation that may be imposed is approximately NIS 1.6 million plus 0.25% of our annual revenue for the preceding year. An additional sanction amounting to 2% of the original sanction may be imposed for each day that the violation continues. In addition, the Ministry of Communications may determine certain service-related terms in our license as “service terms”; the maximum monetary sanctions per violation of a “service term” shall be double the amount of any other monetary sanction set in our license for such a violation per each period of 30 days or portion thereof during which the violation continues. In January 2012, a bill proposing to set gradual financial sanctions on communication operators, for breach of their licenses, the sum of which shall be calculated as a percentage of the operator's income and based on the gravity of the breach, has passed the preliminary stage of enactment in the Israeli Parliament. The adoption of the bill, if adopted, is expected to substantially increase the Ministry of Communications' usage of such sanctions. Substantial sanctions will harm our results of operations.  In the event that we materially violate the terms of our licenses, the Ministry of Communications has the authority to revoke them.
 
Other Licenses
 
Special general license for the provision of landline communication services
 
In April 2006, Cellcom Fixed Line Communications L.P., or Cellcom Fixed Line, a limited partnership wholly-owned by us, was granted a non-exclusive special general license for the provision of landline telephone communication services. The license expires in 2026 but may be extended by the Ministry of Communications for successive periods of 10 years.  We began providing landline telephone services in July 2006, concentrating on offering landline telephone services to selected businesses. The partnership deposited a bank
 
 
guarantee in the amount of NIS 10 million with the Ministry of Communications upon receiving the license.  The provisions of our general license described above, including as to its extension, generally apply to this license, subject to certain modifications.  It should be noted that in addition to any 10% share transfer requiring the prior approval of the Ministry of Communications as noted in our general license, the special general license additionally requires prior approval for acquiring the ability to effect a significant influence over us.  In this context, holding 25% of our means of control is presumed to confer significant influence.
 
Data and transmission license
 
In 2000, we were granted a non-exclusive special license for the provision of local data communication services and high-speed transmission services, which is effective until December 2012.  Following the grant of a special general license for the provision of landline telephone communication services to Cellcom Fixed Line, which also includes the services previously provided through our data and transmission license, our data and transmission license was amended in June 2006 to permit only Cellcom Fixed Line to be our customer of these services (and these services are now being provided to our customers through Cellcom Fixed Line). The provisions of our general and general specific licenses described above, including as to their extension, generally apply to this license, subject to certain modifications.
 
Cellular services in Judea and Samaria
 
The Israeli Civil Administration in Judea and Samaria granted us a non-exclusive license for the provision of cellular services to the Israeli-populated areas in Judea and Samaria.  This license is effective until December 31, 2013. The provisions of the general license described above, including as to its extension, generally apply to this license, subject to certain modifications.
 
Landline communication services in Judea and Samaria
 
The Israeli Civil Administration in Judea and Samaria granted us a non-exclusive license for the provision of landline communications services to the Israeli-populated areas in Judea and Samaria.  This license is effective until December 31, 2013. The provisions of the general license described above, including as to its extension, generally apply to this license, subject to certain modifications.
 
Internet Service Provider license
 
In December 2001, we were granted a non-exclusive special internet services provider, or ISP license for the provision of internet access services. The license expires in 2013 but may be extended by the Ministry of Communications for successive periods of five years. The provisions regarding the transfer of our shares which are included in the special general license for the provision of landline communication services described above, generally apply to this license.
 
Tariff Supervision
 
Under the Israeli Communications Regulations (Telecommunications and Broadcasting) (Payment for Interconnecting), 2000, interconnect tariffs among landline operators, international call operators and cellular operators are subject to regulation and have been gradually decreased, leading to a material decrease in our revenues.
 
 
In September 2010, the regulations were amended as follows:
 
· 
the maximum interconnect tariff payable by a landline operator or a cellular operator for the completion of a call on another cellular network was reduced from the previous tariff of NIS 0.251 per minute to NIS 0.0687 per minute from January 1, 2011; to 0.0634 per minute from January 1, 2012; to NIS 0.0591 per minute from January 1, 2013; and to NIS 0.0555 from January 1, 2014;
 
· 
the maximum interconnect tariff payable by a cellular operator for sending an SMS message to another cellular network was reduced from the previous tariff of NIS 0.0285 to NIS 0.0016 from January 1, 2011; to NIS 0.0015 from January 1, 2012; to NIS 0.0014 from January 1, 2013; and to NIS 0.0013 from January 1, 2014;
 
· 
the tariffs do not include VAT and will be updated annually from January 1, 2011, based on the change in the Israeli CPI published in November of the year preceding the update date from the average annual Israeli CPI for 2009. The tariffs will also be increased by the percentage of royalties payable to the Ministry of Communications by the operator.
 
As a result of these updates, including the increase of the royalties we pay to the Ministry of Communications, the current maximum interconnect tariffs are NIS 0.0728 per minute for the completion of a call on another cellular network and NIS 0.0017 for a completion of an SMS message to another cellular network.
 
This reduction had a material adverse effect on our results of operation in 2011 which is expected to continue. We have taken and intend to continue to take measures in order to reduce the adverse effects of such reduction, through revenue enhancement as well as cost reduction measures, but cannot offer any assurance that these measures will be successful. For details on the effects of the reduction see Item 5. Operating and Financial Review and Prospects.  – A. Operating Results – Overview –General.
 
In addition, in 2011, the Ministry of Communications retained an international consulting company in order to provide the Ministry with recommendations regarding  interconnect tariffs payable to land line operators, which is expected to publish its recommendations during the first half of 2012.
 
 Under these regulations and our license, commencing January 1, 2009, our basic airtime charging units, including for interconnect purposes, were changed from twelve-second units to one-second units. Our general license also prevents us from offering our subscribers pricing plans using airtime charging units other than the basic airtime charging unit.
 
In October 2008, the Ministry of Communications amended our license in a manner that obligates us, commencing December 31, 2008, to set a fixed tariff for non-business subscribers under obligation to purchase our services for a predefined period, during that period, thus limiting our ability to raise tariffs to such subscribers.
 
In  2008, the Consumer Protection Law was amended in a manner that obligates us, commencing January 2009, to terminate certain services (excluding voice services) we
 
 
provide to our subscribers during a predefined period, at the end of that period, unless the price for the services to be provided after the end of the predefined period has been set in advance or we have received the subscriber’s affirmative consent to continue and provide these services.
 
In July 2009, the Ministry of Communications amended our license, effective November 1, 2009, in a manner that prohibits any linkage between a cellular services transaction and a handset purchase transaction, thus requiring us to offer any cellular services-related benefits offered to a customer purchasing a handset from us to any customer who purchased the handset elsewhere.
 
In June 2007, the European Union adopted a resolution to reduce and regulate roaming tariffs.  In August 2008, the Israeli Government adopted a resolution to negotiate a reduction of inbound and outbound roaming tariffs with the European Union and/or members of the European Union or countries frequently visited by Israelis. In November 2008 and again in January 2012 the Ministry of Communications issued a supplemental request for information, following its request in 2007, requesting us to provide information in relation to our roaming services. The requests for information were made in order to evaluate the need for intervention in roaming tariffs. If the Ministry of Communications decides to intervene in the pricing of roaming services, this could reduce the revenues we derive from our roaming services.
 
In December 2010, the Communications Law was amended to reduce the Early Termination Fees in the cellular market.  In accordance with the amendment, as of February 1, 2011, Early Termination Fees are calculated based on the subscriber's average monthly bill, resulting in a negligible fee. The reduced Early Termination Fees apply to customers with less than a certain amount of phone lines. The reduction applies to existing as well as new pricing plans.  An additional amendment prohibits the collection of the handset's remaining installments in one payment pursuant to early termination. As of January 2011, we changed our new pricing plans so that the majority of which do not include a commitment to a predefined period nor an Early Termination Fee. In August 2011, the Communications Law was amended to annul Early Termination Fees in all other communications markets. In addition, a bill proposing to completely annul Early Termination Fees in relation to new cellular customers with less than a certain number of phone lines has passed preliminary enactment procedures in the Israeli parliament and is expected to be enacted during the first half of 2012. The reduction of Early Termination Fees has led to the offering of packages at lower average revenue per minute and resulted in accelerated price erosion, materially increased churn rate and increased subscriber acquisition and retention costs due to materially increased rate of gross recruitment of subscribers.
 
In December 2010, the Communication Law was amended to allow national roaming for new operators and Mirs. For additional details see "Additional UMTS operators" below. Following the amendment, if a new operator or Mirs and the hosting operator have not reached an agreement as to the terms of the service (including the consideration), for any reason, until the service is to commence (after certain criteria is met) the service will be provided for the then prevailing interconnect tariff (in case of a call and for data services - 65% of the interconnect tariff per 1 mega) and subsequently (but no later than February 1, 2012) shall be determined by the Ministry of Communications with the consent of the Minster of Finance and applied retroactively. Unfavorable terms and consideration for the service (such as equal or based on the interconnect tariff), may result in material adverse effect on our results of operations. In October 2011, we entered a national roaming agreement
 
 
with Golan and in September 2011, Mirs entered a national roaming agreement with Pelephone.
 
Under the Communications Law, in the event that a MVNO and the cellular operator, will not have reached an agreement as to the provision of service by way of MVNO within six months from the date the MVNO has approached the cellular operator, and if the Ministry of Communications together with the Ministry of Finance determine that the failure to reach an agreement is due to unreasonable conditions imposed by the cellular operator, the Ministry of Communications may intervene in the terms of the agreement, including by setting the price of the service. Unfavorable terms and consideration for the service (such as equal or based on the interconnect tariff), may result in material adverse effect on our results of operations. For additional details see "Mobile Virtual Network Operators" below. In 2011 five MVNO's have entered into hosting agreements, one of which (Home Cellular) has entered into an agreement with us.
 
In December 2010, the Communication Law was amended to prevent any limitation on the usage of any internet service or application, including though differentiating pricing, (network neutrality). In addition, the Ministry of Communications published a hearing regarding VoC license, which among others, notes the Ministry of Communications' intention to require cellular operators to offer "data only" service, at a price not exceeding current data only subscription (such as for modem), including at lower speed rates. Such requirements may adversely affect our results of operations
 
Permits for Cell Site Construction
 
General
 
In order to provide and improve network coverage to our subscribers, we depend on cell sites located throughout Israel.  The regulation of cell site construction and operation are primarily set forth in the Israeli National Zoning Plan 36 for Communications, which was published in May 2002. The construction of radio access devices, which are cell sites of smaller dimensions, is further regulated in the Communications Law.
 
The construction and operation of cell sites are subject to permits from various government entities and related bodies, including:
 
· 
building permits from the local planning and building committee or the local licensing authority (if no exemption is available);
 
· 
approvals for construction and operation from the Commissioner of Environmental Radiation of the Ministry of Environmental Protection;
 
· 
permits from the Civil Aviation Authority (in most cases);
 
· 
permits from the Israel Defense Forces (in certain cases); and
 
· 
other specific permits necessary where applicable, such as for cell sites on water towers or agricultural land.
 
In March 2010, a new Planning and Building bill, intended to replace the existing Planning and Building law passed the first stage of enactment at the Israeli parliament. If the bill would be enacted, it may have an effect, among others, on current permits for our cell sites, the procedures to receive building permits for our cell
 
 
sites, the exemption for radio access devices set out in the Communications Law (which the bill proposed to annul),  the scope of our indemnification obligations and the obligation to pay amelioration charge. In this preliminary stage, we cannot estimate what are the chances of its enactment and what would be its effects, if so enacted, on our network and network build-out.
 
See “Item 8 – Financial Information - Legal Proceedings” below for details regarding purported class actions filed against us in connection with cell sites construction and operation.
 
National Zoning Plan 36
 
National Zoning Plan 36 includes guidelines for constructing cell sites in order to provide cellular broadcasting and reception communications coverage throughout Israel, while preventing radiation hazards and minimizing damage to the environment and landscape. The purpose of these guidelines is to simplify and streamline the process of cell site construction by creating a uniform framework for handling building permits.
 
National Zoning Plan 36 sets forth the considerations that the planning and building authorities should take into account when issuing building permits for cell sites. These considerations include the satisfaction of safety standards meant to protect the public’s health from non-ionizing radiation emitting from cell sites, minimizing damage to the landscape and examining the effects of cell sites on their physical surroundings.  National Zoning Plan 36 also determines instances in which building and planning committees are obligated to inform the public of requests for building permits prior to their issuance, so that they may submit objections to the construction of a site in accordance with the provisions of the Planning and Building Law. Many local authorities have argued that a building permit issued in reliance on the Plan requires the payment of amelioration charge. The matter was not yet decided by a court of law. Should the matter be decided against us, the costs of constructing a site will substantially increase.
 
See “Site licensing” below for arguments against  the application of National Zoning Plan 36 to certain cell sites.
 
However, National Zoning Plan 36 is in the process of being revised. Current proposed changes will impose additional restrictions and requirements on the construction and operation of cell sites. In June 2010, the proposed changes were approved by the National Council for Planning and Building and submitted for the approval of the Government of Israel. If the proposed changes are approved by the Israeli Government they will harm our ability to construct new cell sites, make the process of obtaining building permits for the construction and operation of cell sites more cumbersome and costly, could  adversely affect our existing network  and may delay the future deployment of our network.
 
Site licensing
 
We have experienced difficulties in obtaining some of the permits and consents required for the construction of cell sites, especially from local planning and building authorities. The construction of a cell site without a building permit (or applicable exemption) constitutes a violation of the Planning and Building Law. Violations of the Planning and Building Law are criminal in nature.  The Planning and Building Law contains enforcement provisions to ensure the removal of unlawful sites.  There have been instances in which we
 
 
received demolition orders or in which we and certain of our directors, officers and employees faced criminal charges in connection with cell sites constructed and/or used without the relevant permits or not in accordance with the permits. In most of these cases, we were successful in preventing or delaying the demolition of these sites, through arrangements with the local municipalities or planning and building authorities for obtaining the permit, or in other cases, by relocating to alternate sites. As of December 31, 2011, we were subject to 18 criminal and administrative legal proceedings alleging that some of our cell sites were built and have been used without the relevant permits or not in accordance with the permits. As of the same date, a small portion of our cell sites operated without building permits or applicable exemptions. Although we are in the process of seeking to obtain building permits or modify our cell sites in order to satisfy applicable exemptions for a portion of these sites, we may not be able to obtain or modify them and in several instances we may be required to relocate these sites to alternative locations or to demolish them without any suitable alternative. In addition, we may be operating a significant  number of our cell sites,  in a manner which is not fully compatible with the building permits issued for them, although they are covered by permits from the Ministry of Environmental Protection in respect of their radiation level.  In some cases we will be required to relocate these cell sites to alternative locations, to reduce capacity coverage or to demolish them without any suitable alternative.
 
Based on advice received from our legal advisors and consistent with most Court rulings on the matter and the Israeli Attorney General opinion on the matter (given in May 2008) that the exemption from obtaining a building permit applies to cellular radio access devices, we have not requested building permits under the Planning and Building Law for rooftop radio access devices.
 
 Notwithstanding the Attorney General's opinion, in May 2008 the District Court of Tel-Aviv-Jaffa, in its capacity as court of appeals, ruled that our and other cellular operators’ devices do not meet the exemption’s requirements and therefore the exemption may not be relied upon by us and other cellular operators. We and other cellular operators appealed against this ruling to the Supreme Court and the State notified the Supreme Court it concurs with our and another cellular operator’s appeals against the District Court ruling. The State requested that a third operator’s appeal be returned to the District Court for further deliberation on specific questions regarding the interpretation of "rooftop" and the requirement to obtain an extraordinary usage permit in the circumstances of that case in the context of the exemption. Furthermore, in July 2008, a petition seeking to annul the Attorney General's opinion and apply the District Court ruling was filed with the Supreme Court by the Union of Local Authorities in Israel and certain local planning and building authorities which also requested to join our appeal and argue against the position of the State. In June 2009, another petition seeking similar remedies, was also filed with the Supreme Court. The Supreme Court decided to hear both petitions and our appeal together.
 
In July 2009, the inter-ministry committee established to examine the appropriateness of future application of the exemption according to the Attorney General opinion, published its recommendations for future application of the exemption. While the Ministry of Communications recommended that, given the difficulties in obtaining permits for the construction of cell sites, the exemption should be reviewed after the lapse of one to two years from the approval of the new National Zoning Plan 36, to verify that it provides an adequate solution that allows the cellular operators to provide required communication services, the Ministries of Interior Affairs and Environmental Protection recommended that the exemption be annulled within 6 months from the date of the recommendations, based,
 
 
among others, on the following arguments: (1) current cellular infrastructure is sufficient, given it is currently used to provide advanced services such as internet, radio and television broadcasting, while such services may be provided by a landline network; and (2) with respect to radiation safety, cell sites constructed pursuant to a building permit are preferable to radio access devices, and utilizing a cellular network to provide advanced services which can be provided through a landline network, is unjustified in light of the preventive care principle set in the Israeli Non-Ionizing Radiation Law.
 
In September 2009, following publication of the recommendations of an inter-ministry committee established to examine the appropriateness of future application of the exemption, the Attorney General concluded that the application of the exemption does not balance properly the different interests involved and therefore cannot continue. In  March 2010 the Israeli Ministry of Interior Affairs submitted  draft regulations setting conditions for the application of the exemption for the approval of the Economy Committee of the Israeli Parliament. The regulations draft includes significant limitations on the ability to construct radio access devices based on such exemption, including a limitation of the number of such radio access devices to 5% of the total number of cell sites constructed or to be constructed with a building permit in a certain area during a certain period (which will render the construction of radio access devices based on the exemption practically impossible), and circumstances in which a request for a building permit for the radio access device was filed and no resolution has been granted within the timeframe set in the regulations.
 
In September 2010, the Israeli Supreme Court issued an interim order prohibiting further construction of radio access devices in cellular networks in reliance on the exemption. The interim order, that was issued pursuant to the Israeli Attorney General's request, will be in effect until the enactment of the proposed regulations or other decision by the court. A further decision of the Supreme Court in February 2011, states that the order will not apply to the replacement of existing radio access devices under certain conditions. In September 2011, the Supreme Court allowed Mirs and Golan to construct radio access devices in reliance on the exemption, under certain limitations, until July 31, 2012 and in December 2011 the Supreme Court extended this period with regard to Golan until November 6, 2012. Our application to relax the interim order against us was denied.
 
  Additionally, in November 2008, the District Court of Central Region, in its capacity as court of appeals, ruled that the exemption does not apply to radio access devices, if the rooftop on which those devices are located is at the same level as a place of residence or other building that is regularly frequented by people. Other appeals relating to the exemption, including as to the requirement to obtain an extraordinary usage permit, are still under consideration in the District Court and other similar challenges, as well as other claims asserting that those cell sites and other facilities do not meet other legal requirements continue.
 
 An annulment of, or inability to rely on, or substantial limitation of, the exemption could adversely affect our existing network and network build-out, particularly given the objection of some local planning and building authorities to grant due permits where required, could have a negative impact on our ability to obtain environmental permits for these sites, could negatively affect the extent, quality, capacity and coverage of our network, and our ability to continue to market our products and services effectively. This may have a material adverse effect on our results of operations and financial condition.
 
 
Radio access devices do receive the required permits from the Ministry of Environmental Protection. Since October 2007, the Commissioner of Environmental Radiation at the Ministry of Environmental Protection took the position that he will not grant and/or renew operating permits to radio access devices, where the local planning and building committee’s engineer objected to the Company's reliance upon this exemption for radio access devices. We believe that in taking this position, the Commissioner is acting beyond his powers.
 
For reasons not related to radiation hazards, we have not received environmental permits for a few of our cell sites, primarily due to building and planning issues, such as objections by local planning and building committee's engineers to our reliance on the exemption from obtaining building permits for radio access devices.
 
Several local planning and building authorities argue that Israeli cellular operators may not receive building permits in reliance on the current National Zoning Plan 36, or the Plan, for cell sites operating in frequencies not specifically detailed in the frequencies charts attached to the Plan. In a number of cases, these authorities have refused to issue a building permit for such new cell sites, arguing that the Plan does not apply to such cell sites and that building permits for such cell sites should be sought through other processes (which are longer and cumbersome), such as an application for an extraordinary usage or under existing local specific zoning plans. Since June 2002, following the approval of the Plan, building permits for the Company's cell sites (where required) have been issued in reliance on the Plan. The current proposed draft amendment to the Plan covers all new cell sites requiring a building permit, independently of the frequencies in which they operate. Most of our cell sites and many cell sites operated by other operators, operate in frequencies not specifically detailed in the Plan. The frequencies allocated in the 2011 UMTS tender are also not detailed in the Plan. We believe that the Plan applies to all cell sites, whether or not they operate in specific frequencies, consistent with the practice developed since 2002 and intend to defend our position vigorously. However, we are currently unable to assess the chances of success of the above argument.
 
If this approach continues, it would have a negative impact on our ability to deploy additional cell sites (until such time as the Plan is amended to include all cellular cell sites), which could negatively affect the extent, quality and capacity of our  network coverage and our ability to continue to market our products and services effectively.
 
In addition to cell sites, we provide repeaters (also known as bi-directional amplifiers) to subscribers seeking a solution to weak signal reception within specific indoor locations.  Based on advice received from our legal advisors, we have not requested building permits under the Planning and Building Law for outdoor rooftop repeaters, which are a small part of the repeaters that have been installed. It is unclear whether other types of repeaters require building permits.  Some repeaters require specific permits and others require a general permit from the Ministry of Environmental Protection in respect of their radiation level, and we ensure that each repeater functions within the parameters of the applicable general permit. Should it be established that the installation of repeaters (including those already installed) requires a building permit, we will perform cost-benefit analyses to determine whether to apply for permits for existing repeaters or to remove them and whether to apply for permits for new repeaters.
 
In addition, we construct and operate microwave sites as part of our transmission network. The various types of microwave sites receive permits from the Ministry of
 
 
Environmental Protection in respect of their radiation level. Based on advice received from our legal advisors, we believe that building permits are not required for the installation of these microwave facilities on rooftops. If the courts determine that building permits are necessary for the installation of these sites, it could have a negative impact on our ability to obtain environmental permits for these sites and to deploy additional microwave sites and could hinder the extent, quality and capacity of our transmission network coverage and our ability to continue to market our landline services effectively.
 
Operating a cell site or a facility without the requisite permits or not in accordance with permits granted could subject us and our officers and directors to criminal, administrative and civil liability. Should any of our officers or directors be found guilty of an offence, although this has not occurred to date, they may face monetary penalties and a term of imprisonment. In addition, our sites or other facilities may be the subject of demolition orders and claims of breach of contract and we may be required to relocate cell sites to less favorable locations or stop operation of cell sites. This could negatively affect the extent, quality and capacity of our network coverage and adversely affect our results of operations.
 
 In July 2011, an inter ministry team of the Ministries of Communications, Finance, Interior, Environmental Protection and the Anti-Trust Commissionaire, published its recommendations regarding cell site sharing. The recommendations include compulsory cell sites sharing in the construction of new cell sites or modification to existing cell sites which require a building permit (the Ministry of Communications may exempt from the obligation to share cell sites where such obligation poses technological and engineering difficulties), while providing preference and leniencies to the new UMTS operators, as well as the reduction of existing non shared cell sites quantity. These recommendations or similar recommendations, if enacted, would further burden the construction of new cell sites and modifications to existing cell sites, and may adversely effect our existing cellular network, the network build-out and our results of operations.
 
Indemnification obligations
 
In January 2006, the Planning and Building Law was amended to provide that as a condition for issuing a building permit for a cell site, local building and planning committees shall require letters of indemnification from cellular operators indemnifying the committees for possible depreciation claims under Section 197 of the Planning and Building Law, in accordance with the directives of the National Council for Planning and Building.  Section 197 establishes that a property owner whose property value has been depreciated as a result of the approval of a building plan that applies to his property or neighboring properties may be entitled to compensation from the local building and planning committee. In February 2007, the Israeli Minister of Interior Affairs extended the limitation period within which depreciation claims may be brought under the Planning and Building Law from three years from approval of the building plan to the later of one year from receiving a building permit under National Zoning Plan 36 for a cell site and six months from the construction of a cell site. The Minister retains the general authority to extend such period further. This extension of the limitation period increases our potential exposure to depreciation claims.
 
The National Council’s guidelines issued in January 2006 provide for an undertaking for full indemnification of the planning and building committees by the cellular companies, in the form published by the council. The form allows the indemnifying party to control the defense of the claim. These guidelines will remain in effect until replaced by an amendment to National Zoning Plan 36.
 
 
Since January 2006, we have provided approximately 340 indemnification letters in order to receive building permits. In addition, prior to January 2006, we provided three undertakings to provide an indemnification letter to local planning and building committees.  Local planning and building committees have sought to join cellular operators, including us, as defendants in depreciation claims made against them even though indemnification letters were not provided.  We were joined as defendants in a small number of cases, but are not, as of December 31, 2011, a party to any such depreciation claim. We expect that we will be required to continue to provide indemnification letters as the process of deploying our cell sites continues. As a result of the requirement to provide indemnification letters, we may decide to construct new cell sites in alternative, less suitable locations, to reduce capacity coverage or not to construct them at all, should we determine that the risks associated with providing such indemnification letters outweigh the benefits derived from constructing such cell sites, which could impair the quality of our service in the affected areas.
 
Construction and operating permits from the commissioner of environmental radiation
 
Under the Non-Ionizing Radiation Law (and previously under the Israeli Pharmacists Regulations (Radioactive Elements and their Products), 1980), it is prohibited to construct and operate cell sites without a permit from the Ministry of Environmental Protection. The Commissioner of Environmental Radiation, or Commissioner, is authorized to issue two types of permits: construction permits, for cell site construction; and operating permits, for cell site operation.
 
These permits contain various conditions that regulate the construction and/or operating of cell sites, as the case may be.  Our cell sites routinely receive both construction and operating permits from the Commissioner within the applicable time frames. Some repeaters require specific permits and others require general permits from the Commissioner in respect of their radiation level, and we ensure that each repeater functions within the parameters of its applicable general permit.
 
The Pharmacists Regulations provide that each of the two kinds of permits is valid for one year from the date of its issuance, or for a shorter period of time as determined by the Commissioner. We submitted annual reports regarding radiation surveys conducted on our cell sites, which, according to the Commissioner, automatically renews the permits for additional one-year terms. Under the Pharmacists Regulations, the Commissioner may issue orders to take appropriate action should he believe a cell site or other facility poses a threat to the health or welfare of individuals, the public or the environment. Failure to comply with the Pharmacists Regulations, the terms of a permit or the instructions of the Commissioner can lead to sanctions, including the revocation or suspension of the permit.
 
Pursuant to the Non-Ionizing Radiation Law, the construction and operation of cell sites and other facilities requires the prior approval of the Ministry of Environmental Protection. The validity of a construction permit will be for a period not exceeding three months, unless otherwise extended by the Commissioner, and the validity of an operating permit will be for a period of five years and we are required to submit to the Commissioner annual reports regarding radiation surveys conducted on our cell sites and other facilities  by third parties that were authorized to conduct such surveys by the Commissioner. Permits that were issued under the Pharmacists Regulations were deemed, for the remainder of their term, as permits issued under the Non-Ionizing Radiation Law. An applicant must first receive a construction permit from the Commissioner and only then may the applicant receive a building permit from the planning and building committee. In order to receive an operating
 
 
permit from the Commissioner, certain conditions must be met, such as presenting a building permit or an exemption and means taken (including technological means) to limit exposure levels from each cell site or facility (relevant also for the receipt of a construction permit). In April 2010, the Commissioner amended all existing operating permits to include an obligation to provide the Commissioner with online, ongoing data regarding the radiation level on each of the cell sites and other facilities operated by each cellular operator, satisfied by a monitoring system supplied by the Commissioner and installed at the operator's premises. We provide the Commissioner with the requested data. See “Site licensing“ above for additional details in regards to obtaining a building permit or relying on an exemption.
 
The Non-Ionizing Radiation Law also regulates permitted exposure levels, documentation and reporting requirements, and provisions for supervision of cell site and other facility operation.  The Non-Ionizing Radiation Law grants the Commissioner authority to issue eviction orders if a cell site or other facility operates in conflict with its permit, and it imposes criminal sanctions on a company and its directors and officers for violations of the law. Failure to comply with the Non-Ionizing Radiation Law or the terms of a permit can lead to revocation or suspension of the permit, as well as to withholding the grant of permits to additional cell sites of that operator.
 
In December 2008, the Minister of Environmental Protection signed the Non-Ionizing Radiation Regulations, which did not include a section setting additional restrictions in relation to the operation of cell sites and other facilities, which was included in a previous draft of the regulations. This section is pending approval by the Internal Affairs Committee of the Israeli Parliament. Further, in February 2010, the Minister of Environmental Protection published a proposed amendment to the Non-Ionizing Radiation Law, aiming to cancel the requirement to obtain the Minister of Communications' approval to the Non-Ionizing Radiation Regulations, where such regulations may have a substantial and direct effect on the monetary burden imposed on the communication market, as is required under the current law.
 
In October 2010, a bill amending the Non-Ionizing Radiation Law so as to prohibit the grant of permits under such law for the construction and operation of cell sites situated within 75 meters from certain institutions, passed a preliminary phase of enactment in the Israeli Parliament. According to the bill, such permits granted prior to the enactment of the bill shall expire within 6 months from its effective date. If restrictions similar to those included in the previous draft of the Non-Ionizing Radiation Regulations (which included additional restrictions on the operation of cell sites and other facilities) or the proposed change to the Non Ionizing Radiation Law are subsequently adopted, they will, among other things, limit our ability to construct new sites (and if applied to existing cell sites, they will also limit our ability to renew operating permits for many of our existing sites), will adversely affect our existing networks and networks build out, specifically in urban areas, and could adversely affect our results of operations.
 
Handsets
 
The Israeli Consumer Protection Regulations (Information Regarding Non-Ionizing Radiation from Cellular Telephones), 2002, regulate the maximum permitted level of non-ionizing radiation from end-user cellular phones that emit non-ionizing radiation, according to the European standard, for testing GSM devices, and the American standard, for testing TDMA and CDMA devices. They also require cellular operators to attach an information leaflet to each cellular phone package that includes explanations regarding non-ionizing radiation, the maximum permitted level of non-ionizing radiation and the level of radiation of
 
 
that specific model of equipment. The Radiation Regulations further require that such information also be displayed at points-of-sale, service centers and on the Internet sites of cellular operators.
 
Pursuant to procedures published by the Ministry of Communications at the end of 2005, end-user cellular equipment must comply with all relevant standards, including specific absorption rate, or SAR, level standards. We obtain type-approval from the Ministry of Communications for each handset model imported or sold by us. We include information published by the manufacturer regarding SAR levels with all of our handsets.  SAR levels are a measurement of non-ionizing radiation that is emitted by a hand-held cellular telephone at its specific rate of absorption by living tissue. SAR tests are performed by handsets manufacturers on prototypes of each model handset, not for each and every handset. We do not perform independent SAR tests for equipment and rely for this purpose on information provided by the manufacturers. As the manufacturers’ approvals refer to a prototype handset, we have no information as to the actual SAR level of each specific handset and throughout  its lifecycle, including in the case of equipment repair.
 
According to these procedures, in the event of equipment repair, SAR levels must be tested again and if they are not tested, the repairing entity is required to inform the customer that there may be changes in the SAR levels by affixing a label to the equipment. The Ministry of Communications has appointed a consultant to create guidelines in that regard, but to date, the Ministry has not issued them. We have awaited the publication of these guidelines before implementing these requirements, but given the continued delay, are informing our customers that there may be changes in the SAR levels.
 
Obtaining a license for importing or trading in spare parts that are likely to affect the level of non-ionizing radiation requires receipt of compliance approvals from the manufacturer of the parts or from a laboratory authorized by the Ministry of Communications. To the best of our knowledge, to date no spare parts manufacturer has provided any cellular operator with such an approval and no laboratory has been authorized by the Ministry of Communications to issue such approvals.
 
We are required to provide warranty for handsets and other end user equipment purchased from us, for certain malfunctions during the first year, and are required to provide repair services for three years. We are also required to annul equipment sale in certain circumstances, at the request of the customer. See “Item 8 – Financial Information - Legal Proceedings” for details regarding purported class actions filed against us, in respect of handsets.
 
Royalties
 
Under the Communications Law, the Israeli Communications Regulations (Royalties), 2001, and the terms of our general license from the Ministry of Communications, in 2011 we were required to pay the State of Israel royalties equal to 1.75% of our revenues generated from telecommunications services, less payments transferred to other license holders for interconnect fees or roaming services, sale of handsets and losses from bad debt.  The rate of these royalties has decreased in recent years, from 4.5% in 2002, to 4% in 2003, to 3.5% in 2004 and 2005, to 3% in 2006, to 2.5% in 2007, to 2% in 2008, to 1.5% in 2009 and 1% in 2010 and thereafter. A public committee appointed by the Ministry of Communications to review various issues in the Israeli communications market published its recommendations in March 2008, including a recommendation that our obligation to pay royalties be annulled no
 
 
later than 2012 (subject to Israeli corporate income tax reduction between 2008 and 2012). However, in January 2011, these regulations were amended to increase the royalties payable regarding cellular operations only, for the year 2011 and 2012, commencing January 19, 2011, from 1% in 2010, to 1.75% in 2011 and 2.5% in 2012, unless the Ministry of Communications has notified that an additional UMTS operator has commenced providing service through national roaming services or that MVNO operators have gained 5% market share. This change will not apply to MVNOs and holders of a special general license for the provision of   landline services. In March 2011, we, Pelephone and Partner have filed a petition with the Israeli Supreme Court against the Ministries of Finance and Communications in that regard. In July 2011 the  State announced it accepts the Supreme Court's  suggestion to set the royalties' rate to 1.75% in 2011 and 2012 (subject to the above conditions) and to 0% starting 2013. The state reserved its right to charge royalties or other payments by primary legislation. An amendment to the regulations requires the approval of the Israeli Parliament.
 
  Frequency Fees
 
Frequency allocations for our cellular services are governed by the Wireless Telegraph Ordinance. We pay frequency fees to the State of Israel in accordance with the Israeli Wireless Telegraph Regulations (Licenses, Certificates and Fees), 1987. In December 2008, we returned the TDD spectrum allocated to us in 2004, to the Ministry of Communications, after not being able to use that spectrum since it was awarded to us, due to unavailability of supporting equipment, and in December 2010, we filed a lawsuit against the Ministry of Communications for the return of the frequencies fees we paid for the TDD spectrum, in the amount of approximately NIS 15 million.
 
Mobile Virtual Network Operator
 
A mobile virtual network operator, or MVNO, is a cellular operator that does not own its own spectrum and usually does not have its own radio network infrastructure.  Instead, MVNOs have business arrangements with existing cellular operators to use their infrastructure and network for the MVNO’s own customers. The operation of MVNOs in the Israeli cellular market could increase competition and may materially adversely affect our revenues, and more so, if such service is to be provided under unfavorable terms and consideration (such as equal to or based on the interconnect tariff).
 
The Communications Law was amended in July 2009 to include an MVNO license. In January 2010, the regulations necessary for the granting of an MVNO license were promulgated. The regulations regulate the operation of an MVNO pursuant to an agreement to be reached and entered between a cellular operator and an MVNO and sets, among others, the conditions for receiving an MVNO license, including a requirement to operate a mobile phone switch, a restriction on a cellular operator and landline operator to receive an MVNO license and limitations on parties related to an existing cellular operator and on other communication licensees, to receive an MVNO license. Although the regulations deal with an agreement based MVNO, the Communications Law, as amended, instructs further that in the event that a MVNO and the cellular operator will not have reached an agreement as to the provision of service by way of MVNO within six months from the date the MVNO has approached the cellular operator, and if the Ministry of Communications together with the Ministry of Commerce determine that the failure to reach an agreement is due to unreasonable conditions imposed by the cellular operator, the Ministry Of Communications
 
 
will use its authority to provide instructions. Such instructions may include intervening in the terms of the agreement, including by setting the price of the service.
 
To date the Ministry of Communications granted nine MVNO licenses to Free Telecom, Ituran, Rami Levy, Bynet, Home Cellular, T2T and Alon Cellular. A ninth licensee has returned its license. Five MVNOs entered hosting agreements with cellular operators: Free Telecom with Pelephone,  Rami Levy with Pelephone, Ituran with Pelephone and Partner, Home Cellular with us and Alon Cellular with Partner. Rami Levy commenced operations during December 2011 and the other four are expected to commence operations in the first half of 2012. For additional details see "Item 4. B. – Business Overview – The Telecommunications Industry in Israel – Cellular services".
 
Additional UMTS Operators
 
In September 2010, the Ministry of Communications published a UMTS spectrum tender for two additional UMTS operators (the general principles of which were published in October 2009). Participation in this tender was allowed only to new operators and Mirs. Mirs (in April 2011) and Golan (In December 2011) were awarded the new UMTS frequencies.  Golan was awarded a general license for the provision of cellular services and Mirs' current license was amended. Mirs and Golan committed to pay license fees in the amount of approximately NIS 700 million and NIS 360 millions, respectively, after the lapse of 5 years from the grant date of the UMTS license which may be reduced up to a minimal license fee of NIS 10 million by one seventh of the sum, for each 1 percent of market share gained by each in the private sector during such 5 years period. Mirs and Golan  were awarded certain additional benefits and leniencies, such as a prolonged timetable for network coverage completion and the right to use national roaming through cellular operators' networks.  The expected entrance of additional UMTS operators is expected to further increase competition in the market and could materially adversely affect our results of operations.
 
In December 2010, the Communications Law was amended to require existing operators (other than Mirs) to provide new UMTS operators and Mirs national roaming services, for a period of 7 - 10 years (subject to certain conditions). If the new operator or Mirs and the hosting operator have not reached an agreement, as to the terms of this service (including the consideration), for any reason, by the time that the service is to commence (after certain criteria are met) the service will be provided for the then prevailing interconnect tariff and subsequently (but no later than February 1, 2012) shall be determined by the Ministry of Communications with the consent of the Minster of Finance and applied retroactively. Unfavorable terms and consideration for the service (such as equal to or based on the interconnect tariff) may result in material adverse effect on our results of operations.
 
In October 2011, we entered a national roaming agreement with Golan, under which we will provide Golan national roaming services and cell site sharing privileges.
 
 See "Site Licensing" above for the recommendations of an inter-ministry team regarding compulsory cell site sharing, including providing preference and leniencies to the new UMTS operators.
 
Long Distance Services
 
In February 2011, the regulations preventing a cellular and landline operator from providing international services and preventing a cellular operator from having a significant
 
 
influence over an international landline, or ILD, operator were amended to allow cellular operators to provide long distance services or have significant influence over an ILD operator upon the earlier of the date in which an MVNO operator begins providing services (and with regards to an ILD which requested an MVNO license before September 1, 2010 and was granted a license – when the Ministry of Communications intervened or decided not to intervene in the terms of it's hosting agreement with the cellular operator) or after December 31, 2012. In addition, the Ministry of Communications may allow a cellular operator to have significant influence over an ILD before those conditions are met, under structural separation of the long distance operation from the cellular operator's operation.
 
As a result of this change, in February 2011, the Ministry of Communications approved the acquisition of Smile Telecom by Partner, subject to the structural separation of the long distance operation until the aforementioned conditions are met, and the acquisition was completed in March 2011. Similary, in July 2011, the Ministry of Communications approved our acquisition of Netvision subject to the same conditions, and the acquisition was completed in August 2011.
 
In December 2011, a formal notification was published in the Israeli Official Gazette  announcing that Rami Levy, an MVNO operator, commenced its operations in December 2011. Following such announcement, the structural separation required by the  Ministry of Communications was lifted.
 
Emergency Situations
 
We may be subject to certain restrictions and instructions regarding our activities or provision of services during national emergencies or for reasons of national security or public welfare, including taking control of our cellular or land line networks. Further, the Prime Minister and the Ministry of Communications may determine that our services are deemed essential services, in which case we may be subject to further additional limitations on our business operations.
 
Reporting Requirements
 
We are subject to extensive reporting requirements.  We are required to submit to the Ministry of Communications detailed annual reports with information concerning subscribers, revenues by service, the number of new subscribers and churn, annual financial statements and prior notice of tariff increases. In addition, under our license we may be required by the Ministry of Communications to file additional reports, such as reports on complaints, pricing, specific costs and revenues, network problems and the development of the network. We are required to provide the Commissioner of Environmental Radiation under the Non-Ionizing Radiation Law and regulations with periodic and online, ongoing data of all cell sites operated by us.
 
Securities Administrative Enforcement
 
An amendment to the Israeli Securities laws, which came into force in January 2011, established administrative enforcement measures for the handling of certain violations of certain securities and securities-related laws supervised by the Israeli Securities Authority, or ISA. This amendment allows the ISA to impose various civil enforcement measures, including financial sanctions, payment to the injured party, prohibition of the violator from serving as an executive officer for a certain period of time, annulment or suspension of licenses, approvals and permits granted under such laws and agreed settlement mechanism as
 
 
alternative for a criminal or administrative proceeding. In case of a violation by a corporation, the amendment provides for additional responsibility of the chief executive officer in some cases, unless certain conditions have been met, including the existence and implementation of procedures for the prevention of the violation. The Company is in the process of examining its procedures for the prevention of such violations.
 
Contributing to the Community and Protecting the Environment
 
We and our employees have been contributing to the community since our inception and are proud to be among the leaders of community responsibility. Like other companies in the IDB group, we consider contribution to the community in Israel, and specifically to the communities residing next to the Israeli northern and southern borders, an important component of our business vision and believe we have a responsibility towards the Israeli community, as we acknowledge that business leadership goes hand in hand with social leadership.
 
In 2011 we continued to contribute to the community with a specific focus on our "Cellcom Volume" youth centers initiative. In addition to promoting Israeli music and artists and providing our customers with Israeli music through a variety of musical content, we have contributed to the creation of "Cellcom Volume" youth centers in various locations throughout Israel, in which we provide young people resources related to music, including music classes, facilities to bands and choirs for rehearsals and recording studios. During 2011 we opened an additional center in Israel, as we believe music is a language which connects and bonds different people together. As of December 31, 2011, we had eleven "Volume Centers" and five “mini Volume Centers” active throughout the country. Our employees volunteer regularly in these centers as well as with other community projects.
 
In addition to our contribution to the build-up and strengthening of the community, through activities such as our "Cellcom Volume" youth centers, we make financial donations to other worthy causes and entities. In August 2006, our Board of Directors determined our donation policy to be at an amount equal to up to one percent of our annual net income. In 2011 we donated a total sum of approximately NIS 6.2 million, including our contribution to the community.
 
We are aware of the importance of environmental protection. Accordingly, while providing quality products and services to our subscribers, we seek to operate responsibly to continuously reduce negative impacts on the environment and the landscape, aiming at a better environmental performance than required by local law. We dedicate personnel, funds and technologies to improve our performance, strive to achieve an efficient deployment of infrastructure subject to the applicable standards, and cooperate with the local authorities. We constantly monitor our environmental performance and aim to reduce our ecological footprint, through activities such as recycling, reduction of paper usage by managed printing, reduction of pollutants' emissions and energy usage as well as activities aimed at allowing our subscribers to better protect the environment, such as collecting used batteries, sending subscribers their monthly bill for our services and other correspondence from us via e-mail in lieu of regular mail, transfer to usage of environment friendly raw materials and separation between different types of waste in our repair services. In 2010, we entered into an agreement for the future purchase of electricity to be produced by a private natural gas based power station.
 
 
NETVISION
 
General
 
On August 31, 2011, we completed the acquisition of 100% of the share capital of Netvision through a merger transaction.  Netvision was founded as an Israeli company in 1994 and became a public company following its initial public offering on the TASE in 2005. In our description of Netvision's business, the term "Netvision" refers to Netvision and its subsidiaries.
 
 Netvision is a leading company in the Israeli communications market and is engaged in two primary businesses through its wholly owned subsidiary 013 Netvision Ltd., or 013 Netvision: provision of internet connectivity and related services (ISP); and provision of telephony services consisting mainly of international calling services, operator services, teleconferencing services and landline telephony services. In addition, Netvision is engaged is additional activities such as internet content services and custom internet applications.
 
ISP Business
 
General - The provision of internet connectivity services is one of Netvision's primary businesses. Netvision is a leading provider of internet connectivity services. The Israeli internet market is characterized by a separation between the internet infrastructure providers and the internet connectivity service providers. Consequently, the internet customer is required to enter into a contractual arrangement with both of these providers. The infrastructure provider is responsible for the connection of the customer from his computer or other device to the infrastructure provider's operator. The internet service provider (such as Netvision) is responsible for providing access to the customer from the infrastructure provider's operator, through its own operator, to the local and global internet network. Currently, there are two main internet infrastructure providers having landline infrastructure for the private sector in Israel: Bezeq and Hot. Netvision's internet infrastructure is currently comprised of connectivity sites in two locations in Israel (Haifa and Petah-Tikvah), which provide Netvision's customers, through overseas connectivity points in New York City, London and Frankfurt, with connectivity to the global internet network. This internet infrastructure contains backup capability in order to ensure continuity of service.
 
Services and Products – Netvision's main service provided to its internet subscribers is internet connectivity service and related services and products, as well as bundles of its services, including  bundling with other companies' products or services.
 
In addition, Netvision offers its internet subscribers value added services, such as data protection services to its private subscribers and connectivity integration solutions and global communications solutions to its business customers, including firewalls, anti-virus and anti-spam software, overseas internet connectivity services and server hosting services. In addition, Netvision provides through one of its controlled subsidiaries, ISP services which also offers the ability to filter the content viewed by the internet user; this service is targeted mainly to the orthodox religious sectors in Israel.
 
Netvision is constantly considering and evaluating the possibility of introducing additional products and services to its customers.
 
The Israeli ISP market is characterized by rapid technological changes, both in terms of the bandwidth offered to customers, as well as terms of expansion of the list of products and services offered.  For developments in the Israeli internet infrastructure sector such as the entrance of new players into this sector, including our Company, see this Item 4.B above
 
 
under "The Telecommunications Industry in Israel – Wireline Services - Broadband and Internet Services".
 
Suppliers – In the course of engaging in its ISP business, Netvision has entered into agreements with various suppliers, the principal of which are the following:
 
Netvision entered into a number of agreements with Mediterranean Nautilus Ltd. and Mediterranean Nautilus (Israel) Ltd., or collectively Med Nautilus, during the years 2003 through 2011. Med Nautilus is the owner of the principal communication infrastructure which connects the Israeli internet network to the "entry points" of the global internet network via an underwater communications cable (two additional cables were recently laid, one  of them by one of Netvision's competitors – Bezeq International). Pursuant to its agreements with Med Nautilus, Netvision purchased rights of use, or IRU, of certain telecommunications capacities on Med Nautilus' communication cables, as well as maintenance and operation services relating to these cables. The agreements include options pursuant to which Netvision may expand the purchased capacity. The terms of these agreements may be subject to regulatory intervention. See additional details under "Item 3.  Key Information - Risk Factors – Risk Factors Related to our wholly owned subsidiary Netvision - Netvision is exposed to risks relating to network infrastructure and is dependent on services it receives from its external suppliers". The term of the agreement with respect to part of the capacity purchased from MedNautilus is until May 2027. Netvision has the option to terminate agreements with respect to parts of the capacity in 2017 and 2022.  See "Competition" below for possible regulatory intervention is these agreements.
 
Netvision entered into agreements with Bezeq and Hot, the primary internet infrastructure providers in the Israeli market. Netvision is dependent upon these suppliers since without their infrastructure Netvision would be unable to provide its ISP services to its customers. Due to the increase in customer demand for broadband width in recent years, Netvision is required from time to time to increase the capacity it purchases from Bezeq and Hot. During 2010, Netvision applied to the Ministry of Communications' intervention in the prices charged by Bezeq and Hot in consideration for connectivity services to their infrastructure. Following that petition, in 2010 Netvision and Bezeq entered into a new agreement that regulates the provision of the internet infrastructure services by Bezeq to Netvision, which was updated in 2011. Under this agreement with Bezeq, Netvision is required to purchase minimum bandwidth capacities in consideration to a price that reflects a considerable decrease in comparison to the previous price per giga-byte unit. The 2010 agreement with Bezeq, as updated in  2011, is valid until  2014.
 
In 2011 Netvision entered into an agreement with Cisco Systems, Inc., or Cisco, effective until 2013. Cisco provides Netvision maintenance and advanced services for its IP network equipment; in addition, Netvision sells various Cisco products to its customers.
 
Netvision uses several supporting systems for the provision of service to its customers, including communications infrastructure by Nortel (see additional details under "Telephony Business – Suppliers" below), customer relations management system by PeopleSoft supported by Matrix for Oracle, inventory and suppliers management system by Priority/Eshbel, billing system by CBP supported  internally and by Intec, financial system by Coda and infrastructure integrations system by Microsoft BizTalk.
 
Sales and Marketing and Customer Care – Netvision conducts its sales and marketing activities in the ISP business through various channels, including media advertising in newspapers, internet and television, concentrated sales campaigns, telemarketing to potential
 
 
customers, as well as targeting existing customers by offering them upgrades to existing subscription programs and value added products and services. In addition, Netvision regularly collaborates with other telecommunication providers (including Bezeq and Hot)   in order to offer   service   packages to existing and potential customers .
 
Netvision's customer care center is located in Haifa, providing technical and support services, billing and general information, by specializing representatives as well as installation services provided by technicians teams at the landline customers' premises.
 
Competition - The Israeli ISP market is highly competitive and saturated and ischaracterized by relatively low entry barriers. Competition among the various players concentrates mainly on the ability to offer high-speeds of internet connection and on pricing. Although the provision of ISP services requires obtaining a license from the Ministry of Communication, the Ministry's policy is liberal in granting ISP licenses. As a result, as of the date of this report, there are a few dozen holders of ISP licenses in Israel, though most of them do not hold significant market shares. Entry into the ISP market requires, however, incurring substantial penetration costs associated with the formation of ISP infrastructure, support systems, customer care systems and marketing channels. Due to such penetration and the other ongoing costs of operating ISP service, profitability in the ISP market usually requires creation of a broad customer base.
 
The key success factors in the ISP market are brand recognition and reputation, advanced and updated technological capabilities, available bandwidth, high levels of customer care service, the ability to constantly develop innovative products and services and complementary products and services, competitive pricing, achieving and maintaining customer loyalty, and strategic cooperation with strong local and international corporations.
 
Netvision's main competitors in the ISP market are Partner (through its wholly-owned, recently-acquired subsidiary Smile Telecom), Bezeq (through its wholly owned-subsidiary Bezeq International) and Hot (through its wholly owned-subsidiary Hotnet).
 
In 2010, the Ministry of Communications amended Bezeq's and its subsidiaries licenses to allow them to offer bundles of services to private customers, under certain limitations, including that each of the services in the Bezeq bundle would be available for sale separately under the same terms as in the bundle, and the requirement that Bezeq allows its competitors to participate in a similar bundle - if includes ISP, VOB or ILD services - under the same terms and equally markets such bundles as its own bundle (the second requirement does not apply to the sale of the bundle by a subsidiary of Bezeq). In 2010 Bezeq began offering bundles of ISP services, internet infrastructure services and landline telephony services. This led to a decrease in the prices of the ISP services sold in the bundle. In February 2011, the Ministry of Communications published a hearing regarding the amendment of Bezeq's and its subsidiaries licenses to allow the offering of such bundles to business customers as well. At the end of 2010, Hotnet, a subsidiary of Hot, received an ISP license under structural limitation from the other Hot group entities (similar to the structural limitation in the Bezeq group) and Hot was also allowed to offer bundles of services including ISP services, under similar limitations as Bezeq, with respect to the ISP service component of the bundle. In February 2012  Hot  began offering ISP services and has done so at tariffs significantly lower than market prices or at prices which would be lower than our costs and Bezeq also significantly lowered its internet infrastructure services tariffs to end-users. Netvision believes there is cause for regulatory intervention and has appealed to the regulators to intervene, but cannot predict the outcome of such appeals. This is expected to
 
 
result in a further decrease in ISP service prices and lead to increased demand for greater bandwidth and would require Netvision to significantly increase the capacity it purchases, significantly increasing its expenses in purchasing capacity from Bezeq and Hot, while its revenues could decrease. This   could have a material adverse effect on Netvision's results of operations.   Also, in recent years, cellular operators started providing ISP services via wireline and wireless networks.  The offering of bundles of services and entry into the ISP market of these players, who have a broad customer base and a wide offering of communication services, could further intensify the competition in this market and adversely affect Netvision's results of operations. In addition, the reduction of the early termination fees by the Ministry of Communication that was implemented in the ISP market during 2011 has increased and is expected to continue to increase the competition in the market. See also “Item 3. Key Information – D. Risk Factors - Risks Related to our wholly owned subsidiary Netvision - Changes in the regulatory environment could adversely affect Netvision's business”.  
 
In late 2011 and early 2012, two additional underwater cables that could serve as an alternative to Med Nautilus were deployed. In addition, proposed regulation published for public comments by the Ministry of Communication on November 2011, proposes certain limitations on the terms of agreements with Med Nautilus, which will, among others, limit the discounts and capacity Med Nautilus may provide. While the deployment of additional underwater cables could improve the competition in the ISP market, as ISP providers will be able to find alternatives to Med Nautilus, which could lead to a decrease in the pricing of the global internet connectivity services provided to Israeli ISP providers, Bezeq International's deployment of one of them and adoption of the proposed regulatory changes might harm Netvision's results of operations and competitive position as it could force ISP providers other than Bezeq International to purchase capacity on less favorable terms and prices, and more so in comparison to Bezeq International.   In addition, the Electric Company's initiative, intended to enable use its optic fiber infrastructure for the provision of broadband transmission services,  would improve Netvision's competitiveness in the ISP market as this is likely to reduce its dependency on Bezeq and Hot as internet infrastructure providers. For additional details see  this Item 4.B above under  "- The Telecommunications Industry in Israel – Wireline Services - Broadband and Internet Services" and "– Government Regulations – Competition".
 
Regulation and Licenses – A major part of Netvision's ISP operations is subject to regulation by the Israeli Ministry of Communications pursuant to the Communications Law, including through its ISP license.
 
The provision of ISP and related services requires a license. Netvision was granted three ISP licenses, one to its wholly owned subsidiary 013 Netvision , one to its controlled subsidiary Internet Rimon, and third was granted to 013 Netvision by the Israeli Civil Administration in Judea and Samaria in respect of this territory. The licenses are valid through April 2012, May 2012  and August 2012 respectively. Netvision estimates that it will be able to renew these licenses without undue burden.
 
Under its ISP licenses, Netvision is required to maintain a minimum standard of customer service, is prohibited to condition the use of its services by the customer on the customer's having to be connected to a portal designated by it, and is generally prohibited from discriminating among subscribers in terms of service packages offered and pricing. Netvision is also required to inform its customers regarding the main features of the service provided, including commencement date of service, the consideration paid by the customer,
 
 
quality standards, and maintenance details, and details about the possibility of email address portability.
 
Under its ISP licenses, Netvision may not transfer or encumber any of its licenses' related assets, without the prior written approval of the Ministry of Communication. The license may be terminated in case that Netvision fails to provide information or provides false information or in case it is engaged in anticompetitive practices in the communications market, subject to certain terms. The licensee is required to provide the Ministry of Communications with certain reports and is required to cooperate with the supervisory bodies of the Ministry of Communication.
 
In  August 2011, the Communications Law was amended pursuant to which the Early Termination Fees in the ISP market were annulled, which led to an increase in competition, churn rates and rate of gross recruitment of subscribers and price erosion. Further intervention by the Ministry of Communication in the ISP market, including by means of granting additional ISP licenses and setting their terms and conditions, change or annulment of the structural separation currently in place for the Bezeq and Hot groups, permitting the bundling of certain services and intervening in the purchasing of global internet connectivity, could have a material adverse effect on Netvision's ISP business.

Telephony Business
 
General - The provision of telephony services is one of Netvision's primary businesses. Netvision's services in its telephony business consist mainly of the following:
 
· 
Provision of international calling services, or ILD services;
 
· 
Provision of landline telephony services, including teleconferencing services; and
 
· 
Sales of telephony equipment (including switchboards, telephones and communication switches), and operation and management of voice communication systems and data communications systems, including maintenance and support of telecommunication systems.
 
ILD services enable an end user (whether in Israeli or overseas) to conduct a telephone conversation with an end user located elsewhere in the world. These include calls (including cellular calls) from Israel to various destinations abroad as well as call (including cellular call) completion services to overseas operators transferring a call to Israel; transferring international calls between operators and signaling services to local and foreign cellular operators to allow roaming.
 
Netvision is a major player in the Israeli ILD market. As a result of a regulatory change that was adopted by the Israeli Ministry of Communication in February 2011, pursuant to which cellular operators were permitted, under certain conditions, to have significant influence over an ILD operator, we were permitted to acquire Netvision in 2011. This regulatory change also enabled the acquisition of Smile by Partner. For further details, see this Item 4.B above under "- Government Regulation – Long Distance Services". In recent years, the ILD market has witnessed a development of and an increase in the use of technologies that can serve as substitute to the traditional ILD services, including voice over IP technologies offered by companies such as Skype. This trend has resulted in a continual decline in the overall use of traditional ILD services. Further developments and penetration of
 
 
such technologies into the Israeli ILD market could have a material adverse effect on the financial results of Netvision's ILD business.
 
Landline telephony service enables an end user to conduct a telephone conversation with another end user who uses either another landline or a cellular telephone or computer, either in Israel or overseas.

Services and Products – Netvision's principal service in the ILD market is the provision of outgoing and incoming telephone calls to and from substantially worldwide coverage. Netvision provides these services mostly to post-paid customers, but also to pre-paid customers mainly through the sale of calling cards. Most of the customers of the pre-paid services are foreign workers who work in Israel. In addition, Netvision provides "hubbing" services to non-Israeli international operators. Hubbing services are bridging services between two non-Israeli international operators. Such services are provided by Netvision where there is no direct connection between two non-Israeli international operators or where pricing differences in different locations make such bridging service desirable. The hubbing service market has been growing in the past few years because of the development of the international dialing market and because of the development of the corresponding arbitrage market on which various international operators trade international dialing capacities. In addition, Netvision provides "signaling" services to cellular operators who use roaming services. A cellular handset located out of its home network needs to "signal" its location to the hosting network in order to enable the cellular subscriber to get roaming services. Netvision provides these services to the cellular operators in Israel (including us), as well as to foreign cellular operators with respect to their customers when they visit Israel.
 
Netvision's principal service in the wireline market is the provision of basic landline telephony services (usually by VOB technology, but also by other traditional technologies, including time-division multiplexing, or TDM). Netvision offers these services to both business and private customers. In addition, Netvision offers switchboard equipment sales services, voice and data systems' sales and operation services, and teleconferencing services and communications solutions to business customers.
 
Suppliers – Netvision's principal suppliers in the telephony market are the following:
 
Bezeq, Hot and cellular operators: Under the Communication Law and licenses, all operators are required to interconnect their network to other public communications networks in Israel, on equal terms and without discrimination in respect of other operators. Netvision has entered into interconnect agreements with Bezeq, Hot and the cellular operators, for facilitating international traffic between Netvision's network and the other networks, as well as for billing and collection services for Netvision services, for certain customers. Substantially all of Netvision's traffic requires interconnections with these operators, as substantially all such traffic requires interconnection with them and is dependant on its availability and quality.
 
Most of the international dialing traffic between Israel and the rest of the world is conducted through the underwater communications cable of Med Nautilus. For further details on the agreements between Netvision and Med Nautilus, see above in the description of Netvision's ISP business under "Netvision - ISP Business - Suppliers".
 
 
Netvision has also entered into agreements with more than 100 foreign carriers. These agreements regulate and facilitate the ILD services of Netvision, as well as its international voice hubbing services.
 
Netvision entered into an agreement with Nortel Networks Israel (Sales and Marketing) Ltd., or Nortel in this section, in June 2004, for the provision of Netvision's international communication switch, on which Netvision bases its ability to provide international calling service, as well as related equipment and services. From 2010, Geneband Inc. (which acquired Nortel's relevant business) provides Netvision with support and maintenance services for the equipment provided under this agreement.
 
Netvision has entered into an agreement with ECI Telecom Ltd. for the provision of transmission switches by ECI Telecom among the various location sites of Netvision in Israel and overseas, used for its ISP operations. Netvision is obligated to purchase maintenance services from ECI until 2012. Under the maintenance agreement, ECI's liability is generally limited to direct damages and the lesser of the total consideration paid or $200,000.
 
Sales and Marketing and Customer Care – The sale and marketing of Netvision's telephony products and services is conducted mainly through media advertising, primarily radio and television, but also through direct means such as telemarketing, mail and email campaigns. In addition, Netvision offers its telephony products and services on a non-exclusive basis through various retailers, through outsourced telemarketing centers and through distributors. Marketing to business customers is conducted also by approaching potential customers (including developers of large commercial real estate projects), participation in tenders (especially for maintenance and support services), through labor unions and targeted marketing campaigns and sponsorships.
 
Netvision's customer care centers provide its telephony services customers the same range of services provided to its ISP customers.
 
Competition – The Israeli ILD market is highly competitive, and the competition in the market is based mainly on the operator's ability to offer attractive pricing. The price of the international call is influenced also from the call completion tariff paid to the operator in the call's destination country, increased competition in the destination country leads to a decrease in tariffs for calls to those destinations and influence an increase of the quantity of minutes made to those destinations. The Israeli landline market   is currently dominated by Bezeq (which is a monopoly in this market ) and by Hot, currently the only two landline carriers with full scale landline infrastructure, but certain technological and possible regulatory changes could increase competition in this market. Recent regulatory changes in the telephony market such as the annulment of Early Termination Fees, which applies to existing as well as new pricing plans in November 2011 as well as the regulatory change that enabled cellular operators to have a significant influence over ILD operators have increased and are likely to intensify competition even further as transfer barriers between service providers have been significantly eased and the various communication groups in the market are competing for the opportunity to offer potential and existing customers a "one stop shop" of communication services.
 
The Israeli landline market has been dominated for many years by Bezeq, a monopoly which held as of December 31, 2011 a market share of  69% in the private landline sector and a market share of 79% in the business landline sector. In recent years, Hot, entered this market and was allowed to bundle its landline service together with its internet infrastructure
 
 
service and its multi-television service. See Netvision – ISP business – Competition" above for details regarding service bundles.  Bezeq and Hot are currently the only landline carriers having full scale landline infrastructure. Recent technological and regulatory developments have enabled landline carriers which do not have a landline infrastructure, including Netvision, to enter the landline market. Netvision commenced its landline telephony services in 2008 using Voice Over Broadband, or VOB, technology, and expanded this business during 2009 through 2011. Netvision is investing substantial efforts and resources in increasing its reach into the Israeli landline market, and predicts that in the long-run its landline business will contribute to its results of operations, to its brand recognition and to enhancing customers' loyalty. We believe that Netvision's penetration into the landline business could be an important element in our ability to offer comprehensive service packages to its subscribers.
 
The key success factors in the telephony market are competitive pricing, which are updated constantly, brand recognition and reputation, advanced and updated technological capabilities, reliable network and high levels of maintenance,  high quality of human resources including customer care services, and the ability to develop comprehensive products and services packages, to build a substantial customer base, to enhance customers' loyalty and the ability to face competition. In addition, the ability to develop strong strategic relations with foreign international dialing carriers and continuous agreements with them are also key elements in the ILD market.
 
In recent years, the use of alternative telecommunication technologies such as voice-over-IP has resulted in downsizing of the telephony market, especially the ILD market. This trend is expected to continue in the future.
 
Netvision is a leading service provider in the Israeli ILD market. As of the date of this report, there are several  ILD operators in the Israeli market. Netvision's main competitors in this market are Bezeq (through its wholly owned subsidiary Bezeq International), Partner (through its wholly owned subsidiary Smile Telecom) and additional competitors include Xfone, Telzar (commenced operation in 2011) and Hilat (commenced operations in 2012).
 
Netvision estimates that its current market share in the Israeli landline market is not material. Netvision's main competitors in the landline market are Bezeq and Hot, as well as Partner (through Smile Telecom) and Bezeq International. To our knowledge, Bezeq remains a monopoly in the landline market.
 
The development of a wholesale wireline services recommended in October 2011  by the public committee appointed by the Ministry of Communications, if and when made available, will enhance Netvision's ability to compete and allow us and Netvision (as well as our competitors) to provide a wider selection of services at low cost, specifically in relation to residential landline services which is currently non-material and generating negative net-income. The proposed changes to the structural separation limitations in the Bezeq group and the supervision on Bezeq tariffs, or anti-competitive behavior if not prevented by the regulators, however, could adversely affect Netvision's ability to compete with Bezeq and Hot in general, and in the landline market in particular and may have a material adverse effect on Netvision's results of operation. For details see also “Item 3. Key Information – D. Risk Factors - Risks Related to our wholly owned subsidiary Netvision - Changes in the regulatory environment could adversely affect Netvision's business” and "Item 4. Information on the Company – Government Regulations – Competition".
 
 
Regulation and Licenses – Netvision's operations in the telephony business are subject to regulation, mostly pursuant to the provisions of the Communications Law and the regulations promulgated thereafter, the Communications Regulations (Telecommunication and Broadcasting) (Procedures and Conditions for the Receipt of General License for the Provision of the International Telecommunication Services) – 2004, or the ILD Regulations, with respect to its ILD  business, and to the provisions of its ILD licenses, and the Communications Regulations (Telecommunication and Broadcasting) (Procedures and Conditions for the Receipt of General unique License) – 2004 with respect to its VOB services and the provisions its landline licenses and its 'network ending point' license.
 
Netvision's main ILD license is held by its wholly owned subsidiary 013 Netvision and expires on May 2025, and its main landline license is held by another wholly owned limited partnership  Veidan Teleconferencing Solutions LP, or Veidan, and expires on March 2026. Each of the licenses may be extended by the Ministry of Communications for successive periods of ten years, provided that Netvision has complied with each such license and applicable law, respectively, has continually invested in the improvement of its services and network pursuant to such license and has demonstrated the ability to continue to do so in the future.
 
The main provisions of Netvision's principal ILD and landline licenses are the following:
 
· 
The license holder is required to interconnect its network to other public telecommunications networks in Israel, on equal terms and without discrimination, in order to enable subscribers of all operators to communicate with one another;
 
· 
The license holder may not take any action or be party to any arrangement which might adversely affect competition in the market;
 
· 
The license holder is required to, among other things, maintain a minimum standard of customer service, including, among other things, establishing call centers and service centers, maintaining a certain service level of its network, tariffs setting and updating and protecting the privacy of subscribers;
 
· 
The licenses or any part thereof may not be transferred, pledged or encumbered without the prior approval of the Ministry of Communications. The licenses also set forth restrictions on the sale, lease or pledge of any assets used for implementing the licenses;
 
· 
Pursuant to theses licenses and the Israeli Communications Regulations (Royalties), 2001, the license holders are required to pay the State of Israel royalties equal to 1%  of their eligible revenues;
 
· 
The license holders are required to obtain insurance coverage for their activities pursuant to theses licenses. In addition, the licenses impose statutory liability for any loss or damage caused to a third party as a result of establishing, sustaining, maintaining or operating the license holder's network. The license holders have further undertaken to indemnify the State of Israel for any monetary obligation imposed on the State of Israel in the event of such loss or damage.  For the purpose of guaranteeing our obligations under theses license, Netvision deposited bank guarantees for this liability under the ILD and landline licenses  in the amounts of $9
 
 
million and $11 million, respectively, with the Ministry of Communications, which may be forfeited in the event that the license holder violates the terms of its license.
 
· 
The transfer or pledge of means of control in the license holder is prohibited without the prior written consent of the Ministry of Communications, if, as a result of such transfer, a person becomes a 5% holder or more in the license holder.
 
In addition, the ILD Regulations impose certain restrictions on cross-ownership in ILD operators, such as the prohibition on landline operators or holders of material international transmission infrastructure or on persons in which an ILD operator holds 5% or more from holding an ILD license. There are additional restrictions on cross-ownership in ILD operators under the ILD Regulations, which may be waived by the Ministry of Communication on grounds of public welfare or encouragement of competition in the communications market. For a regulatory change that was adopted by the Israeli Ministry of Communication in February 2011, pursuant to which cellular operators were permitted, under certain conditions, to have significant influence over an ILD operator, and pursuant to which we were permitted to acquire Netvision in 2011 (and also enabled the acquisition of Smile by Partner), see this Item 4.B above under "- Government Regulation – Long Distance Services".
 
In addition to its principal landline telephony license, Netvision (through its wholly owned limited partnership Veidan) received from the Israeli Civil Administration in Judea and Samaria a license for the provision of landline services to the Israeli-populated areas in Judea and Samaria.  This license is effective until October 2017 and  Netvision estimates that it will be able to renew these licenses without undue burden. The provisions of the principal landline license described above, generally apply to this license, as well, subject to certain modifications .
 
In addition to its principal ILD license, Netvision (through its wholly owned subsidiary 013 Netvision) received from the Israeli Civil Administration in Judea and Samaria a license for the provision of ILD services to the Israeli-populated areas in Judea and Samaria.  This license is effective until August 2018 and Netvision estimates that it will be able to renew these licenses without undue burden. The provisions of the principal ILD license described above generally apply to this license, as well, subject to certain modifications .
 
In addition to its ISP, ILD and landline licenses, Netvision holds (through its wholly owned subsidiary 013 Netvision) a 'network ending point' license to mainly install and maintain telecommunication equipment at a customer's premises or the licensee's premises, which include telephones, switchboards, telephony cables and related equipment as well as enables Netvision to connect a customer premises ,through other license holders, to the public landline network. The license is valid until July 2012 and can be renewed subject to certain conditions, including the license holder's compliance with the terms of the license.
 
In addition, as a service provider, Netvision is subject, like us, to the general legislation governing relations between vendors and consumers, including the Consumer Protection Law, 1981.
 
In August 2011, the Communications Law was amended pursuant to which the Early Termination Fees in the ILD and in the landline telephony market were annulled, which led and is expected to continue to lead to an increase in competition, churn rates and rate of gross recruitment of subscribers and price erosion.
 
 
In December 2011, the Ministry of Communications published a hearing regarding a proposed cancellation of the 'ADSL only' service and requiring Bezeq to set a unified tariff for ADSL services, whether the customer purchases another service form Bezeq or not, such tariff to include the relative cost of the access service.  If such change was adopted, it would facilitate Netvision's competitive standing in the landline market as it would allow the reduction of the access service costs.
 
 
C.   ORGANIZATIONAL STRUCTURE
 
  The IDB Group
 
Our largest shareholder, DIC, is a majority-owned subsidiary of IDB Development Corporation Ltd., or IDB Development, which in turn is a wholly-owned subsidiary of IDB Holding Corporation Ltd., or IDB, one of Israel’s largest business groups.  IDB and DIC are public Israeli companies traded on the Tel Aviv Stock Exchange. IDB Development ceased being a public company in 2009 following the acquisitions of all its shares that were held by the public, but its debentures continue to be traded on the TASE. See the footnote to the table under “Item 7.A – Major Shareholders” for information on the holdings in IDB.
 
Netvision and 013 Netvision, our wholly owned subsidiary and wholly owned indirect company, respectively, incorporated in Israel, are our only significant subsidiaries.
 
 
D.           PROPERTY, PLANT AND EQUIPMENT
 
Headquarters
 
In August 2003, we entered into a long-term agreement for the lease of our headquarters in Netanya, Israel.  The leased property covers approximately 57,800 square meters, of which approximately 26,000 square meters consist of underground parking lots.  The lease is in effect until December 31, 2019 and is renewable for two additional periods of five years each, upon our notice.
 
Central Laboratory
 
In October 2010, we entered into a long-term agreement for the enlargement of our current techno-logistic center, including our new central laboratory, in Netanya, Israel, and the lease thereof.  The leased property covers approximately 11,000 square meters.  The lease is for a term of ten years from August 2011 and is renewable for an additional period of 5 years, at our option. In case we do not exercise the option we shall be required to pay approximately NIS 11 million.
 
Netvision Properties
 
Netvision leases two main properties in Israel: one in Haifa and the other in Rosh-Ha'ayin. Netvision uses these properties for its offices, for its call centers, and for its network servers, as well as for equipment storage and until December 2011, has used them as headquarters as well. The Haifa lease covers approximately 8,900 square meters, is in effect until April 2017, and may be terminated by Netvision in April 2015 subject to prior notice. The Rosh-Ha'ayin lease covers approximately 8,400 square meters, is in effect until
 
 
December 2019, may be terminated by Netvision as of May 2013 by written notice and a certain compensation. Netvision intends to sublease part of the property in Rosh-Ha'ayin and is considering its steps regarding the property in Haifa.
 
Electricity
 
In December 2010, we entered into an agreement with Ashdod Energy Ltd., expected to construct a private power plant fueled by natural gas in Israel, by the end of 2013. Under the agreement we committed to purchase electricity for the earlier of a period of 15 years from commencement of operations of the power plant or until January 2028, subject to our right to terminate the agreement after 8 years from the commencement of operations of the power plant under certain conditions.
 
Service centers, points of sale and cell sites
 
As of December 31, 2011, we leased approximately 75 service centers, points of sale and other facilities (including those operated by our wholly owned dealer), which are used for marketing, sales and customer service. Lease agreements for our retail stores and service centers are generally for periods of two to three years, with extension options that vary by location.
 
In addition, we lease from various parties, including the Israeli Land Authority, or ILA, municipalities and private entities sites for the establishment, maintenance and operation of cell sites for our cellular network. The duration of these lease agreements varies and ranges, in most cases, from two to five years, with an option to extend the lease for successive similar periods. The lease agreements also differ from each other in aspects such as payment terms and exit windows that enable us to terminate the agreement prior to its scheduled expiration. In some of the agreements, the lessor is entitled to terminate the agreement at any time without cause, subject to prior notice.  Based on our past experience, we encounter difficulties in extending the term of approximately 7% of the lease agreements for cell sites, which at times results in our having to pay substantially higher rent in order to remain in the same locations or to find alternative sites.
 
In addition, Netvision leases a number of points of presence in Israel that are used for equipment and servers storage and storage of operators and other communications equipment for the provision of landline telephony services, and leases storage space for its servers and equipment in New York City, London and Frankfurt.
 
Authorization agreement with land regulatory authorities
 
In October 2005, we entered into an authorization agreement with the ILA (which manages the lands of the Development Authority and the Jewish National Fund) that authorizes us to use lands managed by the ILA for the establishment and operation of cell sites. The authorization agreement is effective until December 31, 2009 and the parties have agreed to extend it until December 31, 2010. We are currently negotiating the renewal of the agreement with the ILA, in light of the ILA's demand for increased consideration and we estimate that the agreement will be renewed. Any delay in the renewal of the agreement may cause a delay in the construction of new cell sites on the lands managed by the ILA.
 
The authorization agreement provides that subject to the receipt of approval from the ILA, we will be entitled to establish and operate cell sites on the lands leased to third parties throughout the agreement’s term. In connection with the authorization agreement we
 
 
undertook to vacate at the end of the agreement’s term all facilities installed in the authorized area unless the authorization period is extended.
 
Under the authorization agreement, the ILA is entitled to revoke authorizations granted to us in the event of changes in the designation of the land on which a cell site was erected, in the event that we violate a fundamental condition of the authorization agreement, in the event that the holders of rights in the properties on which we erected cell sites breach the agreements between them and the ILA and in the event that the land on which a cell site was erected is required for public use.
 

ITEM 4A.                       UNRESOLVED STAFF COMMENTS
 
None.
 

ITEM 2.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
The following operating and financial review and prospects should be read in conjunction with “Item 3. Key Information – A- Selected Financial Data” and our consolidated financial statements and accompanying notes appearing elsewhere in this annual report. Our financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRS, which differ in certain respects from U.S. Generally Accepted Accounting Principles, or U.S. GAAP.  Following our adoption of IFRS, as issued by the IASB, we are no longer required to reconcile our financial statements prepared in accordance with IFRS to U.S. GAAP.
 
In accordance with the instructions of the Israeli Accounting Standard No. 29, “Adoption of International Financial Reporting Standards (IFRS)”, which was published in July 2006, we have adopted IFRS as issued by the IASB, with effect from January 1, 2008, based upon the guidance in IFRS 1, "First-time adoption of IFRSs", and have prepared our financial statements according to IFRS.
 
This discussion contains forward-looking statements.  We have based these forward-looking statements on our current expectations and projections about future events.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under “Item 3. Key Information – D. Risk Factors” and elsewhere in this annual report.
 
A. OPERATING RESULTS
 
Overview
 
General
 
We are the largest provider of cellular communications services in Israel with approximately 3.349 million cellular subscribers as of December 31, 2011, with an estimated market share of 33.6%.
 
 
We earn revenues and generate our primary sources of cash by offering a broad range of communications services, including cellular, ISP, ILD and landline services. Our cellular services include basic and advanced cellular telephone services, text and multimedia messaging services and advanced cellular content and data services, which we provide through our network covering substantially all of the populated territory of Israel. We also provide international roaming services to our subscribers in 179 countries as of December 31, 2011 as well as to subscribers of foreign networks visiting Israel. We offer our subscribers a wide selection of handsets of various leading global manufacturers as well as extended warranty services. We have an advanced fiber-optic transmission infrastructure of approximately 1,600 kilometers. Together with our complementary microwave-based infrastructure, our fiber-optic infrastructure connects the majority of our cell sites with the remainder connected using supplemental transmission capacity leased from Bezeq, the incumbent landline operator. Having our own transmission network enables us to save substantial operating cash lease costs that would be associated with complete reliance on Bezeq’s infrastructure, although these savings are partially offset by maintenance costs and microwave spectrum fees.  It also allows us to sell transmission and data services to business customers and telecommunications operators. Following the receipt of our license to provide landline telephone services in Israel in 2006, we began to offer these services and as of February 2008, additional advanced landline services, through our NGN system, to selected landline business customers. Following the acquisition of Netvision in 2011, we are providing internet connectivity and related services (ISP) and landline telephony services consisting mainly of international calling services, operator services, teleconferencing services and landline telephony services.
 
Our management evaluates our performance through focusing on our key performance indicators, which include among others: number of cellular subscribers, cellular subscribers churn rate, average minutes of usage per cellular subscriber, or MOU, average revenue per cellular subscriber, or ARPU, EBITDA (as defined in “Results of Operations”), operating income and net income.  These key performance indicators are primarily affected by the competitive and regulatory landscape in which we operate and our ability to adapt to the challenges posed.
 
Our competitive landscape is characterized primarily by a highly penetrated cellular market. Competition is intense and attracting new subscribers and retaining existing subscribers has become increasingly difficult and costly. The competition in our market has further increased following the launch of Pelephone's UMTS/HSPA network in 2009 and regulatory and other changes in the market and has increased further following the compulsory reduction of Early Termination Fees in February 1, 2011. We expect competition to intensify further with the expected entry of additional competitors, including additional UMTS operators and MVNOs, and technologies and regulatory changes that would facilitate the entry of such competitors such as the reduction of interconnect tariffs, the reduction of Early Termination Fees and national roaming. Following our acquisition of Netvision, we compete in additional markets, including ISP and ILD services. We expect competition to intensify further following the formation of communications groups in Israel, that are expected to offer bundles of services, which are expected to entail further price erosion, more so if the Bezeq and Hot groups' bundle will include cellular services. Also, the offering of services by the Bezeq and Hot groups at tariffs significantly lower than prevailing market tariffs or at prices which would be below our costs for such services, by cross subsidizing with other services in which they have the capacity to monopolize the market, is expected to increase competition in those markets and lead to further price erosion and possible loss of market share by us.   See “Item 3. Key Information – D. Risk Factors  - We face intense
 
 
competition in all aspects of our business” and "Risks Related to our wholly owned subsidiary Netvision - Changes in the regulatory environment could adversely affect Netvision's business"  and “Item 4. Information on the Company – B. Business Overview – Competition” and "Netvision – ISP Business - Competition".
 
We intend to drive revenue growth primarily by: forming a leading Israeli telecommunications group, offering our customers full and comprehensive mobile and wireline solutions,   maintaining and enhancing our strong brand; retaining our existing subscribers; increasing our ARPU by offering new services that will complete our offering as a telecommunications group and provide growth engines that are synergetic to our core businesses, as well as growing and developing our mobile data and value added services and wireline services revenues; and attracting new subscribers. In particular, in addition to being an important factor in selecting a cellular provider, we believe that mobile data and other value-added services are a potential growth engine for increasing revenues.
 
The communications market and specifically the cellular industry are primarily regulated by the Ministry of Communications. See “Item 4. Information on the Company – B. Business Overview - Government Regulations.”  While our pricing is not generally regulated, certain of our rates and pricing mechanisms are subject to regulation. The annual reduction of interconnect tariffs by the Ministry of Communications between March 2005 and 2008, adversely affected our results and required us to find alternative sources of revenues to compensate for these reductions. The additional reduction of interconnect tariffs, beginning January 1, 2011, (for details see “Item 4. Information on the Company – B. Business Overview – Government Regulations – Tariff Supervision”) had a material adverse effect on our results in 2011 and is expected to continue to adversely affect our results in the future. We have taken and intend to continue taking measures to reduce for the expected adverse effects of  this tariff reduction, through revenue enhancement as well as cost reduction measures, but cannot assure that these will be successful.
 
Commencing January 1, 2009, our license prevents us from raising tariffs to non-business customers having an obligation to purchase our services for a predefined period during such period and as of February 2011, we were required to reduce Early Termination Fees to a negligible amount in the cellular market and as of November 2011, cannot charge any Early Termination Fees for other communications services, under an amendment to the Communication Law, which applies to existing as well as new pricing plans. The reduction of Early Termination Fees in the cellular market and the expected entry of additional competitors due to materially increased gross recruitment of subscribers have led to the offering of packages at lower average revenue per minute and resulted in accelerated price erosion, materially increased churn rate and increased acquisition and retention costs due to materially increased gross recruitment rate . Furthermore, these adverse changes were  accompanied by materially increased sales of handsets, which caused a decrease in our free cash flow, due to an increase in the immediate payment to vendors for handset purchases, as opposed to spreading the consideration when these handsets are sold to our subscribers (usually in installments over a period of thirty six months). We expect further price erosion following the expected entry of additional competitors, services bundle offering, more so if the Bezeq and Hot groups' bundle will include cellular services and by the offering of services by the Bezeq and Hot groups at tariffs significantly lower than market tariffs, as they have begun offering in February 2012. See additional details under “Item 3. Key Information – D. Risk Factors  - We face intense competition in all aspects of our business” and "Risks Related to our wholly owned subsidiary Netvision - Changes in the regulatory environment
 
 
could adversely affect Netvision's business" and "Item 4. Information on the Company – B. Business Overview – Government Regulations – Tariff Supervision." We took steps to address the effects of these amendments through revenue enhancement as well as cost reduction measures, but cannot assure that these will be successful.
 
The construction and operation of our cell sites and other transmission facilities are highly regulated and require us to obtain various consents and permits. See “Item 4. Information on the Company – B. Business Overview - Government Regulations—Permits for Cell Site Construction.” We have experienced difficulties in obtaining some of these consents and permits, particularly in obtaining building permits for cell sites from local planning and building authorities and as of September 2010, cannot rely on the exemption from obtaining a building permit due to an interim order issued by the Israeli Supreme Court to that effect, except for the replacement of existing radio access devices under certain conditions. Also, we may be operating a significant number of our cell sites in a manner not fully compatible with the building permits issued for them. However, even though 18 criminal and administrative proceedings (with three cell sites subject to a demolition order) are outstanding as of December 31, 2011, we do not expect that the demolition of these facilities would have a material impact on our results of operations and financial condition. Additional restrictions on the construction and operation of cell sites and other facilities may be enacted by amendment to the Non-Ionizing Radiation Law and Regulations. If such restrictions are subsequently adopted, they will, among other things, limit our ability to construct new sites and renew operating permits for many of our existing sites, especially in residential areas, will adversely affect our existing networks and networks build out, specifically in urban areas, and could adversely affect our results of operations.  National Zoning Plan 36 is in the process of being revised. If proposed changes are approved, they will harm our ability to construct new cell sites, make the process of obtaining building permits for the construction and operation of cell sites more cumbersome and costly, could adversely affect our existing network, and may delay the future deployment of our network.  Moreover, if we are unable to obtain or renew consents and permits or rely on exemptions from obtaining permits for our existing sites or other facilities, we will be required to demolish or relocate these cell sites and facilities. Our inability to relocate cell sites or other facilities in a timely manner and/or our inability to obtain the permits and consents for new cell sites, or rely on exemptions, could adversely affect our existing network resulting in the loss of subscribers, prevent us from meeting the networks coverage and quality requirements contained in our license and adversely impact our networks build-out, all of which may have a material adverse result on our results of operations and financial condition.
 
Our profitability is also affected by other factors, including changes in our cost of revenues and selling, general and administrative expenses, including depreciation and finance expenses.
 
Our results are also impacted by currency fluctuations.  While substantially all of our revenues are denominated in NIS, for 2011, approximately 39% of cash outflow was denominated in, or linked to, other currencies, mainly U.S. dollars.  These payments included capital expenditures, some cell site rental fees and payments for equipment including handset suppliers. Changes to the Israeli CPI, may also impact our results as our debentures (excluding Series E) and some of our expenses are linked to the Israeli CPI.  Any devaluation of the NIS against the U.S. dollar or other foreign currencies will therefore increase the NIS cost of our expenses that are not denominated in NIS or are linked to those currencies and any increase in the Israeli CPI will increase the financial expenses associated with our
 
 
debentures.  We enter into derivative instruments to mitigate the effect of the various market risks associated with these expenses.  See “Item 11 - Quantitative and Qualitative Disclosures About Market Risk.”
 
Further, from late 2005 we incurred significant debt by issuing debentures, the aggregate outstanding principal amount of which as of December 31, 2011 was NIS 6,035 million.  See ““—Liquidity and Capital Resources—– A. Debt Service – Public Debentures”.
 
In February 2006, our Board of Directors adopted a policy to distribute each year at least 75% of our annual net income. Our net income was determined under Israeli GAAP for periods until December 31, 2007 and for periods commencing on or after January 1, 2008, is determined under IFRS, following the adoption of IFRS in accordance with the Israeli Accounting Standard No. 29 “Adoption of International Financial Reporting Standards”. In March 2007, our Board resolved to distribute dividends within the boundaries of the February 2006 dividend policy and until resolved otherwise, on a quarterly basis. In March 2012, in connection with our plans to raise additional debt, we undertook limitations on our dividend distributions. See “Item 8. Financial Information – A. Statements and Other Financial Information - Dividend Policy” and “— B. Liquidity and Capital Resources—Dividend payments.” and "- Debt Service –Shelf Prospectus".
 
Recent Developments
 
Acquisition of Netvision Ltd.
 
On August 31, 2011, we completed the acquisition of 100% of the share capital of Netvision for a total consideration of approximately NIS 1.57 billion ($411 million) pursuant to a merger agreement dated June 15, 2011, by and among our Company, Netvision and a wholly owned subsidiary of our Company, which we formed solely for effecting the merger transaction. Following the consummation of the merger transaction, Netvision became a wholly owned subsidiary of our Company. We funded the acquisition of Netvision through a combination of available cash and issuance of additional debentures from our existing Series D and Series E debenture series on the TASE. The offerings described above were made in Israel to residents of Israel only. For further details, see "Item 5. B – Operating and Financial Review and Prospects – Liquidity and Capital Resources". For Additional details see "Item 4. Information on the Company - Significant Developments During 2011."
 
Since the acquisition of Netvision's share capital was completed on August 31, 2011, the consolidated results for the year ended December 31, 2011, included elsewhere in this annual report, include Netvision's results for the months of September through December 2011 only.
 
Revenues
 
We derive our revenues primarily from the sale of cellular network services (such as airtime), handsets and other services, including content and value added services, extended handset warranties and the provision of transmission and landline services.  Revenues from airtime are derived from cellular subscribers originating calls on our network and from interconnect revenues from other operators for calls terminating on our network. Revenues also include roaming charges that we
 
 
bill to our subscribers for the use of the networks of our roaming partners outside Israel, to which we refer as outbound roaming, and charges that we bill to our roaming partners whose subscribers use our network, to which we refer as inbound roaming.
 
Since the acquisition of Netvision, we also derive our revenues from the provision of internet connectivity and related services (ISP); and provision of telephony services consisting mainly of international calling services, operator services, teleconferencing services and landline telephony services. In addition, Netvision's revenues are also derived from additional business activities such as internet content services and custom internet applications.
 
Our revenues from cellular services are usually affected by seasonality. The third quarter of the year is usually the strongest quarter with the highest revenues, since it occurs in the summer season,  characterized by longer daylight hours (facilitating higher airtime usage) and increased incoming and outgoing tourism (facilitating higher roaming revenues). The fourth quarter of the year is usually the weakest quarter with lower revenues, since the Jewish holiday season, characterized by reduced usage, usually occurs in this quarter, and since it occurs in the fall-winter seasons, characterized by shorter daylight hours (resulting in lower airtime usage).
 
Cost of revenues
 
The principal components of our cost of revenues are interconnect fees, the purchase of handsets, accessories, equipment and spare parts, content cost, cell site leasing costs, transmission services cost, the purchase of call minutes related mainly to international call services, outbound roaming services fees, royalty payments to the government of Israel, salaries and network development and maintenance. Our cost of revenues also includes depreciation of the cost of our network equipment and amortization of our spectrum licenses and capitalized handset subsidies.  See “—Application of Critical Accounting Policies and Use of Estimates—Long-lived assets - depreciation.”
 
Selling and marketing expenses
 
Selling and marketing expenses consist primarily of sales force salaries and commissions, advertising, public relations and promotional expenses.  We compensate our sales force through salaries and incentives. Our selling and marketing expenses also include depreciation, mainly of leasehold improvements and equipment in our service centers and points of sales and amortization of capitalized sales commissions, as well as amortization of intangible assets related to the acquisition of Netvision. 
 
General and administrative expenses
 
General and administrative expenses consist primarily of salaries and compensation, professional and consultancy fees, leases and maintenance of our offices, bad debt and doubtful accounts allowance, and other administrative expenses. Our general and administrative expenses also include depreciation and maintenance fees, mainly for our billing and information systems.
 
Other income and expenses
 
Other income and expenses consist primarily of capital gains or losses from sale and disposal of capital assets.
 
 
Financing income and expenses
 
Financing income and expenses consist primarily of interest expense on long-term and short-term loans and interest on our debentures, the interest income component of handset long-term installment sales, the effects of fluctuations in currency exchange rates, Israeli CPI adjustments related to the Israeli CPI-linked debentures and other expenses, and income or losses relating to financial derivative instruments that do not qualify for hedge accounting according to IFRS. Financing income and expenses also include gains and losses from our current investment in tradable securities.
 
Income Tax
 
Generally, Israeli companies were subject to Corporate tax on their taxable income at the rate of 25% for the 2010 tax year which decreased to 24% for the 2011 tax year. Israeli companies are subject to capital gains tax at the Corporate tax rate. A deferred tax asset or liability is created for temporary differences between income recognized for tax purposes and for accounting purposes.
 
In December 2011, the Israeli Income Tax Ordinance was amended following the tax recommendations of the Israeli public committee for socio-economic reform. The amendment includes, among other things, cancelation of the previously scheduled reduction in the corporate tax rate, so that the corporate tax rate will increase to 25% commencing January 1, 2012  and will remain at such rate for future tax years (corporate tax rate for 2011 was 24% and was  scheduled to gradually decrease to 18% by 2016). Following this amendment, we incurred a one-time deferred tax expense in the amount of approximately NIS 33 million, as a result of an increase in deferred tax liability.
 
Results of Operations - Comparison of 2009, 2010 and 2011
 
The following table sets forth key performance indicators for the periods indicated:
 
   
Year Ended December 31,
   
Change*
 
   
2009
   
2010
   
2011
   
2010 vs. 2009
   
2011 vs. 2010
 
Subscribers at end of period(1) (in thousands)
    3,292       3,394       3,349       3.1 %     (1.3 %)
Period churn rate(1)(2)
    19.6 %     20.5 %     25.1 %  
0.9pp
 
4.6pp
Average monthly usage per subscriber (MOU) (in minutes)(1)(3)
    331       335       346       1.2 %     3.3 %
Average monthly revenue per subscriber (ARPU) (1)(4) (in NIS)
    144       144       106       -       (26.3 %)
Operating income (in NIS millions)
    1,768       1,938       1,422       9.6 %     (26.6 %)
Net income (in NIS millions)
    1,182       1,291       825       9.2 %     (36.1 %)
EBITDA(5) (in NIS millions)
    2,529       2,667       2,167       5.5 %     (18.7 %)
Operating income margin(6)
    27.3 %     29.1 %     21.9 %  
1.8pp
   
(7.2)pp
EBITDA margin(7)
    39.0 %     40.0 %     33.3 %  
1.0pp
   
(6.7)pp
 
*
pp denotes percentage points and this measure of change is calculated by subtracting the 2009 measure from the 2010 measure and the 2010 measure from the 2011 measure, respectively.
 
 (1)
Cellular subscriber data refers to active subscribers. We use a six-month method of calculating our cellular subscriber base, which means that we deduct subscribers from our subscriber base after six months of no revenue generation or activity on our network by or in relation to both the post-paid and pre-paid subscriber.  The six-month method is, to the best of our knowledge, consistent with the methodology used by other cellular providers in Israel. During the fourth quarter of 2011, we have removed approximately 52,000 subscribers from our subscribers base, following the shutdown of our TDMA network as of December 31, 2011, since such subscribers have not requested a transfer to our other networks as of that date, and following a change to our previous policy which allowed subscribers to change from post to prepaid subscription as a result of the reduction of Early Termination Fees in the cellular market in early 2011, as we found this change to be futile since most of those customers ceased using our services. These changes affected other key performance indicators. We have not restated prior subscriber data to conform with these changes.
 
 (2)
Churn rate is defined as the total number of voluntary and involuntary permanent deactivations of cellular subscribers in a given period expressed as a percentage of the number of cellular subscribers at the beginning of such period.  Involuntary permanent deactivations
 
 
relate to cellular subscribers who have failed to pay their arrears for the period of six consecutive months.  Voluntary permanent  deactivations relate to cellular subscribers who terminated their use of our services.
 
(3)
Average monthly minutes of use per cellular subscriber (MOU) is calculated by dividing the total billable minutes (of outgoing and incoming cellular calls from other networks, excluding roaming usage) during the month, by the average number of cellular subscribers during such month, and by dividing the sum of such results for all months in the reported period by the number of months in the period.
 
(4)
Average monthly revenue per cellular subscriber (ARPU) is calculated by dividing revenues from cellular services for the period by the average number of cellular subscribers during the period and by dividing the result by the number of months in the period.  Revenues from inbound roaming services are included even though the number of subscribers in the equation does not include the users of those roaming services.  Inbound roaming services are included because ARPU is meant to capture all service revenues generated by a cellular network, including roaming services.  Revenues from sales of extended warranties are included because they represent recurring revenues generated by subscribers, but revenues from sales of handsets, repair services, and other services are not.  We, and industry analysts, treat ARPU as a key performance indicator of a cellular operator because it is the closest meaningful measure of the contribution to service revenues made by an average subscriber.
 
 
We have set out below the calculation of ARPU for each of the periods presented:
 
   
Year Ended December 31,
 
   
2009
   
2010
   
2011
 
   
(In NIS millions, except number of subscribers and months)
 
       
Revenues
    6,483       6,662       6,506  
less revenues from equipment sales 
    751       802       1,747  
less other revenues*
    162       124       484  
                         
Revenues used in ARPU calculation  (in NIS millions)
    5,570       5,736       4,275  
Average number of subscribers
    3,215,492       3,322,891       3,361,803  
Months during period
    12       12       12  
ARPU (in NIS, per month)
    144       144       106  
 
*
Other revenues include revenues from other communication services such as ISP, transmission services and local and international landline services and repair services.
 
 (5)
EBITDA is a non-IFRS measure and is defined as income before financing income (expenses), net; other income (expenses), net; income tax; depreciation and amortization; share based payments.  We present EBITDA as a supplemental performance measure because we believe that it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structure (most particularly affecting our interest expense given our significant debt), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age of, and depreciation expenses associated with fixed assets.  EBITDA should not be considered in isolation or as a substitute for operating income or other statement of operations or cash flow data prepared in accordance with IFRS as a measure of our profitability or liquidity.  EBITDA does not take into account our debt service requirements and other commitments, including capital expenditures, and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. In addition, EBITDA, as presented in this annual report, may not be comparable to similarly titled measures reported by other companies due to differences in the way these measures are calculated.
 
The following is a reconciliation of EBITDA with net income and operating income:
 
   
Year Ended December 31,
   
   
2009
   
2010
   
2011
   
(In NIS millions)
   
Net income
    1,182       1,291       825  
Financing expenses, net
    219       230       293  
Income taxes
    367       417       304  
Operating income
    1,768       1,938       1,422  
Other expenses (income), net
    6       5       1  
Depreciation and amortization
    755       724       738  
Share based payments
    -       -       6  
EBITDA
    2,529       2,667       2,167  

(6)
Operating income margin is defined as operating income as a percentage of total revenues for each of the applicable periods.
 
(7)
EBITDA margin is defined as EBITDA as a percentage of total revenues for each of the applicable periods.
 
 
The following table sets forth our selected consolidated statements of operations as a percentage of total revenues from operations for the periods indicated:
 
   
Year Ended December 31,
 
   
2009
   
2010
   
2011
 
Revenues
    100.0 %     100.0 %     100.0 %
Cost of revenues
    51.4 %     49.9 %     52.4 %
Gross profit
    48.6 %     50.1 %     47.6 %
Selling and marketing expenses
    11.0 %     11.3 %     15.2 %
General and administrative expenses
    10.2 %     9.6 %     10.5 %
Other (income) expenses, net
    0.1 %     0.1 %     -  
Operating income
    27.3 %     29.1 %     21.9 %
Financing expenses, net
    3.4 %     3.5 %     4.5 %
Income before income tax
    23.9 %     25.6 %     17.4 %
Income tax
    5.7 %     6.2 %     4.7 %
Net income
    18.2 %     19.4 %     12.7 %
 
Revenues
 
   
Year Ended December 31,
   
Change
 
   
2009
   
2010
   
2011
   
2010 vs. 2009
   
2011 vs. 2010
 
   
(In NIS millions)
             
 
Revenues
    6,483       6,662       6,506       2.8 %     (2.3 %)

The decrease in revenues in 2011 is attributed to a 18.8% decrease in revenues from services as a result of the regulatory changes implemented in early 2011 and the increased competition, which resulted in significant airtime price erosion. The decrease in revenues from services was partially offset by a 117.8% increase in equipment revenues in 2011, as well as by Netvision's revenues (for the period from September through December 2011) in the amount of NIS 374 million (excluding inter-company revenues), which are consolidated for the first time.
 
The increase in revenues in 2010 was mainly due to a 26% increase in revenues from content and value added services (including SMS), an increase in revenues from landline services as well as an increase in roaming revenues. The increase in revenues has also resulted from a 6.8% increase in equipment revenues. These increases were partially offset by a decrease in revenues from domestic voice services, mainly due to the ongoing airtime price erosion, and by a one-time provision for a refund to all our subscribers in a total amount of approximately NIS 66 million ($19 million) related to a major network malfunction we experienced in December 2010.
 
The following table sets forth the breakdown of our revenues for the periods indicated based on the various sources thereof:
 
 
 
   
 * 2009
   
* 2010
     
2011
 
   
Revenues
   
% of Total Revenues
   
Revenues
   
% of Total Revenues
   
Revenues
   
% of Total Revenues
 
   
(NIS in millions)
         
(NIS in millions)
         
(NIS in millions)
       
Cellular voice services:
                                   
Outgoing air time**
    2,953       45.5 %     2,760       41.4 %     2,167       33.3 %
Incoming air time
    1,178       18.2 %     1,272       19.1 %     398       6.1 %
Roaming
    340       5.3 %     358       5.4 %     314       4.8 %
Total cellular voice services
    4,471       69.0 %     4,391       65.9 %     2,879       44.2 %
Cellular content and value added services***
    882       13.6 %     1,112       16.7 %     1,167       17.9 %
Internet services (ISP)
    -       -       -       -       216       3.3 %
International long distance services
    -       -       -       -       96       1.5 %
Other services****
    379       5.8 %     357       5.4 %     401       6.2 %
Total services
    5,732       88.4 %     5,860       88.0 %     4,759       73.1 %
Equipment
    751       11.6 %     802       12.0 %     1,747       26.9 %
Total
    6,483       100.0 %     6,662       100.0 %     6,506       100.0 %
 
*
Reclassified (mainly reclassification of fixed monthly subscription fees from other services to outgoing air time)
 
**
Including air time packages, interconnect fees and fixed monthly subscription fees.
 
***
Consists of content services, text messages and data services.
 
****
Consists of extended warranty fees, transmission services, landline services and others.
 
During 2011, revenues from services (comprising 73.1% of total revenues) decreased by approximately 19%, compared with 2010. This decrease in revenues from services resulted mainly from a significant decrease in interconnect fees paid to us by other local operators, due to the reduction in interconnect tariffs as of January 1, 2011 and the reduction in Early Termination Fees due to the regulatory changes, as well as from the ongoing airtime price erosion, due to the increased competition in the market. These decreases were partially offset by an increase of 4.9% in cellular content and value added services revenues in 2011, as well as by Netvision's revenues from services (for the period from September 1 through December 31, 2011) in the amount of NIS 339 million (excluding inter-company revenues), which are consolidated for the first time.
 
During 2010, revenues from services (comprising 88.0% of total revenues) increased by approximately 2%, compared with 2009.  This increase in revenues from services resulted mainly from an increase in our subscriber base of approximately 3.1% (mainly among post-paid subscribers), an increase in revenues from cellular content and value added services, as well as an increase in revenues from landline services and roaming services. These increases were partially offset by the ongoing airtime price erosion and the one- time provision for a refund to all our subscribers related to a major network malfunction we experienced in December 2010.
 
During 2010 and 2011, revenues from cellular content and value added services increased by approximately 26% and 5%, respectively compared with the previous respective years, mainly as a result of the growth in content services and sales of data packages, which is significantly attributable to the growth of our 3G cellular subscriber base. As a percentage of service revenues (excluding Netvision's service revenues), revenues from cellular content and value added services increased from 15.4% in 2009 to 19% in 2010 and to 26.4% in 2011, and as percentage of total revenues (excluding Netvision's revenues), from 13.6% in 2009 to 16.7% in 2010 and 19% in 2011.
 
During 2011, revenues from other services increased by 12.3%, compared with 2010. This increase resulted mainly from the one-time provision recorded in the fourth quarter of 2010 for a refund in the total amount of NIS 66 million to all our subscribers related to a major network malfunction we experienced in December 2010, which was partially offset by a decrease in fixed monthly subscription fees. As a percentage of total revenues, revenues from other services increased to 6.2% in 2011 from 5.4% in 2010.
 
During 2010, revenues from other services decreased by 5.8%, compared with 2009. This decrease resulted mainly from a decrease in fixed monthly subscription fees and the one-
 
 
time provision for a refund in the total amount of NIS 66 million to all our subscribers related to a major network malfunction we experienced in December 2010, which was partially offset by an increase in revenues from landline services and extended warranty. As a percentage of total revenues, revenues from other services decreased to 5.4% in 2010 from 5.8% in 2009.
 
During 2011, equipment revenues (comprising 26.9% of total revenues) increased by 117.8% compared with 2010.  This increase in equipment revenues resulted from an increase in the number of cellular handsets sold during 2011 compared to 2010, as well as from a change in the mix of handsets sold, in favor of smartphones and advanced 3G handsets. The increase in the number of handsets sold resulted from the accelerated competition following the regulatory changes. The increase in equipment revenues also resulted from an increase in accessories sales in 2011 compared to 2010. Netvision's equipment revenues (for the period from September 1 through December 31, 2011) in the amount of NIS 35 million, which are consolidated for the first time, also contributed to the increase in equipment revenues.
 
During 2010, equipment revenues (comprising 12% of total revenues) increased by 6.8% compared with 2009.  This increase primarily resulted from an increase in the average handset sale price, an increase in accessories sales, following the acquisition of Dynamica's operation, as well as an increase in the amount of modems and laptops sold during the year compared with 2009. These increases were partially offset by a decrease in the total amount of handsets sold during 2010 compared with 2009.
 
The following table sets forth the breakdown of our revenues for the periods indicated based on the types of subscribers:
 
     
2009
     
2010
     
2011
 
     
Revenues
     
% of Total Revenues
     
Revenues
     
% of Total Revenues
     
Revenues
     
% of Total Revenues
 
     
(NIS in millions)
           
(NIS in millions)
             
(NIS in millions)
         
Individual
    4,775       73.7 %     4,917       73.8 %     4,727       72.7 %
Business
    1,622       25.0 %     1,649       24.8 %     1,686       25.9 %
Other*
    86       1.3 %     96       1.4 %     93       1.4 %
Total
    6,483       100.0 %     6,662       100.0 %     6,506       100.0 %
 
*
Consists of revenues from inbound roaming services and other services.
 
A breakdown of revenues according to types of subscribers (individual and business) during 2011 shows an approximately 3.9% decrease, compared with 2010, in revenues attributable to individual subscribers, which resulted mainly from a decrease in revenues attributed to the significant decrease in interconnect fees paid to us by other local operators, due to the reduction in interconnect tariffs as of January 1, 2011, as a result of the reduction of cellular Early Termination Fees, as well as from the ongoing price erosion, which was partially offset by increased usage and by Netvision's revenues, which are consolidated for the first time. Revenues attributable to business subscribers increased in 2011 by 2.2%, compared with 2010, mainly due to Netvision's revenues from business customers, which are consolidated for the first time. This increase in revenues attributable to business customers was partially offset by the decrease in interconnect fees and the ongoing price erosion. Other revenues decreased 3.1% in 2011 compared with 2010, mainly due to a decrease in revenues from inbound roaming services.
 
A breakdown of revenues according to types of subscribers (individual and business) during 2010 shows an approximately 3% increase, compared with 2009, in revenues
 
 
attributable to individual subscribers, which resulted mainly from a higher subscriber base and increased usage. Revenues attributable to business subscribers increased in 2010 by 2%, compared with 2009, mainly as a result of an increase in landline services. Other revenues increased 7% in 2010 compared with 2009, mainly due to an increase in revenues from inbound roaming services, which resulted from an improvement in incoming tourism.
 
The following table sets forth the breakdown of our revenues for the periods indicated based on the types of subscription plans:
 
   
2009
   
2010
   
2011
 
   
Revenues
   
% of Total Revenues
   
Revenues
   
% of Total Revenues
   
Revenues
   
% of Total Revenues
 
   
(NIS in millions)
         
(NIS in millions)
         
(NIS in millions)
       
Pre-paid
    657       10.1 %     675       10.1 %     488       7.5 %
Post-paid
    5,741       88.6 %     5,891       88.5 %     5,925       91.1 %
Other*
    86       1.3 %     96       1.4 %     93       1.4 %
Total
    6,483       100.0 %     6,662       100.0 %     6,506       100.0 %
 
 
* Consists of revenues from inbound roaming services and other services.
 
A breakdown of revenues according to types of subscription plans (pre-paid and post-paid) shows that the decrease in revenues in 2011 compared with 2010 resulted mainly from pre-paid subscribers. This decrease was primarily the result of the significant decrease in interconnect fees paid to us by other local operators, due to the reduction in interconnect tariffs as of January 1, 2011. The increase in revenues attributed to post-paid subscribers was mainly due to an increase in revenues from equipment sales and due to Netvision's revenues from post-paid customers, which are consolidated for the first time. These increases were partially offset by the significant decrease in interconnect fees, the reduction of cellular Early Termination Fees, as well as by the ongoing airtime price erosion, due to the increased competition in the market.
 
A breakdown of revenues according to types of subscription plans (pre-paid and post-paid) shows that the increase in revenues in 2010 compared with 2009 resulted mainly from post-paid subscribers. This increase was primarily the result of an increase in usage of content and value-added services and in landline services, as well as from the expansion of our subscriber base. The revenues attributed to both pre-paid and post-paid subscribers also benefited from an increase in revenues from equipment sales.
 
Cost of revenues and gross profit
 
   
Year Ended December 31,
   
Change
 
   
2009
   
2010
   
2011
   
2010 vs. 2009
   
2011 vs. 2010
 
   
(In NIS millions)
             
Cost of revenues-services
    2,643       2,671       2,126       1.1 %     (20.4 %)
Cost of revenues-equipment
    690       651       1,282       (5.7 %)     96.9 %
Total cost of revenues
    3,333       3,322       3,408       (0.3 %)     2.6 %
Gross profit
    3,150       3,340       3,098       6.0 %     (7.2 %)
 
The decrease in services cost of revenues in 2011 compared with 2010, resulted from a significant decrease in total interconnect fees paid to other local cellular operators following the reduction in interconnect tariffs as of January 1, 2011. The decrease in services cost of revenues also resulted from a decrease in depreciation and amortization expenses. These decreases were partially offset by Netvision's services cost of revenues (for the period from
 
 
September 1 through December 31, 2011) in the amount of NIS 237 million (excluding inter-company expenses), which is consolidated for the first time.
 
The increase in services cost of revenues in 2010 compared with 2009, resulted mainly from an increase in interconnect fees due to an increase in the number of outgoing calls completed in other operators' networks and an increase in cost of content and value-added services due to increased usage. These increases were partially offset mainly by a decrease in roaming related expenses due to improved roaming agreements with foreign operators, in depreciation expenses and in royalties paid to the Ministry of Communications resulting from a decline in the royalties' rate. The increases were also offset in part by a decrease in the cost of handsets repair services due to a more efficient handsets repair process, and by the reversal of a one-time provision, which was recorded in 2009, in the amount of NIS 15 million related to a dispute with the Ministry of Communications regarding frequencies fees, following the Israeli Supreme Court's ruling in our favor in that matter.
 
The increase in equipment cost of revenues in 2011 compared with 2010, resulted primarily from a significant increase in cellular handsets cost resulted mainly from an increase in the number of handsets sold during 2011 compared with 2010, as well as from a change in the mix of handsets sold, in favor of smartphones and advanced 3G handsets. Netvision's equipment cost of revenues (for the period from September 1 through December 31, 2011) in the amount of NIS 27 million, which is consolidated for the first time, also contributed to the increase in equipment cost of revenues.
 
The decrease in equipment cost of revenues in 2010 compared with 2009, resulted primarily from a decrease in the average handset cost due to, among others, increased efficiency in handsets purchase, as well as a decrease in the total amount of handsets sold during 2010 compared with 2009.
 
The decrease in gross profit in 2011 compared with 2010, resulted mainly from the significant decrease in interconnect fees paid to us by other local operators, the reduction of cellular Early Termination Fess, and the ongoing price erosion, which was partially offset by increased handsets sales.
 
The increase in gross profit in 2010 compared with 2009, resulted mainly from increases in revenues from content and value added services and in revenues from landline services. The increase also benefited from an increase in the profitability of handsets sales. These increases were partially offset by the ongoing airtime price erosion.
 
Selling and marketing expenses and general and administrative expenses
 
   
Year Ended December 31,
   
Change
 
   
2009
   
2010
   
2011
   
2010 vs. 2009
   
2011 vs. 2010
 
   
(In NIS millions)
             
Selling and marketing expenses
    716       756       990       5.6 %     31.0 %
General and administrative expenses
    660       641       685       (2.9 %)     6.9 %
Total
    1,376       1,397       1,675       1.5 %     19.9 %

The increase in selling and marketing expenses in 2011 compared with 2010, reflects primarily the impact of the regulatory changes, resulting in an increase in the number of customers' queries to our sales and service centers, which led to an increase in our sales and customer service force leading to an increase in payroll expenses, as well as an increase in sales commissions. The increase in sales commissions also resulted from an increase in the
 
 
number of sales transactions in 2011 compared with 2010. Netvision's selling and marketing expenses (for the period from September 1 through December 31, 2011) in the amount of NIS 79 million, which are consolidated for the first time, also contributed to the increase in selling and marketing expenses. These increases were partially offset by a decrease in amortization expenses related to capitalized sales commissions resulted from ceasing the capitalization of these commissions due to the absence of the required accounting conditions for such capitalization, following the regulatory change in relation to the reduction of Early Termination Fees.
 
The increase in selling and marketing expenses in 2010 compared with 2009, primarily resulted from an increase in our sales and customer service workforce, due to, among others, the acquisition of Dynamica's operation, one of our major dealers, which led to an increase in payroll expenses and rent expenses. These increases were partially offset by a decrease in sales commissions, due to the acquisition of Dynamica's operation, and in advertising expenses.
 
The increase in general and administrative expenses in 2011 compared with 2010, primarily resulted from Netvision's general and administrative expenses (for the period from September 1 through December 31, 2011) in the amount of NIS 34 million, which are consolidated for the first time, as well as from an increase in consulting expenses related to the merger of Netvision. These increases were partially offset by a decrease in bad debts and doubtful accounts expenses.
 
The decrease in general and administrative expenses in 2010 compared with 2009, primarily resulted from a decrease in depreciation and amortization expenses, mainly related to software and information systems, which was partially offset by an increase in allowance for doubtful accounts.
 
Other income (expenses), net
 
   
Year Ended December 31,
 
   
2009
   
2010
   
2011
 
   
(In NIS millions)
Other expenses, net
    6       5       1  
 
Other expenses in 2009, 2010 and 2011 consisted mainly of capital losses which resulted from deletion of certain equipment items.
 
Financing expenses, net
 
   
Year Ended December 31,
   
2009
   
2010
   
2011
 
   
(In NIS millions)
Financing expenses
    (370 )     (336 )     (409 )
Financing income
    151       106       116  
Financing expenses, net
    (219 )     (230 )     (293 )
                         
 
Financing Expenses, net, for 2011 increased 27.4% compared with 2010. The increase resulted mainly from increased interest expenses and Israeli Consumer Price Index (CPI) linkage expenses, associated with the Company's debentures, in 2011, compared with 2010, due to the higher debt level following the issuance of additional debentures in 2011. The increase in financing expenses, net, also resulted from an increase in losses from expenses in 2011 from foreign currency exchange differences related to trade payables, which resulted
 
 
from a depreciation of 7.7% of the NIS against the US dollar, compared to income from foreign currency exchange differences in 2010, which resulted from an appreciation of 6% of the NIS against the US dollar in that year. These increases were partially offset by an increase in interest income, associated with handsets sales, as well as an increase in deposit interest income in 2011 compared with 2010, due to higher deposits balance and increased interest rate.
 
Financing expenses, net, for 2010 increased 5% compared with 2009. The increase was primarily due to losses from our hedging portfolio, compared with gains from this hedging portfolio in 2009: (1) a loss from currency hedging transactions in 2010 due to a 6% appreciation of the NIS against the US dollar in 2010 compared with only 0.7% appreciation in 2009; (2) a loss from Israeli Consumer Price Index (CPI) hedging transactions in 2010 due to decreased inflation. The increase in financing expenses, net, was partially offset by a decrease in CPI linkage expenses associated with our CPI linked debentures due to the decreased inflation rate of 2.3% in 2010 compared with 3.8% in 2009, as well as by a net gain on our current investment in publicly traded debt securities in 2010. The increase was also offset in part by a one-time financing income in the amount of approximately NIS 12 million recorded in the fourth quarter of 2010, related to a dispute with the Ministry of Communications regarding frequencies fees, following the Israeli Supreme Court's ruling in our favor in that matter.
 
Interest and CPI linkage expenses associated with the principal amount of the debentures incurred during 2009, 2010 and 2011 were approximately NIS 370 million, NIS 310 million and NIS 377 million, respectively.
 
Income tax
 
   
Year Ended December 31,
   
Change
 
   
2009
   
2010
   
2011
   
2010 vs. 2009
   
2011 vs. 2010
 
   
(In NIS millions)
             
Income tax
    367       417       304       13.6 %     (27.1 %)
                                         
 
Income tax for 2011 decreased 27.1% compared with 2010. The decrease in income tax mainly resulted from a decrease in income before income tax, as well as from the decreased corporate tax rate of 24% in 2011 compared with 25% in 2010. These decreases were partially offset by an increase in deferred tax liabilities and the recognition of a one-time tax expense of approximately NIS 33 million recorded in the fourth quarter of 2011, following an amendment to the tax ordinance, so that corporate tax rate will increase to 25% commencing January 1, 2012 (whereas corporate tax rate was supposed to gradually decrease from 24% in 2011 to 18% by 2016).
 
Income tax for 2010 increased 13.6% compared with 2009. The increase resulted from the reduction of deferred tax liabilities and the recognition of a one-time tax income of approximately NIS 41 million recorded in the third quarter of 2009, due to the enactment in July 2009 of the Economic Efficiency Improvement Law, which provided, among others, for an additional gradual reduction of the Corporate tax rate from 25% for the 2010 tax year down to 18% for the 2016 tax year and thereafter. The increase in income tax resulted also from an increase in income before income tax, which was partially offset by the decreased Corporate tax rate of 25% in 2010 compared with 26% in 2009.
 
 
Net income
 
   
Year Ended December 31,
   
Change
 
   
2009
   
2010
   
2011
   
2010 vs. 2009
   
2011 vs. 2010
 
   
(In NIS millions)
             
Net income
    1,182       1,291       825       9.2 %     (36.1 %)
                                         

The decrease in net income in 2011 compared with 2010, was primarily due to a decrease of 2.3% in revenues, along with an increase of 7.6% in operating expenses and an increase of 27.4% in financing expenses, net, leading to a decrease of 33.9 % in income before income tax. These decreases were partially offset by a decrease of 27.1% in income tax.
 
The increase in net income in 2010 compared with 2009, was primarily due to an increase of 2.8% in revenues, while total operating expenses increased by only 0.2%, leading to an increase of 9.6 % in operating income. This increase was partially offset by an increase in financing expenses and income tax.
 
B. LIQUIDITY AND CAPITAL RESOURCES
 
General
 
Our liquidity requirements relate primarily to working capital requirements, debt service, capital expenditures for the expansion and enhancement of our networks and payment of dividends. We fund these requirements through cash flows from operation and issuance of public debentures.
 
In October 2010, the Commissioner of Capital Markets, Insurance and Savings in the Ministry of Finance published a circular which in most parts became effective by January 2011, instructing institutional investors to follow certain procedures and requirements before investing in non-governmental debentures, including a requirement to verify that certain contractual provisions are included in the indentures of the invested debentures, and to establish a policy for investment in such debentures which will relate among other matters to repayment acceleration rights . These procedures and requirements may adversely affect our possibilities of raising debt from Israeli institutional investors as well as the terms and price of such debt raising and have already adversely affected the terms under which we plan to raise debt in the near future. For additional details see "B. Liquidity and Capital Resources - Debt Service –Shelf Prospectus".
 
We believe that our free cash flow together with our financial reserves will be sufficient to fund our anticipated cash needs for working capital, capital expenditures and debt service for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support marketing and subscriber retention efforts, the expansion of sales and marketing activities and the timing of introductions of new products and enhancements to existing products.
 
In February 2006, our Board of Directors adopted a policy to distribute each year at least 75% of our annual net income (determined in accordance with IFRS for periods commencing on or after January 1, 2008), subject to compliance with applicable law, our license and contractual obligations and so long as the distribution would not be detrimental to
 
 
our cash needs or to any plans approved by our Board of Directors. In March 2012, in connection with our plans to raise additional debt, we undertook limitations on dividend distributions by our company. See “Item 8. Financial Information – A. Consolidated Statements and Other Financial Information – Dividend Policy” and "B. Liquidity and Capital Resources - Debt Service –Shelf Prospectus" and "B. Liquidity and Capital Resources - Debt Service –Shelf Prospectus".  It is possible that our Board of Directors’ estimate of our cash needs will be incorrect, or that events could occur that could increase our cash needs beyond anticipated. If that occurs, we may not have sufficient cash to cover these needs as a result of prior dividend payments, and we would need to identify additional sources of financing, which could include equity or debt financing.  We may not be able to obtain such financing on acceptable terms or at all.
 
Dividend payments
 
During 2011, we distributed cash dividends in the aggregate amount of NIS 827 million ($216 million), including the dividend declared for the fourth quarter of 2010 in the amount of NIS 303 million ($79 million), based on net income. In addition, the dividend for the third quarter of 2011 in the amount of NIS 189 million ($49 million) was paid in January 2012. During 2010, we distributed cash dividends in the aggregate amount of NIS 1,327 million ($347 million), including the dividend declared for the fourth quarter of 2009 in the amount of NIS 257 million ($67 million), based on net income and existing retained earnings.  During 2009, we distributed cash dividends in the aggregate amount of NIS 1,187 million ($311 million), based on net income and existing retained earnings.
 
Debt service
 
Shelf Prospectus
 
In July 2011, we filed a shelf prospectus with the Israeli Securities Authority, or ISA, and the Tel Aviv Stock Exchange. The shelf prospectus allows us, from time to time, until July 2013, to offer and sell debt, equity, warrants and commercial paper  in Israel, in one or more offerings, subject to a supplemental shelf offering report, in which we will describe the terms of the securities offered and the specific details of the offering. At this stage, no decision has been made as to the execution of any offering, nor as to its scope, terms and timing, if executed, and there is no certainty that such offering will be executed.
 
 In March 2012, we amended the indenture included in the shelf prospectus  to include additional undertakings in regards to the issuance of certain new series, if issued by us (which we intend to offer to the public in Israel in the near future), as follows:
 
· 
negative pledge, subject to certain exceptions;
 
· 
a covenant not to distribute more than 95% of the profits available for distribution according to the Israeli Companies law (“Profits”); provided that if our net leverage (defined as the ratio of net debt to EBITDA during a period of 12 consecutive months, excluding onetime influences) exceeds 3.5:1, we will not distribute more than 80% of our Profits and if our net leverage exceeds 4.0:1, we will not distribute more than 70% of our Profits;
 
· 
limitation of our ability to voluntarily redeem the debentures prior to their stated maturity date to a minimum amount of NIS 100 million of each series of debentures
 
 
and an undertaking to pay the holders of such debentures an additional annual interest of 1% in the event of such early redemption;
 
· 
a covenant to have the debentures rated by a rating agency (in as much as under our control);
 
· 
an obligation to pay additional interest of 0.25% for any two-notch or more downgrade in the debentures' rating and up to a maximum addition of 1%, in comparison to the rating given to the debentures prior to their issuance or in case the debentures cease to be rated for a period of over sixty days;
 
· 
a covenant not to issue additional debentures of the relevant series if the additional issuance by itself, will cause a certain rating downgrade.
 
We also agreed in the amendment to the addition of the certain events to the list of events of default, including:
 
· 
cross default, excluding following an immediate repayment initiated in relation to a liability of NIS 150 million or less;
 
· 
failure of our main business to be cellular communications or loss of our cellular license for a period of over 60 days;
 
· 
suspension of trading of the debentures on the TASE over a period of 45 days;
 
· 
failure to comply with the above covenant regarding limitations on dividend distributions;
 
· 
failure to have the debentures rated over a period of 60 days;
 
· 
a petition or court order to withhold all legal proceedings against us or petition for creditors arrangement filed;
 
· 
the sale of a major part of our assets or merger (with certain exclusions);
 
· 
failure to publish financial reports when due;
 
· 
a net leverage in excess of 5.0:1, or in excess of 4.5:1 during four consecutive quarters;
 
· 
failure to comply with our negative pledge covenant;  and
 
· 
any other event causing or expected to cause a material adverse effect (which shall not include any event that shall or is likely to cause our net leverage to increase to a ratio of under 5.0:1) on our business and posing real threat of a substantial damage to the debenture holders’ rights.
 
Public debentures
 
In December 2005 and January 2006, we issued two series of debentures (Series A and Series B) to institutional and other investors in private placements. In May 2006, we issued additional debentures of these two series. The debentures are listed on the Tel Aviv
 
 
Stock Exchange. As of December 31, 2011, these debentures consist of approximately NIS 237 million ($62 million) aggregate principal amount of Series A Debentures (after we repaid the first seven principal payments in July 2008, in January and July 2009, 2010 and 2011, in the sum of approximately NIS 118 millions ($31 million) each) and approximately NIS 925 million ($242 million) aggregate principal amount of Series B Debentures. The Series A Debentures bear interest at the rate of 5.0% per year, and are linked (principal and interest) to the Israeli CPI. The principal is payable in nine semiannual payments commencing in July 2008, and the interest is payable semiannually commencing in July 2006. The Series B Debentures bear interest at the rate of 5.3% per year, and are linked (principal and interest) to the Israeli CPI. The principal is payable in five annual payments commencing in January 2013, and the interest is payable annually commencing in January 2007.
 
The Series A and B debentures are unsecured and do not restrict our ability to issue additional debentures of any class or distribute dividends in the future. The Series A and B debentures contain standard terms and obligations including restriction on our ability to create liens on our assets, other than fixed liens on assets provided in connection with financing the purchase of such assets.
 
In October 2007 we issued two new series of debentures (Series C and Series D) to the public in Israel. The debentures are listed for trading on the Tel Aviv Stock Exchange. In February 2008 we issued, in a private placement, additional debentures of these two Series. In April 2009 and March 2011 (under the 2009 Shelf Prospectus) and in August 2011 (under the above 2011 Shelf Prospectus), we issued to the public in Israel additional Series D debentures.   As of December 31, 2011, these debentures consist, of approximately NIS 109 million ($29 million) aggregate principal amount of Series C Debentures (after we repaid the first six principal payments in March and September 2009 , 2010 and 2011, in the sum of approximately NIS 36 million ($9 million) each) and approximately NIS 2,423 million ($634 million) aggregate principal amount of Series D Debentures.
 
The Series C principal is payable in nine equal semiannual payments on March 1 and September 1, for each of the years 2009 through 2012 (inclusive) and on March 1, 2013. The interest on Series C debentures is payable semiannually on March 1 and on September 1, for each of the years 2008 through 2012 (inclusive) and on March 1, 2013. The Series D principal is payable in five equal annual payments on July 1, for each of the years 2013 through 2017 (inclusive). The interest on Series D debentures is payable annually on July 1, for each of the years 2008 through 2017 (inclusive). Series C and D debentures bear an annual interest rate of 4.60% and 5.19%, respectively and are linked (principal and interest) to the Israeli CPI for August 2007.
 
The Series C and D debentures are unsecured and do not restrict our ability to issue additional debentures of any class or distribute dividends in the future.  The Series C and D debentures contain standard terms and obligations.
 
In April 2009, we issued to the public in Israel a new Series E debentures The debentures were issued in a public offering in Israel based on the 2009 shelf prospectus and were listed for trading on the Tel Aviv Stock Exchange. In March 2011 (under the 2009 Shelf Prospectus) and in August 2011 (under the above 2011 Shelf Prospectus), we issued to the public in Israel additional Series E debentures. As of December 31, 2011, these debentures consist, of approximately NIS 1,799 million ($471 million) aggregate principal amount of Series E Debentures.
 
 
112
 
The Series E principal is payable in six equal annual payments on January 5, of each of the years 2012 through 2017 (inclusive). The interest on Series E debentures is payable annually on January 5, of each of the years 2010 through 2017 (inclusive). Series E debentures bear an interest rate of 6.25% per annum, without any linkage.
 
The Series E debentures are unsecured and do not restrict our ability to issue additional debentures of any class or distribute dividends in the future.  The Series E debentures contain standard terms and obligations.
 
Other credit facilities
 
As of December 31, 2011, we had no other credit facilities outstanding. As of December 31, 2011, Netvision used an amount of approximately NIS 35 million of the credit lines provided to it by Israeli banks, out of which approximately NIS 20 million are at a fixed interest rate of 6% per annum, payable in 4 equal principal amounts to be paid in the years 2012 through 2015 and semi annual interest payments, and approximately NIS 11 million are at a fixed interest rate of 4.8% per annum, payable in semi annual principal and interest amounts in the years 2012 through 2013.
 
Pursuant to the provision of such credit lines, Netvision and 013 Netvision provided such banks with a floating charge on its property, assets and rights, fixed charges on certain bank deposits and with certain undertakings including: negetive pledge (subject to certain exceptions); any change of control, reorganization, merger, change in capital structure and pledge requiring the prior consent of such banks; any owners' loans shall be subordinated to the loans provided by such banks; certain limitations on the transfer of assets out of the ordinary course of business; and 013 Netvision shall not acquire control or main assets of another business if such acquisition shall cause a default of the financial covenants it provided.
 
Financial covenants: 013 Netvision's shareholders equity shall not fall below 30% of 013 Netvision's total balance sheet amount,  Netvision's net leverage ratio of Netvision and 013 Netvision shall not exceed 2.5:1, and Netvision's shareholders equity shall not fall below 35% of  Netvision's total balance sheet amount. As of December 31, 2011 Netvision fulfills all such undertakings and covenants.
 
Capital expenditures
 
Our accrual capital expenditure in 2009, 2010 and 2011 amounted to NIS 663 million, NIS 735 million and NIS 520 million, respectively. Accrual capital expenditure is defined as investment in fixed assets and certain intangible assets, such as spectrum licenses, rights of use of communication lines, UMTS networks' enhancement and expansion and development of new products and services, during a given period. The amount of capital expenditure for 2010 includes the payment of NIS 108 million pursuant to the acquisition of assets and operations of Dynamica, one of our major dealers. The amount of capital expenditure for 2011 excludes the acquisition of Netvision in the amount of NIS 1,458 million (net of cash acquired in the amount of NIS 120 million).  For the periods under review, a key focus of our capital investment has been the enhancement and expansion of our networks and transmission infrastructure.
 
 
113
 
Cash flows from operating activities
 
Cash flows from operating activities decreased by 44% in 2011 to NIS 1,332 million from NIS 2,380 million in 2010. The decrease resulted mainly from the significant increase in sales of cellular handsets, which led to an increase in the immediate payment to vendors for handset purchases, as opposed to spreading the consideration when these handsets are sold to our subscribers (usually in installments over a period of thirty six months). The decrease in service revenues, resulted from the regulatory changes, also contributed to the decrease in cash flows from operating activities.
 
Cash flows from operating activities increased by 14.4% in 2010 to NIS 2,380 million from NIS 2,080 million in 2009. The increase resulted mainly from higher collection from customers mainly due to higher revenues, as well as from a decrease in income tax payments in 2010 compared with 2009, mainly due to a tax overpayment paid in 2009, which was set off against tax payments in 2010.
 
Cash flows from investing activities
 
The net cash flows from operating activities is the main capital resource for our investment activities. In 2009, 2010 and 2011, our net cash used in investing activities amounted to NIS 774 million, NIS 889 million and NIS 1,656 million, respectively.  The payments were primarily for the improvement and expansion of the technological networks and information systems infrastructures. The increase in 2011 compared with 2010 resulted from the net payment of NIS 1,458 million pursuant to the acquisition of Netvision. This increase was partially offset by proceeds from sales of part of our current investments in tradable debentures in 2011, which were purchased in previous years, as well as from a decrease in acquisition of property, plant and equipment and intangible assets. The increase in 2010 compared with 2009 primarily resulted from the payment of NIS 108 million pursuant to the acquisition of assets and operation of Dynamica, one of our major dealers.
 
Cash flows from financing activities
 
In 2011, the net cash provided from financing activities amounted to NIS 715 million compared with net cash used in the amount of NIS 1,861 million in 2010. This change was primarily due to net proceeds of NIS 2,165 million from issuance of debentures in 2011 while in 2010 there was no such issuance. A decrease in the amount of cash dividend distributed in 2011 compared with 2010 also contributed to this change.
 
In 2010, the net cash used in financing activities amounted to NIS 1,861 million compared with NIS 678 million in 2009. The increase resulted primarily from an increase in cash dividend paid and the lack of proceeds from issuance of debentures in 2010 compared with proceeds of NIS 989 million in 2009.
 
During 2009, 2010 and 2011, the average outstanding amount of long-term liabilities (long-term loans and debentures) was NIS 4.3 billion, NIS 4.3 billion and NIS 5 billion, respectively.
 
Working capital
 
Our working capital as of December 31, 2011 was NIS 679 million, compared with NIS 924 million as of December 31, 2010.  The decrease in working capital was primarily due to an increase in current maturities of our debentures, trade payables and other current
 
 
liabilities, which was partially offset by an increase in cash and cash-equivalents, trade receivables and inventory.
 
Our working capital as of December 31, 2010 was NIS 924 million, compared with NIS 1,254 million as of December 31, 2009.  The decrease in working capital was primarily due to the decrease in cash and cash-equivalents, trade receivables and inventory, which was partially offset by a decrease in trade payables.
 
Trade receivables
 
Trade receivables consist of outstanding amounts due from customers, mainly for cellular, ISP and landline telephony services and handsets and accessories, net of the allowance for doubtful accounts.  Most of our handset sales are made on an installment basis (generally, 36 monthly payments).  Installments due in the twelve months following the balance sheet date are included in current trade receivables; the remaining installments are included in long-term receivables. As of December 31, 2011, net current trade receivables amounted to NIS 1,859 million compared with NIS 1,478 million as at December 31, 2010 and NIS 1,579 million as at December 31, 2009.  The increase in 2011 compared with 2010 was due to the significant increase in cellular handsets sales, as well as to Netvision's trade receivables, which are consolidated for the first time. The decrease in 2010 compared with 2009 was primarily due to the provision for a refund to our subscribers related to a major network malfunction we experienced in December 2010.  The current maturity of long-term receivables as of December 31, 2011 was NIS 937 million, compared with NIS 656 million as at December 31, 2010.
 
C.  RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
 
Not applicable.
 
D. TREND INFORMATION
 
Trend information is included throughout the other sections of this Item 5.
 
E. OFF-BALANCE SHEET ARRANGEMENTS
 
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 
Set forth below is a description of our contractual cash obligations, in millions of NIS, as of December 31, 2011.
 
   
Total
   
2012
      2013- 2015       2016-2017    
2018 and Beyond
 
Long-term debt obligations (including interest)(1)
    7,281       1,002       3,968       2,311       -  
Operating lease obligations
    1,448       301       611       259       277  
Purchase obligations
    413       337       63       13       -  
Total
    9,142       1,640       4,642       2,583       277  

 
(1)
Interest does not include any increase in interest that would be required based on increases in the Israeli CPI.
 
 
115
 
Application of Critical Accounting Policies and Use of Estimates
 
The preparation of our financial statements requires management to make judgments, estimates and assumptions that affect the amounts reflected in the consolidated financial statements and accompanying notes, and related disclosure of contingent assets and liabilities.  We base our estimates upon past experience, where applicable, various factors, external sources and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions, and could have a material impact on our reported results.
 
In many cases, the accounting treatment of a particular transaction, event or activity is specifically dictated by accounting principles and does not require management’s judgment in its application, while in other cases, management’s judgment is required in the selection of the most appropriate alternative among the available accounting principles, that allow different accounting treatment for similar transactions.
 
We believe that the accounting policies discussed below are critical to our financial results and to the understanding of our past and future performance, as these policies relate to the more significant areas involving management’s estimates and assumptions.  We consider an accounting estimate to be critical if: (1) it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making our estimate and (2) changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.
 
Revenue recognition
 
Nature of critical estimate items
 
As described in Note 3.L to our consolidated financial statements included elsewhere in this annual report, revenues derived from usage of our networks, including airtime, internet services (ISP), international call services, interconnect, content and value added services and roaming revenues are recognized when the services are provided, in proportion to the stage of completion of the transaction, and all other revenue recognition criteria are met. Usually, the sale of a handset to the customer is executed with no contractual obligation of the customer to purchase services from us in a minimal amount for a predefined period. As a result, we refer to the sale transaction as a separate transaction and recognize revenue from the sale of the handset upon delivery of the handset to the customer. In case the customer is obligated towards the company to purchase services in a minimal amount for a predefined period, the contract is characterized as a multiple element contract and thus, revenue from sale of handset is recorded in an amount not higher than the fair value of the said handset, which is not contingent upon delivery of additional components (such as services) and is recognized upon delivery of the handset to the customer and when the criteria for revenue recognition are met. Revenues from services are recognized and recorded when the services are provided. In revenue arrangements including more than one deliverable, the arrangement consideration is allocated to each deliverable based on the fair value of the individual element. Revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of
 
 
goods can be estimated reliably, there is no continuing management involvement in regards to the goods and the amount of revenue can be measured reliably.
 
Assumptions / approach used
 
We determine the fair value of the individual elements based on prices at which the deliverable is regularly sold on a stand alone basis, after considering volume discounts where appropriate. The accounting estimates used in the results of operations related to the recognition of revenue require us to make assumptions about possible future billing adjustments arising from disputes with subscribers and discounts not taken into consideration at the time of billing.
 
Effect if different assumptions used
 
Management believes that the determination of fair value of the individual elements (relevant to revenue recognition) for each reporting period represent its best estimate, but the actual fair value can differ from the estimate selected.  The impact of variances in actual performance versus the amounts recorded could have an adverse effect on the accounts receivable reported on the balance sheet and the results reported in the statements of operations, and could be material to our financial condition.
 
Long-lived assets – depreciation
 
Nature of critical estimate items
 
The communications industry is capital intensive. The depreciation of operating assets constitutes a significant operating cost for us. We have substantial investments in tangible long-lived assets, primarily our communications networks.
 
Assumptions / approach used
 
 We depreciate our property, plant and equipment using the straight line method. Separate individual significant components are depreciated over their individual estimated useful lives. We periodically review changes in our technology and industry conditions to determine adjustments to estimated remaining useful lives and depreciation rates.
 
Effect if different assumptions used
 
Changes in technology or changes in our intended use of these assets can cause the estimated period of use or the value of these assets to change.  Actual economic lives may differ from estimated useful lives.  Periodic reviews could result in a change in our assets’ depreciable lives, and therefore, in our depreciation expense in future periods.
 
Impairment of long-lived assets
 
Nature of critical estimate items
 
We review finite-lived long-lived assets, principally consisting of property, plant and equipment, spectrum licenses and intangible assets for impairment based on the requirements of International Accounting Standard No. 36, or whenever events or changes in circumstances indicate that their carrying values may not be recoverable through the present value of anticipated cash flows from the continued use of the asset, including those expected at the time of its future retirement and disposal. Where it is not possible to estimate the
 
 
recoverable amount of an individual asset, we group together all of the assets that cannot be tested individually into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”), and estimate the recoverable amount of the cash-generating unit to which the asset belongs. The recoverable amount is the higher of value in use and fair value less cost to sell. Value in use is determined by discounting of expected future cash flows method, using a pre-tax discount rate. An impairment loss is recognized if the carrying amount of an asset or cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. As regards cash-generating units that include goodwill, an impairment loss is recognized when the carrying amount of the cash-generating unit, after adjustment for goodwill, exceeds its recoverable amount.
 
Assumptions / approach used
 
In analyzing finite-lived long-lived assets for potential impairment, significant assumptions that are used in determining the discounted cash flows of the asset group include:
 
 
·
cash flows attributed to the asset group;
 
 
·
future cash flows for the asset group, including estimates of residual values, which incorporate our views of growth rates for the related business and anticipated future economic conditions; and
 
 
·
period of time over which the assets will be held and used.
 
Effect if different assumptions used
 
The use of different estimates and assumptions within our discounted cash flow models (e.g., growth rates, future economic conditions, estimates of residual values) could result in discounted cash flows that are lower than the current carrying value of an asset group, thereby requiring the need to reduce the carrying value to the discounted cash flow amount.
 
The use of different discount rates when determining the fair value of the asset group could result in different fair values, and impact any related impairment charges.
 
Accounts receivable - bad debt and allowance for doubtful accounts
 
Nature of critical estimate items
 
We maintain an allowance for doubtful accounts to reflect estimated losses resulting from impairment of accounts receivables.
 
Assumptions / approach used
 
We regularly evaluate the adequacy of our allowance for doubtful accounts by taking into account variables such as past experience, age of the receivable balance and current economic conditions of the party owing the receivable balance.  If the financial conditions of certain customers were to deteriorate, resulting in impairment in their ability to make payments, additional allowance for doubtful accounts may be required.
 
 
118
 
Effect if different assumptions used
 
We believe that our allowance for doubtful accounts is adequate to cover estimated losses in customer accounts receivable balances under current conditions.  However, changes to the allowance for doubtful accounts may be necessary in the event that the financial condition of our customers improves or deteriorates.
 
Provisions for contingent liabilities
 
Provisions in general are highly judgmental, especially in cases of legal disputes. We assess the probability of an adverse event as a result of a past event and if the probability is evaluated to be more likely than not and the amount of the obligation can be estimated reliably, we fully provide for the total amount of the estimated contingent liability. We continually evaluate our pending provisions to determine if additional accruals are required. It is often difficult to accurately estimate the ultimate outcome of a contingent liability. Different variables can affect the timing and amount we provide for certain contingent liabilities. Our provisions are therefore subject to estimates made by us and our legal counsel, which are subject to changes as the status of legal and commercial disputes changes over time. Adverse revision in our estimates of the potential liability could materially impact our financial condition, results of operations or liquidity.
 
New Accounting Standards
 
1.
IAS 24 (2009) Related Party Disclosures (hereinafter - “the Standard”)

The new standard includes changes in the definition of a related party and changes with respect to disclosures required by entities related to a government. The Standard is effective from January 1, 2011. For the purpose of applying the Standard for the first time, we mapped our relationships with related parties. The Standard has no material impact on our consolidated financial statements.

2.
Amendment to IFRS 7 Financial Instruments: Disclosures – Clarification of disclosures (hereinafter – “the Amendment”)
 
 
The Amendment added a declaration that the interaction between the qualitative and quantitative disclosures enables the users of the financial statements to better assess the company’s exposure to risks arising from financial instruments. Furthermore, the clause stating that quantitative disclosures are not required when the risk is immaterial was removed, and certain disclosure requirements regarding credit risk were amended while others were removed. The Amendment is implemented from annual periods beginning on January 1, 2011. The required disclosures were included in the consolidated financial statements, included elsewhere in this annual report.
 
 
 
ITEM 6.                     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
A.          DIRECTORS AND SENIOR MANAGEMENT
 
The following table sets forth information regarding our directors, executive officers and other key employees as of December 31, 2010:
 
 
 
 
Name
 
Age
 
Position
Ami Erel (2), (3)
64
Chairman of the Board
Nochi Dankner (3)
57
Director
Shay Livnat (2), (3)
53
Director
Raanan Cohen (2), (4)
44
Director
Rafi Bisker  (4)
60
Director
Shlomo Waxe (1), (2), (4)
66
Independent Director
Haim Gavrieli
41
Director
Ari Bronshtein (2)
42
Director
Tal Raz
50
Director
Edith Lusky (2)
61
Director
Assaf Topaz (2)
41
Director(a)
Ephraim Kunda (1), (2)
59
Independent Director
Joseph Barnea (1), (2), (3), (4)
76
Independent / External Director
Ronit Baytel (1)
44
Independent / External Director
Amos Shapira
62
President and Chief Executive Officer(b)
Yaacov Heen
42
Chief Financial Officer
Yoni Sabag
39
Vice President of Marketing
Eliezer (Lipa) Ogman
58
Chief Technology Officer
Isaiah Rozenberg
51
Vice President of Engineering and network operation
Itamar Bartov
49
Vice President of Executive and Regulatory Affairs
Yoav Kirmayer
40
Vice President of Business Customers (c)
Meir Barav
54
Vice President of Sales and Service (d)
Sharon Amit
45
Vice President of Human Resources(e)
Amos Maor
48
Vice President of Operations and Supply Chain (d)
Ran Harpaz
38
Vice President of Information Technology (f)
Liat Menahemi-Stadler
45
General Legal Counsel and Corporate Secretary
Teimurz Romashvily
33
Vice President of Pre Paid Activity (g)
Liat Straus
33
Netvision Vice President of Sales and Service (h)
Gil Ben-Itzhak
46
Controller

 
(a)
Mr. Assaf Topaz was appointed to office as of August 28, 2011.
 
(b)
Mr. Amos Shapira resigned from office as of December 31, 2011 and Mr. Nir Sztern was nominated as our CEO as of January 1, 2012.
 
(c)
Yoav Kirmayer resigned from office as of February 29, 2012 and was  replaced by Keren Shtevy as of March 1, 2012.
 
(d)
Mr. Meir Barav resigned from office as of January 31, 2012 and replaced by Mr. Amos Maor as of February 1, 2012.
 
(e)
Ms. Sharon Amit was appointed to office as of November 1, 2011.
 
(f)
Mr. Ran Harpaz was appointed to office as of December 1, 2011.
 
(g)
Mr. Teimurz Romashvily was appointed to office as of October 23, 2011.
 
(h)
Ms. Liat Straus serves as  Vice President of sales and Service of Netvision.
 
(1)
Member of our Audit Committee.
 
(2)
Member of our Analysis Committee.
 
(3)
Member of our Option Committee.
 
(4)
Member of our Security Committee. Mr Topaz joined our Analysis Committee at January 22, 2012.
 
Ami Erel has served as Chairman of our Board of Directors since 2005. Mr. Erel has served as President and Chief Executive Officer of Discount Investment Corporation Ltd. since 2001. From March to December 2007, Mr. Erel also served as the Chief Executive Officer of Netvision Ltd., where he served prior to March 2007 and from 2008 to 2011, as Chairman of the board of directors. From 1999 to 2001, he served as President of Elron Electronic Industries Ltd., where he continues to serve as a member of the Board of Directors and also served, until January 2007, as its Chairman of the board of directors. From 1997 to 1999, he served as President and Chief Executive Officer of Bezeq – The Israeli Telecommunications Corporation Ltd.  Mr. Erel also serves as deputy Chairman of the board of directors of Makhteshim-Agan Industries Ltd. and as a member of the boards of directors of Maariv Holdings Ltd. and other IDB group companies. Mr. Erel has served as the
 
 
chairman of the executive committee of the Manufacturers Association of Israel from 2005 to 2009 and from 2009 to 2011 he served as the chairman of the Israel Export & International Cooperation Institute.  Mr. Erel holds a B.Sc. in electrical engineering from the Technion, Israel Institute of Technology.
 
Nochi Dankner has served as a member of our Board of Directors since 2005.  Mr. Dankner currently serves as Chairman of the boards of directors of IDB Holding Corporation Ltd. (of which he also served as Chief Executive Officer from December 2003 until August 2009),  IDB Development Corporation Ltd., Discount Investment Corporation Ltd., Clal Industries and Investments Ltd., Ganden Holdings Ltd. and various private companies, and as a member of the boards of directors of Clal Insurance Enterprises Holdings Ltd., Clal Insurance Company Ltd., Shufersal Ltd., Property and Building Corporation Ltd., Koor Industries Ltd., Makhteshim-Agan Industries Ltd., Maariv Holdings Ltd. and various private companies.  Mr. Dankner also serves as the Chairman of the IDB fund “For the Community” (a non-profit organization), as a member of “Matan-Your Way to Give” (a non-profit organization), as a member of the management committee of the Association of Friends of the Tel Aviv Sourasky Medical Center, and as a member of the board of trustees of Tel Aviv University,  Buchmann Faculty of Law - Tel Aviv University and Bar-Ilan University.  Mr. Dankner holds an L.L.B. and a B.A. in political science, both from Tel Aviv University.
 
Shay Livnat has served as a member of our Board of Directors since 2005.  Mr. Livnat has served as the President and Chief Executive Officer of Zoe Holdings Ltd., a holding company that manages a diverse portfolio of international telecommunications operations and hi-tech companies, which was founded by him in 1988, since 2001 and as Vice President and member of the board of directors of Taavura Holdings Ltd.  From 1988 to 1998, he served as Chief Executive Officer of Tashtit Ltd.  Mr. Livnat also serves as a member of the boards of directors of various IDB group companies, including IDB Development Corporation Ltd., Clal Industries and Investments Ltd., Clal Insurance Enterprises Holdings Ltd., Elron Electronic Industries Ltd. and other companies in the Avraham Livnat Group and Zoe/Cyphertech Group of companies. Mr. Livnat also serves as a member of the board of the Academic College of Tel-Aviv-Jaffa. Mr. Livnat holds a B.Sc. in electrical engineering from Fairleigh Dickinson University, New Jersey, USA.
 
Raanan Cohen has served as a member of our Board of Directors since 2000.  Mr. Cohen also has served as Chief Executive Officer of Koor Industries Ltd. since July 2006.  From 2004 to 2006, he also served as Chief Executive Officer of Scailex Corporation Ltd.  Since 2001 he has served as Vice President of Discount Investment Corporation Ltd., having previously served, from 1999 to 2001, as executive assistant to the chief executive officer of Discount Investment Corporation Ltd.  From 1997 to 1999, he was an associate at McKinsey & Company Inc., London.  Mr. Cohen also serves as a member of the boards of directors of Makhteshim-Agan Industries Ltd. and various private companies.  Mr. Cohen is a member of the Israeli Bar Association and holds an L.L.B. and a B.A. in economics from Tel Aviv University and an M.B.A. in management from the J.L. Kellogg Graduate School of management of Northwestern University.
 
Rafi Bisker has served as a member of our Board of Directors since 2006.  Mr. Bisker currently serves as co-Chairman of the board of directors of Shufersal Ltd. and as the Chairman of the board of directors of Property and Building Corporation Ltd., Bayside Land Corporation Ltd. and various private companies.  From 2000 to 2005, he served as Chief Executive Officer of Ganden Holdings Ltd. and Ganden Real Estate Ltd.  From 1989 to 1999, he served as Chief Executive Officer of Dankner Investments Ltd.  Mr. Bisker also serves as
 
 
a member of the boards of directors of IDB Holding Corporation Ltd., IDB Development Corporation Ltd., Discount Investment Corporation Ltd., Clal Industries and Investments Ltd., Koor Industries Ltd., Ganden Holdings Ltd., ISPRO The Israel Properties Rental Corporation Ltd., Mehadrin Ltd., and various private companies.  Mr. Bisker holds a B.Sc. in civil engineering from the Technion, Israel Institute of Technology.
 
Shlomo Waxe has served as a member of our Board of Directors since 2006.  Mr. Waxe has served as Director General of the Israel Association of Electronics and Software Industries since 2006.  From 2002 to 2005, he worked in the field of communications management and consultancy.  From 1999 to 2001, he served as Chief Executive Officer of Zeevi Communications Ltd.  From 1997 to 1999, he served as a consultant to cellular communications projects in Sao Paulo, Brazil and in Northeast Brazil.  From 1993 to 1997, he served as the Director General of Israel’s Ministry of Communications.  From 1990 to 1993, he served as commanding officer of the signal, electronics and computer corps of the Israel Defense Forces and he is a retired brigadier general. Mr. Waxe also serves as a member of the boards of directors of Tambour Ltd. and C. Mer Industries Ltd. and until 2009, served as a board member of Shrem, Fudim – Technologies Ltd.  Mr. Waxe holds a B.A. in political science from the University of Haifa.
 
Haim Gavrieli has served as a member of our Board of Directors since 2008. Mr. Gavrieli has served as the Chief Executive Officer of IDB Holding Corporation Ltd. since 2009 and also as Chief Executive Officer of IDB Development Corporation Ltd. since 2011, where he served as Executive Vice President from 2006 to 2011. He also serves as a member of the boards of directors of Discount Investment Corporation Ltd., Koor Industries Ltd., Makhteshim-Agan Industries Ltd. Clal Finance Ltd., other IDB group companies and various private companies. Mr. Gavrieli also serves as a Deputy Chairman of Shufersal Ltd. and Co-Chairman of the board of directors of IDB Tourism (2009) Ltd. and Chairman of Modiin Energy Management (1992) Ltd. Mr. Gavrieli holds a B.A. in political science and sociology from the University of Haifa and an M.A. in management from the University of Haifa.
 
Ari Bronshtein has served as a member of our Board of Directors since 2008. Mr. Bronshtein has served as Vice-President of DIC. Since July 2010, he also has served as a Chief Executive Officer, and from May 2009 to June 2010 he served as co-Chief Executive Officer of Elron Electronic Industries Ltd. Mr. Bronstein also serves as a member of the boards of directors of Maxima Air Separation Center Ltd., Mode'en Energy Ltd., Sterling Communications Ltd., Maariv Holdings Ltd., Given Imaging Ltd. and various private companies. From 2004 to 2005, he served as Vice President and head of the Economics and Business Development division, and from 2000 to 2003, as Director of Finance and Investments, at Bezeq – The Israeli Telecommunications Corporation Ltd. Mr. Bronshtein holds a B.A. in finance and management and M.Sc. degree in finance and accounting, both from Tel Aviv University.
 
Tal Raz has served as a member of our Board of Directors since 2009. Mr. Raz has served as Chief Executive Officer of Maariv, an Israeli daily newspaper controlled by DIC from 2011. From 2009 to  2011 he served as Chief Executive Officer of Clal Finance. From 2005 to 2009, Mr Raz served as our Chief Financial Officer. From 2002 to 2005, Mr. Raz served as Chief Financial Officer of Elron Electronic Industries Ltd. From 2001 to 2002, he served as the President and Chief Executive Officer of Elbit Ltd. From 1997 to 2001, he served as Elbit’s Chief Financial Officer, having previously served in the same capacity at Agentsoft Ltd. and Paul Winston Corporation. Prior to that, he was a senior auditor at Deloitte & Touche’s New York office.  Until January 2007, Mr. Raz served as a director of
 
 
Netvision Ltd.  Mr. Raz is a member of the steering committee of the Israeli CFO (Chief Financial Officers) Forum and is a certified public accountant. He holds a B.A. in accounting and business administration and an M.B.A. in business administration, from the City University of New York.
 
Edith Lusky has served as a member of our Board of Directors since March 2011. Ms. Lusky serves as an external director at Israel Discount Bank Ltd. since 2009. From 2004 to 2008 Ms. Lusky served as senior vice president of retail banking and risk management of Union Bank of Israel Ltd. and from 2001 to 2004 she served as chief executive officer of Mishcan - Bank Poalim for Mortgages Ltd. Ms. Lusky holds a B.A. in Economics and Statistics and an M.Sc in Economics, both from Tel Aviv University.
 
Assaf Topaz has served as a member of our Board of Directors since August 2011. Mr. Topas has served as Vice President of DIC since January 2010. From June 2005 to May 2009 Mr. Topaz served as Vice President, and from March 2004 to June 2005 he served as business development manager of Elron Electronic Industries Ltd. From 1998 to 2002, Mr. Topaz served as co-founder, chief operating officer and as member of the board of directors of Breach Security (formerly known as Gilian Technologies). Mr. Topaz holds a B.A. in Economics and Geography from the Hebrew University in Jerusalem, and a Master of Science in Management from Stanford University. Mr. Topaz is a son in law of Ruth Manor, one of the controlling shareholders of the Company.
 
Ephraim Kunda has served as a member of our Board of Directors since 2010. Mr. Kunda is an Israeli businessman and is the owner and managing director of a private consulting company that provides economic consultancy and business mediation services. From 2007 to 2010, Mr. Kunda has served as the Chairman of the board of directors and since 2010 as a member of the board of directors of Ravad Ltd., a public real estate investment company.  From 2003 to 2007, Mr. Kunda served as an external director of Property and Building Corporation Ltd., a public real estate company that is a member of the IDB group. Mr. Kunda holds a B.A. in Economics from Tel Aviv University.
 
Joseph Barnea   has served as a member of our Board of Directors since 2007. Mr. Barnea is a retired businessman. He served as the Chief Executive Officer of Oxygen & Argon Works Ltd. from 1987 to 2005 and continued to serve as a member of its management until 2006. From 1985 to 1987, he served as the Chief Executive Officer of Telkoor Ltd. From 1980 to 1985, he served as a Vice President of Elscint Medical Imaging Ltd. Mr. Barnea is a member of the executive committee of the Israeli Industrialists Association  and until 2007 he served as the Chairman of its Chemistry and Environment Association. From 2004 to 2009 Mr. Barnea served as a member of the board of the Israeli Export & International Cooperation Institute, from 2005 he serves as a member of the standard committee of the Israeli Standards Institute and prior to that, as a member of its board. From 2002 to 2004 he served first as President and then as Chairman of the International Oxygen Manufacturers Association (IOMA) USA. He served as Deputy Commander of the signal, electronics and computer corps of the Israeli Defense Forces.  Mr. Barnea holds a B.Sc. in electrical engineering from the Technion, Israel Institute of Technology and an M.Sc. in electrical engineering from Columbia University, New York, USA.
 
Ronit Baytel has served as a member of our Board of Directors since 2007. Ms. Baytel is a director  in the finance department of Ormat Technologies, Inc., a company listed on the NYSE, in charge of SOX internal controls in the preparation of financial statements and tax and special projects. From 1998 to 2005 she served as senior manager at Kesselman &
 
 
Kesselman, a certified public accountants firm in Israel, which is a member of the international PriceWaterhouseCoopers Accountants firm. Ms. Baytel is a certified public accountant and holds a B.A. in economics and accountancy from Tel Aviv University and an M.B.A. from the Hebrew University.

Amos Shapira served as our President and Chief Executive Officer since 2005 until December 31, 2011.  From 2002 to 2005, Mr. Shapira served as Chief Executive Officer of El Al Israel Airlines Ltd.  From 1993 to 2002, he served as Chief Executive Officer of Hogla-Kimberly Ltd., a company owned by Kimberly-Clark USA. He joined the board of directors of Elron Electronic Industries Ltd. in 2006. From 2008 Mr Shapira serves as the president of the Israeli Friends of the Tel Aviv University Association. Mr. Shapira holds an M.Sc. in industrial administration from the Technion, Israel Institute of Technology and a B.A. in economics from the University of Haifa.
 
Nir Sztern has served as our Chief Executive Officer since January 2012.   Mr. Sztern served as the chief executive officer of Netvision (which was recently acquired by us ), from 2010 to 2011. From 2008 to 2010 he served as deputy CEO of Pelephone, and from 2002 to 2008 as Pelephone's vice president of marketing. From 2001 to 2002 he served as vice president of marketing and sales of Barak 013 Ltd. or Barak, a long distance operator (which was later merged into Netvision) and from 1999-2001 as head of Barak's marketing department. From 1994 to 1999 Mr. Sztern served as head of our private sector marketing department. Mr. Sztern holds a B.A. in economics and management from the Tel Aviv University and an M.B.A. in business administration, from the Israeli branch of Manchester University.
 
Yaacov Heen has served as our Chief Financial Officer since 2009.   Mr. Heen served as head of our economic department since 2006, responsible for our budget, financial analysis, cost accounting and control over our performance. From 2002 to 2006 he served as head of our pricing and business research department. Mr. Heen is a member of the steering committee of the Israeli CFO (Cheif Financial Officers) Forum. Mr. Heen holds a B.A. in economics and business administration and an M.B.A. in business administration, both from the Bar-Ilan University.
 
  Yoni Sabag has served as our Vice President of Marketing since April 2011. Mr. Sabag has served as head of our private sector marketing department, in charge of the private and small business sectors from 2006 to March 2011. From 2003 to 2006, he served as a director of marketing for the private sector. Mr Sabag has been a member of our marketing department since 2000.
 
Eliezer (Lipa) Ogman has served as our Chief Technology Officer since 2000. From 1997 to 2000, Mr. Ogman served as our Vice President of Engineering and Network Operation, and from 1994 to 1997 he served as manager of our network design department.  Prior to joining us, he served in the signal, electronics and computer corps of the Israel Defense Forces, reaching the rank of lieutenant colonel. Mr. Ogman holds a B.Sc. in Electrical Engineering from the Technion, Israel Institute of Technology, an M.B.A. in business administration and an M.Sc. in electrical engineering from Tel Aviv University.
 
Isaiah Rozenberg has served as our Vice President of Engineering and Network Operation since 2005.  From 2000 to 2005, Mr. Rozenberg   served as manager of our radio and switch engineering department. Mr. Rozenberg holds a B.Sc. and an M.Sc. in electrical and electronics engineering from Ben-Gurion University of the Negev.
 
 
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Itamar Bartov has served as our Vice President of Executive and Regulatory Affairs since 2005. From 2004 to 2005, Mr. Bartov served as Vice President of Customer Services of El Al Israel Airlines Ltd., and from 2002 to 2004 he served as El Al’s Corporate Secretary.  From 2000 to 2002, he served as a Vice President of Business Development in Overseas Commerce and from 1996 to 2000 he served as a Vice President of Planning and Control in the Israel Postal Authority’s.  From 1993 to 1996, he served as senior advisor to the Minister of Communications. Mr. Bartov holds an L.L.B. from the Hebrew University in Jerusalem.
 
Yoav Kirmayer served as our Vice President of Business Customers from 2010 until February 29, 2012. Mr Kirmayer has previously served as head of our telephonic service apparatus, since 2010, responsible for the support of all customer telephonic applications. From 2006 to 2010 he served as the head of our nationwide chain of sale and service centers. Mr Kirmayer holds a B.A. in economics and business administration from Bar-Ilan University and an M.B.A. in business administration from Ben-Gurion University.
 
Keren Shtevy has served as our Vice President of Business Customers since March 1, 2012 . Ms. Shtevy served as Netvision's vice president of private customers from 2004 to 2011 and from 2011 as general vice president. From 1998 to 2004 she served at various positions in Netvision, from 1999 in various management positions, in charge of sales and customer service for private customers. Ms. Shtevy holds a B.A. in economics and communications from the University of Haifa.
 
Meir Barav served as our Vice President of Sales and Service from 2005 and until January 31, 2012.  From 2001 to 2005, Mr. Barav served as Vice President of Operations and Logistics of D.B.S. Satellite Services (1998) Ltd.  From 1997 to 2000, he served as Vice President of Sales and Logistics of Strauss Ice Creams Ltd.. Mr. Barav holds a B.A. in economics and statistics from the Open University.
 
 Ms. Sharon Amit has served as our Vice President of Human Resources since November 2011.  Ms. Amit has served as Netvision's VP of Human Recourses from 2009 to November 2011. She served as VP of Human Recourses of Tikshoov Call Center from 2006 to 2009, of Bynat Computer Communications from 2002 to 2006 and of ADC Israel from 1996 to 2002. Ms. Amit holds a B.A. in English literature and East Asia science, from the Hebrew University in Jerusalem and an M.A. in labor studies from the Tel Aviv University.
 
Amos Maor has served as our Vice President of Sales and Service as of February 1, 2012 and has served as our Vice President of Operations and Supply Chain from  2004 to  January 2011.  From 2002 to 2004, Mr. Maor served as manager of Supply Chain of Elite Industries Ltd., and from 2000 to 2002, he served as manager of Elite’s sales division headquarters.  Mr. Maor holds a B.Sc. in industry and management engineering from the Technion, Israel Institute of Technology.
 
Ran Harpaz has served as our Vice President of Information Technology since December 2011.  Mr. Harpaz reports to the Company's chief technology officer. Mr. Harpaz has served as Netvision's chief technology officer since 2008. From 2007 to 2008 he served as director of consumer experience at PayPal Inc. (USA). From 2003 to 2007 he served as VP customer advocacy of Skybox Security Inc. (USA). From 2002 to 2003 he served as management consultant at McKinsey & Co. From 1997 to 2002 he served as VP research and development of Sanctum Inc. (Acquired by WatchFire/IBM).  Mr. Harpaz holds an LL.B, a B.A. in economics and  M.B.A. in Finance all from the Tel Aviv University.
 
 
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Liat Menahemi Stadler has served as our General Legal Counsel and Corporate Secretary since 2006. From 2000 to 2006, Ms. Menahemi Stadler served as head of the technology and general purchasing division of our legal department.  She has been a member of our legal department since 1998. Ms. Menahemi Stadler holds an LL.B. and a B.A. in English and French language and literature, both from the University of Haifa and is a member of both the Israeli and the New York bar associations.
 
Teimurz Romashvily has served as our Vice President of Pre Paid Activity since October 2011. Mr. Romashviliy reports to the Company's VP Sales and Service. Mr.  Romashvily has served as Netvision's head of pre-paid and international activity from 2007 to October 2011. From 2005 to 2007 he served as head of pre-paid activity in Barak and prior to that served in a variety of positions in Barak. Mr. Romashvily holds a B.A. in economics and management from the Economics Academy in Kiev, Ukraine.
 
Liat Straus has served as Netvision Vice President of Sales and Services as of 2011. From 2010 to 2011, Ms. Straus served as Netivison's head of customer service department. From 2006 to 2010, Ms. Straus served at various management positions, in charge of sales and customer retention division in Tikshoov Contact Center (placed with Barak – an ILD later merged into Netvision).
 
Gil Ben-Itzhak has served as our Controller since 2006.  From 2003 to 2006, Mr. Ben-Itzhak served as Chief Financial Officer of Paul Winston-Eurostar LLC in New York. From 2002 to 2003, he served as Chief Financial Officer of Elron Telesoft Ltd. and from 1996 to 2002, he served as Controller of Elbit Ltd.  Mr. Ben-Itzhak is a certified public accountant and holds a B.A. in accounting and economics from the University of Haifa.
 
B.          COMPENSATION
 
Executive Officer and Director Compensation
 
The aggregate direct compensation we paid to all our executive officers and directors   as a group (29 persons) for 2011 was approximately NIS 23.5 million, of which approximately NIS 9 million relates to 2010 bonuses paid in 2011 and approximately NIS 2.4 million was set aside or accrued to provide for pension, retirement, severance or similar benefits. These amounts do not include expenses we incurred for other payments, including dues for professional and business associations, business travel and other expenses and benefits commonly reimbursed or paid by companies in Israel. In addition, in 2011 we recorded the sum of approximately NIS 3.7 million, as a compensation cost related to the options granted to all our executive officers under our share incentive plan.
 
We pay no cash compensation to our directors who are affiliated with DIC for their services as directors, but we pay DIC NIS 2.0 million per year for management services, adjusted to changes in the Israeli Consumer Price Index for June 2006, and in 2011 this payment amounted to approximately NIS 2.3 million. In February 2010, our Board of Directors found that each of our external Directors qualifies as an "Expert External Director", as defined in the such regulations, and resolved that we shall pay our external directors an annual fee of NIS 126,900 (approximately $33,211) and a meeting participation fee of NIS 4,880 (approximately $1,277), payable in accordance with the aforesaid regulations to an "Expert External Director", as adjusted for changes in the Israeli CPI since December 2007 (which inclusive of CPI adjustment to December 31, 2011 equals approximately NIS 143,600 (approximately $37,580) and approximately NIS­­­­­­­­­­­­­­­­­­­­­ 5,500 ( approximately $1,440),
 
 
respectively). Until our annual shareholders meeting held in July 2011 we paid Shlomo Waxe, one of our independent directors, a monthly director’s fee of $3,000 plus Israeli value-added tax. In our annual shareholders meeting held in July 2011, it was resolved that Shlomo Waxe (effective from the date of the Meeting) and Edith Lusky (effective retroactively from the date of her appointment to the board of directors) will be compensated similarly to our "expert external directors" (as such term is defined in the above regulations), Mr. Waxe as a communications expert and Ms. Lusky as a financial expert, for meetings which they attend (including for meetings of committees of the board of directors). Also, In our annual meeting of shareholders held in July 2011, it was resolved that Ephraim Kunda, our other independent director, will be compensated, effective retroactively from the date of his appointment to the board of directors, at the same level as a statutory external director of a dual listed company, which, according to the above regulations, is in the amount of NIS 115,400 per year and NIS 3,470 per meeting (including for meetings of committees of the board of directors) which he attends, adjusted for changes in the Israeli consumer price index for December 2007 in accordance with these regulations (which inclusive of CPI adjustment to December 31, 2011 equals approximately NIS 130,600 (approximately $34,180) and approximately NIS­­­­­­­­­­­­­­­­­­­­­ 3,900 ( approximately $1,020), respectively).
 
Employment Agreement of Amos Shapira
 
Mr. Amos Shapira, our President and Chief Executive Officer until December 31, 2011, is entitled to a gross monthly salary of NIS 120,000, linked to the Israeli CPI (approximately NIS 141,000 as of December 31, 2011).  He is also entitled to a company car, the use of a cellular phone and to reimbursement of incidental private expenses in the amount of NIS 9,000 per year. Mr. Shapira is entitled to a fixed bonus equal to six month’s salary per year, linked to Israeli CPI, in respect of which no social benefits are accrued and an annual bonus based on our annual profits that shall not exceed NIS 2.78 million. Mr. Shapira is also entitled to participate in our share option plan (such plan was adopted in September 2006). Mr. Shapira’s agreement contains provisions for vacation days, sick leave, managers’ insurance and an education fund. The aggregate monthly cost to us of Mr. Shapira’s employment in 2011 amounted to approximately NIS 196,000 (approximately $51,300).Mr. Shapira will continue to receive his salary and benefits until December 31, 2012. In January 2012, we have agreed to pay Mr. Shapira a special payment in the amount of twelve monthly salaries, in return for his undertaking not to compete with us, directly or indirectly, for a period ending December 31, 2013. As of December 31, 2011, we have recorded a provision in the amount of NIS 4.16 million to cover Mr. Shapira's above retirement settlement.
 
Employment Agreement of Nir Sztern
 
Mr. Nir Sztern, our Chief Executive Officer as of January 1, 2012, is entitled to a gross monthly salary of NIS 90,000.  He is also entitled to a company car and the use of a cellular phone. Mr. Sztern is entitled to an annual bonus based on our annual profits with a maximum bonus equal to 10 months' salary, linked to Israeli CPI, in respect of which no social benefits are accrued. Mr. Sztern is also entitled to participate in our share option plan. Mr. Sztern’s agreement contains provisions for vacation days, sick leave, managers’ insurance and an education fund. The agreement is for an unspecified period of time and can be terminated by either party with advance notice of three months. Mr. Sztern will continue to receive his salary and benefits for a period of three months after termination by either party, unless we terminate the agreement for cause. Mr. Sztern's terms of employment remained unchanged from his previous position as Netvision's CEO.
 
 
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C.          BOARD PRACTICES
 
Corporate Governance Practices
 
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Israeli Companies Law, 1999, or the Companies Law, relating to such matters as external directors, the audit committee and the internal auditor. These matters are in addition to the requirements of the New York Stock Exchange and other relevant provisions of U.S. securities laws. Under the New York Stock Exchange rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the comparable New York Stock Exchange requirements, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members. We follow the Companies Law, the relevant provisions of which are summarized in this annual report, and comply with the New York Stock Exchange requirement to solicit proxies from our shareholders in respect of each meeting of shareholders.
 
For a summary of the significant differences between our corporate governance practices as a foreign private issuer and those required of U.S. domestic companies under NYSE Listing Standards see “Item 16G – Corporate Governance”.
 
Under the Companies Law, our Board of Directors must determine the minimum number of directors having financial and accounting expertise, as defined in the regulations of the Companies Law, that our Board of Directors should have.  In determining the number of directors required to have such expertise, the Board of Directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our Board of Directors has determined that we require at least two directors with the requisite financial and accounting expertise and that Messrs. Dankner, Erel, Cohen, Bronshtein, Gavrieli, Raz and Lusky have such expertise. The Companies Law and the regulations promulgated thereunder also require that at least one of our External Directors has financial and accounting expertise and consider a person who is an audit committee independent financial expert according to a foreign law, to comply with that requirement.  Our Board of Directors has determined that Ms. Ronit Baytel qualifies as an "audit committee financial expert" as defined by the SEC in Item 16.A of Form 20-F.
 
Board of Directors and Officers
 
Our Board of Directors currently consists of fourteen directors, including four independent directors under the rules of the Sarbanes-Oxley Act applicable to audit committee members, of which two also qualify as external directors under the Companies Law.  Ten of our current directors, including independent directors Mr. Waxe and Mr. Kunda, were elected at our annual shareholders meeting held in July 2011. Our external directors, Mr. Barnea and Ms. Baytel were elected in our annual shareholders meeting held in April 2010 for a term of three years. Two additional directors, Messrs. Dankner and Topaz, were appointed by DIC, as founding shareholder, in accordance with our license and articles of association’s requirement that at least 20% of our directors be appointed by Israeli citizens and residents from among our founding shareholders. We do not enter into service contracts with our directors. Our articles of association provide that we must have at least five directors.
 
Each director (other than external directors and directors required to be appointed by Israeli citizens and residents from among our founding shareholders) will hold office until the
 
 
next annual general meeting of our shareholders following his or her election. The approval of at least a majority of the voting rights represented at a general meeting and voting on the matter is generally required to remove any of our directors from office (other than external directors  and directors required to be appointed by Israeli citizens and residents from among our founding shareholders), provided that directors appointed by the Board of Directors may also be removed by the Board of Directors.  A majority of our shareholders at a general meeting may elect directors or fill any vacancy, however created, in our Board of Directors (other than external directors and directors required to be appointed by Israeli citizens and residents from among our founding shareholders).  In addition, directors, other than an external director or a director required to be appointed by Israeli citizens and residents from among our founding shareholders, may be appointed by a vote of a majority of the directors then in office.
 
Our articles of association provide, as allowed by Israeli law, that any director may, by written notice to us, appoint another person who is not a director to serve as an alternate director (subject to the approval of the chairman of the Board of Directors; and in the case of an appointment made by the chairman, such appointment shall be valid unless objected to by the majority of other directors) and may cancel such appointment.  The term of appointment of an alternate director is unlimited in time and scope unless otherwise specified in the appointment notice, or until notice is given of the termination of the appointment. No director currently has appointed any other person as an alternate director.  The Companies Law stipulates that a person who serves as a director may not serve as an alternate director except under very limited circumstances.  An alternate director has the same responsibility as a director.
 
Each of our executive officers serves at the discretion of our Board of Directors and holds office until his or her successor is elected or until his or her earlier resignation or removal.  There are no family relationships among any of our directors or executive officers.
 
External Directors
 
Qualifications of external directors
 
Companies incorporated under the laws of the State of Israel whose shares are listed on a stock exchange are required by the Companies Law to appoint at least two external directors.  External directors are required to possess professional qualifications as set out in regulations promulgated under the Companies Law. The appointment of our external directors was approved by our shareholders in May 2007 for an initial term of three years and in April 2010 for a second term of three years.  The Companies Law provides that a person may not be appointed as an external director if the person, or the person’s relative, partner, employer or any entity under the person’s control, has or had during the two years preceding the date of appointment, any affiliation with the company or any entity controlling, controlled by or under common control with the company; a person may not be appointed as an external director in a company that does not have a controlling shareholder, in the event that he has affiliation, at the time of his appointment, to the chairman, chief executive officer, a 5% shareholder or the chief financial officer; a person may not be appointed as an external director if he, his relative, partner, employer, supervisor, or an entity he controls, has business or professional relationship with any of the persons with which the external director may not be affiliated ,even in not maintained on a regular basis, other than negligible relations.
 
The term affiliation includes:
 
 
 
 
·
an employment relationship;
 
 
·
a business or professional relationship maintained on a regular basis;
 
 
·
control; and
 
 
·
service as an office holder, excluding service as a director in a private company prior to its initial public offering if such director was appointed in order to serve as an external director following the offering.
 
The term “office holder” is defined in the Companies Law as a general manager, chief business manager, deputy general manager, vice general manager, any manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions, without regard to such person’s title, and a director.  Each person listed above under “Item 6.A - Directors and Senior Management,” except Gil Ben-Itzhak, is an office holder for this purpose.
 
No person may serve as an external director if the person’s position or other business interests creates, or may create, a conflict of interest with the person’s responsibilities as a director or may otherwise interfere with the person’s ability to serve as a director.  If at the time an external director is appointed all current members of the board of directors are of the same gender, then that external director must be of the other gender.
 
Until the lapse of two years from termination of office, a company may not appoint an external director, his or her spouse and child, as an office holder in that company or another company under the same control, and cannot employ or receive services from that person for pay or grant any benefit, either directly or indirectly, including through a corporation controlled by that person, and in regards to a relative that is not his or her spouse or child -  until the lapse of one year.
 
Election of external directors
 
External directors are elected by a majority vote at a shareholders’ meeting, provided that either:
 
 
·
at least a majority of the shares of non-controlling shareholders voted at the meeting vote in favor of the election of the external director; or
 
 
·
the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed 2% of the aggregate voting rights in the company.
 
The initial term of an external director is three years and he or she may be reelected to two additional terms of three years by means of one of the following mechanisms: (i) the board of directors proposed the nominee and his appointment was approved by the shareholders in the manner required to appoint external directors for their initial term, or (ii) a shareholder holding 1% or more of the voting rights proposed the nominee, and the nominee is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations with the controlling shareholders, provided that, the aggregate votes cast by shareholders who are not controlling shareholders and do not have a personal interest in the matter as a result of their relations with the controlling shareholders in favor of the
 
 
 
nominee constitute more than 2% of the voting rights in the company. Thereafter, he or she may be reelected by our shareholders for additional periods of up to three years each only if the audit committee and the board of directors confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period is beneficial to the company.  An external director may only be removed by the same percentage of shareholders votes as is required for his or her election, or by a court, and then only if the external director ceases to meet the statutory qualifications or violates his or her duty of loyalty to the company.  If an external directorship becomes vacant, a company’s board of directors is required under the Companies Law to call a shareholders’ meeting promptly to appoint a new external director.
 
Each committee of a company’s board of directors that has the right to exercise a power delegated by the board of directors is required to include at least one external director, and the audit committee is required to include all of the external directors. An external director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with services provided as an external director.
 
Israeli-Appointed Directors
 
Our license requires, and our articles of association provide, that at least 20% of our directors will be appointed and removed by shareholders who are Israeli citizens and Israeli residents from among our founding shareholders. If our Board of Directors is comprised of 14 directors or less, the Israeli shareholders will be entitled to appoint two directors, and if our Board of Directors is comprised of between 15 and 24 directors, the Israeli shareholders will be entitled to appoint three directors. Our articles of association provide that DIC, as founding shareholder, is responsible for complying with the requirement under our license that Israeli citizens and residents from among our founding shareholders hold at least 20% of our outstanding shares, and that so long as DIC so complies, it will be entitled to appoint and remove these directors.
 
Board Committees
 
Our Board of Directors has established an audit committee, analysis committee, option committee and a security committee.
 
Audit committee
 
Under the Companies Law, the board of directors of a public company must establish an audit committee. The audit committee must consist of at least three directors and must include all of the company’s external directors and the majority of its members is required to be independent (as such term is defined under the Israeli Companies Law). The chairman of the audit committee is required to be an external director. The audit committee may not include the chairman of the board, any director employed by the company or by its controlling shareholder or by an entity controlled by the controlling shareholder,  a director who regularly provides services to the company or to its controlling shareholder or to an entity controlled by the controlling shareholder, and any director who derives most of its income from the controlling shareholder, a controlling shareholder or any of a controlling shareholder’s relatives. The members of the audit committee are also required to meet the independence requirements established by the SEC in accordance with the requirements of the Sarbanes-Oxley Act.
 
 
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Our audit committee provides assistance to our Board of Directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting and internal control functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management. Under the Companies Law, the audit committee is required to identify deficiencies in the management of the company, including by consulting with the internal auditor or the independent accountants, and recommending remedial actions to the board of directors, assessing the scope of work and compensation of the company's independent accountant, assessing the company's internal audit function and the performance of its internal auditor, setting whistle blower procedures (including in respect of the protections afforded to whistle blowers) and is responsible for determining whether certain related party actions and transactions are "material" or "extraordinary" in connection with their approval procedures, reviewing and approving certain related party transactions, as described below. The audit committee may not approve such a related party transaction unless at the time of approval the two external directors were serving as members of the audit committee and at least one of them was present at the meeting at which the approval was granted.
 
Our audit committee is composed entirely of independent members (both under the Israeli Companies Law and the Sarbanes-Oxley Act and includes all the external directors) - Messrs. Barnea (chairman), Waxe , Baytel and Kunda. Our board of directors determined Ms. Baytel to be qualified to serve as an "audit committee financial expert" as defined by the SEC's rules.
 
Financial exposure management subcommittee
 
Our financial exposure management subcommittee, which is a subcommittee of our audit committee, was nominated by our board of directors and reviews our financial exposures, investment and hedging policies and recommends to our board of directors how we might enhance our investment and hedging performance. Our financial exposure management subcommittee consists of our external directors, Barnea and Baytel.
 
Analysis committee
 
Our analysis committee reviews our costs and annual budget and recommends ways to achieve cost efficiency in our activities to our Board of Directors. Our Analysis committee also reviews our operations and future plans and recommends how we might enhance our present and future performance to our Board of Directors.  Our analysis committee consists of Messrs. Bronshtein (chairman), Erel, Cohen, Livnat, Waxe, Barnea, Kunda, Lusky andTopaz.
 
Option committee
 
Our option committee administers the issuance of options under our 2006 Share Incentive Plan to our employees who are not office holders, as well as any actions and decisions necessary for the ongoing management of the plan. Our option committee consists of Messrs. Erel (chairman), Dankner, Livnat and Barnea.
 
 
132
 
Security committee and observer
 
Our security committee, which we were required to appoint once we became a public company pursuant to our license, deals with matters concerning state security. Only directors who have the requisite security clearance by Israel’s General Security Services may be members of this committee. The committee is required to be comprised of at least four members, including at least one external director. In addition, the Minister of Communications is entitled under our license to appoint a state employee with security clearance to act as an observer in all meetings of our Board of Directors and its committees. Such an observer was appointed in February 2008. Our security committee consists of Messrs. Waxe, Bisker, Cohen and Barnea.
 
Internal Auditor
 
Under the Companies Law, the board of directors of a public company must appoint an internal auditor nominated by the audit committee. The role of the internal auditor is to examine whether a company’s actions comply with applicable law and orderly business procedure.  Under the Companies Law, the internal auditor may not be an interested party or an office holder, or a relative of any of the foregoing, nor may the internal auditor be the company’s independent accountant or its representative. An interested party is generally defined in the Companies Law as a 5% or greater shareholder, any person or entity who has the right to designate one director or more or the chief executive officer of the company or any person who serves as a director or as the chief executive officer. Our internal auditor is Mr. Eli Nir, CPA.
 
Approval of Specified Related Party Transactions under Israeli Law
 
Fiduciary duties of office holders
 
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company. The duty of care requires an office holder to act with the degree of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means, in light of the circumstances, to obtain:
 
 
·
information on the appropriateness of a given action brought for his or her approval or performed by virtue of his or her position; and
 
 
·
all other important information pertaining to these actions.
 
The duty of loyalty of an office holder includes a duty to act in good faith and for the best interests of the company, including to:
 
 
·
refrain from any conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs;
 
 
·
refrain from any activity that is competitive with the company;
 
 
·
refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and
 
 
 
 
·
disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder.
 
Personal interests of an office holder
 
The Companies Law requires that an office holder disclose any personal interest that he or she may have and all related material information known to him or her relating to any existing or proposed transaction by the company promptly and in any event no later than the first meeting of the board of directors at which such transaction is considered. If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of these people.
 
Under the Companies Law, an extraordinary transaction is a transaction:
 
 
·
other than in the ordinary course of business;
 
 
·
that is not on market terms; or
 
 
·
that is likely to have a material impact on the company’s profitability, assets or liabilities.
 
Under the Companies Law, once an office holder complies with the above disclosure requirement, the transaction can be approved, provided that it is not adverse to the company’s interest. A director who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee, will generally not be present at this meeting or vote on this matter unless a majority of the directors or members of the audit committee have a personal interest in the matter. If a majority of the directors have a personal interest in the matter, the matter also generally requires approval of the shareholders of the company. Under the Companies Law, unless the articles of association provide otherwise, a transaction with an office holder, or a transaction with a third party in which the office holder has a personal interest, requires approval by the board of directors. If it is an extraordinary transaction or an undertaking to indemnify or insure an office holder who is not a director, audit committee approval is required, as well. Arrangements regarding the compensation, indemnification or insurance of an officer holder who is not a director require the approval of the audit committee and board of directors, in that order. Arrangements regarding the compensation, indemnification or insurance of a director require the approval of the audit committee, board of directors and shareholders, in that order. Our articles of association provide that a non-extraordinary transaction with an office holder, or with a third party in which an office holder has a personal interest, may be approved by our Board of Directors, by our Audit Committee or, if the transaction involves the provision of our communications services and equipment or involves annual payments not exceeding NIS 250,000 per transaction, by our authorized signatories.
 
Personal interests of a controlling shareholder
 
Under the Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from his or her
 
 
position on the board of directors or any other position with the company. Accordingly, DIC, and entities and persons that directly or indirectly control DIC, are considered to be our controlling shareholders. Extraordinary transactions with a controlling shareholder or its relatives or in which a controlling shareholder has a personal interest, directly and indirectly, including through a company controlled by him or her, for the receipt of services from him or her by the company, and the terms of compensation of a controlling shareholder or his or her relative, who is an employee or director, require the approval of the audit committee, the board of directors and a majority of the shareholders of the company, in that order. In addition, the shareholders approval must fulfill one of the following requirements:
 
 
·
at least majority of the shareholders who have no personal interest in approving the transaction and who vote on the matter vote in favor of the transaction; or
 
 
·
the shareholders who have no personal interest in the transaction who vote against the transaction do not represent more than 2% of the voting rights in the company.
 
In addition, any such extraordinary transaction whose term is more than three years, require approval as described above every three years, unless (with respect to transactions not involving management fees or compensation) the audit committee approves that a longer term is reasonable under the circumstances.
 

Duties of shareholders
 
Under the Companies Law, a shareholder has a duty to refrain from abusing his or her power in the company and to act in good faith in exercising its rights in, and performing its obligations to the company and other shareholders, including, among other things, voting at general meetings of shareholders on the following matters:
 
 
·
an amendment to the articles of association;
 
 
·
an increase in the company’s authorized share capital;
 
 
·
a merger; and
 
 
·
approval of related party transactions that require shareholders approval.
 
In addition, any controlling shareholder, any shareholder who knows that its vote can determine the outcome of a shareholders’ vote and any shareholder who, under the company’s articles of association, can appoint or prevent the appointment of an office holder or holds any other right in respect of the company, is required to act with fairness towards the company. The Companies Law does not describe the substance of this duty except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness.
 
Approval of Private Placements
 
Under the Companies Law, a private placement of securities requires approval by the board of directors and the shareholders of the company if it will cause a person to become a controlling shareholder or if:
 
 
 
 
·
the securities issued amount to 20% or more of the company’s outstanding voting rights before the issuance;
 
 
·
some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and
 
 
·
the transaction will increase the relative holdings of a shareholder that holds 5% or more of the company’s outstanding share capital or voting rights or that will cause any person to become, as a result of the issuance, a holder of more than 5% of the company’s outstanding share capital or voting rights.
 
D.          EMPLOYEES
 
Our ability to achieve our strategic goals largely depends on our employees.  Consequently, we strive to recruit the most suitable candidates for each position, to give our employees the best training needed to qualify them for their tasks within our organization and aim to keep them satisfied while being productive and efficient. We implement a comprehensive review system that periodically analyzes our employees’ performance in order to improve their performance and in order to enable us to properly compensate, retain and promote our best employees.  Since we are committed to provide the best service to our subscribers, approximately 81% of our work force (excluding Netvision subsidiaries employees) is engaged in customer facing positions.
 
The numbers and breakdowns of our full-time equivalent employees as of the end of the past three years are set forth in the following table:
 
   
Number of Full-Time Equivalent Positions
 
 
Unit
 
December 2009 **
   
December 2010 **
   
December 2011 **
 
Management and headquarters
    34       37       68  
Human resources
    54       52       72  
Marketing
    80       83       107  
Customers*
    3,452       3,779       5,518  
Finance
    133       134       176  
Technologies
    679       596       851  
Netvision subsidiaries***
    -       -       462  
Total
    4,432       4,681       7,254  

* Includes the customer facing units: business customers, sales and services, operations and supply chain.
**Including 118, 7 and  _ employees previously engaged through subcontractors, mainly in the Technologies  and Supply chain units during  2009, 2010 and 2011 respectively; in 2010 including  289 employees of Dynamica and excluding 46 employees previously employed by us which are employed by Amdocs, as part of outsourcing services related to our billing system; in 2011 including  313 employees of Dynamica and 1,644 of Netvision.
*** In which Netvision has 50% or more of  the issued share capital.

 
Israeli labor laws govern the length of the workday, minimum wages for employees, provisions concerning for hiring and dismissing employees, determination of severance pay, annual leave, sick days and other conditions of employment. Israeli law generally requires severance pay upon the retirement or death of an employee or termination of employment. Commencing in October 2008, Israeli law requires us to hire certain workers retained through subcontractors who provided us services for a certain minimum period. We are complying with this obligation. In addition, under an 2008 order issued by the Ministry of Industry,
 
 
Commerce and Labor, all Israeli employers are obligated to contribute to a pension plan, amounts equal to a certain percentage of the employee's wages, for all employees, after a certain minimum period of employment. Under that order, contribution to a pension plan increases gradually until 2014 and up to 6% of the employee’s wages, with additional identical contribution for severance pay. We contribute to the majority of our employees' pension arrangements a percentage higher than that required by the 2008 order, which are also intended to cover future severance payment.  A provision in our financial reports covers severance pay to those employees who were not entitled to managers’ insurance or other pension arrangements or for the balance between future severance pay according to the law and the contribution for severance payment, made according to said order. Furthermore, we and our employees are required to make payments to the National Insurance Institute, which is similar to the U.S. Social Security Administration. Such amounts also include payments by the employee for health insurance. The total payments to the National Insurance Institute are equal to approximately 17.9% of an employee’s wages (up to a specified amount), of which the employee contributes approximately 12% and the employer contributes approximately 5.9%.
 
We enter into personal employment agreements with our employees on either a monthly (in most cases, full-time positions) or hourly basis. Employment agreements with most of our employees are at will. Substantially all of our employees have signed non-disclosure and non-competition agreements, although the enforceability of non-competition agreements is limited under Israeli law.
 
Our employee compensation structure is aimed at encouraging and supporting employee performance towards enabling us to meet our strategic goals. Approximately 80% of our customer facing employees are entitled to performance-based incentives, which are granted mainly to customer-facing personnel, such as sales and service employees. In addition, some of our employees are entitled to an annual bonus based on our overall performance, subject to the discretion of our Board of Directors. We also contribute funds on behalf of some of our employees to an education fund.
 
We have entered into agreements with a number of manpower agencies and programming companies under which they provide us with temporary workers.
 
Our employees are not represented by any labor union. Since our inception, we have not experienced labor-related work stoppages and believe that our relations with our employees are good.
 
E.          SHARE OWNERSHIP
 
As of December 31, 2011, one of our directors, Mr. Nochi Dankner may be deemed to beneficially own 46,852,982, or approximately 47.1%, of our ordinary shares. 43,381,135 ordinary shares of these are beneficially owned by DIC and the voting rights in additional 3,412,500 are held by DIC, of which Mr. Dankner is the Chairman of the board of directors and 59,347 ordinary shares are held by indirect subsidiaries of IDB Development (of which Mr. Dankner is the Chairman of the board of directors), for their own account. This does not include 584,226 ordinary shares held as of that date for members of the public through, among others, provident funds, mutual funds, pension funds, exchange traded funds, insurance policies and unaffiliated third-party client accounts, which are managed by such subsidiaries. Mr. Dankner is also a controlling shareholder and the Chairman of the board of
 
 
directors of IDB. IDB Development, IDB, Mr. Dankner and each of our other directors who are affiliated with IDB or DIC, disclaim beneficial ownership of such shares.
 
Except as described above, none of our executive officers or directors beneficially owns 1% or more of our outstanding ordinary shares.
 
2006 Share Incentive Plan
 
The Share Incentive Plan was introduced in September 2006.  It is an option plan open to all our employees, directors, consultants and sub-contractors and to those of our affiliates and our shareholders’ affiliates.  Under the plan, our Board of Directors (or an option committee to which such authority may be delegated by our Board of Directors) is authorized to determine the terms of the awards, including the identity of grantees, the number of options or restricted stock units (“RSUs”) to be granted, the vesting schedule and the exercise price.  The options or RSUs have a term of six years and vest in four equal installments on each of the first, second, third and fourth anniversary of the date of grant.  Under the plan, unvested options or RSUs terminate immediately upon termination of employment or service.  The plan, as amended in 2008 and 2011, defines acceleration events of options or RSUs granted, including a merger, a consolidation, a sale of all or substantially all of our consolidated assets, or the sale or other disposition of all or substantially all of our outstanding shares. The plan terminates upon the earlier of ten years from its adoption date or the termination of all outstanding options or RSUs pursuant to an acceleration event.  The terms of the 2006 Share Inventive Plan provide for a net exercise mechanism, the result of which is to require us to issue a smaller number of ordinary shares than represented by the outstanding options.  Unless the Board of Directors otherwise approves, the number of ordinary shares issuable by us upon the exercise of an option will represent a market value that is equal to the difference between the market price of the ordinary shares and the option exercise price of the exercised options, at the date of exercise.  Distribution of cash dividends before the exercise of the options reduces the exercise price of each option by an amount equal to the gross amount of the dividend per share distributed.

In May 2011, our board of directors resolved to enlarge the initial pool of options or RSUs of our 2006 Share Incentive Plan from 2.5 million, by 1.4 million options or RSUs and to grant 1.06 million additional options to certain non-director officers and senior employees, out of which 315,000 options were granted to Mr. Amos Shapira, at an exercise price of US$ 31.74 per share (which expired following Mr. Shapira's resignation from office, according to the terms of the plan or his waiver). The options granted will be vested in three equal installments on each of the first, second and third anniversary of the date of the grant. The options of the first installment may be exercised within 24 months from their vesting and the second and third installments may be exercised with 18 month from their vesting.

As of December 31, 2011, an aggregate of 1,056,896 ordinary shares are issuable upon exercise of options according to the terms above and Mr. Ami Erel, our Chairman of the Board of Directors, and Mr. Amos Shapira, our Chief Executive Officer, each hold 54,647 of our ordinary shares.

 
ITEM 7. 
 
A.          MAJOR SHAREHOLDERS
 
The following table sets forth information regarding beneficial ownership of our shares as of December 31, 2011, by each person, or group of affiliated persons, known to us to be the beneficial owner of 5% or more of our outstanding shares.
 
In accordance with the rules of the SEC, beneficial ownership includes voting or investment power with respect to securities and includes any shares issuable pursuant to options that are exercisable within 60 days of December 31, 2011. Any shares issuable pursuant to options are deemed outstanding for computing the percentage of the person holding such options but are not outstanding for computing the percentage of any other person. The percentage of beneficial ownership for the following table is based on 99,481,487 ordinary shares outstanding as of December 31, 2011. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, our major shareholders do not have different voting rights and the persons named in the table have sole voting and investment power with respect to all ordinary shares held by them.

 
   
Shares Beneficially Owned
 
Name of Beneficial Owner
 
Number
   
Percent
 
             
Discount Investment Corporation Ltd.*
    46,793,635       47.04 %
Directors and executive officers as a group (29 persons)**
    47,005,465       47.25 %
*
DIC, a public Israeli company traded on the Tel Aviv Stock Exchange, is a majority-owned subsidiary of IDB Development Corporation Ltd., or IDB Development. Includes 31,192,780 ordinary shares held by DIC directly, 12,188,355 ordinary shares held by a wholly-owned subsidiary of DIC (namely, DIC Communication and Technology Ltd., an Israeli company) and 3,412,500 ordinary shares, representing approximately 3.43% of our issued and outstanding shares, held by two shareholders whose voting rights are vested in DIC. Does not include 59,347 ordinary shares (representing approximately 0.06% of our issued and outstanding shares) held as of December 31, 2011 by indirect subsidiaries of IDB Development for their own account and 584,226 ordinary shares (representing approximately 0.59% of our issued and outstanding shares) held as of that date for members of the public through, among others, provident funds, mutual funds, pension funds, exchange traded funds, insurance policies and unaffiliated third-party client accounts , which are managed by such subsidiaries.
 
IDB Development, an Israeli company, is a wholly-owned subsidiary of IDB Holding Corporation Ltd., or IDB, a public Israeli company traded on the Tel Aviv Stock Exchange.
 
 
IDB is controlled as follows:
 
 
·
Ganden Holdings Ltd., or Ganden, a private Israeli company controlled by Nochi Dankner (who is also the Chairman of the boards of directors of IDB, IDB Development and DIC and one of our directors) and his sister Shelly Bergman, held as of December 31, 2011, directly and through a wholly-owned subsidiary, approximately 54.78% of the outstanding shares of IDB;
 
 
·
Shelly Bergman, through a wholly-owned company, held as of December 31, 2011 approximately 4.17% of the outstanding shares of IDB;
 
 
·
Avraham Livnat Ltd., or Livnat, a private Israeli company controlled by Avraham Livnat (one of whose sons, Zvi Livnat, is a director and Executive Vice President of IDB, a director and Deputy Chairman of the board of directors of IDB Development and a director
 
 
of DIC, and another son, Shay Livnat, is one of our directors and a director of IDB Development), held as of December 31, 2011, directly and through a wholly-owned subsidiary, approximately 13.33% of the outstanding shares of IDB; and
 
 
·
Manor Holdings BA Ltd., or Manor, a private Israeli company controlled by Ruth Manor (whose son in law Assaf Topaz, is one of our directors and her son Dori Manor is a director of IDB, IDB Development and DIC), held as of December 31, 2011, directly and through a majority-owned subsidiary, approximately 13.32% of the outstanding shares of IDB.
 
Subsidiaries of Ganden, Livnat and Manor have entered into a shareholders agreement with respect to a majority of their holdings in IDB  for the purpose of maintaining and exercising control of IDB as a group. Their additional holdings in IDB are not subject to the shareholders agreement. The term of the shareholders agreement expires in May 2023. In February 2012, subsidiaries of Ganden, Livnat and Manor have entered into an additional agreement (which shall come into force upon the closing of a certain transaction) whereby such parties will act, among other things, to exclude Livnat from the existing control group of IDB, and Livnat will grant to Ganden and Manor an option to purchase from Livnat, and Ganden and Manor will grant to Livnat an  option to sell to them, shares of IDB held by Livnat.
 
Part of the foregoing holdings in IDB have been pledged to financial institutions as collateral for loans taken to finance the purchase of IDB's shares. Upon certain events of default, these financial institutions may foreclose on the loans and assume ownership of or sell such holdings.
 
Based on the foregoing, IDB and IDB Development (by reason of their control of DIC), Ganden, Manor and Livnat (by reason of their control of IDB) and Nochi Dankner, Shelly Bergman, Ruth Manor, and Avraham Livnat (by reason of their control of Ganden, Manor and Livnat, respectively) may be deemed to share with DIC the power to vote and dispose of our shares beneficially owned by DIC. Each of these entities (other than DIC) and persons disclaims beneficial ownership of such shares , and all of these entities and persons disclaim beneficial ownership of our shares held under management of subsidiaries of IDB Development for others.
 
**
Includes the 46,793,635 ordinary shares held, directly or indirectly, by DIC and 59,347 ordinary shares held by indirect subsidiaries of IDB Development, for their own account, which may be deemed to be beneficially owned by Nochi Dankner by virtue of his control of IDB. Does not include an aggregate of 584,226   of our ordinary shares held, as of December 31, 2011, by members of the public through, among others, provident funds, mutual funds, pension funds, exchange traded funds, insurance policies and unaffiliated third-party client accounts, which are managed by indirect subsidiaries of IDB Development. Each of our directors who is affiliated with IDB or DIC disclaims beneficial ownership of such shares. Also includes43,189  ordinary shares issuable upon the exercise of stock options that are exercisable on, or within 60 days following December 31, 2011, and 54,647 ordinary shares held by each of Messrs. Ami Erel and Amos Shapira as of December 31,2011.

 
As of December 31, 2011, we had twenty three holders of record of our equity securities who are, to our knowledge, located in the United States. The shares held by these holders of record represent 95.6% of our outstanding ordinary shares. However, this number is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are located because approximately 95.58% of our ordinary shares were held of record by Cede & Co. for the account of the brokers or other nominees, including the Tel Aviv Stock Exchange; approximately 43.61 % of our ordinary shares owned directly and indirectly by DIC is also held of record by Cede & Co.
 
In  2008 and 2011, DIC sold in several additional transactions approximately 16.47% of our then issued share capital to a financial institution which informed DIC at the time of its intention to place such shares for sale outside the United States to non-US investors. In 2009 DIC purchased minority stakes of approximately 1.97% of our then issued share capital from two shareholders (the voting rights of which were already held by DIC prior to the purchase). For additional details as to such shareholders' agreements, see below under "B. Related Party Transactions – Original 1997 shareholders agreements".
 
 
B.          RELATED PARTY TRANSACTIONS
 
Agreements among Our Shareholders
 
In September 2005, DIC acquired the shares and voting rights in our company held indirectly by BellSouth and the Safra brothers. In 2006, DIC sold a portion of these shares in four transactions to six financial investors based on the price of the Safra transaction, with adjustments for dividends paid and certain additions to such price accrued during the period from the closing of the Safra transaction to the applicable sale transaction. The following summaries of the agreements between DIC and certain other shareholders relate only to provisions that were in effect as of January 1, 2011 or thereafter.
 
Original 1997 shareholders agreements
 
Brian Greenspun, Daniel Steinmetz, Benjamin Steinmetz and Shlomo Piotrkowsky, who owned of record, directly or indirectly, an aggregate of approximately 5.5% of our then outstanding ordinary shares, granted the voting rights in these shares to BellSouth and the Safra brothers. These voting rights were assigned to DIC in connection with its acquisition of our control in September 2005. In 2009 DIC purchased the minority stakes held by Brian Greenspun and Benjamin Steinmetz (indirectly), representing approximately 1.97% of our then share capital. The remaining minority shareholders currently own approximately 3.43% of our outstanding ordinary shares. These minority shareholders are restricted from transferring these shares without the prior written consent of DIC and their transfer are subject to a right of first refusal in favor of DIC. Each of these minority shareholders has also committed not to compete, directly or indirectly, with our cellular communications business in Israel so long as he is a shareholder and for a period of one year thereafter.
 
Migdal 2006 share purchase agreement
 
In 2006, DIC sold 4% of our then outstanding ordinary shares to Migdal Insurance Company Ltd. and two of its affiliates, or the Migdal shareholders. As part of this transaction, DIC granted the Migdal shareholders a tag along right, in the event it sells shares resulting in it no longer being a controlling shareholder. In return, DIC has the right to force the Migdal shareholders to sell their shares in a transaction in which DIC sells all of its shares to a purchaser outside the IDB group. To the best of our knowledge, no such right has materialized.
 
Relationship with IDB
 
As of December 31, 2011, an aggregate amount of approximately NIS  214 million principal amount of our Series A, B,C,D and E Debentures were held by investors who are members of the IDB group and entities affiliated with IDB’s principal shareholders or officers, either for their own account or for the benefit of members of the public (through, among others, provident funds, mutual funds, pension funds, exchange traded funds, insurance policies and unaffiliated third-party client accounts, which are managed by indirect subsidiaries of IDB).
 
 As of December 31, 2011, an aggregate of 584,226 of our ordinary shares (not included in the holdings set forth in the Beneficial Owners' table above) were held by members of the public through, among others, provident funds, mutual funds, pension funds, exchange traded funds, insurance policies and unaffiliated third-party client accounts, which are managed by indirect subsidiaries of IDB.

 
141
 
In October 2006, we entered into an agreement with DIC, to benefit from the experience that DIC has in telecommunications and in the Israeli market generally, pursuant to which DIC provides us with services in the areas of management, finance, business and accountancy in consideration of NIS 2.0 million (linked to the Israeli Consumer Price Index for June 2006) plus VAT per year. Among the services included are consulting and assistance on managerial, economic and accounting issues, such as the preparation of an annual budget, strategic plans and central business processes for us. In addition, the provision of employees and officers of DIC and its affiliates to be directors of Cellcom is included in the agreement. This agreement is for a term of one year and is automatically renewed for one-year terms unless either party provides 60 days’ prior notice to the contrary. In July 2011, our annual shareholders meeting approved an amendment of the agreement so as to clarify that the DIC officers and employees whose service as directors are covered by the management fees, shall not include any person who serves solely as a director of a subsidiary (or several subsidiaries) of DIC (and does not serve as a director of DIC itself) and does not receive any compensation, other than director's fees, in his or her capacity as a director of any subsidiary of DIC. Also, due to an amendment to the Israeli Companies Law, an agreement with a controlling shareholder for a period or periods exceeding a total of three years, such as our management services agreement with DIC, cannot continue for more than three consecutive years unless re-approved by the audit committee, board of directors and shareholders every three years. Accordingly our audit committee, board of directors and annul shareholders meeting approved that the agreement may be renewed in accordance with its terms for up to three consecutive years from the anniversary of this agreement (October 2011 to October 2014).
 
In the ordinary course of business, from time to time, we purchase, lease, sell and cooperate in the sale of goods and services, or otherwise engage in transactions with entities that are members of the IDB group, entities affiliated with IDB’s principal shareholders or officers and entities otherwise engaged with such IDB member or affiliates in a manner that may create a personal interest of our controlling shareholders or directors. We believe that all such transactions are on commercial terms comparable to those that we could obtain from unaffiliated parties
 
Registration Rights Agreement
 
In 2006, we entered into a registration rights agreement with DIC, two wholly-owned subsidiaries of DIC which are shareholders and six other shareholders (some of whom no longer hold the registrable shares).  For a summary of the terms of the agreement, see “Item 10. Additional Information – C. Material Contracts.”
 
Merger with Netvision
 
On August 31, 2011, we completed a merger transaction between us, a wholly-owned subsidiary of ours and Netvision, pursuant to which the abovementioned subsidiary was merged with and into Netvision as the surviving company, in accordance with the relevant provisions of the Companies Law. Following the merger, Netvision was delisted from the TASE and became a private company wholly owned by us.
 
The aggregate merger consideration was approximately NIS 1.57 billion ($411 million). The merger consideration included interest at an effective rate of 5% per year, calculated based on actual days elapsed from April 1, 2011 until the completion of the
 
 
transaction, in accordance with the terms of the merger agreement. We financed the payment of the merger consideration by using cash on hand, as well as by issuance of additional debentures to the public in Israel.
 
Since both us and Netvision were public companies under the joint control of the IDB group, each of us was required by the Companies Law to obtain the approval of the audit committee, board of directors and a special majority of shareholders. Our audit committee and board of directors approved the merger on June 13, 2011 and June 15, 2011, respectively. On July 27, 2011, the merger was approved by our shareholders.
 
C.          INTERESTS OF EXPERTS AND COUNSEL
 
Not applicable.
 
ITEM 8. 
 
A.          CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
 
Consolidated Financial Statements
 
See Item 18.
 
Legal Proceedings
 
General
 
We are served from time to time with claims concerning various matters, including disputes with customers, former employees, commercial disputes with third parties with whom we do business and disputes with government entities, including local planning and building committees and the Ministry of Communications. These include purported class actions, filed mainly by our subscribers, regarding claims such as alleged overcharging of tariffs, misleading representations, providing services not in compliance with applicable law, our license’s requirements or a subscriber’s agreement.  The following is a summary of all significant or potentially significant litigation as well as all our  purported class actions, pending as of the date of this annual report.
 
Various legislative and regulatory changes have been imposed in recent years and additional changes may occur. As a result, the number of requests for certification of class action lawsuits against us have increased which may increase our legal exposure as a result of such class action lawsuits and our legal costs in defending against such suits. See “Item 3. Key Information – D. Risk Factors - We are exposed to, and currently are engaged in, a variety of legal proceedings, including class action lawsuits.”
 
In cases where the claim is approved, all amounts noted below will be adjusted to reflect changes in the Israeli CPI and statutory interest, from the date that each claim was filed.
 
Based on advice of counsel, we believe it is more likely than not that substantially all the claims and disputes detailed below will be determined in our favor and accordingly, no provision has been made in the financial statements in respect of these claims and disputes. We have made a provision in the amount of approximately NIS 74 million, for a class action recently decided against us and for the claim/s and dispute/s we are willing to settle or for
 
 
which we cannot reach a conclusion that it is more likely than not that the claim/s and dispute/s will be determined in our favor.
 
Purported class actions
 
28 purported class actions have been filed against us in connection with allegations that we unlawfully, in violation of our license or agreements with our subscribers, charged or overcharged our subscribers for our services, in amounts estimated by the plaintiffs to be from approximately NIS 5 million to approximately NIS 200 million or which were not estimated by these plaintiffs, if the lawsuits are certified as class actions. In three of the purported class actions (two for a total amount claimed if certified as class actions, of approximately NIS 14 millions and third in which no amount claimed was estimated),  settlement agreements in immaterial sums were filed with the court and the procedures are still pending. In a class action for an estimated amount claimed of NIS 28 million, a settlement agreement in which we guarantee the repayment of in-consequential sums by third parties was filed with the court and the procedure is still pending.
 
15 purported class actions were filed against us in connection with allegations that we misled our subscribers, in amounts estimated by the plaintiffs to be from approximately NIS 21 million to approximately NIS 2.7 billion, if the lawsuits are certified as class actions. In three of the purported class actions (for a total amount claimed if certified as class actions, of approximately NIS 149 million), settlement agreements of immaterial sums were filed with the court and the procedures are still pending. One purported class action (for which no amount claimed was estimated) was dismissed with prejudice and the plaintiffs appealed the ruling and another purported class action (for which no amount claimed was estimated) was dismissed following plaintiff's request and appealed by the Israeli General Counsel regarding a procedural question regarding such dismissal.
 
4 purported class actions were filed against us in connection with allegations that we unlawfully, in violation of our license or agreements with our subscribers, build and operate our network and sell handsets and related equipment, including in relation to alleged hazards relating to non ionizing radiation emitted from cell sites and end-user equipment in amounts estimated by the plaintiffs to be from approximately NIS 1 billion to approximately NIS 3.7 billion, if the lawsuits are certified as class actions.
 
3 purported class actions were filed against us in connection with allegations that we unlawfully sent to our subscribers and to other parties commercial messages, in amounts estimated by the plaintiffs in two purported class actions to be approximately NIS 3 million and approximately NIS 50 million and which were not estimated by the plaintiffs in the third purported class action, if the lawsuits are certified as class actions. In the purported class action in which no amount claimed was estimated, a settlement agreement for immaterial sums were filed with the court and the procedure is still pending.
 
3 purported class actions were filed against us in connection with allegations that we unlawfully, in violation of our license or agreements with our subscribers discriminate between our subscribers, in amounts estimated by the plaintiffs to be from approximately NIS 60 million to approximately NIS 306 million, if the lawsuits are certified as class actions.
 
2 purported class actions were filed against us in connection with allegations that we unlawfully, in violation of our license or agreements with our subscribers failed to provide
 
 
certain services, in amounts estimated by the plaintiffs to be approximately NIS 20 millions and approximately NIS 60 million, if the lawsuits are certified as class actions.
 
2 purported class actions were filed against us in connection with allegations that we failed to provide customer care in accordance with the provisions of our license and applicable law, in amounts estimated by the plaintiffs to be approximately NIS 107 millions and approximately NIS 361 million (which was filled against three additional operators without specifying the amount claimed from us), if the lawsuits are certified as class actions.
 
For additional details regarding purported class actions in claimed amounts exceeding NIS 1 billion, see note 31 to our consolidated financial statements included elsewhere in this annual report.
 
We have recorded appropriate provisions for each of the settlement agreements filed with the courts and described above.
 
In August 2009, the District Court of Central Region approved a request to certify a lawsuit as a class action, relating to an allegation that we breached the agreements with our subscribers by charging them for a call detail service we previously provided free of charge, without obtaining their consent. The total amount claimed was estimated by the plaintiffs to be approximately NIS 440 million. In December 2011, the Court decided against us, accepted the allegation and ordered us to repay our customers the sum charged for the service in the amount of approximately NIS 22 million plus interest and linkage differences from the date of each payment made by the subscribers, an amount of NIS 200,000 to be paid to the plaintiffs and a fee for the plaintiffs' attorney equal to 10% of the sum to be repaid plus VAT. In January 2012, we have appealed the judgment with the Supreme Court and the execution of the judgment was stayed until the appeal is decided. We have recorded a provision for the entire sum in our financial statements.
 
In November 2010, the District Court of Tel Aviv-Jaffa approved a request to certify a lawsuit as a class action, relating to an allegation that Netvision, our wholly owned subsidiary and two other long distance providers, misled the purchasers of certain prepaid cards for long distance calls bought between 2004 and 2008 in relation to certain bonus minutes and reduced certain minutes in certain circumstances. The total amount claimed from all the defendants was estimated by the plaintiffs to be approximately NIS 2.2 billion, of which approximately NIS 818 million was attributed to Netvision. In December 2010, the defendants filed a request for appeal with the Supreme Court challenging the decision and in March 2011 the district court's decision was stayed. A similar purported class action was filed against the defendants in February 2012. See note 31 to our consolidated financial statements included elsewhere in this annual report.
 
Dividend Policy
 
In February 2006, our board of directors adopted a dividend policy to distribute each year at least 75% of our annual net income determined (in accordance with IFRS for periods commencing on or after January 1, 2008), subject to applicable law, our license and our contractual obligations and provided that such distribution would not be detrimental to our cash needs or to any plans approved by our Board of Directors. In March 2007, our Board of Directors resolved to distribute dividends within the boundaries of the February 2006 dividend policy and until resolved otherwise, on a quarterly basis. In March 2012, in connection to our plans to raise additional debt, we amended the indenture included in our
 
 
shelf prospectus  to include additional undertakings in regards to certain new series of debentures, if offered by us, including a covenant not to distribute more than 95% of the profits available for distribution according to the applicable Israeli law (“Profits”), provided that if net leverage (defined as the ratio of net debt to EBITDA over four consecutive quarters) exceeds 3.5:1, we will not distribute more than 80% of the Profits and if net leverage exceeds 4.0:1, we will not distribute more than 70% of the Profits. In February 2012, we issued two new series of debenture to which such undertakings apply. See "Item 5. Operating and Financial Review and Prospects - B. Liquidity and Capital Resources - Debt Service –Shelf Prospectus". Our Board of Directors will consider, among other factors, our expected results of operation, including changes in pricing, regulation and competition, planned capital expenditure for technological upgrades and changes in debt service needs, including due to changes in interest rates or currency exchange rates, in order to reach its conclusion that a distribution of dividends will not prevent us from satisfying our existing and foreseeable obligations as they become due. In addition, there is an agreement among the controlling shareholders of IDB, our ultimate parent company, to target a dividend distribution of at least 50% of its distributable gains each year. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends or to pay dividends at a ratio to net income that is less than that paid in the past.  For example, our Board of Directors may determine that our cash needs for debt service, capital expenditures or operations may increase and that it would not be prudent to distribute dividends. Accordingly, shareholders should not expect that any particular amount will be distributed by us as dividends at any time, even if we have previously made dividend payments in such amount.
 
Our ability to pay dividends is subject to the following limitations under Israeli law: (1) dividends may only be paid out of cumulative retained earnings or out of retained earnings over the prior two years, provided that there is no reasonable concern that the payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due; and (2) our license requires that we and our 10% or more shareholders maintain at least $200 million of combined shareholders’ equity. DIC’s shareholders’ equity on December 31, 2011 was significantly well over $ 200 million.
 
We declare dividends in NIS and convert them for payment in US$ (where applicable) based upon the daily representative rate of exchange as published by the Bank of Israel prior to the distribution date.
 
In 2009 we distributed dividends in the amount of NIS 1,187 million ($311 million). In 2010, we distributed a dividend in the amount of NIS 1,327 million ($347 million). In April 2011, we distributed a dividend in the amount of approximately NIS 303 million ($79 million). In July 2011 we distributed a dividend in the amount of  approximately NIS 292 million ($76 million). In October 2011 we distributed a dividend in the amount of approximately NIS 232 million ($61 million). In January 2012 we distributed a dividend in the amount of approximately NIS 189 million ($ 49 million) for the third quarter of 2011 . The dividends distributed in respect of 2009, 2010 and the first nine months of 2011 constituted approximately 95% of our net income for the respective period and in some cases, part of our retained earnings from earlier periods as well.
 
On March 6, 2012 our board of directors declared a cash dividend for the fourth quarter of 2011 of NIS 0.72 per share, or approximately NIS 72 million in the aggregate. The dividend for the fourth quarter of 2011 constitutes approximately 95% of our net income for the quarter.
 
 
B.          SIGNIFICANT CHANGES
 
No significant change has occurred since December 31, 2011, except as otherwise disclosed in this annual report.
 
ITEM 9. 
 
A.          OFFER AND LISTING DETAILS
 
Trading in Israel

Our ordinary shares have traded on the Tel Aviv Stock Exchange under the symbol CEL since July 1, 2007.  Our ordinary shares do not trade on any other trading market in Israel.

The following table sets forth, for the periods indicated, the reported high and low prices in NIS for our ordinary shares on the Tel Aviv Stock Exchange, as retroactively adjusted by the Tel Aviv Stock Exchange to reflect the payment of dividends.
 
 
       
   
High
   
Low
 
   
NIS
   
NIS
 
Annually
           
2007
    84.3       60.0  
2008
    82.0       55.4  
2009
    98.2       56.6  
2010
    109.4       81.0  
2011
    105.9       59.5  
                 
Quarterly
               
2010
               
First Quarter
    107.7       92.8  
Second Quarter
    103.7       81.3  
Third Quarter
    95.6       81.0  
Fourth Quarter
    109.4       96.1  
2011
               
First Quarter
    105.9       97.3  
Second Quarter
    104.2       86.9  
Third Quarter
    90.5       70.0  
Fourth Quarter
    79.4       59.5  
                 
Monthly
               
2011
               
September
    75.4       70.0  
October
    79.4       69.9  
November
    77.9       61.2  
December
    63.4       59.5  
2012
               
January
               
February
               
                 
On March 5, 2012, the closing price per share of our Ordinary Shares on the TASE was NIS 49.6.
 
 
Trading in the United States

Our ordinary shares have traded on the New York Stock Exchange under the symbol CEL since February 7, 2007.

The following table sets forth, for the periods indicated, the high and low prices in $ for our ordinary shares on The New York Stock Exchange, as retroactively adjusted by the New York Stock Exchange to reflect the payment of dividends.

       
   
High
$
   
Low
$
 
Annually
           
2007
    20.8       10.2  
2008
    24.2       14.4  
2009
    26.0       14.1  
2010
    30.1       20.8  
2011
    30.1       15.7  
                 
Quarterly
               
2010
               
First Quarter
    28.2       25.2  
Second Quarter
    28.0       20.9  
Third Quarter
    26.1       20.8  
Fourth Quarter
    30.1       26.3  
2011
               
First Quarter
    29.8       26.8  
Second Quarter
    30.1       25.4  
Third Quarter
    26.5       18.9  
Fourth Quarter
    22.1       15.7  
                 
Monthly
               
2011
               
September
    20.9       18.9  
October
    22.1       18.6  
November
    21.1       16.1  
December
    16.6       15.7  
2012
               
January
    33.6       30.5  
February
    32.3       30.4  

On March 5, 2012, the closing price per share of our Ordinary Shares on the NSYE was $12.94.

B.          PLAN OF DISTRIBUTION
 
Not applicable.
 
C.          MARKETS
 
Our ordinary shares are listed on the New York Stock Exchange and Tel Aviv Stock Exchange under the symbol “CEL”
 
D.          SELLING SHAREHOLDERS
 
Not applicable.
 
 
E.          DILUTION
 
Not applicable.
 
F.          EXPENSES OF THE ISSUE
 
Not applicable.
 
ITEM 10. 
 
A.          SHARE CAPITAL
 
Not applicable.
 
B.          MEMORANDUM AND ARTICLES OF ASSOCIATION
 
Objects and Purposes
 
Our registration number with the Israeli registrar of companies is 51-1930125. Our object is to engage, directly or indirectly, in any lawful undertaking or business whatsoever as determined by our Board of Directors, including, without limitation, as stipulated in our memorandum of association.
 
Transfer of Shares
 
Fully paid ordinary shares are issued in registered form and may be freely transferred unless the transfer is restricted or prohibited by our articles of association, applicable law, our licenses, the rules of the SEC or the rules of a stock exchange on which the shares are traded.  The ownership or voting of ordinary shares by non-residents of Israel is not restricted in any way by our articles of association or the laws of the State of Israel, except for ownership by nationals of some countries that are, or have been, in a state of war with Israel.
 
According to our licenses, investors are prohibited from acquiring (alone or together with relatives or with other parties who collaborate on a regular basis) or transferring our shares, directly or indirectly (including by way of creating a pledge which if foreclosed, will result in the transfer of shares), in one transaction or a series of transactions, if such acquisition or transfer will result in a holding or transfer of 10% or more of any of our means of control, or from transferring any of our means of control if as a result of such transfer, control over our company will be transferred from one party to another, without the prior approval of the Ministry of Communications. Our specific licenses also require approval of the Minister of Communications before acquiring the ability to effect a significant influence over us. In this context, holding 25% of our means of control is presumed to confer significant influence. In addition, according to our licenses, if you hold more than 5% of our means of control, you may not hold, directly or indirectly, more than 5% of the means of control in Bezeq or another cellular operator in Israel (subject to certain exceptions) and may not serve as an office holder of one of our competitors, other than in specific circumstances and subject to the approval of the Ministry of Communications. For more details relating to these restrictions, please see “Item 4. Information on the Company – B. Business Overview – Government Regulations - Our Principal License” and our principal license, a convenience translation of which has been filed with the SEC. See "Item 19 – Exhibits". The holding and transfer restrictions under our licenses are posted on our website at www.cellcom.co.il under “Investor Relations –   Corporate Governance – Company Profile - Legal & Corporate.”
 
 
Voting
 
Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholder meeting.  Shareholders may vote at shareholder meetings either in person, by proxy or by written ballot. Shareholder voting rights may be affected by the grant of special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. The Companies Law provides that a shareholder, in exercising his or her rights and performing his or her obligations toward the company and its other shareholders, must act in good faith and in a customary manner, and avoid abusing his or her power. This is required when voting at general meetings on matters such as changes to the articles of association, increasing the company’s registered capital, mergers and approval of related party transactions. A shareholder also has a general duty to refrain from depriving any other shareholder of their rights as a shareholder. In addition, any controlling shareholder, any shareholder who knows that its vote can determine the outcome of a shareholder vote and any shareholder who, under the company’s articles of association, can appoint or prevent the appointment of an office holder, is required to act with fairness towards the company. The Companies Law does not describe the substance of this duty, except to state that the remedies generally available upon a breach of contract will apply also in the event of a breach of the duty to act with fairness, but recent case law addressing the substance of this duty, suggests that the duty to act in fairness towards the company may include in certain circumstances, the following: the duty to refrain from competing with the company (applicable to closely held companies), the duty to provide access to the company's documents to other shareholders, and the duty to refrain from exercising a minority shareholders' voting power in a manner aimed at "blackmailing" the controlling shareholder. As required under our license, our articles of association provide that any holdings of our ordinary shares that contravene the holding or transfer restrictions contained in our license, which are summarized under “—Transfer of Shares” and “Item 4. Information on the Company – B. Business Overview - Government Regulations—Our Principal License,” will not be entitled to voting rights. In addition, our license requires that as a condition to voting at any meeting of shareholders, in person or by proxy, each shareholder must certify that its holdings of our shares do not contravene the restrictions contained in our license.
 
Election of Directors
 
Our ordinary shares do not have cumulative voting rights for the election of directors.  Rather, under our articles of association our directors (other than external directors and directors appointed by Israeli citizens and residents from among our founding shareholders) are elected at a shareholders meeting by a simple majority of our ordinary shares.  As a result, the holders of our ordinary shares that represent more than 50% of the voting power represented at a shareholders meeting, have the power to elect any or all of our directors whose positions are being filled at that meeting, subject to the special approval requirements for external directors described under “Item 6.A – Directors and Senior Management—External Directors” and the right of DIC to directly appoint 20% of our directors described under “Item 6.A – Directors and Senior Management—Israeli Appointed Directors.” Directors may also be appointed for office by our Board of Directors until the next annual general meeting of shareholders.
 
Dividend and Liquidation Rights
 
Our board of directors may declare a dividend to be paid to the holders of ordinary shares on a pro rata basis.  Dividends may only be paid out of our profits and other surplus
 
 
funds, as defined in the Companies Law, as of our most recent financial statement or as accrued over the past two years, whichever is higher, or, in the absence of such profits or surplus, with court approval. In any event, a dividend is permitted only if there is no reasonable concern that the payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.  In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares on a pro rata basis. This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future. For a description of a covenant we undertook in March 2012, in connection to our plans to raise additional debt, in regards to our dividend distributions under certain circumstances see “Item 8. Financial Information – A. Statements and Other Financial Information - Dividend Policy” and “— B. Liquidity and Capital Resources – Debt Service – Public Debentures".
 
Shareholders Meetings
 
We are required to convene an annual general meeting of our shareholders once every calendar year within a period of not more than 15 months following the preceding annual general meeting. Our board of directors is required to convene a special general meeting of our shareholders at the request of two directors or one quarter of the members of our Board of Directors or at the request of one or more holders of 5% or more of our share capital and 1% of our voting power or the holder or holders of 5% or more of our voting power. All shareholders meetings require prior notice of at least 21 days, or up to 35 days if required by applicable law or regulation. We provide at least 40 day advance written notice, in accordance with the NYSE’s rules. The chairperson of our Board of Directors presides over our general meetings.  Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the date of the meeting.
 
Quorum
 
Our articles of association provide that the quorum required for any meeting of shareholders shall consist of at least two shareholders present, in person or by proxy or written ballot, who hold or represent between them at least one-third of the voting power of our issued share capital. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or, if not set forth in the notice to shareholders, to a time and place set by the chairperson of the meeting with the consent of the holders of a majority of the voting power represented at the meeting and voting on the question of adjournment.  At the reconvened meeting, the required quorum consists of at least two shareholders present, in person or by proxy or written ballot, unless the meeting was called pursuant to a request by our shareholders in which case the quorum required is the number of shareholders required to call the meeting as described under “—Shareholder Meetings.”
 
Resolutions
 
An ordinary resolution at a shareholders meeting requires approval by a simple majority of the voting rights represented at the meeting, in person, by proxy or written ballot, and voting on the resolution. Under the Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple
 
 
majority. A resolution for the voluntary winding up of the company requires the approval by holders of 75% of the voting rights represented at the meeting, in person or by proxy or written ballot, and voting on the resolution.
 
Modification of Class Rights
 
The rights attached to any class, such as voting, liquidation and dividend rights, may be amended by written consent of holders of a majority of the issued shares of that class, or by adoption of a resolution by a simple majority of the shares of that class represented at a separate class meeting.
 
Indemnification of Directors and Officers
 
Under the Companies Law, an Israeli company may not exempt an office holder from liability for breach of his duty of loyalty, but may exempt in advance an office holder from liability to the company, in whole or in part, for a breach of his or her duty of care (except in connection with distributions), provided the articles of association of the company allow it to do so.  Our articles of association allow us to do so.
 
Our articles of association provide that, subject to the provisions of the Companies Law, we may enter into a contract for insurance against liability of any of our office holders with respect to each of the following:
 
 
·
a breach of his or her duty of care to us or to another person;
 
 
·
a breach of his or her duty of loyalty to us, provided that the office holder acted in good faith and had reasonable grounds to assume that his or her act would not prejudice our interests;
 
 
·
a financial liability imposed upon him or her in favor of another person concerning an act performed in the capacity as an office holder.
 
 
·
reasonable litigation expenses, including attorney fees, incurred by the office holder as a result of an administrative enforcement proceeding instituted against him,   including a payment imposed on the office holder in favor of an injured party as set forth in the Israeli Securities Law and expenses that the office holder incurred in connection with a relevant proceeding under the Securities Law, including reasonable legal expenses, which term includes attorney fees.
 

We maintain a liability insurance policy for the benefit of our officers and directors. In respect to office holders that are or are related to controlling shareholders or in respect of whom our controlling shareholders have a personal interest, who may serve from time to time, such liability insurance was approved for a period of three years from our annual shareholder meeting held on July 2011.
 
Our articles of association provide that we may indemnify an office holder against:
 
 
·
a financial liability imposed on or incurred by an office holder in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court concerning an act performed in his or her capacity
 
 
as an office holder. Such indemnification may be approved (i) after the liability has been incurred or (ii) in advance, provided that the undertaking is limited to types of events which our Board of Directors deems to be foreseeable in light of our actual operations at the time of the undertaking and limited to an amount or criterion determined by our Board of Directors to be reasonable under the circumstances, and further provided that such events and amounts or criteria are set forth in the undertaking to indemnify;
 
 
·
reasonable litigation expenses, including attorney’s fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding was concluded without the filing of an indictment against him or her and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; or in connection with an administrative enforcement proceeding or a  financial sanction, including a payment imposed on the office holder in favor of an injured party as set forth in the Israeli Securities Law, 1968, as amended (the "Securities Law"), and expenses that the office holder incurred in connection with a relevant proceeding under the Securities Law, including reasonable legal expenses, which term includes attorney fees; and
 
 
·
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or charged to him or her by a court, in proceedings instituted by us or on our behalf or by another person, or in a criminal indictment from which he or she was acquitted, or a criminal indictment in which he or she was convicted for a criminal offense that does not require proof of intent, in each case relating to an act performed in his or her capacity as an office holder.
 
We have undertaken to indemnify our directors, officers and certain other employees for certain events listed in the indemnification letters given to them. In respect of office holder who are our controlling shareholders or are related thereto, or in respect of whom our controlling shareholders have a personal interest in their receiving indemnification letters from us, such indemnification was approved for a period of three years from our annual shareholder meeting held on July 2011. Excluding reasonable litigation expenses, as described above, the aggregate amount payable to all directors and officers and other employees who may have been or will be given such indemnification letters is limited to the amounts we receive from our insurance policy plus 30% of our shareholders’ equity as of December 31, 2001, or NIS 486 million, and to be adjusted by the Israeli CPI.
 
The Companies Law provides that a company may not exempt or indemnify an office holder, or enter into an insurance contract, which would provide coverage for any monetary liability incurred as a result of any of the following:
 
 
·
a breach by the office holder of his or her duty of loyalty unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
 
 
 
·
a breach by the office holder of his or her duty of care if the breach was done intentionally or recklessly;
 
 
·
any act or omission done with the intent to derive an illegal personal benefit; or
 
 
·
any fine or penalty levied against the office holder.
 
Under the Companies Law, any exemption of, indemnification of, or procurement of insurance coverage for, our office holders must be approved by our audit committee and our Board of Directors and, if the beneficiary is a director, by our shareholders.
 
Mergers and Acquisitions under Israeli Law
 
The Companies Law includes provisions that allow a merger transaction and requires that each company that is a party to a merger have the transaction approved by its board of directors and a vote of the majority of its shares at a shareholders meeting. For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares represented at the shareholders meeting that are held by parties other than the other party to the merger, or by any person who holds 25% or more of the shares or the right to appoint 25% or more of the directors of the other party, vote against the merger. Upon the request of a creditor of either party of the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger.  In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the requisite proposal for the merger has been filed by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each party.
 
The Companies Law also provides that an acquisition of shares of a public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder in the company. An acquisition of shares of a public company must also be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company and there is no existing 45% or greater shareholder in the company. These requirements do not apply if the acquisition (i) occurs in the context of a private placement by the company that received shareholder approval, (ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% shareholder of the company.  The special tender offer must be extended to all shareholders but the offeror is not required to purchase shares representing more than 5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are tendered by shareholders.  The special tender offer may be consummated only if (i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
 
If, as a result of an acquisition of shares, the acquirer will hold more than 90% of a company’s outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares.  If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to it. The law provides for appraisal rights if any shareholder files a request in court within six months
 
 
 
following the consummation of a full tender offer, but the acquirer may elect to determine that any shareholder tendering his shares will not be entitled to appraisal rights. If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares.
 
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders who are not exempt from Israeli income tax under Israeli law or an applicable tax treaty. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies by certain shareholders are restricted.  Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, tax then becomes payable even if no actual disposition of the shares has occurred.  For information regarding Israeli tax on the sale of our shares, please see “Item 10.E - Taxation—Israeli Tax Considerations—Capital Gains Tax on Sales of Our Ordinary Shares.”
 
Anti-Takeover Measures under Israeli Law
 
The Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including shares providing certain preferred or additional rights to voting, distributions or other matters and shares having preemptive rights.  We do not have any authorized or issued shares other than ordinary shares.  In the future, if we do create and issue a class of shares other than ordinary shares, such class of shares, depending on the specific rights that may be attached to them, may delay or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares.  The authorization of a new class of shares will require an amendment to our articles of association and to our memorandum, which requires the prior approval of a simple majority of our shares represented and voting at a shareholders meeting. Our articles of association provide that our Board of Directors may, at any time in its sole discretion, adopt protective measures to prevent or delay a coercive takeover of us, including, without limitation, the adoption of a shareholder rights plan.
 
C.          MATERIAL CONTRACTS
 
For a description of our material suppliers, see “Item 4. Information on the Company – A. History and Development of the Company – Significant Developments during 2011 – Acquisition of Netvision Ltd.”, “Item 4. Information on the Company – B. Business Overview – Network and Technology”, “Item 4. Information on the Company – B. Business Overview – Customer Care”, “Item 4. Information on the Company – B. Business Overview - Services and Products” and  “Item 4. Information on the Company – B. Business Overview – NETISION.”
 
For a description of our debt agreements, see “Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Debt Service – Public Debentures.”
 
 
Registration Rights Agreement
 
Upon the sale of shares by DIC to Goldman Sachs International on March 15, 2006, we entered into a registration rights agreement with Goldman Sachs International, DIC and two other shareholders who are subsidiaries of DIC on customary terms and conditions.  Upon the subsequent sales of shares by DIC to Migdal Insurance Company Ltd. and two of its affiliates, to Leumi & Co. Investment House Ltd. (an affiliate of Bank Leumi Le-Israel Ltd), and to Stocofin (Israel) Ltd. (an affiliate of the First International Bank of Israel Ltd.), these shareholders also joined the registration rights agreement. We refer to DIC, its two subsidiaries and the additional shareholders who are parties to the registration rights agreement as the registration rights holders. The shares eligible for registration under the agreement are ordinary shares held by the registration rights holders as of the respective dates they entered into the registration rights agreement and any additional ordinary shares such holders may thereafter acquire, so long as they are held by a registration rights holder or a “permitted transferee” (a person directly or indirectly controlling, controlled by or under common control with such registration rights holder) thereof. As of December 31, 2011, 43,381,135 ordinary shares, held by DIC directly and through its wholly owned subsidiary, are entitled to registration rights as well as any additional shares still held, if held, by the other shareholders who joined the agreement.
 
Commencing August 9, 2008, the registration rights holders are entitled to one demand registration per 12-month period, so long as such request is initiated by registration rights holders of at least 3.25% of the then outstanding registrable securities and the demand refers to a minimum of 3% of our then outstanding share capital, subject to customary deferral rights. In addition, in connection with any public offerings that we initiate in the future, if we propose to register any of our securities for our own account or for the account of any of our shareholders other than in a demand registration or in a registration relating solely to an incentive plan, the registration rights holders have piggyback rights to include their shares subject to customary underwriters’ cutback rights.  In the case of a cut back, each registration rights holder that is not a member of the IDB group will be entitled to register registrable shares in an amount equal to its percentage holding of the aggregate number of registrable shares held by all registration rights holders wishing to participate in such registration, or, if such registration rights holder then holds more than 20% of its holdings as of the date it signed the registration rights agreement, registrable shares in an amount equal to twice its percentage holding of the aggregate number of registrable shares held by all registration rights holders wishing to participate in such registration. Members of the IDB group will be entitled to register a number of registrable shares equal to the aggregate number of registrable shares to be included in the registration, less the registrable shares of all the other registration rights holders being registered pursuant to the foregoing calculation.
 
All registration rights terminate, with respect to any individual registration rights holder, at such time as all registrable shares of such holder may be sold without registration pursuant to Rule 144 under the Securities Act during any three-month period. We are required to pay all expenses incurred in carrying out the above registrations, as well as the reasonable fees and expenses of one legal counsel for the selling registration rights holders, except for underwriter discounts and commissions with respect to the shares of such holders. The agreement provides for customary indemnification and contribution provisions. Our initial public offering on February 2007 was effected in accordance with the registration rights agreement, except that the selling shareholders agreed to bear the expenses of the offering.
 
 
Underwriting agreement
 
We entered into an underwriting agreement among Goldman, Sachs & Co., Citigroup Global Markets, Inc. and Deutsche Bank Securities, Inc., as the representatives of the underwriters, and DIC and Goldman Sachs International, as the selling shareholders, on February 5, 2007, with respect to the ordinary shares sold in our initial public offering.
 
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect of such liabilities.
 
D.          EXCHANGE CONTROLS
 
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions. However, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
 
E.          TAXATION
 
U.S. Federal Income Tax Considerations
 
The following is a general discussion of certain material U.S. federal income tax consequences of ownership and disposition of the Company’s shares by a “U.S. holder” (as defined below).  This discussion does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a U.S. holder in light of the holder’s particular circumstances and does not address U.S. state, local and non-U.S. tax consequences.  The discussion applies only to U.S. holders (as defined below) that hold Company's shares as capital assets for U.S. federal income tax purposes and it does not describe all of the tax consequences that may be relevant to U.S. holders subject to special rules, such as certain financial institutions, insurance companies, dealers or traders in securities or foreign currencies, persons holding the shares as part of a hedge, straddle, conversion transaction or other integrated transaction, persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar, partnerships or other entities classified as partnerships for U.S. federal income tax purposes, persons liable for the alternative minimum tax, tax-exempt organizations, shareholders that own or are deemed to own 10% or more of the Company’s voting power, or shareholders that hold our shares in connection with a trade or business conducted outside of the United States.
 
This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof.  These laws are subject to change, possibly on a retroactive basis.  Shareholders are urged to consult their tax advisors regarding the U.S. federal, state, local and foreign tax consequences of purchasing, owning and disposing of Company's shares in light of their particular circumstances.
 
The discussion below applies only to U.S. holders.  As used herein, a “U.S. holder” is a beneficial owner of the Company’s shares that is eligible for the benefits of the Israel –U.S. income tax treaty and is, for U.S. federal income tax purposes:
 
 
·
a citizen or resident of the United States;
 
 
 
·
a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or
 
 
·
an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
 
If an entity that is classified as a partnership for U.S. federal income tax purposes holds Company's shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the entity.  Such entities and their partners or members should consult their tax advisors regarding the tax consequences of investments in the Company’s shares.
 
Taxation of Distributions
 
 Subject to the discussion in "- Passive Foreign Investment Company Rules" below, distributions paid on the Company’s shares, other than certain pro rata distributions of ordinary shares, will be treated as dividends to the extent paid out of current or accumulated earnings and profits (as determined under U.S. federal income tax principles).  Since the Company does not maintain calculations of its earnings and profits under U.S. federal income tax principles, U.S. holders will generally be required to treat such distributions as taxable dividends and include them in income on the date of receipt.  Subject to applicable limitations, dividends paid to certain non-corporate U.S. holders in taxable years beginning before January 1, 2013, will be taxable at a maximum rate of 15%.  The amount of a dividend will include any amounts withheld by the Company or its paying agent in respect of Israeli taxes. The dividend will be treated as foreign source income and will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code.
 
Dividends paid in NIS will be included in a U.S. holder’s income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars.  If the dividend is converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income.  A U.S. holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.  Such gain or loss would generally be treated as U.S. source ordinary income or loss.
 
Subject to applicable limitations that may vary depending upon a U.S. holder’s particular circumstances, Israeli taxes withheld from dividends at a rate not exceeding the applicable rate provided by the U.S.-Israel income tax treaty will be creditable against the holder’s U.S. federal income tax liability.  Israeli taxes withheld in excess of the applicable rate allowed by the treaty will not be eligible for credit against a U.S. holder’s federal income tax liability.  The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income.  Instead of claiming a credit, a U.S. holder may, at the holder’s election, deduct the otherwise creditable foreign taxes in computing the taxable income for the year, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all foreign taxes paid or accrued in the taxable year. The rules governing foreign tax credits are complex and U.S. holders should consult their tax advisors regarding the availability of foreign tax credits and the deductibility of foreign taxes in their particular circumstances.
 
 
Sale and Other Disposition of the Company’s Shares
 
Subject to the discussion in "- Passive Foreign Investment Company Rules" below, gain or loss realized on the sale or other disposition of the Company's shares will be capital gain or loss, and will be long-term capital gain or loss if the U.S. holder held the shares for more than one year.  The amount of gain or loss will be equal to the difference between the tax basis in the shares disposed of and the amount realized on the disposition.  Such gain or loss will generally be U.S. source gain or loss for foreign tax credit purposes. The deductibility of capital losses is subject to limitations.
 
Passive Foreign Investment Company Rules
 
The Company believes that it was not a “passive foreign investment company” for U.S. federal income tax purposes, or PFIC, for the taxable year of 2011. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, equity investments in less than 25%-owned entities) from time to time, there can be no assurance that the Company will not be considered a PFIC for any taxable year.  If the Company were to be treated as a PFIC for any taxable year during which a U.S. holder held a share in the Company, certain adverse consequences could apply to the U.S. holder. Specifically, gain recognized by a U.S. holder on a sale or other disposition of a share would be allocated ratably over the U.S. holder’s holding period for the share.  The amounts allocated to the taxable year of the sale or other exchange and to any year before the Company became a PFIC would be taxed as ordinary income in the current year.  The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, and an interest charge would be imposed on the resulting tax liability.  Further, any distribution in excess of 125% of the average of the annual distributions received by the U.S. holder during the preceding three years or the U.S. holder’s holding period, whichever is shorter, would be subject to taxation as described immediately above.  Certain elections may be available (including a mark-to-market election) to U.S. holders that may mitigate the adverse consequences resulting from PFIC status.  In addition, if we were to be treated as a PFIC in a taxable year in which we pay a dividend or the prior taxable year, the 15% dividend rate discussed above with respect to dividends paid to certain non-corporate holders would not apply.
 
Information Reporting and Backup Withholding
 
Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and backup withholding unless (i) the U.S. holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. holder provides a correct taxpayer identification number and certifies that the U.S. holder is not subject to backup withholding.  The amount of any backup withholding from a payment to a U.S. holder will be allowed as a credit against the U.S. holder’s U.S. federal income tax liability and may entitle the U.S. holder to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
 
Certain U.S. holders who are individuals, or are controlled by individuals, may be required to report on IRS Form 8983 information relating to their holdings of the Company's shares, subject to certain exceptions (including an exception for securities held in accounts
 
 
maintained by U.S. financial institutions). U.S. holders should consult their tax advisers regarding the application of these rules in the holders' particular circumstances.
 
Israeli Tax Considerations
 
The following is a discussion of certain material Israeli tax consequences to purchasers of our ordinary shares. The discussion also contains a description of certain relevant material provisions of the current Israeli income tax system applicable to companies in Israel, with special reference to its effect on us. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion.
 
This discussion applies to shareholders that hold our ordinary shares as capital assets and does not address all of the tax consequences that may be relevant to holders of our ordinary shares in light of their particular circumstances or certain types of holders of our ordinary shares subject to special tax treatment.  Because individual circumstances may differ, shareholders should consult their tax advisor to determine the applicability of the rules discussed below to them, including the application of Israeli or other tax laws. The discussion below is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
 
Taxation of Israeli Companies
 
General Corporate Tax Structure
 
Generally, Israeli companies are subject to corporate tax at the rate of 24% for the 2011 tax year and 25% for the 2012 tax year. Israeli companies are generally subject to capital gains tax at the corporate tax rate. Following an amendment to the Israeli Income Tax Ordinance which came into effect on January 1, 2012,  scheduled gradual reduction of the corporate tax rate in future years was canceled, and the corporate tax rate was increased to 25%  for the 2012 tax year and is scheduled to remain at such rate for future tax years .
 
Amendment No. 174 to the Income Tax Ordinance, enacted in January 2010, provides that Israeli Accounting Standard No. 29 will not apply with respect to the tax years 2007, 2008 and 2009, and as a result the International Financial Reporting Standards (IFRS) will not apply for purposes of determining taxable income for such tax years. In January 2012, Amendment No. 188 to the Income Tax Ordinance was enacted which provides that Israeli Accounting Standard No. 29 (and as a result IFRS) will not apply also with respect to the tax years 2010 and 2011. The effect of this amendment on our financial statements, included elsewhere in this annual report, is not material.
 
Capital Gains Tax on Sales of Our Ordinary Shares
 
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli resident companies, by non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise.  In calculating capital gain, the law distinguishes between real gain and inflationary surplus.  The inflationary surplus is the portion of the total capital gain equal to the increase in the relevant asset’s value that is attributable to the increase in the Israeli CPI between the date of purchase and the date of sale.  The real gain is
 
 
 
the excess of the total capital gain over the inflationary surplus.  A non-resident that invests in taxable assets with foreign currency, or any individual who holds securities the price of which is stated in foreign currency, may elect to calculate the amount of inflationary surplus in that foreign currency.
 
Taxation of Israeli Residents
 
As of January 1, 2012, the tax rate generally applicable to real capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 30%.  Additionally, if such shareholder is considered a significant shareholder at any time during the 12-month period preceding such sale, the tax rate will be 30%. For this purpose, a significant shareholder is one that holds, directly or indirectly, including with others, at least 10% of certain means of control in a company.
 
Israeli companies are generally subject to the corporate tax rate (see above) on capital gains derived from the sale of shares listed on a stock market.
 
Taxation of Non-Israeli Residents
 
Non-Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on the Tel Aviv Stock Exchange or a recognized stock exchange outside of Israel (including the New York Stock Exchange), provided that such shareholders did not acquire their shares prior to the issuer’s initial public offering  (in which case a partial exemption may be available) and that the gains were not derived from a permanent establishment maintained by such shareholders in Israel.  Shareholders that do not engage in activity in Israel generally should not be subject to such law.  However, a non-Israeli corporation will not be entitled to the exemption from capital gains tax if Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli corporation or (ii) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
 
In addition, under the Convention between the Government of the United States of America and the Government of Israel with respect to Taxes on Income, as amended, referred to as the U.S.-Israel tax treaty, the sale of our ordinary shares by a shareholder who qualifies as a resident of the United States within the meaning of the U.S.-Israel tax treaty and who is entitled to claim the benefits afforded to such person by the U.S.-Israel tax treaty, referred to as a treaty U.S. resident, and who holds its ordinary shares as a capital asset is also exempt from Israeli capital gains tax unless either (i) the treaty U.S. resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the treaty U.S. resident that is located in Israel.  However, under the U.S.-Israel tax treaty, a treaty U.S. resident would be permitted to claim a credit for taxes paid in Israel against the U.S. federal income tax imposed on the sale, subject to the limitations in U.S. laws applicable to foreign tax credits.  The U.S.-Israel tax treaty does not relate to U.S. state or local taxes.
 
 
Taxation of Dividends Paid on Our Ordinary Shares
 
Taxation of Israeli Residents
 
Following an amendment to the Israeli Income Tax Ordinance which came into effect on January 1, 2012, individuals who are Israeli residents are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25% (previously 20%), unless the recipient is a significant shareholder (as defined above) at any time during the 12-month period preceding the distribution in which case the applicable tax rate will be 30% (previously 25%).  The company distributing the dividend is required to withhold tax at the rate of 25% (previously 20%) (a different rate may apply to dividends paid on shares deriving from the exercise of stock options or other equity based awards granted as compensation to employees or office holders of the company).  Companies which are Israeli residents are generally exempt from income tax on the receipt of dividends from another Israeli company, unless the source of such dividends is located outside of Israel in which case tax will generally apply at a rate of 25%.
 
Taxation of Non-Israeli Residents
 
Non-residents of Israel are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25% unless the recipient is a significant shareholder at any time during the 12-month period preceding the distribution in which case the applicable tax rate will be 30%.  The company distributing the dividend is required to withhold tax at the source at the rate of 25%.
 
Under the U.S.-Israel tax treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a treaty U.S. resident is 25%.  The maximum rate of withholding tax on dividends that are paid in certain circumstances to a U.S. corporation holding 10% or more of our outstanding voting power throughout the tax year in which the dividend is distributed as well as the previous tax year, is 12.5%.
 
A non-resident of Israel who has dividend income derived from or accrued in Israel, from which tax was withheld at source, is generally exempt from the duty to file tax returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by such non-Israeli resident.
 
F.          DIVIDENDS AND PAYING AGENTS
 
Not applicable.
 
G.          STATEMENT BY EXPERTS
 
Not applicable.
 
H.          DOCUMENTS ON DISPLAY
 
We are sub ject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act, applicable to foreign private issuers. As a foreign private issuer, we are exempt from certain rules and regulations under the Exchange Act prescribing the content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act, with respect to their purchase and
 
 
sale of our ordinary shares. In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we file annual reports with the SEC on Form 20-F containing financial statements audited by an independent accounting firm. We also furnish reports to the SEC on Form 6-K containing unaudited financial information for the first three quarters of each fiscal year and other material information, in accordance with the reporting requirements applicable to us as a dual listed company and as required due to our controlling shareholder's reporting obligations with respect to us.   You may read and copy any document we file, including any exhibits, with the SEC without charge at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549.  Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Substantially all of our SEC filings are also available to the public at the SEC's website at http://www.sec.gov and as of July 2007 also at the TASE's website at http://maya.tase.co.il and at the Israeli Securities Authority's website at http://www.magna.isa.gov.il .
 
I.           SUBSIDIARY INFORMATION
 
Not applicable.
 
ITEM 11. 
 
In the course of our normal operations, we are exposed to market risks including fluctuations in foreign currency exchange rates, interest rates and the Israeli CPI. We are exposed to currency risks primarily as a result of purchasing inventory and fixed assets mainly in U.S. dollars while almost all of our cash receipts are in NIS. A substantial amount of our cash payments are incurred in, or linked to foreign currencies. In particular, in 2010 and 2011, such payments represented approximately 33% and 39%, respectively, of total cash outflows (including payments of principal and interest on our debentures, but excluding payments associated with the acquisition of Netvision). Also, we are exposed to interest rate risks through our hedging instruments and to possible fluctuations in the Israeli CPI through our Series A, B , C and D debentures.
 
In order to protect ourselves from fluctuations in foreign currency exchange rates, we have established a foreign currency hedging program. Under this program, we currently hedge part of our U.S. dollar liabilities, firm commitments and budgeted expenditures for the next 6 to 12 months using foreign currency forward exchange contracts and currency options.  A foreign currency forward exchange contract is a contract whereby we agree to buy or sell a foreign currency at a predetermined exchange rate at a future date. A currency option is an option to buy or sell a foreign currency at a predetermined exchange rate at a future date.  The exchange rate fluctuations that impact our foreign currency denominated financial liabilities, firm commitments and budgeted expenditures are intended to be offset by gains and losses on these hedging instruments.
 
The goal of our hedging program is to limit the impact of exchange rate fluctuations on our transactions denominated in U.S. dollars. We do not hold derivative financial instruments for trading purposes. Nevertheless, under IFRS, we are required to treat our hedges of budgeted expenditures for which there is no contractual commitment as though they were speculative investments. As a result, we are required to value these hedge positions
 
 
at the end of each fiscal quarter and record a gain or loss equal to the difference in their market value from the last balance sheet date, without any reference to the change in value to the related budgeted expenditures. Accordingly, these differences could result in significant fluctuations in our reported net income.
 
As of December 31, 2011, we had four outstanding series of debentures, which are linked to the Israeli CPI, in an aggregate principal amount of approximately NIS 3.7 billion.  As of December 31, 2011, we had forward Israeli CPI / NIS transactions, in a total amount of approximately NIS 1.8 billion, with an average maturity period of 14 months, in order to hedge our exposure to fluctuations in the Israeli CPI. We periodically review the possibility of entering into additional transactions in order to lower the exposure in respect of the debentures.
 
Set forth below is the composition of the derivative financial instruments at the following dates:
 
   
As of December 31,
 
   
2009
   
2010
   
2011
 
   
Par Value
   
Fair Value
   
Par Value
   
Fair Value
   
Par Value
   
Fair Value
 
   
(In NIS millions)
 
Forward contracts on exchange rate
(mainly US$– NIS)
    586       (10 )     439       (14 )     497       24  
Forward contracts on Israeli CPI rate
    1,700       51       1,325       12       1,825       (22 )
Options on the exchange rate
(mainly US$– NIS)
    868       2       500       2       377       1  
Compounded foreign currency and interest swap
    240       (5 )     -       -       -       -  
Total
    3,394       38       2,264       -       2,699       3  

 
Sensitivity information
 
Without taking into account our hedging instruments and based upon our debt outstanding as at December 31, 2011, fluctuations in foreign currency exchange rates, or the Israeli CPI would affect us as follows:
 
 
·
an increase of  0.1% of the Israeli CPI would result in an increase of approximately NIS 4.2 million in our financing expenses;
 
 
·
a devaluation of the NIS against the U.S. dollar of 1.0% would increase our financing expenses by approximately NIS 1.9 million.
 

ITEM 12. 
 
Not applicable.
 

 
PART II
 
ITEM 13. 
 
None.
 
ITEM 14. 
 
Not applicable.
 
ITEM 15. 
 
Disclosure Controls and Procedures

Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of December 31, 2011, have concluded that, as of such date, our disclosure controls and procedures were effective and ensured that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Management Annual Report on Internal Control Over Financial Reporting
 
 
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS and includes those policies and procedures that:
 
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
 
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
 
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future
 
 
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our management assessed the effectiveness of our internal control over financial reporting, as of December 31, 2011. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
 
Management has excluded Netvision, from its assessment of internal control over financial reporting as of December 31, 2011 because it was acquired by us during the third quarter of 2011. Total assets and total revenues of Netvision, which were consolidated in our financial statements, included elsewhere in this annual report, represents approximately 10.4%, or NIS 886 million ($232 million) and 5.9%, or NIS 381 million ($100 million), respectively, of the related consolidated financial statement amounts as of, and for the year ended, December 31, 2011.
 
 Based on our assessment, management believes that as of December 31, 2011 our internal control over financial reporting is effective based on this criteria.
 
The effectiveness of management's internal control over financial reporting as of December 31, 2011 has been audited by the Company's independent registered public accounting firm, Somekh Chaikin, a member of KPMG International and their report as of March 7, 2012, herein expresses an unqualified opinion on the Company's internal control over financial reporting.
 
Attestation Report of the Registered Public Accounting Firm
 
Our independent registered public accounting firm have issued an audit report on the effectiveness of our internal control over financial reporting. This report is included in page F-1 of this Form 20-F.
 
Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 16A. 
 
Our board of directors has determined that Ms. Baytel qualifies as “audit committee financial expert” as defined in Item 16A of Form 20-F. Ms. Baytel qualifies as an independent director under the independence standards applicable to listed company audit committee members, pursuant to Rule 10A-3 under the Securities Exchange Act.
 
ITEM 16B. 
 
Our Code of Ethics applies to all of our officers, directors and employees. Our Board of Directors amended our Code of Ethics during 2011 by updating and clarifying a number of matters, including: conflicts of interest between our employees and our vendors or customers, including the receipt of gifts and prohibition on payment and receipt of bribe; confidentiality of business information; usage of social networks; usage of company property including
 
 
 
privacy aspects in that regard and reporting of suspected violation of Company policy. We have posted a copy of our Code of Ethics on our website at www.cellcom.co.il under “Investor Relations – Corporate Governance –Code of Ethics.”

ITEM 16C. 
 
Somekh Chaikin, a member of KPMG International, has served as our independent registered public accounting firm for 2010 and 2011. These accountants billed the following fees to us for professional services in each of those fiscal years:
 
   
2010
   
2011
 
   
(NIS in thousands)
 
Audit Fees
    1,860       2,671  
Audit-Related Fees
    -       180  
Tax Fees
    106       120  
Total
    1,966       2,971  


“Audit Fees” are the aggregate fees billed for the audit of our annual financial statements. This category also includes services that generally the independent accountant provides, such as consents and assistance with and review of documents filed with the SEC. “Audit-Related Fees” are the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit and are not reported under Audit Fees. These fees include mainly accounting consultations regarding the accounting treatment of matters that occur in the regular course of business, implications of new accounting pronouncements and other accounting issues that occur from time to time. “Tax Fees” are the aggregate fees billed for professional services rendered for tax compliance, tax advice, other than in connection with the audit. Tax compliance involves preparation of original and amended tax returns, tax planning and tax advice.
 
Our Audit Committee has adopted a pre-approval policy for the engagement of our independent accountant to perform certain audit and non-audit services. Pursuant to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, the audit committee pre-approves annually a catalog of specific audit and non-audit services in the categories of audit service, audit-related service and tax services that may be performed by our independent accountants, and the maximum pre-approved fees that may be paid as compensation for each pre-approved service in those categories. Any proposed services exceeding the maximum pre-approved fees require specific approval by the Audit Committee.
 
The Audit Committee has delegated part of its pre-approval authority to the chairman of the Audit Committee, subject to ratification by the entire Audit Committee.
 
ITEM 16D.             EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
None.
 
ITEM 16E.             PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 
None.
 
 
ITEM 16F.            CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
 
None.
 
ITEM 16G.           CORPORATE GOVERNANCE
 
The following are the significant ways in which our corporate governance practices differ from those followed by domestic companies under the listing standards of the NYSE:
 
Majority of Independent Directors - Under Section 303A.01 of the NYSE Listed Company Manual, or LCM, U.S. domestic listed companies, other than controlled companies (i.e. companies with a person or group owning more than 50% of the voting power), must have a majority of independent directors. The Israeli Companies Law enables, but does not require, Israeli companies to voluntarily include a similar arrangement in their articles of association (which in regards to a controlled company provides that a third of the directors be independent). We did not include such a provision in our articles of association and we do not have a majority of independent directors.
 
Nominating/Corporate Governance Committee - Under Section 303A.04 of the LCM, a U.S. domestic listed company, other than a controlled company, must have a nominating/corporate governance committee composed entirely of independent directors. We do not have a nominating/corporate governance committee as we are not required to have such a committee under the Israeli Companies Law.
 
Compensation Committee - Under Section 303A.05 of the LCM, a U.S. domestic listed company, other than a controlled company, must have a compensation committee composed entirely of independent directors. We do not have a compensation committee, as we do not have a requirement for a compensation committee under the Israeli Companies Law.
 
Separate Meetings of Non-Management Directors - Under Section 303A.03 of the LCM, the non-management directors of each U.S. domestic listed company must meet at regularly scheduled executive sessions without management. We do not have a similar requirement under the Israeli Companies Law, and our independent directors do not meet separately from directors who are not independent, other than in the context of audit committee meetings.
 
Audit Committee - Under Section 303A.06 of the LCM, domestic listed companies are required to have an audit committee that complies with the requirements of Rule 10A-3 of the Securities and Exchange Act of 1934. Rule 10A-3 requires the audit committee of a U.S. company to be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review, or attest services, and that each such firm must report directly to the audit committee. However, Rule 10A-3 provides that foreign private issuers may comply with applicable home country law that (i) requires or permits shareholders to appoint the registered public accounting firm or (ii) prohibits the delegation of responsibility to the issuer’s audit committee without being in conflict with Rule 10A-3. Pursuant to the Israeli Companies Law, our registered public accounting firm is appointed by the shareholders at the annual meeting of shareholders. Our audit committee is responsible for recommending to the shareholders the appointment of our registered public accounting firm and to pre-approve the amounts to be paid to our registered public accounting firm.  Pursuant to our audit committee charter, our audit committee is responsible for overseeing the work of our registered public accounting firm.
 
 
Equity Compensation Plans - Under Section 303A.08 of the LCM, shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, with certain limited exemptions as described in the Rule. We follow the requirements of the Israeli Companies Law under which approval of equity-compensation plans and material revisions thereto is within the authority of the board of directors. However, under the Israeli Companies Law, any compensation to directors, including equity based compensation, requires the approval of the audit committee, the board of directors and the shareholders, in that order.
 
Corporate Governance Guidelines - Under Section 303A.09 of the LCM, domestic listed companies must adopt and disclose their corporate governance guidelines. We do not have a similar requirement under the Israeli Companies Law and therefore, other than as disclosed in this annual report on Form 20-F, we are not required to disclose our corporate governance guidelines.
 
ITEM 16H.            MINE SAFETY DISCLOSURE
 
Not applicable.
 
PART III
 
ITEM 17.                FINANCIAL STATEMENTS
 
See Item 18.
 
ITEM 18.                FINANCIAL STATEMENTS
 
See pages F-1 through F-72 of this annual report.
 
ITEM 19.                EXHIBITS
 
Exhibit
Number
 
Description
 
     
1.1
 
Updated Articles of Association and Memorandum of Association *
2.1
 
Form of Ordinary Share Certificate †
4.1
 
Series A Indenture dated December 21, 2005 and an addendum dated February 27, 2006 between Cellcom and Aurora Fidelity Trust Ltd. †
4.1.1
 
Series A Debentures Trustee Replacement Agreement dated June 11, 2009. †††
4.2
 
Series B Indenture dated December 21, 2005 and an addendum dated February 27, 2006 between Cellcom and Hermetic Trust (1975) Ltd. †
4.3
 
Series C Indenture dated September 20, 2007, between Cellcom and Aurora Fidelity Trust Ltd. ††
4.3.1
 
Series C Debentures Trustee Replacement Agreement dated June 11, 2009. †††
 
 
 
Exhibit
Number
 
Description
 
4.4
 
Series D Indenture dated September 20, 2007, between Cellcom and Hermetic Trust (1975) Ltd. ††
4.5
 
Series E Indenture dated March 31, 2009, between Cellcom and Hermetic Trust (1975) Ltd. †††
4.6
 
Shelf Prospectus Indenture dated July 14, 2011, between Cellcom and Hermetic Trust (1975) Ltd. *
4.6.1
 
Shelf Prospectus Indenture dated March 7, 2012, between Cellcom and Strauss Lazar Trust Company (1992) Ltd.*
4.6.2.
 
Amendment and Addendum no. 1 to the Indenture from March 7, 2012, dated March 7, 2012, between Cellcom and Strauss Lazar Trust Company (1992) Ltd.*
4.7
 
Amended 2006 Share Incentive Plan*
4.8
 
Registration Rights Agreement dated March 15, 2006 among Cellcom, Goldman Sachs International, DIC, DIC Communication and Technology Ltd. and PEC Israel Economic Corporation †
4.9
 
Amended Non-Exclusive General License for the Provision of Mobile Radio Telephone Services in the Cellular Method dated June 27, 1994 *
4.10
 
Netvision Ltd. Merger Agreement*
8.1
 
Subsidiaries of the Registrant *
12.1
 
Certification of Principal Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act *
12.2
 
Certification of Principal Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act *
13.1
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act *
15
 
Consent of Independent Registered Public Accounting Firm *
 
*
Filed herewith.
 
†
Incorporated by reference to our registration statement on Form F-1 (registration no. 333-140030) filed with the SEC on January 17, 2007.
 
††
Incorporated by reference to our annual report on Form 20-F for the year 2007 filed with the SEC on March 18, 2008.
 
†† †
Incorporated by reference to our annual report on Form 20-F for the year 2009 filed with the SEC on March 2, 2010.
 
 
 
170
 
SIGNATURES
 
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
 
 
 
Cellcom Israel Ltd.
 
 
By:
/s/ Nir Sztern
 
Name:
Nir Sztern
 
Title:
President and Chief Executive Officer

 

 
Date: March 7, 2012
 
 
171
 
 




To Board of Directors and Shareholders of
Cellcom Israel Ltd.

We have audited the accompanying consolidated statements of financial position of Cellcom Israel Ltd. and subsidiaries (hereinafter – “the Company”) as of December 31, 2011 and 2010 and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2011. We also have audited the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).   Cellcom Israel Ltd.’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We did not audit the financial statements of Netvision Ltd. A wholly owned subsidiary, which financial statements reflect total assets constituting 10 percent and total revenues constituting 6 percent in 2011, of the related consolidated totals. Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Netvision Ltd., is based solely on the report of the other auditors. A copy of the report of such other auditors is appended hereto.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinions.
 
 
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Cellcom Israel Ltd. acquired Netvision Ltd. during 2011, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, Netvision Ltd.’s internal control over financial reporting associated with total assets of 847 NIS million and total revenues constituting of 382 NIS million included in the consolidated financial statements of the Company and subsidiaries as of and for the year ended December 31, 2011. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Netvision Ltd.

The accompanying consolidated financial statements as of and for the year ended December 31, 2011 have been translated into United States dollars (“dollars”) solely for the convenience of the reader. We have audited the translation and, in our opinion, the consolidated financial statements expressed in New Israeli Shekels have been translated into dollars on the basis set forth in Note 2D to the consolidated financial statements.

Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International
Tel Aviv, Israel
March 6, 2012

Cellcom Israel Ltd. and Subsidiaries
 
 
          December 31, 2010     December 31, 2011     Convenience translation into US dollar (Note 2D) December 31, 2011  
   
Note
   
NIS millions
   
NIS millions
   
US$ millions
 
Assets
                       
Cash and cash equivalents
  8       533       920       241  
Current investments, including derivatives
          404       290       76  
Trade receivables
  9       1,478       1,859       487  
Other receivables
  9       64       93       24  
Inventory
  10       104       170       44  
Total current assets
          2,583       3,332       872  
Trade and other receivables
  9       597       1,337       350  
Property, plant and equipment, net
  11       2,063       2,168       567  
Intangible assets, net
  12       753       1,680       440  
Deferred tax assets
  28       -       40       10  
Total non- current assets
          3,413       5,225       1,367  
Total assets
          5,996       8,557       2,239  
Short term credit and current maturities of long term loans and debentures    17       348        674        176   
Trade payables and accrued expenses
  13       716       1,026       268  
Current tax liabilities
          132       69       18  
Provisions
  14       84       148       39  
Other payables, including derivatives
  15       379       547       143  
Dividend declared
  19       -       189       49  
Total current liabilities
          1,659       2,653       693  
Long-term loans from banks
  17       -       19       5  
Debentures
  17       3,913       5,452       1,427  
Provisions
  14       17       21       5  
Other long-term liabilities
  16       -       41       11  
Liability for employee rights upon retirement, net
  18       1       10       3  
Deferred tax liabilities
  28       65       174       46  
Total non- current liabilities
          3,996       5,717       1,497  
Total liabilities
          5,655       8,370       2,190  
Equity attributable to owners of the Company
  19                          
Share capital
          1       1       -  
Cash flow hedge reserve
          (21 )     7       2  
Retained earnings
          361       175       46  
Non-controlling interest
          -       4       1  
Total equity
          341       187       49  
Total liabilities and equity
          5,996       8,557       2,239  

Date of approval of the financial statements: March 6, 2012.
The accompanying notes are an integral part of these consolidated financial statements.

Cellcom Israel Ltd. and Subsidiaries


 
      Year ended December 31, 2009     Year ended December 31, 2010     Year ended December 31, 2011     Convenience translation into US dollar (Note 2D) Year ended December 31, 2011  
 
Note
 
NIS millions
   
NIS millions
   
NIS millions
   
US$ millions
 
Revenues
22     6,483       6,662       6,506       1,703  
Cost of revenues
23     (3,333 )     (3,322 )     (3,408 )     (892 )
Gross profit
      3,150       3,340       3,098       811  
Selling and marketing expenses
24     (716 )     (756 )     (990 )     (259 )
General and administrative expenses
25     (660 )     (641 )     (685 )     (179 )
Other expenses, net
26     (6 )     (5 )     (1 )     -  
Operating profit
      1,768       1,938       1,422       373  
Financing income
      151       106       116       30  
Financing expenses
      (370 )     (336 )     (409 )     (107 )
Financing expenses, net 27     (219 )     (230 )     (293 )     (77 )
Profit before taxes on income
      1,549       1,708       1,129       296  
Taxes on income
28     (367 )     (417 )     (304 )     (80 )
Profit for the year
      1,182       1,291       825       216  
Attributable to:
                                 
Owners of the Company
      1,182       1,291       824       216  
Non-controlling interests
      -       -       1       -  
Profit for the year
      1,182       1,291       825       216  
Earnings per share
                                 
Basic earnings per share (in NIS)
19     12.01       13.04       8.28       2.17  
Diluted earnings per share (in NIS)
19     11.90       12.98       8.28       2.17  

The accompanying notes are an integral part of these consolidated financial statements.

Cellcom Israel Ltd. and Subsidiaries


 
    Year ended December 31, 2009     Year ended December 31, 2010     Year ended December 31, 2011     Convenience translation into US dollar (Note 2D) Year ended December 31, 2011  
   
NIS millions
   
NIS millions
   
NIS millions
   
US$ millions
 
   
Profit for the year
    1,182       1,291       825       216  
Net change in fair value of cash flow hedges transferred to profit or loss
    (14 )     (10 )     20       5  
Changes in fair value of cash flow hedges, net of income tax
    (2 )     9       13       3  
Income tax on other comprehensive income
    4       3       (5 )     (1 )
Other comprehensive income for the year, net of income tax
    (12 )     2       28       7  
Total comprehensive income for the year
    1,170       1,293       853       223  
Total comprehensive income attributable to:
                               
Owners of the Company
    1,170       1,293       852       223  
Non-controlling interests
    -       -       1       -  
Total comprehensive income for the year
    1,170       1,293       853       223  

The accompanying notes are an integral part of these consolidated financial statements.

Cellcom Israel Ltd. and Subsidiaries

 
 
 
   
Attributable to owners of the Company
    Non - controlling interests     Total equity    
Convenience translation into US dollar
(Note 2D)
 
   
Share capital
    Capital reserve     Retained earnings    
Total
                   
   
NIS millions
   
US$ millions
 
                                           
Balance as of January 1, 2009
    1       (11 )     400       390       -       390       102  
Other comprehensive income for the year, net of tax
    -       (12 )     -       (12 )     -       (12 )     (3 )
Profit for the year
    -       -       1,182       1,182       -       1,182       309  
Share based payments
    -       -       1       1       -       1       -  
Dividend paid in cash
    -       -       (1,187 )     (1,187 )     -       (1,187 )     (311 )
 
Balance as of December 31, 2009
    1       (23 )     396       374       -       374       97  
Other comprehensive income for the year, net of tax
    -       2       -       2       -       2       1  
Profit for the year
    -       -       1,291       1,291       -       1,291       338  
Share based payments
    -       -       1       1       -       1       -  
Cash dividend paid
    -       -       (1,327 )     (1,327 )     -       (1,327 )     (347 )
 
Balance as of December 31, 2010
    1       (21 )     361       341       -       341       89  
 
Other comprehensive income for the year, net of tax
    -       28       -       28       -       28       7  
Profit for the year
    -       -       824       824       1       825       216  
Share based payments
    -       -       6       6       -       6       2  
Dividend paid in cash
    -       -       (827 )     (827 )     -       (827 )     (216 )
Declared dividend
    -       -       (189 )     (189 )     (1 )     (190 )     (50 )
Non-controlling interests in respect of business combination (see note 7)
    -       -       -       -       4       4       1  
Balance as of December 31, 2011
    1       7       175       183       4       187       49  
 
The accompanying notes are an integral part of these consolidated financial statements.

Cellcom Israel Ltd. and Subsidiaries


 
    Year ended December 31, 2009     Year ended December 31, 2010     Year ended December 31, 2011     Convenience translation into US dollar (Note 2D) Year ended December 31, 2011  
   
NIS millions
   
NIS millions
   
NIS millions
   
US$ millions
 
Cash flows from operating activities
                       
Profit for the year
    1,182       1,291       825       216  
Adjustments for:
                               
Depreciation and amortization
    755       724       738       193  
Share based payment
    1       1       6       2  
Loss on sale of property, plant and equipment
    6       5       -       -  
Income tax expense
    367       417       304       80  
Financing expenses, net
    219       230       293       77  
Other expenses
    -       -       2       1  
 
Changes in operating assets and liabilities:
                               
Change in inventory
    (105 )     -       (67 )     (18 )
Change in trade receivables (including long- term amounts)
    (69 )     172       (585 )     (153 )
Change in other receivables (including long- term amounts)
    2       (6 )     61       16  
Changes in trade payables, accrued expenses and provisions
    152       (42 )     146       38  
Change in other liabilities (including long-term amounts)
    (4 )     (16 )     (52 )     (14 )
Proceeds from (payments for) derivative hedging contracts, net
    21       (16 )     (14 )     (4 )
Income tax paid
    (447 )     (380 )     (325 )     (85 )
Net cash from operating activities
    2,080       2,380       1,332       349  
 
Cash flows from investing activities
                               
Acquisition of property, plant, and equipment
    (404 )     (441 )     (333 )     (87 )
Acquisition of intangible assets
    (173 )     (180 )     (99 )     (26 )
Acquisition of activity
    -       (108 )     -       -  
Acquisition of subsidiary, net of cash acquired (see note 7)
    -       -       (1,458 )     (382 )
Change in current investments, net
    (212 )     (154 )     197       52  
Proceeds from (payments for) other derivative contracts, net
    8       (17 )     1       -  
Gain on sale of property, plant and equipment
    2       2       3       1  
Interest received
    5       9       33       9  
Net cash used in investing activities
    (774 )     (889 )     (1,656 )     (433 )

The accompanying notes are an integral part of these consolidated financial statements.

Cellcom Israel Ltd. and Subsidiaries


Consolidated Statements of Cash Flows (cont’d)
 
    Year ended December 31, 2009     Year ended December 31, 2010     Year ended December 31, 2011     Convenience translation into US dollar (Note 2D) Year ended December 31, 2011  
   
NIS millions
   
NIS millions
   
NIS millions
   
US$ millions
 
 
Cash flows from financing activities
                       
Proceeds from derivative contracts, net
    33       34       11       3  
Reciept (repayment) of long term loans from banks
    8       (8 )     (4 )     (1 )
Repayment of debentures
    (332 )     (343 )     (354 )     (93 )
Proceeds from issuance of debentures, net of issuance costs
    989       -       2,165       566  
Dividend paid
    (1,186 )     (1,319 )     (858 )     (225 )
Interest paid
    (190 )     (225 )     (245 )     (64 )
 
Net cash from (used in) financing activities
    (678 )     (1,861 )     715       186  
 
Cash balance presented under assets held for sale (see notes 9 and 15)
    -       -       (4 )     (1 )
 
Changes in cash and cash equivalents
    628       (370 )     387       101  
Cash and cash equivalents as at the beginning of the year
    275       903       533       140  
Cash and cash equivalents as at the end of the year
    903       533       920       241  

The accompanying notes are an integral part of these consolidated financial statements.
 
Cellcom Israel Ltd. and Subsidiaries

 
Note 1 - Reporting Entity

Cellcom Israel Ltd. ("the Company") is a company incorporated and domiciled in Israel and its official address is 10 Hagavish Street, Netanya 42140, Israel. These consolidated financial statements of the Company as at December 31, 2011 are comprised of the Company and its subsidiaries ("the Group"). The Group operates and maintains a cellular mobile telephone system and provides cellular and landline telecommunications services in Israel. As of September 1, 2011, following the completion of the acquisition of Netvision Ltd. ("Netvision", see note 7, regarding acquisition of subsidiary), the Group also provides internet services (ISP) and international calls services. The Company is a consolidated subsidiary of Discount Investment Corporation (the parent company "DIC"). The Company's ultimate parent company is Ganden Holdings Ltd., and Mr. Nochi Dankner is the ultimate controlling shareholder.

Note 2 - Basis of Preparation

A.  
Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs), as issued by the International Accounting Standards Board (IASB). The Company adopted IFRSs for the first time in 2008, with the date of transition to IFRSs being January 1, 2007 (hereinafter - “the date of transition”).

These consolidated financial statements were approved by the Board of Directors on March 6, 2012.

B.  
Functional and presentation currency

These consolidated financial statements are presented in New Israeli Shekels ("NIS"), which is the Group's functional currency, and are rounded to the nearest million. NIS is the currency that represents the primary economic environment in which the Group operates.

C.  
Basis of measurement

These consolidated financial statements have been prepared on the basis of historical cost except for following assets and liabilities: current investments and derivative financial instruments that are measured at fair value through profit or loss, inventory is measured at the lower of cost or net realizable value, deferred tax assets and liabilities, assets and liabilities in respect of employee benefits and provisions.

For further information regarding the measurement of these assets and liabilities see note 3 regarding significant accounting policies.

The value of non monetary assets and equity items that were measured on the basis of historical cost were adjusted for changes in the general purchasing power of the Israeli currency - NIS, based upon changes in the Israeli Consumer Price Index (“CPI”) until December 31, 2003, as until that date the Israeli economy was considered hyperinflationary.

D.  
Convenience translation into U.S. dollars ("dollars" or "$")

For the convenience of the reader, the reported NIS figures as of December 31, 2011, have been presented in dollars, translated at the representative rate of exchange as of December 31, 2011 (NIS 3.821 = US$ 1.00). The dollar amounts presented in these financial statements should not be construed as representing amounts that are receivable or payable in dollars or convertible into dollars, unless otherwise indicated.
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  
 
Note 2 - Basis of Preparation (cont'd)

E.  
Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

The preparation of accounting estimates used in the preparation of the Group's financial statements requires management to make assumptions regarding circumstances and events that involve considerable uncertainty. Management of the Group prepares the estimates on the basis of past experience, various facts, external circumstances, and reasonable assumptions according to the pertinent circumstances of each estimate.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about estimates, uncertainty and critical judgments about provisions and contingencies are described in notes 14 and 31. In addition, information about critical estimates, made while applying accounting policies and that have the most significant effect on the consolidated financial statements are described below:

Trade and other receivables
The financial statements include an impairment loss in trade and other receivables which properly reflect, according to management's estimation, the potential loss from non recoverable amounts. The Group provides for impairment loss based on its experience in collecting past debts, as well as on information on specific debtors. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. See also note 21.

Impairment loss and useful life of assets
The Group regularly reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. See also note 3I.
 
The useful economic life of the Group's assets is determined by management at the time the asset is acquired and regularly reviewed for appropriateness. The Group defines useful life of its assets in terms of the assets' expected utility to the Group. This judgment is based on the experience of the Group with similar assets. The useful life of licenses is based on the duration of the license agreement. See also notes 3D and 3F.

Impairment of goodwill
The Group reviews a cash generating unit containing goodwill for the purpose of testing it for impairment at least once a year. Determining the recoverable amount requires management to make an estimate of the projected future cash flows from the continuing use of the cash-generating unit and also to choose a suitable discount rate for those cash flows which represents market estimates as for the time value of the money and the specific risks that are related to the cash-generating unit. Determining the estimates of the future cash flows is based on management past experience and management best estimates as for the economic conditions that will exist over the rest of the remaining useful life of the cash generating unit. Further details are given in note 3I.

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  
 
Note 2 - Basis of Preparation (cont'd)

Business combinations
The Group is required to allocate the acquisition cost of entities and activities through business combinations on the basis of the fair value of the acquired assets and assumed liabilities. The Group uses external and internal valuations to determine the fair value. The valuations include management estimates and assumptions as for future cash flow projections from the acquired business and selection of models to compute the fair value of the acquired components and their depreciation period. Management estimate influences the balance of the acquired assets and assumed liabilities and the depreciation and amortization in the consolidated statements of income. Management estimates as for the future cash flow and the useful life of the acquired assets may be different than the actual results.

Share based payments
Options granted to employees are measured using the Black-Scholes model. The expected life used on the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioral considerations. See also note 20.

Legal claims
In estimating the likelihood of outcome of legal claims filed against the Company and its investees, the companies of the Group rely on the opinion of their legal counsel. These estimates are based on the legal counsel's best professional judgment, taking into account the stage of proceedings and historical legal precedents in respect of the different issues. Since the outcome of the claims will be determined in courts, the results could differ from these estimates. See also note 31.

Uncertain tax positions
When assessing amounts of current and deferred taxes, the Group takes into consideration the effect of the uncertainty that its tax positions will be accepted and of the Group incurring any additional tax and interest expenses. The Group is of the opinion that the cumulative tax liability is fair for all the years in respect of which final tax assessments have not yet been received, based on an analysis of a number of matters including interpretations of tax laws and the Group’s past experience. This assessment is based on estimates and assumptions that may also include assessments and exercising judgment regarding future events. It is possible that new information will become known in future periods that will require the Group to change its estimate regarding the tax liability that was recognized, and any such changes will be expensed immediately in that period.

F.  
Newly adopted accounting standards during the period


 
1.  
IAS 24 (2009) Related Party Disclosures (hereinafter – "the Standard"). The new standard includes changes in the definition of a related party and changes with respect to disclosures required by entities related to government. The Standard is effective from January 1, 2011. For the purpose of applying the Standard for the first time, the Group mapped its relationships with related parties. The Standard has no material impact on the Group's consolidated financial statements.

 
2.  
Amendment to IFRS 7 Financial Instruments: Disclosures - Clarification of disclosures (hereinafter – “the Amendment”) – The Amendment added a declaration that the interaction between the qualitative and quantitative disclosures enables the users of the financial statements to better assess the Group's exposure to risks arising from financial instruments. Furthermore, the clause stating that quantitative disclosures are not required when the risk is immaterial was removed, and certain disclosure requirements regarding credit risk were amended while others were removed. The Amendment is implemented from annual periods beginning on January 1, 2011. The required disclosures were included in the consolidated financial statements. For further details see note 21, regarding financial instruments.
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  
 
Note 3 - Significant Accounting Policies

These consolidated financial statements have been prepared according to International Financial Reporting Standards as issued by the IASB and their related interpretations (IFRSs), that are in effect or otherwise available for early adoption at December 31, 2011.

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

A.
Basis of consolidation

These consolidated financial statements include consolidation of the financial statements of the Company and entities controlled by the Company . Control exists when a company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. All inter-company transactions and balances were eliminated upon consolidation.

 
1.
Business combinations

The Group implements the acquisition method to all business combinations. The acquisition date is the date on which the acquirer obtains control over the acquiree. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable are taken into account. The Group exercises discretion in determining the acquisition date and whether control has been obtained.

The Group recognizes goodwill at acquisition according to the fair value of the consideration transferred including any amounts recognized in respect of rights that do not confer control in the acquiree less the net amount of the identifiable assets acquired and the liabilities assumed.

On the acquisition date the acquirer recognizes a contingent liability assumed in a business combination if there is a present obligation resulting from past events and its fair value can be reliably measured.

The consideration transferred includes the fair value of the assets transferred to the previous owners of the acquiree, the liabilities incurred by the acquirer to the previous owners of the acquiree and equity instruments that were issued by the Group.

When share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree's employees (acquiree's awards) and relate to past services, then all or a portion of the amount of the acquirer's replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based value of the replacement awards compared with the market- based value of the acquiree's awards and the extent to which the replacement awards relate to past and/or future service. The unvested portion of the replacement award that is attributed to post-acquisition services is recognized as a compensation cost following the business combination.

Costs associated with the acquisition that were incurred by the acquirer in the business combination such as: finder's fees, advisory, legal, valuation and other professional or consulting fees, other than those associated with an issue of debt or equity instruments connected to the business combination, are expensed in the period the services are received.

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  
 
Note 3 - Significant Accounting Policies (cont'd)

 
2.
Subsidiaries

Subsidiaries are entities controlled by the parent company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Non-controlling interests comprise the equity of a subsidiary that cannot be attributed, directly or indirectly, to the parent company. Profit or loss and each component of other comprehensive income are attributable to the owners of the parent company and to non-controlling interests.

B.
Foreign currency transactions

Transactions in foreign currencies are translated to NIS at the prevailing foreign exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies as of the reporting date are translated to NIS at the prevailing foreign exchange rate at that date. Foreign exchange differences arising on translation are recognized in profit and loss. Non-monetary assets and liabilities that are measured in terms of historical cost in foreign currency are translated using the exchange rate at the date of the transaction. Non- monetary assets and liabilities denominated in foreign currency that are stated at fair value are translated to NIS at the prevailing foreign exchange rates at the date the fair value was determined.

C.
Financial instruments

Financial instruments are recognized when the Group enters into the contractual terms of the instrument. Financial instruments are initially measured at fair value. After the initial recognition, financial instruments are measured at fair value or amortized cost. Financial assets are derecognized when the contractual rights of the Group to the cash flows deriving from the financial asset expire, or when the Group transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Sales and acquisitions of financial instruments are recognized on the transaction date, in which the Group turns into a side to the instrument's contractual conditions, i.e., the date in which the Group is obligated to sell or purchase the instrument. Financial liabilities are derecognized when the Group's contractual obligations expire, or when it is settled or cancelled.

 
1.  
Non derivative financial instruments

Non derivative financial instruments are comprised of cash and cash equivalents, investments in debt securities, trade receivables, other receivables, loans and borrowings, debentures, trade payables and other payables. Non derivative financial instruments other than investments in debt securities are measured after initial recognition at amortized cost using the effective interest method and less any impairment loss, if relevant. Investments in debt securities are measured at fair value through profit or loss.

Cash and cash equivalents
Cash and cash equivalents comprise of cash balances available for immediate use and call deposits. Cash equivalents comprise short-term highly liquid investments (with original maturities of three months or less) that are readily convertible into known amounts of cash and are exposed to insignificant risks of change in value. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  
 
Note 3 - Significant Accounting Policies (cont'd)

 
2.  
Derivative financial instruments
 
The Group holds derivative financial instruments to hedge its foreign currency and CPI risks exposures. Embedded derivatives are separated from the host contract and carried at fair value when (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, (2) a separate, stand-alone instrument with the same terms would meet the definition of a derivative, and (3) the combined instrument is not measured at fair value through profit or loss.

Derivatives are initially recognized at fair value; transaction costs that can be attributed are recognized to profit and loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value. Changes in fair value are accounted for as follows:

Cash flow hedges
Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognized directly in comprehensive income to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognized in profit and loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in comprehensive income remains there until the forecasted transaction occurs or is no longer expected to occur. The amount recognized in comprehensive income is transferred to profit and loss in the same period that the hedged item affects profit and loss.

Economic Hedges
Hedge accounting is not applied to derivative instruments that economically hedge monetary assets and liabilities denominated in foreign currencies or linked to the CPI. Changes in the fair value of such derivatives are recognized in profit and loss as part of foreign currency gains and losses .

Separable embedded derivatives
Changes in fair value of separable embedded derivatives are recognized immediately in profit and loss.

 
3.  
Financial instruments linked to the Israeli CPI that are not measured at fair value
 
The carrying amount of a financial instrument and the payments derived from it are revalued in each period according to the actual rate of change in the CPI.

 
4.  
Share capital
 
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  

Note 3 - Significant Accounting Policies (cont'd)

D.
Property, plant and equipment

Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.

When major parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

Changes in the obligation to dismantle and remove the items and to restore the site on which they are located, other than changes deriving from the passing of time, are added or deducted from the cost of the asset in the period in which they occur. The amount deducted from the cost of the asset shall not exceed the balance of the carrying amount on the date of change, and any balance is recognized immediately in profit or loss.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized net within "other expenses, net" in profit or loss.

The cost of replacing part of a fixed asset item is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of day-to-day servicing are recognized in profit or loss as incurred.

Depreciation is a systematic allocation of the depreciable amount of an asset over its useful life.

An asset is depreciated from the date it is ready for use, meaning the date it reaches the location and condition required for it to operate in the manner intended by management.

Depreciation is recognized in profit or loss on a straight-line basis. If the property, plant and equipment consist of several components with different estimated useful lives, the individual significant components are depreciated over their individual useful lives. The annual depreciation rates are as
follows :

 
%
Communication network
5-20
Control and testing equipment
15-25
Vehicles
15-33
Computers and hardware
15-33
Furniture and office equipment
6-15

Leasehold improvements are depreciated over the shorter of their estimated useful lives or the expected lease terms.

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  
 
Note 3 - Significant Accounting Policies (cont'd)

E.  
Rights of use of communication lines

The Group implements IFRIC 4, "Determining Whether an Arrangement Contains a Lease", which defines criteria for determining at the beginning of the arrangement, whether the right to use asset constitutes a lease arrangement.

According to IFRIC 4, as mentioned above, acquisition transactions of irrevocable rights of use of underwater cables capacity are treated as service receipt transactions. The amount which was paid for the rights of use of communication lines, is amortized on a straight-line basis over the period stated in the agreements, including the option period, which constitutes the estimated useful life of those capacities.

F.  
Intangible assets

Intangible assets consist of goodwill, assets recognized during business combination, licenses, computer software costs, information systems and deferred expenses.

 
1.  
Goodwill that arises upon the acquisition of subsidiaries is presented as part of intangible assets. For information on measurement of goodwill at initial recognition, see paragraph A(1) of this note.
 
In subsequent periods goodwill is measured at cost less accumulated impairment losses.

 
2.  
Other intangible assets are measured at cost less accumulated amortization and accumulated impairment losses and including direct costs necessary to prepare the asset for its intended use.

 
3.  
Certain direct and indirect development costs associated with internally developed information system software, and payroll costs for employees devoting time to the software projects, incurred during the application development stage, are capitalized. The costs are amortized using the straight-line method beginning when the asset is substantially ready for use. Costs incurred during the research stage and after the asset is substantially ready for use are expensed as incurred.

 
4.  
Deferred expenses in respect of commissions and handset subsidies regarding the acquisition of new subscribers are recognized as intangible assets, if the costs can be measured reliably, are incremental to the contract, there is a control over resources and the existence of future economic benefits and directly attributable to obtaining a specific subscriber. If the costs do not meet the aforementioned criteria, they are recognized immediately as expenses.

 
5.  
Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized in profit or loss as incurred.

 
6.  
Amortization is calculated using the straight-line method, except for a certain intangible asset recognized during business combination, which is amortized according to the economic benefit expected from this asset each period. If the intangible assets consist of several components with different estimated useful lives, the individual significant components are amortized over their individual useful lives. The annual amortization rates are as follows:

Licenses
5-6%
(mainly 6%)
Information systems
25%
 
Software
15-25%
 
Customer relationship
approximately 6 years
 
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  

Note 3 - Significant Accounting Policies (cont'd)

Goodwill has an indefinite useful life and is not systematically amortized but tested for impairment at least once a year.

Deferred expenses are amortized over an 18 month period which represents the expected life of the contractual relationship with the subscriber.

Amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.

The Group examines the useful life of an intangible asset that is not periodically amortized at least once a year in order to determine whether events and circumstances continue to support the decision that the intangible asset has an indefinite useful life.

G.  
Non-current assets and disposal groups held for sale or distribution

Non-current assets (or groups of assets and liabilities for disposal) that are expected to be recovered primarily through sale or distribution rather than through continuing use are classified as held for sale or distribution. This applies also to when the Group is obligated to a sale plan that involves losing control over a subsidiary, whether or not the Group will retain any non-controlling interests in the subsidiary after the sale.

Immediately before classification as held for sale or distribution, the assets (or components of a disposal group) are remeasured in accordance with the Group's accounting policies. Thereafter, generally, the assets (or disposal group) are measured at the lower of their carrying amount and fair value less cost to sell.

H.  
Inventory

Inventory of cellular phone equipment, accessories and spare-parts are stated at the lower of cost or net realizable value. Cost is determined by the moving average method.

The cost of inventory which serves the line of communication is determined on a "first-in, first-out" basis.

The Group periodically evaluates the condition and age of inventories and makes provisions for impairment of inventories accordingly.

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  

Note 3 - Significant Accounting Policies (cont'd)

I.  
Impairment

 
1.  
Non-derivative financial assets

A non-derivative financial asset which is not presented at fair value through profit or loss is reviewed for impairment when objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate of that asset. All impairment losses are recognized in profit or loss.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortized cost, the reversal is recognized in profit or loss.

 
2.  
Property, plant and equipment and intangible assets

At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment and finite lived intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group groups together all of the assets that cannot be tested individually into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”) and estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Cash-generating units to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. When goodwill is not monitored for internal reporting purposes, it is allocated to operating segments (before the aggregation of similar segments) and not to a cash-generating unit (or group of cash-generating units) lower in level than an operating segment.

Goodwill acquired in a business combination is allocated to groups of cash-generating units that are expected to benefit from the synergies of the combination, see further details in note 3F.

The recoverable amount is the higher of value in use and fair value less cost to sell. Value in use is determined by discounting of expected future cash flows method, using a pre-tax discount rate.

In calculating the net present value of the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters including management’s expectations of future revenues, timing and quantum of future capital expenditure, long term growth rates of subscribers and discount rates, to reflect the risks involved.

An impairment loss is recognized if the carrying amount of an asset or cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the cash-generating unit on a pro rata basis.

As regards cash-generating units that include goodwill, an impairment loss is recognized when the carrying amount of the cash-generating unit, after adjustment for goodwill, exceeds its recoverable amount.
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  

Note 3 - Significant Accounting Policies (cont'd)

Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, not to exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit and loss. Impairment loss in respect of goodwill is not reversed.

J.  
Employee benefits

 
1.  
Post employment benefits

Part of the Group's liability for post employment benefits is covered by a defined contribution plan financed by deposits with insurance companies or with funds managed by a trustee. Obligation of contribution to defined contribution pension plan is recognized as an expense in profit and loss in the periods during which services are rendered by employees. In addition, there is a liability for a defined post employment benefit plan that is determined using actuarial assessment techniques. Calculation of the liability involves, among others, regarding the capitalization rates, anticipated return on the assets, the rate of the increase in salary and the rates of employee turnover. There is material uncertainty in respect to these estimates because of the long-term programs, see note 18.

 
2.  
Short term benefits

Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

3.  
Share based payments

The grant date fair value of options granted to employees is recognized as salaries and related expenses, with a corresponding increase in retained earnings, over the period that the employees become unconditionally entitled to the options. The amount recognized as an expense is adjusted to reflect the actual number of share options that vest.

Fair value is measured using the Black-Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioral considerations and that are expected to vest to shares.

K.  
Provisions

A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at management's best estimate of the expenditure required to settle the obligation at the reporting date.

A provision for claims is recognized if, as a result of a past event, the Group has a present legal or constructive obligation and it is more likely than not that an outflow of economic benefits will be required to settle the obligation and the amount of obligation can be estimated reliably.

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  

Note 3 - Significant Accounting Policies (cont'd)

A provision for onerous contracts is recognized when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract.

L.  
Revenue

Revenues derived from services, including airtime, internet services (ISP), international calls services , fixed local calls, interconnect and roaming revenues, are recognized when the services are provided, in proportion to the stage of completion of the transaction and all other revenue recognition criteria are met.

A contract with a customer to sale handset, usually includes an engagement to provide future services. Usually, the sale of handset to the customer is executed with no contractual obligation of the client to consume services in a minimal amount for a predefined period. As a result, the Group refers to the sale transaction as a separate transaction and recognizes revenue from sale of handset upon delivery of the handset to the customer. Revenue from services is recognized and recorded when the services are provided.

In case the customer is obligated towards the Group to consume services in a minimal amount for a predefined period, the contract is characterized as a multiple element arrangement and thus, revenue from sale of handset is recorded in an amount not higher than the fair value of the said handset, which is not contingent upon delivery of additional components (such as services) and is recognized upon delivery to the customer and when the criteria for revenue recognition are met. The Group determines the fair value of the individual elements based on prices at which the deliverable is regularly sold on a standalone basis, after considering volume discounts where appropriate.

The Group recognizes revenue from providing services in connection with software transactions, the results of which are reliably estimable, according to the stage of the completion of the transaction at the reporting date.

The Group, among others, offers value added services including voice mail, text and multimedia messaging, as well as downloadable wireless data applications, including ring tones, music, games, and other informational content. Generally, these enhanced features and data applications generate additional service revenues through monthly subscription fees or increased usage through utilization of the features and applications. Other optional services, such as equipment extended warranty plans are also provided for a monthly fee and are either sold separately or bundled and included in packaged rate plans. Revenues from enhanced features and optional services are recognized when earned.

Revenues from long-term credit arrangements are recognized on the basis of the present value of future cash flows, discounted according to market interest rates at the time of the transaction. The difference between the original credit and its present value is recorded as interest income over the credit period.

Prepaid wireless airtime sold to customers is recorded as deferred revenue prior to the commencement of services and is recognized when the airtime is used or expires.

When the Group acts as an agent or an intermediary without bearing the risks and rewards resulting from the transaction, revenues are presented on a net basis (as a profit or a commission). However, when the Group acts as a principal supplier and bears the risks and rewards resulting from the transaction, revenues are presented on a gross basis, distinguishing the revenue from the related expenses. Costs of revenues mainly include ongoing license fees, interconnection and roaming expenses, cell site

 
F-21
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  

Note 3 - Significant Accounting Policies (cont'd)

leases, depreciation and amortization charges and technical repair and maintenance expenses directly related to services rendered.

M.  
Lease payments

Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease.

N.  
Financing income and expenses

Financing income is comprised of interest income on cash deposits, interest income on installment sales and from investment in debt securities. Interest income is recognized in the consolidated statement of income as it accrues using the effective interest method.

Financing expenses are comprised of interest and indexing expenses on loans and debentures and unwinding of the discount on provisions. All borrowing costs are recognized in profit and loss using the effective interest method.

Foreign currency, investment in debt securities and hedging instruments gains and losses that are recognized in profit or loss are reported on a net basis.

O.  
Income tax expense

Income tax comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or are recognized directly in equity or in other comprehensive income to the extent they relate to items recognized directly in equity or in other comprehensive income.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

P.  
Earnings per share

The Company presents basic and diluted earnings per share ("EPS") data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit and loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees.
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  

Note 3 - Significant Accounting Policies (cont'd)

Q.  
Advertising expenses

Advertising costs are expensed as incurred.

R.  
New standards and interpretations not yet adopted

A number of new standards, amendments to standards and interpretations are not yet effective, and have not been applied in preparing these consolidated financial statements:

 
1.  
IFRS 10 Consolidated Financial Statements (hereinafter – “IFRS 10”). IFRS 10 replaces the requirements of IAS 27 Consolidated and Separate Financial Statements and the requirements of SIC-12 Consolidation – Special Purpose Entities with respect to the consolidation of financial statements, so that the requirements of IAS 27 will continue to be valid only for separate financial statements.

IFRS 10 introduces a new single control model for determining whether an investor controls an investee and should therefore consolidate it. This model is implemented with respect to all investees. According to the model, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with that investee, has the ability to affect those returns through its power over that investee and there is a link between power and returns.

IFRS 10 is applicable retrospectively (with a certain relief) for annual periods beginning on or after January 1, 2013. Early adoption is permitted providing that disclosure is provided and that the entire new suite of standards is early adopted, meaning also the additional standards that were issued at the same time – IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Involvement with Other Entities, IAS 27 (2011) and IAS 28 (2011).

The Group is examining the effect of adopting IFRS 10 on its financial statements.

 
2. 
IFRS 11 Joint Arrangements (hereinafter – “IFRS 11”). IFRS 11 replaces the requirements of IAS 31   Interests in Joint Ventures (hereinafter – IAS 31) and amends part of the requirements in IAS 28   Investments in Associates.
 
IFRS 11 defines a joint arrangement as an arrangement over which two or more parties have joint control (as defined in IFRS 10). Joint arrangements are divided into two types: a joint operation and a joint venture.

IFRS 11 is applicable retrospectively for annual periods beginning on or after January 1, 2013, but there are specific requirements for retrospective implementation in certain cases. Early adoption is permitted providing that disclosure is provided and that the entire new suite of standards is early adopted, meaning also the additional standards that were issued at the same time – IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Involvement with Other Entities, IAS 27 (2011) and IAS 28 (2011).

The Group is examining the effect of adopting IFRS 11 on its financial statements.

 
3.  
IFRS 12 Disclosure of Involvement with Other Entities (hereinafter – “IFRS 12”). IFRS 12 contains extensive disclosure requirements for entities that have interests in subsidiaries, joint arrangements (i.e. joint operations or joint ventures), associates and unconsolidated structured entities.

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  

Note 3 - Significant Accounting Policies (cont'd)

IFRS 12 is applicable for annual periods beginning on or after January 1, 2013. Early adoption is permitted providing that the entire new suite of standards is early adopted, meaning also the additional standards that were issued at the same time – IFRS 11 Joint Arrangements, IFRS 10 Consolidated Financial Statements, IAS 27 (2011) and IAS 28 (2011).

Nevertheless, it is permitted to voluntarily provide the additional disclosures required by IFRS 12 prior to its adoption without early adopting the other standard.

The Group is examining the effect of adopting the standards on its financial statements.

 
4.  
IFRS 13 Fair Value Measurement (hereinafter – “IFRS 13”). IFRS 13 replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value.

IFRS 13 applies to assets, liabilities and an entity’s own equity instruments that, under other IFRSs, are required or permitted to be measured at fair value or when disclosure of fair value is provided. Nevertheless, IFRS 13 does not apply to share based payment transactions within the scope of IFRS 2 Share-Based Payment and leasing transactions within the scope of IAS 17 Leases .

IFRS 13 does not apply to measurements that are similar to but are not fair value (such as the measurement of the net realizable value of inventory, in accordance with IAS 2 Inventories , and the measurement of value in use, in accordance with IAS 36 Impairment of Assets ).

IFRS 13 is applicable prospectively for annual periods beginning on or after January 1, 2013. Earlier application is permitted with disclosure of that fact. The disclosure requirements of IFRS 13 need not be applied in comparative information for periods before initial application.

The Group is examining the effect of adopting IFRS 13 on its financial statements.

 
5.  
Amendment to IAS 1, Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income (hereinafter - “the Amendment”). The Amendment changes the presentation of items of other comprehensive income (hereinafter – “OCI”) in the financial statements, so that items of OCI that may be reclassified to profit or loss in the future, would be presented separately from those that would never be reclassified to profit or loss. Additionally, the Amendment changes the title of the Statement of Comprehensive Income to Statement of Profit or Loss and Other Comprehensive Income. However, entities are still allowed to use other titles. The Amendment is effective for annual periods beginning on or after July 1, 2012. The amendment will be applied retrospectively. Early adoption is permitted providing that disclosure is provided. The Group is examining the effect of adopting the Amendment on its financial statements.

 
6.  
Amendment to IAS 19, Employee Benefits (hereinafter – “the Amendment”). The Amendment introduces a number of changes to the accounting treatment of employee benefits.

The key changes are as follows:

 
•  
The Amendment requires immediate recognition of past service costs regardless of whether the benefits have vested or not.

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements  

Note 3 - Significant Accounting Policies (cont'd)
 
 
• 
The calculation of net financing income or expense will be determined by applying the discount rate used to measure the defined benefit obligation to the net defined benefit liability (asset). Accordingly, calculation of actuarial gains or losses will also change.
 
 
• 
The Amendment changes the definitions of short-term employee benefits and of other long term employee benefits, so that the distinction between the two will depend on when the entity expects the benefits to be wholly settled, rather than when settlement is due.

 
•  
The Amendment enhances the disclosure requirements for defined benefit plans, in an effort to provide better information about the characteristics of defined benefit plans and the risks that entities are exposed to through participation in those plans.

 
•  
The definition of termination benefits has been clarified in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, so that termination benefits are recognized at the earlier of when the entity recognizes costs for a restructuring that includes the payment of termination benefits, and when the entity can no longer withdraw the offer of the termination benefits.

The Amendment is applicable retrospectively (excluding certain exceptions stated in the Amendment) for annual periods beginning on or after January 1, 2013. Early adoption is permitted providing that disclosure is provided.

The Group is examining the effect of adopting the Amendment on its financial statements.

 
7.
Amendment to IFRS 7 Financial Instruments: Disclosures, Transfers of Financial Assets(hereinafter - “the Amendment”) - The Amendment introduces new disclosure requirements regarding transfers of financial assets, including disclosures for:

 
●  
Financial assets that were not derecognized in their entirety, including disclosures of the risks and rewards associated with these assets, the relationship between the transferred assets and the associated liabilities, the restrictions on the Group’s use of the assets and so forth; and

 
●  
Financial assets that were derecognized in their entirety but the entity has a continuing involvement in them, including the carrying amount and fair value that represents the Group’s involvement in these assets, the Group’s maximum exposure to losses from these assets, an analysis of the undiscounted cash flows as well as the gain or loss from the transfer of the asset and the income or expense arising from the Group’s continuing involvement in the asset.

The Amendment is effective for annual periods beginning on or after July 1, 2011. The disclosures required in the Amendment are not required for periods presented in comparative information that began before the Amendment came into effect. Early application is permitted with disclosure.

The Group is examining the effect of adopting the Amendment on its financial statements.

 
8.  
Amendment to IFRS 7 Financial Instruments: Disclosures and to IAS 32 Financial Instruments: Presentation - Offsetting of Financial Assets and Financial Liabilities (hereinafter - “the Amendment to IFRS 7” and “the Amendment to IAS 32”, respectively). The Amendment to IAS 32 clarifies that an entity currently has a legally enforceable right to set-off amounts that were recognized if that right is not contingent on a future event; and it is enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all its counterparties. The Amendment to IFRS 7 contains new disclosure requirements for financial assets and liabilities that are offset in the statement of financial position; or are subject to master netting agreements or similar agreements.

Cellcom Israel Ltd. and Subsidiaries
 
Notes to the Consolidated Financial Statements
 
Note 3 - Significant Accounting Policies (cont'd)

The Amendment to IFRS 7 is effective for annual periods beginning on or after January 1, 2013. The Amendment to IAS 32 is effective for annual periods beginning on or after January 1, 2014. The Amendments are to be applied retrospectively. Early application of the Amendment to IAS 32 is permitted subject to the concurrent application of Amendment to IFRS 7.

The Group is examining the effect of adopting the amendments on its financial statements.

 
9.
IFRS 9 (2010), Financial Instruments (hereinafter – “the Standard”) – This Standard is one of the stages in a comprehensive project to replace IAS 39 Financial Instruments: Recognition and Measurement (hereinafter - IAS 39) and it replaces the requirements included in IAS 39 regarding the classification and measurement of financial assets and financial liabilities.
 
In accordance with the Standard, there are two principal categories for measuring financial assets: amortized cost and fair value, with the basis of classification for debt instruments being the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial asset. In accordance with the Standard, an investment in a debt instrument will be measured at amortized cost if the objective of the entity’s business model is to hold assets in order to collect contractual cash flows and the contractual terms give rise, on specific dates, to cash flows that are solely payments of principal and interest. All other debt assets are measured at fair value through profit or loss. Furthermore, embedded derivatives are no longer separated from hybrid contracts that have a financial asset host. Instead, the entire hybrid contract is assessed for classification using the principles above. In addition, investments in equity instruments are measured at fair value with changes in fair value being recognized in profit or loss. Nevertheless, the Standard allows an entity on the initial recognition of an equity instrument not held for trading to elect irrevocably to present fair value changes in the equity instrument in other comprehensive income where no amount so recognized is ever classified to profit or loss at a later date. Dividends on equity instruments where revaluations are measured through other comprehensive income are recognized in profit or loss unless they clearly constitute a return on an initial investment.

The Standard generally preserves the instructions regarding classification and measurement of financial liabilities that are provided in IAS 39. Nevertheless, unlike IAS 39, IFRS 9 (2010) requires as a rule that the amount of change in the fair value of financial liabilities designated at fair value through profit or loss, other than loan grant commitments and financial guarantee contracts, attributable to changes in the credit risk of the liability, be presented in other comprehensive income, with the remaining amount being included in profit or loss. However, if this requirement aggravates an accounting mismatch in profit or loss, then the whole fair value change is presented in profit or loss. Amounts thus recognized in other comprehensive income may never be reclassified to profit or loss at a later date. The new standard also eliminates the exception that allowed measuring at cost derivative liabilities that are linked to and must be settled by delivery of an unquoted equity instrument whose fair value cannot be reliably measured. Such derivatives are to be measured at fair value.

The Group decided to early adopt the Standard from the first quarter of 2012.
 
In the opinion of the Group, the new standards will not have a material effect on the financial  statements.

Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements

Note 4 - Determination of fair values

A number of the Group's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

A .
Fixed assets
The fair value of fixed assets recognized as a result of a business combination is based on market values. The market value of fixed assets is the estimated amount for which a fixed asset could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction wherein the parties each acted knowledgeably. The market value of items of plant, equipment, fixtures and fittings is based on quoted market prices for similar items, when available, and on replacement costs when such quotes are unavailable. Depreciated replacement cost estimates reflect adjustments for physical deterioration as well as functional and economic obsolescence of the fixed asset.
 
B.
Intangible assets
The fair value of trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the trademark being owned. The fair value of customer relationships acquired in a business combination is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows.

The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets.

C.
Inventories
The fair value of inventories acquired in a business combination is determined based on the estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories.

D. 
Trade and other receivables
The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date.

E. 
Current investments and derivatives
The fair value of forward exchange contracts is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on government bonds).
The fair value of interest rate swaps is based on broker quotes. Those quotes are tested for reasonableness by discounting estimated future cash flows based on the terms and maturity of each contract and using market interest rates for a similar instrument at the measurement date . The fair value of investments in debt securities is based on quoted market prices.

F. 
Non-derivative financial liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. The fair value of marketable debentures is determined by reference to the quoted closing asking price at the reporting date.
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 4 - Determination of fair values (cont'd)

G. 
Share- based payment transactions
Fair value of employee stock options is measured using the Black-Scholes formula. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on   weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behavior), expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.

Note 5 - Financial Risk Management

The Group is exposed to credit, liquidity and market risks as part of its normal course of business. The Group's risk management objective is to monitor risks and minimize the possible influence that results from this exposure, according to its evaluations and expectations of the parameters that affect the risks. The Group uses derivative instruments in order to partially hedge its exposure to foreign currency exchange rate and interest rate fluctuations. See also note 21.

Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's receivables from customers. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The Group conducts credit evaluations on receivables over a certain amount, and requires financial guarantees against them. Management monitors outstanding receivable balances and the financial statements include appropriate allowances for estimated irrecoverable amounts. The Group is exposed to credit risk arising mainly from its operation in Israel. The Group invests in high ranked Israeli government and institutional debt securities. The Group’s cash and cash equivalents are maintained with major banking institutions in Israel. At the reporting date, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivatives, in the consolidated statement of financial position. Financial instruments that could potentially subject the Group to credit risks consist primarily of trade receivables. Credit risk with respect to these receivables is limited due to the composition of the subscriber base, which includes a large number of individuals and businesses.

Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and extreme conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The Group's policy is to ensure that it has sufficient cash and cash equivalents to meet expected operational expenses, including financial obligations.

Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Group's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.

Interest rate risk
The Group is exposed to fluctuations in the interest rate, including changes in the CPI, as the majority of its borrowings are linked to the CPI. As part of its risk management policy the Group has entered into forward contracts that partially hedge the exposure to changes in the CPI.
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 5 - Financial Risk Management (cont'd)

Currency risk
The Group's operating income and cash flows are exposed to currency risk, mainly due to handset and network related acquisitions and its roaming activity. The Group also manages bank accounts that are denominated in a currency other than its respective functional currency, primarily USD and Euro. As part of its risk management policy the Group uses forward and option contracts to partially hedge the exposure to fluctuations in foreign exchange rates.

Capital management
The Group's capital management aim is to ensure a sound and efficient capital structure which takes into consideration, among others, the following factors:
A gearing ratio that supports the Group's cash flow needs with respect to its potential cash flow generation, supporting its dividend policy, while maintaining a net debt to EBITDA (earnings before interest (financing expenses, net), taxes, other income and expenses, depreciation and amortization and share based payments) ratio that meets the industry standards. The Group considers net debt to EBITDA ratio to be an important measure for investors, analysts, and rating agencies. This ratio is a non-GAAP figure not governed by International Financial Reporting Standards and its definition and calculation may vary from one Group to another. The Group's debt consists of short and long term debentures traded publicly in the Tel Aviv Stock Exchange.

Note 6 - Operating segments

Until August 31, 2011 the Company operated as a one operating segment. From September 1, 2011 and following the completion of the merger of Netvision Ltd. to be a wholly owned subsidiary of the Company, the Group has identified two reportable segments, as described below, which are the Group's strategic business units. The strategic business unit's allocation of resources and evaluation of performance are managed separately. The operating segments were determined based on internal management reports reviewed by the Group's chief operating decision maker (CODM). The CODM does not examine assets or liabilities for those segments and therefore, they are not presented.

 
—
Cellcom – the segment includes Cellcom Israel Ltd. and its subsidiaries, excluding Netvision Ltd. and its subsidiaries.

 
—
Netvision – the segment includes Netvision Ltd. and its subsidiaries.

The accounting policies of the reportable segments are the same as described in note 3 regarding significant accounting policies.

Information regarding the results of each reportable segment is included below based on the internal management reports that are reviewed by the CODM.
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 6 - Operating segments (cont'd)
 
 
         
Year ended December 31, 2011
       
         
NIS millions
       
               
Reconciliation
       
               
for
       
   
Cellcom
   
Netvision*
   
consolidation
   
Consolidated
 
                         
Revenues
    6,125       381       -       6,506  
Inter-segment revenues
    7       19       (26 )     -  
Interest income
    92       1       -       93  
                                 
Interest expenses
    (286 )     -       -       (286 )
EBITDA **
    2,084       83       -       2,167  
Reconciliation of reoportable segment
                               
EBITDA to net profit
                               
Depreciation and amortization
    (652 )     (40 )     (46 )     (738 )
Taxes on income
    (313 )     (2 )     11       (304 )
                                 
Financing income
                            116  
                                 
Financing expenses
                            (409 )
                                 
Other expenses
                            (1 )
                                 
Share based payments
                            (6 )
                                 
Net profit
    821       39       (35 )     825  
 
* 
Netvision segment represents results of operations for the four month period commencing September 1, 2011 (see note 7).

**
EBITDA as reviewed by the CODM, represents earnings before interest (financing expenses, net), taxes, other income and expenses, depreciation and amortization and share based payments, as a measure of operating profit. EBITDA is not a financial measure under IFRS and cannot be compared to other similarly titled measures in other companies.

Note 7 - Acquisition of Subsidiary

Business combination

On August 31, 2011 (the "date of acquisition"), the merger transaction of Netvision to be a wholly owned subsidiary of the Company (hereinafter - "the Acquisition"), was completed. Netvision is primarily engaged with providing Internet service, international landline telephone service, as well as providing local landline telephony services. As a result of the merger, the Company holds 100% of the merged company, Netvision, and commencing with the date of acquisition, Netvision it is fully consolidated in the Company's financial statements.

Following the acquisition of Netvision, the Group believes it will be able to provide its customers an additional variety of communication services, which will strengthen its position as a communication group which provides wide answer to customer's cellular and wireline needs.

Since the acquisition date and until December 31, 2011, Netvision contributed NIS 374 million (net of intercompany revenues) and NIS 4 million to the Group's revenues and net income, respectively (after depreciation of Purchase Price Allocation, net in a total amount of NIS 35 million).
 
According to management's estimates and assumptions, if the acquisition had occurred on January 1, 2011, consolidated revenues would have been NIS 7,257 million and consolidated profit for the year would have been NIS 799 million. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition, would have been the same if the acquisition had occurred on January 1, 2011. 
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 7 - Acquisition of Subsidiary (cont'd)

The following summarizes the major classes of consideration transferred, and the recognized amounts of assets acquired and liabilities assumed at the acquisition date:

Consideration transferred
   
NIS millions
 
Cash
    1,570  
Share-based awards - cost of past service
    8  
Total consideration transferred
    1,578  

Replacement of share-based payment awards

According to the terms of the merger agreement, the Company committed to exchange share-based payment awards held by employees of Netvision for cash consideration.
 
The Company recognized NIS 8 million as part of the cost of the business combination on the basis of the portion of awards that can be attributed to services provided before the business combination. An amount of NIS 2 million is recognized as post-acquisition compensation cost over the service period.
 
Identifiable assets acquired and liabilities assumed

Summary of assets acquired and liabilities assumed at acquisition date:
 
   
NIS millions
 
       
Trade and other receivables
    599  
Inventory
    5  
Intangible assets
    1,099  
Deferred tax liabilities
    (44 )
Property, plant and equipment
    180  
Trade and other payables
    (326 )
Credit and loans
    (45 )
Provisions
    (10 )
Net assets acquired
    1,458  
         
Cash acquired
    120  
         
Total consideration transferred
    1,578  

The acquisition is accounted for using the acquisition method. The Company allocated the total purchase price to assets acquired and liabilities assumed using estimates of their fair values and amortization periods.

The intangible assets which were recognized during the acquisition, mainly consist of goodwill in the amount of approximately NIS 753 million, and customer relationship in the amount of approximately NIS 277 million, which is amortized over its useful life of approximately 6 years.

Goodwill was calculated as a residual value of the consideration that was paid, net of the assets that were identified at the time of the acquisition.

The goodwill is attributable mainly to the synergies expected to be achieved from integrating Netvision into the Group's communication business and the skills and technical talent of the acquiree's work force (see also note   12 regarding intangible assets, net ) . None of the goodwill recognized is expected to be deductible for tax purposes.
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
 
Note 7 - Acquisition of Subsidiary (cont'd)
 
Acquisition-related costs
The Company incurred acquisition-related costs of NIS 8 million mainly related to consulting fees, legal fees and due diligence costs. These costs have been included in general and administrative expenses in the statement of income.

Note 8 - Cash and Cash Equivalents

Composition
 
   
December 31,
 
   
2010
   
2011
 
   
NIS millions
   
NIS millions
 
             
Bank balances
    32       14  
Call deposits
    501       906  
      533       920  

The Group's exposure to interest rate risk and sensitivity analysis for financial assets and liabilities is disclosed in note 21.

Note 9 - Trade and Other Receivables

Composition

   
December 31
 
Current
 
2010
   
2011
 
Trade Receivables*
 
NIS millions
   
NIS millions
 
Open accounts
    486       524  
Checks and credit cards receivables
    221       250  
Accrued income
    115       148  
Current maturity of long-term receivables
    656       937  
      1,478       1,859  
Other Receivables
               
Prepaid expenses
    49       60  
Other
    15       6  
Assets held for sale
    -       27  
      64       93  
      1,542       1,952  
Non-current
               
Trade receivables*
    523       980  
Rights of use of communication lines
    -       259  
Deposits and other receivables
    55       56  
Other
    19       42  
      597       1,337  
      2,139       3,289  

* Net of allowance for doubtful debts.
The Group is exposed to credit risks and impairment losses related to trade and other receivables as disclosed in note 21.
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
 
Note 10 - Inventory

 
A. 
Composition
 
   
December 31,
 
   
2010
   
2011
 
   
NIS millions
   
NIS millions
 
Handsets
    68       137  
Accessories
    14       14  
Spare parts
    22       19  
      104       170  
 
 
B.
Inventories of handsets, accessories and spare-parts as at December 31, 2011 and December 31, 2010 are presented net of a provision for impairment and inventory write off in the amount of NIS 19 million and NIS 8 million, respectively.
 
Note 11 - Property, Plant and Equipment, Net
 
     
Communication
network
     
Control and
testing
equipment
     
Vehicles
      Computers,
furniture
and office
equipment
     
Leasehold
improvements
     
Total
 
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
 
Cost
                                   
                                     
Balance at January 1, 2010
    5,927       342       32       863       216       7,380  
                                                 
Additions
    319       20       14       47       20       420  
Disposals
    (121 )     -       (4 )     (14 )     -       (139 )
Balance at December 31, 2010
    6,125       362       42       896       236       7,661  
                                                 
Business combination*
    577       -       19       444       60       1,100  
Additions
    291       14       7       69       5       386  
Disposals
    (17 )     (1 )     (4 )     (11 )     -       (33 )
Reclassification to assets held for sale
    (1 )     -       -       (4 )     -       (5 )
Balance at December 31, 2011
    6,975       375       64       1,394       301       9,109  
                                                 
Accumulated Depreciation
                                               
                                                 
Balance at January 1, 2010
    4,202       261       10       661       150       5,284  
Depreciation for the year
    342       21       4       64       15       446  
Disposals
    (119 )     -       (2 )     (11 )     -       (132 )
Balance at December 31, 2010
    4,425       282       12       714       165       5,598  
                                                 
Business combination*
    493       -       6       376       45       920  
Depreciation for the year
    343       20       7       71       16       457  
Disposals
    (15 )     (1 )     (3 )     (11 )     -       (30 )
Reclassification to assets held for sale
    (1 )     -       -       (3 )     -       (4 )
Balance at December 31, 2011
    5,245       301       22       1,147       226       6,941  
                                                 
Carrying amounts
                                               
                                                 
At January 1, 2010
    1,725       81       22       202       66       2,096  
At December 31, 2010
    1,700       80       30       182       71       2,063  
At December 31, 2011
    1,730       74       42       247       75       2,168  

*   As part of the acquisition, property, plant and equipment, net in the amount of NIS 180 million, has been acquired (see note 7).
 
In the ordinary course of business, the Group acquires property, plant and equipment in credit. The cost of acquisitions, which has not yet been paid at the reporting date, amounted to NIS 157 million.
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 12 - Intangible Assets, Net
 
Cost
 
Licenses
   
Information Systems
   
Software
   
Deferred Expenses
   
Goodwill
   
Customer Relationship and Other
   
Total
 
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
 
Balance at January 1, 2010
    550       684       336       350       -       -       1,920  
                                                         
Additions
    -       80       19       114       77       25       315  
Disposals
    -       -       -       (122 )     -       -       (122 )
Balance at December 31, 2010
    550       764       355       342       77       25       2,113  
                                                         
Business combination*
    6       40       -       -       753       322       1,121  
Additions
    -       69       13       6       -       -       88  
Disposals
    -       (18 )     -       (296 )     -       -       (314 )
Reclassification to assets held for sale
    -       (3 )     -       -       -       -       (3 )
Balance at December 31, 2011
    556       852       368       52       830       347       3,005  
                                                         
Accumulated Amortization
                                                       
                                                         
Balance at January 1, 2010
    197       512       260       240       -       -       1,209  
                                                         
Amortization for the year
    30       69       30       139       -       5       273  
Disposals
    -       -       -       (122 )     -       -       (122 )
Balance at December 31, 2010
    227       581       290       257       -       5       1,360  
                                                         
Business combination*
    3       19       -       -       -       -       22  
Amortization for the year
    28       80       25       79       -       48       260  
Disposals
    -       (18 )     -       (296 )     -       -       (314 )
Reclassification to assets held for sale
    -       (3 )     -       -       -       -       (3 )
Balance at December 31, 2011
    258       659       315       40       -       53       1,325  
                                                         
Carrying amounts
                                                       
                                                         
At January 1, 2010
    353       172       76       110       -       -       711  
At December 31, 2010
    323       183       65       85       77       20       753  
At December 31, 2011
    298       193       53       12       830       294       1,680  
 
*   As part of the acquisition, intangible assets, net in the amount of NIS 1,099 million, have been acquired (see note 7).
 
A.  
Impairment testing for cash-generating unit containing goodwill

For the purpose of impairment testing, goodwill is allocated to Netvision, which represents the lowest level within the Group, at which goodwill is monitored for internal management purposes, which is not higher than the operating segments, reported in note 6 regarding operating segments.

The aggregate carrying amount of goodwill allocated to Netvision is as follows:

   
December 31
 
   
2011
 
   
NIS millions
 
       
Netvision
    753  
 
 
Note 12 - Intangible Assets, Net (cont'd)
 
The recoverable amount of Netvision was based on its value in use and was determined by discounting the expected future cash flows to be generated from the continuing use. The recoverable amount of Netvision was determined to be higher than its carrying amount and thus, no impairment loss has been recognized.

B.  
Key assumptions used in calculation of recoverable amount

Key assumptions used in the calculation of recoverable amounts are discount rates and terminal value growth rates. These assumptions are as follows:
 
 
  After-tax discount rate   Terminal value growth rate
      2011
Netvision 13.0%   1.5%
 
 
(1) 
After-tax discount rate

The after-tax discount rate of Netvision was based on Netvision's weighted average cost of capital.

Netvision's after-tax discount rate was based on the risk-free rate for 15-year NIS denominated debentures issued by the Israeli government, in addition to the average risk premium of the capital market multiplied by the relative risk factor of Netvision (Beta), reflecting the sensitivity of  the investment value to fluctuations in the capital market as a whole.

The after-tax discount rate as mentioned above, represents a pre-tax discount rate of 17.6%.

(2)      Terminal value growth rate

Netvision has cash flows for 5 years, as included in its discounted cash flow model. The long-term growth rate has been determined as 1.5%. This rate reflects the assumption that in the long term Netvision's growth will be lower than the inflation in the State of Israel and that, in the light of long term trends of Netvision's prices erosion and in the light of technology developments and competition in the markets in which Netvision operates.

 (3)      Sensitivity to changes in assumptions

The estimated recoverable amount of Netvision exceeds its carrying amount by approximately NIS 7 million. Management has identified two key assumptions for which there reasonably could be a possible change that could cause the carrying amount to exceed the recoverable amount. The table below shows the amount that these two assumptions are required to change individually in order for the estimated recoverable amount to be equal to the carrying amount.
 
  2011
  %
After-tax discount rate
13.1
Terminal value growth rate
1.4
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 13 - Trade Payables and Accrued Expenses

Composition
 
   
December 31
 
   
2010
   
2011
 
   
NIS millions
   
NIS millions
 
Trade payables
    267       554  
Accrued expenses
    449       472  
                 
      716       1,026  


Note 14 - Provisions
 
   
Dismantling
and restoring
sites
   
Litigations
   
Other legal
obligations
   
Other
   
Total
 
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
 
Balance as at January 1, 2011
    17       22       58       4       101  
Businesss combination
    -       10       -       -       10  
Provisions made during the period
    4       39       19       -       62  
Provisions reversed during the period
    (1 )     (4 )     -       -       (5 )
Unwind of discount
    1       -       -       -       1  
Balance as at December 31, 2011
    21       67       77       4       169  
                                         
Non-current
    21       -       -       -       21  
Current
    -       67       77       4       148  
      21       67       77       4       169  

Dismantling and restoring sites
The Group is required to incur certain costs in respect of a liability to dismantle and remove assets and to restore sites on which the assets were located. These dismantling costs are calculated on the basis of the identified costs for the current financial year, extrapolated for future years using the best estimate of future trends in prices, inflation, etc, and are discounted at a risk-free rate. Forecast of estimated site departures or asset returns is revised in light of future changes in regulations or technological requirements.

Litigations
The Group is involved in a number of legal and other disputes with third parties. The Group's management, after taking legal advice, has established provisions which take into account the facts of each case. The timing of cash outflows associated with legal claims cannot be reasonably determined. For detailed information regarding legal proceedings against the Group, refer to note 31.

Other legal obligations
Provisions for other legal obligations include various obligations that are derived either from a constructive obligation or legislation for which there is a high uncertainty regarding the timing and amount of future expenditure required for settlement.

Other
Include provisions for warranties, as well as a variety of other items for which the individually recognized amounts are largely not material.
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 

Note 15 - Other Payables, Including Derivatives

Composition
 
   
December 31
 
   
 
   
2011
 
    NIS millions     NIS millions  
             
Employees and related liabilities
    110       182  
Government institutions
    38       17  
Interest payable
    163       248  
Accrued expenses
    -       26  
Deferred revenue
    50       44  
Derivative financial instruments
    18       11  
Liability for assets held for sale
    -       19  
                 
      379       547  

Note 16 - Other Long-term Liabilities

Composition
 
   
December 31
 
   
2010
   
2011
 
   
NIS millions
   
NIS millions
 
             
Long-term liabilities to trade payables
    -       24  
Deferred revenue in respect of rights of use of communication lines
    -       6  
Derivative financial instruments
    -       11  
                 
      -       41  

Note 17 - Debentures and Loans from Banks

This note provides information about the contractual terms of the Group's interest-bearing loans and debentures, which are measured at amortized cost. For more information about the Group’s exposure to interest rate, foreign currency and liquidity risk, see note 21.

   
December 31
 
   
2010
   
2011
 
   
NIS millions
   
NIS millions
 
             
Non- current liabilities
           
Debentures
    3,913       5,452  
Loans from banks
    -       19  
      3,913       5,471  
Current liabilities
               
Current maturities of debentures
    348       658  
Current maturities of long-term loans from banks
    -       16  
      348       674  


Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements

Note 17 - Debentures and loans from banks (cont'd)

Terms and debt repayment schedule

The terms and conditions of long-term loans and debentures are as follows:

                 
December, 31 2010
   
December, 31 2011
 
                 
NIS millions
   
NIS millions
 
 
 Currency
 
Nominal
interest rate
   
Year of
maturity
   
Face value
   
carrying amount
   
Face value
   
carrying amount
 
Loans from banks
 NIS
    4.80-6.00 %     2012-2015       -       -       35       35  
Debentures (Series A) - linked to the Israeli CPI
 NIS
    5.00 %     2012       473       537       237       276  
Debentures (Series B) - linked to the Israeli CPI
 NIS
    5.30 %     2017       925       1,052       925       1,079  
Debentures (Series C) - linked to the Israeli CPI
 NIS
    4.60 %     2013       181       202       108       124  
Debentures (Series D) - linked to the Israeli CPI
 NIS
    5.19 %     2017       1,507       1,685       2,423       2,824  
Debentures (Series E) - unlinked
 NIS
    6.25 %     2017       789       785       1,799       1,807  
Total interest- bearing liabilities
                      3,875       4,261       5,527       6,145  

Debentures

In December 2005, the Company issued NIS 1,037 million principal amount of debentures (Series A) to institutional investors at par value. The debentures are payable in nine equal semi-annual installments, on July 5 of each of the years 2008 through 2012 and on January 5 of each of the years 2009 through 2012. The debentures bear annual interest of 5.00%. The interest is to be paid on January 5 of each of the years 2007 through 2012 and on July 5 of each of the years 2006 through 2012 for the six-month period ended on the day prior to each date as stated. Both the principal amount and interest are linked to the CPI for November 2005.

In December 2005, the Company issued NIS 715 million principal amount of debentures (Series B) to institutional investors at par value. The debentures are payable in five equal annual installments, on January 5 of each of the years 2013 through 2017. The debentures bear annual interest of 5.30%. The interest is to be paid on January 5 of each of the years 2007 through 2017 for the twelve-month period ended on the day prior to each date as stated. Both the principal amount and interest are linked to the CPI for November 2005.

In May 2006, the Company issued to institutional investors additional Series A debentures in the aggregate principal amount of NIS 28 million, in exchange for consideration of NIS 29 million, and additional Series B debentures in the aggregate principal amount of NIS 210 million in exchange for consideration of NIS 221 million.

In October 2007, the Company issued Series C debentures to the public in the aggregate principal amount of NIS 245 million in exchange for net consideration of NIS 244 million. The debentures are payable in nine semi-annual installments, on March 1 and September 1 of each of the years 2009 through 2012, and on March 1, 2013. The debentures bear annual interest of 4.60%. The interest is to be paid in semi- annual installments on March 1 and September 1 of each of the years 2008 through 2012 and on March 1, 2013. Both the principal amount and interest are linked to the CPI for August 2007.

Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
 
Note 17 - Debentures and loans from banks (cont'd)

In October 2007, the Company issued Series D new debentures to the public in the aggregate principal amount of NIS 827 million in exchange for net consideration of NIS 823 million. The debentures are payable in five equal annual installments, on July 1 of each of the years 2013 through 2017. The debentures bear annual interest of 5.19%. The interest is to be paid in annual installments on July 1 of each of the years 2008 through 2017. Both the principal amount and interest are linked to the CPI for August 2007.

In February 2008, the Company issued, in a private placement to institutional investors, additional debentures of Series C, in a principal amount of NIS 81 million and additional debentures of Series D, in a principal amount of approximately NIS 494 million, in exchange for total consideration of NIS 600 million.

In April 2009, the Company issued additional Series D debentures to the public in Israel in the aggregate principal amount of approximately NIS 186 million in exchange for total consideration of approximately NIS 215 million.

In April 2009, the Company issued debentures to the public in Israel of a new Series E in the aggregate principal amount of approximately NIS 789 million in exchange for total consideration of approximately NIS 785 million. The Series E debentures are payable in six equal annual installments on January 5 of each of the years 2012 through 2017. The debentures bear annual interest of 6.25%. The interest is to be paid in annual installments on January 5 of each of the years 2010 through 2017. Both the principal amount and interest are without any linkage.

The debentures were offered and sold in 2009 pursuant to a shelf prospectus that the Company filed in March 2009 with the Israeli Securities Authority and the Tel Aviv Stock Exchange. The shelf prospectus allowed the Company, until March 2011, to offer and sell debt, equity and warrants in Israel, from time to time , subject to a supplemental shelf offering report describing the terms of the securities offered and the specific details of the offering.

In March 2011, the Company issued additional Series D debentures to the public in Israel in an aggregate principal amount of approximately NIS 294 million in exchange for total consideration of approximately NIS 383 million, representing an effective interest rate of 2.23% per annum, linked to the Israeli CPI.

In March 2011, the Company issued additional Series E debentures to the public in Israel in an aggregate principal amount of approximately NIS 632 million in exchange for total consideration of approximately NIS 658 million, representing an effective interest rate of 5.47% per annum, without linkage.

The debentures were offered and sold pursuant to a supplemental shelf offering report that the Company filed in March 2011 with the Israeli Securities Authority and the Tel Aviv Stock Exchange. The offering was made pursuant to the Company's shelf prospectus from March, 2009.  

In July 2011, the Company filed a shelf prospectus with the Israeli Securities Authority and the Tel Aviv Stock Exchange. The shelf prospectus will allow the Company, from time to time, to offer and sell debt, equity, warrants and tradable papers in Israel, in one or more offerings, subject to a supplemental shelf offering report, in which the Company will describe the terms of the securities offered and the specific details of the offering.

In August, 2011, the Company issued additional Series D debentures to the public in Israel in an aggregate principal amount of approximately NIS 622 million in exchange for total consideration of
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements

Note 17 - Debentures and loans from banks (cont'd)

approximately NIS 743 million, representing an effective interest rate of 4.03% per annum, linked to the Israeli CPI.

In August, 2011, the Company issued additional Series E debentures to the public in Israel in an aggregate principal amount of approximately NIS 378 million in exchange for total consideration of approximately NIS 398 million, representing an effective interest rate of 5.81% per annum, without linkage.

The debentures were offered and sold pursuant to a supplemental shelf offering report that the Company filed in August 2011 with the Israeli Securities Authority and the Tel Aviv Stock Exchange. The offering was made pursuant to the Company's shelf prospectus dated July 2011.  

The Company used and intends to use the net proceeds from the offering for the acquisition of Netvision (see note 7) and general corporate purposes, which may include financing its operating and investing activity, refinancing of outstanding debt under its debentures, and continued dividend distributions as customary in the Company, subject to the decisions of the Company's board of directors from time to time. 

Note 18 - Liability for Employee Rights Upon Retirement, Net

 
A.
Defined contribution plan

 
1.  
The Group’s liability for severance pay for its Israeli employees is calculated pursuant to Israeli Severance Pay Law. The Group’s liability is mostly covered by monthly deposits with severance pay funds, insurance policies and by an accrual on the consolidated statements of financial position. For most of the Group's employees, the payments to pension funds and to insurance companies exempt the Group from any obligation towards its employees, in accordance with Section 14 of the Severance Pay Law. Accumulated amounts in pension funds and in insurance companies are not under the Group's control or management and accordingly, neither those amounts nor the corresponding accrual for severance pay are presented in the consolidated statement of financial position. The obligation of the Group, under law and labor agreements, to pay severance pay employees who are not covered by the pension or insurance plans as mentioned above, is NIS 10 million and NIS 1 million for the years ended December 31, 2011 and 2010, respectively, as included in the consolidated statement of financial position, under Liability for employee rights upon retirement, net. The calculation for this liability is based on salary components that according to management's estimation create the liability for severance pay.

 
2.  
The severance pay expenses for the years ended December 31, 2011, 2010 and 2009 were approximately NIS 36 million, NIS 35 million and NIS 32 million, respectively.

 
3.
In January 2008, under an expansion order issued by the Israeli Ministry of Industry, Commerce and Labor, all Israeli employers are obligated to contribute to pension plans amounts equal to a certain percentage of the employee's wages, for all employees, after a certain minimum employment period. The Group complies with this order. Other employees are entitled to contribution to a pension plan, which shall increase gradually until 2014 and up to 6% of the employee’s wages, and additional identical contribution for severance pay.
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 18 - Liability for Employee Rights Upon Retirement, Net (cont'd)

 
B. 
Defined benefit plan

In a subsidiary which was acquired in 2011 (see note 7), the portion of the severance payments which is not covered by deposits in defined contribution plans, as aforementioned, is accounted for by the Group as a defined benefit plan, according to which a liability for employee benefits is recognized and in respect of which, the Group deposits amounts in central severance pay funds and in appropriate insurance policies. The total liability as at December 31, 2011 is NIS 28 million. The fair value of the plan assets, the severance pay fund, is NIS 23 million.

Note 19 - Capital and reserves

Share capital
                   
   
2009
   
2010
   
2011
 
   
NIS
 
Issued and paid at January 1
    983,493       988,957       994,647  
Exercise of share options
    5,464       5,690       167  
                         
Issued and paid at December 31
    988,957       994,647       994,814  

The share capital is comprised of ordinary shares of NIS 0.01 par value each .

At December 31, 2011, the authorized share capital was comprised of 300 million ordinary shares (December 31, 2010, 2009- 300 million each). The holders of ordinary shares are entitled to receive dividends as declared.
 
The calculation of basic earnings per share was based on the profit attributable to ordinary share holders and the weighted average number of ordinary shares outstanding (98,644,434, 98,979,544 and 99,476,671, during the years 2009 and 2010 and 2011, respectively). The calculations of diluted earnings per share was based on the profit attributable to ordinary shares and the weighted average number of ordinary shares in the basic earnings per share in addition of 872,600, 501,247 and 1,073,633 incremental shares (NIS 0.01 par value each) that would be issued resulting from exercise of all options for the years ended December 31, 2009, 2010, 2011, respectively.

At December 31, 2011, 975 thousand options (2010 and 2009: 0 thousand and 27 thousand options, respectively) were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been anti-dilutive.

The average market value of the Company’s shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period that the options were outstanding.
 
Dividends
Dividends declared and paid during the reported period are as follows:
     
   
2011
 
   
NIS millions
 
2.60 NIS per share paid in April 2011
    303  
3.05 NIS per share paid in July 2011
    292  
2.93 NIS per share paid in October 2011
    232  
2.33 NIS per share declared in November 2011
    189  
      1,016  
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 19 - Capital and reserves (cont'd)
 
      2010  
   
NIS millions
 
2.60 NIS per share paid in March 2010
    257  
3.64 NIS per share paid in June 2010
    360  
3.13 NIS per share paid in October 2010
    310  
4.03 NIS per share paid in December 2010
    400  
      1,327  
 
   
2009
 
   
NIS millions
 
2.75 NIS per share paid in March 2009
    270  
3.36 NIS per share paid in June 2009
    330  
3.05 NIS per share paid in September 2009
    300  
2.90 NIS per share paid in December 2009
    287  
      1,187  

On March 6, 2012, subsequent to the end of the reporting period, the Company’s Board of Directors declared a cash dividend in the amount of NIS 0.72 per share, totaling approximately NIS 72 million, to be paid on May 17, 2012, to all of the Company's shareholders of record at the end of the trading day in the NYSE on May 2, 2012.

Note 20 - Share-based payments

 
A.
In September 2006, the Company's Board of Directors approved a share based incentive plan ("the plan") for employees, directors, consultants and sub-contractors of the Company and the Company’s affiliates. The plan has an initial pool of 2,500,000 shares from which options and restricted stock units (RSUs) could be granted.

 
B.
In October and November 2006, the Company granted options to purchase an aggregate of 2,414,143 ordinary shares at an exercise price of $12.60 per share.  Among those grants were options to purchase up to 450,000 ordinary shares granted to the Chairman of the Company’s Board of Directors and an additional 450,000 options to the Company’s Chief Executive Officer.  The remainder of the option grants was made to other Company senior employees. Options not exercised within 6 years of the grant date, will expire.

C.  
In March 2007, the Company granted to senior employees options to purchase an aggregate of 30,786 ordinary shares at an exercise price of $12.60 per share according to the terms of the Plan. As a result of a dividend adjustment mechanism, the exercise price for all these options was adjusted to $0 per share as of December 31, 2011 ($0 per share as of December 31, 2010).

D.  
In August 2008, the Company granted to senior employees options to purchase an aggregate of 27,500 ordinary shares at an exercise price of $25 per share according to the terms of the Plan. As a result of a dividend adjustment mechanism, the exercise price for these options was adjusted to $13.89 per share as of December 31, 2011 ($16.77 as of December 31, 2010).

Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 20 - Share-based payments (cont'd)

 
E.
In August 2009, the Company granted to senior employees options to purchase an aggregate of 74,164 ordinary shares at an exercise price of $24.65 per share according to the terms of the plan. As a result of a dividend adjustment mechanism, the exercise price for these options was adjusted to $16.61 per share as of December 31, 2011 ($19.49 as of December 31, 2010).

 
F.
In November 2010, the Company granted to a senior employee options to purchase an aggregate of 12,000 ordinary shares at an exercise price of $27.92 per share under the terms of the plan. As a result of a dividend adjustment mechanism, the exercise price for these options was adjusted to $23.92 per share as of December 31, 2011 ($26.8 as of December 31, 2010).

 
G.
In May 2011, the Company's board of directors resolved to enlarge the initial pool of options or RSUs of the Company's 2006 Share Incentive Plan from 2,500,000, by 1,400,000 options or RSUs and the Company granted to senior employees options to purchase an aggregate of 1,060,000 ordinary shares at an exercise price of $31.74 per share according to the terms of the plan. As a result of a dividend adjustment mechanism, the exercise price for these options was adjusted to $29.72 per share as of December 31, 2011.

 
Grant date/employees entitled  
Number of
instruments
In thousands
  Vesting conditions  
Contractual
life of
options
Share options granted in October-November 2006 to managers and senior employees
 
2,414
 
Four equal installments over four years of employment
 
6 years
             
Share options granted in March 2007 to senior employees
 
31
 
Four equal installments over four years of employment
 
6 years
             
Share options granted in August 2008 to senior employees
 
27
 
Four equal installments over four years of employment
 
6 years
             
Share options granted in August 2009 to senior employees
 
74
 
Four equal installments over four years of employment
 
6 years
             
Share options granted in November 2010 to senior employees
 
12
 
Four equal installments over four years of employment
 
6 years
             
Share options granted in May 2011 to senior employees
 
1,060
 
Three equal installments over three  years of employment
 
4.5 years

The total compensation expense during the year ended December 31, 2011, related to the options granted is NIS 6 million (2010 - NIS 1 million, 2009 - NIS 1 million).
 
The changes in the balances of the options were as follows:
 
   
Number of
options
   
Weighted average
of exercise price
(US Dollars)
   
Number of
options
   
Weighted average
of exercise price
(US Dollars)
   
Number of
options
   
Weighted average
of exercise price
(US Dollars)
 
   
2009
   
2010
   
2011
 
                                     
Balance as at January 1
    1,274,863       6.86       704,674       6.19       116,132       17.20  
                                                 
Granted during the year
    74,164       23.86       12,000       27.36       1,060,000       30.65  
                                                 
Forfeited during the year
    (7,759 )     5.59       (7,395 )     2.74       (100,125 )     29.90  
                                                 
Exercised during the year
    (636,594 )     4.26       (593,147 )     1.11       (19,111 )     2.70  
                                                 
Total options outstanding as at December 31
    704,674       6.19       116,132       17.20       1,056,896       29.10  
                                                 
Total of exercisable options as at December 31
    11,450       12.59       26,936       13.40       43,189       16.68  
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 20 - Share-based payments (cont'd)

The weighted average of the remaining contractual life of options outstanding as at December 31, 2011, is 4 years and 3 months (as at December 31, 2010- 4 years and 3 months).
 
   
2009
   
2010
   
2011
 
                   
Fair  value of share options and assumptions:
                 
                   
Fair value at grant date
  $ 8.82     $ 10.83     $ 4.84  
                         
Fair  value assumptions:
                       
                         
Share price at grant date
  $ 27.88     $ 33.27     $ 31.58  
                         
Exercise price
  $ 24.65     $ 27.92     $ 31.74  
                         
Expected volatility (weighted average life)
    30.28 %     28.85 %     24.35 %
                         
Option life (expected weighted average life)
 
4.25 years
   
3.75 years
   
2.3 years
 
                         
Risk free interest rate
    2.5 %     3.42 %     0.7 %

Note 21 - Financial Instruments

Credit risk
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
 
   
December 31
   
December 31
 
   
2010
   
2011
 
   
NIS millions
   
NIS millions
 
             
Trade receivables including long term amounts
    1,999       2,839  
Loans and other receivables including long term amounts
    76       96  
Investment in debt securities
    386       266  
Cash and cash equivalents
    533       920  
Forward exchange contracts on foreign currencies
    5       24  
Forward exchange contracts on CPI
    13       -  
                 
      3,012       4,145  

The maximum exposure to credit risk of financial assets at the reporting date by type of counterparty is:

   
December 31
   
December 31
 
   
2010
   
2011
 
   
NIS millions
   
NIS millions
 
             
Receivables from subscribers
    1,894       2,793  
Receivables from distributors and other operators
    105       44  
Investment in government of Israel debt securities
    244       143  
Investment in institutional debt securities
    142       123  
Cash and cash equivalents
    533       920  
Other
    94       122  
                 
      3,012       4,145  
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 21 - Financial Instruments (cont'd)

Impairment losses
The aging of financial assets at the reporting date was as follows:

   
Gross
   
Impairment
   
Gross
   
Impairment
 
   
2010
   
2011
 
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
 
                         
Not past due
    2,822       4       3,977       9  
Past due less than one year
    180       71       202       69  
Past due more than one year
    299       214       277       233  
                                 
      3,301       289       4,456       311  

The movement in the allowance for impairment in respect of trade receivables during the year was as follows:

   
2010
   
2011
 
   
NIS millions
   
NIS millions
 
             
Balance at January 1
    218       289  
Business combination
    -       38  
Impairment loss recognized
    (35 )     (97 )
Increase in doubtful debt expenses
    106       81  
                 
Balance at December 31
    289       311  

The allowance accounts in respect of trade receivables is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amount considered irrecoverable is written off against the trade receivable directly.

Liquidity risk
The following are the maturities of contractual of financial liabilities and other non contractual liabilities, including estimated interest payments and excluding the impact of netting agreements:

December 31, 20 11
 
Carrying
   
Contractual
                           
More than
 
   
amount
   
Cash flows
   
1 st year
   
2 nd year
   
3 rd year
   
4-5 years
   
5 years
 
   
NIS millions
 
                                           
Debentures *
    (6,358 )     (7,246 )     (986 )     (1,403 )     (1,302 )     (2,429 )     (1,126 )
Trade and other payables
    (1,443 )     (1,443 )     (1,443 )     -       -       -       -  
Forward exchange  contracts on CPI
    (22 )     (22 )     (11 )     (2 )     (7 )     (2 )     -  
Credit and loans from banks
    (35 )     (35 )     (16 )     (9 )     (5 )     (5 )     -  
Long term liabilities to trade payables
    (35 )     (35 )     (13 )     (12 )     (8 )     (2 )     -  
                                                         
      (7,893 )     (8,781 )     (2,469 )     (1,426 )     (1,322 )     (2,438 )     (1,126 )

*   Including accrued interest on debentures.
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 21 - Financial Instruments (cont'd)

Liquidity risk (cont'd)

December 31, 20 10
 
Carrying
   
Contractual
                           
More than
 
   
amount
   
Cash flows
   
1 st year
   
2 nd year
   
3 rd year
   
4-5 years
   
5 years
 
   
NIS millions
 
                                           
Debentures
    (4,424 )     (5,235 )     (573 )     (688 )     (901 )     (1,610 )     (1,463 )
Trade and other  payables
    (826 )     (826 )     (826 )     -       -       -       -  
Forward exchange  contracts on  foreign currencies
    (17 )     (17 )     (17 )     -       -       -       -  
Forward exchange  contracts on CPI
    (1 )     (1 )     (1 )     -       -       -       -  
                                                         
                                                         
      (5,268 )     (6,079 )     (1,417 )     (688 )     (901 )     (1,610 )     (1,463 )


The following table indicates the periods in which the cash flows associated with derivatives that are cash flow hedges are expected to occur:
 
   
Carrying
   
Contractual
                           
More than
 
   
amount
   
Cash flows
   
1 st year
   
2 nd year
   
3 rd year
   
4-5 years
   
5 years
 
   
NIS millions
 
                                           
December 31, 2011
                                         
Forward exchange contracts:
                                         
Assets
    19       19       19       -       -       -       -  
Liabilities
    -       -       -       -       -       -       -  
                                                         
      19       19       19       -       -       -       -  
                                                         
December 31, 2010
                                                       
Forward exchange contracts:
                                                       
Assets
    -       -       -       -       -       -       -  
Liabilities
    (13 )     (13 )     (13 )     -       -       -       -  
                                                         
      (13 )     (13 )     (13 )     -       -       -       -  
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements

Note 21 - Financial Instruments (cont'd)

Liquidity risk (cont'd)
 
The following table indicates the periods in which the cash flows associated with derivatives that are cash flow hedges are expected to impact profit or loss:

   
Carrying
   
Contractual
                           
More than
 
   
amount
   
Cash flows
   
1 st year
   
2 nd year
   
3 rd year
   
4-5 years
   
5 years
 
   
NIS millions
 
                                           
December 31, 2011
                                         
Forward exchange contracts:
                                         
Assets
    19       19       19       -       -       -       -  
Liabilities
    -       -       -       -       -       -       -  
                                                         
      19       19       19       -       -       -       -  
                                                         
December 31, 2010
                                                       
Forward exchange contracts:
                                                       
Assets
    -       -       -       -       -       -       -  
Liabilities
    (13 )     (13 )     (13 )     -       -       -       -  
                                                         
      (13 )     (13 )     (13 )     -       -       -       -  
 
Currency risk and CPI

The Group's exposure to foreign currency risk and CPI was as follows based on notional amounts:

   
December 31, 2010
   
December 31, 2011
 
   
In or linked
               
In or linked
             
   
to foreign
               
to foreign
             
   
currencies
   
linked
         
currencies
   
linked
       
   
(mainly USD)
   
to CPI
   
unlinked
   
(mainly USD)
   
to CPI
   
unlinked
 
   
NIS millions
   
NIS millions
 
Current assets
                                   
Cash and cash equivalents
    13       -       520       13       -       907  
Current investments, including derivatives
    -       230       174       24       159       107  
Trade receivables
    -       -       1,478       38       -       1,821  
Other receivables, including derivatives
    -       14       -       -       2       31  
                                                 
Non- current assets
                                               
Long-term receivables
    -       19       564       -       20       1,023  
                                                 
Current liabilities
                                               
Current maturities of debentures and long-term loans
    -       (348 )     -       -       (358 )     (316 )
Trade payables and accrued expenses
    (101 )     -       (615 )     (284 )     -       (742 )
Other current liabilities, including derivatives
    -       (114 )     (177 )     -       (148 )     (539 )
                                                 
Non- current liabilities
                                               
Long-term loans from banks
    -       -       -       -       -       (19 )
Debentures
    -       (3,128 )     (785 )     -       (3,945 )     (1,507 )
Non- current other  liabilities
    -       -       -       (21 )     (11 )     (3 )
      (88 )     (3,327 )     1,159       (230 )     (4,281 )     763  
 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 21 - Financial Instruments (cont'd)

Currency risk and CPI (cont'd)

The Group's exposure to linkage and foreign currency risk in respect of derivatives is as follows:
  December 31, 2011
 
Currency/
linkage
receivable
Currency/
linkage
payable
Notional
Value
Fair value
  NIS millions
Instruments not used for hedging
       
Forward exchange contracts on foreign currencies
USD
NIS
204
5
Forward exchange contracts on CPI
CPI
NIS
1,825
(22)
Foreign currency purchase options
USD
NIS
150
1
Foreign currency sell options
NIS
USD
227
-
         
Instruments used for hedging
       
Forward exchange contracts on foreign currencies
USD
NIS
293
19
 
 
 
December 31, 2011
 
Currency/
linkage
receivable
Currency/
linkage
payable
Notional
Value
Fair value
  NIS millions
         
Instruments not used for hedging
       
Forward exchange contracts on foreign currencies
USD
NIS
169
(1)
Forward exchange contracts on CPI
CPI
NIS
1,325
12
Foreign currency purchase options
USD
NIS
444
2
Foreign currency sell options
NIS
USD
56
-
         
Instruments used for hedging
       
Forward exchange contracts on foreign currencies
USD
NIS
270
(13)
 
Following is data regarding the CPI and currency exchange rate:

   
December 31
   
December 31
   
December 31
 
   
2009
   
2010
   
2011
 
                   
CPI (in points)
    206.2       211.7       216.3  
Exchange rate of US$ in NIS
    3.775       3.549       3.821  
                         
      200 9       2010       2011  
Change in %
                       
                         
CPI
    3.9 %     2.7 %     2.2 %
Exchange rate of US$ to NIS
    (0.7 %)     (6.0 %)     7.7 %

Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements

Note 21 - Financial Instruments (cont'd)

Currency risk and CPI (cont'd)

Sensitivity analysis
A change of the CPI as at December 31, 2011 and 2010 would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2010.
 
         
Equity
   
Net income
 
   
Change
 
NIS millions
   
NIS millions
 
                   
December 31, 2011
                 
Increase in the CPI of
    2.0 %     (37 )     (37 )
Increase in the CPI of
    1.0 %     (18 )     (18 )
Decrease in the CPI of
    (1.0 %)     18       18  
Decrease in the CPI of
    (2.0 %)     37       37  
                         
December 31, 2010
                       
Increase in the CPI of
    2.0 %     (30 )     (30 )
Increase in the CPI of
    1.0 %     (15 )     (15 )
Decrease in the CPI of
    (1.0 %)     15       15  
Decrease in the CPI of
    (2.0 %)     30       30  
 
Sensitivity of change in foreign exchange rate is immaterial as at December 31, 2011 and 2010.

Interest rate risk

Profile
At the reporting date the interest rate profile of the Group's interest-bearing financial instruments, not including derivatives, was:

   
Carrying amount
 
   
2010
   
2011
 
   
NIS millions
   
NIS millions
 
Fixed rate instruments
           
Financial assets
    899       1,188  
Financial liabilities
    (4,261 )     (6,141 )
      (3,362 )     (4,953 )
Variable rate instruments
               
Financial assets
    28       6  
Financial liabilities
    -       (3 )
      28       3  

 
Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 21 - Financial Instruments (cont'd)

Fair value sensitivity analysis for fixed rate instruments
A change of interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.

   
Equity
   
Profit or loss
 
   
1.0% increase
   
1.0% decrease
   
0.5% increase
   
0.5% decrease
   
1.0% increase
   
1.0% decrease
   
0.5% increase
   
0.5% decrease
 
   
NIS millions
   
NIS millions
 
December 31, 2011
                                               
Fixed rate instruments
    (7 )     7       (4 )     4       (7 )     7       (4 )     4  
Cash flow sensitivity (net)
    (7 )     7       (4 )     4       (7 )     7       (4 )     4  

   
Equity
   
Profit or loss
 
   
1.0% increase
   
1.0% decrease
   
0.5% increase
   
0.5% decrease
   
1.0% increase
   
1.0% decrease
   
0.5% increase
   
0.5% decrease
 
   
NIS millions
   
NIS millions
 
December 31, 2010
                                               
Fixed rate instruments
    (9 )     9       (4 )     4       (9 )     9       (4 )     4  
Cash flow sensitivity (net)
    (9 )     9       (4 )     4       (9 )     9       (4 )     4  

Cash flow sensitivity analysis for variable rate instruments
A change of interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.
 
   
Equity
   
Profit or loss
 
   
1.0% increase
   
1.0% decrease
   
0.5% increase
   
0.5% decrease
   
1.0% increase
   
1.0% decrease
   
0.5% increase
   
0.5% decrease
 
   
NIS millions
   
NIS millions
 
                                                 
December 31, 2011
                                               
Variable rate instruments
    1       (1 )     -       -       1       (1 )     -       -  
Interest rate swaps
    -       -       -       -       -       -       -       -  
Cash flow sensitivity (net)
    1       (1 )     -       -       1       (1 )     -       -  
                                                                 
December 31, 2010
                                                               
Variable rate instruments
    -       -       -       -       -       -       -       -  
Interest rate swaps
    -       -       -       -       -       -       -       -  
Cash flow sensitivity (net)
    -       -       -       -       -       -       -       -  
 

Cellcom Israel Ltd. and Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 21 - Financial Instruments (cont'd)
 
Fair Values
Fair values versus carrying amounts
The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows:
 
   
December 31, 2010
   
December 31, 2011
 
               
Interest rates
               
Interest rates
 
               
used for
               
used for
 
   
Carrying
   
Fair
   
determining
   
Carrying
   
Fair
   
determining
 
   
amount
   
value
   
Fair value
   
amount
   
value
   
Fair value
 
   
NIS millions
   
NIS millions
 
Assets
                                   
Cash and cash equivalents
    533       533             920       920        
Current investments, Including derivatives
    404       404             290       290        
Trade receivables, net
    1,478       1,478             1,859       1,859        
Other receivables
    14       14             33       33        
Long-term receivables
    583       583       3.5 %     1,043       1,043       5.2 %
                                                 
Current liabilities
                                               
Credit and current maturities of long-term loans
    -       -               (16 )     (16 )        
Trade payables and accrued expenses
    (716 )     (716 )             (1,026 )     (1,026 )        
Other current liabilities, including derivatives
    (128 )     (128 )             (439 )     (439 )        
Long-term loans from banks
    -       -               (19 )     (19 )        
                                                 
Non- current liabilities
                                               
Debentures including current maturities and accrued interest
    (4,424 )     (4,585 )             (6,358 )     *(6,001)          
Other long- term liabilities
    -       -               (35 )     (35 )        
      (2,256 )     (2,417 )             (3,748 )     (3,391 )        

*   The fair value of marketable debentures is determined by reference to the quoted closing asking price at the reporting date.
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements
 
Note 21 - Financial Instruments (cont'd)

Fair Values (cont'd)

Fair value hierarchy
The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

Level 1:
quoted prices (unadjusted) in active markets for identical instruments.
Level 2:
inputs other than quoted prices included within Level 1 that are observable, either directly or  indirectly.
Level 3:
inputs that are not based on observable market data (unobservable inputs).


   
December 31, 2011
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
 
Financial assets at fair value through profit or loss
                       
Current investments in debt securities
    266       -       -       266  
Derivatives
    -       24       -       24  
Total assets
    266       24       -       290  
                                 
Financial liabilities at fair value through profit or loss
                               
Derivatives
    -       (22 )     -       (22 )
Total liabilities
    -       (22 )     -       (22 )

There have been no transfers during the year between Levels 1 and 2.

   
December 31, 2010
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
 
Financial assets at fair value through profit or loss
                       
Current investments in debt securities
    386       -       -       386  
Derivatives
    -       18       -       18  
Total assets
    386       18       -       404  
                                 
Financial liabilities at fair value through profit or loss
                               
Derivatives
    -       (18 )     -       (18 )
Total liabilities
    -       (18 )     -       (18 )


 
F-52
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 22 - Revenues

Composition

   
Year ended December 31
 
   
2009
   
2010
   
2011
 
   
NIS millions
   
NIS millions
   
NIS millions
 
Revenues from equipment
    751       802       1,747  
Revenues from services:
                       
Cellular voice services
    4,471       4,391       2,879  
Cellular content and value added services
    882       1,112       1,167  
Internet services
    -       -       216  
International long distance services
    -       -       96  
Other services
    379       357       401  
Total revenues from services
    5,732       5,860       4,759  
Total revenues
    6,483       6,662       6,506  

Note 23 - Cost of Revenues

Composition

   
Year ended December 31
 
   
2009
   
2010
   
2011
 
   
NIS millions
   
NIS millions
   
NIS millions
 
According to source of income:
                 
Cost of revenues from handsets
    690       651       1,282  
Cost of revenues from services
    2,643       2,671       2,126  
                         
      3,333       3,322       3,408  
According to its components:
                       
Cost of revenues from handsets
    690       651       1,282  
                         
Rent and related expenses
    333       330       333  
Salaries and related expenses
    163       176       240  
Fees to other operators and others
    1,007       1,112       630  
Cost of value added services
    391       376       270  
Depreciation and amortization
    489       472       442  
Royalties and fees (see note 30(1)b)
    154       110       133  
Other
    106       95       78  
                         
      2,643       2,671       2,126  
                         
      3,333       3,322       3,408  

Note 24 - Selling and Marketing Expenses

Composition
 
   
Year ended December 31
 
   
2009
   
2010
   
2011
 
   
NIS millions
   
NIS millions
   
NIS millions
 
Salaries and related expenses
    333       376       412  
Commissions
    96       90       237  
Advertising and public relations
    99       84       95  
Depreciation and amortization
    65       75       104  
Other
    123       131       142  
                         
      716       756       990  
 
 
 
 
F-53
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 25 - General and Administrative Expenses

Composition

   
Year ended December 31
 
   
2009
   
2010
   
2011
 
   
NIS millions
   
NIS millions
   
NIS millions
 
Salaries and related expenses
    145       147       169  
Depreciation and amortization
    200       177       192  
Rent and maintenance
    75       68       72  
Data processing and professional services
    56       55       76  
Allowance for doubtful accounts
    94       106       81  
Other
    90       88       95  
      660       641       685  

Note 26 - Other Expenses, Net

Composition

   
Year ended December 31
 
   
2009
   
2010
   
2011
 
   
NIS millions
   
NIS millions
   
NIS millions
 
Capital loss from sale of property, plant and equipment
    6       5       -  
Other - net
    -       -       1  
Other expenses, net
    6       5       1  

Note 27 - Financing Income and Expenses

Composition

   
Year ended December 31
 
   
2009
   
2010
   
2011
 
   
NIS millions
   
NIS millions
   
NIS millions
 
Interest income on deposits
    15       27       34  
Interest income from installment sale transactions
    50       45       65  
Net foreign exchange gain
    5       14       -  
Net change in fair value of financial assets at fair value through profit or loss
    81       20       17  
Financing income
    151       106       116  
                         
Interest expenses on long term liabilities
    (229 )     (232 )     (286 )
Linkage expenses to CPI on long term liabilities
    (141 )     (78 )     (91 )
Net change in fair value of derivatives
    -       (26 )     (19 )
Net loss from exchange rate differences
    -       -       (13 )
Financing expenses
    (370 )     (336 )     (409 )
                         
Net financing expenses recognized in profit or loss
    (219 )     (230 )     (293 )
 
 
F-54
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements
 
Note 28 - Income Tax

A. 
Details regarding the tax environment of the Group

(1) 
Amendments to the Income Tax Ordinance and the Land Appreciation Tax Law

 
(a)
On July 14, 2009, the Israeli parliament passed the Economic Efficiency Law (Legislation Amendments for Implementation of the 2009 and 2010 Economic Plan) - 2009, which provided, inter alia, an additional gradual reduction in the company tax rate to 18% as from the 2016 tax year. In accordance with the aforementioned amendments, the company tax rates applicable as from the 2009 tax year are as follows: In the 2009 tax year - 26%, in the 2010  tax year - 25%, in the 2011 tax year - 24%, in the 2012 tax year - 23%, in the 2013 tax year - 22%, in the 2014 tax year  - 21%, in the 2015 tax year - 20% and as from the 2016 tax year the company tax rate will be 18%.

On December 5, 2011 the Israeli parliament approved the Law to Change the Tax Burden (Legislative Amendments) - 2011. According to the law the tax reduction that was provided in the Economic Efficiency Law, as aforementioned, will be cancelled and the company tax rate will be 25% as from 2012.

Current taxes for the periods reported in these financial statements are calculated according to the tax rates specified in the Economic Efficiency Law.

Deferred tax balances as at December 31, 2011 are calculated in accordance with the tax rates specified in the Law to Change the Tax Burden, at the tax rate expected on the date of reversal. The effect of the change in the tax rate on the financial statements as at December 31, 2011 is reflected in an increase of NIS 33 million in the deferred tax liability against deferred tax expenses of NIS 33 million.

 
(b)
On February 4, 2010 Amendment 174 to the Income Tax Ordinance - Temporary Order for Tax Years 2007, 2008 and 2009 was published in the Official Gazette (hereinafter - "the Temporary Order"). In accordance with the Temporary Order, Israeli Accounting Standard No. 29 regarding the adoption of International Financial Reporting Standards (IFRS) (hereinafter - "Standard 29") shall not apply when determining the taxable income for the 2007-2009 tax years even if it was applied when preparing the financial statements. On January 12, 2012 Amendment 188 to the Income Tax Ordinance was published, which amended the Temporary Order, in a manner that Standard 29 shall not apply also when determining the taxable income for 2010 and 2011.

(2) 
Taxation under inflation

The Income Tax Law (Adjustments for Inflation) - 1985 (hereinafter - the Law) is effective as from the 1985 tax year. The Law introduced the concept of measurement of results for tax purposes on a real (net of inflation) basis.

On February 26, 2008 the Israeli parliament enacted the Income Tax Law (Adjustments for Inflation) (Amendment No. 20) (Restriction of Effective Period) - 2008 (hereinafter - the Amendment). In accordance with the Amendment, the effective period of the Adjustments Law terminated at the end of the 2007 tax year and as from the 2008 tax year the provisions of the law no longer apply, other than the transitional provisions intended at preventing distortions in the tax calculations.

 
F-55
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements


Note 28 - Income Tax (cont'd)

 In accordance with the Amendment, as from the 2008 tax year, income for tax purposes is no longer adjusted to a real (net of inflation) measurement basis. Furthermore, the depreciation of inflation immune assets and carried forward tax losses are no longer linked to the CPI, so that these amounts are adjusted until the end of the 2007 tax year after which they ceased to be linked to the CPI. The effect of the Amendment to the Adjustments Law is reflected in the calculation of current and deferred taxes as from 2008.

B. 
Composition of income tax expense (income)

    Year ended December 31,  
   
2009
   
2010
   
2011
 
   
NIS millions
   
NIS millions
   
NIS millions
 
 
Current tax expense (income)
                 
Current year
    423       462       288  
Adjustments for prior years, net
    6       (18 )     -  
Changes in accounting policy
    (1 )     -       -  
Total current tax expenses
    428       444       288  
 
Deferred tax expense (income)
                       
 
Creation and reversal of temporary differences
    (20 )     (27 )     (17 )
Change in tax rate
    (41 )     -       33  
Total deferred tax expenses (income)
    (61 )     (27 )     16  
Income tax expense
    367       417       304  

C.
Income tax recognized directly in equity

   
Year ended December 31, 2011
 
   
Before tax
   
Tax expenses
   
Net of tax
 
   
NIS millions
   
NIS millions
   
NIS millions
 
   
Hedging transactions – equity component
    37       (9 )     28  
   
   
   
Year ended December 31, 2010
 
   
Before tax
   
Tax expenses
   
Net of tax
 
   
NIS millions
   
NIS millions
   
NIS millions
 
   
Hedging transactions – equity component
    3       (1 )     2  


 
F-56
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 28 - Income Tax (cont'd)
 
     
Year ended December 31, 2009
 
   
Before tax
   
Tax benefit
   
Net of tax
 
   
NIS millions
   
NIS millions
   
NIS millions
 
Hedging transactions – equity component
    (16 )     4       (12 )


D.
Reconciliation between the theoretical tax on the pre-tax profit and the tax expense:

   
Year ended December 31,
 
   
2009
   
2010
   
2011
 
   
NIS millions
   
NIS millions
   
NIS millions
 
 
Profit before taxes on income
    1,549       1,708       1,129  
Primary tax rate of the Group
    26 %     25 %     24 %
Tax calculated according to the Group’s primary tax rate
    403       427       271  
 
Additional tax (tax saving) in respect of:
                       
 
Non-deductible expenses
    3       2       4  
Taxes in respect of previous years
    6       (18 )     -  
 
Effect of changes in tax rate
    (41 )     -       33  
Other differences, including inflation differences
    (4 )     6       (4 )
Income tax expense
    367       417       304  
 
 
F-57
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 28 - Income Tax (cont'd)

E. 
Deferred tax assets and liabilities

(1) 
Recognized deferred tax assets and liabilities

Deferred taxes are calculated according to the tax rate anticipated to be in effect on the date of reversal as stated above.

The movement in deferred tax assets and liabilities is attributable to the following items:

   
Allowance for doubtful debts
   
Property, plant and equipment and intangible assets
   
Hedging transactions
   
Carry forward tax deductions and losses
   
Other
   
Total
 
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
 
Balance of deferred tax asset (liability) as at January 1, 2011
    64       (164 )     7       -       28       (65 )
Changes recognized in profit or loss
    (9 )     17       -       (5 )     14       17  
Changes recognized in equity
    -       -       (9 )     -       -       (9 )
Effect of change in tax rate
    10       (55 )     -       4       8       (33 )
Business combinations   (see note 7)
    13       (80 )     -       23       -       (44 )
                                                 
Deferred tax asset (liability) as at December 31, 2011
    78       (282 )     (2 )     22       50       (134 )
Deferred tax asset
    78       18       -       22       50       168  
Offset of balances
                                            128  
                                                 
Deferred tax asset in statement of financial position as at December 31, 2011
                                            40  
                                                 
Deferred tax liability
    -       (300 )     (2 )     -       -       (302 )
Offset of balances
                                            (128 )
                                                 
Deferred tax liability in statement of financial position as at December 31, 2011
                                            (174 )
 
 
 
F-58
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements
 
Note 28 - Income Tax (cont'd)

   
Allowance for doubtful debts
   
Property, plant and equipment and intangible assets
   
Hedging transactions
   
Carry forward tax deductions and losses
   
Other
   
Total
 
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
   
NIS millions
 
Balance of deferred tax asset (liability) as at January 1, 2010
    57       (159 )     8       -       3       (91 )
Changes recognized in profit or loss
    7       (5 )     -       -       25       27  
Changes recognized in equity
    -       -       (1 )     -       -       (1 )
                                                 
Balance of deferred tax asset (liability) as at December 31, 2010
    64       (164 )     7       -       28       (65 )
                                                 
Deferred tax asset
    64       -       7       -       28       99  
Offset of balances
                                            99  
                                                 
Deferred tax asset in statement of financial position as at December 31, 2010
                                            -  
                                                 
Deferred tax liability
    -       (164 )     -       -       -       (164 )
Offset of balances
                                            (99 )
                                                 
Deferred tax liability in statement of financial position as at December 31, 2010
                                            (65 )

(2) 
Unrecognized deferred tax liability

As at December 31, 2011 a deferred tax liability for temporary differences related to an investment in subsidiaries was not recognized because the decision as to whether to incur the liability rests with the Group and it is satisfied that it will not be incurred in the foreseeable future.

F.
Tax loss carryforwards and other temporary differences

As of December 31, 2011 Netvision and its subsidiaries have tax loss carryforwards and capital loss carryforwards in a total amount of NIS 145 million. In respect of these losses and in respect of other temporary deductible differences, the Group recorded in the consolidated financial statement deferred tax asset, net, in the amount of NIS 40 million.

G.
Tax assessments

The Company has received final tax assessments up to and including the year ended December 31, 2008 (the 2008 tax year).


 
F-59
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements
 
Note 29 - Operating Leases

Non-cancelable operating lease rentals are payable as follows:
 
   
December 31
 
   
2011
 
   
NIS millions
 
Less than one year
    301  
Between one and five years
    752  
More than five years
    395  
         
      1,448  
 
 
During the year ended December 31 2011, NIS 298 million (including linkage to CPI in the amount of NIS 5.1 million) was recognized as expenses in respect of operating leases in the consolidated statements of income (2010 - NIS 284 million, including linkage to CPI in the amount of NIS 4.9 million; 2009 - NIS 251 million, including linkage to CPI in the amount of NIS 5.7 million).

Major operating lease and service agreements:

 
a.
Office buildings and warehouses - there are lease agreements for periods of up to 18 years.

 
b.
Switching stations - there are lease agreements for switching station locations for periods of up to 21 years and 7 months.

 
c.
Cell sites - there are lease agreements for cell sites for periods of up to 16 years.

 
d.
Service centers, retail stores and stands - there are lease agreements for service and installation centers and stands for periods of up to 16 years and 8 months.

 
e.
Transmission services for cell sites and switches up to 6 years.

 
f.
Motor vehicles - lease for a period of 3 years.

 
g.
Rights of use of international communication lines - there are lease agreements for a period of up to 13 years.

Note 30 - Commitments

 
1.
The Group has commitments regarding the license it was granted in 1994, most of which are:

 
a.
Not to pledge any of the assets used to execute the license without the advance consent of the Ministry of Communications.

 
b.
To pay the State of Israel (the State) royalties equal (in 2011) to 1.75% of the Company’s revenues generated from cellular telecommunications services, less payments transferred to other license holders for interconnect fees or roaming services, sale of handsets and losses from bad debts in respect of royalty-bearing services and revenues collected for other license holder. The rate of these royalties has decreased in recent years, from 4.5% in 2002, to 4% in 2003, to 3.5% in 2004 and 2005, to 3% in 2006, to 2.5% in 2007, to 2% in 2008, to 1.5% in 2009 and to 1% in 2010. In January 2011, the applicable regulations
 
 
 
F-60
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

 
Note 30 - Commitments (cont'd)

were amended to increase the royalties payable by cellular operators only, for the years 2011 and 2012, commencing January 19, 2011, to 1.75% in 2011 and 2.5% in 2012, unless certain circumstances occur. In March 2011, the Company, and two other cellular operators have filed a petition with the Israeli Supreme Court against the Ministries of Finance and Communications in that regard. In July 2011 the State announced it accepts the Supreme Court's suggestion to set the royalties' rate to 1.75% in 2011 and 2012 (subject in the above circumstances) and to 0% starting 2013. The state reserved its right to charge royalties or other payments by primary legislation. An amendment to the regulations requires the approval of the Israeli Parliament.

 
c.
Netvision's International Long Distance license determines that Netvision will have to pay royalties to the State from Netvision's revenues which derive from international Bezeq services, less payments that are transferred to other communication operators in respect of interconnect, payments to a foreign supplier in respect of outgoing calls, bad debt expenses in respect of royalty-bearing services and revenues which are collected for other license holder. In 2011, the rate of such royalties was 1% of the taxable income, as defined in the Communication Regulations (Bezeq and Transmissions)(Royalties), 2011. This rate is expected to apply in 2012 as well.

 
d.
The Company's shareholders' joint equity, combined with the Company's equity, shall not amount to less than $200 million. Regarding this stipulation, a shareholder holding less than 10% of the rights to the Company's equity is not taken into account.

The Group is in compliance with the above conditions.

 
2.
In September 2005, the Company signed an agreement with Ericsson Israel Ltd. according to which the Company will acquire a UMTS radio access network and ancillary products and services. The Company was obligated to purchase maintenance services for 5 years from the launch of the system (until 2011) and the Company has an option to purchase maintenance services for 20 years from the launch of the systems (until 2026), including all the required services for establishment and maintenance of the system (including receipt of updates and upgrades for the system). The aggregate scope of the agreement is USD 27.5 million payable over five years. In December 2011, the Company entered into an addendum to the agreement for the purchase of upgraded UMTS /HSPA products and related services, under similar terms. The Company obligated in such amendment to purchases of at least USD 12 million in 2012. Under the agreement the parties generally have limited liability for direct damages of up to 40% of the value of the agreement.

 
3.
In July 2001, the Company signed an agreement with Nokia Israel Communications Ltd., for the purchase of a GSM/GPRS system (the agreement was assigned to Nokia-Siemens Networks Israel Ltd., or Nokia Siemens, in 2007). The Company was also granted an option to purchase GSM 800, EDGE, UMTS and ancillary systems. In 2002, the Company exercised the option to purchase an EDGE system, and in 2005, the Company purchased a UMTS core system, under similar terms.  In May 2011, the Company entered into an addendum to the agreement for the purchase of radio equipment to the UMTS/HSPA network and related products and additional services to the network. Nokia Siemens is obligated to offer the Company maintenance services for 15 years from execution of the said addendum (until 2026).  Under the agreement, the parties generally have limited liability for direct damages of up to 10% of the value of the agreement.
 
 
 
F-61
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 30 - Commitments (cont'd)

 
4.
Be’eri Printers provides the Company's printing supplies and invoices as well as the distribution, packaging and delivery of invoices and other mail to the postal service distribution centers. The Company entered into an agreement with Be’eri Printers - Limited Partnership and with Be’eri Technologies (1977) Ltd., or together Be’eri, for printing services in August 2003.
 
Under the terms of the agreement, the Company committed to purchase from Be’eri a minimum monthly quantity of production and distribution services which may be reduced if the Company modifies its printed invoice delivery policy. The agreement is valid until December 2013.

 
5.
As at December 31, 2011, the Group has commitments to purchase equipment for the communication network, cellular telephone equipment and systems and software maintenance, at an amount estimated at NIS 413 million.

 
6.
In July 2010, the Company entered into an agreement with Amdocs (Israel) Limited, or Amdocs Israel, for the provision of operation, maintenance, management and development services for its billing system, which were previously performed partly by Amdocs UK and Amdocs Israel and partly by the Company's employees.  Amdocs Israel is obligated to provide the Company with such services for a period of eight years (until August 2018), and after 30 months from entering into this agreement the Company has the option to terminate the agreement subject to the provision of prior written notice and payment of certain amounts. Under the agreement, the parties generally have limited liability for direct damages of up to the value of the agreement for each year subject to certain additional exceptions to the limitation.

 
7.
In October 2010, the Company entered into a long-term agreement for the enlargement of the current techno-logistic center, including its new central laboratory, in Netanya, Israel, and the lease thereof.  The leased property covers approximately 11,000 square meters. The lease is for a term of ten years starting August 1, 2011 and is renewable for an additional period of 5 years, at the Company's option. In case the Company does not exercise the option it shall be required to pay approximately NIS 11 million.

 
8.
In December 2010, the Company entered into an agreement with Ashdod Energy Ltd., expected to construct a private power plant fueled by natural gas in Israel, by the end of 2013. Under the agreement the Company committed to purchase electricity for the earlier of a period of 15 years from commencement of operations of the power plant or until January 2028, subject to the Company's right to terminate the agreement after 8 years from the commencement of operations of the power plant under certain conditions.

 
9.
In the years 2003 through 2011, Netvision entered into a number of agreements with Mediterranean Nautilus Ltd. and Mediterranean Nautilus (Israel) Ltd., or together Med Nautilus. Pursuant to its agreements with Med Nautilus, Netvision purchased rights of use, or IRU, of certain telecommunications capacities on Med Nautilus' communication cables, as well as maintenance and operation services relating to these cables. The agreements include options pursuant to which Netvision may expand the purchased capacity. The term of the agreement with respect to part of the capacity purchased from MedNautilus is until May 2027. Netvision has the option to terminate agreements with respect to parts of the capacity in 2017 and 2022.  The remainder of the obligation to Med Nautilus in respect of rights of use of international communication lines from all existing agreements as of December 31, 2011 is NIS 243 million.
 
 
F-62
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 30 - Commitments (cont'd)

 
10.
In August 2010, Netvision entered into an agreement with Bezeq that regulates the provision of the internet connectivity services by Bezeq to Netvision internet network. In November 2011, the agreement was updated and was extended until the end of 2014. Under this agreement, Netvision obligated to purchase minimum bandwidth capacities which Bezeq undertook to provide Netvision, in consideration to a price that reflects a considerable decrease in comparison to the previous price per giga-byte unit.
 
Note 31 - Contingent Liabilities

In the ordinary course of business, the Group is involved in various lawsuits against it. The costs that may result from these lawsuits are only accrued for when it is more likely than not that a liability, resulting from past events, will be incurred and the amount of that liability can be quantified or estimated within a reasonable range. The amount of the provisions recorded is based on a case-by-case assessment of the risk level, while events that occur in the course of the litigation may require a reassessment of this risk. The Group’s assessment of risk is based both on the advice of its legal counsels and on the Group's estimate of the probable settlements amounts that are expected to be incurred, if such settlements will be agreed by both parties. The provision recorded in the financial statements in respect of all lawsuits against the Group amounted to NIS 67 million (see also note 14 regarding provisions).

Described hereunder are the outstanding lawsuits against the Group, classified into groups with similar characteristic. The amounts presented below are calculated based on the claims amounts as of the date of their submission to the Group.

 
1.
Consumer claims

In the ordinary course of business, lawsuits have been filed against the Group by its customers. These are mostly requests for approval of class action lawsuits, particularly concerning allegations of illegal collection of funds, unlawful conduct or breach of license, or a breach of agreements with customers, causing monetary and non-monetary damage to them. As of December 31, 2011, the amounts claimed from the Group by its customers sum up to NIS 4,161 million. In addition, there are other lawsuits, the amount claimed in which has not been quantified if certified as class actions and in respect of which the Group has an additional exposure to the above mentioned.

Of all claims, there are claims which sum up to a total of NIS 26 million and other claims in respect of which claim amount has not been specified, which at this early stage it is not possible to assess their chances of success.

In respect of lawsuits with a total claim amount of NIS 191 million or which have not been quantified, settlement agreements in immaterial amounts to the Company or requests for withdrawal, in which procedures have not been completed yet. The Company recorded proper provisions in respect of the settlement agreements which have been filed.

After the end of the reporting period, additional lawsuits against the Company have been filed to courts for a total sum of NIS 2,761 million and another lawsuit for approximately NIS 361 million, has been filed against the Company and other defendants together, in which the plaintiffs have not specified the amount claimed from the Company. At this early stage it is not possible to assess their chances of success.
 
 
F-63
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

 
Note 31 - Contingent Liabilities (cont'd)

After the end of the reporting period, claims against the Group, which sum up to a total of approximately NIS 116 million, have been rejected or deleted.

Described hereunder are the outstanding consumer purported class actions against the Group   broken down by amount claimed if the lawsuit is certified as class action, as of the date of approval of these financial statements:

Claim amount
Number of claims
Total claims amount (NIS millions)
Up to NIS 100 million
32
1,083
NIS 100-500 million
11
2,251
NIS 500 million-NIS 1 billion
1
817
Unquantified claims
7
-

In 2011, the court ruled against the Company in a class action as follows:

In March 2008, a purported class action lawsuit was filed against the Company in the District Court of Central Region, by plaintiffs alleging to be the Company's subscribers in connection with allegations that the Company has unlawfully charged its subscribers for providing them with call details records. In August 2009, the District Court of Central Region approved a request to certify a lawsuit as a class action, relating to an allegation that the Company breached the agreements with its subscribers by charging them for a call detail service the Company previously provided free of charge, without obtaining their consent. The total amount claimed was estimated by the plaintiffs to be approximately NIS 440 million. In December 2011, the Court decided against the Company, accepted the allegation and ordered the Company to repay its customers the sum charged for the service in the amount of approximately NIS 22 million plus interest and linkage differences from the date of each payment made by the subscribers, an amount of NIS 200,000 to be paid to the plaintiffs and a fee for the plaintiffs' attorney equal to 10% of the sum to be repaid plus VAT. In January 2012, the Company has appealed the judgment with the Supreme Court and the execution of the judgment was stayed until the appeal is decided. The Company has recorded a provision for the entire sum in our financial statements.

In 2010, the court approved a lawsuit as class action, as follows:

In November 2010, the District Court of Tel Aviv-Jaffa approved a request to certify a lawsuit as a class action, relating to an allegation that Netvision, the Company's wholly owned subsidiary and two other long distance providers, misled the purchasers of certain prepaid cards for long distance calls bought between 2004 and 2008 in relation to certain bonus minutes and reduced certain minutes in certain circumstances. The total amount claimed from all the defendants was estimated by the plaintiffs to be approximately NIS 2.2 billion, of which approximately NIS 818 million was attributed to Netvision. In December 2010, the defendants filed a request for appeal with the Supreme Court challenging the decision and in March 2011 the district court's decision was stayed. A similar purported class action was filed against the defendants in February 2012, as detailed below.
 
 
 
F-64
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

 
Note 31 - Contingent Liabilities (cont'd)

Described hereunder are the outstanding purported class actions against the Group, in which the amount claimed, if the lawsuit is certified as class action is NIS 1 billion or more:

In February 2012, after the end of the reporting period, a purported class action lawsuit was filed against Netvision and certain other long distance operators in the District Court in Tel-Aviv Jaffa, by a plaintiff alleging that the defendants mislead the purchasers of certain international prepaid cards in connection with the amount of minutes included in certain calling cards. The total amount which is claimed from the Company was assessed by the plaintiffs in approximately NIS 2.7 billion (and from any other defendant). At this early stage it is not possible to assess their chances of success.

 
2.
Environmental claims

In the ordinary course of business, lawsuits have been filed against the Group in issues related to the environment, including lawsuits regarding non-ionizing radiation from cellular handsets and lawsuits in connection with the Company's sites. These are mostly requests for approval of class actions, relating to allegations for unlawful conduct or breach of license causing monetary and non-monetary damage (including claims for future damages).


As of December 31, 2011, the amounts that are claimed from the Group under the said claims sum up to a total of approximately NIS 7.8 billion.

Described hereunder is the number of outstanding purported class actions concerning environmental issues, broken down by the amount claimed, if the lawsuit is certified as class action, as of the date of approval of these financial statements:

Claim amount
Number of claims
NIS 1 billion and above
4

Described hereunder are the outstanding purported class actions against the Group, in which the amount claimed if the lawsuit is certified as class action, is above NIS 1 billion:

 
a.
In December 2007, a purported class action lawsuit was filed against the Company (and two other cellular operators) in the District Court of Tel Aviv-Jaffa, by plaintiffs alleging to be residing next to cell sites of the defendants which the plaintiffs allege were built in violation of the law. The plaintiffs allege that the defendants have created environmental hazards by unlawfully building cell sites and therefore demand that the defendants will compensate the public for damages (other than personal damages, such as depreciation of property and/or health related damages which are excluded from the purported class action), dismantle existing unlawfully built cell sites and refrain from unlawfully building new cell sites. If the lawsuit is certified as a class action, the compensation claimed from the defendants is estimated by the plaintiffs to be NIS 1 billion.

 
b.
In March 2010, a purported class action lawsuit was filed against the Company and another cellular operator, in the District Court of Tel-Aviv-Jaffa by two plaintiffs alleging to be subscribers of the defendants, in connection with allegations that the defendants breached their license by failing to purchase insurance against monetary liability which the defendants may suffer due to bodily damages that allegedly may be caused by cellular radiation.
 
 
F-65
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

 
Note 31 - Contingent Liabilities (cont'd)

The plaintiffs request the court to award compensation in an amount equal to the insurance premiums allegedly payable for insuring such liability (estimated by the plaintiffs to be NIS 300 million per year per defendant) for the past seven years and to order the defendants to purchase such insurance coverage in the future. If the lawsuit is certified as a class action, the total amount claimed is estimated by the plaintiffs to be approximately NIS 4.2 billion, out of which NIS 2.1 billion is attributed to the Company individually.

 
c.
In May 2010, a purported class action lawsuit was filed against the Company (and the three other Israeli cellular operators) in the District Court of Central Region, by four plaintiffs alleging to be subscribers of the defendants. The plaintiffs allege that the defendants unlawfully and in violation of their license and agreements with their subscribers fail to construct cell sites in a sufficient quantity, scope and coverage in order to provide cellular services in the requisite quality; fail to test, repair and notify the subscribers that non-ionizing radiation level for repaired handsets may exceed the manufacturer's specifications and the maximum level allowed by law; fail to inform and caution the subscribers of the risks related to the manner of carrying the handset and its distance from the subscriber's body; all of which allegedly increase the level of non-ionizing radiation and health risks to which the subscribers are exposed. In September 2010, at the Company and two other cellular operators' request, the Court instructed the transfer of this purported class action to the Tel-Aviv-Jaffa District Court, to be heard by the Judge hearing the purported class action filed against the Company in December 2007 (by plaintiffs alleging that the Company and the two other Israeli cellular operators have created environmental hazards by unlawfully building cell sites). If the lawsuit is certified as a class action, the total amount claimed from the Company is estimated by the plaintiffs to be approximately NIS 3.68 billion (the total amount claimed from the four defendants is estimated by the plaintiffs to be approximately NIS 12 billion).

 
d.
In June 2011, a purported class action lawsuit was filed against the Company and three other cellular operators in the District Court of Tel-Aviv-Jaffa, by an Israeli citizen, in connection with the allegation that the defendants mislead customers who buy accessories for carryingcellular handsets or do not disclose to them  relevant data concerning radiation hazards associated with the usage of accessories for carrying cellular handsets, allegedly contrary to the cellular handsets manufacturers' instructions and warnings and the Israeli Ministry of Health' recommendations.
 
Thereafter, the plaintiff also requested interim remedies to prevent further sale of such accessories by the Company and two other defendants (the forth allegedly doesn't sell such accessories) or to require them to take necessary precautionary measures, including by complying with alleged disclosure duties and by ceasing alleged misleading, which were rejected by the court in October 2011. In July 2011, at the request of the Company, the purported class action was transferred to be heard by the Judge hearing the purported class action filed against the Company and three other cellular operators in May 2011, by the same plaintiff and three other plaintiffs, raising similar questions.
 
The total amount claimed from the Company, if the lawsuit is certified as a class action, is estimated by the plaintiff to be approximately NIS 1 billion (out of a total sum of approximately NIS 2.7 billion against all defendants), substantially all for non monetary damages.
 
 
F-66
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

 
Note 31 - Contingent Liabilities (cont'd)

 
3.
Employees, subcontractors, suppliers, authorities and others claims

In the ordinary course of business, lawsuits have been filed against the Group by employees, subcontractors, suppliers, authorities and others which deal mostly in claims for breach of provisions of the law governing termination of employment and obligatory payments to employees, claims for breach of agreements and patent infringement and compulsory payments to authorities.

As of December 31, 2011, the amounts that are claimed from the Group under the said claims total approximately NIS 55 million.

Liens and guarantees

As part of issuance of the Series A and B debentures (see note 17), the Company committed not to create liens on its assets so long as the debentures have not been fully repaid, except for a fixed lien on assets for purposes of securing credit that will permit acquisition of those assets.

The Group has given bank guarantees as follows:

 
a. 
To the Government of Israel (to guarantee performance of the License) - U.S. $10 million.

 
b.
To the Government of Israel (to guarantee performance of the Licenses of the Group ) - NIS 31 million.
 
 
c. 
To suppliers, government institutions and other - NIS 53 million.

Liens (Netvision)

To guarantee liabilities of Netvision towards banks, floating pledges on the plant, equipment, financial assets, property and rights and fixed pledges on the equipment, share capital and goodwill of Netvision, have been recorded.

Also, there is a current pledge on the property, assets and rights of Netvision, a pledge on a deposit account of Netvision and a fixed pledge on its unpaid share capital and goodwill.

Netvision committed towards certain banks, not to create pledges on its assets (Negative Pledge), expect for certain exceptions.

The loans from banks balance, guaranteed by the said pledges, as at December 31, 2011, is NIS 35 million.

Note 32 - Regulation and Legislation

 
1.
In September 2010, the Ministry of Communications announced its decision to amend the regulations which determine the interconnect fees paid to cellular operators in Israel, as follows:

 
·
the maximum interconnect tariff payable by a landline operator or a cellular operator for the completion of a call on another cellular network was reduced from the previous tariff of NIS 0.251 per minute to NIS 0.0687 per minute from January 1, 2011; to 0.0634 per minute from January 1, 2012; to NIS 0.0591 per minute from January 1, 2013; and to NIS 0.0555 from January 1, 2014;
 
 
 
F-67
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 32 - Regulation and Legislation (cont'd)

 
 
·
the maximum interconnect tariff payable by a cellular operator for sending an SMS message to another cellular network was reduced from the previous tariff of NIS 0.0285 to NIS 0.0016 from January 1, 2011; to NIS 0.0015 from January 1, 2012; to NIS 0.0014 from January 1, 2013; and to NIS 0.0013 from January 1, 2014.  The tariffs do not include VAT and will be updated annually from January 1, 2011, based on the change in the Israeli CPI published in November of the year preceding the update date from the average annual Israeli CPI for 2009. The tariffs will also be increased by the percentage of royalties payable to the Ministry of Communications by the operator. As a result of these updates, including the increase of the royalties the Group pays to the Ministry of Communications, the current maximum interconnect tariffs are NIS 0.0728 per minute for the completion of a call on another cellular network and NIS 0.0017 for a completion of an SMS message to another cellular network.
 
In June 2011, a petition filed by the Company regarding the interconnect tariffs reduction was dismissed with prejudice with the Company's consent.
 
This reduction had a material adverse effect on the Company's results of operation in 2011.    The Company has taken and intends to continue to take measures in order to reduce as much as possible the adverse effects of such reduction, through revenue enhancement as well as cost reduction measures, but cannot offer any assurance that these measures will be successful.

 
2.
In July 2009, the Communications Law was amended to include an MVNO license. In January 2010, the regulations necessary for the grant of an MVNO license were promulgated. As of the balance sheet date the Ministry of Communications granted nine MVNO licenses one of which was returned. Under the Communications Law, in the event that a MVNO and the cellular operator, will not have reached an agreement as to the provision of service by way of MVNO within six months from the date the MVNO has approached the cellular operator, and if the Ministry of Communications together with the Ministry of  Finance determine that the failure to reach an agreement is due to unreasonable conditions imposed by the cellular operator, the Ministry of Communications may intervene in the terms of the agreement, including by setting the price of the service. The operation of MVNO operators in the cellular market and unfavorable terms and consideration for the service (such as equal or based on the Interconnect tariff), may result in material adverse effect on the Group's results of operations. In 2011 five MVNO's have entered into hosting agreements, one of which (Home Cellular) has entered into an agreement with the Company.

 
3. 
In March 2010 the Israeli Ministry of Interior Affairs submitted a draft regulation setting substantial limitations on the ability to construct radio access devices based on the exemption from obtaining a building permit, for the approval of the Economy Committee of the Israeli Parliament. The proposed limitations will render the construction of radio access devices based on the exemption practically impossible. In September 2010, the Israeli Supreme Court issued an interim order prohibiting further construction of radio access devices in cellular networks in reliance on the exemption (requested in two petitions filed in July 2008 and June 2009). The interim order, which was issued pursuant to the Israeli Attorney General's request, will be in effect until the enactment of the proposed regulations or other decision by the court. A further decision of the Supreme Court in February 2011, states that the order will not apply to the replacement of existing radio access devices under certain conditions.
 
 
F-68
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

 
Note 32 - Regulation and Legislation (cont'd)

In September 2011, the Supreme Court allowed Mirs and Golan to construct radio access devices in reliance on the exemption, under certain limitations, until July 31, 2012 and in December 2011 the Supreme court extended this period with regard to Golan until November 6, 2012. The Company's application to relax the interim order against the Company was denied.

 
4.
National Zoning Plan 36 includes guidelines for constructing cell sites in order to provide cellular broadcasting and reception communications coverage throughout Israel, while preventing radiation hazards and minimizing damage to the environment and landscape. However, National Zoning Plan 36 is in the process of being revised. Current proposed changes will impose additional restrictions and requirements on the construction and operation of cell sites. In June 2010, the proposed changes were approved by the National Council for Planning and Building and submitted for the approval of the Government of Israel. If the proposed changes are approved by the Israeli Government they will harm the Group's ability to construct new cell sites, make the process of obtaining building permits for the construction and operation of cell sites more cumbersome and costly, could adversely affect the Group's existing network  and may delay the future deployment of its network.

 
5.
In December 2010, the Communications Law was amended to reduce the early termination fees in pricing plans that include a commitment to a predefined period, in the cellular market.  In accordance with the amendment, as of February 1, 2011, early termination fees are calculated based on the subscriber's average monthly bill, resulting in a negligible fee. The reduced Early Termination Fees apply to customers with less than a certain amount of phone lines. The reduction applies to existing as well as new pricing plans.  In August 2011, the Communications Law was amended to annul early termination fees in all other communications markets. The reduction and annulment of early termination fees has led to the offering of packages at lower average revenue per minute and resulted in accelerated price erosion, materially increased churn rate and increased subscriber acquisition and retention costs due to materially increased rate of gross recruitment of subscribers.
 
 
 
6.
In December 2010, the Communication Law was amended to allow national roaming for new operators and Mirs Communications Ltd. ("Mirs"), one of the existing four cellular companies. Following the amendment, if a new operator or Mirs and the hosting operator have not reached an agreement as to the terms of the service (including the consideration), for any reason, until the service is to commence (after certain criteria is met) the service will be provided for the then prevailing interconnect tariff (in case of a call and for data services - 65% of the interconnect tariff per 1 mega) and subsequently (but no later than February 1, 2012) shall be determined by the Ministry of Communications with the consent of the Minster of Finance and applied retroactively. In April 2011 and December 2011 Mirs and Golan, respectively, were awarded UMTS operator licenses including authorization for national roaming on the existing cellular networks.  In September 2011, Mirs entered a national roaming agreement with Pelephone and in October 2011, the Company entered a national roaming agreement with Golan. Additional UMTS operators and unfavorable terms and consideration for the service may result in material adverse effect on the Company's results of operations.

 
7.
In October 2011, the public committee appointed by the Ministry of communications to examine Bezeq's tariffs structure and tariffs for wireline wholesale services and to review the possible annulment of the structural limitations currently imposed on Bezeq and its subsidiaries, published its recommendations. The recommendations include: (1) The creation of an effective
 
 
 
F-69
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 32 - Regulation and Legislation (cont'd)

wholesale telecommunications access markets in Israel- Bezeq and Hot will allow other operators which do not own an infrastructure, to use their infrastructure in order to provide services to end users. The terms of such services will be agreed by the operators, or by the regulator, if no wholesale market has evolved within a certain period. (2)  annulment of structural separation in the communication market -  Structural separation imposed on the holders of landline general licenses, shall be annulled, other than as to multichannel television (which will be annulled only after internet based TV market is available),  within 6 months from the earlier of the execution of a wholesale agreement or the provision of wholesale services, or upon wholesale tariffs setting by The  Ministry of Communications, and replaced by accounting separation and restrictions on information transfer between the retail and wholesale divisions of the landline general license holders. If no wholesale market is established within 2 years, the regulator will resume structural separation between infrastructure and end-user services of landline general license holders. (3) change of the supervision on Bezeq retail tariffs to setting maximum tariffs rather than the current setting of fixed tariffs. (4) wholesale tariffs to be set by the regulators shall be maximum tariffs, based on a cost plus basis in order to induce investments in the wholesale wireline market and shall be reviewed by the regulator every 3 years. Until such tariffs shall be set, the tariff shall be fixed, regardless of customer's traits and amount to 75% of Bezeq's average retail price for private customers, during July to September 2011. This tariff will be in place for 6 months, with a maximum extension of additional 6 months (5) landline operators who hold general licenses (such as Bezeq and Hot) will deposit autonomous bank guarantees in substantial amounts to guarantee the existence of a wholesale market. (6) The provision of broadband access by Israel Electric Corporation, or IEC, should be promoted in order to increase competition and should be regulated the same as Bezeq and Hot. The implementation of the recommendations, in whole or in part, is subject to the adoption thereof by the Minister of Communications and further legislative proceedings.
 
While an effective wholesale wireline market will enhance the Group's ability (including through Netvision) to compete and extend its service offering, the recommendations regarding the structural separation and Bezeq's tariffs supervision may have a material adverse effect on Netvision's results of operation.

 
8.
In January 2012, a bill proposing to set gradually increasing financial sanctions on communication operators, for breach of their licenses, the amount of which shall be calculated as a percentage of the operator's income and based on the gravity of the breach passed the preliminary enacting stage in the Israeli Parliament. Such bill, if adopted, is expected to substantially increase the Ministry of Communications' usage of such sanctions. Substantial sanctions will harm the Group's results of operations.
 
 
 
F-70
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 33 - Related Parties


A. 
Balance sheet
 
   
December 31
   
December 31
 
   
2010
   
2011
 
   
NIS millions
   
NIS millions
 
Current assets
    1       150  
Current liabilities
    5       2  
Long-term liability - debentures
    267       214  
 
 
B.
Transactions with related and interested parties executed in the ordinary course of business at regular commercial terms:


   
Year ended December 31
 
   
2009
   
2010
   
2011
 
   
NIS millions
   
NIS millions
   
NIS millions
 
Income:
                 
                   
Revenues
    32       33       26  
                         
Expenses:
                       
                         
Cost of revenues
    77       74       43  
Other
    16       8       18  


In the ordinary course of business, from time to time, the Group purchases, leases, sells and cooperates in the sale of goods and services or otherwise engages in transactions with entities that are members of the IDB group or other interested or related parties.

The Group has examined said transactions and believes them to be on commercial terms comparable to those that the Group could obtain from/ provide to unaffiliated parties.

C. 
Key management personnel compensation (including directors)

In addition to their salaries, the Group also provides non-cash benefits to executive officers (such as a car, medical insurance, etc.), and contributes to a post-employment defined benefit plan on their behalf.

The Group has undertaken to indemnify the Group's directors and officers, as well as certain other employees for certain events listed in the indemnifications letters given to them.  The aggregate amount payable to all directors and officers and other employees who may have been or will be given such indemnification letters is limited to the amounts the Group receives from the Group’s insurance policy plus 30% of the Group’s shareholders’ equity as of December 31, 2001 or NIS 486 million, adjusted for changes in the Israeli CPI.
 

 
F-71
 
Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 33 - Related Parties (cont'd)

Executive officers also participate in the Group’s share option program (see note 20 regarding share-based payments).

Key management personnel compensation is (including directors) comprised of:


   
Year ended December 31
 
   
2009
   
2010
   
2011
 
   
NIS millions
   
NIS millions
   
NIS millions
 
Short-term employee benefits
    5       6       11  
Share-based payments
    -       -       -  
                         
      5       6       11  

D.
An agreement with DIC

In October 2006, the Company entered into an agreement with DIC pursuant to which DIC provides the Company with advisory services in the areas of management, finance, business and accountancy in consideration of NIS 2 million per year linked to the Israeli CPI for June 2006. This agreement is for a term of one year and is automatically renewed for one-year terms (however any extension thereof after December 31, 2014 will require the approvals of the parties organs according to the Israeli Companies Law), unless either party provides 60 days prior notice to the contrary.

E.
An agreement with Netvision 013 Barak

In July 2007, the Company entered into an agreement with Netvision 013 Barak (a subsidiary of Netvision, see note 7) pursuant to which Netvision 013 Barak will provide the Company with interconnect and roaming services. In January 2011, the agreement was amended and extended. From January 2011 to August 31, 2011, Netvision 013 Barak provided the Company interconnect and roaming services in the amount of NIS 27 million. The agreement is renewable once a year until the end of 2013.

 
F-72
Exhibit 1.1
As amended and restated on July 27, 2011

 
THE ISRAELI COMPANIES LAW
 

 
A COMPANY LIMITED BY SHARES
 

 
AMENDED AND RESTATED
 

 
ARTICLES OF ASSOCIATION
 
OF
 
Cellcom Israel Ltd.
 

 
GENERAL PROVISIONS
 

 
1.
Definitions
 
 
a)  
In these Articles the following terms shall bear the meaning ascribed to them below:
 
“ Affiliate ” shall mean, with respect to any Person, another Person which, whether directly or indirectly, Controls, is Controlled by, or is under common Control with, the subject Person.
 
“ Alternate Director ” is defined in Article 44.
 
“ Annual General Meeting ” shall have the meaning assigned to such term in the Companies Law.
 
The “ Articles ” shall mean these Articles of Association of the Company, as amended from time to time.
 
“ Board of Directors ” shall mean Board of Directors of the Company.
 
A “ Business Day ” shall mean any day on which banks in Israel are open for business.
 
The “ Cellular License ” shall mean the license for the provision of cellular services granted to the Company on June 27, 1994 by the Israeli Ministry of Communications, as amended from time to time.
 
The “ Company ” shall mean Cellcom Israel Ltd.
 
The “ Companies Law ” shall mean the Israeli Companies Law, 1999, as amended from time to time.
 
 
 
 
 
“ Contravening Holdings ” shall mean the holdings of Traded Means of Control, that are held (i) without the approval of the Minister of Communications required pursuant to Section 21 of the Cellular License or in contravention of the provisions of Section 23 of the Cellular License, and all holdings of a holder of  Traded Means of Control who acted in contravention of the provisions of Section 24 of the Cellular License, for so long as the approval of the Minister of Communications is required pursuant to Section 21 of the Cellular License but has not been obtained, or the circumstances which constitute a violation of the provisions of Sections 23 or 24 of the Cellular License continue to exist, as the case may be, or (ii) in contravention of any of the similar restrictions set forth in any of the Other Licenses, for so long as such contravention continues to exist.
 
“ Control ” shall have the meaning assigned to such term in the Israeli Securities Law, 1968, as amended from time to time.
 
“ DIC " shall mean Discount Investment Corporation Ltd., an Israeli company, and any Person Controlled by DIC which holds shares of the Company (excluding the Company itself), and their respective successors.
 
A “ Director ” shall have the meaning assigned to such term in the Companies Law.
 
“ External Director ” shall have the meaning assigned to such term in the Companies Law.
 
“ Extraordinary General Meeting ” shall mean any General Meeting other than the Annual General Meeting.
 
“ Founding Shareholders ” shall mean DIC and any of its transferees, including transferees which are Israeli Shareholders, provided that each such transferee: (i) is approved by the Minister of Communications in writing to be a substitute for a Founding Shareholder for the purpose of the Cellular License (which substitution shall be effective as of the date determined by the Minister of Communications), (ii) undertakes to the Company to hold its respective minimum number of Ordinary Shares pursuant to such approval, and (iii) enters into one or more agreements with the other Founding Shareholders for the purpose of ensuring the compliance by the Company with  section 22A of the Cellular License.
 
“ General Manager(s) ” is defined in Article 49.
 
“ General Meeting ” shall mean a general meeting of the shareholders of the Company, which may be an Annual General Meeting or an Extraordinary General Meeting.
 
“ IDB ” shall mean IDB Holding Corporation Ltd., an Israeli company.
 
“ IDB Group ” shall mean IDB and its Affiliates.
 
“ Israeli Citizen ” shall have the meaning assigned to such term in the Israeli Citizenship Law, 1952, as amended from time to time.
 
“ Israeli Director ” shall mean a Director appointed by the Israeli Shareholders from among the Founding Shareholders.
 
 
- 2 -
 
 
“ Israeli Resident ” shall have the meaning assigned to such term in the Israeli Population Registration Law, 1965, as amended from time to time.
 
“ Israeli Shareholder ” shall mean a holder of Ordinary Shares that: (i) in respect of an individual, is an individual who is an Israeli Citizen and Israeli Resident, and (ii) in respect of an entity, is an entity formed under the laws of the State of Israel and Controlled, directly or indirectly, by an individual who qualifies under clause (i) above, provided that any indirect Control may only be exercised through one or more entities formed under the laws of the State of Israel, and further provided with respect to any indirect Control, that the Prime Minister and the Minister of Communications of Israel may approve in their discretion such indirect Control through an entity that was not formed under the laws of the State of Israel for the purpose of qualifying the Person Controlling such entity as an Israeli Shareholder, provided that such non-Israeli entity does not hold any of the Company’s shares directly.
 
“ Means of Control ” shall mean any of the following: (1) the right to vote at a General Meeting of the Company; (2) the right to appoint a Director or General Manager of the Company; (3) the right to participate in the profits of the Company; or (4) the right to a share of the remaining assets of the Company after payment of its debts upon liquidation.
 
The “ Memorandum ” shall mean the Memorandum of Association of the Company, as amended from time to time.
 
The “ Minimum Israeli Holding Percentage ” shall mean   the minimum percentage of each of the Means of Control in the Company required to be held by the Israeli Shareholders from among the Founding Shareholders (which, as of the date on which these Articles become effective, are DIC), pursuant to the Cellular License and the Other Licenses, which on the date of adoption of these Articles is 20%, provided, however, that “dormant shares” (as defined in the Companies Law) held by the Company shall not be counted as part of the Company’s outstanding share capital for the purpose of calculating the Minimum Israeli Holding Percentage.
 
“ NIS ” shall mean New Israeli Shekel.
 
“ Office ” means the registered office of the Company.
 
“ Ordinary Majority ” shall mean a simple majority of the votes cast by shareholders at a General Meeting in person or by means of a proxy.
 
“ Ordinary Shares ” shall mean the ordinary shares of the Company, par value NIS 0.01 per share.
 
An “ Original Minority Shareholder ” shall mean each of Mr. Shlomo Piotrkowsky, Mr. Brian Greenspun, Mr. Daniel Steinmetz and Mr. Benjamin Steinmetz, and all their respective successors, heirs, estates and assigns, except for members of the IDB Group, and collectively the “ Original Minority Shareholders ”.
 
The “ Other Licenses ” shall mean the licenses granted and future licenses to be granted to the Company by the Israeli Ministry of Communications other than the Cellular License, as such licenses may be amended from time to time.
 
 
- 3 -
 
 
“ Person ” shall mean any individual or firm, corporation, partnership, association, trust or other entity.
 
“ Register of Shareholders ” shall mean a register of the shareholders of the Company.
 
The “ Secretary ” shall mean the corporate secretary of the Company.
 
“ Shareholders Resolution ” shall mean a resolution adopted by votes of shareholders of the Company at a General Meeting.
 
“ Traded Means of Control ” shall mean Means of Control, including Global or American Depositary Shares or similar instruments in respect of securities, listed for trade on a securities exchange in Israel or abroad (other than a country that is an enemy of the State of Israel) or which have been offered to the public by means of a prospectus other than in a country that is an enemy of the State of Israel, and are held by the public in Israel or abroad.
 
 
b)  
The captions in these Articles are for convenience only and shall not be deemed a part hereof or affect the construction of any provision hereof.
 
 
c)  
Unless the subject or the context otherwise requires, words and expressions not defined herein shall have the respective meanings set forth in the Companies Law in force on the date when these Articles or any amendment thereto, as the case may be, first became effective; words and expressions importing the singular shall include the plural and vice versa; and words and expressions importing the masculine gender shall include the feminine gender.
 
 
2.
Object and Purpose of the Company
 
(a)           The object and purpose of the Company shall be as set forth in the Company’s Memorandum, as the same shall be amended from time to time in accordance with applicable law.
 
(b)           In accordance with Section 11(a) of the Companies Law, the Company may donate reasonable amounts to any cause it deems worthy.  The Board of Directors may from time to time determine the policy and amounts within which such donations may be made by the Company, and the Person or Persons authorized to approve any such specific donation.
 
 
3.
Limitation of Liability
 
The liability of the shareholders is limited to the payment of the nominal value of the shares in the Company allotted to them and which remains unpaid, and only to that amount.  If the Company’s share capital shall include at any time shares without a nominal value, the shareholders’ liability in respect of such shares shall be limited to the payment of up to NIS 0.01 for each such share allotted to them and which remains unpaid, and only to that amount.
 
 
- 4 -
 

 
SHARE CAPITAL
 
 
4.
Authorized Share Capital
 
The authorized share capital of the Company is three million New Israeli Shekels (NIS 3,000,000) divided into three hundred million (300,000,000) Ordinary Shares, par value NIS 0.01 per share.
 
5.  
Increase of Authorized Share Capital
 
(a)           The Company may, from time to time, by a Shareholders Resolution, whether or not all the shares then authorized have been issued, and whether or not all the shares theretofore issued have been called up for payment, increase its authorized share capital by the creation of new shares through amending the Memorandum and these Articles.  Any such increase shall be in such amount and shall be divided into shares of such nominal amounts (or no nominal amounts), and such shares shall confer such rights and preferences, and shall be subject to such restrictions, as such resolution shall provide.
 
(b)           Except to the extent otherwise provided in such resolution, such new shares shall be subject to all the provisions applicable to the shares prior to such resolution.
 
6.  
Rights of the Ordinary Shares
 
The Ordinary Shares confer upon the holders thereof all rights accruing to a shareholder of a Company, as provided in these Articles, including, inter alia , the right to receive notices of, and to attend meetings of shareholders; for each share held, the right to one vote at all meetings of shareholders; and to share equally, on a per share basis, in such dividend and other distributions to shareholders of the Company as may be declared by the Board of Directors in accordance with these Articles and the Companies Law, and upon liquidation or dissolution of the Company, in the distribution of assets of the Company legally available for distribution to shareholders in accordance with the terms of applicable law and these Articles. All Ordinary Shares rank pari passu in all respects with each other.
 
 
7.  
Special Rights; Modifications of Rights
 
(a)           Without prejudice to any special rights previously conferred upon the holders of existing shares in the Company or obligations previously undertaken by the holders of existing shares in the Company, the Company may, from time to time, by Shareholders Resolution, provide for shares with such preferred or deferred rights or rights of redemption or other special rights and/or such restrictions, whether in regard to dividends, voting, repayment of share capital or otherwise, as may be stipulated in such resolution.
 
(b)           (i)           If at any time the share capital is divided into different classes of shares, the rights attached to any class, unless otherwise provided by these Articles and subject to applicable law, may be modified or abrogated by the Company, by Shareholders Resolution, subject to an approval by a resolution passed by the holders of a majority of the shares of such class voting at a separate General Meeting of the holders of the shares of such class.
 
 
- 5 -
 
 
(ii)           The provisions of these Articles relating to General Meetings shall, mutatis mutandis , apply to any separate General Meeting of the holders of the shares of a particular class.
 
(iii)           Unless otherwise provided by these Articles, the enlargement of an existing class of shares, or the issuance of additional shares thereof, shall not be deemed, for purposes of this Article 7(b), to modify or abrogate the rights attached to the previously issued shares of such class or of any other class.
 

8.  
Consolidation, Subdivision, Cancellation and Reduction of Share Capital
 
(a)           The Company may, from time to time, by Shareholders Resolution (subject, however, to the provisions of Article 7(b) hereof and to applicable law):
 
(i)           consolidate and divide all or any of its issued or unissued share capital into shares of larger nominal value than its existing shares;
 
(ii)          subdivide its shares (issued or unissued) or any of them, into shares of smaller nominal value than is fixed by these Articles (subject, however, to the provisions of the Companies Law), and the Shareholders Resolution whereby any share is subdivided may determine that, as among the holders of the shares resulting from such subdivision, one or more of the shares may, as compared with the others, have any such preferred or deferred rights or rights of redemption or other special rights, or be subject to any such restrictions, as the Company has power to attach to unissued or new shares;
 
(iii)         cancel any shares which, at the date of the adoption of such resolution, have not been taken or agreed to be taken by any Person, and diminish the amount of its share capital by the amount of the shares so canceled; or
 
(iv)         reduce its share capital in any manner, and with and subject to any consent required by law.
 
(b)           With respect to any consolidation of issued shares into shares of larger nominal value, and with respect to any other action which may result in fractional shares, the Board of Directors may settle any difficulty which may arise with regard thereto, as it deems fit, including, inter alia , resort to one or more of the following actions:
 
(i)           determine, as to the holder of shares so consolidated, which issued shares shall be consolidated into each share of larger nominal value;
 
(ii)          allot, in contemplation of or subsequent to such consolidation or other action, such shares or fractional shares sufficient to preclude or remove fractional share holdings;
 
(iii)         redeem, in the case of redeemable preference shares, and subject to applicable law, such shares or fractional shares sufficient to preclude or remove fractional share holdings;
 
(iv)         cause the transfer of fractional shares by certain shareholders of the Company to other shareholders thereof so as to most expediently preclude or remove any fractional shareholdings, and cause the transferees to pay the transferors the fair value of fractional shares so transferred; or
 
 
- 6 -
 
 
(v)          cause the sale of fractional shares so as to most expediently preclude or remove any fractional shareholding and cause the proceeds thereof, less expenses, to be paid to the transferors.
 
(c)           Notwithstanding the foregoing, if a class of shares has no nominal value, then any of the foregoing actions may be taken with respect to such class without regard to nominal value.
 
 
SHARES
 
 
9.  
Issuance of Share Certificates; Replacement of Lost Certificates
 
(a)           Share certificates shall be issued under the seal or stamp of the Company and shall bear the signature of the General Manager and the Chief Financial Officer, or of any other Person or Persons authorized thereto by the Board of Directors. For the avoidance of doubt, any transfer agent designated by the Company may issue share certificates on behalf of the Company even if the signatories on the share certificate no longer serve in the relevant capacities at the time of such issuance.
 
(b)           The Company may issue un-certificated shares, provided, however, that each holder of shares shall be entitled to one numbered certificate for all the shares of any class registered in his name, and if reasonably requested by such holder, to several certificates, each for one or more of such shares.
 
(c)           A share certificate registered in the names of two or more Persons shall be delivered to the Person first named in the Register of Shareholders in respect of such co-ownership.
 
(d)           If a share certificate is defaced, lost or destroyed, it may be replaced, upon payment of such fee, and upon the furnishing of such evidence of ownership and such affidavit and indemnity, as the Company’s Secretary may deem fit.
 
10.  
Allotment of Shares; Registered Holders of Shares
 
(a)           The unissued shares from time to time shall be under the control of the Board of Directors, who shall have the power to allot shares or otherwise dispose of them to such Persons, on such terms and conditions (including inter alia terms relating to calls as set forth in Article 11(f) hereof), and either at par or at a premium, or, subject to the provisions of the Companies Law, at a discount, and at such times, as the Board of Directors may deem fit, and the power to give to any Person the option to acquire from the Company any shares, either at par or at a premium, or, subject to the provisions of the Companies Law, at a discount, during such time and for such consideration as the Board of Directors may deem fit.
 
(b)           Except as otherwise provided in these Articles, the Company shall be entitled to treat the registered holder of any share as the absolute owner thereof, and, accordingly, shall not, except as ordered by a court of competent jurisdiction, or as required by statute, be bound to recognize any trust or equitable or other claim to, or interest in such share on the part of any other Person.
 
 
- 7 -
 
 
(c)           The Board of Directors may elect to maintain one or more Registers of Shareholders outside of Israel in addition to its principal Register of Shareholders, and each such register shall be deemed a Register of Shareholders for purposes of these Articles.
 
 
11.  
Calls on Shares
 
(a)           The Company may, from time to time, make such calls as the Board of Directors may determine upon holders of shares in respect of any sum unpaid for shares held by such holders which is not, by the terms of allotment thereof or otherwise, payable at a fixed time, and each such holder shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments), to the Person(s) and at the time(s) and place(s) designated by the Board of Directors, as any such time(s) may be thereafter extended and/or such Person(s) or place(s) changed. Unless otherwise stipulated in the resolution of the Board of Directors (and in the notice hereafter referred to), each payment in response to a call shall be deemed to constitute a pro rata payment on account of all shares in respect of which such call was made.
 
(b)           Notice of any call shall be given in writing to the holder(s) in question not less than fourteen (14) days prior to the time of payment, specifying the time and place of payment, and designating the Person to whom such payment shall be made, provided, however, that before the time for any such payment, the Company upon approval of the Board of Directors may, by notice in writing to such holder(s), revoke such call in whole or in part, extend such time, or alter such Person and/or place.  In the event of a call payable in installments, only one notice thereof need be given.
 
(c)           If, by the terms of allotment of any share or otherwise, any amount is made payable at any fixed time, every such amount shall be payable at such time as if it were a call duly made by the Company and of which due notice had been given, and all the provisions herein contained with respect to such calls shall apply to each such amount.
 
(d)           The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof and all interest payable thereon.
 
(e)           Any amount unpaid in respect of a call shall bear interest from the date on which it is payable until actual payment thereof, at such rate (not exceeding the then prevailing debitory rate charged by leading commercial banks in Israel), and at such time(s) as the Board of Directors may prescribe.
 
(f)           Upon the allotment of shares, the Board of Directors may provide for differences among the allottees of such shares as to the amount of calls and/or the times of payment thereof.
 
(g)           With the approval of the Board of Directors, any holder of shares may pay to the Company any amount not yet payable in respect of his shares, and the Board of Directors may approve the payment of interest on any such amount until the same would be payable if it had not been paid in advance, at such rate and time(s) as may be approved by the Board of Directors. The Board of Directors may at any time cause the Company to repay all or any part of the money so advanced, without premium or penalty.  Nothing in this Article 11(g) shall derogate from the right of the Company to make any call before or after receipt by the Company of any such advance.
 
 
- 8 -
 

 
12.  
Forfeiture and Surrender
 
(a)           If any holder fails to pay any amount payable in respect of a call, or interest thereon as provided for herein, on or before the day fixed for payment of the same, the Company, by resolution of the Board of Directors, may at any time thereafter, so long as the said amount or interest remains unpaid, forfeit all or any of the shares in respect of which said call had been made.  Any expense incurred by the Company in attempting to collect any such amount or interest, including, inter alia , attorneys' fees and costs of suit, shall be added to, and shall, for all purposes (including the accrual of interest thereon), constitute a part of the amount payable to the Company in respect of such call.
 
(b)           Upon the adoption of a resolution of forfeiture, the Board of Directors shall cause notice thereof to be given to such holder, which notice shall state that, in the event of the failure to pay the entire amount so payable within a period stipulated in the notice (which period shall not be less than fourteen (14) days and which may be extended by the Company with the approval of the Board of Directors), such shares shall be ipso facto forfeited, provided, however, that, prior to the expiration of such period, the Board of Directors may nullify such resolution of forfeiture, but no such nullification shall estop the Board of Directors from adopting a further resolution of forfeiture in respect of the non-payment of the same amount.
 
(c)           Whenever shares are forfeited as herein provided, all dividends theretofore declared in respect thereof and not actually paid shall be deemed to have been forfeited at the same time.
 
(d)           The Company, by resolution of the Board of Directors, may accept the voluntary surrender of any share.
 
(e)           Any shares forfeited or surrendered as provided herein shall become “dormant shares” (as defined in the Companies Law) and the property of the Company, and the same, subject to the provisions of these Articles, may be sold, re-allotted or otherwise disposed of as the Board of Directors deems fit.
 
(f)           Any holder whose shares have been forfeited or surrendered shall cease to be a holder in respect of the forfeited or surrendered shares, but shall, notwithstanding, be liable to pay, and shall forthwith pay, to the Company, all calls, interest and expenses owing upon or in respect of such shares at the time of forfeiture or surrender, together with interest thereon from the time of forfeiture or surrender until actual payment, at the rate prescribed in Article 11(e) above, and the Company, in its discretion, may enforce the payment of such moneys, or any part thereof, but shall not be under any obligation to do so.  In the event of such forfeiture or surrender, the Company, by resolution of the Board of Directors, may accelerate the date(s) of payment of any or all amounts then owing by the holder in question (but not yet due) in respect of all shares owned by such holder, solely or jointly with another.
 
(g)           The Board of Directors may at any time, before any share so forfeited or surrendered shall have been sold, re-allotted or otherwise disposed of, nullify the forfeiture or surrender on such conditions as it deems fit, but no such nullification shall estop the Board of Directors from re-exercising its powers of forfeiture pursuant to this Article 12.
 
 
13.  
Lien
 
(a)           Except to the extent the same may be waived or subordinated in writing, the Company shall have a first and paramount lien upon all the shares (other than shares which are fully paid up) registered in the name of each holder (without regard to any equitable or other
 
 
- 9 -
 
 
claim or interest in such shares on the part of any other Person), and upon the proceeds of the sale thereof, for his debts and liabilities, solely or jointly with another, to the Company in respect of such shares, whether the period for the payment, fulfillment or discharge thereof shall have actually arrived or not.  Such lien shall extend to all dividends from time to time declared in respect of such share.  Unless otherwise provided, the registration by the Company of a transfer of shares shall be deemed to be a waiver on the part of the Company of the lien (if any) existing on such shares immediately prior to such transfer.
 
(b)           The Board of Directors may cause the Company to sell any shares subject to such lien when any such debt or liability has matured, in such manner as the Board of Directors may deem fit, but no such sale shall be made unless such debt or liability has not been satisfied within fourteen (14) days after written notice of the intention to sell shall have been served on such holder, his executors or administrators.
 
(c)           The net proceeds of any such sale, after payment of the costs thereof, shall be applied in or toward satisfaction of such debts and liabilities of such holder (whether or not the same have matured), or any specific part of the same (as the Company may determine), and the residue (if any) shall be paid to the holder, his executors, administrators or assigns.
 
 
14.  
Sale after Forfeiture or Surrender or in Enforcement of Lien
 
Upon any sale of shares after forfeiture or surrender or for enforcing a lien, the Board of Directors may appoint some Person to execute an instrument of transfer of the shares so sold and cause the purchaser's name to be entered in the Register of Shareholders in respect of such shares, and the purchaser shall not be bound to see to the propriety of the proceedings, or to the application of the purchase money, and after his name has been entered in the Register of Shareholders in respect of such shares, the validity of the sale shall not be impeached by any Person, and the remedy of any Person aggrieved by the sale shall be in damages only and against the Company exclusively.
 

15.  
Redeemable Shares
 
The Company may, subject to applicable law, issue redeemable shares and redeem the same upon the conditions and terms determined by the Board of Directors.
 
 
TRANSFER OF SHARES
 
 
16.
Effectiveness and Registration
 
(a)           No transfer of shares shall be registered in the Register of Shareholders unless a proper instrument of transfer (in form and substance satisfactory to the Secretary) has been submitted to the Company or its agent, together with any share certificate(s) and such other evidence of title as the Secretary may reasonably require, and unless such transfer complies with applicable law, the Cellular License, the Other Licenses and these Articles.  Until the transferee has been registered in the Register of Shareholders in respect of the shares so transferred, the Company may continue to treat the transferor as the owner thereof.  The Board of Directors may, from time to time, prescribe a fee for the registration of a transfer.
 
 
- 10 -
 
 
(b)           The Company shall be entitled to refuse to recognize a transfer deed until the certificate of the transferred share is attached to it together with any other evidence which the Board of Directors or the Secretary shall require as proof of the transferor’s right to transfer the share and payment of any transfer fee determined by the Board of Directors. Registered transfer deeds shall remain with the Company, but any transfer deed which the Company refused to register shall be returned to the transferor upon demand.
 
(c)           The Board of Directors may close the Register of Shareholders for a period of up to thirty days in each year.
 
 
17.  
Limitation on Transfer of Shares Held by Original Minority Shareholders
 
(a)           Any purported transaction in the shares of the Company in violation of the provisions of this Article 17 shall be null and void, and the Company shall not recognize or give any effect thereto.
 
(b)           The sale, assignment or transfer to any third parties (including shareholders in the Company) other than DIC of all or part of the Ordinary Shares held by an Original Minority Shareholder without the prior written consent of DIC shall be null and void, and the Company shall not recognize or give any effect thereto.
 
(c)           The sale, assignment or transfer to any third parties (including shareholders in the Company) of all or part of the Ordinary Shares held by an Original Minority Shareholder may not be effected unless the following conditions are met: (i) there is a formal written offer from a proposed purchaser (the “ Proposed Purchaser ”) for the acquisition of such Ordinary Shares with payment to be made in cash; and (ii) the acquisition is subject to the agreement of the Proposed Purchaser to be bound by the terms of the agreement between the Original Minority Shareholders and DIC.
 
(d)           Any Original Minority Shareholder (the “ Minority Offeror ”) intending for any reason to sell, transfer or assign any number of its Ordinary Shares in the Company (the “ Minority Offeror’s Shares ”) shall notify DIC of same in writing stating the price per share and payment terms offered (the “ Minority Offeror's Notice ”).
 
(e)           The Minority Offeror's   Notice shall be conclusively deemed an irrevocable offer made by the Original Minority Offeror to sell to DIC the Minority Offeror’s Shares under the terms specified in the Minority Notice and in the manner herein below provided (the “ Minority Offeror's Offer ”).
 
(f)           DIC shall have a period of thirty (30) Business Days from the date the Minority Offeror's   Notice is delivered thereto to notify the Minority Offeror of its desire to accept the Minority Offer (“ DIC Acceptance Notice ”). If DIC shall not have given the DIC Acceptance Notice within the said 30-day period, it shall be conclusively deemed to have rejected the Minority Offer. Conditional, partial or qualified acceptance of the offer shall be deemed a rejection of the Minority Offer.
 
(g)           The closing of the transaction for the sale of the Minority Offeror’s Shares in accordance with the DIC Acceptance Notice (the “ Closing ”), shall take place and be consummated on the fifteenth (15 th ) Business Day following the date upon which the said 30-day period expires. At the Closing, the Minority Offeror’s Shares shall be sold and transferred against payment of the consideration therefor, in accordance with the terms specified in the Minority Offeror's   Notice.
 
 
- 11 -
 
 
(h)           In the event the Minority Offeror shall fail to transfer the Minority Offeror’s Shares as aforesaid in accordance with the DIC Acceptance Notice, DIC shall be entitled to deposit the entire consideration specified in the Minority Offeror's   Notice with the Company, and thereupon the Company may appoint any Person to execute adequate instruments of transfer and the name DIC shall be entered into the Register of Shareholders as the holder of the Minority Offeror’s Shares so purchased and the name of the Minority Offeror shall be removed therefrom with respect to the Minority Offeror’s Shares. As of the entry of DIC’s name in the Register of Shareholders in respect of such shares, the validity of the sale shall not be rebuttable, and the sole right of the Minority Offeror would be to obtain the entire consideration for the Minority Offeror’s Shares deposited with the Company.
 
(i)           If a Minority Offeror intends to transfer all or part of its Ordinary Shares in the Company as aforesaid and DIC which has expressed its interest in exercising its above stated right of first refusal is impeded by provisions of the Cellular License or the Other Licenses or applicable law with which it must comply, from acquiring all or part of such shares, then DIC may designate a Person that will qualify in its stead to acquire the shares which it would have been otherwise entitled to purchase provided such Person is not prohibited from acquiring such shares pursuant to the Cellular License or Other Licenses or applicable law.
 
(j)           In the event that by the end of the 30 Business-Day period specified above DIC shall not have delivered the DIC Acceptance Notice with respect to the purchase of all the Minority Offeror’s Shares, the Minority Offeror shall be free to consummate the sale of the Minority Offeror’s Shares under the terms and conditions specified in the Minority Notice within a period of additional 60 days.
 
(k)           Notwithstanding the foregoing, any Ordinary Shares acquired by an Original Minority Shareholder after the Company’s initial public offering of its Ordinary Shares shall not be subject to this Article 17 (other than Ordinary Shares initially held by an Original Minority Shareholder and subsequently transferred to a third party subject to the restrictions and limitations set forth in Articles 17(a) through 17(j) above).

 
18.
Contravening Holdings; Compliance with the Cellular License and the Other Licenses
 
(a) To the extent practicable, Contravening Holdings shall be registered in a Register of Shareholders with a notation that such holdings have been classified as Contravening Holdings, immediately upon the Company’s learning of the same. The Company shall send notice of any Contravening Holdings to the registered holder of the Contravening Holdings and to the Minister of Communications.
 
(b) Contravening Holdings shall not entitle the holder thereof to any rights in respect of such holdings and shall be deemed “dormant shares” as defined in the Companies Law, except with respect to receiving dividends or other distributions to shareholders (including the right to participate in any rights offering calculated on the basis of holding of any Means of Control, provided that any additional holdings acquired as a result of the exercise of such right to participate in a rights offering shall also become Contravening Holdings). Therefore, any action taken or claim made on the basis of a right deriving from Contravening Holdings shall have no effect from the time that the Company becomes aware thereof, except with respect to receiving dividends or other distributions as aforesaid.
 
(c) Without derogating from the foregoing:
 
 
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(i) Contravening Holdings shall not have any voting rights at a General Meeting. Any shareholder participating in a General Meeting shall certify to the Company prior to the vote or, if the shareholder is voting by a proxy or any similar instrument, on   such proxy card or similar instrument, as to whether or not his holdings in the Company or his vote require the approval by the Minister of Communications pursuant to Sections 21 or 23 of the Cellular License (or the similar provisions of the Other Licenses) or whether such shareholder is in violation of Section 24 of the Cellular License (or the similar provisions of the Other Licenses); in the event that any shareholder does not provide notification as aforesaid, he shall not be entitled to vote at a General Meeting and his vote shall not be counted.
 
(ii) No Director shall be appointed, elected or removed on the basis of Contravening Holdings. In the event a Director is appointed, elected or removed on the basis of Contravening Holdings, such appointment, election or removal shall be void from the time that the Company becomes aware thereof.
 
(d) Notwithstanding the foregoing, the provisions of Articles 18(a) through 18(c) shall not apply to holdings of Founding Shareholders. The Persons who undertake towards the Company to be deemed a Founding Shareholder and approved as such by the Minister of Communications shall hold in the aggregate at least 26% of each of the Means of Control of the Company, or such lower percentage thereof as may be approved from time to time by Minister of Communications.
 
(e) The shareholders of the Company shall at all times comply with the terms of the Cellular License and the Other Licenses. Nothing herein shall be construed as requiring or permitting the performance of any acts that are inconsistent with the terms of the Cellular License or the Other Licenses. If any of these Articles shall be found to be inconsistent with the terms of the Cellular License or the Other Licenses, the inconsistent provisions of such article shall be null and void, but the validity, legality or enforceability of provisions of other provisions shall not be affected thereby. Without derogating from the foregoing, the Founding Shareholders shall comply at all times with the Minimum Israeli Holding Percentage set forth in the Cellular License and the Other Licenses, as such may be amended from time to time.
 
 
18A. 
Security Committee; Security Observer; Qualifications of Directors and Officers
 
(a)           Notwithstanding any other provision in these Articles, the Board of Directors shall appoint from among its members a Committee of the Board of Directors to be designated the “Security Committee”. The Security Committee shall be comprised of at least four (4) Directors, including at least one External Director, all of whom have security clearance and security compatibility as determined by the Israeli General Security Service (“Directors with Clearance”). Subject to Article 18A(b) below, security matters shall be considered only by the Security Committee. Any decision of, or action by, the Security Committee shall have the same effect as if it had been made or taken by the Board of Directors. The Board of Directors shall consider a security matter only if required pursuant to Article 18A(b) below, and subject to the terms of that Article. For purposes of this Article 18A, “security matters” shall mean as defined in the Israeli Bezeq Order (Determination of Essential Service Provided by Bezeq-The Israeli Telecommunications Company Ltd.), 1997.
 
(b)           Security matters which the Audit Committee or Board of Directors shall be required to consider in accordance with the mandatory provisions of the Companies Law or other law or rules applicable to the Company shall be considered, to the extent necessary, only by Directors with Clearance. Other Directors shall not be entitled to participate in
 
 
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meetings of the Audit Committee or Board of Directors dealing with security matters, or to receive information or to review documents related to these matters. A quorum for these meetings shall include only Directors with Clearance.
 
(c)           Any Director or officer of the Company who would otherwise be required to receive information or participate in meetings regarding security matters by virtue of his position or these Articles or any law, but who is prevented from doing so by the provisions of this Article 18A, will be released from any liability for any claim of breach of duty of care to the Company which results from his inability to receive such information or participate such in meetings.
 
(d)           The General Meeting shall not be entitled to assume, delegate, transfer or exercise any of the authorities granted to any other corporate body in the Company with respect to security matters.
 
(e)           (i)           The Minister of Communications shall be entitled to appoint an observer (the “Security Observer”) to all meetings of the Board of Directors and its Committees. The Security Observer shall have the security clearance and security compatibility as determined by the Israeli General Security Service.
 
(ii)           The Security Observer shall be an employee of the State of Israel qualified to serve as a director pursuant to Chapter C of the Israeli Governmental Companies Law, 1975.
 
(iii)           In addition to any other obligations under law, the Security Observer shall be bound to preserve the confidentiality of any information relating to the Company, except as required to fulfill his responsibilities as Security Observer. The Security Observer shall not act as an observer or in any other position at an entity providing communication services which is a direct competitor of the Company, and shall avoid a conflict between his position as an observer and the interests of the Company, except for such conflicts arising from his being an employee of the State of Israel serving as a Security Observer. The Security Observer shall undertake not to serve as an observer or officer or director, and not serve in any other capacity or be employed, directly or indirectly, by any entity competing with the Company or in a position of conflict of interest with the Company, except for such conflicts arising from his being an employee of the State of Israel serving as a Security Observer, during the period of his service as the Security Observer and for 18 months after termination of such period. Any differences of opinion with respect to whether the Security Observer has a conflict of interest as described above shall be resolved by the Attorney General of Israel or his representative.
 
(iv)           Notices of meetings of the Board of Directors and its Committees, including of the Security Committee, shall be delivered to the Security Observer, and he shall be entitled to participate as an observer in each such meeting.
 
(v)           The Security Observer shall have the same right to obtain information from the Company as that of a Director. If the Company believes that specific information requested is commercially sensitive and not required by the Security Observer for fulfillment of his duties, the Company may delay delivery of the information upon notice to the Security Observer. If the Security Observer still believes the information is needed for his duties, the matter shall be brought for decision to the head of the Israeli General Security Service.
 
(vi)           If the Security Observer believes that the Company has made a decision, or is about to make a decision, in a security matter which conflicts with a provision
 
 
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of the Cellular License or the Other Licenses or Section 13 of the Israeli Communications Law (Telecommunications and Broadcasting), 1982 or Section 11 of the Israeli General Security Service Law, 2002, he shall promptly notify the Company in writing of the same. Said notice shall be delivered to the Chairman of the Board of Directors and the chairman of the Security Committee, and shall provide an appropriate defined period of time, in light of the circumstances, in which the Company shall be required to correct the violation or change the decision, to the extent possible.
 
(f)           To the extent required by the Cellular License or the Other Licenses, specific Directors (including the Chairman) and/or officers, and/or a specified percentage of the Directors shall be Israeli Citizens and Israeli Residents and/or have clearance from the Israeli General Security Service.
 
 
19. 
Record Dates
 
(a)           Notwithstanding any provision to the contrary in these Articles, for the determination of the holders entitled to receive notice of and to participate in and vote at a General Meeting or to express consent to or dissent from any corporate action in writing, the Board of Directors may fix, in advance, a record date which shall neither be earlier nor later than is permitted under applicable law.  No Persons other than holders of record of Ordinary Shares as of such record date shall be entitled to notice of and to participate in and vote at such General Meeting, or to exercise such other right, as the case may be. A determination of holders of record with respect to a General Meeting shall apply to any adjournment of such meeting, provided that the Board of Directors may fix a new record date for an adjourned meeting.
 
(b)           Subject to the applicable law, the holders entitled to receive payment of any dividend or other distribution or allotment of any rights, shall be the shareholders on the date upon which it was resolved to distribute the dividend or at such later date as shall be determined by, or pursuant to a resolution of, the Board of Directors.
 

 
TRANSMISSION OF SHARES
 
20. 
Decedents' Shares
 
(a)           In case of a share registered in the names of two or more holders, the Company may recognize the survivor(s) as the sole owner(s) thereof unless and until the provisions of Article 20(b) have been effectively invoked.
 
(b)           Any Person becoming entitled to a share in consequence of the death of any individual, upon producing evidence of the grant of probate or letters of administration or declaration of succession (or such other evidence as the Board of Directors or the Secretary may reasonably deem sufficient of the capacity in which he proposes to act under this Article), shall be registered as a holder in respect of such share, or may, subject to the regulations as to transfer herein contained, transfer such share.
 
 
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21. 
Receivers and Liquidators
 
(a)           The Company may recognize the receiver or liquidator of any corporate shareholder in winding-up or dissolution, or the receiver or trustee in bankruptcy of any shareholder, as being entitled to the shares registered in the name of such shareholder.
 
(b)           The receiver or liquidator of a corporate shareholder in winding-up or dissolution, or the receiver or trustee in bankruptcy of any shareholder, upon producing such evidence as the Board of Directors or the Secretary may deem sufficient of the capacity in which he proposes to act under this Article, shall be registered as a shareholder in respect of such shares, or may, subject to the provisions as to transfer herein contained, transfer such shares.

 
GENERAL MEETINGS
 
22. 
Annual General Meeting
 
An Annual General Meeting shall be held once in every calendar year at such time (within a period of not more than fifteen (15) months after the last preceding Annual General Meeting) and at such place either within or without the State of Israel as may be determined by the Board of Directors.
 
 
23. 
Extraordinary General Meetings
 
The Board of Directors may, whenever it deems fit, convene an Extraordinary General Meeting at such time and place, within or without the State of Israel, as may be determined by the Board of Directors, and shall be obliged to do so upon a requisition in writing in accordance with Sections 63(b) of the Companies Law.
 
 
24. 
Notice of General Meetings
 
(a)            The Company is required to give such prior notice of a General Meeting as required by law, but in any event not less than fourteen (14) days. The Company is not required to deliver personal notice to every shareholder except to the extent required by applicable law. In any event, the accidental omission to give notice of a meeting to any shareholder or the non-receipt of notice by any of the shareholders shall not invalidate the proceedings at any meeting.
 
(b)           The notice of the meeting shall set forth the agenda of the meeting.
 
(c)            A shareholder desiring to request that the Board of Directors include a certain item on the agenda of the meeting pursuant to Section 66(b) of the Companies Law, shall, as a condition to such proposal being considered by the Board of Directors, make such request to the Company in writing at least eight (8) weeks prior to the date of the meeting (or such shorter period as may be determined by the Board of Directors).
 
 
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PROCEEDINGS AT GENERAL MEETINGS
 
25. 
Quorum
 
(a)           Two or more holders of Ordinary Shares (not in default in payment of any sum referred to in Article 12(a) hereof), present in person or by proxy and holding shares conferring in the aggregate at least one-third of the voting power of the Company shall constitute a quorum at General Meetings.  Except as set forth in this Article 25, no business shall be transacted at a General Meeting, or at any adjournment thereof, unless the requisite quorum is present when the meeting proceeds to business.
 
(b)           If within an hour from the time set for the meeting a quorum is not present, in person or by proxy, the meeting shall stand adjourned to the same day in the next week, at the same time and place, or, if not set forth in the notice of the meeting, to such day and at such time and place as the chairman may determine with the consent of the holders of a majority of the voting power represented at the meeting in person or by proxy and voting on the question of adjournment.  No business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting as originally called.  At such adjourned meeting, if a quorum is not present, in person or by proxy, within a half hour from the time set, any two (2) holders of Ordinary Shares (not in default as aforesaid) present in person or by proxy, shall constitute a quorum.  Notwithstanding anything in this Article 25 to the contrary, if the meeting was convened upon requisition pursuant to Section 63 or 64 of the Companies Law, the quorum requirement at any adjournment thereof shall be governed by the provisions of the Companies Law.

 
26.
Chairman of Meetings
 
The Chairman, if any, of the Board of Directors shall preside as chairman at every General Meeting of the Company.  If there is no such chairman, or if at any meeting he is not present within fifteen (15) minutes after the time fixed for the meeting or is unwilling to act as chairman or has notified the Company that he will not attend such meeting, the holders of Ordinary Shares present (or their proxies) shall choose someone else to be chairman.  The office of chairman shall not, by itself, entitle the holder thereof to vote at any General Meeting (without derogating, however, from the rights of such chairman to vote as a holder of Ordinary Shares or proxy of a shareholder if, in fact, he is also a shareholder or a proxy).
 
 
27. 
Adoption of Resolutions at General Meetings
 
(a)           Unless otherwise indicated herein or required by applicable law, a Shareholders Resolution shall be deemed adopted if approved by an Ordinary Majority.
 
(b)           For the avoidance of doubt, a Shareholders Resolution approving a merger (as defined in the Companies Law) of the Company or an amendment to these Articles shall be deemed adopted if approved by an Ordinary Majority.
 
(c)           Every question submitted to a General Meeting shall be decided by a show of hands, without derogating from voting by written ballot in the events and to the extent required by applicable law or permitted by these Articles to be made available to the shareholders.
 
 
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(d)           A declaration by the chairman of the meeting that a resolution has been carried unanimously, or carried by a particular majority, or defeated, and an entry to that effect in the minutes book of the Company, shall be conclusive evidence of the fact without need of proof of the number or proportion of the votes recorded in favor of or against such resolution.
 
 
28. 
Resolutions in Writing
 
A resolution in writing signed by all holders of Ordinary Shares of the Company then entitled to attend and vote at General Meetings or to which all such holders of Ordinary Shares have given their written consent (by letter, facsimile, telegram, telex, electronic mail or otherwise), or their oral consent by telephone (provided that a written summary thereof has been approved and signed by the Chairman of the Board of Directors of the Company) shall be deemed to have been unanimously adopted by a General Meeting duly convened and held.
 
 
29. 
Power to Adjourn
 
The chairman of a General Meeting at which a quorum is present may, with the consent of the holders of a majority of the voting power represented in person or by proxy and voting on the question of adjournment (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting as originally called.
 
 
30. 
Voting Power
 
Subject to the provisions of Article 18 and Article 31(a) and subject to applicable law, and subject to any provision hereof conferring special rights as to voting, or restricting the right to vote, every holder of Ordinary Shares shall have one vote for each share registered in his name in the Register of Shareholders upon any voting on every resolution, without regard to whether the vote thereon is conducted by a show of hands, by written ballot or by any other means.
 
 
31. 
Voting Rights
 
(a)           No holder of Ordinary Shares shall be entitled to participate and vote in any General Meeting (or to be counted as part of the quorum thereat): (i) unless all calls and other sums payable by him in respect of his shares in the Company have been paid, except if the allotment conditions of the shares provide otherwise, and/or (ii) in respect of any Contravening Holdings.
 
(b)           A company or other entity which is not an individual being a holder of Ordinary Shares of the Company may be represented by an authorized individual at any meeting of the Company.  Such authorized individual shall be entitled to exercise on behalf of such holder all the power, which the latter could have exercised if it were an individual shareholder.  Upon the request of the chairman of the meeting, written evidence of such authorization (in form acceptable to the chairman) shall be delivered to him. The chairman of the meeting, in his sole discretion, shall be entitled to accept or reject a purported representative.
 
 
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(c)           Any holder of Ordinary Shares entitled to vote at the General Meeting may vote thereat either personally or by proxy (who need not be a shareholder of the Company), or, if the shareholder is a company or other corporate body, by a representative authorized pursuant to Article 31(b).
 
(d)           If two or more Persons are registered in the Register of Shareholders as joint holders of any Ordinary Share, the vote of the senior who tenders a vote, in person or by proxy, shall be accepted to the exclusion of the vote(s) of the other joint holder(s); and for this purpose seniority shall be determined by the order in which the names stand in the Register of Shareholders, all subject to applicable law.
 
(e)           The Board of Directors may determine, in its discretion, the matters, if any, that may be voted upon by written ballot delivered to the Company (without attendance in person or by proxy), as shall be permitted, at a General Meeting, in addition to the matters listed in Section 87(a) of the Companies Law. If the Company disseminates a form of written ballot in connection with a General Meeting, then a vote by a properly completed and delivered written ballot shall be considered a vote at such General Meeting.
 
(f)           Subject to the provisions of applicable law, the Secretary of the Company may, in his discretion, disqualify proxies, proxy cards, written ballots or any other similar instruments, and notify the shareholder who submitted such proxy, proxy card, written ballot, authorization or similar instrument, in the following cases:
 
(i)           If the Secretary reasonably suspects that they are forged;
 
(ii)          If the Secretary reasonably suspects that they are falsified, or given with respect to shares for which one or more proxies or written ballots have been given and not withdrawn; or
 
(iii)         If there is no indication on such proxy, proxy card, written ballot or similar instrument as to whether or not the holding in the Company or the vote of such shareholder requires the approval of the Minister of Communications pursuant to the provisions of the Cellular License or the Other Licenses.
 
 (g)         Notwithstanding the foregoing, for as long as DIC is a shareholder of the Company, DIC shall hold whatever voting power that is attached to any and all Ordinary Shares held by the Original Minority Shareholders for any purpose whatsoever. Accordingly, DIC shall be entitled to vote all such shares at all General Meetings and the Original Minority Shareholders shall not be entitled to receive notice with respect to such meetings and/or attend and/or vote at the same. An Original Minority Shareholder that claims or asserts any rights contrary to Article 31(g) shall be deemed to have offered all its shares to DIC at such shares’ Book Value in accordance with Article 17 hereof.
 
For the purpose of this Article 31(g), “ Book Value ” shall mean such amount as shall be determined by the independent auditors of the Company as being equal to all assets of the Company less all liabilities and reserves divided by the number of shares of the Company then outstanding, which determination shall be binding and conclusive and be made in accordance with Israeli generally accepted accounting practice, including however but not limited to the following provisions: (a) the computation of the book value shall be made on the basis of the audited balance sheet of the Company as at the close of the fiscal year of the Company immediately preceding the date of the transfer or other transaction in question contemplated hereunder; (b) no allowance of any kind shall be made for goodwill or any similar intangible asset of the Company; (c) all accounts payable shall be taken at their value
 
 
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as reflected in the said audited balance sheet, less discounts deductible therefrom, and all accounts receivable shall be taken at their value as reflected in the said audited balance sheet, less discount and a reasonable reserve for bad debts; (d) all machinery fixtures and equipment are to be computed at the depreciated value appearing on the books of the Company; (e) inventory of merchandise and supplies shall be computed at cost or market value, whichever is lower; and (f) all accrued and unpaid taxes, of every kind, shall be deducted as liabilities.
 
Notwithstanding the foregoing, any Ordinary Shares acquired by an Original Minority Shareholder after the Company’s initial public offering of its Ordinary Shares shall not be subject to this Article 31(g) (other than Ordinary Shares initially held by an Original Minority Shareholder and subsequently transferred to a third party subject to the restrictions and limitations set forth in Articles 17(a) through 17(j) above) .
 
 
PROXIES
 
 
32.            Instrument of Appointment
 
(a)           The instrument appointing a proxy shall be substantially in the form provided below or any other usual or customary form that includes the paragraph below regarding the shares represented by such proxy not being Contravening Holdings or such other form as may be approved by the Board of Directors from time to time.  It shall be duly signed by the appointer or his duly authorized attorney or, if such appointer is a company or other corporate body, under its common seal or stamp or the hand of its duly authorized agent(s) or attorney(s).
 
  “I, the undersigned,   , being a
   
(name of shareholder)
 
 
shareholder of Cellcom Israel Ltd. hereby appoints
    of    
 
(name of proxy)
 
(address of proxy)
 
         
 
as my proxy to attend and vote on my behalf at [any General Meeting of the Company] [the General Meeting of the Company to be held on the _____ day of _______ , 2____ ] and at any adjournment thereof.
 
Neither the holding nor the voting of the shares to which this proxy relates requires the approval of the Minister of Communications pursuant to Company’s telecommunication licenses and are not considered “Contravening Holdings”, as this term is defined in the Company’s Articles of Association.
 
Signed this ______ day of ___________, 2___ .
   
    , ”    
 
(signature of shareholder)
     
 
(b)           The instrument appointing a proxy (and the power of attorney or other authority, if any, under which such instrument has been signed) shall be delivered to the Company (at its registered office, or at its principal place of business or at the offices of its registrar and/or transfer agent or at such place as the Board of Directors may specify) not less than seventy-two
 
 
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(72) hours before the time fixed for the meeting at which the Person named in the instrument proposes to vote, unless otherwise determined by the chairman of the meeting.
 
(c)           The rights of a shareholder who is legally incapacitated to attend and/or vote at a General Meeting may be exercised by his guardian.
 
 
33. 
Effect of Death of Appointer or Revocation of Appointment
 
A vote cast pursuant to an instrument appointing a proxy shall be valid notwithstanding the previous death of the appointing shareholder (or of his attorney-in-fact, if any, who signed such instrument) or the revocation of the appointment, provided that no written notice of such death or revocation shall have been received by the Company or by the chairman of the meeting before such vote is cast and provided, further, that the appointing shareholder, if present in person at said meeting, may revoke the authority granted by the execution of a proxy by filing with the Company a duly executed instrument appointing another proxy, on or prior to the deadline for the delivery of proxies, or by voting in person at the General Meeting.
 
 
BOARD OF DIRECTORS
 
34. 
Powers of Board of Directors
 
(a)            In General
 
The oversight of the management of the business of the Company shall be vested in the Board of Directors, which may exercise all such powers and do all such acts and things as the Company is authorized to exercise and do, and are not hereby or by law required to be exercised or done by the Company in a General Meeting.  The authority conferred on the Board of Directors by this Article 34 shall be subject to the provisions of the Companies Law, of these Articles and any resolution consistent with these Articles adopted from time to time by a General Meeting, provided, however, that no such resolution shall invalidate any prior act done by or pursuant to a decision of the Board of Directors which would have been valid if such resolution had not been adopted.
 
(b)            Borrowing Power
 
The Board of Directors may from time to time, in its discretion, cause the Company to borrow any sum or sums of money for the purposes of the Company, and also may cause the Company to secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions in all respects as it deems fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking or the whole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid share capital for the time being.
 
(c)            Reserves
 
The Board of Directors may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves for any purpose(s) which the Board of Directors, in its absolute discretion, shall deem fit, and the Company may invest any sum so set aside in any manner and from time to time deal with and vary such investments, and dispose of all or any part thereof, and employ any such reserve or any part thereof in the
 
 
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business of the Company without being bound to keep the same separate from other assets of the Company, and may subdivide or redesignate any reserve or cancel the same or apply the funds therein for another purpose, all as the Board of Directors may from time to time deem fit.
 
(d)            Protective Measures
 
The Board of Directors may, at any time in its sole discretion, adopt protective measures to prevent or delay a coercive takeover of the Company, including without limitation the adoption of a “Shareholder Rights Plan.”
 
 
35. 
Exercise of Powers of Directors
 
(a)           A meeting of the Board of Directors at which a quorum is present (in person, by means of a conference call or any other device allowing each director participating in such meeting to hear all the other directors participating in such meeting) shall be competent to exercise all the authorities, powers and discretions vested in or exercisable by the Board of Directors.
 
(b)           A resolution proposed at any meeting of the Board of Directors shall be deemed adopted if approved by a majority of the Directors present, entitled to vote thereon (as conclusively determined by the Secretary, and in the absence of such determination, by the chairman of the meeting) and voting thereon.
 
(c)           A resolution may be adopted by the Board of Directors without convening a meeting if all Directors then in office and lawfully entitled to vote thereon (as conclusively determined by the Secretary, and in the absence of such determination, by the Chairman of the Board of Directors), have given their written consent (in any manner whatsoever) not to convene a meeting. Such resolution shall be adopted if approved by a majority of the Directors lawfully entitled to vote thereon (as determined as aforesaid). The Chairman of the Board of Directors shall sign the instrument evidencing any resolutions so adopted, including the decision to adopt said resolutions without a meeting.
 
 
36. 
Delegation of Powers
 
(a)           The Board of Directors may, subject to the provisions of the Companies Law and these Articles, delegate any of its powers to committees, each consisting of two or more Persons (all of whose members must be Directors), and it may from time to time revoke such delegation or alter the composition of any such committee.  Any Committee so formed (in these Articles referred to as a “ Committee of the Board of Directors ”), shall, in the exercise of the powers so delegated, conform to any regulations imposed on it by the Board of Directors.  The meetings and proceedings of any such Committee of the Board of Directors shall, mutatis mutandis , be governed by the provisions herein contained for regulating the meetings of the Board of Directors, so far as not superseded by the Companies Law or any regulations adopted by the Board of Directors under this Article. Notwithstanding the foregoing, the chairman of a Committee of the Board of Directors shall not have a casting vote. Unless otherwise expressly provided by the Board of Directors in delegating powers to a Committee of the Board of Directors, such Committee shall not be empowered to further delegate such powers.
 
 
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(b)           Without derogating from the provisions of Article 49, the Board of Directors may, subject to the provisions of the Companies Law, from time to time appoint a Secretary to the Company, as well as any executive officers of the Company, and may terminate the service of any such Person, and also may cause the Company to engage employees, agents and independent contractors and to terminate the service of any such Person, all as the Board of Directors may deem fit.  The Board of Directors may, subject to the provisions of the Companies Law, determine the powers and duties, as well as the compensation terms of all such Persons, and may require security in such cases and in such amounts as it deems fit.

 
37. 
Number of Directors
 
(a)           The Board of Directors shall include at least five (5) Directors.
 
(b)           The Board of Directors shall include independent Directors as required to comply with the applicable requirements of any law and the regulations of any stock exchange on which the securities of the Company are listed. The requirements of the Companies Law applicable to an External Director shall prevail over the provisions of these Articles to the extent that these Articles are inconsistent with the Companies Law, and shall apply to the extent that these Articles are silent.
 
 
38. 
Election and Removal of Directors
 
(a)           For so long as and to the extent required under the Cellular License or any of the Other Licenses, at least 20% of the Directors shall be Israeli Directors and shall be appointed and removed only by the Founding Shareholders who are Israeli Shareholders by means of delivering a written notice from such Israeli Shareholders to the Company advising it of such appointment or removal, as applicable, provided, however, that: (i) in the event that the Board of Directors includes fourteen (14) Directors or less, such Israeli Shareholders shall be entitled to appoint two (2) Israeli Directors, and (ii) in the event that the Board of Directors includes between fifteen (15) and twenty-four (24) Directors, such Israeli Shareholders shall be entitled to appoint three (3) Israeli Directors. In the event that there is only one Founding Shareholder who is also an Israeli Shareholder, the written notices regarding the appointment or removal of the Israeli Directors shall be delivered by such shareholder, and in the event that there are two or more Founding Shareholders who are also Israeli Shareholders, the written notices regarding the appointment or removal of the Israeli Directors shall be delivered jointly by the holder or holders of the majority of the Ordinary Shares held by Founding Shareholders who are also Israeli Shareholders. The provisions of the other subsections of Article 38 (other than Article 38(e), to the extent that an Israeli Director was appointed for a specific term) shall not apply to any Israeli Director who may be appointed to and removed from office in accordance with this Article 38(a).
 
(b)           The Directors shall be elected at each Annual General Meeting and shall serve in office until the close of the next Annual General Meeting, unless their office becomes vacant earlier in accordance with the provisions of these Articles. Each Director shall be elected by a Shareholders Resolution at the Annual General Meeting; provided, however, that External Directors shall be elected in accordance with the Companies Law. The elected Directors shall commence their terms from the close of the Annual General Meeting at which they are elected, unless a later date is stated in the resolution with respect to their appointment.
 
 
- 23 -
 
 
(c)           Notwithstanding the other provisions of these Articles, one or more Directors may be appointed by the Board of Directors or elected by a Shareholders Resolution at an Extraordinary General Meeting. Any Director appointed or elected in such manner (excluding an External Director) shall serve in office until the election of Directors at the next Annual General Meeting, unless his office becomes vacant earlier in accordance with the provisions of these Articles.
 
(d)           An elected External Director shall commence his term from the date of, and shall serve for the period stated in, the resolution of the General Meeting at which he was elected, unless his office becomes vacant earlier in accordance with the provisions of the Companies Law.
 
(e)           A Director may serve for multiple terms, provided, however, that the terms of an External Director shall be limited in accordance with applicable law.
 
(f)           The General Meeting shall be entitled to remove any Director(s) from office by a Shareholder Resolution, all subject to applicable law. The Board of Directors shall be entitled to remove from office any Director(s) appointed by the Board of Directors.
 
 
39. 
Qualification of Directors
 
No Person shall be disqualified to serve as a Director by reason of his not holding shares in the Company.
 
 
40. 
Continuing Directors in the Event of Vacancies
 
In the event of one or more vacancies in the Board of Directors, the continuing Directors may continue to act in every matter, provided, however, that if they number less than the minimum number set forth in Article 37(a) hereof, they may only act in an emergency (as determined in their absolute discretion), and may appoint Directors and/or call a General Meeting of the Company for any purpose.
 
 
41. 
Vacation of Office
 
(a)           The office of a Director shall be vacated, ipso facto , upon his death, or if he be found mentally incapacitated, or, upon the conviction of a crime enumerated in the Companies Law.
 
(b)           The office of a Director shall be vacated by his written resignation.  Such resignation shall become effective on the date fixed therein, or upon the delivery thereof to the Company, whichever is later.
 
(c)           The office of a Director shall be vacated upon his removal from office pursuant to Article 38(a) or Article 38(f) hereof, as applicable.
 
 
- 24 -
 

 
42. 
Remuneration of Directors
 
No Director shall be paid any remuneration by the Company for his services as Director except as may be approved pursuant to the provisions of the Companies Law.  Except as otherwise provided by applicable law, reimbursement of expenses incurred by a Director in carrying out his duties as such shall be made pursuant to the policy in this respect as determined by the Board of Directors and in effect from time to time.
 
 
43. 
Conflict of Interests
 
(a)           Subject to the provisions of the Companies Law, the Company may enter into any contract or otherwise transact any business with any Director in which contract or business such Director has a personal interest, directly or indirectly; and may enter into any contract of otherwise transact any business with any third party in which contract or business a Director has a personal interest, directly or indirectly.
 
 
(b)            A transaction as set forth in Section 270(1) of the Companies Law, provided that such transaction is not an Extraordinary Transaction (as such term is defined in the Companies Law), may be approved by:
 
(i) the Company’s Audit Committee – without any monetary limit, or
 
(ii) the Company's Board of Directors – without any monetary limit, or
 
(iii) the Company's authorized signatories approving such transaction on behalf of the Company, in accordance with the Company’s signatory rights, (provided that no such approval may be given by any signatory who has or is deemed to have a personal interest in the transaction) – without any monetary limit as to transactions related to the provision of communications services and equipment by the Company, and with a limit of up to an annual amount of NIS  250,000 per transaction as to other transactions.
 
 
44. 
Alternate Directors
 
(a)           A Director may, by written notice to the Company, appoint an individual as an alternate for himself (“ Alternate Director ”), remove such Alternate Director and appoint another Alternate Director in place of any Alternate Director appointed by him whose office has been vacated for any reason whatsoever. The appointment of an Alternate Director by any Director other than the Chairman of the Board of Directors shall be subject to the consent of the Chairman of the Board of Directors, and the appointment of an Alternate Director by the Chairman of the Board of Directors shall be valid unless objected to by the majority of the other Directors. Unless the appointing Director, by the instrument appointing an Alternate Director or by written notice to the Company, limits such appointment to a specified period of time or restricts it to a specified meeting or action of the Board of Directors, or otherwise restricts its scope, the appointment shall be for an indefinite period, but will expire upon the expiration of the appointing Director’s term, and shall be for all purposes.
 
(b)           Any notice given to the Company pursuant to Article 44(a) shall become effective on the date fixed therein, or upon the delivery thereof to the Company, whichever is later.
 
 
- 25 -
 
 
(c)           An Alternate Director shall have all the rights and obligations of the Director who appointed him, provided, however, that he may not in turn appoint an alternate for himself, and provided further that an Alternate Director shall have no standing at any meeting of the Board of Directors or any committee thereof while the Director who appointed him is present at such meeting.
 
(d)           An Alternate Director shall alone be responsible for his own acts and defaults, and he shall not be deemed the agent of the Director who appointed him.
 
(e)           The office of an Alternate Director shall be vacated under the circumstances, mutatis mutandis , set forth in Article 41, and such office shall ipso facto be vacated if the Director who appointed such Alternate Director ceases to be a Director.
 
(f)           Notwithstanding Article 44(a), (i) no Person shall be appointed as the Alternate Director for more than one Director and (ii) except as otherwise specifically permitted by the  Companies Law, (A) no External Director may appoint an Alternate Director and (B) no Director may serve as an Alternate Director.
 
 
PROCEEDINGS OF THE BOARD OF DIRECTORS
 
45. 
Meetings
 
(a)           The Board of Directors may meet and adjourn its meetings and otherwise regulate such meetings and proceedings as the Board of Directors deems fit, provided, however, that the Board of Directors must meet at least once every three (3) months. Notice of the meetings of the Board of Directors shall be sent to each Director at the last address that the Director provided to the Company, or via telephone, facsimile or e-mail message.
 
(b)           Any two Directors may, at any time, and the Secretary, upon the request of such Directors, shall, convene a meeting of the Board of Directors, but not less than four (4) days written notice shall be given of any meeting so convened, provided that the Chairman of the Board of Directors may convene a meeting of the Board of Directors upon not less than twenty-four (24) hours written notice, and further provided, that the Board of Directors may convene a meeting without such prior notice with the consent of all of the Directors who are lawfully entitled to participate in and vote at such meeting  (as conclusively determined by the Secretary, and in the absence of such determination, by the Chairman of the Board of Directors).  In urgent situations, a meeting of the Board of Directors can be convened without any prior notice with the consent of a majority of the Directors, including a majority of those who are lawfully entitled to participate in and vote at such meeting (as conclusively determined by the Secretary, and in the absence of such determination, by the Chairman of the Board of Directors). The notice of a meeting of the Board of Directors shall describe the agenda for such meeting in reasonable detail.
 
 
46. 
Quorum
 
Unless otherwise unanimously decided by the Board of Directors, a quorum at a meeting of the Board of Directors shall be constituted by the presence of a majority of the Directors then in office who are lawfully entitled to participate in the meeting (as conclusively determined by the Secretary, and in the absence of such determination, by the Chairman of the Board of Directors).
 
 
- 26 -
 

 
47.
Chairman of the Board of Directors
 
(a)           The Board of Directors may from time to time elect one of its members to be the Chairman of the Board of Directors, remove such Chairman from office and appoint another in his place, provided, however, that for as long as (i) the members of IDB Group, collectively, are the largest shareholders of the Company and (ii) they hold collectively at least 35% of the voting power in the Company, then the Chairman shall be designated by DIC by means of a written notice delivered to the Company by DIC.
 
(b)           The Chairman, if any, of the Board of Directors shall preside at every meeting of the Board of Directors, but if there is no such Chairman, or if at any meeting he is not present within fifteen (15) minutes after the time fixed for the meeting, or is unwilling to act as Chairman or has notified the Company that he will not attend such meeting, the Directors present shall choose one of their number to be the chairman of such meeting.
 
(c) The Chairman of the Board of Directors designated by DIC pursuant to Article 47(a) above shall have a casting vote at the meetings of the Board of Directors in the event of a tied vote.
 
 
48.
Validity of Acts Despite Defects
 
Subject to the provisions of the Companies Law, all acts done bona fide at any meeting of the Board of Directors, or of a Committee of the Board of Directors, or by any Person(s) acting as Director(s), shall, notwithstanding that it may afterwards be discovered that there was some defect in the process or in the appointment of the participants in such meetings or any of them or any Person(s) acting as aforesaid, or that they or any of them were disqualified, be as valid as if there were no such defect or disqualification.
 
 
GENERAL MANAGER
 
49.
General Manager
 
The Board of Directors may from time to time appoint one or more Persons, whether or not Directors, as general managers (the “ General Manager(s) ”) of the Company and may confer upon such Person(s), and from time to time modify or revoke, such title(s) (including Managing Director, President, Chief Executive Officer, Director General or any similar or dissimilar title) and such duties and authorities of the Board of Directors as the Board of Directors may deem fit, subject to such limitations and restrictions as the Board of Directors may from time to time prescribe.  Such appointment(s) may be either for a fixed term or without any limitation of time, and the Board of Directors may from time to time (subject to the provisions of the Companies Law and of any contract between any such Person and the Company) fix his or their compensation terms, remove or dismiss him or them from office, or assume his or their authorities with respect to a specific matter or period of time.
 
 
- 27 -
 

 
MINUTES
 
50.
Minutes
 
(a)           Minutes of each General Meeting and of each meeting of the Board of Directors and any Committees thereof shall be recorded and duly entered in books provided for that purpose.  Such minutes shall, in all events, set forth the names of the persons present at the meeting and all resolutions adopted thereat.
 
(b)           Any minutes as aforesaid, if purporting to be signed by the chairman of the meeting shall constitute prima facie evidence of the matters recorded therein.
 
 
DIVIDENDS
 
51.
Declaration and Payment of Dividends
 
(a)           Subject to the Companies Law, the Board of Directors may from time to time declare, and cause the Company to pay, such dividend as may appear to the Board of Directors to be appropriate.  Subject to the Companies Law, the Board of Directors shall determine the time for payment of such dividends, and the record date for determining the shareholders entitled thereto.
 
(b)           The Company’s obligation to pay dividends or any other amount in respect of shares, may be set-off by the Company against any indebtedness, however arising, liquidated or non-liquidated, of the Person entitled to receive the dividend. The provisions contained in this Article shall not prejudice any other right or remedy vested with the Company pursuant to these Articles or otherwise.
 
 
52.
Amount Payable by Way of Dividends
 
Subject to the rights of the holders of shares with special rights as to dividends, any dividend paid by the Company shall be allocated among the shareholders entitled thereto in proportion to their respective holdings of the shares in respect of which such dividend is being paid.
 
 
53. 
Interest
 
No dividend shall carry interest as against the Company.
 
 
54. 
Form of Dividend
 
Upon the declaration of the Board of Directors, a dividend may be paid, wholly or partly, by the distribution of cash or specific assets of the Company or by distribution of securities of the Company or of any other companies, or in any one or more of such ways.
 
 
- 28 -
 
 
 
55.
Retention of Dividends
 
The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share in respect of which any Person is, under Articles 20 or 21, entitled to become a shareholder, or which any Person is, under said Articles, entitled to transfer, until such Person shall become a shareholder in respect of such share or shall transfer the same.
 
 
56.
Unclaimed Dividends
 
All unclaimed dividends or other moneys payable in respect of a share may be invested or otherwise made use of by and for the benefit of the Company until claimed.  The payment by the Company of any unclaimed dividend or such other moneys into a separate account shall not constitute the Company a trustee in respect thereof, and any dividend unclaimed after a period of seven (7) years from the date of declaration of such dividend, and any such other moneys unclaimed after a like period from the date the same were payable, shall be forfeited and shall revert to the Company, provided, however, that the Board of Directors may, at its discretion, cause the Company to pay any such dividend or such other moneys, or any part thereof, to a Person who would have been entitled thereto had the same not reverted to the Company.
 
 
57.
Mechanics of Payment
 
Any dividend or other moneys payable in cash in respect of a share may be paid by check sent through the post to, or left at, the registered address of the Person entitled thereto or by transfer to a bank account specified by such Person (or, if two or more Persons are registered in the Register of Shareholders as joint holders of such share or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, to any one of such Persons or to his bank account), or to such Person and at such address as the Person entitled thereto may by writing direct, in each such case subject to applicable law.  Every such check shall be made payable to the order of the Person to whom it is sent, or to such other Person as the Person entitled thereto as aforesaid may direct, and payment of the check by the banker upon whom it is drawn shall be a good discharge to the Company.  Every such check shall be sent at the risk of the Person entitled to the money represented thereby.
 
 
FINANCIAL STATEMENTS
 
58. 
Financial Statements
 
The Board of Directors shall cause accurate books of account to be kept in accordance with the provisions of the Companies Law and of any other applicable law.  Such books of account shall be kept at the Registered Office of the Company, or at such other place or places as the Board of Directors may think fit, and they shall always be open to inspection by all Directors.  No shareholder, not being a Director, shall have any right to inspect any account or book or other similar document of the Company, except as conferred by law or authorized by the Board of Directors or by a Shareholders Resolution.  The Company shall not be required to send copies of its financial statements to the shareholders.
 
 
- 29 -
 

 
AUDITORS
 
59.
Outside Auditor
 
The outside auditor of the Company shall be recommended by the Audit Committee and elected by Shareholder Resolution at each Annual General Meeting and shall serve until the next Annual General Meeting or its earlier removal or replacement by Shareholder Resolution. The Board of Directors shall have the authority to fix, in its discretion, the remuneration of the auditor for audit and any other services, or to delegate such authority to the Audit Committee, provided that the Board of Directors reports such remuneration to the Annual General Meeting.
 
 
60.
Internal Auditor
 
The internal auditor of the Company shall be subject to the administrative supervision of the General Manager and shall present all its proposed work plans to the Board of Directors, which shall have the authority to approve them subject to any modifications in its discretion.
 
EXCULPATION, INSURANCE AND INDEMNITY
 
61. 
Exculpation, Indemnity and Insurance
 
(a)           For purposes of this Article 61, the term "Office Holder" shall mean every Director and every officer of the Company defined as " Nosei Misra " in the Companies Law.
 
(b)           Subject to the provisions of the Companies Law, the Company may exculpate an Office Holder in advance from all or some of the Office Holder’s responsibility for liability resulting from the Office Holder’s breach of the Office Holder’s duty of care to the Company.
 
(c)           Subject to the provisions of the Companies Law, the Company may indemnify an Office Holder in respect of an obligation or expense specified below imposed on or incurred by the Office Holder in respect of an act performed in his capacity as an Office Holder, and in his capacity as an office holder of any other company in which he serves in such capacity at the request of the Company as follows:
 
(i)   a financial obligation imposed on him in favor of another Person by a court judgment, including a compromise judgment or an arbitrator's award approved by court;
 
(ii)   reasonable litigation expenses, including attorney’s fees, expended by the Office Holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding was concluded without the filing of an indictment against him and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; or in connection with an administrative enforcement proceeding or a  financial sanction. Without derogating from the generality of the foregoing, such expenses will include a payment imposed on the Office Holder in favor of an injured party as set forth in Section 52(54)(a)(1)(a) of the Israeli Securities Law, 1968, as amended (the "Securities Law"), and expenses that the Office Holder incurred in connection with a proceeding under Chapters H'3,
 
 
- 30 -
 
 
H'4 or I'1 of the Securities Law, including reasonable legal expenses, which term includes attorney fees; and
 
(iii)   reasonable litigation expenses, including attorneys' fees, expended by an Office Holder or charged to the Office Holder by a court, in a proceeding instituted against the Office Holder by the Company or on its behalf or by another Person, or in a criminal charge from which the Office Holder was acquitted, or in a criminal proceeding in which the Office Holder was convicted of an offense that does not require proof of criminal intent.
 
The Company may undertake to indemnify an Office Holder as aforesaid, (aa) prospectively, provided, in respect of Article 61(c)(i) that the undertaking is limited to events which, in the opinion of the Board of Directors, are foreseeable in light of the Company’s actual operations when the undertaking to indemnify is given, and to an amount or criteria set by the Board of Directors as reasonable under the circumstances, and further provided that such events and amount or criteria are set forth in the undertaking to indemnify, and (bb) retroactively.
 
(d)           Subject to the provisions of the Companies Law, the Company may enter into a contract for the insurance of all or a portion of the liability of any Office Holder imposed on the Office Holder in respect of an act performed in his capacity as an Office Holder, in respect of each of the following:
 
(i)           a breach of his duty of care to the Company or to another Person;
 
(ii)           a breach of his duty of loyalty to the Company, provided that the Office Holder acted in good faith and had reasonable cause to assume that such act would not prejudice the interests of the Company;
 
(iii)           a financial obligation imposed on him in favor of another Person; or
 
(iv)           reasonable litigation expenses, including attorney fees, incurred by the Office Holder as a result of an administrative enforcement proceeding instituted against him. Without derogating from the generality of the foregoing, such expenses will include a payment imposed on the Office Holder in favor of an injured party as set forth in Section 52(54)(a)(1)(a) of the Israeli Securities Law and expenses that the Office Holder incurred in connection with a proceeding under Chapters H'3, H'4 or I'1 of the Securities Law, including reasonable legal expenses, which term includes attorney fees.
 
(e)           The provisions of this Article 61 are not intended, and shall not be construed, to restrict the Company in any manner in respect of the procurement of insurance and/or payment of indemnification (i) in connection with any Person who is not an Office Holder, including, without limitation, any employee, agent, consultant or contractor of the Company who is not an Office Holder, and/or (ii) in connection with any Office Holder to the extent that such insurance and/or indemnification is not specifically prohibited under law.
 
Any amendment to the Companies Law, the Securities Law or any other applicable law adversely affecting the right of any Office Holder to be indemnified or insured pursuant to this Article 61 shall be prospective in effect, and shall not affect the Company’s obligation or ability to indemnify or insure an Office Holder for any act or omission occurring prior to such amendment, unless otherwise provided by the Companies Law, the Securities Law or such other applicable law.
 
 
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NOTICES
 
62.
Notices
 
(a)           Any written notice or other document may be served by the Company upon any shareholder either personally, or by facsimile transmission, or by sending it by prepaid mail (airmail or overnight air courier, if being sent from any country to a destination outside such country) or electronic mail addressed to such shareholder at his address as set forth in the Register of Shareholders or such other address as he may have designated in writing for the receipt of notices and other documents.  Any written notice or other document may be served by any shareholder upon the Company by tendering the same in person to the Secretary or the General Manager of the Company at the principal office of the Company, or by facsimile transmission, or by sending it by prepaid registered mail (airmail or overnight air courier if being sent from any country outside Israel) to the Company at its registered office.  Any such notice or other document shall be deemed to have been served (i) in the case of mailing, three (3) days after it has been posted, or when actually received by the addressee if sooner than three (3) days, after it has been posted; (ii) in the case of overnight air courier, on the second business day following the day sent; (iii) in the case of personal delivery, on the date such notice was actually tendered in person to such shareholder (or to the Secretary or the General Manager); (iv) in the case of facsimile transmission, on the date on which the sender receives automatic electronic confirmation that such notice was successfully transmitted; or (v) in the case of electronic mail, on the date on which the sender receives telephonic or written confirmation that such notice was received.   If a notice is, in fact, received by the addressee, it shall be deemed to have been duly served, when received, notwithstanding that it was defectively addressed or failed, in some respect, to comply with the provisions of this Article 62(a).
 
(b)           All notices to be given to the shareholders shall, with respect to any share to which Persons are jointly entitled, be given to whichever of such Persons is named first in the Register of Shareholders, and any notice so given shall be sufficient notice to the holders of such share.
 
(c)           Any shareholder whose address is not specified in the Register of Shareholders, and who shall not have designated in writing an address for the receipt of notices, shall not be entitled to receive any notice from the Company.
 
(d)           Notwithstanding anything to the contrary herein, notice by the Company of a General Meeting which is published in two (2) daily newspapers in the State of Israel, if at all, shall be deemed to have been duly given on the date of such publication to any shareholder whose address as registered in the Register of Shareholders (or as designated in writing for the receipt of notices and other documents) is located in the State of Israel.
 
(e)           Notwithstanding anything to the contrary herein, notice by the Company of a General Meeting or any other matter which is published in one (1) daily newspaper in the United States or via one international wire service shall be deemed to have been duly given on the date of such publication to any shareholder whose address as registered in the Register of Shareholders (or as designated in writing for the receipt of notices and other documents) is located outside the State of Israel.
 
(f)           The date of publication of a notice of a General Meeting as set forth in Article 62(d) or Article 62(e), as applicable, and the date of the meeting shall be counted as part of the days comprising any notice period with respect to such General Meeting.
 
 
- 32 -
 
 
(g)           Without derogating from Article 31(g), all notices sent by the Company to an Original Minority Shareholder, if sent, shall also be sent by the Company to DIC.
 
 
RIGHTS OF SIGNATURE
 
63.
Rights of Signature
 
The Board of Directors shall be entitled to authorize any Person or Persons (who need not be officers or Directors) to act and sign on behalf of the Company, and the acts and signature of such Person(s) on behalf of the Company with the Company’s stamp or printed name shall bind the Company insofar as such Person(s) acted and signed within the scope of his or their authority.
 
 
WINDING UP
 
64. 
Winding Up
 
(a)           A Shareholders Resolution approved by 75% of the voting shares represented at such meeting in person or by proxy is required to approve the voluntary winding up of the Company.
 
(b)           If the Company be wound up, liquidated or dissolved, then, subject to applicable law and to the rights of the holders of shares with special rights upon winding up, the assets of the Company legally available for distribution among the shareholders, after payment of all debts and other liabilities of the Company, shall be distributed to the shareholders in proportion to the nominal value of their respective holdings of the shares in respect of which such distribution is being made, provided, however, that if a class of shares has no nominal value, then the assets of the Company legally available for distribution among the holders of such class shall be distributed to them in proportion of their respective holdings of the shares in respect of which such distribution is made.
 
***
 
- 33 -
Exhibit 4.6
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
Indenture
 
Entered into and executed in Tel Aviv, on July 14, 2011
 
Between
   
 
Cellcom Israel Ltd.
 
 
of 10 HaGavish St., Netanya
 
 
Telephone: 052-9989595
 
 
Fax: 098607986
 
 
(The “ Company ”)
of the First Part;
     
And :
   
 
Hermetic Trust (1975) Ltd.
 
 
of 113 HaYarkon St., Tel Aviv
 
 
Telephone: 03-5274867
 
 
Fax: 03-5271736
 
 
(The “ Trustee ”)
 
   
of the Second Part;
 
 
Whereas
The Company’s board of directors decided on July 14, 2011 to publish a shelf prospectus according to which the Company might issue, inter alia , Series F to O and Series 1 to 6 Debentures of the Company, in the manner described in this Indenture and in the Shelf Prospectus; and
 
Whereas
An Indenture had been executed between the parties on March 31, 2009 for the Series E to I Debentures and the Series 1 to 2 Debentures which were offered pursuant to a shelf prospectus published by the Company in March 2009 and by virtue of which the Company issued the Series E Debentures; and it is agreed that the said indenture shall remain in effect only in respect of the Series E Debentures of the Company; and
 
Whereas
The Trustee declares that it is a company registered in Israel, engaged in trusts and it complies with the qualification requirements set forth in the Securities Law, 5728-1968 (the “ Securities Law ”) to serve as a trustee for the debentures subject matter of this Indenture and that there is no impediment according to the Securities Law against the engagement thereof with the Company according to this Indenture and that it complies with the requirements and qualification terms set forth in the Securities Law to serve as a trustee for the issuance of the debentures subject matter of this Indenture. The contact person at the Trustee in respect of this Indenture is Merav Offer Oren, Joint CEO, e-mail: hermetic@hermetic.co.il ; and
 
 
 
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
Whereas
Each of the parties to this Indenture declares, that they are not subject to any impediment according to any law or agreement against the engagement thereof in this Indenture; and
 
Whereas
The Trustee has agreed to operate as a trustee of the Debenture holders subject matter of this Indenture, according to the trust terms specified in this Indenture below; and
 
Whereas
The provisions of this Indenture shall apply, separately to each of the Debenture Series subject matter of this Indenture and this Indenture shall be deemed as if separately signed for each of the said series and independently of each other;
 
Now therefore it has been agreed, declared and stipulated between the parties as follows:
 
1.  
Interpretation and Definitions
 
 
1.1.
The preamble of this Indenture and the annexes and schedules thereto constitute an integral part hereof.
 
 
1.2.
The division of this Indenture into sections as well as the provision of headings to sections, were done for purposes of convenience and as reference only, and may not be used for interpretation.
 
 
1.3.
Each term or expression in this Indenture, except for those explicitly defined in this Indenture (including those defined in Section 1.6 below) will have the meaning ascribed thereto in the Debenture Certificate (the form of which is attached in the First Schedule of this Indenture), unless another intention is implicated by the contents of matters or context thereof.
 
 
1.4.
Anywhere in the Indenture which says “subject to any law” (or a similar expression), the meaning is subject to any mandatory law.
 
 
1.5.
Anything stated in this Indenture in the plural shall also include the singular by implication and vice a versa, and anything stated in the masculine shall also include the feminine and vice a versa, and anything referring to a person, shall also include a corporation by implication, all when there is no other explicit or implicit provision or if the contents of matters or context thereof does not mandate otherwise.
 
 
1.6.
The terms specified below shall have in this Indenture the meaning stated alongside them, unless another intention is implicated from the contents of matters or the context thereof, or if explicitly otherwise stated below:
 
 
This or the “ Indenture ”
 
This Indenture including the schedules and annexes attached hereto, constituting an integral part hereof.
 
 
- 2 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
The “ Prospectus ” or the “ Shelf Prospectus ” -
 
A shelf prospectus of the Company which shall be published in respect of, inter alia , debentures, as shall be amended from time to time.
 
The “ Shelf Offering Report ” or the “ Offering Report ” -
 
The shelf offering reports which shall be released pursuant to the shelf prospectus, according to the provisions of Section 23a of the Securities Law, 5728-1968, in which all of the special details for such offering shall be completed according to the provisions of any law, including the Rules and Regulations of TASE, as shall be in effect at the time.
 
The “ Debenture Series ” or the “ Relevant Series ”
 
Registered series F to O and Series 1 to 6 Debentures of the Company, the terms of each of which will be according to the debenture certificate of such series and the Shelf Offering Report according to which such series shall be initially offered, which will be issued from time to time by the Company, according to its sole discretion.
It is clarified, that even though in the Shelf Prospectus it was stipulated that the total par value of each of the debenture series would not exceed NIS5,000,000,000, the Company shall be entitled to increase, from time to time and pursuant to the provisions of any law, each of the debenture series, with no limitation, and this Indenture, and the terms hereunder, shall apply to each of the Debenture Series, with no amount limitation.
 
The “ Debentures ” or the “ Debenture of the Relevant Series ” -
 
Debentures of each of the Debenture Series
 
The “ Relevant Series' Initial Offering Report ” -
 
An offering report according to which Debentures of the Relevant Series shall be initially offered.
 
The “ Trustee ” -
 
Hermetic Trust (1975) Ltd. and/or anyone who shall serve from time to time as a trustee of the Debenture holders pursuant to this Indenture.
 
The “ Register ”
 
The register of the holders of the Debentures of the Relevant Series, as stated in Section 26 of this Indenture.
 
“ Debenture Certificate ”
 
A debenture certificate in respect of the relevant series, the form of which appears in the First Schedule of this Indenture and which shall be issued according to the terms of this Indenture and the Shelf
 
 
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TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
      Prospectus.
 
The “ Law ” or the “ Securities Law ” -
 
The Securities Law, 5728-1968 and the regulations promulgated thereunder, as shall exist from time to time.
 
“ TASE ”
 
The Tel Aviv Stock Exchange Ltd.
 
The “ Debenture holders ” and/or the “ Debenture Owners ” and/or the “ Holders ” -
 
Anyone holding the Debentures.
 
“ Business Day ” or “ Bank Business Day ” -
 
Any day on which most of the banks in Israel are open for the performance of transactions.
 
“ Principal ”
 
The total unpaid nominal value of the Debentures of the Relevant Series.
 
“ Special Resolution ” -
 
A resolution adopted in a general meeting of the Holders of Debentures of the Relevant Series, in which Holders of at least fifty five percent (55%) of the unpaid balance of the Debenture Principal of the same series in circulation, were present in person or by proxy, or in an adjourned meeting in which the Holders of at least ten percent (10%) of the said balance were present in person or by proxy, and which was adopted (whether in the original meeting or in the adjourned meeting) at a majority of at least seventy five percent (75%) of the overall votes of the participants counted in the vote, not including abstainers.
 
“ TASE Clearinghouse ”
 
The Tel Aviv Stock Exchange Clearing House Ltd.
 
2.  
Issuance of the Debentures and the Applicability of the Indenture
 
The Company will be entitled to issue pursuant to the terms of the Shelf Prospectus and this Indenture: 1
 
 
2.1.  
Up to 10 series of Series F to O Debentures while each of these Debenture Series will be at a total nominal value of up to NIS 5,000,000,000, registered, and available for payment (principal) in one payment or more, equal or unequal, on each of the dates, all as shall be specified in the offering report according to which each of the said series will be first offered, but no more than on one date in each quarter (the “ Series F to O Debentures ”). The linkage (or no linkage) basis and the type of interest (or no interest) that the Debenture Principal of each of the said series shall bear, will be specified in the offering report according to which such Debentures shall be initially offered. For
 
 
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TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
specification of the linkage bases of the Series F to O Debentures and the types of interest for such Debentures, possible according to the Shelf Prospectus, see Section 2 of the Terms and Conditions Overleaf. The interest rate borne by the Debenture Principal of each of the said series which will be issued, or the margin above or below the Base Interest borne by the Debenture Principal of each of the said series, or the absence of interest (or such margin) borne by the Debenture Principal of each of the said series, as applicable, will be specified in the offering report according to which such debentures will be initially offered, or will be determined in a tender according to which their initial offer will be prepared. The interest, if any, on the Debenture Principal of the series F to O will be paid in one or more installments on each of the dates, all as shall be specified in the offering report according to which such debentures will be initially offered, but not more than once in a quarter. The dates and number of Principal installments, the linkage (or no linkage) base, the interest type or the margin above or below the Base Interest rate as applicable, or the manner of determination thereof and the dates of payment of the interest (or the absence of such interest or margin) of the Series F to O Debentures, as shall be specified in the offering report according to which each of the said series of debentures shall be initially offered, will be determined by the Company at the eve of the initial offering of the Debentures of the Relevant Series. The Company will be entitled to determine in the offering report in which the Series F to O Debentures will be initially offered, that the Company shall be conferred a right to subject the debentures of the said series to early redemption as aforesaid and subject to the terms as specified in Section 7.2 of the Indenture.
 
 
If after the date of the initial issuance of the Debentures of any series of the Series F to O such Debenture Series shall be expanded by the Company, the Holders of Series F to O Debentures which will be issued within the framework of the expansion of such series, will not be entitled to receive payment on account of a Principal and/or interest for the said Debentures, in respect of which the effective date for payment shall occur prior to the date of issuance as aforesaid.
 
 
2.2.  
Up to 6 series of convertible debentures (Series 1 to 6) while each of these Debenture Series will be at an overall nominal value of up to NIS 5,000,000,000, registered, and available for payment (Principal) in one payment or more, equal or non-equal, on each of the dates, all as shall be specified in the Offering Report according to which each of the said series be initially offered, but no more than on one date in each quarter (the “ Series 1 to 6 Debentures ”). The linkage (or no linkage) base and the type of interest (or no interest) that the Debenture Principal of each of the said series shall bear, will be specified in the Offering Report according to which such Debentures shall initially be offered. For specification of the linkage bases of the Series 1 to 6 Debentures and the types of interest for such Debentures, possible according to this Shelf Prospectus, see Sections 2 and 3 of the Terms and Conditions
 
 
- 5 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
Overleaf. The interest rate borne by the Debenture Principal of each of the said series, or the margin above or below the Base Interest which will be borne by the Debenture Principal of each of the said series, or the absence of interest (or absence of such margin) which will be borne by the Debenture Principal of each of the said series, as applicable, will be specified in the Offering Report according to which such debentures will be initially offered, or will be determined in a tender according to which their offer will be first prepared. The Interest, if any, on the Debenture Principal of the said series will be paid in one or more installments on each of the dates, all as shall be specified in the Offering Report according to which such debentures will be first offered, but not more than once in a quarter. The dates and number of Principal installments, the linkage (or no linkage) basis, the interest type or the margin above or below the Base Interest rate, as applicable, or the manner of determination thereof and the dates of payment of the interest (or the absence of such interest or margin) of the Series 1 to 6  Debentures, as shall be specified in the Offering Report according to which each of the said series of debentures shall be first offered, will be determined by the Company prior to the initial offering of the Debentures of the Relevant Series. The Series 1 to 6 Debentures will be convertible into ordinary shares of the Company as shall exist on the date of release of the Initial Offering Report of each of the said series and as shall be specified therein, on each day which trade is performed at TASE (a “ Trade Day ”), commencing on the date of registration of such Debentures for trade on TASE and until several days prior to the expiration of the term of Debentures of such series, except for several days prior to the effective date for partial redemption and until the date of performance of the partial redemption all in accordance with TASE’s directives as shall be in effect on the Offering Report Date, according to a conversion rate which will be no less than the nominal value of the ordinary shares of the Company on the First Offering Report Date of the Series 1 to 6 Debentures (subject to adjustments as specified in Sections 7.3 and 7.4 of the Terms and Conditions Overleaf), in the manner and under the terms, all as shall be specified in the First Offering Report of the Debentures of each of the said series, according to the determination of such details by the Company at the eve of the initial offering of the Debentures of the Relevant Series. The Company may determine in the Offering Report in which the Series 1 to 6 Debentures shall be initially offered, that the Company will be granted the right to subject the Debentures of the said series to early redemption as aforesaid and subject to the terms as specified in Section 7.2 of the Indenture.
 
 
If after the date of the initial issuance of the Debentures of any series of the Series 1 to 6 such Debenture Series will be expanded by the Company, the Holders of Series 1 to 6 Debentures which will be issued within the framework of the expansion of such series, will not be entitled to receive payment on account of Principal and/or interest for the said Debentures, in respect of which the effective date for payment shall occur prior to the date of issuance as aforesaid.
 
 
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TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
2.3.
The provisions of this Indenture shall apply, separately, in respect to each of the Debenture series, and all – unless otherwise stated or implicated from the context of matters. The provisions of this Indenture in respect of one of the relevant series are not contingent and do not depend on the provisions of this Indenture in respect of another series.
 
 
2.4.
Insofar as by virtue of the Shelf Prospectus, the Series F to O and/or Series 1 to 6 Debentures shall be offered, the possibility shall be examined, of the Trustee’s tenure as a trustee for the Debentures of the series that shall be offered in such an Offering Report, in whole or in part, in light of the existence or absence of possible conflict of interests between the Series B, D and E Series Debenture holders, which as of the date of execution of this Indenture the Trustee serves as a trustee for debentures of such series, and the Holders of the Debentures of the series that shall be offered as aforesaid, according to the provisions of law (including – the directives of the Securities Authority) commencing on such date.
 
3.  
Expansion of existing series and issuance and allocation of Debentures and additional securities
 
 
 
3.1.
The Company shall be entitled, from time to time, without requiring an approval from the Trustee for the Relevant Series and/or the Holders of the Debentures of the Relevant Series who exist at the time, to expand each of the Debenture Series and issue additional Debentures of the same series (whether through a private offering, in the framework of a Prospectus, according to a Shelf Offering Report or otherwise), including to a subsidiary of the Company, at any price and in any manner that the Company shall deem fit, including at a discount or a premium (including with no discount or premium) rate different than those that prevailed (if any) in other issuances which were carried out of the same series, provided that it shall provide a notice to the Trustee for such series in respect thereof. The Trustee shall serve, subject to the provisions of the Indenture, as a trustee for the Debentures of the Relevant Series, as shall be from time to time in circulation, also in the case of expansion of a series and the consent of the Trustee to the service as aforesaid for the expanded series, will not be required. The Debentures of the Relevant Series which will be in circulation and other Debentures of the same series, which will be issued (if any) as stated in this Section above, shall constitute (commencing on the date of issuance thereof) one series for all intents and purposes, and the indenture of the Debentures of such series shall apply also in respect of all of the additional Debentures of such series. The additional Debentures will not confer a right for payment of Principal and/or interest in respect of the Debentures of the Relevant series for which the effective date for payment occurs prior to the date of issuance thereof. In case of the expansion of a series as aforesaid, the tax implications as specified in the Shelf Prospectus and in the relevant Offering Report shall apply.
 
 
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TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
3.2.
Without derogating from the aforesaid, the Company reserves the right to issue at any time additional series of Debentures and/or other securities, of any type, without requiring the receipt of an approval from the Trustee and/or the Holders existing at the time, whether they purchase a Conversion Right in the Company’s shares or not, and under terms of payment, interest, linkage, collateral and other terms as it shall deem fit, whether they are preferable to the terms of the Debentures of any Relevant Series in circulation, equal thereto or inferior thereof.
 
 
3.3.
Nothing stated in this Section above shall constitute prior consent on behalf of the Trustee or the Debenture holders to such issuance, or derogate from any rights of the Trustee and the Holders of the Debentures pursuant to the Indenture.
 
4.  
The Company hereby undertakes to pay all of the Principal amounts, the interest (including the interest in arrears, if any) and the linkage differentials pursuant to the terms of the Debentures (insofar as such shall be issued) and to comply with all of the other conditions and undertakings imposed thereon pursuant to the terms of the Debentures and this Indenture.
 
5.  
Securing the Debentures
 
The Company’s undertaking to pay the Debentures may or may not be secured by any collaterals, charges or in any other manner. In case that the Debentures shall be secured by any collaterals as aforesaid, a schedule to the Indenture of the Relevant Series shall be executed and insofar as such shall be required pursuant to the requirements of the law on the relevant date, the Company shall release an amendment to the Shelf Prospectus. Details regarding the mechanism for securing the Debentures, insofar as they shall be secured by collaterals, any charges or in any other manner, shall be released within the Relevant Series’ Initial Offering Report. As of the date of release of the Prospectus, and insofar as it shall not be otherwise specified in the Offering Report as aforesaid, the Debentures offered (if any) according to the Shelf Prospectus will not be secured by collaterals, pledges or otherwise.
 
In case that the Company shall perform an expansion of a Debenture Series which will be secured by a certain collateral or pledge, without changing the scope of the collaterals provided to the Holders of such series following the expansion of the series, the Company shall state in the Offering Report, within the framework of which the increase of the said series will be carried out, that the increase of the series which will be carried out by the Company without changing the scope of collaterals provided to the Holders of such series, will lead to a reduction in the rate of the collateral’s value out of the overall value of the whole series, after the increase thereof. It shall be emphasized that the aforesaid does not constitute an undertaking of the Company to issue Debentures secured by any collateral or charge.
 
For avoidance of doubt it is clarified that the Trustee is not subject to a duty to examine, and the Trustee did not actually examine the need to provide
 
 
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TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
securities for ensuring the payments to the Holders of the Debentures of the same series and/or the economic value of the securities, insofar they shall be provided. The Trustee had not been requested to prepare, and in fact, did not prepare, an economic, accounting or legal due diligence inspection, in respect of the state of the business of the Company or the subsidiaries thereof. In the engagement thereof in the Indenture, and in the Trustee’s consent to serve as a trustee for the Holders of Debentures of such series, the Trustee does not provide the opinion thereof, explicitly or implicitly, in respect of the economic value of the securities, insofar as they were provided and/or will be provided (if at all) by the Company and/or in respect of the Company’s ability to comply with its undertakings towards the Holders of the Debentures of the same series. The aforesaid shall not derogate of the Trustee’s duties according to any law and/or the Indenture, and it does not derogate from the Trustee’s duty (insofar as such duty applies to the Trustee according to any law) to examine the influence of changes in the Company from the date of the Prospectus onwards, insofar as they may adversely affect the Company’s ability to comply with its undertakings to the Holders of Debentures of the same series.
 
Insofar as it had not been otherwise determined in any Initial Offering Report of Debentures of any Relevant Series, the Company shall be entitled to pledge all of its assets and/or any part thereof, in any charge and in any manner, in favor of whomever its shall deem fit, with no restriction, and at any rank, including for securing any Debentures (or any series of debentures) or other undertakings, and without requiring the consent of the Trustee and/or the holders of the Debentures of any series. Also, the Company shall be entitled to sell, lease, deliver and/or transfer in any other way, the property thereof, in whole or in part, in any manner, in favor of whomever it shall deem fit, without requiring any consent of the Trustee and/or the Holders of Debentures of any series.
 
The Debentures of any Relevant Series shall equally rank, pari passu , among themselves in respect of the Company’s undertakings pursuant to the Debentures of the same series, and without any preference or priority of one over the other.
 
6.  
Purchase Debentures by the Company and/or a subsidiary of the Company and/or a corporation controlled by the Company
 
The Company reserves its rights to purchase at any time (on TASE and/or outside thereof) Debentures out of the Debentures of the Relevant Series which were issued, at the price and terms which it shall deem fit (and from sellers who shall be elected according to its discretion and without requiring approaching all of the Holders of Debentures of the same series), and in case of such purchase the purchased Debentures shall automatically expire and be delisted and the Company shall not be entitled to re-issue them. In case that the Debentures will be purchased during the trading thereof on TASE, the Company shall apply to the TASE Clearinghouse with an application for withdrawal of their certificates. The Company shall file an immediate report in respect of any purchase of the Debentures of the Relevant Series which was
 
 
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TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
carried out thereby as aforesaid, and shall notify the Trustee for the Relevant Series in writing thereof.
 
Subject to the restrictions by virtue of securities laws applicable to the Company, a subsidiary of the Company and/or a corporation controlled by the Company (an “ Affiliated Holder ”) may purchase and/or sell from time to time on TASE or outside thereof (including in a case of an issuance by the Company) Debentures of the Relevant Series according to their discretion (subject to any law). The Debentures which will be so held by an Affiliated Holder, will be deemed as their asset, will not be delisted and will also be transferrable the same as the other Debentures of the same series. The Debentures of the Relevant Series which will be held by a subsidiary of the Company and/or a corporation controlled by the Company will not confer a voting right in the meetings of the Holders of Debentures of the same series, and shall not be counted for the purpose of determining the legal quorum in such meetings, for so long that they are held by an Affiliated Holder as aforesaid. Should a subsidiary of the Company and/or a corporation controlled by the Company purchase such Debentures, then the sale of such Debentures, may, under certain circumstances, be subject to the receipt of permission of the Securities Authority and/or the restrictions applicable in respect of a private offering of securities, all subject to the provisions of law (including the directives of the Securities Authority) on the relevant date.
 
7.  
Early Redemption
 
 
 
7.1.  
Early Redemption initiated by TASE
 
If TASE shall decide of the delisting of the Debentures of each of the Series F to O in circulation, because the value of the series had decreased below the minimal amount prescribed in the Rules and Directives of TASE regarding the delisting from trade thereon and/or if it shall be decided by TASE of the delisting of the convertible debentures of each of the Series 1 to 6 in circulation because the value of the public’s holdings therein decreased below the minimal amount prescribed in the Rules and Directives of TASE regarding delisting, the Company shall act as follows (all – subject to the provisions of the Rules of TASE and the directives promulgated thereunder, as shall prevail on the relevant date):
 
Within forty five (45) days from the date of TASE’s decision of the delisting, as aforesaid, the Company shall announce the early redemption date on which the Holder of the Debentures may redeem such Debentures. The notice of the early redemption date will be reported in an immediate report and published in two (2) newspapers with a wide distribution, published in Israel in Hebrew.
 
The early redemption date of the Series F to O Debentures in respect of which a delisting decision had been made, as aforesaid, shall occur no earlier than seventeen (17) days from the date of publication of the notice and no later than forty five (45) days of such date, but not in the
 
 
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TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
period between the effective date for payment of interest and the date of actual payment thereof.
 
The early redemption date of Series 1 to 6 Debentures in respect of which such delisting decision had been made, will occur no earlier than thirty (30) days from the date of publication of the notice and no later than forty five (45) days from the said date, but not in the period between the effective date for payment of interest and the date of actual payment thereof.
 
On the early redemption date the Company shall redeem the Debentures of the same series in which the Holders had sought to redeem, according to the balance of the nominal value thereof, plus linkage differentials, if any, and interest, accrued on the Principal, while the interest shall be calculated pro rata to the period commencing on the day after the last day for which interest was paid and until the actual early redemption date (calculation of the interest for a part of a year will be done on the basis of 365 days a year).
 
Determination of an early redemption date as aforesaid, may not prejudice the redemption rights prescribed in the Debentures of the same series, to any of the Holders who shall not redeem such on the early redemption date as aforesaid, and in case of convertible Debentures, it may also not prejudice the conversion rights prescribed therein, but the Debentures shall be delisted from TASE and the tax implications deriving therefrom shall apply thereto, inter alia . Early Redemption of the Debentures as aforesaid, shall not confer upon anyone who held Debentures of the same series which shall be so redeemed, the right to payment of Principal and/or interest for the period following the redemption date.
 
 
7.2.  
Early Redemption initiated by the Company
 
The Company may, according to its sole discretion, determine in the Relevant Series’ Initial Offering Report, that the Company may subject the Debentures of the Relevant Series to early redemption, and in such case the following provisions shall apply, all – subject to the directives of the Securities Authority and the provisions of TASE Rules and the Directives promulgated thereunder, in effect at the relevant date:
 
 
[a]
The minimal amount of each early redemption will be determined in the First Offering Report of the Debentures of the Relevant Series.
 
 
[b]
Upon the adoption of a resolution of the Company’s board of directors pertaining to early redemption as aforesaid, the Company shall release an immediate report regarding the performance of early redemption for Holders of Debentures of the Relevant Series with a copy to the Trustee, the effective date for performance of which will be determined in the immediate report and shall occur no less than seventeen (17)
 
 
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TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
days and no more than forty five (45) days prior to the performance of early redemption. Notwithstanding the aforesaid, in the early redemption of Series 1 to 6 Debentures only, the effective date for performance of early redemption shall occur no less than thirty (30) days and no more than forty five (45) days before the early redemption. The date of the early redemption shall not occur in the period between the effective date for payment of interest due to the Debentures of the Relevant Series and the date of actual payment. In the immediate report as aforesaid, the Company shall publish the Principal amount to be paid through early redemption as well as the interest accrued in respect of the said Principal amount until the early redemption date, according to the provisions of subsection [c] below.
 
 
Partial redemption shall not be carried out more than once in each calendar quarter, and insofar as partial redemption be carried out during a quarter in which Principal and/or interest payments are carried out, the partial early redemption will be carried out on the date which the payment is made as aforesaid.
 
 
Early redemption for a part of the Relevant Debenture Series shall not take place if the amount of the last redemption shall be less than NIS3.2 million. On a partial early redemption date, if any, the Company shall announce in an immediate report the: (1) rate of partial redemption in terms of the unpaid balance; (2) rate of the partial redemption in terms of the original series; (3) the rate of the interest in the partial redemption on the redeemed part; (4) the rate of interest to be paid in the partial redemption, calculated in respect of the unpaid balance; (5) update of the partial redemption rates remaining, in terms of the original series; (6) the effective date for entitlement to receive the early redemption of the Debenture Principal which will be twelve (12) days prior to the date scheduled for the early redemption (it shall be clarified that if the effective date for entitlement to receive the partial redemption will occur during a quarter in which current interest payment exists, the effective date for entitlement to receipt of the partial redemption shall occur on the next effective date for receipt of the current interest payment which will be paid during such quarter).
 
 
Partial early redemption shall be carried out pari passu to each of the Debenture holders.
 
 
[c]
The amount which will be paid to the Holders of Debentures of the Relevant Series in case of early redemption, will be the highest amount among the following: (1) market value of the balance of the Debentures of the Relevant Series in circulation, which will be determined according to the higher between: (a) the price of the Debentures of the Relevant Series on TASE in
 
 
- 12 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
the end of the Trade Day preceding the date on which the Company’s board resolution for performance of the early redemption shall be adopted; or (b) the average closing price of the Debentures of the Relevant Series in the thirty (30) Trade Days preceding the date of adopting the board resolution regarding the early redemption; (2) the liability value of the Debentures of the Relevant Series available for early redemption in circulation, namely, Principal plus interest and linkage differentials (if any), until the actual early redemption date; (3) the cash flow balance of the Debentures of the Relevant Series available for early redemption (Principal plus interest) while discounted according to the Government Debentures Yield (as defined below) plus interest which will be determined in the Initial Offering Report. Discounting of the Debentures of the Relevant Series subject to early redemption will be calculated commencing from the early redemption date until the date of the last payment determined in respect of the Debentures of the Relevant Series being redeemed early, as shall be determined in the Initial Offering Report.
 
 
For this matter: the “ Government Debentures Yield ” means the average return (gross) for redemption, during a period of seven Business Days, ending two Business Days prior to the date of announcement of the early redemption, of three series of government debentures of which average lifetime is the closest to the average lifetime of the Debentures of the Relevant Series on the relevant date.
 
8.  
Acceleration
 
 
8.1.
Upon the occurrence of one or more of the events specified below the provisions in Section 8.2 of the Indenture shall apply:
 
 
8.1.1.
If the Company shall not pay any amount due therefrom in respect of the Debentures of the Relevant Series within forty five (45) days after the payment date had become due.
 
 
8.1.2.
If a temporary liquidator had been appointed to the Company by a court or a final irrevocable valid resolution for dissolution of the Company shall be adopted (except for dissolution for reasons of merger with another company and/or restructuring of the Company), and such appointment or resolution had not been revoked within ninety (90) Business Days from the date of appointment or resolution, as applicable.
 
 
8.1.3.
If an attachment shall be imposed, a charge be exercised or execution actions be carried out, all on the Majority of the Company’s Assets, and such attachment not be removed or the exercise be cancelled or the action be canceled within ninety (90) Business Days after the attachment had been imposed or
 
 
- 13 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
the charge was exercised or the action carried out, and such attachment, charge exercise or action entail or is reasonably  liable to entail actual risk for the possibility of payment of any amount due from the Company in respect of the Debentures of the Relevant Series.
 
 
8.1.4.
If a receiver or a temporary receiver be appointed for the Majority of the Company’s Assets, and the appointment will not be removed within ninety (90) Business Days, and such appointment entails or is reasonably liable to entail actual risk for the possibility of payment of any amount due from the Company regarding the Debentures of the Relevant Series.
 
 
8.1.5.
If the Company shall cease or announce its intention to cease the payment of debts thereof, in a manner that any such event entails or is reasonably liable to entail risk to the rights of the Holders of Debentures of the Relevant Series.
 
 
8.1.6.
If the Company shall cease to continue its business and/or to conduct its business as shall be from time to time and/or notify the Trustee of its intention to cease continuation of engaging in the business thereof as shall be from time to time and/or conduct them and/or shall intend to cease continuation of the business thereof as shall be from time to time.
 
 
8.1.7.
If the Company shall violate or not fulfill any material condition or undertaking included in the Debentures of the Relevant Series or in the Indenture, in a manner which such shall entail or is reasonably liable to entail material prejudice to the rights of the Debenture holders of the same series.
 
 
In this Section the “ Majority of the Company’s Assets ” means assets of which overall amounts constitutes most of the overall amount of all of the assets as recorded in the consolidated report on the financial position according to the consolidated financial reports recently released by the Company according to a relevant case as aforesaid.
 
 
8.2.
In cases as specified in this Section, the provisions in Section 8.2 below shall apply:
 
 
[a]
Upon the occurrence of any of the events in Sections 8.1.1 to 8.1.6 (inclusive) above, the Trustee shall be obligated to convene a meeting of the holders of Debentures of the Relevant Series;
 
 
[b]
Upon the occurrence of an event as specified in Section 8.1.7 above, the Trustee shall be entitled (but not obligated) to, and each of the Debenture holders who holds ten percent (10%) or more of the Debentures of the Relevant Series, will be entitled to convene a meeting of Debenture holders of the Relevant Series.
 
 
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TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
[c]
The date of convening a meeting of Holders of Debentures of the Relevant Series on whose agenda there shall be a resolution regarding the acceleration of all of the unpaid balance of the Debentures of the Relevant Series, due to the occurrence of any of the events specified in Section 8.1 above, will be upon the passing of thirty (30) days from the date of convening thereof (or a shorter term according to the provisions of subsection [f] below).
 
 
[d]
In a case which until the date of convening of a meeting as aforesaid, any of the events specified in Section 8.1 above had not been cancelled or removed, and a resolution in the meeting of Debenture holders as aforesaid regarding the acceleration was adopted as a Special Resolution, the Trustee will be obligated, within reasonable time, to accelerate all of the unpaid balance of the Debentures of the Relevant Series.
 
 
[e]
A copy of the meeting convening notice as aforesaid will be sent by the person convening the meeting to the Company immediately upon the publication of the notice of the convening thereof and shall constitute an advance written notification to the Company of the intention thereof to operate as aforesaid, and the Company shall release an immediate report regarding the convening of a meeting as aforesaid.
 
 
[f]
The Trustee may, according to its discretion, reduce the period of thirty [30] days stated in subsection [c] above, in a case which the Trustee shall be of the opinion that any delay in the convening of a meeting may risk the rights of the holders of Debentures of the same series.
 
 
[g]
The Trustee will be responsible to report to the Holders of Debentures of the Relevant Series of the occurrence of any of the events specified in Section 8.1 above, whether by virtue of general publications made by the Company or according to the Company’s notice which will be sent thereto according to the provisions of Section 24 of the Indenture.
 
 
[h]
It is hereby clarified that the Trustee’s duties according to this Section 8.2 are subject to the actual knowledge thereof of the occurrence of the facts, cases, circumstances and events specified therein. Such may not prejudice the duties of the Trustee according to any law, provided that such may not prejudice the rights of the Trustee.
 
9.  
Actions and Proceedings by the Trustee
 
 
9.1.
In addition to any provision in this Indenture and as an independent right and authority, the Trustee shall be entitled, according to the discretion thereof, to initiate any proceedings, including legal proceedings, as the Trustee shall deem fit, and subject to the provisions
 
 
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of any law, for the enforcement of the Company’s undertakings pursuant to the Indenture and for the exercise of the rights of the holders of Debentures of the Relevant Series according to the Indenture. Notwithstanding the provisions of this Section, a right for acceleration shall arise only pursuant to the provisions of Section 8 above and not by virtue of this Section.
 
Subject to the provisions of this Section, the Trustee shall be obligated to act as aforesaid in this Section if it shall be required to do so by a Special Resolution adopted in a meeting of the Holders of Debentures of the Relevant Series, unless the Trustee believes that in the circumstances of the matter it is not just and/or reasonable to do so, and it referred to the competent court with a motion to receive instructions on the subject matter on the first possible date.
 
9.2.  
The Trustee may, prior to initiating proceedings as aforesaid, convene a meeting of Holders of the Debentures of the Relevant Series in order for such Holders to decide in a Special Resolution what proceedings to instigate for exercise of the rights thereof pursuant to the Indenture, provided that the convening of the meeting shall be done on the first possible date and delaying of proceedings shall not risk the rights of the said Holders. Also, the Trustee will be entitled to reconvene meetings of Holders as aforesaid, for the purpose of receiving instructions in all matters pertaining to conduct of such proceedings according to the aforesaid above.
 
9.3.  
Subject to the provisions of the Indenture, the Trustee may, but is not obligated to, convene at any time, a general meeting of Holders of Debentures of the Relevant Series in order to deliberate and/or receive the instructions thereof on any matter pertaining to the Indenture provided that the convening of the meeting shall be done on the first possible date and the delaying of proceedings shall not risk the rights of the said Holders. The Trustee shall be obligated to convene a meeting on the first possible date pursuant to a request of the Holders of at least ten percent (10%) of the Principal of the Debentures of the same series in circulation.
 
9.4.  
The Trustee may, according to the sole discretion thereof, withhold the performance of any action thereby according to the Indenture, for referring to a meeting of Holders of Debentures of the Relevant Series and/or the court until he receives instructions from the meeting of the Holders of Debentures of the Relevant Series and/or instructions from the court how to act, provided that the convening of the meeting or reference to the court shall be done on the first possible date.
 
9.5.  
For avoidance of doubt it is hereby clarified that none of the provisions specified above may prejudice and/or derogate from the right of the Trustee, hereby conferred upon the Trustee, to refer, according to the sole discretion thereof, to legal instances, even before the Debentures
 
 
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of the Relevant Series shall be accelerated, and thereafter, for the purpose of provision of any order in respect of the trusteeship matters.
 
10.  
Trust for the Proceeds
 
All of the proceeds received by the Trustee as a result of proceedings that the Trustee shall instigate, if any, against the Company, will be held thereby in trust and shall serve in the hands thereof for the purposes and according to the order of priorities as follows:
 
First for clearing expenses, payments, levies and liabilities expended by the Trustee, charged against it, or incurred through or as a result of the actions of performance of the trust or in another manner in relation with the terms of the Indenture, including the fee thereof, all in respect of the Debentures of the Relevant Series, and will use the balance, first – to pay the Holders of the Debentures of the Relevant Series the arrears in interest and/or Principal (including the interest in arrears if any) due thereto according to the conditions of the Debentures of the Relevant Series and subject to the terms of linkage in the Debentures,   pari passu and pro rata to the amount of the interest and/or Principal which is late, owing to each of them with no preference or priority right in respect of any of them; second – to pay the Debenture holders the amounts of the Principal and/or the interest due thereto according to the Debentures and subject to the linkage terms in the Debentures, whether the date for clearance of the Principal and/or interest amounts had become due or not, pari passu and pro rata to the amounts due thereto, with no preference regarding priority in time of issuance of the Debentures by the Company or otherwise, and the excess, if any, the Trustee shall pay the Company or the alternates thereof. Withholding tax shall be deducted from the payments to the Debenture holders, insofar as there is a duty to deduct such according to any law.
 
Payment of the amounts by the Trustee to the Holders of Debentures of the Relevant Series, is subject to the rights of other creditors of the Company, if any, according to the provisions of law.
 
11.  
Authority to withhold distribution of funds
 
Notwithstanding the provisions of Section 10 of the Indenture, should the monetary amount received as a result of instigation of the proceedings specified in Section 9 of the Indenture and which will be available for distribution at any time to the Holders of Debentures of the Relevant Series as aforesaid, will be less than the amount of interest for the next payment determined according to the conditions of the Debentures of the same series, the Trustee shall not be obligated to distribute such and will be entitled to invest the said amount, in whole or in part, in investments permitted pursuant to the Indenture.
 
Once the aforesaid investments including the profits thereof, together with other funds which shall reach the Trustee for the payment thereof to the Holders of the Debentures of the Relevant Series, if any, shall reach an amount which will be sufficient to pay at least the amount of interest for the next
 
 
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payment determined according to the terms of the Debentures of the same series, the Trustee shall be obligated to distribute the said amount to the Holders of the Debentures of the Relevant Series on the next payment date of Principal or interest. Notwithstanding the provisions of this Section above, the Holders of Debentures of the same series may, according to a Special Resolution which shall be adopted thereby, instruct the Trustee to pay them the funds received by the Trustee and are available for distribution as stated in Section 10 of the Indenture, even if the amount thereof stands at less than the amount of the next interest payment amount determined according to the terms of the Debentures of the same series.
 
12.  
Notice of Distribution
 
 
12.1.
The Trustee shall notify the Holders of the date and place in which any payment of the payments stated in Sections 10 and 11 above shall be made, by an advance notice of 14 days which will be delivered in the manner prescribed in Section 24 of the Indenture.
 
 
12.2.
After the date specified in the notice, the Holders will be entitled to interest according to the rate set forth in the Debenture of the same series, only for the balance of the Principal amount (if any) after deduction of the amount paid, or proposed to be paid to them, as aforesaid.
 
13.  
Non-Payment for a Reason Beyond the Company’s Control
 
 
13.1.
Any sum payable to a holder of Debentures of the Relevant Series which was not paid on the due date for the payment thereof for a reason beyond the Company’s control, even though the Company was ready to pay the same (the “ Impediment ”), shall cease from bearing interest and linkage differentials from the aforesaid date and the said holder shall be entitled only to the sums to which he was entitled on the due date of that payment on account of the principal and/or linkage differentials and/or interest (as the case may be).
 
 
13.2.
If such sum as aforesaid was not paid within fourteen (14) days from the due date for the payment thereof, then on the fifteenth (15) day after the due date for the payment (and if this day is not a Business Day, then on the first Business Day thereafter) the Company shall remit this sum to the Trustee, who shall hold the sum in trust for the Debenture holder and the remittance of the sum to the Trustee as aforesaid shall be deemed as payment of that sum to this holder, subject to the provisions of Section 13.3 below. If the aforesaid sum is the last payment – the deposit of this sum in trust in the hands of the Trustee shall be deemed as the redemption of the aforesaid Debentures, subject to the provisions of Section 13.3 below. The Trustee shall deposit in the bank any sum held thereby in trust for holders in the investments permitted under the Indenture. After receiving from the holder a notice on the removal of the Impediment, the Trustee shall remit to the holder the funds accrued for the deposit and resulting from
 
 
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the liquidation of the investment of the same, net of all of the expenses and management fees of the escrow account and net of any tax under law. The payment shall be made against the presentation of such proof as shall be acceptable to the Trustee concerning the holder’s right to receive the same.
 
 
13.3.
Upon the expiration of one year after the final date for the payment of the Debentures of the Relevant Series, the Trustee shall remit the sums accrued in its hands to the Company, net of its expenses, and the Company shall hold the same in trust and invest the same as provided in Section 13.2 above for the holder until the expiration of three (3) years after the date of the final payment of the Debentures of that series, and it shall make no use of the same during this period. With respect to the sums that shall be remitted to the Company by the Trustee as aforesaid, they shall be subject to the provisions of this section 13.3, mutatis mutandis. After remitting the sums to the Company the Trustee shall owe to the Debenture holders of this series no payment for the sums held thereby as aforesaid.
 
 
13.4.
The Company shall confirm for the Trustee in writing the remittance of the aforesaid sums to it and the receipt of the same in trust for the Debenture holders of that series as aforesaid, and it shall undertake to indemnify the Trustee for any damage of any kind that shall be caused thereto for the remittance of the funds as aforesaid, provided that it acted reasonably and not in bad faith and/or malice and/or negligence. Funds as aforesaid which shall not be demanded from the Company by the Debenture holder of the Relevant Series upon the expiration of three (3) years after the final payment date of the Debentures of that series shall become the Company’s property and it shall be entitled to use the remaining funds for any purpose whatsoever.
 
14.  
Receipt from the Debenture holders
 
 
14.1.
A receipt from the holder or evidence from the transferring bank of the execution of the transfer or the execution of the transfer via the TASE Clearinghouse for the principal and/or interest sums paid thereto by the Trustee and/or the Company for the Debentures of the Relevant Series shall release the Trustee and/or the Company (as the case may be) entirely with respect to the payment of the sums stated therein.
 
 
14.2.
A receipt from the Trustee concerning the deposit of the principal and interest sums therewith in favor of the Debenture holder shall be deemed as a receipt from the Debenture holder of the Relevant Series.
 
 
14.3.
The funds distributed as provided in Section 12 above shall be deemed as made on account of the payment.
 
15.  
Application of the Securities Law
 
 
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In any matter not mentioned herein as well as in any case of discrepancy between the (mandatory) provisions of the Securities Law and this Indenture, the parties shall act in accordance with the provisions of the Securities Law.
 
16.  
Investment of Funds
 
 
All of the funds which the Trustee may invest hereunder shall be invested by him in one of the five large banks in Israel, on its name or to its order, in investments in which the laws of the State of Israel permit to invest trust funds, as it shall see fit, subject to the terms of the Indenture and to the provisions of any law, provided that any investment in securities shall be in securities rated no lower than AA. If the Trustee invested funds as aforesaid, the Trustee shall only owe to the entitled parties for these funds the consideration received from the liquidation of the investments, net of its fee and expenses, the commissions and expenses related to the investments as aforesaid and the management of the trust’s accounts, the commissions and the deduction of the mandatory payments applicable to the escrow account, and the Trustee shall act with respect to the balance of the funds in accordance with the provisions of the Indenture, as the case may be.
 
17.  
The Company’s Undertakings vis-à-vis the Trustee
 
 
The Company assumes, vis-à-vis the Trustee, the following undertakings, for as long as the Debentures of the Relevant Series have not yet been fully paid-up:
 
 
17.1.
To continue managing the Company’s businesses in an orderly and proper manner.
 
 
17.2.  
To keep and maintain its assets (as being from time to time) in good and functioning condition.
 
 
17.3.  
To provide and order its accountants to provide to the Trustee and accountants, attorneys or other consultants on its behalf any information that shall be reasonably required for protecting the holders with respect to all of the data related to its businesses or assets (subject to the provisions of any law and to the execution thereby of an undertaking of confidentiality in favor of the Company).
 
 
17.4.  
To keep regular account books in accordance with the acceptable accounting principles and to safeguard the books, including the documents serving as evidence thereof, at its offices, as required under law.
 
 
17.5.  
To allow the Trustee to attend the general meetings of the Company’s shareholders (without a right to participate or to vote).
 
 
17.6.  
To deliver to the Trustee the reports and notices as specified in Section 29 of the Indenture.
 
 
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17.7.  
To provide to the Trustee, at its request, an affidavit and/or statements and/or details and/or information, as required by the Trustee, at its sole discretion, for implementing and exercising the authorities, powers and authorizations of the Trustee and/or its representatives under the Indenture, provided that they are reasonable.
 
 
17.8.  
To file immediately, without delay, in the Trustee’s name, any report in such language as shall be delivered thereto in writing by the Trustee, with respect to the Debentures and/or the trust with respect thereto according to this Indenture.
 
 
The Trustee hereby undertakes to keep confidential any information that it shall receive from the Company as aforesaid, except for the purpose of the transfer of information to a meeting of holders convened for the purpose of reporting and/or making a decision concerning their rights under the Debentures of the Relevant Series, provided that such transfer of information as aforesaid shall be subject to the provisions of any law and that such transfer shall not damage a legitimate interest of the Company.
 
18.  
Additional Undertakings
 
 
After and insofar as Debentures of the Relevant Series shall be accelerated, as defined in Section 8 above, the Company shall perform from time to time and at any time that it shall be required to do so by the Trustee all of the reasonable actions in order to allow the exercise of all of the authorities vested in the Trustee and the Company shall take in particular the following actions:
 
 
18.1.
It shall transfer and remit to the Trustee the consideration for the Debentures due, according to the terms thereof.
 
 
18.2.
It shall deliver statements and execute all of the documents and take or ensure the taking of all of the actions necessary or required under the law for validating the exercise of the Trustee’s authorities, powers and authorizations.
 
 
18.3.
It shall give all of the notices, orders and instructions that the Trustee shall deem useful and reasonably demand for implementing the provisions hereof.
 
19.  
Other Agreements
 
 
Subject to the provisions of the law, neither the fulfillment of the Trustee’s duties hereunder, nor its mere status as a trustee, shall prevent the Trustee from engaging with the Company in various contracts or from performing transactions therewith in its ordinary course of business.
 
20.  
Trustee’s Fee
 
 
The Company shall pay to the Trustee a fee for its services as a trustee for the Debentures under the Indenture, as follows:
 
 
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20.1.
For the trust services for any series of Debentures that shall be issued according to the Shelf Prospectus the Company shall pay to the Trustee:
 
 
20.1.1.
For the first year of trust, from the actual issue, the Trustee shall be paid an annual fee of NIS 15,000, and for each additional year in which the Trustee shall act as a trustee for the Debentures of that series, the sum of NIS 12,500 (and all linked to the Consumer Price Index known on the issue date of the Relevant Series) (the “ Annual Fee ”).
 
 
The Annual Fee for any series of Debentures shall be paid to the Trustee at the beginning of each trust year, for each trust year.
 
 
20.1.2.
For participating in the Debenture holders meeting, the Trustee shall be paid an additional fee of NIS 500 per meeting (linked to the Consumer Price Index as aforesaid) in addition to travel expenses.
 
 
20.2.
If the Trustee’s office expired with respect to a certain series of Debentures as provided in the Indenture and/or if it ended in accordance with the terms of the Debentures, the Trustee shall not be entitled for the payment of a fee for the period from the aforesaid date and any overpayment made to the Trustee for such period shall be repaid thereby to the Company.
 
 
20.3.
If the Trustee is required to perform special works in connection with and for the purpose of exercising its duties hereunder, such as the performance of an action resulting from a breach of the Indenture by the Company and/or due to the need to take actions due to the non-performance by the Company of its undertakings to the Debenture holders and/or for accelerating the Debentures, and including the participation in various meetings (such as meetings with the Securities Authority), the Company shall pay the Trustee a fee according to the hours actually invested thereby in the sum of NIS 500.
 
 
20.4.
To all of the aforesaid sums that shall be paid to the Trustee legal VAT and reimbursement of expenses shall be added.
 
 
20.5.
If the Company issues debentures secured by liens, the Trustee shall be entitled to an additional fee as shall be determined by the parties.
 
21.  
Special Authorities
 
 
21.1.
The Trustee shall be entitled to deposit all of the instruments and documents that attest to, represent and/or determine its right with respect to any asset found at that time in its hands in a safe and/or any other place of its choice, with any banker and/or banking company and/or attorney.
 
 
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21.2.
In the framework of performing the matters of the trust hereunder and subject to the provisions of any law and the Indenture, the Trustee may commission the opinion and/or advice of any lawyer, accountant, assessor, appraiser, surveyor, broker or other expert, and to act in accordance with the conclusions thereof, whether such opinion and/or advice was prepared at the request of the Trustee and/or of the Company. The Trustee shall be liable for no loss or damage caused as a result of any act and/or omission committed thereby in reliance on such advice or opinion as aforesaid, unless it was determined in a final judgment that the Trustee acted with malice or negligence, in respect of which the Trustee is not exempted by law (as applicable from time to time) and/or with malice.
 
 
21.3.
Any advice and/or opinion as aforesaid may be provided, sent or received by a letter, telegram, fax and/or any other electronic media for the transfer of information in writing.
 
 
21.4.  
Subject to the provisions hereof, the Trustee may, but is not obligated to, convene at any time a general meeting of Debenture holders of any Relevant Series, in order to discuss and/or receive its instructions in any matter concerning this Indenture and it may reconvene the same.
 
 
21.5.  
The Trustee shall not be required to notify any party of the execution hereof and it may not intervene in any form whatsoever in the management of the Company’s businesses or matters, except according with the authorities granted thereto herein.
 
 
21.6.  
The Trustee shall exercise in the framework of the trust the powers, authorizations and authorities granted thereto hereunder at its absolute discretion and subject to the other provisions hereof it shall not be liable for any loss or damage caused due to an error in the exercise of the aforesaid discretion, unless it was determined in a final judgment that the Trustee acted with malice or negligence, in respect of which the Trustee is not exempted by law with negligence, in respect of which the Trustee is not exempted by law  as applicable from time to time.
 
22.  
Trustee’s Authority to Employ Representatives
 
 
The Trustee may, in the framework of managing the businesses of the trust, appoint representatives to act in its place, whether an attorney or another person, in order to take or participate in taking special actions that are required in connection with the trust, and without derogating from the generality of the aforesaid, instituting legal proceedings, provided that the Trustee gave a notice to the Company of the appointment of a representative as aforesaid. The Trustee may also pay on the Company’s account the reasonable fee of any such representative for proceedings for the purpose of or after the acceleration of the Debentures, and the Company shall repay the Trustee, immediately at its first demand, such expenses, provided that the Trustee gave the Company an advance notice of the appointment of such representatives. The
 
 
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appointment of a representative as aforesaid may not release the Trustee of any liability that would have applied thereto if not for the said appointment and/or derogate from the Trustee’s liability for its actions and the actions of its representatives. The Company may object the appointment of a certain representative as aforesaid on any reasonable ground, including in case that the representative is a competitor or found in conflict of interests, whether directly or indirectly, with the Company’s businesses.
 
23.  
Indemnification of the Trustee
 
 
23.1.
The Trustee shall be entitled to receive indemnification from the Debenture holders of the Relevant Series and/or the Company, as the case may be, for reasonable expenses that it incurred and/or shall incur in connection with actions concerning this Series, which it took or has to take by virtue of its duties under the terms hereof and/or under law and/or under any instruction of a competent authority and/or under any law and/or at the demand of the Debenture holders and/or at the Company’s demand, as specified in this section below.
 
 
23.2.
Notwithstanding the aforesaid:
 
 
[a]
The Trustee shall not be entitled to demand indemnification as aforesaid in advance in an urgent matter (without derogating from the Trustee’s right for retroactive indemnification in the same matter, if and insofar as it shall have such a right).
 
 
[b]
The Trustee shall be entitled to indemnification for liability in torts in case it shall be charged with such liability under a final judgment or concluded settlement vis-à-vis a third party, who is not one of the Debentureholders of that Series, provided that it did not act in negligence and/or bad faith and/or malice.
 
 
23.3.
The aforesaid right of indemnification is subject to the following conditions:
 
 
[a]
The expenses for the liability in torts are reasonable.
 
 
[b]
The Trustee acted in good faith and this action was taken in the framework of the performance of its duties, according to the provisions of the law and hereunder.
 
 
23.4.  
Without derogating from the rights of compensation and indemnification granted to the Trustee under the law and/or the commitments of the Company and the Debenture holders hereunder, the Trustee, its representative or any other person appointed by the Trustee hereunder shall be entitled to receive out of the funds received by the Trustee from the proceedings instituted thereby and/or otherwise hereunder indemnification with respect to the undertakings assumed by them, with respect to expenses incurred by them in the course of performing the trust or in connection with such actions, which at the Trustee’s opinion were required for the performance of the same and/or with respect to the exercise of authorities and authorizations granted by
 
 
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virtue of the Indenture as well as with respect to all kinds of legal proceedings, opinions and consultation with attorneys and other experts, negotiations, talks, expenses, claims and demands with respect to any matter and/or issue which were done and/or not done in any matter, and all with respect to the Relevant Series, and the Trustee may withhold the funds held thereby and pay therefrom the sums required for the payment of the indemnification as aforesaid. All of the aforesaid sums shall have preference over the rights of the Debenture holders of that Series, subject to the provisions of any law, provided that the Trustee acted in good faith and in accordance with the duties applicable thereto under any law and hereunder.
 
 
23.5.  
Whenever the Trustee shall be required under the terms of the Indenture and/or under the law and/or an instruction by a competent authority and/or any law and/or at the demand of the Debenture holders of the Relevant Series and/or at the Company’s demand, to take any action with respect to that Series, including, without limitation, instituting proceedings or filing actions at the request of the Debenture holders of that Series, as provided in the Indenture, the Trustee may refrain from taking any such action until it receives to its satisfaction a letter of indemnification from all or any of the Debenture holders of that Series with respect to expenses and/or damages that may be caused thereto and/or to the Company due to taking such action as aforesaid, and if the action is taken due to the Company’s demand – from the Company, for any liability to damages and/or expenses that may be caused to the Trustee and the Company or any of them due to taking such action. It is clarified that the aforesaid does not exempt the Trustee from taking an urgent action which is required in order to prevent a material breach of the rights of the Debenture holders of that Series.
 
 
23.6.  
Notwithstanding the aforesaid in this Section 23, whenever the Trustee deems right, for protecting and/or exercising the rights of the Debenture holders of the Relevant Series and/or shall be required, according to the terms of the Indenture and/or under law and/or an instruction of a competent authority and/or any law and/or at the demand of the Company and/or the Debenture holders of that Series, to institute legal proceedings, the Company shall deposit in the Trustee’s hands a sum that shall be determined reasonably by the Trustee as the expected sum of the Trustee’s expenses in connection with these proceedings. In case that the Company does not deposit the aforesaid sum on the date that it was requested to do so by the Trustee, and in the Trustee’s opinion there is a doubt as to the Company’s ability to cover the expenses involved in instituting proceedings by the Trustee, the Trustee shall immediately convene a meeting of the Debenture holders of that Series in order to confirm their liability for covering the expenses involved in the proceedings which the Trustee intends to institute. In case that the Debentureholders of that Series refuse to bear the expenses involved in instituting the proceedings by the Trustee, the Trustee shall be under no obligation to institute proceeding as
 
 
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aforesaid. It shall be hereby clarified that the Debenture holders’ consent as aforesaid shall not release the Company from its undertakings to bear and cover all of the expenses involved in instituting proceedings as aforesaid. In addition, all of the funds that shall be received from the exercise proceedings shall be also used for reimbursement and covering of expenses which the Debenture holders undertook to bear as aforesaid. It is clarified that the aforesaid does not exempt the Trustee from taking an urgent action required for preventing a material breach of the Debenture holders’ rights.
 
 
The indemnification undertakings under this Section 23.6 shall be referred to as the “ Indemnification Undertaking ”.
 
 
23.7.  
The ‘Indemnification Undertaking’:
 
 
[a]
Shall apply to the Company in any case of (1) actions that were taken and/or required to be taken according to the terms hereof or for protecting the rights of the Debenture holders (including at a Holder’s demand which is required for such protection); and (2) actions that were taken and/or required to be taken at the Company’s demand.
 
 
[b]
Shall apply to the Holders who held the Debentures of the Relevant Series on the effective date in any case of (1) actions that were taken and/or required to be taken at the Debenture holders’ demand (except for such actions that were taken at Debenture holders’ demand for protecting the Debenture holders’ rights); and (2) the non-payment by the Company of the sum of the ‘Indemnification Undertaking’ that apply thereto under subsection [a] above (subject to the provisions of Section 23.8 below).
 
 
For this matter, the effective date for determining the liability of a Holder for the ‘Indemnification Undertaking’ is as follows: in any case in which the ‘Indemnification Undertaking’ is required due to an urgent decision or action required in order to prevent an adverse material breach of the Debenture holders’ rights, without a prior decision of the Debenture holders meeting – the effective date for the liability shall be the close of the Trading Day on the day on which the action is taken or the decision is made (according to the earlier) and if that day is not a Trading Day, the preceding Trading Day. In any case in which the ‘Indemnification Undertaking’ is required according to the decision of the Debentureholders meeting – the effective date for the liability shall be the date stated in the proof of ownership (as specified in Section 7 of the Second Schedule hereto) and it shall also apply to a Holder who did not attend or participated in the meeting.
 
 
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23.8.  
The payment by the Holders in the Company’s place of any sum imposed on the Company pursuant to this Section 23 shall not release the Company from its obligation to bear the said payment.
 
24.  
Notices
 
 
Any notice on behalf of the Company and/or Trustee to the Debenture holders shall be given by an immediate report and in the following cases only the Company shall also publish an announcement in two (2) newspapers of broad circulation, which are published in Israel in Hebrew: (a) an arrangement or settlement pursuant to Section 350 of the Companies Law; (b) a merger. In case that the Company ceases from reporting according to Chapter F of the Securities Law, any notice on behalf of the Company and/or the Trustee to the Debenture holders shall be given by sending a notice by registered mail to each one of the Debenture holders, according to his last address as registered in the Register (and in the case of several co-holders, the co-holder who is registered first in the Register). Any notice that was sent as aforesaid shall be deemed as if it was delivered to the Debenture holders three (3) Business Days after postal dispatch thereof.
 
 
Any notice or demand on behalf of the Trustee to the Company or on behalf of the Company to the Trustee may be given by a letter that shall be sent by registered mail or by courier according to the address specified in the Indenture or according to a different address of which the parties shall give a written notice or – also by transmitting it by fax or by e-mail. Any notice or demand that shall be sent by registered mail shall be deemed to have been received by the other party three (3) Business Days after postal dispatch thereof. Any notice or demand that shall be sent by courier shall be deemed to have been received by the other party upon its delivery by the courier to the addressee or upon the tender thereof to the addressee, as the case may be. Any notice or demand that shall be sent by fax (in addition to telephone confirmation of the receipt thereof) shall be deemed to have been received by the other party one Business Day after the transmission thereof and in case of a transmission by e-mail – on the date of receipt of an e-mail confirmation of the reading thereof or on the date of the telephone confirmation of its receipt (if any), according to the earlier.
 
 
Copies of notices that shall be given by the Company to the Debenture holders shall be sent by the Company also to the Trustee, and copies of notices that shall be given by the Trustee to the Debenture holders shall be sent by the Trustee also to the Company.
 
25.  
Waivers, Settlements and/or Modifications in the Indenture
 
 
[a]
Subject to the provisions of any law, the Company and the Trustee may, whether before or after the Principal of the Debentures of the Relevant Series is due, modify the Indenture and/or the terms of the Debentures of that Series, if one of the following applies:
 
 
[1]
Except for a modification of the dates of the payments according to the terms of the Debentures of that Series, of its interest rates, the causes for acceleration and reports that the
 
 
- 27 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
Company is required to submit to the Trustee, if the Trustee was convinced that the modification does not materially damages the Debenture holders of that Series.
 
 
[2]
A meeting of the Debenture holders of that Series approved the modification in a Special Resolution.
 
 
[b]
In addition to the provisions of Subsection [a] and subject to the provisions of any law:
 
 
[1]
Except with respect to the dates of the payments according to the terms of the Debentures of that Series, its interest rate, in linkage of the Debentures, insofar as the terms of the Debentures of the Relevant Series provide for a method of linkage, the causes for acceleration and reports that the Company is required to submit to the Trustee, the Trustee for that Series may, from time to time and at any time, if in its opinion it does not violate the rights of the Holders of that Series, waive any breach or non-performance of any of the terms of the Indenture by the Company.
 
 
[2]
The Trustee shall be authorized, with a prior approval that shall be granted by a Special Resolution of the meeting of the Debenture holders of that Series, settle with the Company with respect to any of their rights or actions, and to waive any of their rights or actions vis-à-vis the Company pursuant to the Indenture and the Debentures of the Relevant Series. If the Trustee settled with the Company after it received a prior approval of the Debenture holders as aforesaid, the Trustee shall be exempt from any liability for this action.
 
 
[c]
The Company and/or Trustee shall deliver to all of the Debenture holders of the Relevant Series a written notice of any modification and/or waiver as aforesaid in Subsections [a][1] or [b][1] above with respect to this Series, shortly after the execution thereof.
 
 
[d]
In any case of exercise of the Trustee’s right under this section above with respect to any Relevant Series, the Trustee may demand from the Debenture holders of that Series to deliver to it or to the Company the Certificates of the Debentures of that Series for registering a note concerning any waiver, settlement, modification or amendment as aforesaid, and at the Trustee’s demand the Company shall register such a note in the Debenture Certificates delivered thereto.
 
 
[e]
In addition to the aforesaid, the terms of the Debentures may be modified in the framework of an arrangement or settlement that was approved by the court pursuant to Section 350 of the Companies Law.
 
 
[f]
The exchange of the Debentures of any Relevant Series for debentures of another traded company in the framework of a process of merger, split, re-organization of the Company or an exchange tender offer may be performed subject to the adoption of a Special Resolution by the Debenture holders of the Relevant Series or, at the Company’s choice, in another way permitted under law on the relevant date.
 
 
- 28 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
26.  
The Debenture holders Register
 
 
The Company shall keep at its registered office a separate Debenture holders Register for each Relevant Series (the “ Register for the Relevant Series ”), in which shall be registered all of the registered Holders, as being from time to time, of the Debentures of that Series as well as their addresses, details of the bank accounts to which the payments on account of the Principal and interest shall be transferred and the par value of the Debentures of this Series which are registered in their names, as being from time to time. In the Register for the Relevant Series other Holders shall be also registered, insofar as such Holders shall exist due to a split or a transfer of ownership of the Debenture of that Series, if actions are taken in accordance with Sections 8 or 9 of the Terms and Conditions Overleaf.
 
 
The Company may close the Register for the Relevant Series from time to time for period or periods of time that shall not exceed thirty (30) cumulative days in each year.
 
 
The Debenture holder of the Relevant Series may inspect the Register for that Series at any reasonable time, as long as he holds Debentures of that Series. In addition, the Trustee may inspect the Register for that Series at any reasonable time.
 
 
The Company shall not be required to enter any notice in the Debenture holders Register concerning explicit, implicit or presumed trust, or a pledge or lien of any kind or any right in equity, action or setoff or any other right with respect to the Debentures. The Company shall only acknowledge the ownership of the person in whose name the Debentures were registered. The legal heirs, administrators or executors of the registered Holder and any person who shall be entitled to the Debentures due to the bankruptcy of any registered Holder (and if it is a corporation – due to its dissolution) may be registered as the Holders thereof after providing proofs which in the Company’s opinion shall suffice to prove their right to be registered as Holders thereof.
 
27.  
Appointment of a New Trustee and Expiry of the Trustee’s Office
 
 
27.1.  
The Trustee’s office shall terminate in the cases specified in Section 35N of the Securities Law and according to the terms thereof.
 
 
27.2.  
In case of termination of the Trustee’s office or in case that the Trustee is replaced as a result of the Securities Authority’s demand that the Trustee not act as the trustee of several series of Debentures of the Company, the Company shall take action to appoint a new Trustee which shall be a trust company of one of the six large banks in Israel or any other Trustee that shall be approved at the Debenture holders meeting by a simple majority.
 
 
27.3.  
The Trustee shall hand-over to the new Trustee all of the documents and sums accrued therewith in connection with the trust contemplated in the Indenture for the Relevant Series, and it shall execute any document required for this purpose. Any new Trustee shall have the same powers, obligations and authorities and it shall be able to act for
 
 
- 29 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
all purposes and intents as if it had been initially appointed as a Trustee.
 
28.  
Holders Meetings
 
 
The meetings of the Holders of any Relevant Series shall be conducted as provided in the Second Schedule hereto.
 
29.  
Reporting to the Trustee
 
 
The Company shall deliver to the Trustee, as long as the Debentures subject to the trust are in circulation and have not yet been paid-up in full:
 
 
29.1.
Audited annual financial statements of the Company and reviewed quarterly financial statements of the Company, immediately upon the publication thereof.
 
 
29.2.
Within four (4) Business Days after making any payment to the Debenture holders of the Relevant Series the Company shall deliver to the Trustee a lawfully signed letter, confirming the performance of that payment to the Debenture holders and the balance of the par value of the Debentures of this Series which are still in circulation as of the confirmation date.
 
 
29.3.
Within ten (10) days from the end of each calendar year and as long as this Indenture is in force with respect to this Series, the Company shall deliver to the Trustee a written and lawfully signed certification, whereby, to the best of its knowledge, the Company did not breach this Indenture, including a breach of the terms of the Debentures of the Relevant Series, unless it was stated therein otherwise.
 
 
29.4.
No later than thirty (30) days after the issue date of a series of Debentures in the framework of a Shelf Offer Report pursuant to the Shelf Prospectus, the Company shall submit to the Trustee a payment schedule for the Debentures (Principal and interest) of the issued series, summarized in an Excel file.
 
 
29.5.
The Company shall notify the Trustee immediately and in writing of any reasonable concern of the Company that all or any of the events specified in Section 8.1 above is likely to occur and of the occurrence of all or any of the events specified in the aforesaid section.
 
 
30.  
Applicable Law and Jurisdiction
 
 
The law that governs the Indenture with its annexes and the Debentures is the Israeli law. The courts in the city of Tel Aviv Jaffa shall have a unique and exclusive jurisdiction in any conflict regarding the Indenture and the Debentures.
 
 
- 30 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
31.  
Rating
 
 
The Company may determine in the First Offer Report of the Relevant Series' Initial Offering Report that insofar as the Debentures that shall be offered pursuant to the Offer Report as aforesaid shall be rated the Company shall act (insofar as the matter shall be within its control) to arrange that as long as Debentures of the Relevant Series are listed for trade, the Debentures of the Relevant Series shall be under rating follow-up by a rating agency.
 
 
In such case, the Company does not undertake not to replace the rating company throughout the Debentures’ life time. In case of replacing the rating company, the Company shall publish an immediate report concerning the replacement as aforesaid.
 
32.  
Distribution of Dividend and/or Repurchase of Shares by the Company
 
 
It is clarified that no limitations on the Company with respect to the distribution of dividend and/or any other distribution and/or repurchase of Company’s securities were set forth in the Indenture and/or the terms of the Series F to O and Series  1 to 6 Debentures.
 
33.  
Authorization for MAGNA
 
 
By signing this Indenture the Trustee authorizes any of the Company’s authorized signatories to report in its name in the MAGNA system of its engagement herein and its execution hereof.
 
 
[Remainder of this page intentionally left blank]
 
 
- 31 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
In witness whereof the parties have hereunto set their hands:
 
 
 
 
     
Cellcom Israel Ltd.
 
Hermetic Trust (1975) Ltd.
 
Signed by: Yaacov Heen
                  CFO
 
 
Signed by: Dan Avnun
 
 
 
 
 
Attorney’s Certification
 
 
I, the undersigned, Adv. Tamar Enav, hereby certify that this Indenture was signed lawfully by the authorized signatories of Cellcom Israel Ltd., Mr. Yaacov He en.
 
 
 
 

 
     
     
 
Tamar Enav, Adv.
 
 
 
- 32 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
Cellcom Israel Ltd.
 
 
First Schedule
 
 
Series                           Debenture Certificate
 
 

 
 
Registered Debentures
 
Certificate no. ____________
 
Par value of this certificate: NIS ________________________.
 
The registered holder of this debenture certificate: ________________________.
 
1.  
This certificate attests that Cellcom Israel Ltd. (the “ Company ”) shall pay to the (Series ____) Debenture holders principal and interest payments on such dates, pursuant to such payment terms and in accordance with such other conditions as set forth in the Terms and Conditions Overleaf in the Indenture of July 14, 2011 (the “ Indenture ”), between the Company, of the first part, and Hermetic Trust (1975) Ltd., of the second part, and in the Shelf Offer Report published by the Company on __________________, pursuant to which the Debentures contemplated herein were issued, all of which constitute an integral part hereof.
 
2.  
This Debenture is issued as part of a series of debentures in identical terms to the terms hereof. The Debentures of the same series in circulation shall rank pari-passu with each other, without any preference or priority of the one over the other.
 
 

 
 
Signed by the Company on:
 
       
       
 
Cellcom Israel Ltd.
 
  Signed by:    
 
 
- 33 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 

 
The Terms and Conditions Overleaf
 
 
The terms and conditions detailed overleaf, as specified in this part below, constitute an integral part of the Indenture (as defined below).
 
 
1.  
General
 
In this Debenture, the following expressions shall bear the following meanings, unless implied otherwise by the context:
 
 
"Company"-
 
Cellcom Israel Ltd.
       
 
"Indenture"-
 
The Indenture which was signed between the Company and the Trustee, on July 14, 2011, including the schedules and annexes which are attached thereto which constitute an integral part thereof.
       
 
"Prospectus" or "Shelf Prospectus"-
 
A shelf prospectus of the Company which will be published due to, inter alia , the Debentures, as amended from time to time.
       
 
"Shelf Offering Report" or "Offering Report"-
 
Shelf offering reports which will be published pursuant to the Shelf Prospectus, in accordance with the provisions of Section 23A of the Securities Law, 5728-1968, in which all of the details which are unique to such offering will be filled out in accordance with the provisions of any law, including TASE rules and directives, as being from time to time.
       
 
"Debenture Series" or "Relevant Series"-
 
Series F to O and Series 1 to 6 of registered debentures of the Company, the terms of each shall be in accordance with the Debenture Certificate of such series and the Shelf Offering Report pursuant to which such series will be initially
 
 
- 34 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
     
issued, which will be issued from time to time by the Company according to the sole discretion thereof.
 
It is clarified that although the Shelf Prospectus determines that the total par value of each of the Debenture Series shall not exceed NIS 5,000,000,000, the Company shall be entitled to increase, from time to time and in accordance with the provisions of any law, each one of the Debenture Series, without limitation, and the Indenture and the conditions thereunder shall apply to each one of the Debenture Series, in an unlimited amount.
       
 
"Debentures" or Debenture of the Relevant Series"-
 
Debentures from each one of the Debenture Series.
       
 
"Relevant Series' Initial Offering Report"-
 
An Offering Report pursuant to which Debentures of the Relevant Series will be initially offered.
       
 
"Trustee"-
 
Hermetic Trust (1975) Ltd. and/or anyone acting from time to time as the Debenture holders' trustee pursuant to the Indenture.
       
 
"Register"-
 
The Debenture holders' register as provided in Section 26 of the Indenture.
       
 
"Debenture Certificate"-
 
The debenture certificate in respect of the Relevant Series, the language of which appears in the First Schedule to the Indenture and which will be issued in accordance with the terms
 
 
- 35 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
      of the Indenture and Shelf Prospectus.
       
 
"Law" or "Securities Law"-
 
The Securities Law, 5728-1968, and the regulations thereunder, as being from time to time.
       
 
"TASE"-
 
The Tel Aviv Stock Exchange Ltd.
       
 
"Consumer Price Index" or "Index"-
 
The price index which is known by the name "consumer price index" which includes vegetables and fruit and is published by the Central Bureau of Statistics and Economic Research in Israel, and including such index also if published by a different official institute or body, and including any other official index which will replace the same, whether or not it will be based on the same data on which the existing index is based. If a different index which will be published by a body or an institute as aforesaid will replace the same, and such body or institute shall not have determined the ratio between it and the replaced index, such ratio shall be determined by the Central Bureau of Statistics, and in the event that such ratio will not be determined as aforesaid, then it shall be determined by the Trustee for the Relevant Series, in consultation with economic experts which will be chosen thereby.
       
 
"Known Index" on any date-
 
The last known Index which was published before such date.
       
 
"Base Index" with regard to any Relevant Series-
 
The Known Index on a specific date, which will be detailed in the Relevant
 
 
- 36 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
      Series' Initial Offering Report.
       
 
"Payment Index"-
 
The Known Index on the date which is scheduled for any payment on account of a Principal and/or interest, subject to the provisions below.
 
The Relevant Series' Initial Offering Report, which includes Index linked Debentures, shall specify whether protection will apply to the Principal and/or interest of such Debentures (in other words, if the Known Index on the date which is scheduled for the relevant installment will be lower than the Base Index, the payment index will be the Base Index) or no such protection will apply (in other words, the payment index shall be the Known Index on the date which is scheduled for the relevant installment, also if such Index will be lower than the Base Index).
 
The manner of determination of the payment index, as aforesaid, shall be detailed in the Relevant Series' Initial Offering Report.
 
If the Company shall not have determined in the Offering Report as aforesaid whether or not such protection will apply, no protection shall apply.
       
 
"Debenture holders" and/or "Debenture Owners" and/or "Holders"
 
Anyone holding the Debentures.
       
 
"Business Day" or "Bank Business Day"-
 
Any day on which most of the banks in Israel are open for the performance of transactions.
 
 
- 37 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
"Overseas Business Day"-
 
Any day on which Base Interest which refers to Foreign Currency is quoted which is published on Reuters information service, or any other source of information which will be specified in the Relevant Series' Initial Offering Report.
       
 
"Principal"-
 
The total par value which has not yet been paid of the Debentures of the Relevant Series.
       
 
"Special Resolution"-
 
A resolution which was adopted by a general meeting of the Debenture holders of the Relevant Series, which was attended by, in person or through their attorneys, Holders of at least fifty five percent (55%) of the balance of the par value of the Debentures in circulation of such series, or by an adjourned meeting, which was attended by, in person or through their attorneys, Holders of at least ten percent (10%) of the aforesaid balance, and which was adopted (either by the original meeting or the adjourned meeting) by a majority of at least seventy five percent (75%) of all of the votes of those participating in the vote, other than the abstainers.
       
 
"Transfer Agent"-
 
The transfer agent of Israel Discount Bank Ltd.
       
 
"Foreign Currency"-
 
No more than one foreign currency due to each Relevant Series, as will be specified in the Relevant Series' Initial Offering Report.
 
 
- 38 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
"Foreign Currency Rate"-
 
The representative rate of the Foreign Currency which is published by the Bank of Israel or any official exchange rate of the Foreign Currency to the Israeli currency which will replace the representative rate as aforesaid, and which will apply at such time with regard to the government debentures which are linked to such foreign currency rate.
       
 
"Known Rate" on any date-
 
The last Foreign Currency Rate which was determined by the Bank of Israel before such date. However, in a period during which the Bank of Israel does not regularly determine a representative rate, the Known Rate on any date shall be the rate which was last determined before such date by the Minister of Finance together with the Governor of the Bank of Israel for government debentures which are linked to the Foreign Currency Rate.
       
 
"Base Rate" with regard to any Relevant Series-
 
The Known Rate on a specific date, which will be specified in the Relevant Series' Initial Offering Report.
       
 
"Payment Rate"-
 
The Known Rate on the actual payment date, subject to the provisions below.
 
The Relevant Series' Initial Offering Report, which includes Foreign Currency linked Debentures, shall specify whether protection will apply to the Principal and/or interest of such Debentures (in other words, if the Known Rate on the date which is
 
 
- 39 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
      scheduled for the relevant installment will be lower than the Base Rate, the Payment Rate shall be the Base Rate) or no such protection will apply (in other words, the Payment Rate shall be the Known Rate on the date which is scheduled for the relevant installment, also if such rate will be lower than the Base Rate).
 
The manner of determination of the Payment Rate, as aforesaid, shall be detailed in the Relevant Series' Initial Offering Report.
 
If the Company shall not have determined in the Offering Report as aforesaid whether or not such protection shall apply, no protection shall apply.
       
 
"LIBOR Interest"-
 
The London Interbank Offered Rate – The interest rate which is offered on the interbank market in London on deposits in USD for the period which will be specified in the Relevant Series' Initial Offering Report (for one week, one month, six months, etc.) as quoted on the Sampling Date in respect of such interest modification period which will be stated as aforesaid in the Relevant Series' Initial Offering Report, 2 at 11:00 o'clock, London time, or close
 
2
For example, if a Relevant Series' Initial Offering Report determines that the interest rate shall be for a one month period, then the quote on the Sampling Date shall be of the LIBOR interest per month.
 
 
- 40 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
      thereafter, on the Libor01 page which is published by the Reuters information service (or, if such page will be replaced by a different page, then as quoted on the Sampling Date, at the aforesaid time or close thereafter, on the different page, as aforesaid), or on a different information source which will be specified in the Relevant Series' Initial Offering Report.
       
 
"CHF LIBOR Interest"-
 
The CHF London Interbank Offered Rate – The interest rate which is offered on the interbank market in London on deposits in Swiss Francs for the period which will be specified in the Relevant Series' Initial Offering Report (for one week, one month, six months, etc.) as quoted on the Sampling Date in respect of such interest modification period which will be stated as aforesaid in the Relevant Series' Initial Offering Report, 3 at 11:00 o'clock, London time, or close thereafter, on the Libor01 page which is published by the Reuters information service (or, if such page will be replaced by a different page, then as quoted on the Sampling Date at the aforesaid time or close thereafter, on the different page, as aforesaid), or on another information source which will be specified in the Relevant Series' Initial Offering Report.
       
 
"EURIBOR Interest"-
 
The Euro Interbank Offered Rate - The interest rate which is offered on the interbank market on deposits in Euros for the period which will be specified in the Relevant Series' Initial Offering Report (for one week, one month, six months, etc.) as quoted on the Sampling Date in
 
3
For example, if a Relevant Series' Initial Offering Report determines that the interest rate shall be for a one month period, then the quote on the Sampling Date shall be of the CHF LIBOR interest per month.
 
 
- 41 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
      respect of such interest modification period which will be stated as aforesaid in the Relevant Series' Initial Offering Report, 4 at 11:00 o'clock CET, or close thereafter, on the Euribor01 page which is published by the Reuters information service (or, if such page will be replaced by a different page, then as quoted on the Sampling Date at the aforesaid time or close thereafter, on the different page, as aforesaid), or on another information source which will be specified in the Relevant Series' Initial Offering Report.
       
 
"TELBOR Interest"-
 
The Tel Aviv Interbank Offered Rate – The interest rate for interbank loans in NIS, which is calculated according to interest offers which are issued by several banks in Israel, for the period which will be specified in the Relevant Series' Initial Offering Report, as will appear on the Sampling Date in respect of such interest modification period which will be stated as aforesaid in the Relevant Series' Initial Offering Report, 5 (if on Mondays through Thursdays – at 13:00 o'clock or close thereto, and if on Fridays – at 12:00 o'clock or close thereto) on the system of the information distributor, Reuters, or on another information source which will be specified in the Relevant Series' Initial Offering Report.
 
4
For example, if a Relevant Series' Initial Offering Report determines that the interest rate shall be for a one month period, then the quote on the Sampling Date shall be of the EURIBOR interest per month.
 
5
For example, if a Relevant Series' Initial Offering Report determines that the interest rate shall be for a one month period, then the quote on the Sampling Date shall be of the TELBOR interest per month.
 
 
- 42 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
"Bank of Israel Interest"-
 
Bank of Israel's declared interest which is announced by the Governor of the Bank of Israel from time to time. In the event that Bank of Israel's interest shall no longer be calculated and published by the Bank of Israel, the interest shall be replaced by interest the manner and method of calculation of which is significantly similar to Bank of Israel's interest, as approved by an objective economic expert who will be appointed by the Company, and whose identity will be approved in advance by the Trustee.
       
 
 
""Government Debenture-with Variable Interest" Interest"
 
The interest rate which will be borne by "Government Debentures-with Variable Interest" type Debentures, which either were and/or will be issued pursuant to the State Loan Regulations ("Government Debentures – Variable Interest" Type Debentures), 5766-2006 (of the series which will be specified in the Relevant Series' Initial Offering Report) as will be published by the Government Debt Management Unit of the General Accountant at the Ministry of Finance or any other government body which will come in its stead, or the variable interest rate which will be borne by government debentures which are not linked to a linkage basis of any kind, which either were and/or will be issued pursuant to the State Loan Law, 5739-1979, and the regulations thereunder, and/or any law which will replace the same and/or add thereto, which are listed for trade on TASE.
 
 
- 43 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
       
 
"Prime" or "Prime Interest" on any date -
 
The average prime interest on such date as published by Bank Hapoalim Ltd., Bank Leumi L'Israel Ltd., and Israel Discount Bank Ltd.
       
 
""Gilon Chadash Government Debenture "Interest"-
 
The interest rate which will be borne by "Gilon Chadash" type Debentures which either were and/or will be issued pursuant to the State Loan Regulations ("Gilon Chadash" Type Series), 5759-1999 (of the series which will be specified in the Relevant Series' Initial Offering Report) as will be published by the Government Debt Management Unit of the General Accountant at the Ministry of Finance or any other government body which will come in its stead, or the variable interest rate which will be borne by government debentures which are not linked to a linkage basis of any kind, which either were and/or will be issued pursuant to the State Loan Law, 5739-1979, and the regulations thereunder, and/or any law which will replace the same and/or add thereto, which are listed for trade on TASE.
       
 
"Zero Coupon Debenture "-
 
Debentures which are issued in series by the State of Israel for the purpose of a zero coupon debenture which the State of Israel borrows in accordance with the provisions of the Zero Coupon Debenture Law, 5744-1984 and/or any law which will replace the same and/or add thereto, which are listed for trade on TASE and sold in a tender by the Bank of Israel, and do not bear interest and/or linkage differentials.
 
 
- 44 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
"One Year Zero Coupon Debenture"-
 
A Zero Coupon Debenture series which is in circulation, the payment date of which was scheduled for the period which is closest to a period of twelve (12) months from the Sampling Date, provided that the payment date thereof is at least ten (10) months from the Sampling Date. In the event that on the Sampling Date there is no such Zero Coupon Debenture, the One Year Zero Coupon Debenture shall be a series of other NIS government debentures which do not bear linkage differentials, which are listed for trade on TASE, and whose payment date was scheduled for the period which is closest to twelve (12) months from the Sampling Date.
       
 
"Zero Coupon Debenture Yield"-
 
An average of One Year Zero Coupon Debenture yields (according to the yield per year of such Zero Coupon Debenture, as being at the time of the ending of the daily trade on TASE) in the several Trading Days before the Sampling Date, as will be determined in the Relevant Series' Initial Offering Report. In the event that during such Trading Days before the Sampling Date as aforesaid, trade will commence on TASE in a new Zero Coupon Debenture series, the payment date of which was scheduled for the period which is closest to a period of twelve (12) months from the Sampling Date, then for the purpose of calculation of the One Year Zero Coupon Debenture Yield, on each Trading Day (from among such Trading Days before the Sampling Date as aforesaid, on which
 
 
- 45 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
2.  
    the One Year Zero Coupon Yield is measured) will be taken the One Year Zero Coupon Yield which fulfills, on such date, the definition of the One Year Zero Coupon Debenture as aforesaid.
       
 
"Sampling Date" with regard to any Interest Period of a Base Interest-
 
As will be determined in the Relevant Series' Initial Offering Report in respect of the Base Interest which will be borne by the Debentures which will be offered in an Offering Report as aforesaid, provided that the Sampling Date in respect of any Interest Period shall be at least seven (7) Trading Days before the effective date in respect of such Interest Period.
       
 
"Trading Day"-
 
A day on which trade is performed on the Tel Aviv Stock Exchange.
       
 
"TASE Clearinghouse"-
 
The clearing house of the Tel Aviv Stock Exchange Ltd.
 
 
 
The Principal of the Debentures and the Principal linkage bases
 
The Principal of the Debentures shall be paid in one or more installments on each one of the dates, all as will be specified in the Relevant Series' Initial Offering Report, but no more than on one date in each quarter, and subject to the linkage terms as provided in this Section 2 below.
 
The Principal of the Debentures of each one of the series which will be offered according to the Shelf Prospectus may be linked to one of the linkage bases which are specified below, or non-linked, all as will be specified in the Relevant Series' Initial Offering Report, while referring to linkage base definitions which are specified in Sections 2.1 to 2.3 below:
 
 
2.1.
Linkage to the Index
 
If the terms of the Relevant Series of the Debentures will determine that the Principal and interest of the Debentures of such series are linked to the Index, then the linkage to the Index of the Principal and the interest shall be performed such that if it will transpire, on the date
 
 
- 46 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
of any installment on account of a Principal and/or interest due to such Debentures, that the Payment Index is higher than the Base Index, the Company shall pay such installment of a Principal and/or interest, increased proportionately to the rate of the increase in the Payment Index versus the Base Index. For a case where the Payment Index is lower than the Base Index, see the definition of the "Payment Index" in Section 1 of the Terms and Conditions Overleaf.
 
With regard to the interest on Index linked Debentures as aforesaid, see Section 3(a) below.
 
 
2.2.
Linkage to Foreign Currency
 
If the terms of the Relevant Series of the Debentures will determine that the Principal and interest of the Debentures of such series are linked to Foreign Currency, then the linkage thereof to the Foreign Currency shall be performed such that if it will transpire, on the date of any installment on account of a Principal and/or interest due to such Debentures, that the Payment Rate is higher than the Base Rate, the Company shall pay such installment of a Principal and/or interest, increased proportionately to the rate of the increase in the Payment Rate versus the Base Rate. In a case where the Payment Rate is lower than the Base Rate, see the definition of the "Payment Rate" in Section 1 of the Terms and Conditions Overleaf.
 
With regard to the interest on Debentures which are linked to Foreign Currency as aforesaid, see Section 3(c) below.
 
 
2.3.
Non-linked Debentures
 
In the event that the terms of the Relevant Series of the Debentures will determine that there shall be no linkage to the Principal of the Debentures of such series, the Principal shall be stated in NIS and not be linked to any Index or currency. In such a case, also the interest due to the Debentures of such series shall not be linked to any Index or currency.
 
With regard to the interest on non-linked Debentures as aforesaid, see Section 3(b) below.
 
 
2.4.  
Subject to the provisions of the TASE rules and the directives by virtue thereof, the linkage method shall not be modified during the period of the Debentures.
 
3.  
The interest due to the Debentures
 
 
- 47 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
The Principal of the Debentures shall bear interest (or not bear interest) as will be determined in the Relevant Series' Initial Offering Report, and according to any of the interest calculation mechanisms as will be specified in such Offering Report, while referring to the interest mechanism definitions which are specified below: 6
 
 
(a)  
Interest on Index linked Principal
 
The Principal of the Relevant Series of Debentures, if linked to the Consumer Price Index, shall bear linked interest as aforesaid, while the interest is at a fixed rate which will be determined by the tender of the initial offering of the Debentures of such series and/or in the Offering Report.
 
 
(b)  
Interest on non-linked Principal
 
The Principal of the Debentures of the Relevant Series, if non-linked to any Index or currency, shall bear non-linked interest at a fixed rate, or variable interest, as specified below:
 
(1)  
Fixed interest in NIS – Interest at a fixed rate which will be set forth in the Relevant Series' Initial Offering Report and/or in a tender pursuant to such Offering Report.
 
(2)  
Interest at a variable rate, while the margin above or below the Base Interest (as defined below) shall be specified in the Relevant Series' Initial Offering Report or determined by a tender pursuant thereto, and while the Base Interest is the Bank of Israel Interest or Prime Interest or Telbor Interest or "Government Debenture-with Variable Interest" Interest or "Gilon Chadash Government Debenture" Interest or Zero Coupon Debenture Yield (in this Subsection (2) – the " Base Interest ") which will be determined in the Offering Report as aforesaid – the interest rate due to each Interest Period of Debentures of such series shall be determined in accordance with the Base Interest rate, as quoted on the Sampling Date, plus or minus a margin (as the case may be) as will be specified in the Offering Report. The Company shall submit an immediate report within four (4) days from the Sampling Date (but in any event, no less than four (4) Trading Days before the effective date in respect of the relevant Interest Period), with regard to the interest rate which will be borne by the Debentures in the relevant Interest Period.
 
6
The interest rate, including the rate of the margin above or below (as the case may be) Base Interest (in the event of a variable interest rate), which will be borne by the Series 1 to 6 Debentures, shall be specified in the Offering Report pursuant to which the Debentures of such series will be initially offered and shall not be determined by a tender.
 
 
- 48 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
The Company shall be entitled to determine in the Relevant Series' Initial Offering Report that the interest rate which will be borne by the Debentures of the Relevant Series shall be calculated according to a weighted average (according to the number of days) of the Base Interest rates which will be applicable on the date  between the commencement of the relevant Interest Period and the Sampling Date of such Interest Period (inclusive) (the " Calculation Period ") plus or minus a margin (as the case may be) as will be specified in the Offering Report, provided that the Company shall submit an immediate report within four (4) days from the Sampling Date (but in any event no less than four (4) Trading Days before the effective date in respect of the relevant Interest Period) with regard to the interest rate which will be borne by the Debentures in the relevant Interest Period.
 
Below is an example for the calculation of the interest rate which shall be borne by the Debentures of the Relevant Series due to any Interest Period according to a weighted average of the Base Interest rates in the Calculation Period, in the event that the Base Interest is the Bank of Israel Interest:
 
If there were 91 days in the Calculation Period, while on 45 of them the Bank of Israel Interest rate was 1.5% and on 46 of them, 1.75%, then the weighted average of the Bank of Israel Interest in the aforesaid period (with an accuracy of four digits after the decimal point), is 1.6264%, according to the following calculation:
 
1.6264= 91 / [(1.75*46) + (1.5*45)]
 
If (for purposes of the example) the fixed margin due to such Debentures is 2% above the Base Interest, then the interest rate (in annual terms) which the Debentures of the Relevant Series shall bear, due to the relevant Interest Period, shall be 3.6264%. For the sake of clarity, for purposes of calculation of the average Base Interest rates on the Sampling Date as aforesaid, the Base Interest rates which will be applicable after the Sampling Date and until the last date in the relevant Interest Period, shall not be taken into account and in addition, in any event where during the period after the Sampling Date in any Interest Period, and until expiration of such Interest Period, a change will occur in the Base Interest rate, no change will occur in the interest rate which will be borne by the Debentures of the Relevant Series due to such Interest Period.
 
 
(c)  
Interest on Foreign Currency linked Principal
 
 
- 49 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
The Principal of the Debentures of the Relevant Series, if linked to Foreign Currency, shall bear Foreign Currency linked interest at a fixed rate, or variable rate interest, as specified below:
 
(1)  
Foreign Currency linked fixed interest – Interest which is linked to Foreign Currency while the interest is at a fixed rate which will be determined in the Relevant Series' Initial Offering Report and/or in a tender pursuant to the aforesaid Offering Report.
 
(2)  
Interest at a variable rate, while the margin above or below the Base Interest (as defined below) shall be specified in the Relevant Series' Initial Offering Report or determined by a tender pursuant thereto, and while the Base Interest is the LIBOR Interest or CHF LIBOR Interest or EURIBOR Interest (in this Subsection (2) – the " Base Interest ") which shall be determined in the Offering Report as aforesaid – the interest rate due to each Interest Period of Debentures of such series shall be determined in accordance with the Base Interest rate for the period which will be stated in the Relevant Series' Initial Offering Report, as will be quoted on the Sampling Date, plus or minus a margin (as the case may be) as will be specified in the Offering Report. The Company shall submit an immediate report within four (4) days from the Sampling Date (but in any event no less than four (4) Trading Days before the effective date in respect of the relevant Interest Period), with regard to the interest rate which will be borne by the Debentures in the relevant Interest Period.
 
The Company shall be entitled to determine in the Relevant Series' Initial Offering Report that the interest rate which will be borne by the Debentures of the Relevant Series, shall be calculated according to a weighted average (according to a number of days) of the Base Interest rates which will be applicable at the time between the beginning of the relevant Interest Period and the Sampling Date of such Interest Period (inclusive) (the " Calculation Period ") plus or minus a margin (as the case may be) as will be specified in the Offering Report, provided that the Company shall submit an immediate report within four (4) days from the Sampling Date (but in any event no less than four (4) Trading Days from the effective date in respect of the relevant Interest Period), with regard to the interest rate which will be borne by the Debentures in the relevant Interest Period.
 
Below is an example for the calculation of the interest rate which shall be borne by the Debentures due to any Interest Period according to a weighted average of the Base Interest rates in the Calculation Period, in the event that the Base Interest is the LIBOR Interest:
 
 
- 50 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
If a weighted average of the LIBOR Interest rates (on the basis of days) in the Calculation Period is (with an accuracy of four digits after the decimal point) - 0.9142%, and the fixed margin in respect of such Debentures is 1.5% above the Base Interest, then the interest rate (in annual terms) which will be borne by the Debentures of the Relevant Series due to the relevant Interest Period, shall be 2.4142%. For the sake of clarity, for purposes of calculation of the average Base Interest rates on the Sampling Date as aforesaid, the Base Interest rates which will be applicable after the Sampling Date and until the last date in the relevant Interest Period, shall not be taken into account and in addition, in any event where during the period after the Sampling Date in any Interest Period and until expiration of such Interest Period a change will occur in the Base Interest rate, no change will occur in the interest rate which will be borne by the Debentures of the Relevant Series due to such Interest Period.
 
 
(d)  
The interest rate due to the first Interest Period of the Debentures of the Relevant Series, and the annual interest rate based on which it was determined, shall be specified in the Relevant Series' Initial Offering Report and/or in a report which the Company will release pertaining to the results of the tender in connection with the interest rate and/or in the immediate report in which the Company will announce the results of the calculation of the interest rate on the Sampling Date, as the case may be, and as will be specified in the aforesaid Offering Report.
 
 
(e)  
It is clarified that in respect of the Debentures bearing a variable interest, as provided in Sections 3(b)(2) and 3(c)(2), it is anticipated that the interest rate which will be paid due to the entire Interest Period shall be a different interest rate, as specified above.
 
 
(f)  
The interest rate which will be determined due to the Debentures of the Relevant Series shall be an annual rate. Insofar as the terms of the Debentures will determine that the interest due thereto shall be paid on more than one date in a year, the interest payment which will be made on each interest payment date shall be calculated according to the annual interest rate, divided into the number of the installments in a year which is determined pursuant to the terms of the Debentures of the Relevant Series and all as will be specified in the Relevant Series' Initial Offering Report.
 
 
(g)  
The interest due to each Relevant Series of Debentures shall be paid in one or more installments, on each one of the dates, all as will be specified in the Offering Report pursuant to which such series will be initially offered, for the interest period which shall have expired on the last day before the payment date (the " Interest Period "). The first Interest Period of the Debentures of the Relevant Series shall commence on the first Trading Day after the date of closing of the
 
 
- 51 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
subscription list, which will be specified in the aforesaid Offering Report, and expire on the last day before the first interest payment date. Each additional Interest Period of the Debentures of the Relevant Series shall commence on the first day after expiration of the previous Interest Period and expire on the last day before the next payment date after the commencement thereof. The interest for the first Interest Period shall be calculated according to the number of days in such period, based on 365 days in a year.
 
 
(h)  
The last installment of interest on the Principal of the Debentures of the Relevant Series shall be paid together with the last payment on account of the Principal of the Debentures of such series, against the delivery of the Debenture Certificates of such series to the Company.
 
4.  
Payments of the Principal and interest of the Debentures
 
 
(a) 
The payments on account of the interest and/or Principal of the Debentures of the Relevant Series which will be offered pursuant to this Shelf Prospectus shall be made to the persons whose names will be registered on the Register for such series on the dates as will be specified in the initial offering report of such series in accordance with the provisions of the TASE rules and the directives by virtue thereof, as being at such time (the " Effective Date in the Relevant Series "), other than the final installment of the Principal and interest which will be performed against the delivery of the Debenture Certificates of such series to the Company on the payment date, at the Company's registered office or at any other location of which the Company will inform at least five (5) Business Days before the last payment date.
 
It is clarified that anyone who is not registered on the Register for the Relevant Series on the Effective Date in the Relevant Series shall not be entitled to an interest payment due to the Interest Period which commenced prior to such date.
 
 
(b) 
In any event that the date of payment of the installment on account of the Principal and/or interest will fall on a day which is not a Business Day, the payment date shall be postponed to the next Business Day thereafter, for no added payment, and the "effective date" for the purpose of determination of the entitlement to redemption or interest shall not change due thereto.
 
 
(c) 
The payment of the Principal and interest shall be performed subject to the linkage terms as specified in Sections 2 and 3 of the Terms and Conditions Overleaf.
 
 
(d) 
Any and all installments on account of a Principal and/or interest which will be paid in arrears of more than seven (7) Business Days from the date which is scheduled for the payment thereof pursuant to the terms of the Debentures as aforesaid for reasons within the Company's control, shall bear arrears interest (as defined below) commencing from
 
 
- 52 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
the date which is scheduled for the payment thereof until the actual date of payment thereof. In this regard, arrears interest shall mean annual interest in the amount of the Debenture interest as provided in Section 3 of the Terms and Conditions Overleaf, plus 2%. In the event of arrears as aforesaid, the Company shall notify of the interest rate, including the arrears interest as aforesaid, in an immediate report, two (2) Trading Days before the actual payment date.
 
 
(e) 
The payment to registered entitled persons shall be performed in checks or in a wire transfer to the credit of the bank account of the persons whose names will be registered on the Register for the Relevant Series and which will be stated in the details which will be timely delivered to the Company, according to the provisions of Subsection (f) below. If the Company will be unable to pay any amount to those who are entitled thereto, for a reason beyond its control, the provisions of Section 13 of the Indenture shall apply.
 
 
(f) 
A registered Holder of the Debentures of the Relevant Series shall inform the Company of the details of the bank account to be credited with the payments pursuant to the Debentures of such series as aforesaid or of a change in the details of such account, or his address, as the case may be, in a written notice which he will dispatch via registered mail to the Company. The Company shall be obligated to act according to the notice of a registered Holder pertaining to such change after the lapse of fifteen (15) Business Days from the date on which his notice shall have reached the Company.
 
 
(g)
If a registered Holder of the Debentures who is entitled to payment as aforesaid shall not have timely delivered details pertaining to his bank account to the Company, each payment on account of the Principal and interest shall be performed in a check which shall be dispatched via registered mail to his last address which is registered on the Register for the Relevant Series. The dispatch of a check to a registered entitled person via registered mail as aforesaid shall be deemed, for all intents and purposes, as a payment of the amount which is stated therein on the date of dispatch thereof via mail, provided that it shall have been cleared at the time of its lawful presentation for collection.
 
 
(h)
Any and all mandatory payments shall be deducted from each payment due to the Debentures of the Relevant Series, as required in accordance with the provisions of the law on the relevant date.
 
5.  
Refrainment from payment for a reason which is beyond the Company's control
 
For details on refrainment from payment for a reason which is beyond the Company's control, see Section 13 of the Indenture.
 
6.  
Debenture holders' Register
 
 
- 53 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
For details on the Register of the Debenture holders for the Relevant Series, see Section 26 of the Indenture.
 
7.  
Conversion Right of Debentures (Series 1 to 6) (the "Convertible Debentures")
 
 
7.1.  
Terms of Conversion
 
 
 
(a)  
On each Trading Day, beginning on the date of the initial registration of each of the Convertible Debentures' Series for trade in the TASE and until several days prior to the end of the term of the Debentures of the same series, according to the directives of the TASE, as such shall be on the date of the initial offering report of the same series and as specified in the aforesaid offering report (the " Conversion Term ", and every Trading Day as stated: the " Conversion Day ", and the last day of the Conversion Term: the " End of the Conversion Term "), excluding several days prior to the effective date for partial redemption according to the TASE rules and directives, as shall be on the date of the aforesaid offering report and until the partial redemption's date of execution, the balance of the Principal of the Convertible Debentures of the same series, which are in circulation at that time, will be convertible into ordinary registered shares of the Company, as shall exist on the publication date of the initial offering  report of each of the aforesaid series (the: " Conversion Shares "), per a conversion rate which shall be no less than the nominal value of the Company's ordinary shares on the date of the aforesaid offering report (the: " Conversion Rate "), subject to adjustments as specified hereunder and in the manner and on the terms as specified in the aforesaid offering report.
 
 
(b)  
Any Holder of Convertible Debentures of any series, who will wish to convert the balance of the nominal value of the Principal of the Convertible Debentures of the same series held thereby into Conversion Shares (the " Converter "), will directly submit to the Company, at its registered office (in the event such Debentures are registered in the name of the Converter in the Register for such series) or via a member of the TASE (in the event such Debentures are held by the Converter through same TASE member), on the Conversion Days and in any event until the End of the Conversion Term with respect to such series, a written application thereof, on a form as determined by the Company, attaching the Convertible Debenture Certificates to which the application refers (the "Conversion Notice").
 
 
(c)  
A conversion of the balance of the nominal value of the Principal of several Convertible Debentures of the same series,
 
 
- 54 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
which are registered in the name of the same Holder, may be requested in one Conversion Notice, and in such an event, all of the Convertible Debenture Certificates to which such Conversion Notice refers, should be attached thereto.
 
 
(d)  
In the event of a conversion of Convertible Debentures into shares in accordance with this section, concerning only part of the Convertible Debentures' nominal value registered in one certificate, the  Convertible Debenture Certificate should first be split into several Debenture Certificates as required therefor and as stated in Section 9 of the Terms and Conditions Overleaf, in such manner that the total of all nominal value sums of the Debentures listed therein will be equal to the nominal value sum of the Debenture Certificate which shall be split as stated.
 
 
(e)  
The Conversion Notice forms are available at the Company's registered office as well as any other place which the Company shall give notice of.
 
 
(f)  
The Converter will sign any document required by law and per the Company's instructions for the purpose of the allotment of the Conversion Shares. The day on which the Company directly receives a Conversion Notice from the Converter (for Convertible Debentures directly held by a registered Holder), or the TASE Clearinghouse receives a notice of conversion of the Convertible Debentures from a member of the TASE (for Convertible Debentures held via the Transfer Agent), which fulfills all the conditions specified in this Prospectus, as the case may be, will be deemed the conversion date (the "Conversion Date").
 
 
(g)  
In case the Converter will have not fulfilled all of the conditions for the conversion of the Convertible Debentures in full, the Conversion Notice will be deemed null and the Convertible Debenture Certificates attached to such Conversion Notice will be returned to the applicant.
 
 
(h)  
A Conversion Notice submitted to the Company is irrevocable and unchangeable.
 
 
(i)  
The Converter will not be entitled to an allotment of part of a Conversion Share, however, all fractions of Conversion Shares formed in the conversion process, if any, will be sold on the TASE, by a trustee to be appointed for this purpose by the Company, within thirty (30) days of the accumulation of such fractions to whole shares in a reasonable quantity for sale on the TASE, considering the costs involved therein, and the net consideration of their sale shall be distributed among the entitled persons respectively, within fifteen (15) days of the
 
 
- 55 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
date of the sale. A check for an amount lower than 50 NIS shall not be sent to a registered entitled person as stated, and such sum may be received at the Company offices on normal business days and hours, following prior coordination.  An entitled person as stated who shall have not arrived at the Company's offices to receive such sum as stated within twelve (12) months of the sale date, shall forfeit his right to such sum.
 
 
(j)  
The Conversion Shares will grant their owners the full rights of participation in any dividend and another distribution in full, for which the date determining the right to receive such is on the Conversion Date or thereafter, and shall be of equal rights, in all respects, as the Company's ordinary shares which will exist at that time.
 
 
(k)  
The Convertible Debentures which will have been converted, will be removed from circulation on their Conversion Date and be completely null, retroactively to the Conversion Date, as of the date when Conversion Shares were allotted therefor, and shall grant no right whatsoever after the last date for payment of interest, the effective date for which occurs before the Conversion Date.
 
 
(l)  
The Convertible Debentures of any series, which will have not been converted by the End of the Conversion Term with respect to same series, will no longer grant their Holder any right to convert such into Conversion Shares, and the conversion right therefor shall be null and void after such date.
 
 
7.2.  
Conversion Schedules
 
Conversion schedules for the conversion of Convertible Debentures shall be as specified in the Prospectus and as determined in the offering report of the Debentures of the Relevant Series.
 
 
7.3.  
Instructions for the Protection of Holders of Convertible Debentures in the Conversion Term
 
 
(a)  
Distribution of Stock Dividend
 
If the Company will have distributed stock dividend as of the date of the initial offering report of any series of the Convertible Debentures and until the End of the Conversion Term with respect to such series, the rights of the Convertible Debentures' Holders of the same series will be reserved in the following manner:
 
 
1.  
After the date determining the entitlement to participate in the said distribution, the number of Conversion Shares, to which the Holder of the Convertible Debentures of the same series will be entitled upon conversion thereof, will be increased by adding the number of shares the Holder would have been
 
 
- 56 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
entitled to as stock dividend, had he converted the Convertible Shares immediately before the said effective date. The Company will give notice of the new conversion ratio in an immediate report, prior to the opening of trade on the Ex-dividend date.
 
 
2.  
The Holder of Convertible Debentures will not be entitled to an allotment of a portion of a stock dividend as per the aforesaid, however, all fractions of stock dividends formed in the process of the allotment and accumulated to whole shares in a reasonable quantity for sale on the TASE, will be sold on the TASE, by a trustee appointed for this purpose by the Company, within thirty (30) days of the aforesaid allotment date, and the net consideration (after deduction of sale expenses and compulsory payments and levies) will be distributed among the entitled persons within fifteen (15) days of the sale date. A check for an amount lower than 50 NIS shall not be sent to a registered entitled person, and such sum may be received at the Company offices on normal business days and hours, following prior coordination. An entitled person as stated who shall have not arrived at the Company's offices to receive such sum as stated within twelve (12) months of the sale date, shall forfeit his right to such sum.
 
 
3.  
Subject to the provisions of the TASE rules and directives, the adjustment method is unchangeable.
 
 
 
(b)  
Rights Issue
 
If the company will have offered its shareholders as of the date of the initial offering  report of any Convertible Debentures series and until the End of the Conversion Term with respect to such series, securities of any type by way of rights issue, the number of Conversion Shares due to a conversion of Convertible debentures of the same series which have yet to be converted into ordinary shares of the Company, will be adjusted on the date determining the right to purchase the securities offered in the rights issue, according to the benefit component of the rights, as reflected in the ratio between the rate of the Company's share in the TASE on said effective date and the base Ex-rights rate. The Company will give notice of the new conversion ratio, in an immediate report, prior to the opening of trade on the Ex-rights day.
 
Subject to the provisions of the TASE rules and directives, the adjustment method as specified above is unchangeable.
 
 
(c)  
Adjustment due to Dividend Distribution
 
If the Company will execute a dividend distribution, as defined in the Companies Law (in this section, the: " Distribution "), for which the
 
 
- 57 -
 
 
TRANSLATION FROM HEBREW
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
date determining entitlement thereto (the " Effective Date for Distribution ") occurs before the End of the Conversion Term, then starting on the first Trading Day on which Company shares are traded after the Effective Date for Distribution  (Ex-dividend), the conversion ratio of the Convertible Debentures, which are in circulation, will be adjusted by its multiplication by the ratio between the rate of the Company's share in the TASE, as will be determined by the TASE as an adjusted rate for distribution (Ex-dividend rate), and the closing rate determined by the TASE for the Company's share on the Effective Date for Distribution. The Company will give notice of the adjusted conversion ratio as stated in an immediate report, prior to the opening of trade on the Ex-dividend distribution date .
 
 
7.4.  
Additional Instructions for the Protection of Holders of Convertible Debentures in the Conversion Term
 
As of the date of publication of the offering report with respect to any Series of Convertible Debentures, and for as long as not all Convertible Debentures of the same series are converted, but, in any event, no later than the End of the Conversion Term with respect to the same series, the following instructions shall apply:
 
 
1.  
The Company will reserve a sufficient amount of ordinary shares in its registered share capital, to ensure the allotment of all shares which may stem out of the conversion of all of the Convertible Debentures of the same series, which are in circulation from time to time, and, if necessary, will cause the Company to increase its registered share capital accordingly.
 
 
2.  
If the Company will have united the ordinary shares in its issued share capital into shares of greater nominal value or shall have subdivided them into shares of lower nominal value – the number of Conversion Shares issued as a result of the conversion of the Convertible Debentures of the same series will be increased or decreased, as the case may be, after an action as stated. In such event, the provisions of this section 7 will apply, mutatis mutandis.
 
 
3.  
The Company will make a copy of the Company's periodic reports and interim financial statements available for the perusal of the Holders of Convertible Debentures of the same series, in its registered office during normal business hours.
 
 
4.  
Within ten (10) days of each adjustment in the Conversion Rate or in the number of Conversion Shares with respect to the same Convertible Debentures' series, the Company will publish an announcement in two (2) widely circulated newspapers, published in Israel in the Hebrew language, as to the right of the Convertible Debentures' Holders of the same series to convert them into shares, listing the Conversion Term, the
 
 
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THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
Conversion Rate and the number of Conversion Shares to which a Holder of Convertible Debentures will be entitled as a result of a conversion at that time, all with respect to the same series.
 
 
5.  
In addition to the aforesaid announcement, no later than three (3) weeks and no earlier than four (4) weeks prior to the End of the Conversion Term, the Company will publish an announcement in two (2) widely circulated newspapers, published in Israel in the Hebrew language, and will send a written notice to the Holders registered in the Register for said series, with a copy to the TASE and the Trustee of the same series, of the last date for conversion of the Convertible Debentures of the same series. Such announcement shall specify the Conversion Rate, the number of Conversion Shares and the amount of stock dividend to which a Holder of the Convertible Debentures is entitled at the time of the conversion during such period, all with respect to the said series.
 
 
6.  
The Company shall not distribute and shall not offer a cash dividend or stock dividend or any offer of rights to any securities, to ordinary shareholders, unless the date determining the right of their receipt is at least ten (10) Trading Days after the publication of the Company's announcement as to the distribution or offer of rights, as the case may be.
 
 
7.  
The Company will abstain from any action, including the distribution of stock dividend, which may cause a decrease in the price of a Conversion Share below its nominal value.
 
 
8.  
According to the provisions of the TASE rules and the directives thereunder, as per their wording as of the date of the Prospectus, the conditions of the Convertible Debentures are unchangeable with respect to the Conversion Rate, the Conversion Days and the linkage method, but the Company may change the Conversion Term and/or the Conversion Rate, provided that such is done within an arrangement or settlement approved by a court of law, pursuant to Clause 350 of the Companies Law. Additionally, the Company may change the Conversion Rate within a Splitting Process of the Company or a Merger Process of the Company, provided that the change will only include the adjustments which are necessary as a result of the process as stated.
 
According to the provisions of the TASE rules and directives: the "Splitting Process" means, for this purpose – a process whereby the Company will transfer to its shareholders shares it holds in another company, or a process whereby the Company will transfer assets and liabilities to a new company incorporated for the purpose of the split, and the new
 
 
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THE BINDING VERSION IS THE HEBREW VERSION
 
 
company's shareholders will also be the shareholders of the company transferring the assets and liabilities, all provided that the splitting process is done on equal terms for the Company's shareholders; a "Merger Process" means, for this purpose – a process whereby all of the Company's shares will be transferred to the ownership of a new company or another registered company, the shares of which are listed on the TASE, or a process whereby the Company will transfer all of its assets and liabilities to a new company or another registered company, all provided that the securities of the company, the shares or assets of which will be transferred as stated, will be delisted from TASE and the process will be done on equal terms for the Company's shareholders.
 
Notwithstanding the aforesaid, according to the TASE Rules and directives, the Company may change the Conversion Rate, provided that such is done within a process of an offering by way of rights in the Company or within a process of distribution of stock dividend in the Company or within a process of distribution of dividend in the Company or rights issue, and that the change only includes the adjustments which are necessary as a result of the aforesaid process.
 
If a change will occur in the TASE Rules and the directives thereunder, with respect to change in the conditions of the Convertible Debentures, the provisions of the aforesaid instructions, as per their wording on the relevant date, will apply, provided that the change as stated will bind the Company on the relevant date.
 
It is clarified that in the Indenture and/or the terms of the Debentures of Series F to O and the Debentures of Series 1 to 6, no restrictions have been set on the Company with respect to the distribution of dividend and/or any other distribution and/or a repurchase of the Company's securities.
 
 
7.5.  
Voluntary Liquidation
 
 
 
1.  
In the event where a resolution of the Company's voluntary liquidation is adopted, the Company shall notify thereof in an immediate report and shall give written notice thereof to all Holders of the Convertible Debentures, which are in circulation at that time, who are registered in the Register of the Relevant Series of Convertible Debentures, and will also publish an announcement in two (2) widely circulated newspapers, published in Israel in the Hebrew language. Any Holder of the Convertible Debentures will be entitled, as per his wish, to be deemed as if the conversion right therefor has been exercised thereby on the eve of the resolution, if he informs the Company
 
 
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THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
in writing of his said wish within three (3) months of the date of the Company's said announcement.
 
 
 
2.  
In such case, the Holder of the Convertible Debentures is entitled to participate in the distribution of the surplus property of the Company in the liquidation (after the settlement of all its debts) among its shareholders, in the amount he would have received in the Company's liquidation, had he been a shareholder of the Company on the eve of the liquidation resolution as a result of the conversion of Convertible Debentures held thereby, with respect to which he has given notice to the Company as stated, after deduction of the amounts of interest paid due to such Convertible Debentures on the date of the resolution or thereafter (excluding interest, the due date of which occurred prior to the date of the resolution, even if it had been paid on the date of the resolution or thereafter); and the Owner of the Convertible Debentures will not be entitled to any payment therefor, the due date for which occurred after the date of the resolution.
 
8.  
Transfer of Debentures
 
Debentures of any series are transferrable with respect to the full nominal amount of the Principal, and even with respect to part thereof, provided that it will be in whole New Shekels. Any transfer of the Debentures (excluding a transfer executed through trade in the TASE) will be made by a deed of transfer in standard wording, duly signed by the registered Holder or the lawful representatives thereof and by the transferee and/or the lawful representatives thereof, which shall be delivered to the Company at its registered office, together with the Certificates of the Debentures transferred thereby and any other poof required by the Company in order to prove the transferor's right to transfer such. All of the expenses entailed in the transfer of the Debentures, including compulsory payments, if any, will be borne by the transfer applicant. If a tax or any compulsory payment applies to the Debentures' deed of transfer, proof of their payment, to the Company's satisfaction, will be delivered to the Company. Subject to the provisions of this section, the provisions of the Company's articles of association, which apply to the transfer and endorsement of fully paid-up shares, will apply, mutantis mutandis , to the manner of transfer and endorsement of the Debentures. In the event of a transfer of only part of the Principal amount stated on the Debenture Certificate, the Debenture Certificate should first be split into several Certificates, in the manner specified in Section 9 of the Terms and Conditions Overleaf. After the fulfillment of all such conditions, the transfer will be registered in the Register and the Company may require that a note as to the transfer as stated will be added to the Certificate of the transferred Debenture to be delivered to the transferee, or that a new Debenture Certificate will be issued thereto in its stead, and all of the conditions specified in the Certificate of the transferred Debentures will apply to the transferee, so that any reference
 
 
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THE BINDING VERSION IS THE HEBREW VERSION
 
 
to "holder" shall be deemed to read "transferee", who will be deemed a "Holder" for the purposes of the Indenture for the Relevant Series.
 
9.  
Debenture Certificates and Split thereof
 
For Debentures registered in the name of one Holder, one Certificate will be issued thereto, or, as per the request thereof, several Certificates will be issued thereto (up to a reasonable quantity, as determined by the Company).
 
Any Debenture Certificate may be split into several Debenture Certificates, the total Principal amounts stated on which are equal to the amount of the nominal amount of Principal of the Certificate requested to be split, provided that the said Certificates will not be issued, except at a reasonable quantity. The split will be made against the delivery of such Debenture Certificate to the Company at its registered office for the execution of the split, together with a split application, lawfully signed by the applicant. All of the expenses entailed in the split, including taxes and levies, if any, will be borne by the split applicant.
 
10.  
Early Redemption
 
For details as to early redemption of the Debentures by the TASE and/or by the Company, see Section 7 of the Indenture.
 
11.  
Waivers, Compromises and/or Changes in the Indenture
 
For details as to the Company's and/or the Trustee's authority to make a waiver, compromise and/or changes in the conditions of the Debentures, see Section 25 of the Indenture.
 
 
12.  
Debenture holders Meetings
 
General meetings of Debenture holders of the Relevant Series will be convened and conducted in accordance with the provisions of the Second Schedule of the Indenture.
 
13.  
Replacement of Debenture Certificates
 
In the event where a Debenture Certificate wears out, is lost or destroyed, the Company will issue in its stead (subject to the conditions in this section) a new Certificate for the Debentures and on the same conditions. Taxes and other levies, as well as other expenses entailed in the issuance of a new Certificate, will be borne by the applicant requesting such Certificate (including expenses pertaining to the proof of his ownership of the Debentures and pertaining to indemnification and/or insurance coverage requested by the Company, if requested, with respect thereto). In the event of wear, the worn Certificate will be returned to the Company concurrently and against the issuance of a new Certificate.
 
 
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14.  
Applicable Law and Jurisdiction
 
The law applicable to the Indenture, including its annexes, and the Debentures is the Israeli law. The Courts in the city of Tel Aviv Jaffa will have sole and exclusive jurisdiction in any dispute pertaining to the Indenture and the Debentures.
 
15.  
Notices
 
For details as to notices, see Section 24 of the Indenture.
 
 
 
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TRANSLATION FROM HEBREW
 
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  Cellcom Israel Ltd.
Second Schedule
 
 
Debenture holders Meetings
 
 
Calling Debenture holders Meetings
 
1.  
The Trustee or the Company may call the Debenture holders of the Relevant Series to a meeting of Debenture holders of the same series. In case the Company calls such meeting, it should immediately send written notice of the place, date and time of the meeting as well as of the matters to be discussed therein, to the Trustee. In case the Trustee calls such meeting, it should send written notice of the place, date and time of the meeting as well as of the matters to be discussed therein, to the Company.
 
 
2.  
The Company must call a meeting of the Debenture holders of the Relevant Series pursuant to a written request by the Trustee or by the Holders of at least ten percent (10%) of the nominal value of the unpaid balance of the Principal of the Debentures of the same series, which are in circulation. The Trustee must call such meeting pursuant to a written request by the Holders of at least ten percent (10%) of the nominal value of the unpaid balance of the Principal of the Debentures of the same series, which are in circulation. In the event where Debenture holders request to call the meeting, the Company and/or the Trustee, as the case may be, may demand indemnification from the applicants for the reasonable expenses involved therein.
 
3.  
The Debenture holders of the Relevant Series, the Trustee and the Company, as the case may be, will be given an advance written notice of at least fourteen (14) days, which shall specify the place, date and time of the beginning of the meeting, and which shall also list, in general, the topics to be discussed in the meeting. In the event where the objective of the meeting is to discuss a proposal to adopt a Special Resolution, an advance written notice will be given as stated of at least twenty one (21) days and the notice will specify the date and time of the beginning of the meeting as well as the main points of the proposed resolution. The Trustee may bring forward the advance notice date if it will have seen that a postponement in convening the meeting constitutes prejudice or may cause prejudice to the rights of the Debenture holders of the same series or a legitimate interest of the Company. A notice of a meeting or an adjourned meeting, as the case may be, will be reported by the Company in an immediate report as well.
 
4.  
Any resolution which was lawfully adopted in a meeting called as stated (or in an adjourned meeting, as the case may be) will not be disqualified due to a notice thereof erroneously not being given to all of the Debenture holders of the Relevant Series or to a notice as stated not being received by all of the Holders of Debentures of the same series, which are in circulation, provided that a notice of the meeting (or adjourned meeting) will be reported in an immediate report.
 
 
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THE BINDING VERSION IS THE HEBREW VERSION
 
 
5.  
Any meeting of Debenture holders of the Relevant Series will take place at the registered office of the Company, or another address of which the caller of the meeting shall notify.
 
6.  
In any event where a different mechanism for calling debenture holders meetings shall have been determined by law, including the TASE rules and the directives thereunder, the aforesaid mechanism shall be automatically adjusted to the mechanism determined by law, to the extent such is required by the provisions of the same law.
 
Proof of Ownership of Debentures
 
7.  
The Debenture holder of the Relevant Series shall present the Company at its registered office (or the entity calling the meeting, at the address determined by said entity), no later than forty eight (48) hours before the time of the Debentureholders meeting of the same series or its adjourned meeting, as the case may be (or until another time, as determined by the caller of the meeting in the invitation to the meeting), with a confirmation from the TASE member, by which the Debentures of the same series are held, as to the quantity of Debentures of the same series which are held by the Holder as stated as of the date specified in the same confirmation. A Debenture holder of the same series may vote in the meeting of Debenture holders of the same series for the quantity of Debentures included in the TASE member's confirmation as stated, insofar as the Holder continues to hold the quantity of Debentures with respect to which the TASE member's confirmation was given at the time of the vote. In case the holdings of the Debenture holder of the same series will have changed between the time specified in the said confirmation and the time of the meeting of Debenture holders of the same series, the Holder – if he shall participate in such meeting – will have to present the Company with a confirmation of proof of ownership from a TASE member, representing the Holder's holdings of Debentures of the same series as of the time of the meeting, before the beginning of the meeting.
 
Debentureholders Meetings
 
8.  
The chairperson of the meeting shall be a person appointed by the Trustee. In case the Trustee will have not appointed a chairperson as stated or such is absent from the meeting, the Debenture holders of the Relevant Series who are present at the meeting will select a chairperson from amongst themselves.
 
9.  
A Debenture holders meeting will open after it will have been proven that the legal quorum required is present at the beginning of the discussion. In a Debenture holders meeting, resolutions which were included in the meeting's agenda, and with respect to which the legal quorum required for adoption thereof is present, will be put to the vote.
 
10.  
In meetings of Debenture holders of the Relevant Series, but except with respect to a Special Resolution, Debenture holders of the same series, present in person or by proxy in the meeting and holding or representing together at
 
 
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THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
least ten percent (10%) of the unpaid balance of the nominal value of the Debentures of the same series, which are in circulation, will constitute legal quorum.
 
11.  
If, within half an hour of the time set for the beginning of the meeting, a legal quorum as stated will have not been present, the meeting shall be adjourned to the same day in the following week (and in the event such day is not a Business Day – the Business Day immediately consecutive thereto), at the same place and at the same time (with no need for further notice), or to a different day and/or a place and/or a time, as shall be determined by the Trustee or the Company (all according to the caller), provided that they inform the Debenture holders of the Relevant Series in the manner provided by Section 24 of the Indenture.
 
12.  
In a meeting adjourned as stated, the presence of any Debenture holder of the Relevant Series (in person or by proxy thereof), independent of the nominal value of the Debentures of the same series held thereby, will constitute legal quorum.
 
13.  
With respect to a Special Resolution, Debenture holders of the Relevant Series, present in person or by proxies thereof in the meeting and holding or representing together at least fifty five percent (55%) of the unpaid balance of the nominal value of the Debentures of the same series, which are in circulation, will constitute legal quorum. If, within half an hour of the time set for the beginning of the meeting, a legal quorum as stated will have not be present, the meeting shall be adjourned and the provisions of Subsection (d) above  shall apply, mutatis mutandis . In a meeting adjourned as stated, Debenture holders of the same series, present in person or by proxy in the meeting and holding or representing together at least ten percent (10%) of the unpaid balance of the nominal value of the Debentures of the same series which are in circulation, will constitute legal quorum.
 
14.  
When conducting the Debenture holders meeting, the Trustee shall examine the existence of Conflicting Interests of the Debenture holders, according to the circumstances, and shall determine, in accordance with the provisions of any law, case law, the provisions of the Securities Law and the regulations and directives issued thereunder, which of the participants has a Conflicting Interest.
 
The Trustee may demand that a Debenture holder requesting to participate in a Holders meeting provide him with a declaration as to the existence and/or absence of Conflicting Interests. The Trustee will rely on such declarations and will not have to conduct a further investigation or examination. In this section, a " Conflicting Interest " shall mean: any additional material interest of a Holder, beyond the interest stemming from the mere holding of the Debentures of the Relevant Series, including a material interest of a family member and of a different corporation in which he or a family member thereof are controlling shareholders.
 
 
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THE BINDING VERSION IS THE HEBREW VERSION
 
 
15.  
Debentures of the Relevant Series which are owned by a subsidiary of the Company or by a corporation controlled by the Company, will not grant the subsidiary or the corporation controlled by the Company voting rights in meetings of Debenture holders of the same series and will not be counted for the purpose of legal quorum.
 
Additionally, with respect to a Holders meeting, whose agenda includes an adoption of a Special Resolution, a Holder who is a controlling shareholder in the Company and/or a company which is controlled by the controlling shareholder of the Company (" Affiliated Corporation "), will be required to notify that it is an Affiliated Corporation as stated, prior to the convening of the Debenture holders meeting, whose agenda includes an adoption of a Special Resolution. The votes of: (1) a Debenture holder which is an Affiliated Corporation; (2) whomever the Trustee has determined according to the provisions of this section above to be of Conflicting Interest – will not be counted in the votes in a Holders meeting, whose agenda includes an adoption of a Special Resolution, including for the purpose of establishing legal quorum or voting therein.
 
16.  
With the consent of the Holders of most of the Principal of the Debentures of the Relevant Series who are present (in person or by proxies thereof) in a meeting, in which a legal quorum is present, the chairperson may, and at the demand of the majority of those present must, adjourn the continuation of the meeting from time to time and from place to place, as per the meeting's decision. In such case, a notice of the continued meeting will be given in the same manner as a notice of the first meeting. No matters shall be discussed in a continued meeting, except for matters which may have been discussed in the meeting in which the continuance was decided.
 
17.  
In any meeting of Debenture holders of the Relevant Series, any Debenture holder of the same series, who is present therein in person or by proxy thereof, is entitled to one vote for every 1 NIS nominal value of the Principal of the Debentures of the same series, by virtue of which he is entitled to vote. The Trustee, who shall participate in a meeting, will participate without a voting right.
 
18.  
In the event of joint Holders of Debentures of the Relevant Series, only the vote of the Holder listed first from among them in the Register for same series, seeking to vote either in person or by proxy thereof, will be counted.
 
19.  
Any proposed resolution which will have been put to the vote in a Debenture holders meeting of the Relevant Series, will be decided by a count of votes.
 
20.  
The majority required for the adoption of an ordinary resolution in a Debenture holders meeting is a simple majority of all the votes of the participants in the vote, excluding the abstainers. The majority required for the adoption of a Special Resolution in a Debenture holders meeting is a majority
 
 
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THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
of no less than seventy five percent (75%) of all the votes of the participants in the vote, excluding the abstainers. 7
 
21.  
The announcement of the chairperson with respect to the adoption or rejection of a resolution and an entry to this effect in the book of minutes, will serve as prima facie evidence of such fact.
 
22.  
A Debenture holder may participate and vote in general meetings of Debenture holders by proxies. A proxy appointment form shall be made in writing and signed by the principal or by an attorney thereof duly authorized in writing to do so. If the principal is a corporation, the appointment will be made in writing, signed by the corporate stamp together with the signature of a corporate official or an attorney of the corporation who is authorized to do so. The proxy appointment form will be drawn-up in any standard form. A proxy does not have to be a Debenture holder himself.
 
23.  
A proxy appointment form and the power of attorney pursuant to which the appointment form was signed, or a certified copy of such power of attorney, will be deposited with the Company's registered office (or with the entity calling the meeting at the address determined by such entity) no later than forty eight (48) hours before the time of the meeting with respect to which the appointment form was given, unless otherwise determined by the caller of the meeting in the notice calling the meeting. The appointment form will be valid for any adjourned meeting of a meeting listed in the appointment form, provided that the appointment form does not stipulate otherwise.
 
24.  
A vote, which was made in accordance with the conditions of the document appointing a proxy, will be valid even if prior thereto the principal will have passed away or declared legally incompetent or the appointment form will have been revoked or the Debenture with respect to which the vote was granted will have been transferred, unless a written notice of the passing, the incompetence decision, the revocation or the transfer, respectively, will have been received at the Company's registered office (or by the entity calling the meeting at the time set by such entity), before the meeting.
 
25.  
A Debenture holder of the Relevant Series or his proxy may cast some of his votes in favor of a certain proposed resolution, and some against, and abstain in respect of others, all as he deems fit.
 
26.  
The Trustee will arrange to take minutes of all discussions and resolutions in every general meeting of Debenture holders of the Relevant Series, and to keep such in the book of minutes of the meetings of Debenture holders of the same series.
 
27.  
Debenture holders of the Relevant Series may vote in a meeting of Debenture holders of the same series by written proxies, the wording of which will be
 
7
Nothing in the aforesaid shall derogate from the provisions of Section 35N(d) of the Securities Law, in the context of the majority required in a Holders meeting for removing the Trustee from office.
 
 
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delivered to such Holders by the Trustee and/or the Company (as the case may be) at the time of the calling of the meeting of Debenture holders of the same series and/or will be announced after the meeting and prior to the closing thereof by an immediate report (all according to the decision of the caller of the meeting). In order to vote by written proxy as stated, such should be delivered filled-in, duly signed and with all the required documents attached thereto, to the Company at its registered office (or to the entity calling the meeting at the address determined by such entity), no later than forty eight (48) hours before the time of the meeting of Debenture holders of the same series or before such other time to be set in the invitation to the meeting or before such other time after the holding of the meeting and before its closing to be set by the caller of the meeting as announced in an immediate report.
 
28.  
A person or persons appointed by the Trustee, may be present but are not entitled to vote in meetings of Debenture holders of the Relevant Series. In Debenture holders meetings called by the Trustee, the Company's secretary and any other person or persons authorized therefor by the Trustee, may be present, with no voting right.
 

 
 - 69 -
 
Exhibit 4.6.1
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
Indenture
 
 
Entered into and executed in Tel Aviv, on March 7, 2012
 
 
Between
 
 
 
Cellcom Israel Ltd.
 
 
of 10 HaGavish St., Netanya
 
 
Telephone: 052-9989595
 
 
Fax: 098607986
 
 
(The “ Company ”)
 
   
of the First Part ;
 
And :
 
 
Strauss Lazar Trust Company (1992) Ltd.
 
of 17 Yitzchak Sade St., Tel Aviv
 
 
Telephone: 03-6237777
 
 
Fax: 03-5613824
 
 
(The “ Trustee ”)
 
   
of the Second Part ;
 

 
Whereas
On July 14, 2011, The Company and Hermetic Trust (1975) Ltd. (“ Hermetic ”) engaged in an indenture (the “ First Indenture ”) with respect to a shelf prospects published by the Company on July 18, 2011, (the “ Shelf Prospectus ”), according to which the Company may issue, inter alia , Series F and/or Series G Debentures of the Company, and/or Debentures of other series (if and insofar as it is determined in their first offering report that the provisions hereof apply thereto) (the “ Debentures ”); and
 
Whereas
The Company intends to publish under the Shelf Prospectus a shelf offering report or shelf offering reports, under which the Company shall initially offer the Debentures (the “ Offering Report ” or the “ Shelf Offering Report ”; and
 
Whereas
Hermetic cannot act as a trustee for the Debentures that the Company intends to issue under the Shelf Prospectus due to a concern of a potential conflict of interests, and the Company applied to the Trustee in order that it step into Hermetic’s shoes as a trustee with respect to the Debentures (as defined above), and the Trustee agreed to act as a trustee for the Debentures and step into Hermetic’s shoes, on the condition that the terms of the Shelf Prospectus and hereof shall bind the Company and the Trustee and the Trustee shall be deemed to have acted initially as a trustee for the First Indenture with respect to the Debentures, subject to the provisions hereof with the amendments hereto, as applicable from time to time; and
 
 
 
 
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
Whereas
The Trustee declares that it is a company registered in Israel, engaged in trusts and it complies with the qualification requirements set forth in the Securities Law, 5728-1968 to serve as a trustee for the Debentures; and
 
Whereas
The Trustee declares, after an independent examination performed thereby, that there is no impediment with respect thereof according to any law or agreement that applies to the Trustee against the engagement thereof with the Company in this Indenture, of which the provisions of the First Indenture are an integral part; and
 
Whereas
The parties wish to fill out the details of the Debentures with the concrete details, as they shall be stated in the Shelf Offering Report to be published by the Company and as specified below and set forth supplements and modifications that shall apply in the First Indenture, with respect to the Debentures only, as specified herein below and as shall be specified in Amendment and Supplement no. 1 to the First Indenture, such that this Indenture and the Schedule thereto shall supersede the Indenture and the modification and supplement thereto as executed between the parties on January 19, 2012;
 
 
Now therefore it has been declared, stipulated and agreed between the parties as follows:
 
1.
General
 
 
1.1.
The provisions of the First Indenture, which is attached hereto as Annex A , constitute an integral part hereof and shall apply in the relations between the parties and with respect to the Debentures, while for the purpose of this Indenture, the Trustee shall be Strauss Lazar Trust Company (1992) Ltd.
 
 
1.2.
Unless explicitly stated otherwise in this Indenture, all of the provisions of the First Indenture shall remain in force, subject to the modification of the Trustee’s identity and fees, as follows:
 
In Section 20.1.1 of the First Indenture, the words “NIS 15,000” shall be replaced by “NIS 18,000” and the words “NIS 12,500” by “NIS 15,000”.
 
 
1.3.
In case of discrepancy between the provisions hereof and the provisions of the First Indenture, the provisions hereof shall prevail.
 
2.
Notwithstanding the aforesaid, the Debentures shall include the provisions of Amendment and Supplement no. 1 hereto.
 
3.
Except for the provisions of Amendment and Supplement no. 1 hereto as aforesaid in Section 2 above, the Trustee’s details as aforesaid and the modifications and supplement as aforesaid, no modification is made in the remaining terms of the Indenture and the First Indenture and its provisions shall continue to apply between the parties with respect to the Debentures.
 
 
 
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4.
It shall be clarified that the provisions of this Indenture, including the Amendment hereof, shall only apply with respect to the Series F Debentures, the Series G Debentures and debentures of other series (if and insofar as it is determined in the first offering report of the debentures of the other series as aforesaid that the provisions hereof shall apply thereto) and it does not apply the terms specified herein to other series of debentures which the Company may offer under the Shelf Prospectus and in whose offering report it was not determined that the provisions hereof apply in respect thereof.
 
5.
By signing this Agreement the Trustee authorizes any of the Company’s authorized signatories to report in its name in the MAGNA system of its engagement herein and its execution hereof.
 
 
In witness whereof the parties have hereunto set their hands:
 
 
 
       
Cellcom Israel Ltd.
 
Strauss Lazar Trust Company (1992) Ltd
 
       
Signed by:   Yaacob Heen
                      CFO
  Signed by: Uri Lazar  
 
 
 
Attorney’s Certification
 
 
I, the undersigned, Adv. Liat Menahemi Stadler, hereby certify that this Indenture was signed lawfully by the authorized signatories of Cellcom Israel Ltd., Mr. Yaacob Heen.
 
 
 
     
 
Liat Menahemi Stadler, Adv.
 
 
-3-
 
 
 
 
 
Exhibit 4.6.2
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
Amendment and Supplement no. 1 to Indenture of March 7, 2012
 
Entered into and executed in Tel Aviv, on March 7, 2012
 
 
Between
 
 
 
Cellcom Israel Ltd.
 
 
of 10 HaGavish St., Netanya
 
 
Telephone: 052-9989595
 
 
Fax: 098607986
 
 
(The “ Company ”)
 
   
of the First Part ;
 
And :
 
 
Strauss Lazar Trust Company (1992) Ltd.
 
of 17 Yitzchak Sade St., Tel Aviv
 
 
Telephone: 03-6237777
 
 
Fax: 03-5613824
 
 
(The “ Trustee ”)
 
   
of the Second Part ;
 

 
Whereas
An Indenture was entered into between the parties with respect to Series F Debentures, Series G Debentures and debentures of other series (if and insofar as it is determined in their first offering report that the provisions hereof shall apply thereto), which adopted all of the provisions of the indenture that was entered into between the Company and Hermetic Trust (1975) Ltd. on July 14, 2011 (the “ Indenture ” and the “ First Indenture ”, respectively); and
 
Whereas
The Company published a shelf prospectus dated July 18, 2011, under which it may issue in the future, inter alia , any of the Series F to O Series Debentures and of Series 1 to 6 Debentures, in the manner described in the prospectus as aforesaid and in the Indenture (the “ Prospectus ” or the “ Shelf Prospectus ”); and
 
Whereas
The parties wish to amend existing provisions and add further provisions to the provisions of the Indenture in the manner specified herein and to fill out the details of the Series F Debentures and the Series G Debentures as well as the details of the debentures of other series (if and insofar as it is determined in the first offering report of the debentures of the other series as aforesaid that the provisions hereof shall apply thereto) with the concrete terms, following the first offering of the Debentures, which shall be offered pursuant to the Shelf Prospectus by virtue of the Shelf Offering Report and as shall be specified in the Shelf Offering Report (the “ Debentures ” and the “ Offering Report ” or the “ Shelf Offering Report ”, as the case may be); and
 
 
 
 
-4-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
Whereas
The parties wish to determine that the Series F Debentures and the Series G Debentures as well as the debentures of other series (if and insofar as it is determined in the first offering report of the debentures of the other series as aforesaid that the provisions hereof shall apply thereto) which shall be issued by the Company, if and insofar issued, shall be listed for trade in the Tel Aviv Stock Exchange Ltd. (“ TASE ”); and
 
Whereas
The parties wish that this Amendment and Supplement shall constitute an integral part of the Indenture with respect to the Debentures;
 
 
Now therefore it has been agreed, declared and stipulated between the parties as follows:
 
1.
Interpretation and Definitions
 
 
1.1.
The preamble hereto constitutes an integral part hereof.
 
 
1.2.
The division hereof into sections as well as the provision of headings to sections, were done for purposes of convenience and as reference only, and may not be used for interpretation.
 
 
1.3.
The terms herein which were defined in the Indenture shall have the meaning ascribed thereto in the Indenture, unless explicitly stated otherwise.
 
2.
Term of the Indenture
 
 
2.1.
With respect to the Series F Debentures, the Series G Debentures and with respect to the debentures of other series (if and insofar as it is determined in the first offering report of the debentures of the other series as aforesaid that the provisions hereof shall apply thereto), the Indenture, with its annexes, shall continue to apply to the parties, and the provisions of the Indenture shall continue to bind the parties verbatim , unless and only insofar explicitly modified herein.
 
 
2.2.
If it is not determined in the Offering Report of the debentures of the other series as aforesaid that the provisions hereof shall apply thereto, the provisions of the Indenture shall apply and this Amendment and Supplement shall have no effect with respect thereto. For the avoidance of doubt, the provisions hereof shall not apply to debentures of other series issued by the Company prior to the date hereof.
 
3.
Amendment of Section 3 of the Indenture: Expansion of existing series and issuance and allocation of Debentures and additional securities
 
In Section 3, Section 3.4 shall be added to the Indenture as follows:
 
“Notwithstanding Section 3.1 of the Indenture above, an additional issuance of additional debentures by way of a series expansion shall be performed subject to the condition that the additional issuance of the debentures as aforesaid in itself (and no other cause or circumstance that existed prior to such issuance)
 
 
 
-5-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
does not harm the rating of the that series of debentures as being prior to the additional issuance of the such debentures. For this purpose, harm to rating shall be deemed as a downgrade from the rating of the debentures prior to such expansion to the rating of +A (or an equivalent rating) or lower. In any case of additional issuance as aforesaid, the Company shall notify the Trustee in wiring, prior to the performance of the additional issuance as aforesaid, whether an additional issuance as aforesaid complies (or does not comply, as the case may be) with the aforesaid condition. To the notice to the Trustee the Company shall attach the rating agency’s notice. The Trustee shall rely on the rating agency’s notice and shall not require an additional examination. It is clarified that the Company’s undertaking as provided in this subsection shall only apply to additional issuances of Debentures by way of series expansion and not to the issuance of other series of debentures that exist in circulation at that time by way of series expansion or to the issuance of other new securities, whether or not rated”.
 
4.
Adding Section 5.1 of the Indenture – Additional Undertakings
 
Section 5 of the Indenture shall be followed by Sections 5.1 and 5.2 of the Indenture as follows:
 
“5.1            Additional Undertakings
 
The following undertakings of the Company shall apply:
 
 
(a)
Negative Pledge Covenant
 
Notwithstanding Section 5 of the Indenture, the Company undertakes that for as long as the Series F Debentures, the Series G Debentures, insofar as issued (as well as debentures of other series, if and insofar as it is determined in the first offering report of the debentures of the other series as aforesaid that the provisions hereof shall apply thereto) (in this Section 5.1, the “ Debentures of the Relevant Series ”), were not paid-up in full, the Company shall not create and shall not agree to create in favor of any third party any pledges of any rank on its assets for securing any debt or obligation, unless it applies to the Trustee in writing prior to the creation of the pledge and notified it thereof, and: (1) the consent of the Debenture Holders is obtained in advance, by a special resolution, permitting the Company to create the pledge in favor of the third party; or, alternatively – (2) the Company creates in favor of the Debenture Holders, simultaneously with the creation of the pledge in favor of the third party, a pledge of the same kind, on the same asset and equally ranking, for securing the full debt vis-à-vis the Holders, and that this pledge shall remain in force for as long as the Debentures of the Relevant Series were not paid-up in full. The Company shall deliver to the Trustee an original attorney’s certification whereby the pledge that the Company intends to create in favor of the holders of the Debentures of the Relevant Series complies with the aforesaid condition. The Company’s undertaking
 
 
 
-6-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
as specified in this subsection above shall be referred to as the “ Negative Pledge Covenant ”.
 
Notwithstanding the aforesaid, it is clarified that a Negative Pledge Covenant shall not apply to any of any following actions and pledges:
 
 
(1)
The creation of a fixed pledge on assets that shall be purchased by the Company in the future (the “ Aforesaid Assets ”), if the obligations, for the securing of which these pledges were given, were created for the purchase of the Aforesaid Assets and/or for securing loans or credit that were received thereby for the payment of loans or credit received for the purchase of the Aforesaid Assets, provided that no pledges shall be created thereby on further assets beyond the Aforesaid Assets.
 
 
(2)
The creation of a fixed pledge on those parts of the Company’s assets that shall be expanded, for securing loans or credit received for the expansion of those parts.
 
 
(3)
A pledge on assets or rights that were (or shall be) purchased while being pledge prior to the purchase thereof.
 
 
(4)
Setoff rights, liens, collateral granted in the framework of transactions in financial assets (derivatives and so forth), which are granted to banks or financial institutions in the regular course of business therewith, as well as transfers to hedge exposure which are regulated in the Financial Assets Agreements Law, 5766-2006.
 
 
(5)
A symbolic pledge (such as the pledge of a deposit in a symbolic sum for securing debentures).
 
 
(6)
A pledge or lien created by law.
 
 
(7)
A pledge on assets which were sold by the Company, the full proceeds for which having been paid prior to the date of creating the pledge, but the registration of the change of ownership thereof in the purchaser’s name has not yet been completed.
 
In the framework of the annual reporting that shall be submitted to the Trustee as specified in Section 29.3 of the Indenture, the Company shall declare its compliance with this undertaking, such declaration being signed by a senior financial officer of the Company, specifying relevant explanations (if necessary), and shall attach thereto an updated pledge printout of the Company. The Trustee shall rely on the Company’s confirmation and shall not be required to perform a further examination.
 
 
 
-7-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
Whenever the Company creates in favor of the Holders a pledge as stated in subsection (2) at the beginning of this Section 5.1(a) above, the perfection of which pledge requires registration in the Pledge Registry kept by the Registrar of Companies, the pledge shall be deemed to be lawfully registered only after the Company submitted to the Trustee all of the following documents:
 
 
(1)
A pledge document, pursuant to which the pledge was registered in the Trustee’s favor, bearing an original signature of the Company and an original “received” stamp of the Registrar of Companies’ office, and dated no later than twenty one (21) days after the execution date of the pledge document;
 
 
(2)
Notice of Mortgage and Pledge Details (Form 10), bearing an original “received” stamp of the Registrar of Companies’ office and dated no later than twenty one (21) days after the creation of the notice;
 
 
(3)
An original pledge registration certificate from the Registrar of Companies;
 
 
(4)
A pledge printout from the Registrar of Companies, pursuant to which the aforesaid pledge was registered;
 
 
(5)
An affidavit of a senior officer of the Company whereby the pledge does not contradict or is not contrary to the Company’s obligations towards third parties, in a language that shall be acceptable to the Trustee at its reasonable discretion;
 
 
(6)
A legal opinion of an attorney on the Company’s behalf, inter alia , with respect to the nature of the rights of the pledging entity in the pledged asset, the manner of registering the pledge, its term, creditor ranking, legality and exercisability and enforceability against the pledging entity under the law applicable in Israel, in a language that shall be acceptable to the Trustee at its reasonable discretion;
 
It shall be clarified that the Company’s undertakings specified in this Section 5.1 shall apply to the Series F and G Debentures only (separately), if and insofar as issued. However, the Company may notify in the shelf offering report, in the framework of which other series are offered, that all or part of the undertakings specified in this section above shall apply to that series, as shall be specified in the relevant shelf offering report.
 
 
5.2
Limitations on the Performance of Distribution (as defined in the Companies Law)
 
 
Notwithstanding the provisions of Section 32 of the Indenture, the Company undertakes that as long as the Series F Debentures, the Series G Debentures, insofar as issued (as well as debentures of other series,
 
 
 
-8-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
if and insofar as it is determined in their first offering report that the provisions hereof shall apply thereto), were not paid-up in full, the Company shall not be authorized to perform a distribution (as this term is defined in the Companies Law), including a distribution of dividend, to its shareholders in a sum exceeding 95% of the total sum of the Company’s profits as defined in Section 302 of the Companies Law of the Company (the “ Maximum Distribution Rate ”) on the date of the board of directors’ resolution on such distribution. Notwithstanding the aforesaid, if the Debt to EBITDA Ratio (as this term is defined in Section 8.1.16 of the Indenture) exceeds 3.5, the Maximum Distribution Rate shall stand at 85% of the total sum of the Company’s profits as defined in Section 302 of the Companies Law and if the Debt to EBITDA Ratio (as this term is defined in Section 8.1.16 of the Indenture) exceeds 4, the Maximum Distribution Rate shall stand at 70% of the total sum of the Company’s profits as defined in Section 302 of the Companies Law.
 
It is clarified that as of the date of execution hereof, except for the aforesaid undertaking, no limitation applies to the Company with respect to the performance of a distribution (as defined in Section 302 of the Companies Law) except as follows: (1) limitations that apply to the Company pursuant to the Companies Law with respect to the performance of a distribution; (2) limitations that arise from the Company’s license to provide cellular communication services as specified in the Company’s annual statement for 2010, which was filed on form F-20 (filed with the Securities Authority on March 15, 2011 (Ref. no. 2011-02-080886)) under Item 8 – Dividend Policy. It shall be clarified that the aforesaid limitations apply to the Company in connection with the performance of a distribution as of the date of execution hereof. In this context, it shall be noted that the scope of the limitations that apply to the Company as aforesaid, including the aforesaid limitations, may be adjusted and/or modified from time to time and the Company does not undertake to update the Debenture Holders and/or the Trustee specifically of such adjustment and/or modification. It shall be further clarified that the aforesaid description of the limitations does not create in any way an obligation of the Company vis-à-vis the Debenture Holders.
 
5.
Amendment of Section 6 of the Indenture - Purchase of Debentures by the Company and/or a subsidiary of the Company and/or a corporation controlled by the Company
 
In the second paragraph, the words “a subsidiary of the Company and/or a corporation controlled by the Company” shall be followed by the words: “as well as controlling shareholders of the Company and companies controlled by them”.
 
6.
Amendment of Section 7 of the Indenture - Early Redemption
 
The Company may, at its sole discretion, subject the Series F Debentures, the Series G Debentures, insofar as issued (as well as debentures of other series, if
 
 
 
-9-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
and insofar as it is determined in their first offering report that the provisions hereof shall apply thereto) to early redemption, pursuant to the provisions of Section 7.2 of the Indenture.
 
In Section 7.2[a] of the Indenture, the sentence ending with the words “of the Relevant Series.” shall be followed by the sentence: “with respect to the Series F Debentures, the Series G Debentures, insofar as issued (as well as debentures of other series, if and insofar as it is determined in their first offering report that this provision shall apply thereto) the minimal amount of each early redemption shall not be lower than NIS 100 million par value of the Series F Debentures or the Series G Debentures or debentures of other series, if and insofar as it is determined in their first offering report that this provision shall apply thereto”.
 
In Section 7.2[c](3) of the Indenture, the words “plus interest which will be determined in the Initial Offering Report” shall be followed by “notwithstanding the aforesaid, with respect to the Series F Debentures, the Series G Debentures, insofar as issued (as well as debentures of other series, if and insofar as it is determined in their first offering report that these provisions shall apply thereto), plus interest at an annual rate of 1%, calculated on a daily basis based on a 365-day year”.
 
7.
Amendment of Section 8 of the Indenture - Acceleration
 
 
7.1.
In Section 8.1.1 of the Indenture, the words “forty five (45)” shall be replaced by “twenty one (21)”.
 
 
7.2.
In Sections 8.1.2 to 8.1.4 of the Indenture, the words “ninety (90) Business Days” shall be replaced by “forty five (45) or thirty (30) Business Days, according to the later”.
 
 
7.3.
In addition to the provisions of Section 7.2 above, the following changes shall be made in Section 8.1.2 of the Indenture: (1) the words “temporary liquidator” shall be followed by the words “or a permanent liquidator”; (2) the words “by a court” shall be followed by the words “or a temporary or permanent dissolution order had been issued”; (3) the words in brackets, “except for dissolution for reasons of merger”, shall be followed by the words “as defined below”; (4) at the end of the paragraph the following definition shall be added: “In this matter – “ merger ” shall mean a merger that was performed after obtaining a prior approval of the Debenture Holders of the Relevant Series, unless the Company or the surviving company, as the case may be, declared vis-à-vis the Debenture Holders of the Relevant Series, including via the Trustee, at least ten (10) Business Days prior to the merger date that there is no reasonable concern that following the aforesaid merger the Company or the surviving company, as the case may be, shall be unable to perform its undertakings vis-à-vis the Debenture Holders of the Relevant Series, or in case of a merger between companies from the Cellcom Group, as this term is defined in Section 8.1.9 of the Indenture, including the Company, in which case the declaration as
 
 
 
 
-10-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
aforesaid or a prior approval of the Debenture Holders as aforesaid shall not be required”.
 
 
7.4.
In addition to the provisions of Section 7.2 above, Sections 8.1.3 and 8.1.4 of the Indenture shall be modified as follows: the latter part starting with the words “and such” and ending with the words “the Debentures of the Relevant Series” shall be deleted.
 
 
7.5.
Section 8.1.7 of the Indenture shall be followed by Sections 8.1.8 to 8.1.20 of the Indenture as follows:
 
 
“8.1.8
If a third party who is a lender of the Company (except for a supplier of the Company) accelerated debts of the Company thereto and the acceleration demand was not removed or stayed within 35 days after the acceleration date and/or the Company did not pay such debts within 35 days of their acceleration. The aforesaid in this subsection shall not apply if the total cumulative sum of the debts with respect to which the right for acceleration was created and exercised does not exceed NIS 150 million.
 
 
For this matter, it shall be clarified that non-recourse loans shall not be deemed for this matter as Company’s debts as aforesaid in this section.
 
 
8.1.9
If Cellcom Group ceased from operating in the cellular communication area and/or ceased from holding a license for grating cellular communication services for a period exceeding 60 (sixty) days. For this matter – “ Cellcom Group ” shall mean the Company and companies held thereby.
 
 
8.1.10
If trade in Debentures of the Relevant Series on TASE was suspended by TASE pursuant to the provisions of the Fourth Part of the TASE rules, except for suspension on grounds of the emergence of unclarity as provided in the Fourth Part of TASE rules, and forty five (45) days have passed since the date of suspension, during which the grounds for the suspension of trade were not cured or removed.
 
 
8.1.11
If the Company performs a distribution (as defined in the Companies Law) and such distribution exceeds the Maximum Distribution Rate.
 
 
8.1.12
With respect to the Series F Debentures and the Series G Debentures, as the case may be, if, for a period of 60 consecutive days, the Series F Debentures or the Series G Debentures, as the case may be, are not be rated by any rating agency. This section shall apply  to Debentures of other series, insofar as their first offering report shall include a provision to this effect, subject to the provisions of Section 5A4 of the Terms and Conditions Overleaf.
 
 
 
-11-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
For this matter only: a “ rating agency ” shall mean any Israeli rating agency or any of the international rating agencies S&P or Moody’s, provided that there is at least one active rating agency in Israel at that time.
 
 
8.1.13
A motion was filed for a stay-of-proceedings order for the Company or such order was granted or the Company filed a motion to make a composition with its creditors pursuant to Section 350 of the Companies Law, provided that such composition undermines or is likely to undermine the Company’s solvency with respect to the Debentures, except for a case in which the motion or composition as aforesaid were filed for the purpose of merger (as this term is defined in Section 8.1.2 of the Indenture) and/or a change in the Company’s structure.
 
 
8.1.14
If a Sale to Another of most of the Company’s assets as defined below was performed and the Trustee’s prior written consent to such sale shall not have been received, which consent shall be given after obtaining the consent of the Debenture Holders; except for a sale whose proceeds served or are expected to serve the Company (according to its notice) for the purchase of another asset or assets with characteristics matching the Company’s business segments, as being on the date of such sale.
 
 
For this matter, a “ Sale to Another ” shall mean a sale to any third party (including controlling shareholders of the Company and/or to corporation controlled by them), but except for corporations from the Cellcom Group (as this term is defined in Section 8.1.9 above), provided that in case of a sale to corporations from the Cellcom Group (as this term is defined in Section 8.1.9 above), the Company declared vis-à-vis the Debenture Holders of the Relevant Series, including via the Trustee, at least ten (10) Business Days prior to the date of the sale, that there is no reasonable concern that due to such sale the Company shall be unable to perform its undertakings vis-à-vis the Debenture Holders of the Relevant Series.
 
 
8.1.15
In case that the Company does not publish financial statements by the expiration of 60 days after the date set for this purpose pursuant to the provisions of the law applicable thereto (and if the Company obtained an extension from a competent authority – within 60 days after the end of such extension period).
 
 
8.1.16
If the net debt to EBITDA ratio, net of non-recurring effects (the “ Debt to EBITDA Ratio ”) exceeds 5.
 
 
For this matter: “ net debt ” shall mean credit from banking and other corporations as well as loans from banking and other corporations as well as obligations due to Debentures, net of
 
 
 
-12-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
cash and cash equivalents and current investments in negotiable securities; and “ EBITDA ” shall mean with respect to the 12-month period preceding the date of the Company’s last financial statements – earnings before depreciation and amortization, other net expenses/income, net financing expenses/income and taxes. Within three (3) Business Days from the date of publication of the Company’s financial statements, the Company shall submit to the Trustee a certification signed by a senior financial officer of the Company, in which shall be stated the ratio of net debt to EBITDA, based on the financial statements as aforesaid. The Trustee shall rely on the Company’s certification and shall not be required to perform an additional examination in this matter.
 
 
8.1.17
If the Company does not comply with a Debt to EBITDA Ratio (as this term is defined in Section 8.1.16 of the Indenture) that does not exceed 4.5, for the period of four consecutive quarters.
 
 
8.1.18
With respect to Debentures of the Relevant Series, if a merger was performed without obtaining a prior approval of the Debenture Holders of the Relevant Series, unless the Company or the surviving company, as the case may be, declared vis-à-vis the Debenture Holders of the Relevant Series, including via the Trustee, at least ten (10) Business Days prior to the merger date that there is no reasonable concern that following the aforesaid merger the Company or the surviving company, as the case may be, shall be unable to perform its undertakings vis-à-vis the Debenture Holders of the Relevant Series.
 
For the purpose of this Section 8.1.18: “ merger ” shall not include a merger between companies from the Cellcom Group, as this term is defined in Section 8.1.9 of the Indenture, including the Company, in which case the declaration of the Company or the surviving company as aforesaid or a prior approval of the Debenture Holders as aforesaid shall not be required.
 
 
8.1.19
If the Company breached its undertakings not to create pledges as set forth in Section 5.1(a) of the Indenture and did not cancel the pledges having been registered incidentally to such breach within 45 days after receiving a warning thereof from the Trustee.
 
 
8.1.20
Upon the occurrence of any other event which causes or is expected to cause a material deterioration in the Company’s businesses, so as to create a substantial concern of material harm to the Debenture Holders’ rights.
 
 
For this matter: an event which resulted or is expected to result in the Ratio of the Debt to EBITDA increasing to a rate which is lower than 5 shall not be deemed as a material deterioration”.
 
 
 
-13-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
Section 8.1.7 shall be modified as follows: (1) the words “If the Company shall violate or not fulfill any material condition” shall be followed by the words “or representation”; (2) the words “of the same series” shall be followed by the words “and the violation was not cured within 14 days after the Trustee gave written warning thereof”.
 
In Section 8.2[a] of the Indenture, the words “Upon the occurrence of any of the events in Sections 8.1.1 to 8.1.6 (inclusive) of the Indenture” shall be followed by the words “as well as Sections 8.1.8 to 8.1.19 (inclusive) of the Indenture”.
 
In Section 8.2[b] of the Indenture, the words “Upon the occurrence of an event as specified in Section 8.1.7 above” shall be followed by the words “as well as upon the occurrence of an event as specified in Section 8.1.20 above”..
 
8.
Amendment of Section 16 of the Indenture - Investment of Funds
 
Notwithstanding Section 16 of the Indenture, the Trustee may invest the funds in bank deposits in one of the five large banks in Israel or in government debentures only and it shall not perform investments in other securities.
 
9.
Amendment of Section 17 of the Indenture - The Company’s Undertakings vis-à-vis the Trustee
 
Section 17.8 of the Indenture shall be followed by Section 17.9 of the Indenture as follows:
 
 
“17.8
To provide to the Trustee reports as specified in Section 5.1 of the Indenture”.
 
At the end of the last paragraph in the section, the word “law” shall be followed by a full stop and the words “and that such transfer shall not damage a legitimate interest of the Company” shall be deleted.
 
10.
Amendment of Section 19 of the Indenture - Other Agreements
 
At the end of the paragraph, the words “in its ordinary course of business” shall be followed by the words “provided that the aforesaid engagement with the Company does not prejudice the rights of the Series F Debenture Holders and of the Series G Debenture Holders”.
 
11.
Amendment of Section 25 of the Indenture - Waivers, Settlements and/or Modifications in the Indenture
 
Section 25[a][1] of the Indenture shall be modified as follows: the word “materially” after the words “the modification does not” shall be deleted.
 
Section 25[b][1] of the Indenture shall be modified as follows: the words “in its opinion” before the words “it does not violate” shall be deleted.
 
Section 25[f] of the Indenture shall be deleted.
 
12.
Amendment of Section 28 of the Indenture - Holders Meetings
 
 
 
-14-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
In Section 28 of the Indenture the following words shall be added: “Notwithstanding the provisions of the Second Schedule of the Indenture, in case that, at the Trustee’s reasonable discretion and for reasons that shall be recorded, a discussion without the presence of the Company’s representatives is required in a part of the Holders meeting, then the Company and/or anyone on its behalf shall not participate in that part of the discussion”.
 
13.
Amendment of Section 29 of the Indenture - Reporting to the Trustee
 
In Section 29.4 of the Indenture, the words “thirty (30)” shall be replaced by “ten (10)”.
 
Section 29.5 of the Indenture shall be followed by Sections 29.6 and 29.7 of the Indenture as follows:
 
 
“29.6
To deliver immediately to the Trustee a notice in case that the Company learns of a breach of a material provision of the provisions of the Indenture, including a material breach of such a provision.
 
 
29.7
To deliver to the Trustee a notice of new pledges on the Company’s property, with respect to pledges that the Company shall register at the Registrar of Companies and/or the Registrar of Pledges.”
 
14.
Amendment of Section 31 of the Indenture - Rating
 
The following paragraphs:
 
“The Company may determine in the First Offer Report of the Relevant Series that insofar as the Debentures that shall be offered pursuant to the Offer shall be rated the Company shall act (insofar as the matter shall be within its control) to arrange that as long as Debentures of the Relevant Series are listed for trade, the Debentures of the Relevant Series shall be under rating follow-up by a rating agency.
 
 
The Company does not undertake not to replace the rating agency throughout the Debentures’ life time. In case of replacing the rating agency, the Company shall publish an immediate report concerning the replacement as aforesaid.”
 
 
Shall be replaced by the following paragraphs:
 
“The Company undertakes to arrange that, insofar as the matter shall be within its control, the Series F Debentures and the Series G Debentures, insofar as issued (as well as debentures of other series, if and insofar as it is determined in their first offering report that the provisions of this section shall apply thereto) (in this section, the “ Debentures of the Relevant Series ”), shall be under rating follow-up by one rating agency at least, as long as Debentures of that series are in circulation (and without derogating from the generality of the aforesaid, in this framework, inter alia , the Company undertakes to make all of the payments and deliver the required reports to a rating agency, according to the provisions of the agreement therewith). For this matter it is clarified that the transfer of the Debentures to the watch list or any similar action which is taken by the rating agency shall not be deemed as termination of the rating.
 
 
 
-15-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
Without derogating from the Company’s undertaking as aforesaid, in case that the Debentures of the Relevant Series are rated by one rating agency only, and the Company of its own initiative replaces the rating agency by another (single) rating agency, the Company shall publish an immediate report specifying the reasons for replacing the rating agency, within one trading day after the occurrence of the event. It is clarified that the aforesaid does not derogate from the Company’s right to replace a rating agency at any time, at its sole discretion and as it shall deem fit. If the Debentures of the Relevant Series stop being rated (i.e. they shall not be rated by any rating agency), the Company shall immediately give the Trustee a written notice of the reasons for termination of the rating, no later than one Business Day after the date of the termination of the rating.”
 
15.
Addition of Section 4A of the Terms and Conditions Overleaf – Adjusting the Interest Rate as a Result of a Rating Change
 
Section 4 of the Terms and Conditions Overleaf shall be followed by Section 4A of the Terms and Conditions Overleaf as follows:
 
“4A.            Adjusting the Interest Rate as a Result of a Rating Change
 
With respect to Series F Debentures, Series G Debentures, if issued and if given a credit rating, the rate of the interest that these Debentures shall bear shall be adjusted due to a change in the rating of the Debentures. Insofar as Debentures of other series are issued, if and insofar as it is determined in their first offering report that the provisions of this section shall apply thereto (the “ Debentures of the Additional Series ”), and insofar as the Debentures of the Additional Series shall be given a credit rating, the first offering report of the Debentures of the Additional Series shall specify whether the interest rate that they bear shall be adjusted due to a change in the rating of the Debentures of the Additional Series. If the Company does not determine in the first offering report of the Debentures of the Additional Series that such adjustment is to be done, then no change shall occur in the interest rate that the Debentures of the Additional Series  shall bear as a result of a change in the rating of the Debentures of the Additional Series. The manner of adjusting the interest rate that the Debentures of the Additional Series shall bear, as aforesaid, if and insofar as it is adjusted, shall be in accordance with the mechanism described below, as specified in the first offering report of the Debentures of the Additional Series (in this section below, the Debentures of the Additional Series together with the Series F Debentures and the Series G Debentures shall be referred to as the “ Debentures of the Relevant Series ”, as the case may be).
 
 
4A1.
Insofar as the rating of the Debentures of the Relevant Series by a rating agency which shall be indicated in the first offering report or any other rating agency that shall replace it (in this section, the “ Rating Agency ”) shall be updated during any interest period, such that the rating that shall be determined for the Debentures of the Relevant Series shall be lower by two levels or more (the “ Reduced Rating ”) than the basic rating that shall be specified in the shelf offering report (or an equivalent rating that shall replace it as shall be determined by another Rating Agency, insofar as it shall replace the Rating Agency
 
 
 
 
-16-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
that was indicated in the shelf offering report) (the “ Basic Rating ”), the rate of the annual interest that the unpaid balance of the principal of the Debentures of the Relevant Series shall bear shall increase by 0.25% above the rate of the annual interest that the Debentures of the Relevant Series shall bear, or above the rate of the annual interest that shall be determined in a tender as published by the Company in an immediate report concerning the results of the issuance, as the case may be (the “ Basic Interest ”), for the period commencing on the date of the next interest (i.e. commencing immediately after the period during which the relevant change in the rating occurred) until a full payment of the unpaid balance of the principal of the Debentures of the Relevant Series or, alternatively, until the Reduced Rating increases back to the Basic Rating, according to the earlier (in which case the provisions of Section 4A6 below shall apply). It is clarified that no additional interest shall be received for the period from the downgrade of the rating until the end of the interest period during which the rating of the Debentures was updated and that the interest shall not be decreased back for the period from the date on which the raring increased back to the Basic Rating (or a higher rating) until the end of the interest period during which the rating of the Debentures was updated (for example, if the interest period is from March to September and in April of a certain year a change of rating occurs which entails the decrease or increase of interest according to the terms specified below, then no change (increase or decrease) shall occur in the interest until the end of September of that year, but only from the beginning of October of that year).
 
 
4A2.
The interest rate that the Debentures of the Relevant Series shall bear shall be updated also in the case of further downgrading of the rating beyond the Reduced Rating (jointly: the “ Further Reduced Rating ”), such that: (a) in case that the determined rating shall be one level lower than the Reduced Rating – the rate of the annual interest that the unpaid balance of the principal of the Debentures of the Relevant Series shall bear shall increase by another 0.25%, such that it shall be equal to the Basic Interest plus 0.50%; (b) in case that the determined rating shall be two levels lower than the Reduced Rating, the rate of the annual interest that the unpaid balance of the principal of the Debentures of the Relevant Series shall bear shall increase by another 0.25%, such that it shall be equal to the Basic Interest plus 0.75%; (c) in case that the determined rating shall be three or more levels lower than the Reduced Rating, the rate of the annual interest that the unpaid balance of the principal of the Debentures of the Relevant Series shall bear shall increase by another 0.25%, such that it shall be equal to the Basic Interest plus 1%.
 
 
It is clarified that in no case shall the Basic Interest be increased by more than 1% as a result of a downgrade of the rating compared to the Basic Rating.
 
 
4A3.
No later than one Business Day after receiving the notice of the Rating Agency concerning the downgrade of the Debentures of the Relevant Series to the Reduced Rating as defined in Section 1A4 above or the
 
 
 
-17-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
Further Reduced Rating, the Company shall publish an immediate report in which it shall specify: (a) the fact of the downgrade of the rating, the Reduced Rating (or the Further Reduced Rating) and the effective date of that rating of the Debentures of the Relevant Series (the “ Rating Downgrade Date ”); (b) the rate of the updated annual interest that the balance of the principal of the Debentures of the Relevant Series shall bear, for the period commencing on the next interest date (i.e. commencing immediately after the period during which the relevant change in the rating occurred); (c) the interest rate for the period which the balance of the principal of the Debentures of the Relevant Series shall bear with respect to the next periods, insofar as the terms of the Debentures of the Relevant Series shall determine that the interest for them be paid on more than one date each year.
 
It is clarified that in any case of change in interest as a result of change in rating as aforesaid in this section, no change shall occur in the dates of payment (principal of interest) or on the Effective Date in the Relevant Series (as defined above).
 
 
4A4.
In case of an update of the rating of the Debentures of the Relevant Series by the Rating Agency, in a manner that shall affect the rate of interest that the Debentures of the Relevant Series shall bear as aforesaid in this Section 4A, the Company shall notify the Trustee thereof within one Business Day from the date of publication of the immediate report as aforesaid.
 
 
4A5.
Insofar as the Debentures of the Relevant Series shall stop being rated for a reason dependent solely upon the Company, prior to their final payment, for a consecutive period exceeding sixty (60) days, provided that the interest rate was not increased as provided in Sections 4A1 and/or 4A2 above, it shall be determined in the first offering report of the Relevant Series of the Debentures of the Relevant Series whether the termination of the rating shall be deemed as a downgrade of the rating of the Debentures of the Relevant Series to the Reduced Rating as provided in Section 4A1 above or to another lower rating, as provided in Section 4A2 above. In this context, it shall be clarified that if it is so determined in the offering report as aforesaid, the provisions of Section 8.1.12 of the Indenture shall not apply. For this matter, and without derogating from the generality of the aforesaid, the default on payments to the Rating Agency, which the Company undertook vis-à-vis the Rating Agency to make, and the non-delivery of reasonable reports and information, which there is no legal impediment to deliver and are required by the Rating Agency in the framework of the engagement between the Company and the Rating Agency, shall be considered as reasons dependent solely upon the Company. For the avoidance of doubt, it is hereby clarified that, if the Debentures stop being rated prior to their final payment due to a reason which is not dependent upon the Company, it shall not affect the interest rate as provided in Sections 4A1 and/or 4A2 above and in any case the provisions of this Section 4A shall not apply.
 
 
 
-18-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
It is clarified that the replacement of the Rating Agency (if and insofar as the Company decides to replace it, as provided in Section 31 of the Indenture) shall not affect the interest rate as provided in Section 4A1 and/or 4A2 above and in any case the provisions of this Section 4A shall not apply, provided that the rating given by the new Rating Agency is an equivalent rating to the rating of the current Rating Agency on the replacement date.
 
 
4A6.
It shall be clarified that if, after the downgrade of the rating in a manner affecting the rate of interest that the Debentures of the Relevant Series bear as aforesaid, the Rating Agency upgrades the rating of the Debentures of the Relevant Series to a higher rating that the Reduced Rating (and respectively to a higher rating than the Further Reduced Rating) (the “ High Rating ”), the rate of the annual interest paid by the Company to the Debenture Holders of the Relevant Series shall decrease by an annual rate of 0.25% for each level as specified in Section 4A2 above until the rating above the Reduced Rating, in which case the rate of the annual interest, which the unpaid balance of the principal of the Debentures of the Relevant Series shall bear, shall be the Basic Interest rate with no additions, for the period commencing on the beginning of the next interest period (i.e. which commences immediately after the period during which the relevant change in the rating occurred) until the full payment of the unpaid balance of the principal of the Debentures of the Relevant Series or until the change in the rating of the aforesaid Debentures pursuant to the provisions of this Section 4A. In such case, the Company shall act in accordance with the provisions of Sections 4A2 to 4A4 above, mutatis mutandis .
 
 
4A7.
For the avoidance of doubt, it is clarified that a change in the rating horizon of the Debentures of the Relevant Series shall not entail a change in the interest that the Debentures shall bear as aforesaid in this section.
 
 
In addition, notwithstanding the provisions of this Section 4A, the downgrade of the rating of the Debentures of the Relevant Series, which is done as part of updating the rating of all of the companies in Israel which engage in one or more of the Company’s business segments, as a result of changing the Rating Agency’s methodology only, shall not entail a change in the rate of interest that the Debentures of the Relevant Series shall bear.
 
 
4A8.
The Company undertook, in Section 31 of the Indenture, to arrange that, insofar as the matter shall be within its control, the Debentures of the Relevant Series shall be under rating follow-up by at least one Rating Agency, as long as Debentures of that series are in circulation (and without derogating from the generality of the aforesaid, in this framework, inter alia , the Company undertakes to make all of the payment and to submit all of the reports required for the Rating Agency, according to the provisions of the agreement therewith).
 
16.
General Terms
 
 
 
-19-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
This Amendment and Supplement shall take effect subject to the issuance of the Series F Debentures, the Series G Debentures and, with respect to Debentures of other series, subject to the issuance of Debentures of other series as aforesaid (if and insofar as it is determined in the first offering report of the Debentures of the other series as aforesaid that the provisions hereof shall apply thereto), and they shall apply with respect to the relevant series as aforesaid immediately after the issuance thereof. No change shall occur in the remaining terms of the original Indenture and the schedules thereto with respect to the Series F Debentures, the Series G Debentures and with respect to other series as aforesaid.
 
17.
Applicable Law and Jurisdiction
 
 
The law that governs the Indenture with its annexes and the Debentures is the Israeli law. The courts in the city of Tel Aviv Jaffa shall have a unique and exclusive jurisdiction in any conflict regarding the Indenture and the Debentures.
 
18.
Authorization for MAGNA Reporting
 
 
By signing these Amendment and Supplement, the Trustee authorizes the Company’s authorized electronic signatories, as being, to report in its name in MAGNA of its engagement herein and its execution hereof, insofar as it is required by law.
 

 
 
 
[ Signature Page to Follow ]
 

 
-20-
 
 

 
TRANSLATION FROM HEBREW
 
 
THE BINDING VERSION IS THE HEBREW VERSION
 
 
[ Signature Page ]
 
 
In witness whereof the parties have hereunto set their hands:
 
 
 
       
Cellcom Israel Ltd.
 
Strauss Lazar Trust Company (1992) Ltd
 
       
Signed by:   Yaacob Heen
                      CFO
  Signed by: Uri Lazar  
 
 
 
Attorney’s Certification
 
 
I, the undersigned, Adv. Liat Menahemi Stadler, hereby certify that this Indenture was signed lawfully by the authorized signatories of Cellcom Israel Ltd., Mr. Yaacob Heen.
 
 
 
     
 
Liat Menahemi Stadler, Adv.
 
 
 
 
 
 -21-
Exhibit 4.7
 
CELLCOM ISRAEL , LTD.
 
2006 SHARE INCENTIVE PLAN
 
A.  NAME AND PURPOSE
 
1.            Name:   This plan, as amended from time to time, shall be known as the “Cellcom Israel, Ltd. 2006 Share Incentive Plan”.
 
2.            Purpose: The purpose and intent of the Plan is to provide incentives to employees, directors, consultants and/or contractors of the Company and its Affiliates, by providing them with opportunities to purchase Shares, pursuant to a plan approved by the Board which is designed to enable the Company to issue options and restricted stock units, with respect to Israeli residents, pursuant to the provisions of either Section 102 or Section 3(9) of the Ordinance, as applicable, and the rules and regulations promulgated thereunder, as amended from time to time, or any other tax ruling provided by the tax authorities to the Company, as well as with respect to non-Israeli residents pursuant to the applicable law in their respective country of residence.
 
B. DEFINITIONS
 
“ Adoption Date ” means the Date of Grant, or any other date of commencement of vesting of an Award for the purposes of this Plan, that is determined by the Committee for a given grant of an Award
 
“ Affiliate ” means any company (i) that is a Controlling Shareholder (as such term is defined in Section 102 of the Ordinance) of the Company, or (ii) of which the Company is a Controlling Shareholder, or (iii) which has a Controlling Shareholder that is also a Controlling Shareholder of the Company.
 
“ Awards ” means Options and/or RSUs.
 
“ Beneficial Grantee ” means the Grantee in respect of whom, an Award held in Trust by the Trustee was granted.
 
“ Board ” means Board of Directors of the Company.
 
“ Cessation of Employment ” means the cessation of employment of a Grantee (who was an employee of the Company on the Date of Grant of any Awards to him or her), with the Company, for any reason.
 
“ Committee ” means the Board or a committee appointed by the Board for such purpose, if appointed.
 
“ Companies Law ” means the Companies Law 1999.
 
 
 
 
2
 
“Company ” means Cellcom Israel, Ltd., a company organized under the laws of the State of Israel, or any Affiliate thereof, unless the context otherwise requires.
 
“ Controlling Shareholders ” means controlling shareholders of the Company, as such term is defined in the Ordinance.
 
“ Corporate Transaction ”   means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:
 
(i)            a sale or other disposition, of all or substantially all, of the outstanding Shares of the Company; or
 
(ii)           a sale or other disposition of all or substantially all, as determined by the Board in its discretion, of the consolidated assets of the Company and its subsidiaries; or
 
(iii)          a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or
 
(iv)          a merger, consolidation or similar transaction following which the Company is the surviving corporation but the Ordinary Shares of the Company outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.
 
Whether a transaction is a “Corporate Transaction” as defined above, shall be finally and conclusively determined by the Committee in its absolute discretion.
 
“ Date of Grant ” means the effective date of the grant of an Award, as detailed in Section 5.1(b) hereinafter.
 
“ Date of Cessation ” means (i) the date on which the employee-employer relationship between the Grantee and the Company ceases to exist, or (ii) if the Grantee is a contractor or consultant - the date on which the consulting or contractor agreement between the Grantee and the Company expires, or the date on which either of the parties to such agreement sends the other notice of its intention to terminate said agreement, or (iii) if the Grantee is a director - the date on which the Grantee ceases to serve as a director of the Company.
 
“ Disability ” means the inability to engage in any substantial gainful occupation for which the Grantee is suited by education, training or experience, by reason of any medically determinable physical or mental impairment that is expected to result in such person’s death or to continue for a period of six (6) consecutive months or more.
 
“ Exercise Date ” means the actual date of exercise of Options.
 
 
 
 
3
 
“Exercise Price” means the purchase price per Exercised Share, subject to each Option, or the nominal value per Exercised Share to be paid upon the vesting of an RSU, if applicable.
 
“ Exercised Shares ” means Shares received upon exercise of Options (or Rights, if applicable) and/or vesting of RSUs.
 
“ Grantee ” means the person to whom Awards shall be granted under this Plan.
 
“ IPO ” means an initial public offering of Shares.
 
“ Notice of Exercise ” means a written notice of exercise of an Option, delivered by a Grantee to the Company.
 
“ Notice of Grant ” means a written notice of the grant of an Award.
 
“ 102 Awards ” means grants of Awards to Israeli employees, directors and office holders of the Company, other than to a Controlling Shareholder, pursuant to the provisions of Section 102 of the Ordinance, the 102 Rules, and any other regulations, rulings, procedures or clarifications promulgated thereunder. Such grants of Awards may be pursuant to (i) a Taxation Route and/or (ii) Section 102(c) of the Ordinance (“ 102(c) Awards ”).
 
“ 102 Rules ” means the Income Tax Rules (Tax Relief in Issuance of Shares to Employees), 2003.
 
“ Options ” means options to purchase Shares.
 
“ Ordinance ” means the Israeli Income Tax Ordinance [New Version], 1961.
 
 “ Plan ” means this “Cellcom Israel, Ltd. 2006 Share Incentive Plan”, as amended from time to time.
 
“ Representative ” means any third party designated by the Company for the purpose of the exercise of the Options, as provided in Section 9.2 hereinafter.
 
“ Rights ” means rights issued in respect of Exercised Shares, including bonus shares but excluding cash dividends.
 
“ RSUs ” means Restricted Stock Units, as described in Section 13 below.
 
“ Shares ” means ordinary shares, nominal value of NIS 0.01 each of the Company (subject to an expected split of the Company’s shares).
 
“ Taxation Route ” means the capital gains route under Section 102(b)(2) of the Ordinance.
 
“ 3(9) Awards ” means grants of Awards to Israeli consultants, contractors or Controlling Shareholders of the Company pursuant to the provisions of Section 3(9) of the Ordinance and
 
 
 
 
4
 
the rules and regulations promulgated thereunder, or any other section of the Ordinance that will be relevant for such issuance in the future.
 
“ Trust ” means the holding of each Award and Exercised Shares by the Trustee in Trust for the benefit of the Beneficial Grantee.
 
“ Trustee ” means a trustee designated by the Committee in accordance with the provisions of Section 3.4 hereof and, with respect to 102 Awards, approved by the Israeli Tax Authority.
 
“ Trust Expiration Date ” means 1.1.2015, or any other date determined by the Board.
 
“ Trust Period ” means the period of time required under a Taxation Route for Awards and/or Exercised Shares to be held in Trust in order for the Beneficial Grantee to enjoy the tax benefits afforded under such Taxation Route, as will be applicable for such Taxation Route from time to time.
 
“ Vesting Period ” of an Award means, for the purpose of the Plan and its related instruments, the period between the Adoption Date and the date on which (i) an Option becomes exercisable into a Share; or (ii) an RSU is automatically vested into a Share, as applicable.
 
C.  GENERAL TERMS AND CONDITIONS OF THE PLAN
 
3.   Administration:
 
3.1           The Plan will be administered by the Board or, subject to applicable law, including but not limited to the instructions of the Companies Law, by a Committee, which will consist of such number of directors of the Company as may be fixed, from time to time, by the Board. If a Committee is not appointed, the term Committee, whenever used herein, shall mean the Board. The Board shall appoint the members of the Committee, may from time to time remove members from, or add members to, the Committee and shall fill vacancies in the Committee however caused.
 
3.2           The Committee shall select one of its members as its Chairman and shall hold its meetings at such times and places, as it shall determine. Actions taken by a majority of the members of the Committee, at a meeting at which a majority of its members is present, or acts reduced to, or approved in, writing by all members of the Committee, shall be the valid acts of the Committee. The Committee may appoint a secretary, who shall keep records of its meetings and shall make such rules and regulations for the conduct of its business, as it shall deem advisable.
 
3.3           Subject to the general terms and conditions of this Plan and applicable law, the Committee shall have the full authority in its discretion, from time to time and at any time to determine (i) the Grantees under the Plan, (ii) the number of Shares subject to each Award, (iii) the time or times at which the same shall be granted, (iv) the schedule and conditions, including performance conditions, if applicable, on which such Awards may be exercised and/or
 
 
 
 
5
 
on which such Shares shall be paid for and/or on which such RSUs may vest, and/or (v) rules and provisions, as may be necessary or appropriate to permit eligible Grantees who are not Israeli residents to participate in the Plan and/or to receive preferential tax treatment in their country of residence, with respect to the Awards granted hereunder, and/or (vi) any other matter which is necessary or desirable for, or incidental to, the administration of the Plan.
 
3.4           Furthermore, subject to the general terms and conditions of the Plan, the Ordinance, and any other applicable laws and regulations, the Committee shall have the full authority in its discretion, from time to time and at any time, to determine:
 
(a)           With respect to grants of 102 Awards pursuant to the Taxation Route the identity of the trustee who shall be granted such 102 Awards in accordance with the provisions of this Plan and the Taxation Route; and
 
(b)           With respect to the grant of 3(9) Awards - whether or not 3(9) Awards shall be granted to a trustee in accordance with the terms and conditions of this Plan, and the identity of the trustee who shall be granted such 3(9) Awards in accordance with the provisions of this Plan.
 
3.5           Notwithstanding the aforesaid, the Committee may, from time to time and at any time, grant 102(c) Awards.
 
3.6           The Committee may, from time to time, adopt such rules and regulations for carrying out the Plan, as it may deem necessary.  No member of the Board or of the Committee shall be liable for any act or determination made in good faith with respect to the Plan or any Award granted thereunder.
 
3.7           The interpretation and construction by the Committee of any provision of the Plan or of any Award thereunder shall be final and conclusive and binding on all parties who have an interest in the Plan or any Award or Share issuance thereunder, unless otherwise determined by the Board.
 
4.            Eligible Grantees:
 
4.1           The Committee, at its discretion, may grant Awards to any employee, director, consultant and/or contractor of the Company. Anything in this Plan to the contrary notwithstanding, all grants of Awards shall be authorized and implemented only in accordance with the provisions of applicable law.
 
4.2           The grant of an Award to a Grantee hereunder, shall neither entitle such Grantee to participate, nor disqualify him from participating, in any other grant of Awards pursuant to this Plan or any other incentive plan of the Company.
 
5.            Grant of Awards, Issuance of Shares, Dividends and Shareholder Rights:
 
 
 
 
6
 
5.1            Grant of Awards and Issuance of Shares .
 
(a)           Subject to the provisions of the Ordinance and applicable law (it being understood that, unless otherwise determined by the Committee, the following shall not apply to Awards granted to non Israeli Grantees),
 
(i)           All grants of Awards to Israeli employees, directors and office holders of the Company, other than to Controlling Shareholders, shall be as 102 Awards and shall be subject either to the Taxation Route or to Section 102(c) of the Ordinance; and
 
(ii)           All grants of Awards to Israeli consultants, contractors or Controlling Shareholders of the Company shall be as 3(9) Awards.
 
(b)           Subject to Sections 7.1 and 7.2 hereof, the Date of Grant shall be the date the Committee resolves to grant such Award, unless specified otherwise by the Committee in its determination relating to the grant of such Award.  The Committee shall promptly give the Grantee a Notice of Grant.
 
(c)            Trust .  In the event Awards are deposited with a Trustee, the Trustee shall hold each such Award and Exercised Shares in Trust for the benefit of the Beneficial Grantee; provided, however, that unless the Committee determines otherwise, in its sole and absolute discretion, the Trustee shall not hold any Awards in Trust following the Trust Expiration Date, all Awards held in Trust on such date shall be transferred automatically to the Grantee, and all implications, including tax implications, resulting from such transfer of Awards shall be borne solely by the Grantee.
 
In accordance with Section 102, the tax benefits afforded to 102 Awards and any Exercised Shares, in accordance with the Taxation Route, shall be contingent upon the Trustee holding such 102 Awards for the applicable Trust Period.
 
With respect to 102 Awards granted to the Trustee, the following shall apply:
 
(i)            A Grantee granted 102 Awards shall not be entitled to sell the Exercised Shares or to transfer such Exercised Shares (or such 102 Awards) from the Trust prior to the lapse of the Trust Period; and
 
(ii)            Any and all Rights shall be issued to the Trustee and held thereby until the lapse of the Trust Period, and such Rights shall be subject to the Taxation Route.
 
Notwithstanding the aforesaid, Exercised Shares or Rights may be sold or transferred, and the Trustee may release such Exercised Shares (or 102 Awards) or Rights   from Trust, prior to the lapse of the Trust Period, provided however, that tax is paid or withheld in accordance with Section 102 of the Ordinance and/or the 102 Rules, and/or any
 
 
 
 
7
 
other provision of the Ordinance and any regulation, ruling, procedure and clarification promulgated thereunder, that will be relevant from time to time.
 
All certificates representing Exercised Shares issued to the Trustee under the Plan shall be deposited with the Trustee, and shall be held by the Trustee until such time that such Shares are released from the Trust as herein provided.
 
Alternatively, in the event the Company’s Shares are listed on any stock exchange or admitted to trading on an electronic securities trading system, whether in Israel or outside of Israel, the Company shall register the Exercised Shares issued to the Trustee pursuant to the Plan, in the name of the Trustee, in accordance with any applicable laws, rules and regulations, until such time that such Shares are released from the Trust as herein provided.
 
(d)           Subject to the terms hereof, at any time after the Awards are vested, with respect to any 102 Awards or Exercised Shares held by the Trustee the following shall apply:
 
(i)           Upon the written request of any Beneficial Grantee, the Trustee shall release   from the Trust, within a reasonable period of time, the Awards granted, and/or the Exercised Shares issued, on behalf of such Beneficial Grantee, by executing and delivering to the Company such instrument(s) as the Company may require, giving due notice of such release to such Beneficial Grantee, provided , however , that the Trustee shall not so release any such Awards and/or Exercised Shares to such Beneficial Grantee unless the latter, prior to, or concurrently with, such release, provides the Trustee with evidence, satisfactory in form and substance to the Trustee, that all taxes, if any, required to be paid upon such release have, in fact, been paid.
 
(ii)           Alternatively, subject to the terms hereof, with respect to any  Exercised Shares held by the Trustee, provided the Exercised Shares are listed on a stock exchange or admitted to trading on an electronic securities trading system (such as the Nasdaq), upon the written instructions of the Beneficial Grantee to sell any Exercised Shares, the Company and/or the Trustee shall use their reasonable efforts to effect such sale within a reasonable period of time, and shall transfer such Exercised Shares to the purchaser thereof concurrently with the receipt of, or after having made suitable arrangements to secure, the payment of the proceeds of the purchase price in such transaction.  The Company and/or the Trustee, as applicable, shall withhold from such proceeds any and all taxes required to be paid in respect of such sale, shall remit the amount so withheld to the appropriate tax authorities and shall pay the balance thereof directly to the Beneficial Grantee, reporting to such Beneficial Grantee and to the Company the amount so withheld and paid to said tax authorities. In case an appropriate tax exemption or partial tax exemption certificate was provided to the Company and/or Trustee, an adequate time prior to the date in which the proceeds are to be paid, the Company and/or Trustee shall not withhold or partially withhold the taxes required, in accordance with the tax exemption certificate, as the case may be).
 
 
 
 
8
 
5.2            Guarantee . In the event a 102(c) Award is granted to a Grantee who is an employee at the time of such grant, upon  the Grantee’s Cessation of Employment, such Grantee shall provide the Company, to its full satisfaction, with a guarantee or collateral securing the future payment of all taxes required to be paid upon the sale of the Exercised Shares received upon exercise of such 102(c) Award or its vesting (if an RSU), all in accordance with the provisions of Section 102 of the Ordinance, the 102 Rules and the regulation or orders promulgated thereunder.
 
5.3            Dividend .  All Exercised Shares shall entitle the Grantee thereof to receive dividends with respect thereto. For so long as Exercised Shares deposited with the Trustee on behalf of a Beneficial Grantee are held in the Trust, the cash dividends paid or distributed with respect thereto shall be distributed directly to such Beneficial Grantee, subject to any applicable taxation on distribution of dividends, and when applicable subject to the provisions of Section 102 of the Ordinance, the 102 Rules and the regulations or orders promulgated thereunder.
 
5.4            Voting Rights; Shareholder Rights .  The holder of an Award shall have no shareholder rights with respect to the Shares subject to such Award until such person shall have exercised the Award, or the Award has vested (if an RSU), as the case may be, has paid the Exercise Price, if applicable, and has become the record holder of the applicable Exercised Shares.
 
As long as the Exercised Shares are held by the Trustee, the voting rights at the Company’s general meeting attached to such Exercised Shares will remain with the Trustee. The Trustee shall not be obligated to exercise such voting rights at general meetings, nor to notify the Grantee of any ExercisedShares held in the Trust, of any meeting of the Company’s shareholders. However, the Trustee may, at his sole discretion, empower the respective Beneficial Grantee, to vote in name and in place of the Trustee according to such Beneficial Grantee’s instructions, if provided.
 
6.            Reserved Shares: The total number of Shares that may be subject to Awards granted under this Plan shall not exceed 3,900,000 in the aggregate, subject to adjustments as provided in Section 11 hereof. All Shares under the Plan, in respect of which the right of a Grantee to purchase the same shall, for any reason, terminate, expire or otherwise cease to exist, shall again be available for grant through Awards under the Plan, and under any other plans or sub-plans, as the Committee may determine at its own discretion, from time to time, provided, however, that until termination of the Plan the Company shall at all times reserve sufficient number of unissued Shares to meet the requirements of the Plan.
 
Without derogating from the foregoing, the Committee shall have full authority in its discretion to determine that the Company may issue, for the purposes of this Plan and/or any other plans, previously issued Shares that are held by the Company, from time to time, as Dormant Shares (as such term is defined in the Companies Law).
 
 
 
 
9
 
7.            Required Approvals; Notice of Grant; Vesting and Re-pricing:
 
7.1           The implementation of the Plan and the grant of any Award under the Plan shall be subject to the Company’s procurement of all approvals and permits required by applicable law or regulatory authorities having jurisdiction over the Plan, the Awards granted under it, and the Exercised Shares issued pursuant to it.
 
The Company shall obtain the approval of the Company’s shareholders for the adoption of this Plan or for any amendment or sub-plan adopted in the future to this Plan, if shareholders’ approval is necessary to comply with the Company's bylaws, any applicable law, rule or regulation, including without limitation the US securities laws, or the securities laws of other jurisdictions applicable to Awards granted to Grantees under this Plan, or if shareholders’ approval is required by any authority or by any governmental agencies or national securities exchanges, including without limitation the US Securities and Exchange Commission.
 
7.2           The Notice of Grant shall state, inter alia , the number of Shares subject to each Award, the vesting schedule, the dates when the Awards may be exercised or shall automatically vest into Exercised Shares (for RSUs), as applicable, their Exercise Price, if applicable, whether the Awards granted to Israeli Grantees are 102 Awards (and in particular whether the 102 Awards are granted under the Taxation Route, or as 102(c) Awards) or 3(9) Awards, and such other terms and conditions as the Committee at its discretion may prescribe, provided that they are consistent with this Plan. Each Notice of Grant evidencing a 102 Award shall, in addition, be subject to the provisions of the Ordinance applicable to such awards.
 
Furthermore, each Grantee of a 102 Award under the Taxation Route shall be required to execute a declaration stating that he or she is familiar with the provisions of Section 102 of the Ordinance and the Taxation Route, and to undertake not to sell or transfer the Awards and/or the Exercised Shares prior to the lapse of the applicable Trust Period, unless he or she pays all taxes that may arise in connection with such sale and/or transfer .
 
7.3            Term of Awards; Vesting .  Without derogating from the rights and powers of the Committee under Section 7.2 hereof and subject to Section 10 hereinafter, unless otherwise specified by the Committee, the Awards shall be for a term of six (6) years, and, unless determined otherwise by the Committee, the Vesting Period pursuant to which such Awards shall vest, shall be such that 25% of the Awards granted to a Grantee in a specific grant shall vest on each of the first, second, third and fourth anniversaries of the Adoption Date; provided, however , that no Award granted under this Plan shall vest prior to the consummation of an IPO .
 
Unless determined otherwise by the Committee, any period in which the Grantee shall not be employed by the Company, or in which the Grantee shall have taken an unpaid leave of absence, or in which the Grantee shall cease to serve as a director, consultant or contractor of the Company, shall not be included in the Vesting Period.
 
 
 
 
10
 
7.4            Acceleration of Vesting .  Anything herein to the contrary in this Plan notwithstanding, the Committee shall have full authority, whether before of after the grant of an Award, to determine any provisions regarding the acceleration of the Vesting Period of any Award, or the cancellation of all or any portion of any outstanding restrictions with respect to any Award upon certain events or occurrences, on such terms and conditions as the Committee shall deem appropriate.
 
7.5            Repricing . Subject to applicable law, the Committee shall have full authority to, at any time and from time to time, (i) grant in its discretion to the holder of an outstanding Award, in exchange for the surrender and cancellation of such Award, a new Award having   an Exercise Price lower than   provided in the Award   so surrendered and canceled and containing such other terms and conditions as the Committee may prescribe in accordance with the provisions of the Plan, or ( ii) effectuate a decrease in the Exercise Price (see Section 8 below) of outstanding Awards .
 
8.            Exercise Price: The Exercise Price shall be determined by the Committee in its sole and absolute discretion, subject to applicable law and to guidelines adopted by the Board from time to time.
 
9.            Exercise of Options:
 
9.1           Options shall be exercisable pursuant to the terms under which they were awarded and subject to the terms and conditions of the Plan.
 
9.2           The exercise of an Option shall be made by a written Notice of Exercise delivered by the Grantee to the Company at its principal executive office, and/or to a Representative and, with respect to Options held in the Trust, to the Trustee, in such form and method as may be determined by the Company and when applicable, by the Trustee in accordance with the requirements of Section 102 of the Ordinance, specifying the number of Shares to be purchased and accompanied by the payment of the Exercise Price, at the Company’s or the Representative’s principal office, and containing such other terms and conditions as the Committee shall prescribe from time to time.
 
9.3           Notwithstanding the provisions of Section 9.2 above, and unless otherwise provided by the Board, all Options shall be exercised using the following method (the “ Net Exercise ”):
 
(a)           The Company shall issue to the Grantee (or to the Trustee, as applicable) a number of Shares having an aggregate Market Value (as defined below) equal to the Benefit Amount (as defined below) (the “ Net Exercise Shares ”);
 
For the purposes of this Section:
 
(i) The “ Benefit Amount ” shall mean the difference between:
 
 
 
 
11
 
      (A)  (i) the Market Value times (ii) the number of Shares subject to the Options for which a Notice of Exercise has been delivered to the Company; and
 
      (B)  (i) the Exercise Price times (ii) the number of Shares subject to the Options for which a Notice of Exercise has been delivered to the Company.
 
            (ii) “ Market Value ” shall mean the closing price for a Share on the last trading day prior to the date of exercise, as reported or quoted on the Nasdaq or on any other stock market on which Shares are traded, as shall be determined by the Committee.
 
(b)           The Grantee shall not be required to pay to the Company any sum with respect to the exercise of such Options, other than a sum equal to [the aggregate nominal value of the Net Exercise Shares (which shall be paid in a manner provided in Section 9.5 below) (the “ Nominal Value Sum ”). However, the Company shall have the full authority in its discretion to determine at any time that the Nominal Value Sum shall not be paid and that the Company shall capitalize applicable profits or take any other action to ensure that it meets any requirement of applicable law regarding issuance of Shares for consideration that is lower than the nominal value of such Shares;
 
(c)           No fractional Shares will be issued to the Grantee and the number of Shares granted to the Grantee under the Plan shall be rounded off (upward or downward) to the nearest whole number.
 
9.4           Anything herein to the contrary notwithstanding, but without derogating from the provisions of Section 10 hereof, unless otherwise determined by the Committee, if any Option has not been exercised and the Shares subject thereto not paid for within six (6) years after the Date of Grant (or any shorter period set forth in the Notice of Grant), such Option and the right to acquire such Shares shall terminate, all interests and rights of the Grantee in and to the same shall ipso facto expire, and, in the event that in connection therewith any Options are still held in the Trust as aforesaid, the Trust with respect thereto shall ipso facto expire, and the Shares subject to such Options shall again be available for grant through Awards under the Plan (provided its term is extended, if needed), any other plans or sub-plans, as provided for in Section 6 herein, or any other incentive arrangement of the Company.
 
9.5           Each payment for Exercised Shares shall be in respect of a whole number of Shares, and shall be effected in cash or by a bank’s check payable to the order of the Company, or such other method of payment acceptable to the Company.
 
10.            Termination of Employment:
 
10.1            Employees .  In the event of a Cessation of Employment of a Grantee who was an employee at the Date of Grant, all Awards theretofore granted to such Grantee when such Grantee was an employee of the Company, unless determined otherwise by the Committee, shall terminate as follows:
 
 
 
 
12
 
(a)           All such Awards that are not vested on the Date of Cessation shall terminate immediately.
 
(b)           If the Grantee’s cessation of employment is by reason of such Grantee's death or Disability, any Options previously granted to the Grantee (to the extent vested on the Date of Cessation) shall be exercisable by the Grantee (if applicable) or the Grantee's guardian, legal representative, estate or other person to whom the Grantee's rights are transferred by will or by laws of descent or distribution, at any time until the lapse of twelve (12)   months from the Date of Cessation (but in no event after the expiration date of such Options), and shall thereafter terminate.
 
(c)           If the Grantee’s Cessation of Employment is due to any reason other than those stated in Sections 11.1(b), 11.1(d) or 11.1(e) herein, any Options previously granted to the Grantee (to the extent vested on the Date of Cessation) shall be exercisable at any time until the lapse of three (3) months from the Date of Cessation (but in no event after the expiration date of such Options), and shall thereafter terminate;
 
(d)           Notwithstanding the aforesaid, if the Grantee’s Cessation of Employment is due to (i) breach of the Grantee’s duty of loyalty towards the Company, or (ii) breach of the Grantee’s duty of care towards the Company, or (iii) the commission of any flagrant criminal offense by the Grantee, or (iv) the commission of any act of fraud, embezzlement or dishonesty towards the Company by the Grantee, or (v) any unauthorized use or disclosure by the Grantee of confidential information or trade secrets of the Company, or any substantial breach of the Grantee’s employment agreement with the Company, or (vi) any other intentional misconduct by the Grantee (by act or omission) adversely affecting the business or affairs of the Company in a material manner, or (vii) any act or omission by the Grantee which would allow for the termination of the Grantee’s employment without severance pay, according to the Severance Pay Law, 1963, any and all Options previously granted to the Grantee whether vested or not shall ipso facto expire immediately and be of no legal effect.
 
(e)           If a Grantee retires, he may, subject to the approval of the Committee, continue to enjoy such rights, if any, under the Plan and on such terms and conditions, with such limitations and subject to such requirements as the Committee in its discretion may determine.
 
(f)           Whether the Cessation of Employment of a particular Grantee is by reason of “ Disability ” for the purposes of paragraph 10.1(b) hereof or by virtue of “retirement” for purposes of paragraph 10.1(e) hereof, or is a termination of employment other than by reason of such Disability or retirement, or is for reasons as set forth in paragraph 10.1(d) hereof, shall be finally and conclusively determined by the Committee in its absolute discretion.
 
 
 
 
13
 
(g)           Notwithstanding the aforesaid, under no circumstances shall any Option be exercisable after the specified expiration of the term of such Option.
 
10.2                 Directors, Consultants and Contractors .  In the event that a Grantee, who is a director, consultant or contractor of the Company, ceases, for any reason, to serve as such, the provisions of Sections 10.1(a), 10.1(b), 10.1(c), 10.1(d), 10.1(f) and 10.1(g) above shall apply, mutatis mutandis .
 
10.3           Notwithstanding the foregoing provisions of this Section 10, the Committee shall have the discretion, exercisable either at the time an Option is granted or thereafter, to:
 
(a)           Extend the period of time for which the Option is to remain exercisable following the Date of Cessation to such greater period of time, as the Committee shall deem appropriate, but in no event beyond the specified expiration of the term of the Option; or
 
(b)           Permit the Option to be exercised, during the applicable exercise period following the Date of Cessation, not only with respect to the number of Shares for which such Option is exercisable on the Date of Cessation but also with respect to one or more additional installments in which the Grantee would have vested under the Option had the Grantee continued in the employ or service of the Company.
 
10.4           Notwithstanding the foregoing provisions of this Section 10, and for the avoidance of doubt, unless the Board determines otherwise, the transfer of a Grantee from the employ or service of the Company to the employ or service of an Affiliate, or from the employ or service of an Affiliate to the employ or service of the Company or another Affiliate, shall not be deemed a Cessation of Employment or termination of service for purposes hereof.
 
11.            Adjustments, Liquidation and Corporate Transaction:
 
11.1            Bonus Shares .
 
(a)           If the Company distributes bonus shares to all of its shareholders, including all holders of Shares, whose date of distribution is earlier than the Exercise Date or vesting date (for RSUs), as applicable, Shares in the number and kind that the Award holder would have been entitled to as bonus shares had he/she exercised the Options or had his/her RSUs vested, as the case may be, before the record date determining the right to receive bonus shares, will be added to the Exercised Shares to which the holder of the Awards is entitled upon exercising the Options or vesting of the RSUs, as applicable.
 
(b)           The Exercise Price of each Award will not change as a result of the addition of such bonus shares, while other terms referring to the Exercised Shares will also apply to the bonus shares added to the Exercised Shares, mutatis mutandis .
 
 
 
 
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(c)           If the Company distributes bonus shares, as described in Section (a) above, for which the record date for distribution and/or the date of distribution fall during the period in which Exercised Shares are registered in the name of the Trustee for the Beneficial Grantee, the Company will transfer to the Trustee an amount of bonus shares according to the number of Exercised Shares registered in its name at the time of distribution, and the Trustee will hold them in Trust for the Beneficial Grantees. In the event Exercised Shares have been transferred from the Trustee to a Beneficial Grantee and/or sold by the Company or the Trustee at the Beneficial Grantee’s request between the record date for distribution and the date of distribution, the Company will transfer bonus shares in respect of these Shares directly to such Beneficial Grantee. Each such Grantee will be entitled to Shares in the same number and class to which he would have been entitled, had the Shares been held by him prior to the record date for the right to receive the bonus shares.
 
11.2            Cash Dividends . If the Company distributes cash dividends with respect to all Company’s Shares issued to its shareholders, and the record date for determining the right to receive such dividends (the “ Determining Date ”) is earlier than the Exercise Date of the Options granted hereunder, then the Exercise Price for each Share subject to an Option not exercised prior to the Determining Date, shall be reduced by an amount equal to the gross amount of the dividend per Share distributed, calculated in the same currency as the Exercise Price according to the representative rate of exchange as of the Determining Date, if applicable. Notwithstanding the aforesaid, in the event the Company’s Shares are listed on any stock exchange or admitted to trading on an electronic securities trading system, the aforesaid reduction of the Exercise Price for each Share subject to an Option not exercised shall correspond to the reduction in the price of a Company Share as a result of such distribution as recorded by such stock exchange or electronic securities trading system. Unless determined otherwise by the Board, the Exercise Price shall not be reduced to less than the nominal value of a Share.
 
11.3            Adjustments .  Unless determined otherwise by the Committee, subject to any required action by the shareholders of the Company and/or any other required action under any applicable law, the number of Shares subject to each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Award, as well as the price per share of Shares subject to each such outstanding Award, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a share split, reverse share split, combination or reclassification of the Shares or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided , however , that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.”  Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive.
 
 
 
 
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Except as expressly provided in this Section 12, no issuance by the Company of shares of any class, or securities convertible into shares of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Award.
 
Except as expressly provided in this Section 11, the grant of Awards under the Plan shall in no way affect the right of the Company to distribute bonus shares, to offer rights to purchase its securities, or to distribute cash dividends.
 
11.4            Liquidation .  Unless otherwise provided by the Board, in the event of the proposed dissolution or liquidation of the Company, all outstanding Awards will terminate immediately prior to the consummation of such proposed action. In such case, the Committee may declare that any Award shall terminate as of a date fixed by the Committee and give each Grantee the right to exercise his/her Award or to allow his/her Awards to vest (for RSUs), including any Award that would not otherwise be vested (in respect of RSUs) and/or exercisable (in respect of Options).
 
11.5            Corporate Transaction .
 
(a)           In the event of a Corporate Transaction, the Vesting Period of the Awards shall be automatically and immediately accelerated so that all Awards whether vested or not shall become vested and, in respect of Options, exercisable, as of ten (10) days prior to the effective date of such Corporate Transaction and until the effective date of such Corporate Transaction. The Company will provide each Grantee with a ten (10) day advanced notice prior to the effective date of a Corporate Transaction and in case no such advance notice is possible and/or the exercise of Awards is restricted under applicable law or regulations during the ten (10) days prior to the effective date of a Corporate Transaction, the Grantee will be entitled to exercise his or her Awards after the effective date of said Corporate Transaction, allowing a ten (10) day period to do so from the later of (i) receipt of such notice, or (ii) removal of all restrictions under applicable law or regulations on the exercise of the Awards, after which any unexercised Awards shall terminate.
 
(b)           Immediately prior the consummation of the Corporate Transaction, all outstanding Awards which are not exercised until the effective date of the Corporate Transaction, shall terminate and cease to be outstanding.
 
11.6            Sale .  Subject to any provision in the Articles of Association of the Company and to the Committee’s sole and absolute discretion, in the event of sale or other disposition of all or substantially all of the outstanding share capital of the Company, each Grantee shall be obligated to participate in such sale and sell his or her Exercised Shares, provided , however , that each such Exercised Share shall be sold at a price equal to that of any other Share sold under the sale, subject to the absolute discretion of the Board.
 
 
 
 
16
 
With respect to Exercised Shares held in Trust the following procedure will be applied:  the Trustee will transfer the Exercised Shares held in Trust and sign any document in order to effectuate the transfer of such Shares, including share transfer deeds, provided , however , that the Trustee receives a notice from the Board, specifying that: (i) all or substantially all of the issued outstanding share capital of the Company is to be sold, and therefore the Trustee is obligated to transfer the Exercised Shares held in Trust under the provisions of this Section 11.5; and (ii) the Company is obligated to withhold at source all taxes required to be paid upon release of the Exercised Shares from the Trust and to provide the Trustee with evidence, satisfactory to the Trustee, that such taxes indeed have been paid;   and (iii) the Company is obligated to transfer the consideration for the Exercised Shares directly to the Grantees.
 
11.7           The grant of Awards under the Plan shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
 
12.            Limitations on Transfer:
 
12.1           Unless determined otherwise by the Committee, no Award shall be assignable or transferable by the Grantee to whom granted otherwise than by will or the laws of descent and distribution, and an Award may be exercised, where applicable, during the lifetime of the Grantee only by such Grantee or by such Grantee's guardian or legal representative. Any assignment or transfer other than as aforesaid, shall be null and void. The terms of such Award shall be binding upon the beneficiaries, executors, administrators, heirs and successors of such Grantee.  In addition, as long as Awards and/or Exercised Shares are held by the Trustee on behalf of the Grantee, all rights of the Grantee over the Exercised Shares are personal, cannot be transferred, assigned, pledged or mortgaged, other than by will or pursuant to the laws of descent and distribution.
 
12.2            Underwriter’s Lock-up .   The Grantee’s rights to sell Exercised Shares may be subject to certain limitations (including a lock-up period), as will be requested by the Company or its underwriters, from time to time, or upon a specific occurrence, and the Grantee unconditionally agrees and accepts any such limitations.
 
12.3            Restrictions on Shares. The Committee may impose such restrictions on any Exercised Shares, as it may deem advisable, including, but not limited to, restrictions related to applicable U.S. federal securities laws, the requirements of any national securities exchange or system upon which Shares are then listed or traded, or any U.S. blue sky or state securities laws.
 
13.            Restricted Stock Units
 
13.1           Subject to the sole and absolute discretion and determination of the Committee,
 
 
 
 
17
 
the Committee may decide to grant under this Plan, in addition to, or instead of, any grant of Options, Restricted Stock Unit(s) (“ RSU(s) ”). RSUs are Options, bearing an Exercise Price of no more than the underlying Share’s nominal value.  In addition, notwithstanding anything to the contrary in Section 9.2 above, upon the lapse of the Vesting Period of an RSU, such RSU shall automatically vest into an Exercised Share of the Company and, unless otherwise determined by the Board, the Grantee shall pay to the Company its nominal value as a precondition to any issuance of such Exercised Share. However, the Company shall have the full authority in its discretion to determine at any time that the nominal value shall not be paid and that the Company shall capitalize applicable profits or take any other action to ensure that it meets any requirement of applicable law regarding issuance of shares for consideration that is lower than the nominal value of such Shares.
 
13.2           All other terms and conditions of this Plan applicable to Options, shall apply to RSUs mutatis mutandis .
 
14.            Term and Amendment of the Plan:
 
14.1           The Plan shall terminate, and no additional Awards may be granted pursuant to it, upon the earliest of (i) the expiration of ten (10) years from the date the Plan was adopted by the Board, or (ii) the termination of all outstanding Awards in connection with a Corporate Transaction. All Awards outstanding at the time of a clause (i) termination event shall continue to have full force and effect in accordance with the provisions of the Plan and the documents evidencing such Awards.
 
14.2           Subject to applicable laws and regulations, the Board in its discretion may, at any time and from time to time, amend, alter, extend or terminate the Plan,   as it deems advisable. However, no amendment or modification shall adversely affect any rights and obligations with respect to Options at the time outstanding under the Plan, unless the applicable Grantee consents to such amendment or modification. In the event the Committee wishes to grant Awards to non-Israeli Grantees, the Committee may adopt, as part of this Plan and based on it, sub-plans, in order to comply with all relevant and applicable laws and regulations of the country of residence of such Grantees.
 
15.            Withholding and Tax Consequences: The Company’s obligation to deliver Exercised Shares upon the exercise or vesting of any Awards granted under the Plan shall be subject to the satisfaction of all applicable income tax and other compulsory payments withholding requirements. All tax consequences and obligations regarding any other compulsory payments arising from the grant, exercise, or vesting of any Award, from the payment for, or the subsequent disposition of, Exercised Shares subject thereto or from any other event or act (of the Company, of the Trustee or of the Grantee) hereunder, shall be borne solely by the Grantee, and the Grantee shall indemnify the Company and/or the Trustee, as applicable, and hold them harmless against and from any and all liability for any such tax or other compulsory payment, or
 
 
 
 
18
 
interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax or other compulsory payment from any payment made to the Grantee.
 
The Company and/or the Trustee, when applicable, shall not be required to release any Share certificate to a Grantee until all required payments have been fully made.
 
16.            Miscellaneous:
 
16.1            Continuance of Employment.   Neither the Plan nor the grant of an Award thereunder shall impose any obligation on the Company to continue the employment or service of any Grantee. Nothing in the Plan or in any Award granted thereunder shall confer upon any Grantee any right to continue in the employment or service of the Company for any period of specific duration, or interfere with or otherwise restrict in any way the right of the Company to terminate such employment or service at any time, for any reason, with or without cause.
 
16.2           Notwithstanding anything to the contrary in this Plan, it is hereby clarified, that any income attributed (or deemed to be attributed) to the Grantee as a result of this Plan, the grant or exercise of Awards thereunder, or the sale of Exercised Shares, shall not be taken into account for the purpose of calculating the Grantee’s eligibility for any rights deriving from the employee-employer or service provider-client relationship between the Grantee and the Company.
 
16.3            Governing Law.   The Plan and all instruments issued thereunder or in connection therewith, shall be governed by, and interpreted in accordance with, the laws of the State of Israel, excluding the choice of law rules thereof .
 
16.4            Application of Funds .  Any proceeds received by the Company from the sale of Exercised Shares pursuant to the Awards granted under the Plan shall be used for general corporate purposes of the Company.
 
16.5            Multiple Agreements.   The terms of each Award may differ from other Awards granted under the Plan at the same time, or at any other time.  The Committee may also grant more than one Award to a given Grantee during the term of the Plan, either in addition to, or in substitution for, one or more Awards previously granted to that Grantee.  The grant of multiple Awards may be evidenced by a single Notice of Grant or multiple Notices of Grant, as determined by the Committee.
 
16.6            Non-Exclusivity of the Plan .  The adoption of the Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of awards otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases.
 
 
 
 
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16.7                      The provisions of this Plan shall not be construed as deviating from any applicable laws, rules and regulations.
 
*****
 
 
 
Exhibit 4.9
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010

 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 

State of Israel
Ministry of Communications


General License to Cellcom Israel Ltd.
for the Provision of mobile radio telephone services by the cellular method (cellular)

Combined Version, as at November 27, 2011
 
 
 
I
 
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010

 
Table of Contents
 
General   License   for
1
CHAPTER A: GENERAL
2
PART A: DEFINITIONS AND INTERPRETATION:
2
 
1.
Definitions
2
 
2.
Clause headings
13
 
3.
Blue pencil principle
13
PART B – LEGAL PROVISIONS AND ADMINISTRATIVE PROVISIONS
14
 
4.
Upholding laws and provisions
14
 
5.
Permit obligation pursuant to any other law
14
 
6.
Contradiction in the License provisions
14
PART A – SCOPE AND PERIOD OF THE LICENSE
15
 
7.
Scope of the License
15
 
8.
Absence of exclusivity A16
15
 
9 .
The License period
16
 
10.
Extension of the License Period
16
 
11.
Renewal of the License
18
 
12.
Termination of the License Period
19
PART B – CHANGE IN CONDITIONS AND CANCELLATION OF THE LICENSE
20
 
13.
Change in the License conditions
20
 
14.
Cancellation of the License
20
 
15.
Other remedies
23
CHAPTER C: OWNERSHIP, ASSETS AND MEANS OF CONTROL
25
PART A – RESTRICTIONS ON TRANSFER OF THE LICENSE AND ITS ASSETS
25
 
16.
Prohibition on transfer of the license
25
 
17.
Ownership of the Cellular System
25
 
18.
Restrictions on transfer of the License assets
25
 
19.
Engagement with another
26
Part B: Means of Control – Changes and Limitations
27
 
20.
Particulars of Licensee
27
 
21.
Transfer of Means of Control
27
 
22.
Encumbrance of Means of Control
29
 
22A.
Israeli Nationality and Holdings of Founding Shareholders or Their Substitutes
30
Part C: Cross-Ownership and Conflict of Interest
32
 
23.
Prohibition on Cross-Ownership
32
 
24.
Prohibition on a Conflict of Interest
32
Chapter D: Setup and Operation of Cellular system
34
Part A: Setting Up the System
34
 
25.
Definition
34
 
26.
Setup according to Plans and Specifications
34
 
27.
Execution Stages and Timetable
34
 
29.
Utilization and Construction of Infrastructures
36
 
30.
Obligation of Interconnection
37
 
30A.
Rules Concerning the Implementation of Interconnection
37
 
30B.
Payment for Traffic Completion and Interconnection
39
 
30C.
Prohibition on Delaying Interconnection
39
 
30D.
Providing the Possibility of Utilization
39
 
30E.
Infrastructure Services for an Interested Company
39
 
30F.
Numbering Program
40
 
31.
Reports on the Setup Works
41
 
32.
Handover of Information and Documents
41
 
 
 
 
II
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
 
33.
Supervision of Setup Works
41
 
34.
Correction of Deficiencies and Defects
41
 
35.
Safety Precautions and Prevention of Hazards
42
 
36.
Void.
42
 
37.
Intersections with Electricity and Telecommunications Lines
42
 
38.
Discovery of Antiquities and Site Preservation
42
 
39.
Land-Related Powers
42
Part B: Equipment Checks and Installation Certifications
44
 
40.
Compliance Check
44
 
41.
Responsibility for Compliance
44
 
42.
Performance Testing Program and Its Approval
44
 
43.
Notice of Setup Completion
44
 
44.
Terms of Fitness and Operation
44
Part C: Use of Frequencies
46
 
45.
Allocation of Frequencies
46
 
46.
Restriction on Use of Frequencies
46
 
47.
Prevention of Interferences
46
 
48.
Cellphone Activity in Emergencies
47
Part D: Inspections and MaintenanceA43)
49
 
49.
Definitions
49
 
50.
Performance of Inspections
49
 
51.
Inspections, Malfunctions and Maintenance Log
49
 
52.
Repair of Deficiencies and Defects
50
Chapter E: Providing Cellular Services to Subscribers
51
Part A: Entering into an Agreement with Subscribers
51
 
55. A43)
The Contract
51
 
56. A43)
Modification of Contract
56
 
59.
Obligation of Connecting Applicants and Prohibition on Stipulation
57
Part B: Service Level for Subscribers
58
 
60.
Obligation of Maintaining the Service
58
 
62.
Obligation of Maintenance
60
 
63.
Repair of Malfunctions
61
 
64.
End-user equipment – Selling and Renting
61
 
65.
Public Emergency Services
63
 
65A.
Blocking Service to a Nuisance Subscriber
64
 
66.
Protecting Subscriber Privacy
66
 
66A.
Special Services for the Security Forces
66
 
66B.
Security Provisions
67
 
67.
Bills to Subscribers
67
 
67A. Information Service for Clarifying Telephone Numbers
69
 
67B. 43 Void.
72
 
67C.Service Dossier
72
 
67D.Erotic Service
73
Part C: Termination, Delay or Restriction of Service
75
 
68.
Definitions
75
 
69.
Prohibition on the Termination or Disconnection of Service
75
 
70.
Disconnection of Service at Subscriber's Request
75
 
71.
Termination of Service at the Subscriber's Request
75
 
72.
Termination or Disconnection of Service Due to Breach of Agreement
79
 
73.
Disconnection of Service Due to Maintenance Operations
83
CHAPTER F – PAYMENT FOR SERVICES
84
Part A – General
84
 
 
III
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010

 
 
73A.
Definitions
84
 
74.
Payment Categories
84
Part B – Setting and Publication of Rates
86
 
75.
Setting the Rates and Their Amount
86
 
75A.
Completion of a Call in Another Public Telecommunications Network
89
 
75B.
Completion of an SMS on Another Public Telecommunications Network
89
 
75C.
Temporary Order
89
 
76.
Publication of Rates
90
 
77.
Void A43)
90
 
77A.
Fraud Prevention
90
Part C – Changes in the Rates
92
 
78. A43)
Change in the Rates
92
 
79.
Start of an Increase or Reduction in a Rate
92
 
80.
Arrears in Payment
92
Part D – Miscellaneous
94
 
81.
Onetime Debit for Connection Fee
94
 
82.
Collection of Subscription Fee in Installments
94
 
83.
Harm to Competition or to Consumers
94
CHAPTER G: PAYMENTS FROM THE LICENSEE, LIABILITY, INSURANCE AND GUARANTEE
96
Part A – Royalties and Payments
96
 
84.
Royalties
96
 
85.
Arrears in the Payment of Royalties
96
 
86.
Payment Method
96
 
87.
Other Mandatory Payments
96
Part B – Liability and Insurance
98
 
88.
Definition of Scope of Insurance
98
 
89.
Licensee’s Liability
98
 
90.
Immunity from Liability
98
 
91.
Making an Insurance Contract
98
 
92.
Conditions in the Insurance Contract
100
 
93.
Remedy for Breach of Conditions with Respect to Insurance
100
Part C – Guarantee to Secure Fulfillment of the Terms of the License
101
 
94.
The Guarantee and Its Purpose
101
 
95.
Exercise of the Guarantee
101
 
96.
Manner of Exercise of the Guarantee
102
 
97.
Term of Validity of the Guarantee
102
 
98.
Preservation of Remedies
104
CHAPTER EIGHT – SUPERVISION AND REPORTING
105
Part A: Supervision of Licensee’s Activities
105
 
99.
Supervisory Power
105
 
100.
Preservation of Confidentiality
105
 
101.
Entry to Premises and Inspection of Documents
105
 
102.
Cooperation
105
Part B: Reporting and Correction of Defects
106
 
103. A43)
Duty of Submission of Reports
106
 
104. A43)
Types of Reports
106
 
105. A43)
Notice Concerning a Defect
108
 
106. A43)
Void.
108
CHAPTER I – MISCELLANEOUS
109
 
107.
The License as an Exhaustive Document
109
 
108.
Keeping the License Document and Returning the License
109
 
109.
Postponement of Deadline
109
 
 
IV
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
 
110.
Reserving of Liability
110
 
111.
Notices
110
First Schedule
1
Second Schedule – List of Appendices
2
 
Appendix D – Uniform Engagement Agreement – Not Attached
1
 
Appendix J –Accessibility to International Telecommunications Services
1
 
Appendix K – Discontinuation of Service to Cellular End-User Equipment of the IS-54 type
1
 
Appendix O – Erotic Services
1
 

 
 
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 

General   License   for


Cellcom Israel Ltd.


Award of license



By the authority vested in me under the Telecommunications Law, 5742 – 1982 (hereinafter – the Law), the Wireless Telegraph Ordinance [New Version], 5732 – 1972 (hereinafter – the Ordinance), and my other powers pursuant to any law, I, the Minister of Communications, hereby grant a license to Cellcom Israel Ltd. (hereinafter – the Licensee) to establish, maintain and operate a mobile radio telephone system by the cellular method, and to provide thereby mobile radio telephone services to the Israeli public, as set forth in this License.

This License is granted for the period set forth in the license and is subject to its conditions as follows:

 
VI
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
CHAPTER A: GENERAL

PART A: DEFINITIONS AND INTERPRETATION:

 
1.
Definitions
1.1
In this License, the words and expressions below will have the meaning listed next to them, unless another meaning is evident from the written language or its context.

" Type Approval"
 
-
Approval given by the Minister pursuant to the Law and the Ordinance to a cellular end-equipment model.
"Means of Control"
 
-
In a corporation – any one of the following:
(1) the right to vote at a general meeting of a company or in an entity corresponding thereto in another corporation;
(2) the right to appoint a director or CEO;
(3) the right to participate in the profits of the corporation;
(4) the right to a share in the balance of the assets of the corporation after payment of its debts on liquidation.
"Telecommunications"
 
-
Broadcast, transfer or reception of marks, signals, written material, visual forms, sound or information, via wire, wireless, optical system or other electromagnetic systems;
"Franchisee" A16
 
-
As defined in Section 6(12)(1) of the Law;
"Interested Party"
 
-
Anyone holding, directly or indirectly, 5% of a certain type of the Means of Control;
"Licensee"
 
-
Anyone to whom the Minster granted, pursuant to the Law, a general or special license; A16
"General Licensee" A16
 
-
Anyone who has received a general license for implementing the Telecommunications operations and providing Telecommunications services;
" Roaming Licensee "   A60
 
-
The person who one Tender 12/2010 – Combined License for the Provision of Mobile Radio Telephone Services by the Cellular Method (Cellular) in Israel – Extension of Existing License and Grant of a New License.
"Broadcasting Licensee" A16
 
-
As defined in the Law;
"Accessibility Fees"
 
-
Payment for the use of another Telecommunications system, including for connection, transmission and collection;
"Technical Requirements and Service Quality"
 
-
Standards of availability and service quality, standards for Telecommunications facilities and instructions for installation, operation and maintenance, all according to the engineering plan as the Director will order from time to time relating to the services of the Licensee
“Contract” A43
 
-
Contract between the Licensee and a Subscriber, for the provision of all or any of the services of the Licensee;
the "Proposal"
 
-
The Licensee’s Proposal in the Tender;
the "Bezeq Corp."
 
-
Bezeq Israel Telecommunication Corp. Ltd.;
 
 
2
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
the “Law"
-
The Communications Law (Telecommunications and Broadcasts), 5742 – 1982; A16


                                                    
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A60 Amendment No. 60
A16 Amendment No. 16
A43 Amendment No. 43 [Inception: This amendment shall come into force not later than March 15, 2007]
 
 
3
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010

 
"Holding" A16
 
-
For the purpose of Means of Control – directly or indirectly, whether alone or in concert with others, including through another, including a trustee or agent, or through a right granted under an agreement, including an option for a Holding that does not derive from convertible securities, or in any other way;
"Transfer" A16
 
-
For the purpose of the Means of Control, whether directly or indirectly, whether for consideration or without consideration, whether in perpetuity or for a period, all at once or in parts;
"In Concert With Others" A16
 
-
Permanent collaboration and, with regard to an individual, permanent collaborators will be deemed – the individual, his Relative, and a corporation that one of them controls and, with regard to a corporation – the corporation, anyone controlling it and anyone who is controlled by one of them;
"Security Forces"
 
-
The Israel Defence Forces, the Israel Police, the General Security Service and the Mossad Institute for Intelligence and Special Operations;
"Index"
 
-
The Consumer Price Index published by the Central Bureau of Statistics from time to time, or any other index that may replace it;
“Cellular Radio Center"
 
-
A wireless facility functioning on the operating frequencies and used for creating a radio connection between cellular end-equipment units in the possession of the subscribers in its coverage area and the cellular switchboard;
"Interface"
 
-
The physical meeting between various functional Telecommunications units, including by optical or wireless means; A16
"Telecommunications Facility"
 
-
A facility or device intended mainly for telecommunication purposes, including end-equipment; A16
"Tender No. 1/01" A16
 
-
A tender published by the Ministry on 4 Nissan 5761 (March 28, 2001), including the clarifications given by the Ministry in the course of the Tender, as a result of which this License was amended;
the "Tender"
 
-
Tender No. 10/93 published by the Ministry on November 11, 1993, including clarifications given by the Ministry in the course of the Tender, as a result of which this License is granted;
the "Director"
 
-
The Director General of the Ministry of Communications or anyone authorized by him for the purposes of this License, in whole or in part;
"Subscriber" A43
 
-
Anyone who enters into an agreement with the Licensee for the purpose of receiving cellular services as an end user;
"Dormant subscriber" T 48)
   
A subscriber in respect of which all of the conditions set out below are fulfilled:
       
(a)    He did not receive or use cellular services
 
 
T48) Amendment No. 48 (Inception: This amendment will come into force on October 2, 2008).
 
 
4
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
       
during a minimum of one year, starting from January 1, 2008;
 
(b)    He does not pay the Licensee any fixed payment;
 
(c)    He is not bound with the Licensee by any plan that includes a commitment period.
         
"Business subscriber" T 47)
   
 
-A subscriber who is any of the following:
 
(a)A corporation, as defined in the Interpretation Law, 5741-1981;
 
(b)Government offices and auxiliary government bodies;
 
(c)A licensed dealer excluding an exempt dealer;
 
(d)An entity established by or pursuant to a law.
“Private Subscriber” T 52
   
Non-Business Subscriber
 
"International Telecommunications System"
 
-
A system of Telecommunications facilities, connected or designated for connection to the Public Telecommunications Network through an International NEP, which is used or designated for use in the transfer of Telecommunications messages between an international switch situated in Israel and a Telecommunications Facility located abroad, including a satellite ground station and other Telecommunications facilities (hereinafter – the System Components ) and including transmission facilities among the System Components; A16
                                                    
A16 Amendment No. 16
 
 
T47) Amendment No. 47.
T52) Amendment No. 52.
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16

 
 
5
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
"Mobile Radio Telephone System" (Cellular System)
 
-
A system of wireless facilities built by the cellular method and other installations, through which mobile radio telephone services are provided to the public, including a cellular coordinator, cellular radio centers and wireless or cable transmission arteries between cellular radio centers, a cellular radio center and a cellular coordinator, between Cellular coordinators, or between a cellular switchboard and a Public Telecommunications Network.
"NDO (National Domestic Operator)" A16
 
-
A General Licensee for the provision of landline domestic Telecommunications services
"Cellular Operator"
 
-
A General Licensee for the provision of mobile radio telephone services A16
"Another Cellular Operator"
 
-
A Cellular Operator that is not the Licensee.
"Switchboard"
 
-
A Telecommunications Facility in which are situated and operated switching and transmission means, enabling contact between various end-equipment units that are connected or linked thereto, and the transfer of Telecommunications messages between them, including control and monitoring facilities and other facilities that enable the provision of various services to Subscribers of the Licensee or to subscribers of another Licensee;
"The Ministry"
 
-
The Ministry of Communications
"Transit Switch" A16
 
-
A Telecommunications Facility in which are situated and operated the means of switching, routing and transmission enabling contact between various switchboards that are connected or linked thereto and the transfer of Telecommunications messages between them, including control and monitoring facilities;
" Domestic Roaming "   A60
 
-
Expansion of the services of another cellular licensee (hereinafter – " cellular licensee ") to the coverage areas of the Licensee by means of the Licensee's cellular system, as set forth in section 67E.
"Officer" A16
 
-
Anyone acting as a director, CEO, chief business officer, deputy CEO, someone who fills such a position in a company even if the title is different, as well as any other manager who is directly subordinate to the CEO of the company;
"Appendices" A16
 
-
The first addendum and the Appendices set forth in the second addendum to the License A16
"NEP (Network End-Point)"
 
-
An Interface to which is connected on one side a Public Telecommunications Network and on the other side, end-user equipment, a private network, a mobile telephone network or other public network, as applicable;
"International NEP"
 
-
A connections device to which are linked a Public Telecommunications Network on one side and an International Telecommunications System on the other;
"Telecommunications operation"
 
-
The operation, installation, construction or maintenance of a Telecommunications Facility, all for the purpose of Telecommunications;
the "Ordinance"
 
-
The Wireless Telegraph Ordinance [New Version]. 5732 – 1972;
"End-User Equipment"
 
-
Telecommunications equipment, which is connected or is designated for connection to a public Telecommunications network through an NEP or through a private network, including a telephone, modem, facsimile or private switchboard;
                                                    
A16 Amendment No. 16
A16 Amendment No. 16
A60 Amendment No. 60
A16 Amendment No. 16
A16 Amendment No. 16
 
 
6
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 

"Cellular End-User Equipment"
 
-
Portable or movable Telecommunications equipment, connected or designated for connection to a Cellular System by means of a cellular radio center.
"Interconnection" A16
 
-
Connection between a Public Telecommunications Network of one Licensee to a Public Telecommunications Network of another Licensee, physically or logically, that facilitates the transfer of Telecommunications messages between Subscribers of the Licensees or the provision of services by one Licensee to the subscribers of the other Licensee;
"Relative"
 
-
Spouse, parent, son, daughter, brother, sister or their spouses;
the "License"
 
-
This License, with all its Appendices and any other document or condition stipulated in the License that will constitute an integral part of the License or its conditions;
the “Network" A16
 
-
The Cellular System of the Licensee;
the “Minister"
 
-
The Minister of Communications, including anyone to whom he has delegated his authority with regard to this License, in whole or in part;
"Public Telecommunications    Network"
 
-
A system of Telecommunications facilities, used or designated for the provision of Telecommunications services to the general public throughout Israel or at least in the area of service, including Coordinators or Transit Switches, transmission equipment and an access Network, including a Cellular System and an international Telecommunications system, except for a private network, End-Equipment and Cellular End-Equipment;
"Public Telecommunications Landline Network"
 
-
A domestic Public Telecommunications Network, except for a Cellular System and an international Telecommunications network;
"Access Network" A16
 
-
Components of a Public Telecommunications Network, which are used for connection between Coordinators and an NEP by means of a landline infrastructure, wireless infrastructure or a combination of the two;
"Bezeq Network"
 
-
The Public Telecommunications Network used by Bezeq for provision of its services under the general license granted to it and the other Telecommunications services provided under the Law, whether by Bezeq or by any other person;
"Use" A16
 
-
Access to a Telecommunications Facility of the Licensee, including to the public Telecommunications network or its Access Network, in whole or in part, and the possibility of using them for the purpose of conducting Telecommunications operations and providing Telecommunications services by means thereof, including the installation of a Telecommunications Facility of another Licensee in a Telecommunications Facility or courtyards of the Licensee
"Telecommunications Service"
 
-
The performance of Telecommunications operations for others;
"Basic Telephone Service"
 
-
Two-way switched or routed transfer, including via modem, of speech or of speech-like Telecommunications messages, for example, facsimile signals;
"Telephony Service" A16
 
-
Basic telephone service and services related to this service;
                                                    
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
 
 
7
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
"International Telephone Service (ITMS)"
 
-
A telephone service by means of the international system of a Licensee for the provision of international services;
"Roaming Service" A16
 
-
A cellular service provided abroad and in the areas of civilian control of the Palestinian Council via the Cellular System of a foreign Cellular operator (hereinafter – Foreign Operator), whereby the Subscriber pays the Licensee for the service; and, similarly, a cellular service provided in Israel via the Cellular System of the Licensee, whereby the Licensee provides service to a Foreign Operator for the subscribers of that operator; in this regard, the "Palestinian Council " – as defined in the Law for Implementation of the Interim Agreement Regarding the West Bank and Gaza Strip (Jurisdictional Powers and Other Provisions) (Legislative Amendments), 5756 – 1998 [sic];
"Related Service"
 
-
A service set forth in the first addendum to the License, provided on the basis of the Basic Telephone Service and which, by its nature, can only be provided by the supplier of the basic service;
" Value Added Service" A16
 
-
A service provided on the basis of the Basic Telephone Service, which, by its nature, can be provided by another, including another Licensee that is not the supplier of the basic service; with regard to the services of the Licensee, a service as stated, which is set forth in the first addendum to the License;
"infrastructure Service"
 
-
An Interconnection, or possibility of Use given to another Licensee, to a Franchisee or to a broadcast Licensee; A16
"Domestic Telecommunications Landline Service" A16
 
-
Infrastructure, transmissions, communication of data and landline telephony;
"Licensee Services"
 
-
Cellular services, Telecommunications Services and other services which the Licensee is entitled to provide pursuant to this License, to its Subscribers, to other Licensees, to broadcast licensees, to Franchisees and to the Security Forces; A16
"Cellular Services"
 
-
Telecommunications services provided by means of the Cellular System;
"Control"
 
-
The ability to direct a corporation's activity, directly or indirectly, including ability deriving from the articles of incorporation, by virtue of an agreement, either written or oral, by virtue of a Holding in the Means of Control in another corporation - or from any other source, except for ability deriving solely from fulfilling the position of director or other position in the corporation;
"the Minister"
 
-
The Minister of Communications, including anyone to whom he has delegated his authority with regard to this License, in whole or in part;
"Engineering Plan"
 
-
An engineering plan submitted by the Licensee in the Tender, including any change introduced therein with the approval of the Director and attached to the license as Appendix B;
"Numbering Plan" A16
 
-
As defined in Section 5A(B) of the Law;

                                                    
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16
 
 
8
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
1.2
Other words and expressions in the License, insofar as they are not defined in Clause 1.1, will have the meaning they have in the Law, in the Ordinance, in the regulations enacted thereunder, in the Interpretation Law, 5741 – 1981, or as set forth in the relevant places in the License, unless another meaning is implied by the written language or its context.

 
2. 
Clause headings

The headings of the clauses in this License are provided solely for the convenience of the reader, and should not be used for interpretation or explanation of the content of any of the conditions of the License.

 
3. 
Blue pencil principle

A cancellation or determination regarding the non-validity of a condition of this License or part of a condition will apply only with regard to that condition or part, as applicable, and will not serve, per se, to derogate from the binding validity of the License or any other condition therein.

 
9
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
PART B – LEGAL PROVISIONS AND ADMINISTRATIVE PROVISIONS
 
4. 
Upholding laws and provisions

4.1
In everything pertaining to the setup, existence, operation, and maintenance of the Cellular System and the provision of Cellular Services thereby, the Licensee will act in accordance with the provisions of any law and, without derogating from the aforesaid generality, will ensure compliance with the following:

 
(1)
the provisions of the Telecommunication Law and the regulations promulgated thereunder;

 
(2)
the provisions of the Wireless Telegraph Ordinance and the regulations promulgated thereunder;

 
(3)
administrative provisions;

 
(4)
international Telecommunications and radio treaties to which Israel is a party;

 
(5)
any other law or treaty that will apply to Telecommunications and radio, even if they go into effect after the License is granted.

4.2
The Licensee will act pursuant to laws and provisions as stated in Clause 4.1 as these will be in force from time to time during the license period, including the remedies for the breach thereof, and they will be deemed an integral part of the License conditions.

 
5. 
Permit obligation pursuant to any other law

5.1
The granting of this License will not exempt the Licensee from the obligation to obtain, with regard to execution of the License, any license, permit, approval, or consent pursuant to any other law.
 
6. 
Contradiction in the License provisions

In the event of an apparent contradiction in the License provisions, the Minister will determine the interpretation of the provisions or how to settle the contradiction between them and after the Licensee has been given a fair opportunity to voice its claims A2 .
 



                                                    
A2 Amendment No. 2
 
 
10
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
CHAPTER B: THE LICENSE – SCOPE, VALIDITY AND CANCELLATION

PART A – SCOPE AND PERIOD OF THE LICENSE
 
7. 
Scope of the License

7.1
Pursuant to this License and subject to all the provisions and conditions hereof, the Licensee is entitled to set up, implement, maintain and operate a Cellular System and, through it, to provide cellular Services to the Israeli public; without derogating from the aforementioned generality, the Licensee is entitled to do the following:

 
(1)
to set up, implement, maintain and operate cellular radio centers and to connect them to cellular switchboards, and to connect between cellular switchboards, by means of cable and wireless transmission channels;
 
(2)
To connect the cellular System to the Public Telecommunications Network of Bezeq;
 
(3)
To connect the cellular System to the international Telecommunications system;
 
(4)
To connect its cellular System to another cellular System;
 
(5)
To contract with Subscribers for the purpose of providing cellular Services;
 
(6)
To provide Subscribers with cellular End-User Equipment;
 
(7)
To connect Subscribers to the cellular System and provide cellular Services and other services pursuant to this License;
 
(8)
To provide Subscribers with the following services:
 
(A)
Basic mobile wireless telephone service;
 
(B)
Related services as set forth in the first addendum;
 
(C)
Roaming service; A16
 
(D)
Any other cellular service permitted pursuant to this License. A16

7.2
The Licensee will not be entitled to provide any cellular service or other Telecommunications Service that is not explicitly permitted within the context of this License.

 
8. 
Absence of exclusivity A16

8.1
The Licensee will not have any exclusivity in the provision of its services.

8.2
The Minister is entitled, at any time, to grant a license to additional operators for the provision of cellular Services..

8.3
Should the Minister publish a tender for the provision of cellular services, the Licensee will be entitled to submit its bid in the tender, however, the Minister will be entitled to determine as part of the conditions of such a tender that if the Licensee wins the tender, the receipt of a license will be contingent on the fact that the Licensee transfer its cellular System to another as instructed by the Minister and under conditions determined thereby, and it will cease to provide cellular Services by means thereof.
                                                    
A16 Amendment No. 16
A16 Amendment No. 16
A16 Amendment No. 16

 
11
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
9.
The License period

9.1
This License is valid for a period of 10 years, commencing on the date of the granting of the License (hereinafter – the License Period).

9.2
The License Period may be extended by additional six years in accordance with that stated in Clause 10 (hereinafter – the Additional Period).

9.3
This License may be renewed for one or more Additional Periods of six years, in accordance with that stated in Clause 11.

9.4
During the License Period and the Additional Period or on renewal of the License, the License will be subject to the authority of the Minister pursuant to Clauses 13 to 15 with regard to change, restriction, suspension or cancellation of the License.

9.5 A15
Notwithstanding the aforesaid A16 , in the context of expansion of the License, as a result of the Licensee winning Tender No. 1/01, this License will be valid for a period of twenty (20) years, commencing on 19 Shevat 5762 (February 1, 2002).

 
10. 
Extension of the License Period

10.1
The Minister is entitled, at the request of the Licensee, to extend the License Period for additional six years, if, after he has examined the following:

 
(A)
The Licensee has complied with the provisions of the Law, the Ordinance, the regulations thereunder and the provisions of the License;
 
(B)
The Licensee has continually acted to improve the scope, availability and quality of the cellular Services and to update the technology of the cellular System and its activities did not include an act or omission that would impair or restrict competition in the cellular sector;
 
(C)
The Licensee is capable of continuing to provide cellular Services at a high level and that it is able to make the investments required for the technological updating of the cellular System and for improving the scope, availability and quality of the cellular Services.

10.2
The Licensee must submit its request for an extension of the License Period during the forty-five days prior to the period of eighteen months preceding the end of the License Period.

10.3
The Licensee must attach the following to its request:
 
(A)
A report summarizing the annual statements that the Licensee has submitted pursuant to this License between the date of commencement of the License and the date of submission of its request;
 
(B)
Comparison of the data in the report for each year with the data for the preceding year and explanations of unusual changes in the data;
 
(C)
Review of the means, actions and investments taken or made by the Licensee to improve the quality, scope and availability of the Cellular Services and to develop and update the Cellular System technology.
 
 
12
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
10.4
The summary report pursuant to Clause 10.3 must contain up-to-date and precise details and be prepared in the form of an affidavit.
 
 
                                                    
A15 Amendment No. 15
A16 Amendment No. 16
 
 
13
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
10.5
For the purpose of examining the Licensee’s request to extend the License Period, the Minister is entitled to require the Licensee to furnish, during the period and in the manner that he will determine, any information or document and, without derogating from the generality of that stated, the Minister is entitled -
 
(A)
To require the Licensee to attach any document to the summary report for the purpose of verifying the details therein, to complete the report or to furnish any additional detail that is not included therein;
 
(B)
To summon the Licensee to appear before him to respond to questions or to present documents that are in its possession or under its control, relating to the data in the report;
 
(C)
To require the Licensee to submit to him an Engineering Plan outlining its plans for the technological update of the Cellular System during the Additional Period;

10.6
The Licensee must fulfil every requirement or summons as stated in Clause 10.5; if the Licensee is required to appear before the Minister, the chairman of the board of directors of the company holding the License or the CEO of the company or anyone authorized to do so in writing, will appear;

10.7
If the Licensee fails at least twice to respond to the request or summons as stated in Clause 10.5, the Minister is entitled to reject its request to extend the validity of the License.

10.8
The Minister will inform the Licensee of his decision regarding the request for extending the validity of the License no later than a year before the end of the License Period.

10.9
The Additional Period will be subject to the terms of this License, including any change therein.

10.10
The provisions of Clause 100 regarding confidentiality will apply, mutatis mutandis , to data furnished by the Licensee to the Minister or anyone acting on his behalf, pursuant to the provisions of Clause 10.

 
11.            Renewal of the License

11.1
At the end of the License Period or the Additional Period, the Minister is entitled, at the request of the Licensee, to renew the License for one or more Additional Periods of six years, as will be determined.

11.2
The Licensee will submit its request for the renewal of the License during the forty-five days prior to the eighteen months preceding of the end of the License Period or the Additional Period.

11.3
The Minister will inform the Licensee in writing, within 30 days of the date of receiving its request for renewal of the License, whether he intends to take the measures and institute the proceedings required to renew the License, or a tender will be conducted for the services under this License.

 
14
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
12.
Termination of the License Period

12.1
If the License Period pursuant to Clause 9.5 A16 or the Additional Period pursuant to Clause 10.1 or the License Period after its renewal pursuant to Clause 11.1 ends and the License is not extended or not renewed, the Minister is entitled to instruct the Licensee to continue to operate the  Cellular System for a period to be determined (hereinafter - the Period for Terminating the Service) until a license is duly granted to another for the provision of services pursuant to this License (hereinafter – Alternate Licensee), and the procedures for transferring the system thereunder are completed, or until a license is duly granted to another for alternate services. In any case, the Period for Terminating the Service will not exceed two years from the date on which the License expires.

12.2
During the Period for Terminating the Service and no later than ten months from the date on which a license is granted to an Alternate Licensee, the Licensee and the Alternate Licensee will negotiate for the purpose of purchasing the Cellular system at its economic value and assigning the rights and obligations of Subscribers to the Alternate Licensee; if said Licensees do not reach an agreement within said ten months, the price will be determined by an arbitrator, whose decision will be final, to be appointed by the Chairman of the Institute of Certified Public Accountants.


                                                    
A2 Amendment No. 16
 
 
15
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
PART B – CHANGE IN CONDITIONS AND CANCELLATION OF THE LICENSE
 
13. 
Change in the License conditions

13.1
The Minister is entitled to change, add to or subtract from the License conditions if he is convinced that one of the following exists:

 
(A)
A change has occurred in the extent of the License applicant’s suitability to perform the actions and services that are the subject of the License;
 
(B)
Subject to that stated in Clause 8, a change is required in the License to ensure competition in the telecommunications area;
 
(C)
A change is required in the License to ensure the level of services provided thereunder;
 
(D)
Changes that have occurred in telecommunications technology require a change in the license;

13.2
The Minister is entitled to change, increase or reduce the rates for services, if he is convinced that a change has occurred in one or more of the components of the costs, which represent a basis for calculating the rates.

13.3
The Minister will act pursuant to his authority as stated in Clauses 13.1 and 13.2 after the Licensee has been given a reasonable opportunity to voice its claims.

 
14. 
Cancellation of the License

14.1
The Minister is entitled to cancel the License before the end of its period, if one or more of the causes set forth in Section 6 to the Law exist, or in one of the following cases:

 
(A)
The Licensee did not disclose to the tenders committee information that must be disclosed or it furnished inaccurate information;
 
(B) A2
If the Licensee refuses to furnish the Minister or anyone acting on his behalf with information in its possession that must be disclosed and which it was obligated to disclose by virtue of the provisions of this license or pursuant to law, or the Licensee furnished the Minister or someone acting on his behalf with false information;
 
(C)
The Licensee did not comply with the provision of the Law, the Ordinance or the regulations thereunder;
 
(D)
The Licensee committed a material breach of the License conditions and, without derogating from the generality of that stated, including the following:
 
(1)
The Licensee is demanding for its services payments that are higher than the maximum rates prescribed in this License or pursuant thereto, or pursuant to any law;
 
(2)
The Licensee is not complying with the coverage or quality requirements prescribed in this license;
 
(3)
The Licensee did not comply with the provisions of this license with regard to the operation of digital technology in the  cellular System;
 
(E)
The Licensee did not commence provision of the services pursuant to that set forth in the License or unlawfully discontinued, restricted or delayed one of the services;


                                                    
A2 Amendment No. 2
 
 
16
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
(F)           One or more of the qualities that rendered the Licensee suitable to participate in the tender for cellular services, or to be a Licensee, has ceased to exist, including:
 
 
(1)
The Licensee has ceased to be a company registered in Israel;
 
(2)
Residents and citizens of Israel no longer hold, directly or indirectly, at least 20% of all of the Means of Control in the Franchisee; in this clause – "Citizen of Israel" – as defined in the Citizenship Law, 5712 – 1952; "Resident" – as defined in the Population Registry Law, 5735 – 1965;
 
(3)
A majority of the directors in the Licensee company are not citizens and residents of Israel;
 
(4)
The manager or a director of the Licensee company was convicted of an infamous crime and continues to serve in his position;
 
(5)
The joint equity, including surpluses, of all of the shareholders in the Licensee company, together with the equity of the Licensee, has declined to under US $200 million; in this matter, a shareholder holding less than 10% of the right to the company's earnings will not be taken into account.
 
(6)
Before 5 years have elapsed from the date of granting the License, the share of the cellular operator has fallen to less than 25% of the voting rights in the general meeting or of the right to appoint a director or CEO in the Licensee company;
 
(7)
Subject to that stated in paragraph (8), the Licensee, or an officer in the Licensee company or anyone who holds more than 5% of the Means of Control in the Licensee company, holds, directly or indirectly, more than one per cent (5%) of the Means of Control in Bezeq A2 , Another cellular Operator, or one of them acts as an Officer in a competing corporation.
 
(8)
If one of the following occurs in an Interested Party in the Licensee company, which is a mutual fund, insurance company, investment company or pension fund;
 
-
it holds, directly or indirectly, more than 5% of any Means of Control in a competing corporation, without receiving a permit therefor from the Minister;

 
-
it holds, directly or indirectly, more than 5% of any Means of Control in a competing company pursuant to a permit from the Minister and, additionally, it is a controlling shareholder and exercises actual Control in a competing corporation or it has a representative or appointee on its behalf among the Officers in the competing corporation, unless it is required to do so under law;

 
-
it holds, directly or indirectly, more than 10% of any Means of Control in a competing corporation, even though it has received permission to hold up to 10% of said Means of Control;
 
(G)
Void A2

 
(H)
If an act or omission in the Licensee’s operations impaired or restricted competition in the cellular sector;

                                                   
A16 Amendment No. 16
A2 Amendment No. 2
 
 
17
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
 
(I)
A receiver or temporary liquidator was appointed to the Licensee company and an order was given for its liquidation or it decided on voluntary liquidation;
 
(J)
Void A2)
 
(K)
The Licensee requested cancellation of the License;

14.1.1 A2
For the purposes of sub-clause 14.1(E A2 ), the restriction of service for technological reasons, effected after the Director was provided with prior written notification of the reasons and approved by the Director,  will not be considered deemed an improper unlawful cessation, restriction or delay of service.
 
14.2
If the Minister is convinced that, in the circumstances, the cause of invalidity does not necessitate cancellation of the License, the Minister will grant the Licensee a fair opportunity to rectify the act or omission constituting a cause for cancellation.
 
14.3
The Minister will notify the Licensee in advance of his intention to cancel the license, will state in the notice the cause in question, and will allow the Licensee to voice its claims relating to the cause for cancellation, either in writing or orally, according to the circumstances, within the period set forth in the notice.
 
14.4
The Minister is entitled to summon the Licensee to appear before him and may demand that it respond to questions, present documents or furnish him with whatever information and documents are required for the purposes of clarifying the cause for cancellation.
 
14.5
If the Licensee is required or summoned as stated, it must respond to the requirement or summons on the date set forth therein.
 
14.6
If the Licensee fails to respond, at least twice, to the Minister's demand or summons within the period stipulated by the Minister in his demand or summons, the Minister is entitled to cancel the License in a notice that will be sent to the Licensee (hereinafter - Cancellation Notice).
 
14.7
In the Cancellation Notice, the Minister will determine the date on which the cancellation of the License will take effect and he is entitled to instruct the Licensee to continue the provision of services pursuant to this License until a license is granted to another or until the appointment of a trustee or until a receiver is duly appointed for the purpose of managing and operating the cellular System – as applicable.
 
14.8
The Licensee will continue to provide services until the end of the period stipulated by the Minister in his notice and will comply with the provisions of this License and any instruction given by the Minister in this matter.
 
 
15. 
Other remedies

In addition to his authority to cancel the License as stated in Clause 14, the Minister is entitled, if the causes outlined in Clause 14.1 occur, to restrict or suspend the License or to change its conditions or to foreclose on the guarantee given by the Licensee to secure fulfilment of the conditions of the License, in whole or in part; the procedures set forth for cancellation of the License will
 
 
18
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
apply, mutatis mutandis , to the restriction or suspension of the License or forfeiture of the guarantee.
                                                    
A2 Amendment No. 2
A2 Amendment No. 2
A2 Section 3 in the original version of Amendment No. 2 contained a typographical error, in which 14.1(D) was written instead of 14.1(E).
 
 
19
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
CHAPTER C: OWNERSHIP, ASSETS AND MEANS OF CONTROL

PART A – RESTRICTIONS ON TRANSFER OF THE LICENSE AND ITS ASSETS

 
16. 
Prohibition on transfer of the license

The license, in whole or in part, may not be transferred, encumbered or attached without the prior consent of the Minister.
 
17. 
Ownership of the Cellular System

17.1 
The Licensee will be the owner of the Cellular System.

17.2
Notwithstanding that stated in Clause 17.1, the Director is entitled to permit the Licensee to utilize the cable or wireless transmission arteries of another for the purpose of connecting cellular radio centers, connecting a cellular radio center to a Cellular Coordinator of the Licensee or of another Licensee, connecting Cellular Coordinators of the Licensee, connecting a Cellular Coordinator of the licensee to a Cellular Coordinator of Another Cellular Operator A16 , or connecting a Cellular Coordinator to a Public Telecommunications Network or to an International Telecommunications Network.
 
18. 
Restrictions on transfer of the License assets

18.1
The Licensee may not sell, lease or pledge any of the assets used in performance of the License (hereinafter – the License Assets) with the Minister's prior consent and in accordance with the conditions determined by him.

18.2
Without derogating from the generality of that stated in Clauses 16 and 18.1, the Minister will give his consent for the granting of rights in the License Assets to a third party, if he is convinced to his satisfaction that the Licensee has promised that, in any event, the exercise of the rights by a third party will not cause any impairment in the provision of the services pursuant to this License, as long as the Licensee is obligated to provide these services pursuant to the provisions of this License.

18.3 A2
Notwithstanding that stated in Clause 18.1, the Licensee is entitled to encumber one of the License Assets in favour of a bank duly operating in Israel, for the purpose of receiving bank credit, provided that it has furnished notice of the encumbrance that it intends to create, whereby the encumbrance agreement includes a clause ensuring that that, in any event, the exercise of the rights by the banking corporation will not cause any impairment in the provision of the services pursuant to this license. For the purposes of this clause – "Banking Corporation" is as defined in the Banking Law (Licensing), 5741 – 1981, except for a "Foreign Corporation," as defined in the same law.

18.4 A2
The provisions of Clause 18.1 will not apply to the sale of equipment items during an upgrade, including the sale of equipment, as stated, on a "trade-in" basis.

                                                    
A16 Amendment No. 16
A2 Amendment No. 2
A2 Amendment No. 2
 
 
20
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
19. 
Engagement with another

19.1
If the Licensee wishes to provide one of the services pursuant to this license, in whole or in part, through another on its behalf, it must apply to the Director for his approval therefor; the Licensee must attach the Contract A43) to its application. The provisions of this clause will not apply for the purposes of the engagement between the Licensee and a marketer of Cellular End-Equipment or anyone acting on behalf of the Licensee for the purpose of marketing its services. A2

19.2
The Director is entitled to approve or reject the application, or to condition his approval on terms that must be fulfilled, including amendment of the agreement; the Director will consider, inter alia , to what extent the terms of the engagement with the other guarantee compliance with the conditions of this License and the obligations of the Licensee hereunder. The Director will not approve an engagement with another that contradicts the obligations of the Licensee pursuant to this License.

19.3
Nothing in the engagement with another will derogate from the obligations and of the Licensee and its responsibility for performing any of the services pursuant to this License, in whole or in part, pursuant to the provisions of this License, nor will it serve to derogate from the powers of the Minister, the Director or anyone acting on their behalf.

                                                    
A2 Amendment No. 2
 
 
21
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
Part B: Means of Control – Changes and Limitations

 
20. 
Particulars of Licensee

20.1 A43)
Details regarding the Licensee's legal entity, incorporation, holders of the controlling interest, holders of a material influence, interested parties and officers, are attached as Addendum A to the license. The Licensee must submit to the Director, every year at the beginning of January, an updated Addendum A.

20.2  
The Licensee will report to the Director in writing regarding any change in the information contained in Addendum A, including any transfer and acquisition of control or of 5% of the means of control in the Licensee company or change in the appointment of a director or general manager, within 14 days of the date of change.

 
21. 
Transfer of Means of Control

21.1  
There will be no transfer, directly or indirectly, of ten percent or more of any means of control in the Licensee, whether all at once or in parts, unless this received the Minister's prior consent.

21.2
There will be no kind of transfer of any means of control in the Licensee, or a part of said means of control, so that as a result of the transfer, control in the Licensee is transferred from one person to another, unless this was given the Minister's prior consent.

21.3
There will be no acquisition of control, directly or indirectly, in the Licensee, and there will be no acquisition, directly or indirectly, by a person himself or together with his relative or with another person, who operate with him regularly of 10% or more of any means of control in the Licensee, whether all at once or in parts, without the prior consent of the Minister.

21.4
Subject to the foregoing in this section, there will be no transfer, directly or indirectly, of means of control, so that the share of a cellular system operator in the Licensee drops below 25% of the voting rights in the general meeting and of the right to appoint a director or general manager, except after 5 years have elapsed since the date of the granting of the license. If 5 years have elapsed since the date of the granting of the license, the cellular system operator's share can go below 25% to the point of selling all the means of control in its possession to another, all subject to the Minister's approval for the very reduction of the cellular system operator's share in the means of control in the Licensee and also regarding the purchaser.
 
21.5
Notwithstanding that stated in sections 21.1 and 21.3, if traded means of control in the Licensee, not entailing the transfer of control in the Licensee, have been transferred or acquired at a rate requiring approval under sections 21.1 or 21.3, without the Minister’s approval having been requested, the Licensee shall report this to the Minister, in writing, and shall submit to the Minister an application for approval of the transfer or the acquisition, all within 21 days from when the Licensee learned of this fact, provided the Minister gave his prior written approval to the holding per se of the issue or the sale of the securities to the public. In this regard, “traded means of control” – means of control, including deposit certificates, Global or American Depository Shares (GDRs or ADRs), or similar certificates, in respect of securities listed on the stock exchange in Israel and/or
 
 
22
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
 
abroad, in a non-hostile country, or means of control offered to the public pursuant to a prospectus and held by the public, in Israel and/or abroad, in a non-hostile country.
 
21.6
Entry into an underwriting agreement in connection with an issue or sale of securities to the public, and listing on a stock exchange in Israel or abroad, in a non-hostile country, or the deposit of securities, including deposit certificates, Global or American Depository Shares (GDRs or ADRs), or similar certificates, in respect of securities, or the registration thereof with a nominee company and/or agent, shall not in themselves be deemed as the transfer of means of control in the Licensee.

21.7
(A)
Irregular holdings shall be registered in the members register (shareholders register) at the Licensee, noting the fact of their irregularity, immediately when the Licensee learns of this fact, and a notice concerning the registration shall be delivered by the Licensee to the owner of the irregular holdings and to the Minister. In this regard, “irregular holdings” – the holding of traded means of control without the Minister’s agreement as required under section 21 or in contravention of the provisions of section 23, and the entire holdings of a holder of traded means of control who acted contrary to the provisions of section 24; the aforesaid for as long as the Minister’s agreement is required and was not given under section 21 of the license or circumstances exist involving the contravention of the provisions of sections 23 or 24 of the license.

 
(B)
Irregular holdings registered as stated in section 21.7(A), shall not confer any rights on the holder, and shall be “dormant shares” as defined in section 308 of the Companies Law, 1999, except for purposes of receiving a dividend or other distribution to the shareholders (including the right to participate in an issue of rights which are calculated on the basis of holdings in means of control in the Licensee, except that holdings added as stated shall also be deemed as irregular holdings), therefore no act or contention of exercise of a right by virtue of irregular holdings shall be valid, except for purposes of receiving a dividend or other distribution as stated.

 
(C)
Irregular holdings shall not confer voting rights in the general meeting. A shareholder participating in a vote in the shareholders meeting shall notify the Licensee prior to the vote, or where the vote is by means of a voting instrument – on the voting instrument, whether or not its holdings in the Licensee or its vote require approval under sections 21 or 23 of the License. If the shareholders did not give a notice as stated, it shall not vote and its vote shall not be counted.

 
(D)
A director may not be appointed to the Licensee, elected or dismissed by virtue of irregular holdings. If a director was appointed, elected or dismissed as stated, such appointment, election or dismissal, as the case may be, shall not be valid.

 
(E)
The provisions of sections 21.7 and 21.9 shall be included in the articles of the Licensee, mutatis mutandis.

21.8
For as long as the Licensee’s articles prescribe as stated in section 21.7 and the Licensee acts in accordance with that stated in sections 21.5 and 21.7, for as long as the holdings of founding shareholders or their substitutes are not reduced to less than 50% of each of the means of control in the Licensee, and for as long as the Licensee’s articles prescribe that a majority of the voting power in the shareholders general meeting may appoint all the

 
 
23
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
 
directors in the Licensee, excluding outside directors in accordance with any relevant statutory requirement or stock exchange directive, irregular holdings shall not in themselves be cause for the cancellation of the license.
 
 
For purposes of this section, “ founding shareholders or their substitutes” – Discount Investment Corporation Ltd., DEC Communications and Technology Ltd. and PEC Israel Economic Corporation, or any other body to which any of those enumerated above transferred, with the Minister’s approval, means of control, provided the Minister confirmed in writing that the transferee body shall be deemed in this regard as the substitute of the founding shareholder beginning from the date to be determined by the Minister, and including anyone who is an “Israeli entity” as defined in clause 22.2A, who acquired a means of control from the Licensee and received the Minister’s approval for being deemed a founding shareholder of its substitute starting from the date that was determined by the Minister. The grant of approval under this section shall not exempt the Licensee from the duty of receiving the Minister’s approval for every transfer of means of control in the Licensee that requires approval under any other section of the license.

21.9
The provisions of sections 21.5 and 21.8 shall not apply to founding shareholders or their substitutes.

 
22. 
Encumbrance of Means of Control
 
A shareholder of the Licensee company or a shareholder of an interested party therein may not encumber his shares in such manner so that exercise of the encumbrance results in a change in ownership of 10% or more of any means of control in the Licensee, unless the encumbrance agreement contains a limitation by which the encumbrance may not be exercised without the prior consent of the Minister.
 
 
24
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
22A. 
Israeli Nationality and Holdings of Founding Shareholders or Their Substitutes

22A.1
The total holdings of “founding shareholders or their substitutes” as defined in section 21.8 (including anyone being an “Israeli entity” as defined in section 22.2A below, who acquired means of control from the Licensee and received the Minister’s approval for being deemed a founding shareholder or a substitute thereof as from the date determined by the Minister), who are mutually bound by an agreement for the fulfillment of the provisions of section 22A of the license (in this section, all of the above will be deemed: “founding shareholders or their substitutes”), cumulatively, may not be less than 26% of each of the means of control in the Licensee.

22A.2
The cumulative holdings of “Israeli entities,” one or more, included among founding shareholders or their substitutes, out of the total holdings of founding shareholders or their substitutes as stated in section 22A.1 above, may not be at any time less than 20% of the total issued capital and of the means of control in the Licensee. For this purpose, the Licensee’s issued share capital will be calculated less the number of “dormant shares” held by the Licensee.

 
In this section –

 
“Israeli entity” – With respect to an individual – anyone who is a citizen and resident of Israel; with respect to a corporation – the corporation was incorporated in Israel, and an individual who is a citizen and resident of Israel controls it, directly or indirectly, provided indirect control is solely through a corporation incorporated in Israel, one or more. However, for purposes of indirect holding, the Prime Minister and the Minister of Communications may approve holding through a corporation that was not incorporated in Israel, provided such corporation does not hold shares in the Licensee directly, where they are satisfied that this will not be detrimental to the purposes of this section. In this regard, “Israeli citizen” – as defined in the Citizenship Law 1952; “resident” – as defined in the Population Registry Law 1965; “dormant share” – as defined in section 308 of the Companies Law 1999.

22A.3
At least twenty percent (20%) of the Licensee’s directors will be appointed by Israeli entities as stated in clause 22A.2. Notwithstanding the above, in this regard, if the Licensee’s board of directors numbers up to 14 members – at least two directors will be appointed by Israeli entities as stated in clause 22A.2 above, if the Licensee’s board of directors numbers from 15 to 24 directors – at least three directors will be appointed by Israeli entities as stated in clause 22A.2 above, and so forth.

22A.4
The Licensee’s board of directors will appoint from among its members having a security classification and security clearance as will be determined by the General Security Service (hereinafter – “classified directors” ), a committee called the “Committee for Security Matters.”

 
At least four directors will serve on the Committee for Security Matters, among them at least one outside director. Matters pertaining to security will be considered, subject to that stated in clause 22A.5 below, solely in the framework of the Committee for Security Matters.
 
 
25
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
 
A resolution that was adopted or an action that was performed by the Committee for Security Matters, will be deemed the same as a resolution adopted or action performed by the Company’s board of directors, and it will be considered by the board of directly only if this is required under section 22A.5 below and subject to that stated in section 22A.5 below. In this clause, “security matters” – as defined in the Telecommunications Order (Designation of an Essential Service Provided by Bezeq Israeli Telecommunications Company Ltd.) 1997.

22A.5
Security matters which the Licensee’s board of directors or Audit Committee are required to consider according to the cogent provisions in the Companies Law 1999 or according to cogent provisions of any other law applying to the Licensee, will be considered, insofar as necessary, by the board of directors or by the Audit Committee, with the participation of classified directors only. Non-classified directors may not participate in such meetings of the board of directors or the Audit Committee and may not receive information or inspect documents pertaining to the security matters considered in the meeting. The quorum in every such meeting will consist of classified directors only.

 
The Licensee will specify in its articles that an officer who by virtue of his position and by virtue of the provisions of the law or the articles should have received information or participated in meetings on security matters, and is prevented from doing so by reason of the provision of clause 22A.5, will be exempt from liability for breach of the duty of care towards the Licensee, if the duty of care was breached due to non-participation in a meeting or non-receipt of information.

22A.6
The general meeting may not assume, delegate, transfer or exercise powers that are vested in another organ of the Company, in security matters.

22A.7
(A)
The Minister will appoint an observer at meetings of the Company’s board of directors and committees, having a security classification and security clearance as will be determined by the General Security Service.

 
(B)
The observer will be a government employee qualifying as a director under Chapter C of the Government Companies Law 1975.

 
(C)
In addition, and without derogating from any duty imposed on him by law, the observer will owe the Licensee a duty of confidentiality, except as required for the fulfillment of his function as an observer. The observer may not serve as an observer or in any other position on behalf of any other entity engaging in the provision of communication services and competing directly with the Licensee, and he will avoid any conflict of interest between his function as an observer and the Licensee, except a conflict of interest stemming from his being a government employee filling the function of an observer at the Licensee. The observer will commit towards the Licensee not to serve as an observer or officer and not to hold any position or be employed, directly or indirectly, at any entity competing directly with the Licensee or being in a conflict of interest with it, except for a conflict of interest stemming, as stated, from his being a government employee filling the function of an observer at the Licensee, throughout his tenure as observer at the Licensee and during eighteen (18) after the end of such tenure.
 
In any case of differences of opinion as to the observer being in a conflict of interest, the Attorney General or someone on his behalf will decide in the matter.
 
 
26
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
 
(D)
An invitation to meetings of the board of directors and its committees, including the Committee for Security Matters, will be delivered to the observer as well, who may participate as an observer at any meeting as stated.

 
(E)
The observer’s right to receive information from the Licensee will be the same as a director’s right. If the Licensee is of the opinion that certain information in the nature of sensitive business information is not required by the observer for the fulfillment of his function, the Licensee may withhold delivery of such information to the observer, notifying him in this regard. If the observer is of the opinion that he should receive that information, the matter will be referred to the decision of the head of the General Security Services.

 
(F)
If the observer saw that the Licensee adopted or is about to adopt a resolution on security matters contrary to any provision of the license, contract to section 13 of the Law or contrary to section 11 of the General Security Services Law 2002, it will notify the Licensee without any delay, in writing, such notice to be delivered to the chairman of the board of directors and to the chairman of the Committee for Security Matters, and to set a proper time in the circumstances of the case for remedying the breach or modifying the resolution, should this be possible.

Part C: Cross-Ownership and Conflict of Interest

 
23. 
Prohibition on Cross-Ownership

23.1
The Licensee, an officer therein or whoever holds more than 5% of any means of control in the Licensee, will not hold, directly or indirectly, more than one percent (5%) of the means of control in Bezeq, A16) another cellular system operator. Regarding this matter, "holding" – includes the holding as an agent.

23.2
Notwithstanding that stated in Section 23.1, an interested party in the Licensee that is a mutual fund, insurance company, investment company or a pension fund, may hold up to 5% of the means of control in Bezeq, another cellular system operator A16) , provided all the following are fulfilled:

 
 
(A)
It is not a controlling shareholder and does not exert, directly or indirectly, any control in Bezeq or A16) another cellular system operator;

 
 
(B)
It has no representative or person in charge on its behalf among Bezeq's or the other cellular system operator's officers, unless required to do so by law.
 
23.3
Pursuant to a written request, the Minister may allow an interested party in the Licensee, as stated in Section 23.2, to hold up to 10% of the means of control in Bezeq, A16) another cellular system operator, when the terms stated in Section 23.2(A) and (B) are fulfilled, if he saw, to his satisfaction, that such a holding will not harm competition.
 
 
24. 
Prohibition on a Conflict of Interest
 
The Licensee, an officer therein or an interested party in the Licensee company will not be a party to any agreement, arrangement or understanding with Bezeq, A16) another

 
27
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
cellular system operator, meant or liable to reduce competition or harm it in all pertaining to cellular system services, cellphone network end-equipment and other services provided via the cellular system.
 
 
28
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
Chapter D: Setup and Operation of Cellular system

Part A: Setting Up the System


 
25.            Definition
 
 
In this part –
 
"Milestones" – Stages in the setup of the cellular system, according to the timetable detailed in the engineering plan – Addendum B to the license.

 
26.            Setup according to Plans and Specifications
 
26.1
In all pertaining to the setup and operation of the cellular system (in this section – network), including the technical quality of its various components, as well as the network's structure and manner of setup, the Licensee will comply with the terms and provisions in the engineering plan.

26.2  
The Licensee will follow all the specifications of the Ministry of Communications and the network-related standards prescribed by standardization organizations in Israel and around the world, as well as other international organizations, in the telecommunications and wireless field as well as in any other field pertaining to the setup and operation of the network.
26.3  
The Licensee may discontinue the operation of a cellular system that has become technologically obsolete, after received the Director's approval in that regard and subject to conditions to be set in the License A 63 .

 
27.            Execution Stages and Timetable

27.1  
The setup rate of the cellular system, the setup milestones, the commencement date for providing the service in the various regions in Israel, will be in accordance with the timetable set in the engineering plan – Addendum B to the license.

27.2
The Licensee may not deviate from the timetable unless authorized to do so by the Director, provided the Licensee applies in writing to the Director to receive his permission immediately after realizing that difficulties have arisen that prevent it from meeting the original timetable.

 
27.2.1  
A delay in signing agreements with a third party or obtaining approval from the planning and construction authorities will be deemed a reasonable reason for obtaining the Director's permission for deviating from the timetable, only if the Director realizes to his satisfaction that the Licensee has done its reasonable utmost in the circumstances of the matter, to come to an agreement with a third party or to receive approval from the planning and construction authorities.

27.3
The Director may approve the Licensee's request to deviate from the timetable, in whole or in part, and to stipulate conditions for its approval. The Director may also approve deviation regarding a specific milestone, provided the Licensee undertakes to catch up with the planned setup rate in the succeeding milestones.

 
A63 Amendment No. 63
 
 
29
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
28.
Modification of Plans during Setup

28.1
The Licensee may not deviate from the engineering plan unless it has been authorized to do so by the Director under the provisions of this section. However, the placement of a Cellular Radio  Center in a different site from that set in the engineering plan will not be deemed a deviation, if done within the search region. As regards this section, a "search region" denotes a territory defined in the engineering plan in which a Cellular Radio center is planned to be set up, at a specific site within the territory, and regarding which it has been stated in the engineering plan that it might be necessary to place the center in another site found in the territory.

28.2
If in the course of setting up the cellular system, the Licensee realizes that it has become necessary to deviate or depart from the engineering plan, the Licensee must apply in writing to the Director to obtain his approval for the plan. In its application, the Licensee must describe the essence and nature of the requested modification and the reasons therefor. The Licensee must attach the amended plan it proposes, to the application.

28.3  
The Director may reject or approve the request, in whole or in part, and may also stipulate conditions for its approval, insofar as these are needed for the rigorous assurance of the network's quality and performance level. The Director will make a decision in the matter of the request and notify the Licensee of his decision, all within a reasonable amount of time.

 
29. 
Utilization and Construction of Infrastructures

29.1  
For the purpose of setting up and operating the cellular network, the Licensee may, subject to any law, set up, maintain and operate cable or wireless transmission arteries, provided such transmission arteries will be used solely for the following:

(A)  
Connection between the Cellular Radio Centers forming part of the Licensee's cellular system;

(B)  
Connection between the Licensee's Cellular Radio Centers and its cellular exchanges;

(C)  
Connection between all the cellular exchanges;

(D)  
Connection between the Licensee's cellular exchanges and a public telecommunications system, or another cellular operator's cellular network A16) , or other systems operating lawfully.

29.2
For the purpose of the connection described in Section 29.1, the Licensee may use also the cable or wireless transmission arteries of Bezeq or of another licensee or concessionaire lawfully authorized to provide aforesaid infrastructure services.

29.3
To remove any doubt, it is hereby clarified that use of the transmission arteries to be set up by the Licensee is solely for operating the cellular system as stated in Section 29.1, unless the Minister permitted the Licensee in the license to make other use thereof, in accordance with the terms he laid down.

 
30
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
30. A16)
Obligation of Interconnection

30.1
The Licensee will act to effect interconnection of the network with every other public telecommunications network, operating in the territory subject to the law, jurisdiction and governance of the State of Israel (including settlements, military sites and military installations in Judah, Samaria and Gaza Strip), including with every public landline telecommunications network, international telecommunications network and cellular network of another cellular operator.

30.2
The interconnection between the network and another licensee's public telecommunications network will be effected in such manner as to enable the following:
 
(A)
Relay of telecommunication messages between end-equipment connected to the network and end-equipment connected to the other public telecommunications network;

(B)  
Proper, regular provision of services by the Licensee to the other licensee's subscribers, and the provision of services by the other licensee to the Licensee's subscribers.

30.3
Interconnection may be effected either directly or indirectly, via a public telecommunications network of another general license holder, provided it enables that stated in Section 30.2.

30.4
As regards the interconnection between the network and public landline telecommunications network, the Licensee will act to set up interface points between the two networks, for each type of service (infrastructure, data transmission and communication, telephony), with at least three transition switches, unless the Director has decided otherwise at the written request of the Licensee. Setup of the interface points will be done under an agreement between the Licensee and the domestic operator licensee. Such an agreement will include, inter alia, the technical, operational and business details of the connection, the number of connections and their location.

30.5
As regards the interconnection between the network and an international telecommunications network, the Licensee will act in compliance with the provisions of Addendum J to the license.

 
30A. A16 )
Rules Concerning the Implementation of Interconnection

 
The Licensee will act to implement interconnection in accordance with all the following:

(A)
The Licensee will verify that the network's technical and operational standards comply wit the requirements for linkup with the public telecommunications network of the domestic operators, the other cellphone operators, and the international operators (hereinafter – other operator ), that the network's activities will mesh properly with the activities of the other operator's public telecommunications network, and that the interconnection will not adversely affect the proper functioning of these networks and the normal service to their subscribers;
 
 
31
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
(B)
The Licensee will provide the interconnection service under equal conditions for every other operator and avoid any discrimination in actuating the interconnection, including with regard to the following:

(1)  
Supply of infrastructure facilities and network linkup services;
(2)  
Availability of linkup facilities;
(3)  
Linkup method, quality and survival;
(4)  
Alterations and adaptations in the switching in the facilities, in the protocols and at the network interface points;
(5)  
Payments for interconnection;
(6)  
Debiting and collection arrangements, and the transfer of information regarding subscribers;
(7)  
Commercial terms for effecting interconnection;
(8)  
Submission of information regarding the network and alteration therein relating to interconnection;

(C)
The Licensee will place at the disposal of the other operator any essential information the other operator needs for providing its services via the Licensee's facilities. Said information will be given subject to any law concerning the protection of privacy or commercial confidentiality. In the event the parties fail to reach an agreement regarding the nature and scope of the essential information, the Minister will decide in the matter;

(D)
The Licensee will give the other operator information regarding alterations planned in its network, which may affect the interconnection with the other operator's public telecommunications' network, or the interconnection between the public telecommunications networks of the other operators. The Licensee will provide the aforesaid information in such manner as to enable the other operator to prepare reasonably for the implementation of said alterations;

(E)
As regards Subsections (C) and (D), the Licensee may stipulate the provision of information to the other operator on signing a reasonable privacy protection agreement, intended to safeguard the Licensee's rights under any law, including trade secrets, intellectual property rights and the like, pertaining to information regarding modification of the network meant to be given to the other operator;

(F)
The terms in respect of interconnection between the network and the other operator's public telecommunications network will be formalized in an agreement between the Licensee and the other operator. If the parties fail to reach an agreement, the Minister will decide in the matter.

(G)
(1)
The Licensee will allow its subscribers to receive all the services offered to them by another operator, The Licensee may also allow another operator's subscribers to receive services from the Licensee, provided that said receipt of services is possible under any law.
 
(2)
The Director may order the Licensee to allow the other operator's subscribers to receive services provided by the Licensee, provided that such receipt of services is possible technically and under any law.
 
(3)
Notwithstanding that stated in Subsection (1), the Director may, at the written request of the Licensee, exempt the Licensee from the obligation of allowing its subscribers the possibility of receiving services from another operator, for technical, economic reasons or for other justified reasons.
 
 
32
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
(H)
The Licensee will forward to the Director a signed copy of every agreement between it and the other operator concerning interconnection;

(I)
The Licensee will forward to the Director on demand, any information given to the other operator under Subsections (C) and (D), as well as a copy of every confidentiality agreement under Subsection (E);

(J)
The Licensee will act in compliance with additional provisions the Minister will prescribe.


 
30B. A16 )
Payment for Traffic Completion and Interconnection

 
In the event the Minister did not determine payment for interconnection or payment deriving from interconnection, the Licensee may demand in respect thereof reasonable and non-discriminatory payment.

 
30C. A16 )
Prohibition on Delaying Interconnection

 
The Minister will give the Licensee a reasonable opportunity to voice his position in all pertaining to the Minister's intention to order it regarding the manner of effecting interconnection and its scope, regarding the actions, services and arrangements incidental to effecting interconnection, and regarding payments in respect of interconnection. Once the Minister has instructed the Licensee on said matters, the Licensee will not delay in any way interconnection with the network, and will fulfill its obligations in accordance with the Minister's provisions, properly and in good faith, on the date set therefor and with full cooperation.

 
30D. A16 )
Providing the Possibility of Utilization

30.1D
The Minister may order the Licensee to provide the possibility of utilizing its telecommunications facility, by virtue of his authority under Section 5 of the Law.

30.2D
The Licensee will enable another licensee, by the Minister's order, to provide value added services via the Licensee's network. The Licensee will ensure reasonable and equal terms for any other licensee, in all pertaining to the provision of value added services by the latter to the Licensee's subscribers.

30.3D
As regards providing the possibility of utilization, the provisions of Sections 30A to 30C will apply, mutatis mutandis.

 
30E. A16 )
Infrastructure Services for an Interested Company

30.1E
The Licensee will not give preference, in providing infrastructure services, to a licensee that is an interested company over another licensee, whether in payment for the service, in service conditions, in service availability or in any other way.
 
 
33
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
30.2E
(A)
Pursuant to a written request from the Licensee, the Director may permit the Licensee limitations on the provisions of Section 30.1E, in all pertaining to another licensee or a broadcasting licensee that is an interested company, provided the following conditions are fulfilled:
 
(1)
The other licensee or the concessionaire is not a material operator:
 
(2)
The Director is of the opinion that giving such permission does not materially harm competition in the field of telecommunications.

(B)  
As regards the limitations stated in Subsection (A), these may allow the Licensee to offer an interested company the use of its telecommunications facilities under preferred conditions, and these may be limited in time or by another condition.

(C)  
When considering a permit under this section, the Director will take into account the existence of a valid agreement, which was signed prior to Amendment No. 16 to this license, between the Licensee and the interested company, concerning, inter alia, the restriction of the permit in time or by other conditions.

30.3E
In this section – " interested company ," " subsidiary ," and " material operator " – as these terms are defined in the Telecommunications Regulations (Procedures and Conditions for Obtaining a General License for Providing Domestic Landline Telecommunications Services), 2000.

 
30F. A16 )
Numbering Program

30.1F
The Licensee will act in accordance with the numbering program, and in compliance with the Director's provisions regarding the activation and implementation of the numbering program.

30.2F
The Director ordered the activation of number portability, so that every subscriber of another cellular system licensee will be able to switch over to and be a subscriber of the Licensee or receive services from the Licensee without any change in his telephone number, and vice versa – the Licensee will incorporate into its public telecommunications network devices enabling the application of this property, on the date and using the method laid down in the Director's provision.

 
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General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
31. 
Reports on the Setup Works

31.1
The Licensee will submit to the Director, throughout the cellular system setup period, quarterly reports describing the setup works carried out during the period of each report, according to the milestones and timetables in the engineering plan. As regards this section, "the setup period" denotes 15 months from the date the license was granted or until the date of the completion of the network's setup in full deployment, according to the engineering plan, whichever the earlier.

31.2
The reports will include a comparison of the plans' execution versus the plan for each report's period, as well as explanations for any deviation or alteration that occurred in the execution compared with the plan.

31.3
Each report will be submitted in triplicate in a format to be instructed by the Director, and will bear a date and be signed by the Licensee or whoever it empowered especially for this purpose.

31.4
The Director may demand that the Licensee prepare special reports, and also that it draw up anew or supplement a report submitted to him.

 
32.            Handover of Information and Documents
 
 
The Licensee will furnish to the Director, on demand, any information or document regarding the execution of cellular system setup works, at the time, in the format, and in the manner instructed by the Director.


33.
Supervision of Setup Works

33.1
The Director may supervise, by himself or through a designee, the Licensee's actions connected with the execution of the setup works. To this end, the Director may enter at any reasonable time, the Licensee's work sites, cellular system facilities and offices, for the purpose of making measurements, performing inspections and perusing any plan or document pertaining to the execution of the setup works.

33.2
The Licensee will cooperate with the Director in all pertaining to the supervision of the setup works, and without derogating from the generality of the foregoing, will enable him to enter the work site and its facilities, enable the perusal of any document, plan and specification, and provide him with any information he requests.
 
 
34. 
Correction of Deficiencies and Defects

34.1
The Director may notify the Licensee in writing about deficiencies, defects and deviations he found in the cellular system setup operations, based on reports submitted by the Licensee, documents and information it furnished him, or based on measurements and inspections he made.
 
 
35
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
34.2  
In the event the Licensee receives a notice as stated in Section 34.1, it will notify the Director, within fourteen days of the date of receiving the notice, regarding its response to that stated therein and the measures it took or plans to take, in order to correct the deficiencies, defects or deviations.

 
35.            Safety Precautions and Prevention of Hazards

35.1
The Licensee will execute the setup works, taking adequate safety precautions to prevent personal accidents and property damage, will prevent the causation of nuisances and hazards to the public in the work areas, and if required to do excavations at the spot, will do everything to prevent damages to underground systems, including telecommunications networks, and to this end will make sure to obtain every permit required by any law, including an excavation works permit under Section 53B of the Law.

35.2
Upon completion of the setup works, the Licensee will make sure to clean up the work sites and restore them to their previous condition.

 
36.             Void. A2A2)

37.            Intersections with Electricity and Telecommunications Lines

 
In a place where there are electricity lines or electricity facilities prior to the installation of the cellular system, the Licensee is subject to the obligations imposed under the Telecommunications and Electricity Regulations (Convergence and Intersection between Telecommunications Lines and Electricity Lines), 1986.

 
38.            Discovery of Antiquities and Site Preservation

38.1
Antiquities, as defined in the Antiquities Law, 1978, which are discovered at a setup work site, are state assets, and the Licensee will take the appropriate precautions to prevent damage thereto.

38.2
The Licensee will notify the director of the antiquities authority regarding the discovery of an antiquity within 15 days of the date of the antiquity's discovery and will follow the instructions of the authority's director in all pertaining to the manner of handling the antiquity.

38.3
In the course of the setup works, the Licensee will avoid, inasmuch as possible, damaging sites of historical or national value, tourist sites and landscape.

38.4
The Licensee will avoid, insofar as possible, damaging buildings and trees found in the places where setup works are being carried out.
 
39.            Land-Related Powers
 
 
36
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
39.1
The Minister may, at the Licensee's request, grant it all or some of the powers prescribed in Chapter F of the Law, subject to that stated in Section 39.2.

39.2
The Licensee will specify in its request the sites at which it requires the aforesaid powers, the scope of the required powers and the reasons therefor, including the steps it took to find alternative sites, without having to use the power under Chapter F of the Law.

39.3
In the event the Minister is convinced of the need to grant the Licensee powers under Chapter F of the Law, the Minister will publish his decision in the Reshumot (Official Announcements and Advertisements Gazette).
 
 
37
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 

 
Part B: Equipment Checks and Installation Certifications
 
 
40.            Compliance Check
 
 
The Director may determine which items of equipment should not be installed in the Cellular System before undergoing a compliance check. "Compliance" as regards this section – as emerges from that stated in Section 41. If the Director has decided as aforesaid, the items will not be installed before undergoing a compliance check.

 
41.            Responsibility for Compliance
 
 
It is the responsibility of the Licensee to see to it that the equipment installed in the Cellular System is, at least, technically compliant with the properties detailed in the manufacturer's specifications relating to the specific item of equipment, and attached to the engineering plan.

 
42. 
Performance Testing Program and Its Approval

42.1
The Licensee will furnish the Director, no later than 30 days before giving notice of the completion of installation under Section 43, with an up-to-date, detailed testing program for carrying out the performance check, relating to that part of the Cellular System it wishes to operate (hereinafter – detailed testing program).

42.2
The Licensee will present the detailed testing program to the Director. The Director may demand within 15 days of the aforesaid presentation that the Licensee make changes in the detailed testing program or complete it, if he deems it necessary for the full and accurate execution of the performance check, and the Licensee will carry out the checks according to the Director's request.

 
43.            Notice of Setup Completion
 
 
Once the Licensee has completed setting up a Switchboard or Cellular Radio Center in some region, so that it is possible to start providing cellular services through it, the Licensee will notify the Director in writing thereof, in the format it was instructed by the Director, along with the results of the detailed check indicating successful installation and operation.

 
44.            Terms of Fitness and Operation

44.1
Prior to operating the network, the Licensee must meet the requirements and conditions detailed below:

(A)  
Entering into an Agreement with an Equipment Manufacturer
The Licensee must have agreements in force for the entire operation period planned, with a Cellular System manufacturer, comprising the following:
 
(1)
Know-how agreement;
 
(2)
An agreement guaranteeing the supply of parts for the network's equipment for a period of at least 7 years;
 
(3)
An agreement guaranteeing the supply of technical literature and full documentation of the network's equipment, including updates.
 
 
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General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
(B)   
Lab and Testing Equipment
The Licensee must operate a lab, or have a valid agreement with a competent lab.  The lab should include professional testing equipment for performing the checks and making the repairs on the Cellular System equipment, including mobile testing equipment.

 
(C)
Parts
The Licensee must maintain and run a spare parts warehouse for Cellular System equipment according to the recommendations of the equipment manufacturers.

 
(D)
Maintenance System
 
The Licensee must maintain, on its own or through another, an efficient maintenance system, consisting of maintenance personnel, service vans and communication means, ensuring the proper, ongoing operation of the network and enabling the handling of any malfunction within the response time required under this license, and also enabling, in any case of a serious problem with the Cellular System causing radio interferences, large-scale disconnection of subscribers or posing a safety risk, repair of the malfunction within 4 hours.

(E)   
Communication Means
Means of communication, such as a walkie-talkie, telephone or cellphone, should be installed in the operation exchanges and centers, as well as in the service and maintenance centers.

44.2
The Licensee must present to the Director, seven days before setting the network in operation for the first time, certifications and documents regarding compliance with the requirements and conditions specified in Section 44.1.  In the event the Director fails to respond within five days of the date of delivery of said documents, the Licensee may operate the Cellular System and connect subscribers thereto. If the Director orders the Licensee, based on the documents' findings, to alter or fix the network, the Licensee must make the required alteration or correction and present a certification of execution to the Director, and if the Director fails to respond within 3 days, the Licensee may operate the system.

 
39
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
Part C: Use of Frequencies
 
45.
Allocation of Frequencies A16)

45.1
The Licensee may operate the Cellular Radio centers of the Cellular System, using the frequency bands allocated for its exclusive use, as detailed below:

 
(A) A35)
835 to 845 MHz and corresponding range 880 to 890 MHz;

 
(A1) A35)
1710 to 1712 MHz and corresponding range 1805 to 1807 MHz;
 
That stated in this subsection in no way derogates from the Director's authority to allocate an alternative frequency band with identical bandwidth for the Licensee's use, instead of the frequency band specified in this subsection.

(B)  
Starting from February 1, 2002 to January 1, 2004 the following bands will be allocated:
1710 to 1715.4 MHz and corresponding range 1805 to 1810.4 MHz;
1716.6 to 1721.2 MHz and corresponding range 1811.6 to 1816 MHz;
1962 to 1967 MHz and corresponding range 2152 to 2157 MHz;

 
(C)
Starting from January 1, 2004 the following bands will be allocated:
 
1720 to 1730 MHz and corresponding range 1815 to 1825 MHz;
 
1960 to 1970 MHz and corresponding range 2150 to 2160 MHz;
 
as well as the frequency range 1905 to 1910 MHz.

 
(C1)
A2A26) Starting from April 4, 2004 the following frequency bands will be allocated:
 
 1715 to 1720 MHz and corresponding range 1810 to 1815 MHz.

 
(D)
Notwithstanding the foregoing, in the event the Licensee asks to postpone the usage commencement date for the frequencies specified in subsections (B) and (C), or a part thereof, to a later date, the Director may suspend the allocation of frequencies to a date he decides on.

45.2
The Licensee may select a narrower frequency band than that stated above in the framework of the frequency bands specified in Section 45.1.

45.3
In the event of detection of electromagnetic interferences from other radiants that can harm the proper functioning of the Cellular System, the Director must, at the Licensee's request, take any reasonable action to find an appropriate solution or stop the aforesaid interferences.

 
46.            Restriction on Use of Frequencies
 
 
The Licensee will make use of the frequencies allocated to it as stated in Section 45 only for providing the services under this license.

 
47.            Prevention of Interferences

47.1
The Licensee will set up the Cellular System and operate it in such manner so that no part of its parts will emit radiation prohibited under the provisions of the Pharmacists'
 
 
40
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
Regulations (Radioactive Elements and Their Products), 1980, and do everything required, if required, to obtain a permit in accordance with the aforesaid regulations.
 
47.2
The Licensee will coordinate the use of the frequencies with the Director, who will base his directives, inter alia, on the program derived from the preparation for a national emergency crisis.

47.3
The Licensee will submit to the Director, or anyone appointed for this purpose on its behalf, a detailed, up-to-date plan for the operation of Cellular Radio Centersand for the expected use of the frequencies at least 60 days before the operation, and will report to the Director regarding the actual execution, within 7 days of the operation date.

47.4
The Licensee will set up and operate the Cellular System in such a manner as to prevent interferences with other Bezeq and wireless systems operating lawfully. Prior to the activation of any Cellular System, the Licensee will perform tests and measurements for the purpose of preventing electromagnetic interferences. If found that electromagnetic interferences can be expected or interferences have been detected during operation, the Licensee will act to find a solution that will prevent these interferences and also prevent their recurrence, and in the absence of a solution it will turn in writing to the Director or to anyone appointed for this purpose on its behalf, in order to find a reasonable solution in this regard. The Director may demand that each of the parties make changes in the operation of the equipment or in the use of the frequencies or that they stop broadcasting over certain frequencies, throughout the country or in a certain region.

47.5
The granting of this license, including the approval of the engineering plan, in no way provides protection against harmonies from other radiants operating lawfully, or other radiants operating outside state territory; however, the Director must make every reasonable effort to find an appropriate solution providing the necessary protection.

 
48. 
Cellphone Activity in Emergencies

48.1
In times of national emergency or for national security reasons, the one empowered to do so by any law may take the steps needed for state security, with a notice to the Licensee A2A2) , including control of the network. In such circumstances, the Licensee will operate according to the instructions and notices of those authorized to do so by any law, including the government, the Minister, the Director and head of the unit for the management of a broadcasting spectrum and satellites in an emergency (hereinafter – head of the emergency unit).

48.2  
The Licensee will give the head of the emergency unit the names of its representatives authorized to receive instructions and notices anytime, 24 hours a day, in all pertaining to national emergency and security matters. The representative will have a first and second deputy, who will substitute for him during his absence.

48.3
The Licensee will set up and operate the network in a manner that will allow reducing the network's activity, when necessary, during times of emergency:
 
(A)
In terms of the frequency profile;
 
(B)
In terms of the geographical profile;
 
 
41
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
 
(C)
Through the disconnection of part of its subscribers, according to predetermined lists, or according to directives deriving from the situation;
 
(D)
In terms of a profile combining profiles A, B and C.

48.4
The Licensee will organize itself in such manner, so that it will be able to carry out the reductions detailed in Section 48.3 rapidly and efficiently, by remote control or by presence at the sites themselves.

48.5
The head of the emergency unit may establish a detailed procedure formalizing and regulating the Cellular System activity during an emergency, which he will present to the Licensee, and the latter will strictly fulfill the provisions of this procedure.
 
 
42
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
Part D: Inspections and Maintenance A43)

 
49. 
Definitions

 
" Periodical inspection " – An inspection of the network or any part thereof performed according to the license's provisions, at fixed time intervals and at least once every half year;

 
" Special inspection " – An inspection of the network or any part thereof performed due to a maintenance action or repair, following electromagnetic interferences, a malfunction, clarification of a complaint, a technological modification, an alteration in the engineering plan or the like;

 
" Regular inspection " – An inspection of the network or any part thereof, done on a regular, ongoing basis.

 
50. 
Performance of Inspections

50.1
The Licensee will carry out periodical inspections on the Cellular System and will submit the results of the inspection, at the Director’s request, within 30 days of the day of the request.

50.2
The Licensee will set up and operate a control system for continual monitoring of the performance and functionality of the network, and will perform, on an ongoing basis,    regular inspections of the network or any part thereof, as necessary.

50.3
The Licensee will perform a regular inspection for quality of the service as detailed in Addendum E, including compliance with relevant ITU-T standards, and will submit the results of the inspection, at the Director’s request, within 30 days of the day of the request.

50.4
The Director may instruct the Licensee to perform a special inspection; The Licensee will perform such inspection in the format and at the time specified by the Director and will submit its results to him.

50.5
The Director or anyone so authorized by him will be allowed to carry out inspections himself, where he deems this to be necessary; The Licensee will permit the Director or anyone so authorized by him access to the installations and the equipment, subject to prior coordination, and will place at his disposal testing equipment used by it or professional manpower employed by it.

 
51. 
Inspections, Malfunctions and Maintenance Log

51.1
The Licensee will manage an inspections, malfunctions and maintenance log (hereinafter – maintenance log), in which details of the malfunctions in and inspections of the network are recorded.
 
 
43
 
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
51.2
The Licensee will keep the maintenance log and enable the Director or a representative authorized by him to peruse it at any time, to examine it or copy it in any manner, and will submit it for inspection by the Director at his request.
 
 
52. 
Repair of Deficiencies and Defects

52.1
The Director may, after giving the Licensee sufficient opportunity in the circumstances of the case to present its case to him, notify the Licensee in writing of deficiencies and defects he found that are affecting the level of the service to Subscribers, the level of survivability and backup of the network or the safety level or interfering with other lawfully operating systems, based on a follow-up of the network’s performance, including by means of Subscribers’ complaints or inspections carried out by him or on the basis of inspection reports, documents and information provided to him by the Licensee.

52.2
The Director may instruct the Licensee regarding the times by which it must correct the deficiencies and defects.

52.3
In the event the Licensee received such a notice, it will notify the Director, within the time set for this purpose in the Director's notice, of the correction of the deficiencies and defects, at the level of detail requested by the Director.

53.
Void.

54.
Void.
 
 
44
 
 
 
 
Chapter E: Providing Cellular Services to Subscribers

Part A: Entering into an Agreement with Subscribers

 
55. A43)
The Contract

55.1
The Licensee will prepare a wording for the contract that it intends to offer its subscribers, and will submit it for the Director’s perusal at his request.

55.2
The terms of the contract shall not contradict, explicitly or implicitly, the provisions of any law or the provisions of the license: The aforesaid shall not prevent the stipulation of various provisions in the contract that benefit the subscriber compared to the provisions of the law or the license.

55.3
The contract will be in writing and laid out in a clear manner conducive to reading and comprehension and specifying prominently any term or limitation on the subscriber’s right to cancel the contract or on the Licensee's liability toward the subscriber; Any stipulation in the contract shall be stated explicitly and not by way of reference.
 
For purposes of this section, “writing” – including an electronic document that can be saved and retrieved by the subscriber.

55.4
The contract will include, inter alia, in a clear manner, the following:

 
(a) A 58
A first, separate, printed page, setting out the following details, in a clear and precise manner, without any handwritten additions or alterations (hereinafter – the Plan Summary Page ):

(1) Licensee's name or logo, details of the Licensee's representative who executed the contract, date of conclusion of the transaction, subscriber's details including name, identity number, address, telephone number to which the contract relates, additional telephone number of the subscriber for sending notices concerning the rate of utilization of a surfing package as stated in section 75D and a cellular end-equipment model, if included in the contract. Notwithstanding that stated at the beginning of section (a), the details mentioned in this subsection, other than the Licensee's name or logo, can be written in handwriting.

(2) The duration of the commitment period, if any, and its expiry date. For purposes of this subsection, "commitment" – as this term is defined in section 56.1A.

(3) All the rates according to which the Licensee will charge the subscriber for the services the subscriber requested to receive when executing the contract, and the amount of every fixed payment, if such are included in the contract.
The service rates will be presented in a table with two columns – "Name of Service" and "Price of Service."
With respect to a surfing package, as this term is defined in section 75D – the service unit rate outside the package will be presented in the same values as in the package.
 
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
 
51
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
(4) The inclusive price of the end-equipment and any accessory to the end-equipment purchased at the time of executing the contract (hereinafter – the equipment ), and if the subscriber and the Licensee agreed on payment in installments for the equipment – the amount of each installment.

(5) Any benefit, as this term is defined in section 64A.1, noting the value of the benefit and the exact period of time during which it will be granted.

(6) The method of calculation of the amount the subscriber will be required to pay for a breach of the commitment, as this term is defined in section 56A.1.

(7) With respect to a business subscriber – information on rate increases during the commitment period, if this possibility exists under the terms of the contract, including the date and amount of such increase.

(8) Information on the balance of any payment and/or cancellation of any benefit for end-equipment that was purchased from the Licensee in a previous contract.

(9) The Licensee's undertaking to pay to a subscriber of another cellular licensee who has become a subscriber of the Licensee, the payment such subscriber will be required to make to the other cellular licensee for the breach of his commitment to that cellular licensee, and the manner of spreading such payment.
  In this regard, " commitment " – as this term is defined in section 56A.1.

(10)     The subscriber's declaration that he read the page and that it was provided to him at the time of executing the contract. The subscriber's original signature, as well as the details and original signature of the Licensee's representative who executed the contract, must be appended to the declaration, which will appear at the bottom of the Plan Summary Page.

(11)     Respecting subsection (a)(1) to (10) – "Subscriber" is any person who entered into an agreement with the Licensee for receipt of cellular mobile radio telephone services for up to twenty five telephone numbers, excluding a Pre-Paid Subscriber. A 59

(a1) A58 (1) A separate, printed page, on which the subscriber will be required to mark his choice as to the accessibility of any telephone number to which the contract relates, to services as set out in Appendix E2 (hereinafter – the Access to Services Form or the form ) and to sign by original signature alongside the mark and at the bottom of the form A 59 ; The form will come after the Plan Summary Page.

(2)     A new Subscriber who did not mark his selection, blocked or open, on the form in the designated spot (hereinafter, the "Selection") and signed against the service appearing on the form as stated in item (1), or did not sign against the service, even if he marked the Selection, or did not mark the Selection and did not sign against the service, shall be blocked from receiving such service.
 
A59  Amendment No. 59
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A59  Amendment No. 59
 
 
52
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
 
In this section, " new Subscriber " means a Subscriber who entered into an agreement with the Licensee after September 13, 2011 (14 Ellul, 5771). A 59

(3) A subscriber may request the Licensee at any time, orally or in writing, to change his choice regarding accessibility to services specified in the form (hereinafter in this section – the subscriber's request ). A first change will be made free of charge. The Licensee will implement the subscriber's request only after it has identified the subscriber. The request must be kept available by the Licensee for playing or presenting (as the case may be) to the Director within five (5) work days from the day of request's receipt.
  The subscriber's request must be implemented within one working day A 59 from the date of the request.

(4) The Licensee will include in the next telephone bill after the date of the subscriber's request a notice concerning the implementation of the request and the date of implementation. Said telephone bill must be kept available by the Licensee for presenting to the Director within five (5) work days from the day of preparation of the account.

(5) The Licensee shall attach to the form two (2) immediate telephone statements sent after September 13, 2011 (14 Ellul, 5771) to a Subscriber who is not a new Subscriber A 59 .

(6) A Subscriber who is not a new Subscriber who failed to transfer to the Licensee his comments on the form by December 13, 2011 (17 Kislev, 5772) will be blocked from receiving the services set forth in section 3 of the form within seven (7) working days of the aforesaid date; Notwithstanding that stated, where a non-new subscriber has not used the services set out in Section 3 of the form starting November 1, 2011 (4 Heshvan 5772) and has not submitted to the Licensee a response to the form by December 1, 2011 (5 Kislev 5772), the Licensee may block his access to said services as of December 1, 2011 (5 Kislev 5772) A 64 ; A non-new subscriber who has submitted to the Licensee a response to the form, will have his access to services blocked or opened in accordance with his request in the form, within one workday of the request's receipt A 62 ; a Subscriber who transferred to the Licensee his comments on the form and failed to mark his Selection and signed alongside the service appearing on the form as stated in subsection (1) shall be blocked from receiving such service A 59 .
  The Licensee will notify the subscriber about the block in the next telephone bill after the block. Said telephone bill must be kept available by the Licensee for presenting to the Director within five (5) work days from when it was sent to the subscriber.
 
 
  
A59 Amendment No. 59
A59 Amendment No. 59
A59 Amendment No. 59
A64 Amendment No. 64
A62 Amendment No. 62
A59 Amendment No. 59
 
 
53
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010

 
 
(7)
The Licensee will publish the form on its website, within seven (7) work days from September 13, 2011 (14 Ellul, 5771) A 59 .

 
(8)
Respecting subsection (a1)(1) to (6) – "Subscriber" - excluding a Pre-Paid Subscriber. Notwithstanding the above, the Licensee shall block services at the request of a Pre-Paid Subscriber, to the extent that it comes from a telephone number to which the request refers, or such Subscriber presented before it the end-equipment serving the telephone number forming the subject matter of the request, or in any other manner to the Licensee's satisfaction A 59 .

 
(a2)
Terms of the service to the subscriber, including quality measures for customer and subscriber service as detailed in section 2 in Addendum E;

 
(b)
Terms for disconnecting from the Licensee’s services or discontinuation of all service A 58 terms;

 
(c)
Licensee’s rates for the services for which the subscriber registered, as of the day of the agreement, including the date and terms for termination of the rates program;

 
(d)
Limitation on the rate of arrears interest, linkage differences and collection expenses, as stated in section 80.3;

 
(e)
Condition for changing the rate for the service for which the subscriber registered, as stated in section 78.1;

 
(f)
The details set out in sections 61 and 61A regarding the public ombudsman and umpire.

 
(g)
Condition specifying that in case of a contradiction between the provisions relating to the rates and to the basket of services detailed in the contract, and the provisions of the license in this regard, the provisions of the license shall prevail;

 
(h)
Notice concerning the Director’s authority to instruct the Licensee to modify the contract, and a clarification that the subscriber’s engagement with the Licensee under the contract constitutes agreement to such modification.

55.5 A 58
Where a contract is executed in the presence of the Licensee's representative and the subscriber, the Licensee will act as follows:

(a)     Prior to executing the contract, the Licensee's representative will present to the person requesting to be a subscriber of the Licensee (hereinafter in this section – the applicant ) a printed copy of the contract, and will allow him to peruse the contract.
 
A59 Amendment No. 59
A59 Amendment No. 59
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
 
54
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010

 
(b)     When executing the contract, the applicant and the Licensee's representative must affix their original signature to the contract that was given to the applicant for perusal. Following such signature, the Licensee's representative will give the subscriber a copy of the contract bearing the original signatures of the Licensee's representative and the subscriber.

(c)     After that stated in subsections (a) and (b) has been done, the Licensee's representative may require the subscriber to sign an identical contract to the one signed with original signatures, by electronic means.

(d)     The Licensee must keep in its possession a signed copy of the contract. Said copy must be kept available by the Licensee for presenting to the Director within five (5) work days from the date of executing the contract.

(e)     Should the subscriber request to make a change in the terms of the contract, including a request to receive an additional service, to cancel a service or to join a service package – he will be given, at the time of the request for the change, a printed notice bearing the Licensee's name or logo, noting the details of the change that was made, its effective date and the full name of the Licensee's representative and the subscriber together with their original signatures. The signed notice must be kept available by the Licensee for presenting to the Director within five (5) work days from when the subscriber's request was implemented.

55.6
If the Licensee publishes on its website a tariff plan, including for purchases of cellular end-equipment, such publication will also contain the contract terms pertaining to that tariff plan, including the details appearing on the Plan Summary Page.

55A. A 58
Remote Sales Transaction

55A.1
In a remote sales transaction, as this term is defined in section 14C of the Consumer Protection Law, 5741-1981 (hereinafter – remote sales transaction ), the Licensee will act as follows:

(a)     It will send the subscriber a document containing all the details specified in subsection 55.4(a2) to 55.4(h), as well as the Plan Summary Page and the Access to Services Form marked with the subscriber's choices as indicated verbally to the Licensee's representative (hereinafter – the Contract Terms Document ). The Contract Terms Document must note the full name of the Licensee's representative who executed the contract and the subscriber.

 
The Contract Terms Document will be sent to the subscriber by regular post, or via email or fax if the subscriber gave his consent thereto. A copy of the Contract Terms Document must be kept available by the Licensee for presenting to the Director within five (5) work days from the day of executing the contract. If the Licensee sent the Contract Terms Document via email or fax, the sending confirmation must also be available for presenting to the Director within five (5) work days from when the document was sent as stated.
 
 
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
 
55
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010

 
(b)     Should the subscriber request to make a change in any detail of the Contract Terms Document, including a request to receive a service or a service package (in this section – "change") A 59 – the Licensee will send to the subscriber a printed notice bearing the Licensee's name or logo, noting the details of the change that was made, its effective date , service or service package tariff A 59 and the full name of the Licensee's representative and the subscriber. The notice must be dept available by the Licensee for presenting to the Director within five (5) work days from when the subscriber's request was implemented.

 
The notice will be sent to the subscriber by regular post, or via email or fax if the subscriber gave his consent thereto. If the Licensee sent the notice via email or fax, the sending confirmation must also be available for presenting to the Director within five (5) work days from when the notice was sent as stated.

(c)     Notwithstanding the above, where a Subscriber requested to make a change which does not involve an extension of the term of undertaking of the Subscriber or the creation of such a term, the Licensee shall include in the immediate telephone statement to the date of the request a notice in which the particulars specified in subsection (b) shall be noted, except for the name of the Licensee's representative. For the purpose of this subsection, "undertaking" is within the meaning in section 56.1A of the License.

 
56. A43)
Modification of Contract

56.1
The Director may instruct the Licensee to modify the contract, after giving the Licensee sufficient opportunity to present its case.

56.2
If the contract was amended pursuant to the Director’s instructions or pursuant to a decision of the Standard Contracts Court, in the event that the contract was submitted for its approval, the engagement between the Licensee and the subscriber will be in accordance with the amended contract, as from the date of the amendment.

56.3
The provisions of section 55 shall apply, mutatis mutandis, to an amendment of the wording of the contract by the Licensee.

 
56A. T 47)
Period of Commitment under a Contract
 
56A.1
Where the Licensee entered with a subscriber who is not a business subscriber into a contract that includes a commitment, the period of the commitment may not exceed eighteen (18) months.
 
 
In this regard, "commitment," – the subscriber's commitment to comply with conditions relating to the scope of consumption of services, the amount of the payment or the payment terms, during a defined period, where noncompliance with such conditions during such period entails a payment, including the return of a benefit or an exit fee.
 
  
A59 Amendment No. 59
A59 Amendment No. 59
T47) Amendment No. 47.
 
 
56
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
56A.2
Where the Licensee proposed to a subscriber who is not a business subscriber to enter into a contract that includes a commitment, the Licensee will present to such subscriber a proposal to enter into a contract that does not include a commitment, as a reasonable alternative to contracts that include a commitment. In this regard, a contract containing a "prepaid" plan will not be deemed a reasonable alternative to a plan that includes a commitment. The Licensee will publish on its website the contract that does not include a commitment, including the Plan Summary Page of such contract A 58 .
 
56A.3
If the Director finds that the Licensee has violated Section 56A.2, he may direct the Licensee to modify conditions in a contract that does not include a commitment, without thereby derogating from any other power established in the License or in any law. In this regard, the Director will consider, inter alia, the number of subscribers of the Licensee who are signed on contracts that do not include a commitment.
57. A43)
Void.
 
58. A43)
Void.
 
59. 
Obligation of Connecting Applicants and Prohibition on Stipulation

59.1
If the Licensee has met the terms for operating a Cellular System as stated in Section 44.2, the Licensee will connect any applicant to the cellular network no later than the date set in the contract with the subscriber, unless the Director has authorized the Licensee not to connect the applicant, under circumstances he deems justified. A2)

59.2
The Licensee may not stipulate the connection of an applicant on unreasonable, discriminatory or unfair terms, and without derogating from the generality of the foregoing:

 
The Licensee may not require a subscriber to purchase end-user equipment from it or from its designee;

 
The Licensee may not require the subscriber to receive maintenance services from it for the end-user equipment in the subscriber's possession;

 
The Licensee may not stipulate or condition cellular services, service conditions or a rate on the purchase of cellular end-user equipment from it or from any other.

59.3           Void. A1)
    
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
 
57
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
Part B: Service Level for Subscribers

 
60. A16)
Obligation of Maintaining the Service

60.1
The Licensee will put at the disposal of its subscribers all the services detailed in the First Schedule, in accordance with the terms detailed in the schedule, and will maintain all its services all year round, around the clock, both in times of calm and in times of an emergency, subject to Section 48, in accordance with the technical requirements and service quality requirements, in a proper and regular fashion, and of a quality no lower than that indicated by the service quality indexes specified in the first schedule to the license and in Addendum E to the Second Schedule to the license. In the event of a contradiction between the First Schedule and Addendum E to the license's Second Schedule, the provisions of Addendum E to the Second Schedule will prevail.

60.2
Without derogating from that stated in Section 75.3, the Licensee will provide cellular services and a service package, as this term is defined in Section 73A, to every applicant, under equal and non-discriminatory terms and at a non-discriminatory rate.

60.3
If the Director has found that the service package is liable to harm competition or the consumers, he will notify the Licensee thereof, indicating the date by which the Licensee must stop offering its subscribers the service package.

60.4
If the Licensee provides any cellular service to any person or organization, for payment, the service must be available to any subscriber throughout the network coverage area, complying with the minimal requirements as regards service quality, without discrimination, within 24 months of the date of commencing provision of the service for payment.

60.5
The Director may, at the written request of the Licensee, allow the Licensee limitations on the provision of Section 60.4, after being convinced that there is a real difficulty in providing the service to anyone that requests it, and that the specific features of the service possess a unique and exceptional flavor justifying this.

60.6 A43)
 
(a)
A 58 The Licensee may not provide, with or without consideration, any of its services not explicitly requested by the subscriber, except for a service given free of charge to all the subscribers, and it may not allow the provision of a service of a service provider not explicitly requested by the subscriber.
 
For purposes of this section, “service provider” – anyone providing a service through the network, for which payment is made by means of the telephone bill.

 
(b)
A 58   An explicit request may be made in one of the following ways:

 
(1)
By a document signed by the subscriber and sent to the Licensee;
 
(2)
By an email message sent by the subscriber to the Licensee;
 
(3)
In a phone call between the subscriber and the Licensee's representative;
 
(4)
By an SMS message sent from the subscriber to the Licensee;
 
 
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
 
58
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
(5)     By ordering a service on the website of the Licensee or a service provider. Ordering of the service shall be done in accordance with the provisions of Appendix F to the License. A 61

 
(c)
The Licensee will keep documentation on the subscriber's explicit request throughout the subscriber's commitment period, and where the subscriber is not in a commitment period, during the last eighteen (18) months at least, and also during a year after the date of sending the final bill to the subscriber, as stated in section 2.3(c)(2) in Appendix E. A 61 The documentation must be kept available by the Licensee for presenting to the Director within five (5) work days from the day of the subscriber's explicit request.

 
In this regard – " documentation ":
 
For purposes of subsection (b)(1) – a copy of the document;
 
For purposes of subsection (b)(2) – a printout of the email message;
 
For purposes of subsection (b)(3) – a recording of the phone call;
 
For purposes of subjection (b)(4) – a copy of the subscriber's telephone bill in which the details of the SMS sent by the subscriber appear in the "itemized list of calls."
 
For purposes of subsection (b)(5) – for purposes of subsection (b)(5) – a log printout from the Licensee's short message service center (SMSC a ), detailing the fact of the sending of the two SMS messages from the Licensee to the subscriber during the service ordering process. If the service was ordered on the Licensee's website or on its cellular portal by means of a user code and password as stated in section 1.3 in Appendix F to the License – a log printout from the SMSC testifying to the execution of the service ordering process, and a log printout of the log-in of the user code and password by the subscriber A 61 .

 
A memorandum entered by the Licensee's representative in the Licensee's information systems does not constitute documentation.

60.7 A 63
Without derogating from that stated in section 26.3, the Licensee may not discontinue the provision of cellular services through a system that has become technologically obsolete, until after that stated in Appendix K-1 is fulfilled.

60.7 A 58
The Licensee may not collect payment from a subscriber for a service, unless it has documentation on the subscriber's explicit request to receive the service.

  60.8 A 58
A subscriber who was debited for a service and notifies the Licensee that he did not request to receive the service, will be refunded the full amount collected from him as payment for the service, where the Licensee has no documentation on the subscriber's explicit request to receive the service. The subscriber's contestations and the refund will be handled in accordance with the provisions on "excess charges" in section 83A of the License.
 
 
A61   Amendment No. 61
A61 Amendment No. 61
a Short Message Service Center.
A61 Amendment No. 61
A63 Amendment No. 63 - Mistake in the original language
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
 
59
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 

61. A43)   Public Ombudsman

61.1
The Licensee will appoint a person to handle complaints of the public ( “the Ombudsman” ), having the following responsibilities:

 
(a)
Clarifying subscribers’ complaints in connection with the Licensee’s services, including the complaint of someone applying to receive a service.

 
(b)
Clarifying subscribers’ complaints in connection with bills that were submitted by the Licensee, and deciding in regard thereto.

 
The Public Ombudsman will respond in writing to complaints as stated that were submitted in writing.

 
The Licensee will keep a copy of the complaint and of the written response that was sent to the subscriber. Said copies must be kept available by the Licensee for presenting to the Director within five (5) work days from the day of sending the response A 58 .

61.2
The Public Ombudsman will act according to a policy to be set by the Licensee’s management.

61.3
The Licensee will render the Public Ombudsman all the assistance required by him for filling his function.

61.4
The Licensee will notify every subscriber regarding the possibility of submitting a complaint to the Public Ombudsman, the powers of the Public Ombudsman and the ways of applying to him. The contents of this sub-section shall be included in the contract, in the bill sent to the subscriber and on the Licensee’s website.

 
61A. A43) Umpiring of Disputes

61A.1
The contract will stipulate that any disagreements arising between the Licensee and a subscriber in connection with the interpretation or performance of the contract, shall be submitted for clarification to the Licensee’s Public Ombudsman.

61A.2
The contract will specify that an application to the Public Ombudsman under section 61A.1 shall not:

 
(a)
Prevent the subscriber a priori from bringing his case before a competent court;

 
(b)
Derogate from the Licensee’s authority to act in accordance with the provisions of section 72 regarding the discontinuation of all service A 58 or disconnection of a service owing to a breach of the contract.

 
62.            Obligation of Maintenance
 
   
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
 
60
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010

 
62.1
The Licensee is responsible for the maintenance of the Cellular System.

62.2
If a subscriber purchased cellular end-user equipment from the Licensee or from its designee, and the purchase agreement included maintenance services, the Licensee A43) will be responsible for the maintenance of said purchased end-user equipment, however the Licensee A43) will not be responsible for the maintenance of said purchased end-user equipment beyond the maintenance period undertaken by the manufacturer, unless agreed otherwise between it and the subscriber. A2)

 
If, in order to receive cellular services, the subscriber used cellular end-user equipment not purchased from the Licensee or from its designee, the Licensee is not obligated to look out for the maintenance of this end-user equipment, but may enter into an agreement with the subscriber for providing maintenance services also for said equipment.


63. A 56
Call Center
 
63.1
The Licensee will operate a manned call center for receiving calls of its subscribers. The Licensee will also operate additional means that allow its subscribers to turn to it for information and inquiries, all as set forth in Appendix E to the License.
 
63.2
The call center will be manned by skilled and professional personnel, having the appropriate competence for handling calls, and if a complaint has been received regarding a malfunction that led to termination of all cellular services to a subscriber, said personnel will act immediately to localize the malfunction and start taking steps to immediately correct it.
 
63.3
The Licensee will specify in the maintenance log the details of the malfunction, as stated in section 63.2, and the steps taken to correct it, all as stated in section 51
 
 
64. 
End-user equipment – Selling and Renting
 
The Licensee may sell or rent out to its subscribers cellular end-user equipment for the purpose of linkup to the Cellular System, provided it complies with the following:

 
The Licensee has notified the subscriber that he may purchase cellular end-user equipment from any licensed marketer and that he does not have to buy the equipment from the Licensee in order to receive cellular services;

A56 Amendment No. 56
 
 
61
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
 
The Licensee will not stipulate the provision of maintenance services for cellular end-user equipment on the very receipt of cellular services from the Licensee, and will notify the subscriber that he may receive maintenance service for end-user equipment, from any person, including the end-user equipment purchased or rented from the Licensee.
 
 
 
62
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
 
64A.   T 53
Grant of Benefit to Subscriber

64A.1   T 53
The licensee shall not create any link between any benefit whatsoever for mobile radio-telephone services it granted to a subscriber, including any credit, discount, special tariff program, basket of services etc. (hereinafter referred to in this section as “ Benefit ”) and the fact that the mobile radio-telephone terminal equipment in the subscriber’s possession was purchased, hired or received from the licensee or any other marketer on its behalf. As part of this, the licensee shall offer an identical Benefit to that offered by it at the time the subscriber receives, purchases or hires from it a specific model of mobile radio-telephone terminal equipment for each subscriber using mobile radio-telephone terminal equipment with similar characteristics to the aforesaid model and which shall be granted to the subscriber in the course of a period of not less than the period in which a monetary credit was granted to the subscriber purchasing terminal equipment from the licensee, pursuant to the following rules:

 
(a)
To the extent that the model of the terminal equipment in the subscriber’s possession is identical to the model marketed by the licensee at the time the subscriber approaches the licensee, the licensee shall offer the subscriber an identical Benefit to that granted by it to any person purchasing from it the aforesaid model, in reliance on the confirmation of purchase presented to it by the subscriber;
 

 
(b)
To the extent that the model of the terminal equipment in the subscriber’s possession is not marketed by the licensee at the time the subscriber approaches the licensee, the licensee shall grant the subscriber a Benefit according to the terminal equipment classification determined in advance by the licensee and in reliance on the confirmation of purchase presented to it by the subscriber;

In this subsection -

“ Terminal equipment classification ” means the division of terminal equipment models not marketed by the licensee into no more than six categories, and determination of the amount and the terms and conditions of the Benefit to be granted in relation to each of the categories; this is according to the amount and terms and conditions of the Benefit granted by the licensee in relation to terminal equipment models marketed by it which are models of devices having similar characteristics;

 
(c)
At the time of calculating the period in which the Benefit will be granted under subsections (a) or (b), the licensee may take into account the date on
 
T53) Amendment No. 53.
T53) Amendment No. 53.
 
 
63
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010

 
 
which the terminal equipment was purchased by the subscriber, as appears in the confirmation of purchase.
 
In this section, “ confirmation of purchase ” means any certificate attesting to purchase of the terminal equipment, including, inter alia , the date of purchase and the amount paid.

64A.2   T 53
The licensee shall present updated information on its website about the terminal equipment classification made by it.”
 
 
65.            Public Emergency Services

65.1 A21)
The Licensee will enable, anytime and at no charge, for all its subscribers, free and rapid access to public emergency services such as: Magen David Adom, the Israel Police and the Fire Station.

65.2 A42)
Starting from April 5, 2007 (“the inception day”) the Licensee will enable the call centers of the public emergency systems 2 to identify the telephone number of a subscriber calling them 3 , anytime and at no charge, including a subscriber with a confidential telephone number, a subscriber who blocked his number before the call and a subscriber calling from a private exchange.

 
The Licensee may do the aforesaid through a licensee that routes the call to the public emergency system.

 
Not later than two days before the inception day A44) the Licensee will notify all its subscribers, clearly, in writing, that starting from the inception day it will be possible for the call centers of the public emergency systems to identify the subscriber’s telephone number, and it will notify in writing any subscriber requesting a “confidential number” – that the number is not confidential with respect to calls to the call centers of the public emergency systems.
 
65A A21) Blocking Service to a Nuisance Subscriber

65.1A
Notwithstanding that stated in Section 65.1, the Licensee will block a nuisance subscriber's access to the public emergency service. If blockage of public emergency service alone is not technically possible, then the Licensee will block the nuisance subscriber's access to all the cellular services. As regards this section, a " nuisance subscriber " denotes a subscriber who has contacted a certain emergency center, for no justifiable reason, more than 10 times during one whole day, using the end-user equipment in his possession.

65.2A
A notice regarding a nuisance subscriber will be submitted in writing to the Licensee by a senior employee in the public emergency service (hereinafter – the employee) and will be
 
    
T53) Amendment No. 53.
b Israel Police – 100, Magen David Adom – 101, Fire Station - 102
c Excluding a subscriber that his end user equipment permits dialing only to the call centers of the public emergency systems, such as a non SIM card cellphone in a GSM network
 
 
64
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010

 
 
corroborated by an affidavit signed by the employee (hereinafter – the complaint). The complaint will include, inter alia, the name of the nuisance subscriber, his telephone number, insofar as these are known to the complainant, as well as a specification of the contact times of the nuisance subscriber, and the content of the call showing that the contact was made without any justifiable reason. If the complaint does not include the telephone number of the nuisance subscriber, the Licensee will act in a reasonable fashion, to identify the nuisance subscriber based on the data provided in the complaint.
 
65.3A
The Licensee will block the nuisance subscriber's access to the emergency service as stated in Section 65.1A, after giving the nuisance subscriber advance warning. The notice will be given 3 workdays before the date of service blockage, in one of the following ways:

A.  
A phone call from a service center of the Licensee to the cellphone end-equipment of the subscriber;

B.  
An SMS message sent to the cellphone end-equipment of the subscriber;

C.  
Delivery of a registered letter to the subscriber, except for one who is a prepaid subscriber and his address is unknown.

65.4A
Blockage of service to a nuisance subscriber who is a prepaid subscriber whose address is unknown will be done no later than one full day from the time of receiving a complaint or identification as stated in Section 65.2A.

65.5A
Notwithstanding that stated in Section 65.1A, the Licensee will not block the public emergency service to a subscriber, if the circumstances of contacting, as these emerge from the explanation given by the subscriber to the Licensee, show that the contacting was justified and that he should not be deemed a nuisance subscriber. The Licensee will forward to the Director, within 10 workdays from the date of receiving the complaint or the identification as stated in Section 65.2A, the arguments for not blocking the nuisance subscriber.

65.6A
In the event it blocked the nuisance subscriber's access to emergency calls, the Licensee may collect from the subscriber all his debts, and may also collect payment from him for removing the block.

65.7A
The Licensee may remove the block once the nuisance subscriber has given it a written undertaking not to repeat his nuisance calls in the future.

65.8A
The Licensee will keep records of how the nuisance subscriber was identified, how the notice was given to the nuisance subscriber, or, alternatively, in a case where a notice was not given the nuisance subscriber, the reasoning for not giving the notice. Likewise, a record will be kept concerning the removal of the block.

65.9A
The Licensee will specify, in the framework of the nuisance subscribers report as stated in Section 104(B) A43) , the number of nuisance subscribers whose access to the public emergency service or to all the cellular services was blocked under this section, and the subscribers for whom said block was removed, as well as the number of subscribers that were not blocked under this section and the reasons for this.


 
65
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
66. A16)             Protecting Subscriber Privacy

66.1
Without derogating from the provisions of the Law, The Wiretapping Law, 1979, The Privacy Protection Law, 1981, or any other law concerning the safeguarding of an individual's privacy, the Licensee may not wiretap the telephone or any other communication of the subscriber without the written permission of the subscriber, except for the purpose of controlling the quality and standard of the service or for preventing frauds.

66.2
Subject to that stated in Section 66A, the Licensee, its workers, agents and designees may not disclose lists or documents containing the name and address of a subscriber or any other information pertaining to him, including account details, phone call traffic, call durations and destinations, to any person whatsoever except to the subscriber or to anyone empowered by the subscriber for this purpose.

66.3
Notwithstanding that stated in Section 66.2, the Licensee may do the following:

(A)  
To give the subscriber's details to another licensee for the purpose of collecting monies owed  him by the subscriber in respect of services it provided him through the network, provided that the information relayed is necessary fro collecting monies and preparing bills, and the other licensee has undertaken to safeguard the subscribers' privacy;

(B)  
To transfer a subscribers' details to another, insofar as the particulars are in its possession, by lawful authority.

 
66A. T 3)            Special Services for the Security Forces

(A)  
The Licensee will provide special services to the security forces as detailed in the classified security addendum attached to the license as Addendum I and in the classified security addendum attached to the license as Addendum L A12) .

 
(A1) A12) The Licensee will enable the security forces, regarding which the Director informed in writing, to realize, subject to any law, their powers with respect to any telecommunications activity in the framework of the license, and will be responsible for the maintenance, proper functioning, and technological adaptation of the equipment and infrastructure required for realizing said execution capability, all in coordination with the security forces, as detailed in Addenda I and L. The security forces will bear the payment under the provisions of Section 13 of the Law.

(B)  
The Licensee will see to it that Addenda I and L are guarded A12) in accordance with the provisions of the procedure for safeguarding records to be laid down by the Licensee in conjunction with the security officer of the "General Security Service."

(C)  
The Licensee will be exempt from the duty of indemnification toward the State, by virtue of the provisions of Section 91.2 of the general license and/or by virtue of any law, in respect of the very execution of the special services for the security forces.

 
T3)   Amendment No. 3
 
66
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
66B. A12)          Security Provisions

(A)  
The Licensee will appoint a security supervisor in accordance with the provisions of the Security Arrangement in Public Bodies Law, 1998, and rigorously follow the security provisions detailed in the Addendum M to the license.

(B)  
The Licensee will establish appropriate provisions in the incorporation documents and in its regulations, and will act in such manner so that only a person who meets the conditions set out below will be appointed and serve in a position or function enumerated in Addendum M to the license:

 
(1)
An Israeli citizen, as this term is defined in the Citizenship Law, 1952, and a resident of Israel;

 
(2)
Was given security clearance by the General Security Service, by which there is no prevention to his serving as stated.

(C)  
The Licensee will act to safeguard the secrecy of the security forces' operations, and act according to the security directives of those same security forces, including in the matter of the appropriate security classification for officers and holders of important functions working for the Licensee, and compartmentalization of knowledge pertaining to activities involving the security forces.

(D)  
The Licensee will take the measures necessary to protect the network, its components and the databases used for providing services, and for operating and controlling the network in the face of activities carried out by unauthorized entities, according to the provisions detailed in Addendum M to the license.

 
67.            Bills to Subscribers

67.1 A16)
A bill that the Licensee submits to the subscriber should be clear, succinct, readable and understandable. The bill should contain an accurate breakdown of the components of the payment required according to the types of payments and the rules specified in Chapter F.

67.2  
Void A 58 .

67.3  
The Licensee may collect payments for his services from the subscriber through another, including through Bezeq.

67.4 A34)
(A)
Without derogating from the rest of the license provisions pertaining to the manner of preparing the bill for the subscriber and to the manner of debiting, the Licensee will act in compliance with Israel Standard 5262, concerning debiting credibility and due disclosure in telephone bills (hereinafter – "the Standard").

 
(B)
Subsection (A) constitutes a "service condition," as concerns Section 37B(a)(1) of the Law.
 
 

A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
67
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
(C)
Notwithstanding that stated in subsection (A) -

 
(1)
Regarding the provision in Section 2.2.2 of the Standard, the rounding off method will apply as follows:

 
(a)
An amount in the bill will be rounded off to the nearest amount ending in two digits after the decimal point of the shekel, with an amount ending in five tenths of an agora (three digits after the decimal point) to be rounded up.

 
(b)
An amount to be paid for a single call will be rounded off to the nearest amount ending in three digits after the decimal point of the shekel, with an amount ending in five hundredths of an agora (four digits after the decimal point) to be rounded up.

 
(2)
The Licensee may present any amount included in the bill with a breakdown exceeding that required by the provision in Section 2.2.2 of the Standard, provided the rounding off method stated in Subsection (C)(1) above will apply thereto.

 
(3)
The price of a phone call (voice) that includes a changing rate, will be presented in the bill submitted to the subscriber as an average price per minute, computed by dividing the payment amount for that same call by the its total number of minutes.

 
In this paragraph, "changing rate" denotes a rate that varies in the course of the call according to various criteria, such as a rate that diminishes with increasing consumption, or a rate that varies due to a transition from a "peak period" to a "slack period" in the course of the call or vice versa.

 
(4)
In addition to that stated in the provision of the last part of Section 2.2.4 of the Standard regarding service packages, the bill will contain a breakdown of the services included in the package, along with the overall rate paid for the package as a whole.

 
In this paragraph, "service package" denotes several services marketed to the subscriber as a single package, in return for an overall rate (and without a breakdown of the payment for each component separately).

 
(D)
(1)
Chapter B in the Standard concerning due disclosure in telephone bills will come into effect no later than Friday, October 14, 2005.

 
(2)
Chapter C in the Standard regarding debiting credibility will come into effect no later than Sunday, January 14, 2006.

67.5   T 52
A bill submitted to a private subscriber shall also be drawn up according to the provisions of Appendix E 1 (hereinafter referred to in this section as the “ Private Subscriber Billing Format ”).
 
 

 
T52) Amendment No. 52.
 
68
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
67A.5 A 58
A bill submitted to a business subscriber will include the same details as in subsections 9b(1) to 9b(4) in Appendix E1 to the License.

 
In this section, 'business subscriber ' – excluding the subscribers specified in subsections (b) and (d) of the definition of 'business subscriber' in section 1 of the License.
 
67.6   T 52
 
A business subscriber may request that the licensee furnish him with a telephone bill in Private Subscriber Billing Format (hereinafter referred to in this section as a “ Request ”). Where a subscriber has requested as aforesaid, the licensee shall begin to send him the bill according to the aforesaid format by no later than the expiration of two billing periods after the date of the Request. The licensee shall publish once every six months a notice in the telephone bill submitted to the business subscriber according to which the business subscriber may demand that the licensee draw up the telephone bill submitted to him according to the Private Subscriber Billing Format. A business subscriber may also request from the Licensee a written explanation regarding the method of calculating a 'onetime debit.' The Licensee will submit to the business subscriber such written explanation regarding a 'onetime debit' within thirty (30) days from when the subscriber submitted a request in the matter to the customer service center or to the public ombudsman A 58 .

67.7   T 52
 
The bill shall be sent to the address registered at the licensee or any other address delivered by the subscriber to the licensee or by any other means, if the subscriber has granted his express prior consent thereto; the licensee may demand any payment whatsoever for the issue and mailing of the bill to the subscriber. The licensee may demand reasonable payment for “Call Details” sent to the subscriber at his demand.”

67.8 A 58
If the payment specified in the telephone bill is made by standing order or credit card, the payment will not be executed before the expiry of eight (8) A 59 days from the day on which the telephone bill was sent to the subscriber.

 
67A. A16) Information Service for Clarifying Telephone Numbers T 39)                                                                                                                                 

67.1A
Without derogating from the provisions of Section 66, the Licensee will provide, by itself or through another on its behalf, an information service for clarifying the telephone number of anyone who is a subscriber of a NDO or of a Cellular System operator, excluding an ID-restricted subscriber (hereinafter – "information service"), as follows:

(A)  
For the general public and at no charge, via a website through which the service will be provided;
 
 
 
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
T52) Amendment No. 52.
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
T52) Amendment No. 52.
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A59 Amendment No. 59
A39)   Amendment No. 39
 
69
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
(B)  
For its subscribers, at a reasonable price, via a phone center, the access to which will be effected by means of a network access code set by the Director;
(C)  
The information service will be given through each of the aforesaid means based on the same information characteristics to be provided by the subscriber applying to receive the service.

67.2A
Without derogating from that stated in Section 67.1A, the Licensee will provide to the general public and at no charge, by itself or through another, an information service for clarifying the telephone number of any subscriber, excluding an ID-restricted subscriber, via a phone center, the access to which will be effected by means of a national access code set by the Director.
 
67.3A 
In addition to that stated in Sections 67.1A and 67.2A, the Licensee may offer, at a reasonable price, by itself or through another on its behalf, an information service, by any other means, including by means of a national access code or by means of an SMS.

67.4A
In order to execute that stated in Subsections 67.1A and 67.3A:
 
 
(A)
The Licensee may send a query on its behalf to any database of a NDO or cellular system operator (hereinafter – "another licensee"), or to receive information from the database of another licensee by any other method and with the consent of the other licensee, all subject to the duty of safeguarding the subscriber's privacy;

 
(B)
In order for an information service to be provided by another licensee under its general license, the Licensee will enable any other licensee access to the Licensee's database;

 
(C)
The Licensee will update the database on a regular basis, so that each name, address or telephone number of a subscriber that was added, altered or removed, will be updated in the database within one workday following execution of the update in the Licensee's system being used to provide telephony services.

 
As regards this section –
"Database" denotes a collection of data including the name, address and telephone number of any subscriber that is not ID-restricted, including a subscriber that is a business.

67.5A
(A)
The Licensee will request the consent of each new subscriber for including his details in the database. If the subscriber gives his consent, the Licensee will include his details in the database.

 
(B)
The Licensee will grant the first request of any subscriber who wishes to remain ID-restricted, free of charge.
 
In this subsection, a "new subscriber" denotes a subscriber who has signed a contract with the Licensee after the commencement date as stated in Section 67.7A.

67.6A
(A)
The terms for providing an information service for clarifying telephone numbers, given under Section 67A, will be established by the Licensee, provided they are fair and non-discriminatory, including as regards the order of the data presented to the user of the service. The service will be given twenty four (24) hours a day, all year round, except for Yom Kippur. In this subsection, "order of the data presented" –
 
 
70
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
Insofar as the answer to the service user's query comprises several different data, the requested data will be presented to the service user in random order.
 
 
(B)
The response in respect of the information service for clarifying telephone numbers as stated in Section 67.2A will be given within a reasonable time. If the Director sees that the waiting times for the service are not reasonable, he may establish response time indexes.

 
(C)
An information service for clarifying telephone numbers as stated in Section 67.1A(B) and an information service using a phone center, the access to which is effected by means of a national access code as stated in Section 67.3A, will comply with the service indexes specified below:
 
 
(1)
At any time, in the event of a heavy service call load 6 , the number of inquirers receiving service should not be less than 90%;
 
(2)
The average waiting period of a caller until the start of receiving service 7 should not exceed  30 seconds;
 
(3)
The maximum waiting period for a caller until the start of receiving the service should not exceed 60 seconds.
 
67.7A
Section 67A will go into effect on February 8, 2007, except for Subsection 67.1A(a), which will go into effect on March 15, 2007 (“the commencement date”), and except for Section 67.2A A45) , which will go into effect at the time of signing this amendment.

67.8A
The Licensee, by itself or through another, including together with another licensee, will advertise all the information services for clarifying telephone numbers given free of charge by the Licensee, as well as the national access codes allocated to the cellular service licensees for providing the service ("free information services"). The advertising should include at least the following:

 
(A)
The Licensee's website;

 
(B)
At least once every half year, the Licensee will attach, in the framework of the bill submitted to the subscriber, a separate information sheet A43) regarding the free information services, which will not include any other information, starting from the first bill submitted to the subscriber following the commencement date.

 
(C)
At least four (4) times during the first year following the commencement date, the Licensee will run large, prominent ads in at least the 3 largest Hebrew language newspapers, and in the largest newspaper in Arabic, in English and in Russian, as well as in the largest economic newspaper. These ads will include no other information. The first ad in all the aforesaid newspapers, except for the economic newspaper, will be on the first Friday after the commencement date or on the following one, and in the economic newspaper it will run on the first Tuesday after the commencement date or on the following one, regarding the free information services.
 
 
 
 
6      Busy Hour Call Attempts
7      Start of receiving service – the beginning of the response by a center operator or of an IVR system, which ask the inquirer for the information needed to find the requested phone number and the like.

 
 
71
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 

Without derogating from the foregoing, the Director may instruct the Licensee regarding the manner and format for advertising the information services.
 
67B. A 43 )           Void.
 
67C. A16)           Service Dossier

67C.1
If the Licensee wishes to operate a service included in the list of services in the First Schedule and marked “future”, it must notify the Director of this in writing not later than thirty (30) days before the date on which it plans to begin providing the service.

67C.2
If the Licensee wishes to operate a service not included in the list of services in the First Schedule which it intends to provide to any recipient of its services, it must notify the Director of this in writing not later than thirty (30) days before the intended date for commencement of provision of the new service.

67C.3
The Director will notify the Licensee within thirty (30) days of the date of receipt of the Licensee’s notice as stated in sections 67C.1 and 67C.2, whether it is allowed to commence provision of the service or whether it must submit a service dossier for the Director’s approval, as a condition for commencement of the service.

67C.4
The Licensee will submit a service dossier for the Director’s approval, at his request; If the Licensee fails to submit a service dossier as instructed by the Director, or if the Director does not approve the service dossier, the Licensee shall not commence provision of the service.

67C.5
The Director will give a decision regarding the service dossier that was submitted to him within sixty (60) days from when the Licensee has submitted to the Director all the documents and information requested by him for the purpose of approving the service dossier. In special cases, the Director may extend the times set in this section, by a written, explanatory notice to be given to the Licensee.

67C.6
The Director may require the Licensee to submit for his approval a service dossier for an existing service regarding which no service dossier was previously required, and he may require the Licensee to submit for his approval a new service dossier for a service regarding which a service dossier was approved in the past.

67C.7
The service dossier will be submitted to the Director in the format and at the time specified by the Director and will include, inter alia, the following: the name of the service; a detailed description of the service and the manner in which it is provided; the service rate, and an engineering description, all as set out in the First Schedule; The Director may give instructions on additional matters which are to be included in the service dossier.

67C.8
If the service dossier is approved, the Licensee will provide the service according to the terms of the approved dossier, and the approved service dossier will be deemed an integral part of the license.

67C.9
The Licensee will advertise an approved service dossier, with details and in the manner specified by the Director, and the Director may advertise it himself, provided he does not
 
 
 
72
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
do so until after the Licensee has begun providing the service. The advertising will not include information comprising a trade secret, which was identified as such by the Licensee and attached to the service dossier as a separate addendum marked as a trade secret.

67C.10
Any new service which the Licensee begins to provide pursuant to this section will be deemed a part of the First Schedule; The Director will update the First Schedule from time to time.

67C.11
The provisions of this section will apply, mutatis mutandis, to a trial using the Licensee’s network.
 
 
67D. A24)           Erotic Service
 
 
An erotic service provided through the network, will be provided in accordance with the provisions of Addendum O in the Second Schedule.
 
As regards this section –
 
"Erotic service" – as defined in Section 1 of Addendum O in the Second Schedule.
 
67E. T 60)            Domestic Roaming
 
67E.1
The Licensee provide by means of its network to a roaming licensee a domestic roaming service for the subscribers of the roaming to the network of the host operator, as set forth below.
 
67E.2
Licensee's preparations
 
The Licensee shall prepare for the implementation of domestic roaming in accordance with all of the following:
 
 
(a)
The provisions of Appendix C, in the Second Schedule.
 
 
(b)
The provisions of the Law and the License concerning provision of the possibility of utilization of its network, and specifically sections 30 to 30C of the License, mutatis mutandis .
 
67E.3
Operating arrangement
 
 
(a)
If a roaming licensee notifies the Licensee, after notifying the Minister of its failure to reach agreement with any existing licensees on the conditions for the provision of roaming services as stated in section 5B(b)(1) of the Law, that it has chosen the Licensee for the receipt of domestic roaming services (in this subsection " notice "), the Licensee and the roaming operator shall forward to the Director the engineering and operating details agreed between them with respect to the implementation of domestic roaming (" operating arrangement "), within three months from the date of sending of the notice. In
 
 
 
A60) Amendment No. 60
 
73
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
addition, said operators shall include engineering or operating details as required for maintaining domestic roaming, which were not included in the operating arrangement due to disagreements, should any arise.
 
 
(b)
Matters in disagreement as stated in paragraph (a) above, should there be any, shall be decided by the Director. The Director's instructions in this regard shall form an integral part of the operating arrangement.
 
67E.4
Starting date for implementation of domestic roaming
 
 
A host licensee shall begin providing domestic roaming services in accordance with the operating arrangement no later than three months after the date on which the roaming licensee presented to the host licensee the Minister's approval as stated in section 5B(b)(2) of the Law.


 
 
74
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
Part C: Termination, Delay or Restriction of Service

 
68.                  Definitions

 
In this part –
 
' Disconnection of service ' – Temporary discontinuation of cellular system service to a subscriber;
 
' Termination of all service ' – Full termination of all the Licensee's services to the subscriber A 58 ;
 
' Termination of a service ' – Full termination of one of the Licensee's services to the subscriber A 58 .

 
69.                   Prohibition on the Termination or Disconnection of Service
 
The Licensee may not terminate or disconnect cellular system services and other services, which the Licensee must provide under this license, unless that stated in this part is fulfilled, or that stated in Section 48.

 
70.                  Disconnection of Service at Subscriber's Request

70.1
A subscriber may ask the Licensee for a temporary disconnection of service for a period no less than thirty days and no longer than ninety days (hereinafter – disconnection period). The subscriber's request will be made in writing, and may be done through the cellular system end-user equipment in his possession, provided that the Licensee has verified the request's credibility by a return call to the subscriber's cellular system end-user equipment or by any other reliable way.

70.2
The Licensee will effect the disconnection of service no later than the workday following the day of the request's submittal.

70.3
The Licensee will resume the cellular system services to the cellular system end-user equipment in the subscriber's possession at the end of the disconnection period. If the subscriber requests, in a written notice, to resume the cellular system services to the cellular system end-user equipment in his possession before the end of the disconnection period, the Licensee will resume the services no later than the workday following the day on which the subscriber's notice was submitted.
 
71.                  Termination of Service at the Subscriber's Request
 
71.
Discontinuation of Service at a Subscriber's Request
 
71.1
A subscriber may request the Licensee to discontinue service   or discontinue all service   A 58 to the cellular end-user equipment in his possession. For this purpose,
 
 
 
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
75
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
a subscriber may communicate with the Licensee in writing, including by fax or by email   T 48) .
 
71.2
The Licensee will discontinue a service or discontinue all service not later than the work day after the date specified by the subscriber in his notice. If the subscriber did not specify a date, the service or all service will be discontinued not later than the work day after the date of delivery of the notice to the Licensee   A 58 .
 
71.3 T 48)
The Licensee will publish on its website, and in the bill sent by it to the subscriber, the fax number and the email address through which the subscriber may request the Licensee to discontinue a service.
 
 
(A)
The subscriber did not pay for the third time during the same year the bill in respect of the payments he was charged for cellular system services on the date set therefor in the payment notice. In this section, "year" denotes the period from January 1 to December 31;

 
(B)
There is reasonable suspicion of a fraudulent act being committed through the subscriber's end-user equipment or using the features of the end-user equipment;

 
(C)
the Licensee found that the subscriber used the cellular system services in an unusual amount for that type of subscriber, and after the Licensee's service center contacted the subscriber in a phone call placed to the end-user equipment in his possession, and the subscriber did not give a reasonable explanation for said anomaly. As regards this paragraph, consumption will not be deemed unusual when less than threefold the average consumption for the same type of subscribers.
 
71.4 A 58
The Licensee will send the subscriber a written notice concerning the discontinuation of a service or the discontinuation of all service, within one work day after the discontinuation was effected. The notice will contain, inter alia, the date of effecting of the discontinuation, and in a notice of discontinuation of all service also the last date for sending the final bill, as stated in subsection 2.3(c)(2) in Appendix E to the License (hereinafter – the final bill ). Such notice will be sent by regular post, or via email or fax if the subscriber gave his consent thereto. Where the subscriber submitted a request to discontinue a service or to discontinue all service at a service station of the Licensee, the Licensee's representative will give him the aforesaid written notice at the time of the submission of the request.
 
 
A copy of said notice must be kept available by the Licensee for presenting to the Director within five (5) work days from when it was sent. If the Licensee sent the notice via email or fax, the sending confirmation must also be available for presenting to the Director within five (5) work days from when the notice was sent.
 
 
  
T48) Amendment No. 48 (inception: this amendment will come into force on October 2, 2008).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
T48) Amendment No. 48 (inception: this amendment will come into force on October 2, 2008).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
76
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
71.5 A 58
Following the collection of the amount for payment as specified in the final bill, the Licensee will not be entitled to collect any payment via the payment means provided to it by the subscriber, without the subscriber's express prior written consent, except for the collection of payment for end-equipment that was purchased by the subscriber from the Licensee on installments, as stated in section 2.3(c)(2) in Appendix E to the License. A copy of the subscriber's said consent must be kept available by the Licensee for presenting to the Director within five (5) work days from when it was delivered to the Licensee.

 
71A. T 48)
Blocking of Cellular End-User Equipment
 
71A.1
The Licensee will register the identification number of a subscriber's cellular end-user equipment, excluding cellular end-user equipment operating by the IDEN technology (hereinafter in this section "cellular end-user equipment" ):
 
 
(a)
On the date of delivery of the cellular end-user equipment to the subscriber, on the date of contracting with the subscriber or on the date of renewal of the contract, including on the date of replacement, upgrading or repair of the cellular end-user equipment.
 
 
(b)
In the case of cellular end-user equipment that was not provided to the subscriber by the Licensee, the Licensee will make reasonable efforts to bring to the subscriber's attention the possibility available to him of registering with the Licensee the identification number of such aforesaid cellular end-user equipment.
 
 
(c)
At the subscriber's request from the Licensee; the subscriber's request may be via the telephone, after the Licensee has verified the reliability of the request.
 
71A.2
If a subscriber notifies the Licensee that his end-user equipment has been stolen or lost, the Licensee will block the end-user equipment of a subscriber who was registered as stated in Section 71A.1, free of charge, not later than thirty (30) days after it has verified the reliability of the subscriber's request. For purposes of this section, "blocking" – elimination of the possibility that the cellular end-user equipment will receive cellular services.
 
71A.3
The Licensee will provide details of end-user equipment that was blocked by it to any other cellular licensee, not later than the workday after implementing that stated in Section 71A.2.
 
71A.4
(a) T 50)
The Licensee may not provide cellular services to end-user equipment that was blocked by it or by another cellular licensee.
 
 
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
T48) Amendment No. 48 (inception: this amendment will come into force on October 2, 2008).
 
77
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
(b) T 50)
Notwithstanding that stated in Section 71A.2 and Subsection (a), if it is found that blocking the identification number will cause the discontinuation of service to other end-user equipment having the same identification number, the Licensee may abstain from implementing the block as stated.
 
71A.5
The Licensee will remove the block on end-user equipment that was blocked by it, after receiving a request T 50) from the subscriber. Removal of the block will be done not later than one workday after the Licensee has verified the reliability of the request, unless the subscriber has specified a later date in his request T 50) .
 
71A.6
The Licensee will publish to all its subscribers its obligations with respect to the possibility of blocking cellular end-user equipment, the procedure for registration of the identification number of cellular end-user equipment with the Licensee and the ways of communicating with it for the purpose of implementing the block. The publication will be made in at least the following ways:
 
 
(a)
In the contract;
 
 
(b)
On the Licensee's website;
 
 
(c)
In a separate information sheet to be enclosed with the bill submitted to the subscriber, by January 30, 2009 T 50) .
 
71A.7 T 50)
The Licensee will detail, in a half yearly report, the number of identification numbers that were blocked and the number of identification numbers in respect of which such block was removed, as well as the number of identification numbers that were not blocked pursuant to this section and the reasons therefor.

 
  
T50) Amendment No. 50.
T50) Amendment No. 50
T50) Amendment No. 50
T50) Amendment No. 50
T50) Amendment No. 50
T50) Amendment No. 50

 
78
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
72.                   Termination or Disconnection of Service Due to Breach of Agreement

72.1
The Licensee A16) may terminate or disconnect the service to a subscriber if one of the following is fulfilled:

 
(A)
The subscriber did not pay a payment he owes in respect of service he received, on the date set for its defrayal in his contract with the Licensee;

 
(B)
The subscriber breached a condition in the contract between him and the Licensee, which was established as a material condition;

 
(C)
The subscriber used unlawfully or allowed another to use as aforesaid the end-user equipment in his possession.

72.2
Service to a subscriber will not be terminated or disconnected in the cases detailed in Section 72.1(A) and (B), except after the Licensee gives the subscriber a notice in writing at least 10 days prior to the expected termination or disconnection date. The notice will state that the subscriber is being given an opportunity, within the time set in the notice, to rectify the act or default, in respect of which the service will be terminated or disconnected.
 
72.3 T 2)
Notwithstanding that stated in Section 72.2, the Licensee may disconnect service to a subscriber without prior notice, if one of the following is fulfilled:
 
 
(a)
The subscriber did not pay, for the third time during the same year, the bill in respect of the payments he was charged for cellular services, on the date set therefor in the payment notice. In this paragraph, "year" – the period from January 1 to December 31;
 
 
(b)
There is a reasonable suspicion of a fraudulent act being committed through the subscriber's end-user equipment or using the features of the end-user equipment;
 
 
(c)
The Licensee found that the subscriber used the cellular services in an unusual amount for that type of subscriber, and after the Licensee's service center contacted the subscriber in a phone call placed to the end-user equipment
 
72A.4 T 2)
The Licensee may disconnect service to a subscriber if it has found that the end-user equipment in the subscriber's possession, through which the subscriber receives cellular services, causes interference with the provision of cellular services to other subscribers or interference with the cellular system activity, provided that the Licensee gave the subscriber notice in writing at least 21 days prior to the expected disconnection date. The notice will specify the reason for the expected disconnection and state that the subscriber is being given an
 
 
T2) Amendment No. 2 (due to a clerical error in the amendment, appeared as Section 71.3 instead of 72.3).
T2) Amendment No. 2 (due to a clerical error in the amendment, appeared as Section 71.4 instead of 72.4).
 
79
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
opportunity, within an amount of time to be set in the notice, to repair the end-user equipment in such manner as to prevent said interference.
 
72A. T 48)
Discontinuation of Service to a Dormant Subscriber
 
72A.1
If the Licensee wishes to discontinue service to a dormant subscriber, it must give the dormant subscriber prior notice of such intention, in the manner set out below (hereinafter in this section "the notice" ). The time of discontinuation of the service may not be less than thirty (30) days after the date of sending of the notice.
 
72A.2
The Licensee will specify in the notice the telephone number in respect of which it intends to discontinue the service.
 
72A.3
The sending of a notice to a dormant subscriber will be done:
 
 
(a)
With respect to a subscriber whose name and address are known to the Licensee, in each of the following ways:
 
 
(1)
By a letter via regular post;
 
 
(2)
By two SMS messages to be sent to the dormant subscriber at a difference of at least two weeks between the messages.
 
 
(b)
With respect to a subscriber whose name and address are not known to the Licensee – by four SMS messages to be sent at a difference of at least one week between the messages.
 
 
(c)
Notwithstanding that stated in Subsections (a)(2) and (b), if the subscriber's end-user equipment does not support the receipt of SMS messages, the Licensee will send the subscriber voice messages instead of SMS messages, insofar as the subscriber's end-user equipment supports the receipt of voice messages.
 
72A.4
The Licensee may not discontinue service to a dormant subscriber to whom a notice was sent, where the dormant subscriber has notified the Licensee that he does not wish the service to be discontinued. The subscriber may deliver such a message via the telephone or in writing, including by fax or by email.
 
 
Notwithstanding the aforesaid, the Licensee may discontinue service to a dormant subscriber who has notified it that he does not wish the service to be discontinued, after the subscriber was sent at least two notices, as stated in Section 72A.3 and 72A.5, and where in the second notice the Licensee has notified the subscriber that if within one year from the date of the second notice the subscriber does not make use of the cellular service, the subscription to the service will be discontinued, without delivery of further notice to the subscriber.
 


T48) Amendment No. 48 (inception: this amendment will come into force on October 2, 2008).
 
 
 
80
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
72A.5
The Licensee may not send the subscriber further notice concerning its wish to discontinue the service after one year has passed from the date on which the subscriber was sent the previous notice in that regard.
 
72A.6
The Licensee will keep the telephone number of a dormant subscriber to whom service was discontinued, during at least three months from the date of discontinuation of the service, before the number is returned to the pool of telephone numbers of the Licensee itself or to another cellular licensee who originally allocated the number to the dormant subscriber. If during this period a written request is received from the subscriber to renew the service, the Licensee will renew the service upon the same terms as those that applied prior to the discontinuation of the service, free of charge.
 
72A.7
Where service was discontinued to a dormant prepaid subscriber who has a balance of the payment remaining to his credit, the Licensee will refund the appropriate balance within 30 days after receiving a written request from the subscriber who has proven that he is the owner of the line to which the service was discontinued, provided such request is received by the Licensee not later than six months after the date of discontinuation of the service.

 
 
81
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
73.                  Disconnection of Service Due to Maintenance Operations

73.1
The Licensee may temporarily disconnect or restrict services that it is obligated to provide (hereinafter – disconnection due to maintenance), if the need to carry out vital cellular system maintenance or setup operations necessitates this, provided the following are fulfilled:
 
 
(A)
The duration of the disconnection due to maintenance does not exceed twelve (12) consecutive hours;
 
(B)
The number of disconnections due to maintenance does not exceed two (2) during a single year;
 
(C)
Void. A2)

73.2
The Director may ask the Licensee for a detailed explanation regarding the circumstances necessitating disconnection due to maintenance, and may ask the Licensee to postpone said disconnection if he came to the realization, after considering the Licensee's contentions, that a vital public interest necessitates such a postponement.

73.3
If due to the need to carry out vital maintenance or setup operations in the cellular system requires disconnection of service exceeding 12 hours, the Licensee will ask in advance for the Director's approval. The request will specify the maintenance operations required and the actions taken by the Licensee to speed up these operations and reduce, inasmuch as possible, the duration of the service disconnection.

73.4
Void. A2)

73.5
If disconnection or restriction of service is required urgently for the purpose of carrying out immediate, vital operations, the Licensee will notify the Director forthwith, including by phone, cable or fax, regarding the urgent disconnection or restriction. The Licensee will notify its subscribers about the aforesaid urgent disconnection or restriction, as early as possible, including via the public address system operating through the cellular system, insofar as this is possible, as well as through the public media.

73.6
Notwithstanding that stated in Sections 73.1 and 73.4, the Licensee does not have to notify the Director or the subscribers about disconnection due to maintenance, when the following are fulfilled:
 
(A)
The duration of the disconnection due to maintenance does not exceed half an hour;
 
(B)
Disconnection due to maintenance is being done between 24:00 Saturday night and 05:00 Sunday morning the following day.

Such a disconnection will not be counted in the number of disconnections as required under Section 73.1(B).
 
 
 
82
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
CHAPTER F – PAYMENT FOR SERVICES A8)

Part A – General

 
73A.            Definitions
 
In this chapter –
 
 
“Licensee”
-
Anyone to whom the Minister has granted, in accordance with the Law, a general or special license;
       
 
“Airtime”
-
Duration of the time in which a subscriber receives cellular services, whether the connection is initiated by the subscriber or by someone else;
       
 
“Airtime unit” A31A31)
-
Time unit of 12 seconds at the most, but starting from Thursday, 1 January 2009, a time unit of 1 second.
       
 
“Package of services”
-
Several services sold to a subscriber as a package, for which a rate has been set as specified in section 75.2.
       
 
“Public telecommunications network”
-
Including an international telecommunications system.
 
 
   
 
“Payment for completion of a call”
-
Payment made by the initiator of a call which began on end-user equipment connected to one public telecommunications network and ended on another public telecommunications network, or on end-user equipment connected to such a public telecommunications network, for completing the call on the other public telecommunications network.
 
74.            Payment Categories
 
74.1 A 57
The Licensee may collect from its subscribers payments for Cellular services, as follows:
 
 
(a)
A onetime installation fee for connecting mobile or portable end-user equipment held by the subscriber to the Cellular system, including issuance of a smart (SIM) card to the subscriber, or a onetime registration fee (hereinafter – connection fee);
 
 
(b)
A fixed monthly A 57 payment;
 
 
A57 Amendment No. 57 (Inception: This amendment will come into force on the day of signing the Amendment)
A57 Amendment No. 57 (Inception: This amendment will come into force on the day of signing the Amendment)
 
83
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
(c)
Payment for airtime as specified in section 75A;
 
 
(d)
Payment for completion of a call as specified in section 75A;
 
 
(e)
Payment for basic telephone services, related services and value added services, detailed in the First Schedule to the License;
 
74.2 A 57
The Licensee may not collect from a subscriber:
 
(a)       Payment for establishing a call;
 
(b)         A minimum price for a call.
 
 
(c)   A 58
Any payment prior to the actual supply of the service, excluding a 'prepaid service.'

 
  
 
A57 Amendment No. 57 (Inception: This amendment will come into force on the day of signing the Amendment)
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
 
84
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
Part B – Setting and Publication of Rates


 
75.                Setting the Rates and Their Amount
 
75.1
The Licensee shall fix a rate for every service and package of services provided by it to its subscribers, and it may determine the manner of linkage of the rate to the index. The Licensee shall notify the Director of the amount of each rate, before the rate comes into effect.
 
75.2
The Licensee may designate packages of services according to types of services included in the package or time periods or by any other method. The Licensee may set a separate rate for each of the services included in the package or set a general rate for the package.
 
75.3
The Licensee shall offer each package of services at equal terms and at a uniform rate according to categories of subscribers; For purposes of this section, “category of subscribers” – A16) a group of subscribers whose attributes provide reasonable justification for distinguishing it from another group.
 
75.4
The Licensee shall allow any subscriber, without discrimination, to switch from one package of services to another that is being offered by it at the time. The Licensee shall include such a provision in the contract with its subscribers. In the framework of this provision it may set times when it is permissible to make such a switch and it may set conditions, including payment terms, for implementing the switch.
 
75.5 T 49)
If the Licensee contracts with the subscriber in regard to a certain service or package of services, and the contract includes a commitment as defined in Section 56A.1 ( "commitment period" ), the following provisions will apply, with the exception of a business subscriber:
 
 
(a)
The terms of the contract, excluding the contract rates, will be final, known and fixed in advance for the entire commitment period.
 
 
(b)
The rate for each service will be fixed on the date of the contract and will be uniform and specified in shekels for the entire commitment period.
 
 
For purposes of this section, "uniform" – any rate before VAT which the subscriber is required to pay, as determined on the date of the contract, may not be increased during the commitment period.
 
 
Notwithstanding the aforesaid, the Licensee may provide its subscriber services at lower rates than those fixed in advance in the contract, during a limited time period, to all the subscribers or to a certain type of subscriber.
 
 
(c)
The Licensee will include provisions as stated above in the contract with the subscriber.
 
 
 
T49) Amendment No. 49 (Inception: This amendment will come into force on December 31, 2008).
 
85
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
75.6
The Licensee may not condition a contract with a subscriber or a subscriber’s switch from one package of service to another on the purchase of value added services or end-user equipment from the Licensee.
 
75.7
A package of services in which a payment in installments is set for end-user equipment or for one of the services, shall include also a payment arrangement in the event that the subscriber wishes to be released from that package or to switch from that package to another package of services, according to the outstanding balance of the payments due from the subscriber or according to the remainder of the commitment period.
 
75.8
(a)
The Licensee may not collect from a subscriber payment for a call when the call was not initiated by the subscriber (hereinafter – uninitiated call).
 
 
(b)
Notwithstanding that stated in subsection (a), the Licensee may collect from a subscriber payment for an uninitiated call in the following cases:
 
 
(1)
Call transferred to the subscriber by means of a roaming service;
 
 
(2)
Collect call to which the subscriber has given his agreement;
 
 
(3)
A call created by dialing a special prefix for a toll-free service that was allocated to the subscriber under an agreement with him A 55 ;
 
 
(4)
Void A 51
 
 
(c)
The licensee may collect from a subscriber initiating a call by dialing the following services or access codes, payment not exceeding the tariff collected by the licensee from a subscriber for a call whose destination is on a domestic operator network: A 51
 
(1) Split charge call service 1 ;
 
 
(2) Short number service for businesses 2 ;

 
(d)
For a call to an international destination, the Licensee may receive only the payment imposed on the international operator, as determined in the Interconnection Regulations."   A 54
 
 

 
A55 Amendment No. 55 (Inception: This amendment will come into force on the day the relevant amendments to the Payment Regulations and to the Interconnection Regulations come into force, or on March 28, 2010 – whichever the later)
A51 Amendment No. 51 (Inception: This amendment will come into force on March 31, 2009)
A51 Amendment No. 51 (Inception: This amendment will come into force on March 31, 2009)
1   Pursuant to the "split charge call" service file (1-700 service).
2   Pursuant to the Administration Direction on "Short Form Dial for Businesses - Star  (*) Plus Four Digits" dated May 4, 2008
 
86
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
75.9 A18) I nception
 
 
Void A 55
 
75.10
The payment for airtime will be determined in the manner set out below:
 
 
(a)
The payment for airtime will be determined according to an airtime unit A31) ; For the purpose of calculating the payment, a part of an airtime unit shall be deemed the same as a whole airtime unit.
 
 
(b)
The payment for each airtime unit, at least during the first minute of contact, will be fixed. A 57
 
 
(c)
The duration of the call for payment purposes is from the moment the connection is established between the subscriber who initiated the connection (hereinafter – the calling subscriber) and the subscriber receiving the call, until the moment when the call is terminated, which is the moment when an instruction to terminate the connection is received from the calling subscriber or from the subscriber receiving the call; The duration of the connection setup time, until the moment the connection is established, and the duration of the disconnection time, from the moment the instruction to terminate the connection is received until it is actually implemented, is not included in the count of the duration of the call.
 
 
In this regard, subscriber receiving the call – including a voice mailbox.
 
 
“Voice mailbox” – an installation or device forming part of the cellular system, designed to enable the calling subscriber to leave a voice message for the called subscriber A40) .
 
 
(d)
A40) Regarding a call that is transferred to a voice mailbox, the Licensee shall play to the calling subscriber an introductory voice message, lasting at least 2 seconds (in this subsection – “message” ), and will enable the calling subscriber, at his option, to disconnect the call without any debit, in the course of the message, or within a reasonable time being not less than one second after the end of the message ( “reasonable time” ). In such case, the moment of establishing the connection with the subscriber receiving the call, within the meaning of subsection (c) above, will be deemed to occur at the end of the reasonable time.
 
 
 
A54 Amendment No. 54 (Inception: This amendment will come into force on the day the amendment to the Interconnection Regulations concerning a call from a cellular network to an international telecommunications network comes into force)
Inception The inception of section 75.9 is on December 15, 2002.
A55 Amendment No. 55 (Inception: This amendment will come into force on the day the relevant amendments to the Payment Regulations and to the Interconnection Regulations come into force, or on March 28, 2010 – whichever the later)
A57 Amendment No. 57 (Inception: This amendment will come into force on the day of signing the Amendment)
 
87
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
The wording of the message will be: “The call is being transferred to a voice mailbox,” and it will be articulated clearly and at a reasonable speed. In this subsection, “call transferred to a voice mailbox” – excluding a call originating in an international telecommunications system.

 
75A.
A25 ) Completion of a Call in Another Public Telecommunications Network
 
 
The payment for completion of a call to be collected by the Licensee shall not exceed the interconnection rate specified in the Telecommunications Regulations (Payments for Interconnection), 2000.

 
75B.             A2A25) Completion of an SMS on Another Public Telecommunications Network
 
 
The Licensee may collect from a subscriber for the transfer of an SMS which is being transferred from end-user equipment that is connected to the network to end-user equipment that is connected to a cellular system of another cellular licensee, a payment not exceeding the payment which the Licensee collects from the subscriber for the transfer of an SMS which is transferred from end-user equipment that is connected to the network to end-user equipment that is connected to the network, plus a payment not exceeding the rate for the transfer of an SMS specified in the Communications Regulations (Telecommunications and Transmissions) (Payments for Interconnection), 2000.
 
 
For purposes of this section –
 
 
“SMS” – telecommunications messages comprised of writing, including signs or symbols, transferred from end-user equipment that is connected to the network, to end-user equipment that is connected to the network or to a cellular system of another cellular licensee.

 
75C.             A27 ) Temporary Order
 
 
Notwithstanding that stated in section 75B, for the period beginning May 9, 2004 and ending February 9, 2005 A29) , the following provisions shall apply:
 
 
(a)
The Licensee may collect from a subscriber for the transfer of an SMS which is destined for end-user equipment that is connected to a cellular system of another cellular licensee (hereinafter – “inter-network SMS”) a payment not exceeding the payment which the Licensee collects from the subscriber for the transfer of an SMS which is transferred from end-user equipment that is connected to the network to end-user equipment that is connected to the network, plus a payment not exceeding the rate for the transfer of an SMS specified in the Communications Regulations (Telecommunications and Transmissions) (Payments for Interconnection), 2000, less a rate of 0.7% 8 ;
 
 
 
 
  8 The 0.7% reduction is based on a report received from some  cellular operators concerning the rate of inter-network SMS messages that did not reach their destination. Section 75C was enacted as an temporary order, with the  cellular operators to make the necessary adjustments in the  cellular systems and in the interconnection arrangements between them to enable full implementation of section 75B of their license. To remove doubt, it is clarified that this temporary order was enacted only for a limited time,  owing to
 
88
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
(b)
The Licensee may collect from a subscriber payment for an inter-network SMS as stated in subsection (a), even if its transfer to the called subscriber was not completed.

 
75D. A 58       Notice Concerning Utilization of Surfing Package

 
75D.1
The Licensee will send an SMS message to a subscriber who has utilized 75% and 95% of a surfing package. The SMS message will be sent to the subscriber's telephone number and to the additional telephone number indicated by the subscriber when executing the contract, as soon as possible after the time of such utilization, and will contain at least the following: percentage of utilization of the package, time of calculation of the utilization (date and hour), and the telephone number to which the SMS message relates. In this regard, " surfing package " means the number of units of a cell phone Internet surfing service in Israel  (hereinafter – surfing service ) that are supplied to the subscriber at a fixed rate regardless of the actual scope of use.
 
 
This section will apply only when the rate of a surfing service unit, after full utilization of all the surfing service units included in the surfing package, is more than 1.25 times the rate of a surfing service unit in the framework of the surfing package.

 
76.                Publication of Rates
 
76.1
The Licensee shall provide to anyone so requesting, at the service offices and at the call centers, free of charge, full and detailed information concerning the up-to-date rates for all its services, including the payment for completion of a call; The Director may instruct the Licensee concerning the manner and format of publication of the rates.
 
76.2
The Licensee shall indicate in every account sent to a subscriber the package of services according to which the subscriber is being debited.
 
76.3
The Director may request to receive from the Licensee at any time details of the rates charged by it.

 
77.              Void A43)
 
77A.            Fraud Prevention
 
 
difficulties that were pointed out by the  cellular operators concerning the possibility of receiving information about non-completion of an SMS on another  cellular network; However, beyond this, nothing may be inferred from this temporary arrangement concerning permission to collect payment for an SMS that was not transferred to its destination, and said arrangement does not detract from the Ministry’s basic position according to which, in general, no payment may be collected for a telecommunications service that was not realized.
  A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
 
 
89
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
77A.1
The Licensee shall take suitable and reasonable steps to prevent fraud and shall maintain a control and follow-up system for verifying, to the extent possible, that the calls for which the subscriber is being debited were actually made from end-user equipment connected to the Licensee’s cellular system in the subscriber’s name.
 
77A.2
The Licensee shall disconnect the service to the subscriber’s end-user equipment after receiving at the service offices the subscriber’s notification that the end-user equipment was lost or stolen, or that there is a possibility that someone else is making calls through the end-user equipment without having received permission to do so; The subscriber may give such a notification by telephone or in writing, including by fax or email; Upon receipt of a telephone notification or immediately after receipt of a written notification, the Licensee shall verify its reliability and disconnect the service.
 
77A.3
The Licensee shall cooperate with other licensees in locating and preventing fraud.

 
  
 
 
90
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
Part C – Changes in the Rates
 
78. A43)          Change in the Rates
 
 
Subject to that stated in section 75, the Licensee may change the rate that was set by it for any service or basket of services (in this section – “service”), provided:
 
 
(a)
It sent the Director prior written notice at least fourteen (14) days before the effective date of the rate, stating the new rate and the rate before the change. Notwithstanding the foregoing, regarding a reduction in a rate, the Licensee may send the notice to the Director up to a month after the reduction A 58 ;
 
 
(b)
It sent every subscriber who joined the service prior written notice at least fourteen (14) days before the effective date, noting the new rate and the rate before the change. Notwithstanding the foregoing, regarding a reduction in a rate, the Licensee may send the notice to the subscriber up to a month after the reduction.
 
 
Said notice will be sent to the subscriber by regular post or via the telephone bill sent to the subscriber A 58 .
 
 
For purposes of this section, “change” – any change in a rate resulting in an increase or reduction in the payment before VAT which a subscriber is required to pay for the Licensee’s services.
 
79.                Start of an Increase or Reduction in a Rate
 
 
In case of an increase or reduction in any rate for cellular services according to the provisions of the license, such increase or reduction shall not apply to payments made for such a service prior to the starting date of the increase or the reduction; An increase or reduction shall apply only to cellular services provided to a subscriber after the date of the increase or reduction; This section shall not apply to a rate adjustment ordered by the Minister under section 83(A).
 
80.                Arrears in Payment
 
80.1
The Licensee may debit a subscriber arrears interest, linkage differences and collection costs on payments for cellular services which were not paid by a subscriber on their stipulated payment date, in a payment notice sent to the subscriber, according to the contract between them A33) (hereinafter – the payment date).
 
80.2
Void A43)
 
80.3
The amount of the arrears interest shall not exceed the rate specified in the definition of “linkage differences and interest” in section 1 of the Adjudication of Interest and Linkage Law, 1961, plus linkage differences for the period between the stipulated payment date and the actual payment date of the specified amount.
 
80.4
A33) The Licensee may debit a subscriber collection costs on a payment for a service which it provided to the subscriber, which was not paid on the payment date (hereinafter – the amount of the debt), provided at least fourteen (14) days have elapsed from the payment date, excluding a case of nonpayment due to the bank’s or the credit-card

 
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
  
 
 
91
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
company’s refusal to pay a debit for the collection of which the Licensee received an authorization; The amount of the collection costs to be collected by the Licensee shall be reasonable and in proportion to the amount of the debt and the actions which the Licensee must take in order to collect it.: In this regard, “collection costs” – including legal handling by the Licensee or someone acting on its behalf, of the collection of the amount of the debt before application is made to the courts.
 
 
 
92
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
Part D – Miscellaneous
 
81.            Onetime Debit for Connection Fee
 
 
If the Licensee decides to collect a connection fee as defined in section 74(A), it may debit a subscriber a connection fee only for the connection of the subscriber for the first time to the cellular network and the provision of the cellular services, or for a connection after the termination of all A 58 service under section 71 or the termination or disconnection of a service under section 72.
 
82.            Collection of Subscription Fee in Installments
 
 
The Licensee may collect the connection fee as stated in section 81 for connection to the cellular system in a number of installments, at the times agreed upon with the subscriber and in the amount specified in the contract.
 
83.            Harm to Competition or to Consumers
 
 
(a)
If the Minister finds that any of the Licensee’s rates or any payment required to be made to or through the Licensee is contrary to the provisions of the License, the Minister shall notify the Licensee in that regard, indicating the correction that needs to be made and that if the Licensee fails to do so, the Minister will act pursuant to his power under sections 5 and 15 of the Law; The Licensee shall send the Minister a written notification setting out the corrected rate and shall act to refund the excess amount, if any, which a subscriber was debited according to the rate prior to its correction.
 
 
(b)
If the Minister finds that any of the Licensee’s rates or any payment required to be made to or through the Licensee is unreasonable or is liable to harm competition or the consumers, the Minister shall notify the Licensee in that regard, indicating the correction that needs to be made and that if the Licensee fails to do so, the Minister will act pursuant to his power under sections 5 and 15 of the Law; The Licensee shall send the Minister a written notification setting out the corrected rate
 

83A. A 58                   Excess Charges
 
 
(a)
The Licensee will document in its information systems any written or verbal contestation by a subscriber concerning an excess charge that appears in the telephone bill.
 
 
(b)
The Licensee will give a subscriber a written, explanatory response to his contestation, setting out the manner of calculation of the refund or the reasons for rejecting the contestation, as the case may be, within twenty one (21) days from the day of receipt of the contestation. In this regard, "day of receipt of the contestation" – With respect to a notice sent in writing – the day on which the notice was received by the Licensee;
 
 
 
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
93
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
With respect to a notice delivered orally – the day on which the notice was delivered to the Licensee.
 
 
A copy of such response must be kept available by the Licensee for presenting to the Director within five (5) work days from when it was sent. If the Licensee sent the response via email or fax, the sending confirmation must also be available for presenting to the Director within five (5) work days from when the notice was sent.
 
 
Notwithstanding the above, where a Subscriber has submitted a verbal objection and the Licensee found that the Subscriber has been overcharged by an amount not exceeding NIS 100, the Licensee has authority not to respond in writing to the objection, to the extent that the Subscriber granted his express consent thereto A 59 .
 
 
(c)
If the Licensee finds that the subscriber was overcharged, it will refund the excess charge in a single payment, without setting any conditions for the refund, with the addition of "linkage differences and interest" as this term is defined in section 1 of the Adjudication of Interest and Linkage Law, 5721-1961, for the period from the date of collection of the excess charge to the date of actual making of the refund, as set forth below:
 
(1) If the excess charge is more than NIS 100 (including VAT and linkage differences and interest) – the amount refunded will be transferred directly to the subscriber's to the means of payment (bank account or credit card) A 59 within three (3) work days from the date on which the Licensee sent the response, as stated in subsection (b). Notwithstanding the above, the Licensee may return the reimbursement to a business Subscriber by means of crediting the telephone statement, if the business Subscriber expressly agreed to this A 59 .
 
(2) If the excess charge is equal to or less than NIS 100 (including VAT and linkage differences and interest) – the amount refunded will be credited in the next telephone bill after the date of sending of the written response, as stated in subsection (b). If the refund is for a higher amount than the amount for payment in the next telephone bill, the balance will be transferred directly to the subscriber's bank account within three (3) work days from the date on which the notice was sent to the subscriber, and a note to that effect will be included in the aforesaid telephone bill.
 
(3) Notwithstanding the provisions of subsection (c)(1) and c(2), a reimbursement to a Pre-Paid Subscriber shall be performed by means of crediting the available balance A 59 .

 
A59 Amendment No. 59
A59 Amendment No. 59
A59 Amendment No. 59
A59 Amendment No. 59
 
 
 
94
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
CHAPTER G: PAYMENTS FROM THE LICENSEE, LIABILITY, INSURANCE AND GUARANTEE

Part A – Royalties and Payments A16)

 
84.                Royalties
 
84.1
The Licensee shall pay royalties as prescribed in the Telecommunications Regulations (Royalties), 2001, or in any other regulations replacing them (hereinafter – “the Royalties Regulations” ).
 
84.2
To every payment of royalties under this section the Licensee shall attach two copies of an unaudited quarterly income report, signed by the Licensee and certified by an accountant; The report shall contain a detailed calculation of the liable income according to the Royalties Regulations, and any other particular on which the Licensee based the amount of the royalties.
 
84.3
Upon the submission of an annual income report audited and signed by the Licensee’s accountant (hereinafter: “the audited report” ), the Licensee shall submit a report, prepared by quarters, setting out the adjustment between the income on which it paid royalties, and the income appearing in the audited report (hereinafter – “the adjustment report” ).
 
84.4
If it becomes apparent that the amount of the royalties to be paid by the Licensee, according to the adjustment report, is greater than the amount paid by it for the quarter to which the audited report relates, the Licensee shall pay royalties differences, in addition to interest and linkage differences, as prescribed in the Royalties Regulations.
 
84.5
If it becomes apparent that the amount of the royalties paid by the Licensee is greater than the amount it was required to pay for the quarter to which the audited report relates, the Licensee shall be credited with the amount of the excess payment; The excess payments to which the Licensee is entitled shall be offset, pursuant to a written approval of the Director, from the next payment of royalties, and linkage differences and interest shall be calculated according to the last index published before the date of the offset; In this regard – interest and linkage differences, as prescribed in the Royalties Regulations.
 
85.               Arrears in the Payment of Royalties
 
 
The Licensee shall pay linkage differences, arrears interest and collection costs, as set forth in the Royalties Regulations, on royalties that were not paid at the time stipulated therefor in the regulations.
 
86.               Payment Method
 
 
Royalties as well as linkage differences, arrears interest and collection costs in respect thereof shall be paid to the Ministry of Communication’s accountant by a bank transfer to the ministry’s account.
 
87.               Other Mandatory Payments
 
 
 
95
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
The royalties under this Part shall be in addition to any other fee, tax or mandatory payment which the Licensee is required to pay under any law.
 
 
 
96
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
Part B – Liability and Insurance

 
88.               Definition of Scope of Insurance
 
 
In this Part, “use of the license” – setup, installation, maintenance, upkeep or operation of the cellular system, whether by the Licensee itself or through anyone acting on its behalf, including its employees, contractors, agents or representatives.
 
89.                Licensee’s Liability
 
89.1
The Licensee shall be liable at law for death, damage or loss to the body or property of any person, directly or indirectly resulting from or consequent on the use of the license.
 
89.2
When using the license, the Licensee shall take all reasonable precautions to prevent damage or loss to the body or property of any person, and where such damage or loss was caused due to the use of the license, the Licensee shall repair the damage at its expense and compensate the aggrieved party, all subject to any law, excluding a case in respect of which the Minister granted the Licensee immunity as specified in section 90.
 
 
To avoid doubt, this section shall not impose on the Licensee liability beyond the liability in torts established in the regular law of torts.
 
90.               Immunity from Liability
 
90.1
The Minister may, at the Licensee’s request, grant it all or any of the immunities enumerated in Chapter I of the Law, subject to that stated in section 90.3.
 
90.2
The Licensee shall set out in its request the immunities which it is requesting and the reasons therefor.
 
90.3
If the Minister is persuaded of the necessity of granting the Licensee the immunities under Chapter I of the Law, he shall publish his decision in a notice in Reshumot .
 
91.               Making an Insurance Contract
 
91.1
The Licensee shall make, at its expense, an insurance contract with a licensed insurer according to the terms contained in section 92; The insurance contract shall be presented to the Director at the time of the grant of the license.
 
91.2
The Licensee shall indemnify the State in respect of any financial liability as stated in section 89.1, for which it may be held liable towards a third party due to the use of the license; Any indemnity under this section shall be insured by the Licensee for liability insurance.
 
91.3
The Licensee shall insure itself, including its employees and contractors, against any financial liability as stated in section 89.1, for which it may be held liable at law owing to damage caused to the body or property of a person from the use of the license, and against any loss or damage caused to all or a part of the cellular system from the use of the license, including against third party risks.
 
91.4
The Licensee shall submit to the Director an opinion of a lawyer specializing in insurance, confirming that the insurance policy covers everything required in sections
 
 
 
97
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
91.2 and 91.3; The Licensee shall attach to the opinion a copy of the insurance contract and its attachments; Said documents shall be submitted to the Director within 7 days of the signing of the insurance contract and shall be attached to this license as Addendum G.
 
 
98
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
92.                Conditions in the Insurance Contract
 
92.1
The insurance contract shall specify the period of insurance and shall stipulate that at the end of the period of insurance the insurance shall be extended automatically.
 
92.2
The Licensee shall present to the Director, once a year, the insurer’s confirmation that the insurance contract is valid, there are no arrears in the Licensee’s payments of the premiums and there are no pending notices concerning the cancellation, suspension, limitation, amendment or termination of the insurance contract.
 
92.3
The insurance contract shall stipulate that in the event the insurer wishes to cancel the insurance contract, owing to nonpayment of the premium, it must give the Director prior notice in that regard not less than 90 days before the contract is actually due to be cancelled (hereinafter in this section – cancellation notice).
 
92.4
If a cancellation notice has been sent as stated in section 92.3, the Licensee shall act immediately to eliminate the cause of the cancellation, or shall act immediately to obtain an alternative insurance contract as stated in section 92.6, and it shall notify the Director of the actions it took for this purpose; Where the cause of cancellation was nonpayment of the premium by the Licensee, the Director may pay the premium in the Licensee’s stead, and he may exercise the bank guarantee or any part thereof to cover amounts which he expended on payment of the premium or collect them in any other manner.
 
92.5
If the Licensee wishes to cancel the insurance contract, it must notify the Director in that regard at least 45 days before the contract is actually due to be cancelled.
 
92.6
If the Licensee has agreed to the cancellation of the insurance contract by the insurer or itself wishes to cancel the insurance contract, it shall make an insurance contract with another licensed insurer, in such manner that the new insurance contract will come into effect simultaneously with the lapse of the previous contract; The new insurance contract shall be submitted for approval to the Director, together with an opinion as stated in section 91.4, 45 days before its effective date, and it shall be subject to the provisions of the sections in this Part.
 
93.                Remedy for Breach of Conditions with Respect to Insurance
 
 
If the Licensee did not make an insurance contract, or if it becomes apparent that the insurance contract which it made was cancelled or expired, the Director may effect insurance and pay the premium in the Licensee’s stead, and it may exercise the bank guarantee to cover amounts expended by it on the insurance or collect them in any other manner; All the foregoing without derogating from the authority to cancel, restrict or suspend the license owing to the Licensee’s failure to effect insurance according to the terms of this license.
 

 
99
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
Part C – Guarantee to Secure Fulfillment of the Terms of the License

 
94.                The Guarantee and Its Purpose
 
94.1
A30) The Licensee shall present to the Director an unconditional bank guarantee in favor of the State of Israel, in shekels, equivalent to ten (10) million US dollars, as security for fulfillment of the terms of the License; The guarantee is attached to this license as Addendum H to the Second Schedule.
 
94.2
The guarantee shall serve as security for fulfillment of the terms of the license and for compensation and indemnification of the State for any damage, payment, loss, detriment or expense caused or liable to be caused to the State – whether directly or indirectly – due to nonfulfillment of all or any of the terms of the license, fully and on time, or due to the cancellation, restriction or suspension of the license.
 
95.                Exercise of the Guarantee
 
95.1
Without derogating from the general purport of section 94.2, the Director may exercise the guarantee, in whole or in part, if damage is caused due to nonfulfillment of the terms of the license, including in each of the cases set out below:
 
 
(a)
The State incurred a loss of income from royalties owing to a lack of revenues from subscribers’ payments, including by reason of:
 
 
(1)
Failure to operate the cellular services at a time stipulated therefore in the timetable determined by the Director, or as approved by the Director;
 
 
(2)
Discontinuation, suspension or restriction of services;
 
 
(3)
Restriction or suspension of the license;
 
 
(b)
No insurance contract was made according to sections 91-92, the premium was not paid, or the insurance contract was cancelled or expired;
 
 
(c)
The Licensee is debiting its subscribers for payments contrary to that stated in section 75;
 
 
(d)
The Licensee is not complying with the coverage and service quality requirements as stated in Appendix B, or the Licensee consistently stops, suspends or limits the service contrary to the provisions of the license;
 
 
(e)
The Licensee does not convert the cellular system to a digital technology by the date specified in Appendix B.
 
 
(f)
The Licensee consistently or willfully violates any of the provisions, terms or requirements of the license;
 
 
(g)
A claim or demand was submitted against the State for payment of compensation and damages due to a violation of a condition in the license or faulty implementation of the license or due to the cancellation of the license, and where the State incurred expenses due to such claim or demand; The exercise of the
 
 
100
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
guarantee for the purpose of covering the amount of a claim as stated, shall be done only after the judgment in that claim has become absolute;
 
 
(h)
Royalties according to section 74 were not paid fully and on time;
 
 
(i)
The State incurred costs or damage due to the cancellation of the license;
 
 
(j)
The Licensee did not complete the guarantee fees as specified in sections 96.2 and 79.2.
 
 
(k)
A16) The Licensee did not present the license fee on the required date, as stipulated in section 40.1 of the conditions of Tender No. 1/01.
 
 
(l)
A16) A monetary sanction was imposed on the Licensee in accordance with the law, and the required amount was not paid on time, provided no amount above the amount of the sanction is collected.
 
95.2
The Director may exercise the guarantee as stated in this Part also by reason of an expected violation of the terms of the license or frustration of the terms of the license that justify, at his discretion, early exercise of the guarantee.
 
96.               Manner of Exercise of the Guarantee
 
96.1
The Director may exercise the guarantee, in whole or in part, up to the amount specified therein, provided it warned the Licensee that if it does not correct the act or omission the subject of the warning within the period specified in the warning – the guarantee will be exercised, in whole or in part.
 
96.2
If the entire amount of the guarantee or a part thereof was exercised, the Licensee shall provide a new guarantee or complete the balance up to the original amount of the guarantee immediately upon the Director’s demand; Failure to complete the amount of the guarantee as stated shall constitute a material breach of the terms of the license, and the Director may – without derogating from his authority to cancel, restrict or suspend the license – exercise any remaining balance of the guarantee.
 
96.3
The Licensee may appeal a decision of the Director to exercise the guarantee, in whole or in part, before the Minister within 15 days of being notified of the Director’s decision.
 
97.               Term of Validity of the Guarantee
 
97.1
The guarantee shall be valid throughout the term of validity of the license and for A16) two years after the end of the term of the license, or until the Licensee satisfies all its obligations under the license to the Director’s satisfaction – according to the later of these two dates.
 
97.2
If the Director determines that the Licensee did not satisfy all its obligations under the license, within 60 days before the expiry of the term of the guarantee, he may require the Licensee to extend the term of the guarantee or to present a new guarantee, within the period specified by the Director; The new guarantee shall be valid up to the date specified by the Director or until the Licensee satisfies, to the Director’s satisfaction, all its obligations under the licenses – according to the later of these two dates; If the
 
 
101
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
Licensee fails to present a new guarantee as stated, the Director may exercise the guarantee.
 
97.3
Where the Director confirmed receipt of a guarantee the validity of which may be extended from time to time upon his demand, the Licensee shall extend the validity of the guarantee before the expected end of its term, for a year, unless the Director exempted it from this obligation; If the Director did not grant an exemption from the obligation to extend the validity of the guarantee, and the validity of the guarantee was not extended at the specified time, the Director may exercise the guarantee in its entirety without advance warning.
 
 
102
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
98.               Preservation of Remedies
 
98.1
Exercise of the guarantee, in whole or in part, does not derogate from the authority to cancel, restrict or suspend the license.
 
98.2
The amount of the guarantee shall not serve to limit the scope of the Licensee’s liability towards the State for payment of the full damages caused to it, where the Licensee is obligated to make such payment under the license or by law.
 
98.3
The exercise of the guarantee, in whole or in part, shall not derogate from the Director’s right to demand from the Licensee in any other manner payment for damages which it is obligated to cover under this license or to exercise other reliefs that are available to him by law.
 
 
 
103
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
CHAPTER EIGHT – SUPERVISION AND REPORTING

Part A: Supervision of Licensee’s Activities

 
99.            Supervisory Power
 
 
The Director or anyone authorized by him for this purpose may supervise the Licensee’s activities with respect to the implementation of the license and compliance with the provisions of the Law, the Ordinance and the Regulations pursuant thereto.
 
100.         Preservation of Confidentiality
 
 
The Director and anyone engaging on his behalf in supervising the Licensee shall not disclose any information or document coming into their possession by virtue of their function, to a person who is not authorized to receive such information or document, unless it was already published in public or disclosure is necessary for the performance of their function under this license or by law.
 
101.         Entry to Premises and Inspection of Documents
 
 
For the purpose of exercising the supervision as stated in this Part, the Director may:
 
 
(a)
Enter at any reasonable time any facility or office used by the Licensee to provide its services under this license.
 
 
(b)
Carry out measurements and tests on the cellular system, and he may inspect any record, document, plan, account book, ledger or data base, whether regular or computerized, of the Licensee or of anyone employed by the Licensee in subjects over which the Director has supervisory power as stated; The Director may inspect them and copy them in any manner he deems fit.
 
102.            Cooperation
 
 
The Licensee shall cooperate with the Director or with anyone authorized by him with respect to the exercise of supervision over its activities as stated, and without derogating from the general purport of the aforesaid, it shall allow them to carry out that stated in sections 100 and 101 and shall furnish to them, upon their demand, any information in its possession or control that is required by them for the exercise of the supervision.
 
 
 
104
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
Part B: Reporting and Correction of Defects

 
103. A43)       Duty of Submission of Reports
 
103.1
The Licensee shall submit to the Director the reports specified in this license, in the format and at the times stipulated in this part.
 
103.2
Every report shall reflect the correct facts relating to the subject thereof, updated for the period of the report.
 
103.3
A report shall be submitted in two (2) copies, printed and prepared in an easily readable form, bearing the date of its preparation and signed by the Licensee or whoever it authorized for this purpose; The report shall be submitted in a format as directed by the Director, including with respect to its contents, structure and manner of submission.
 
103.4
The Director may require the Licensee to prepare anew or to complete a report which it submitted, if he found it lacking in necessary details or details which, in the Director’s opinion, should have been included by the Licensee in the report.
 
104. A43)        Types of Reports
 
 
The Licensee shall submit to the Director, at his request and at least once a year, at the end of the calendar year and not later than ninety (90) days thereafter, annual reports describing its activity in the period from January to December of the past year:
 
 
(a)
Financial statement audited and signed by an accountant;
 
 
(b)
Subscribers report, including the following data:
 
 
(1)
Number of subscribers broken down according to business and private subscribers and according to post-paid and pre-paid;
 
 
(2)
Amount of income broken down according to subsection (1), with each type of income from interconnection appearing separately, and broken down as well according to airtime and added-value services.
 
 
(c)
Report on the use of frequencies according to Chapter D Part C;
 
 
(d)
Addendum A – “Particulars of Licensee” updated as of the beginning of January, as detailed in section 20.1.
 
104.2
The Licensee shall submit to the Director once a quarter, not later than a month after the end of the quarter, the following reports:
 
 
(a)
Unaudited quarterly financial statement signed by an accountant;
 
 
(b)
Unaudited quarterly income report signed by an accountant, giving details of income on which royalties are payable;
 
 
(c)
Traffic report – in a format as directed by the Director.
 
 
 
105
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
104.3
The Licensee shall submit a report on any special occurrence, as set out in regulation 8 of the Control Regulations.
 
104.4
The Licensee shall submit to the Director the following report, at his request:
 
 
(a)
Report concerning development works of the network;
 
 
(b)
Malfunctions report – containing a brief description and discussion of the malfunctions that occurred in the network, the number of malfunctions and the cumulative duration of malfunctions of each type, an analysis of the malfunctions and the steps taken to repair them;
 
 
(c)
Service quality report – Analysis of the Licensee’s compliance with the requirements of sections 49 to 51 and Addendum E – Level of Services for Subscribers, during the period of the report;
 
 
(d)
Complaints report – detailing the written service complaints that were submitted by subscribers, including the subject of the complaints, the dates on which they were received, the written response given, the manner in which they were dealt with and details of the activity of the Public Ombudsman;
 
 
(e)
List of the Licensee’s rates;
 
 
(f)
Updated engineering program;
 
 
(g)
Encumbrances report – The Licensee must report to the Director immediately any case of imposition of an attachment or encumbrance on any of the Licensee’s assets or any case of an encumbrance on means of control in the Licensee, any realization of such encumbrances or voidance of any right of the Licensee in an asset; The Licensee must also submit to the Director, at his request, a report detailing all such encumbrances.
 
 
(h)
Report on number of subscribers, income and minutes broken down according to private and business subscribers, and within each category – broken down according to subscribers for programs priced according to an “inclusive standard rate” and subscribers for programs priced separately for payment in respect of “airtime” and interconnection, in a format as directed by the Director;
 
 
(i)
Nuisance subscribers report as detailed in section 65A.9;
 
 
(j)
Any other data required for performance of control on the Licensee’s activities, and any information required by the Ministry for regulating the telecommunications sector.
 
104.5
The Director may add or remove periodical, annual or quarterly reports, and he may request the Licensee to submit special reports as directed by him.
 
 
 
106
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
105. A43)        Notice Concerning a Defect
 
105.1
Where the Director finds defects or deficiencies in the Licensee’s activities, he shall notify the Licensee thereof in writing.
 
105.2
If the Licensee received a notification as stated, it shall submit to the Director, within thirty (30) days from receipt of the notification, its written response detailing the measures taken by it to correct the defects indicated therein.
 
106. A43)       Void.
 
 
107
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010

CHAPTER I – MISCELLANEOUS
 
107.            The License as an Exhaustive Document
 
107.1
The Licensee’s rights, obligations and powers with respect to the setup, maintenance and operation of the cellular system and the provision of services by means thereof, originate in and derive exclusively from and according to this license.
 
107.2
Void. A2)
 
108.            Keeping the License Document and Returning the License
 
108.1
The Licensee shall keep the license documents in its office and shall allow the public to inspect their true and up-to-date copies; In case the terms of the license are modified, the Licensee shall attach the modification wording to said license documents.
 
108.2
A16) If the license and its documents are made available for public inspection, the public shall not be allowed to inspect the following documents, which are included in the Second Schedule to the License:
 
 
(a)
Appendix A – Details of the Licensee;
 
(b)
Appendix B – Engineering program;
 
(c)
Void A43) ;
 
(d)
Appendix G – Insurance contract;
 
(e)
Appendix H – Bank guarantee;
 
(f)
Appendix I – Special services for the security forces;
 
(g)
Appendix L – Special services for the security forces – security addendum (confidential);
 
(h)
Appendix M – Security directives;
 
(i)
Appendix N – Letters of undertaking.
 
108.3
The license documents are the property of the State and are entrusted to the Licensee for the term of validity of the license; Upon the cancellation or expiry of the license, the Licensee shall return the license with all its documents to the Director.
 
108.4
A16) The Licensee shall allow the public to inspect the license documents via the Internet; The Licensee may do this also by way of referral to the website of the Ministry of Communications, as long as the Ministry publishes the license on its website.
 
108.5
A16) The Ministry may publish the license, excluding the appendices indicated in section 108.2, at the time and in the manner deemed fit by it.
 
109.            Postponement of Deadline
 
109.1
A duty imposed on the Licensee in this license, for which a performance deadline has been set, must be performed by the Licensee within the deadline.
 
109.2
A2) The Director, at the Licensee’s request, may postpone a deadline set as stated, if it deems it impossible to perform the duty within such deadline for reasons of force majeure.
 
 
 
108
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
110.             Reserving of Liability
 
 
Any approval or supervisory authority granted under this license to the Minister or to the Director, including the exercise of such authority, shall not impose on them any liability which is imposed by this license on the Licensee, and shall not derogate or detract from or void or diminish the Licensee’s liability as stated.
 
111.            Notices
 
111.1
A notice concerning this license or its implementation shall be in writing and shall be delivered by hand or dispatched by registered post with confirmation of delivery; A notice sent by registered post as stated shall be presumed to have reached its destination by the end of 48 hours from the time of its delivery for dispatch.
 
111.2
Any notice of the Licensee to the Minister shall be delivered or sent through the Director.
 
111.3
The Licensee’s address for receipt of notices under this section is: 10 Hagavish St., Poleg Industrial Area, Netanya 42140; The Licensee shall notify the Director immediately of any changes in this address.


112. A 58         Documents and Recordings

112.1
The Licensee will present and/or play to the Director, at his request, any recording and/or document relevant to the subscriber, throughout the subscriber's last commitment period, and if the subscriber is not within a commitment period – during at least the last eighteen (18) months, and for a year after the date on which the final invoice is sent to the subscriber, as stated in section 2.3(c)(2) in Appendix E.

 
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
109
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
First Schedule
List of Services and Measures for Quality of Service A16)

 
 
1.
General
 
 
1.1.
This Schedule includes the list of services the Licensee will provide, under the conditions set out in Section B of Chapter E – “Level of Services for Subscribers”.

 
1.2.
The services will be provided in each of the technologies operated by the Licensee, unless otherwise noted in the License or in the Schedule to the License.

 
1.3.
Wherever the term: “ Support in Various Languages” is used, this denotes support in at least these four languages: Hebrew, Arabic, English and Russian.

 
1.4.
A43) The Licensee must include in the service dossier at least the following details:

 
a.
Name of the service: Name of the service, including its trade name and a general description of the service.
 
 
b.
Detailed description of the service: A mong other things  –
Is it a new service / expansion of an existing service / combination of services / is there any need for a pretrial;
Manner of operating the service;
Date on which provision of the service is to commence;
Availability and measures for quality of service;
Support centers;
Price of the service;
Target audience of the service;
How to order the service;
Process of connecting to the service;
Implications or effects of this service on other services.
 
 
c.
Engineering description:
Description and block diagram of the system;
End-user equipment – dedicated equipment for receiving the service.
 
 
d.
Miscellaneous:
The need for numbering;
Required coordination with other licensees or entities.
 
 
 
First Schedule - 1
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010

 
 
2. 
List of Services

 
2.1.
Basic Telephone Services

No.
Name of Service
Description of Service
Date provided
Measures for quality of service
Remarks
1.
Cellular Calls
Telephone calls to and from Licensee’s subscribers to any telephone or other appropriate end user equipment in another public telecommunications network in Israel or throughout the world
Existing service
98% availability
 
2.
Emergency Calls
Free dialing to emergency services determined by the Director (for example: police, ambulance, fire dept., etc). Caller will be referred to the emergency hotline according to the services provider’s definition with reference to the subscriber’s location.
Existing service
98% availability
According to the Director’s  rules


2.2.
Related Services

No.
Name of Service
Description of Service
Date provided
Measures for quality of service
Remarks
1.
Call Waiting
Subscriber may receive incoming calls while on another call. Subscriber may cancel service at will.
Existing service
99.9% availability
 
2.
Selective Call Waiting
 Only calls from a list of numbers defined by the subscriber will activate call waiting alert
Future service
99.9% availability
 
3.
Call Forwarding
Diversion of incoming calls to a phone number at the subscriber’s choice:
 
Always
Existing service
99.9% availability
 
 

 
 
 
First Schedule - 2
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
   
When busy
     
   
When call is not answered
     
   
When subscriber unavailable
     
4.
Selective Call Forwarding
Diversion of incoming calls according to a list of numbers predefined by the subscriber, to another destination at the subscriber’s choice:
·  Always
·  When call is not answered
·  When busy
 
Future Service
99.9% availability
 
5.
Call Transfer
Subscriber may transfer call to another telephone number
Future Service
99.9% availability
 
6.
Hunting Group
Determining a leading number for a subscriber’s group of numbers: dialing the leading number will refer the call to a free number in the group.
Future Service
99.9% availability
 
7.
Caller ID
Caller’s number will appear on the screen
Existing Service
99.9% availability
Depends on caller's end  device
8.
Calling ID Restriction
Allows blocking subscriber’s number from appearing on call receiver’s screen. Block may be permanent or one-time.
Existing Service
99.9% availability
 
9.
Caller Name Announcement
Option of identification of caller by voice signature
Existing Service
99.9% availability
 
10.
Conference Call
Establishing a call for a number of subscribers simultaneously
Existing Service
98% availability
 
11.
Closed User Group
A group of phone numbers than may establish a call only among themselves
Existing Service
98% availability
GSM network only
12.
Voice Mail
Storing messages of callers to the subscriber in a personal box and allowing extraction of such
Existing Service
99% availability
 
 
 
 
First Schedule - 3
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
13.
Advanced Voice Mail
Voice mail system as described in paragraph 12 above, with added “smart” element, including visual or audio indication of messages waiting, transfer of messages to other platforms and receiving messages from such platforms.
Existing Service
98% availability
 
14.
Voice Mail Notification
When message received in voice mail box, the mail box will dial or send message to destinations defined by subscriber
Future Service
99.9% availability
 
15.
Voice Activated Service
Allows operation of telephone and basic services, related services and value added services by voice
Partialy existing, Future Service expansion.
70% chance of correct identification  in regions where signal strength is better than 85dbm
 
16.
Call Tracking
Allows subscriber to send the applicant an indication, while talking, for purposes of later identification of source of call.
Future Service
99.9% availability
Subject to law
17.
Virtual Private Network (VPN)
Allows short dialing according to a private numbering program
Existing Service
99.9% availability
For subscribers according to relevant types. Currently provided to business sector.
18.
Centrex
Allows maintaining a private network while using network resources
Future Service
   
19.
Facsimile Services
Allows receiving, storing and extracting facsimile messages via phone
Existing Service
99.9% availability
 
20.
Roaming
Allows receiving, extracting and blocking messages abroad
Existing Service
99.9% availability
Subject to availability of foreign operator. In GSM network
 
 
 
First Schedule - 4
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
          in 3 months of launching of the network.
21.
GPRS Roaming
Allows using certain communications data services while using roaming services
Future Service
99.9% availability
Subject to operator availability
22.   A 55
Toll-Free Call
The initiator of the call is not charged. The subscriber to whom the call is made is charged according to relevant debiting arrangements.
March 2010
 
According to the service file (1800).
23.
Void A 51
       
24.
Call Screening
Defining a list of phone numbers subscriber will receive calls from. Call from other numbers will be referred to another destination.
Existing Service
99.9% availability
 
25.
Talk Two
One number for two end user equipment units.
Existing Service
99% availability
 
26.
One number for two SIM cards
cellular services for two or more telephones in one number
Future Service
99% availability
 
27.
Two numbers for one SIM card
Defining two telephone numbers for the same SIM card
Future Service
99% availability
 
28.
Change of number announcement
A caller to a subscriber will receive an announcement of the subscriber’s new number, and will be given the option of directing the call to the new number.
Existing Service
99.9% availability
GSM network only
29.
Wake-up Service
Allows subscriber to request the system call him at an hour defined.
Future Service
Precision of service approx. 5 minutes.
 
 
 
 
A55 Amendment No. 55 (Inception: This amendment will come into force on the day the relevant amendments to the Payment Regulations and to the Interconnection Regulations come into force, or on March 28, 2010 – whichever the later)
 
A51 Amendment No. 51 (Inception: This amendment will come into force on March 31, 2009)

 
First Schedule - 5
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
        99.9% availability  
30.
Camp on busy line
Call automatically put through to busy number when number frees up.
Future Service
99.9% availability
 
31.
Personal Number Service
Allows subscriber to define calls to a certain number be forwarded to various destinations according to parameters set by subscriber.
Future Service
99.9% availability
 
32.
Collect Call
Cost of call to be paid by subscriber receiver, after confirmation.
Existing Service
99.9% availability
Between licensed  subscribers only
33.
Message Distribution
Distribution of messages to a list of addressees, using various platforms
Future Service
99.9% availability
 
34.
Hot Billing
Provides updated information to subscriber regarding his bill with the applicant via various platforms
Future Service
99% availability
 
35.
Over the Air Services (OTA)
Update of data and applications on SIM card via SMS by the applicant. Running applications from SIM card will be performed by subscriber, using end device.
Future Service
99% availability
 
36.
Account Code Billing
Splitting charge for one phone number into separate accounts. Subscriber’s instructions regarding the account to be billed will be performed by punching a code at the beginning or during a call.
Future Service
99% availability
 
37.
Star Services
Allows establishing a connection by dialing a short access code according to applicant’s internal numbering program.
Existing Service
99.9% availability
 
38.
Short Messages Service (SMS)
Allow receiving and sending written messages
Existing Service
99% availability
Depends  on end user equipment
 
 
 
First Schedule - 6
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
    via phone       
39.
Circuit Switch Data (CSD)/High speed circuit switch data (HSCSD)
Access to data service using a dial-up modem on phone or independent dial modem
Existing Service
98% availability
Depends  on end user equipment
40.
Data communications in Packet Switch
Subscriber connection via phone or independent  modem to TCP/UDP/IP communications for broadcastung using packet switch
Existing Service
98% availability on best effort basis
Depends  on end user equipment
41.
Discontinuation of Service
Discontinuation of service  upon subscriber's request
Existing Service
Will be performed  no later than the next business day after subscriber's request
 
42.
POC (Push to Talk Over Cellular)
Call made by pressing a button on cellular end user equipment
Call may be private (between subscriber and subscriber) or group on data communications network
Service Exists (just started)
According to service file
According to temp. provision

 
Temporary Provision
The Licensee will allow operation of Push to Talk Over Cellular services (hereinafter: the Service) to any subscriber who is a legal entity (individual or corporation), provided the number of users (number of cellular end user equipment units permitted use of this service, hereinafter – end user equipments) in the possession of such subscriber does not exceed 20 during the first year starting on the date service begins. Notwithstanding the aforesaid, should there be any considerable changes in the cellular sector influencing provision of such service, the Ministry will consider a shorter period.
 
Application
This service will not begin before Sunday, the 29 th day of Tamuz, 5764 (July 18, 2004)
 
* availability of service is the percentage of time the service is available, not
 

 
 
First Schedule - 7
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
including availability of basic services.

 
2.3.
Value Added Services

No.
Name of Service
Description of Service
Date provided
Measures for quality of service
Remarks
1.
Speaking Clock
Notice of time
Future Service
99.9% availability
 
2.
Directory Assistance
Allows receiving information on phone numbers and automatic establishment of calling number so given.
Future service
99.9% availability
 
3.
Connectivity to Information and Entertainment Services
Allows subscriber to connect to information, entertainment, applications and content services, whether interactive or noniteractive, whether by download, by upload, or by various means of access.
Existing service
99.9% availability
 
Depends on end user equipment. Subject to Director’s rules
4.
Access to Internet Provider Services
Allows subscriber access to internet provider.
Future Service
   
5.
Location Based Information & Tracking
Receiving and sending information depending on location of phone, subject to law.
Future Service
   
6.
M-Commerce
Connection via end user equipment for performing transactions
Existing Service
 
Depends on end user equipment. Subject to Director’s rules
7.
Unified Messaging
Allows subscriber to receive and send voice messages, speaking messages, faxes, SMS, E-mail messages, application messages and multimedia files, to and from unified cell, allowing the convertion of the data
Future Service
 99.9% availability
Depends on end  device
 
 
 
First Schedule - 8
 
General license for Cellcom Israel Ltd. for the provision of mobile radio telephone services by the cellular method (cellular) Combined Version, as at December 12, 2010
 
 
    received from one format to another, as well as access to data from various means of access.      
8.
Telemetry Command and Control
Use of phone or cellular modem for receiving indication and sending orders concerning various device operation (for example: alarm systems, inventory systems, traffic lights, controllers, etc.)
Existing Service
99.9% availability
 
9.
Sponsored Call
Connection during which subscriber will be exposed to commercial information and advertisements
Future Service
 
Subject to law
10.
Video Conference
Allows visual and audio communication between a number of users.
Future Service
 
Depends on end  device
11.
Instant Messaging
Message transfer service between “community” participants, organizations, groups of friends, groups of people with same interests. Subscriber notifies he is on network and ready to receive messages. Service notifies subscriber members of group who are in geographic proximity.
Future Service
   
12.
Surf & Talk
Allows subscriber to receive an indication of call waiting and reply while connected to internet
Existing Service
99% availability
Depends on end user equipment. GSM network only
13.
Personal Information Management
Access and synchronization via end user equipment to personal data base.
Existing Service
 
Depends on end user equipment.

 
·
availability of service is the percentage of time the service is available, not including availability of basic services.
 
 
 
First Schedule - 9
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
 
Second Schedule – List of Appendices
 
 
Second Schedule – List of Appendices

Appendix A
Particulars of Licensee – not available to public;
Appendix B A16
Engineering Plan - not available to public;
Appendix C A60
Domestic Roaming;
Appendix D A43
void;
Appendix E A16
Level of Subscriber Services;
Appendix F A8
Ordering Of A Service On The Website Of The Licensee Or A Service Provider ;
Appendix G
Insurance Contract - not available to public;
Appendix H A16
Bank Guarantee - not available to public;
Appendix I t 3t 5
Special Services for security forces - not available to public;
Appendix J A6
Access to International Communications Services;
Appendix K A7
Discontinuation of Services for cellular end user equipments of IS-54 type;
Appendix L A12
Special Services for security forces - not available to public;
Appendix M A12
Security Instructions - not available to public;
Appendix N A16
Letters of Undertaking - not available to public;
Appendix O A24
Erotic Services


 
A16 Amendment no.16
A60 Amendment no.60
A43 Amendment no.43
A16 Amendment no.16
A8 Amendment no.8
A16 Amendment no.16
A3 Amendment no.3
A5 Amendment no. 5
A6 Amendment no.6 replaced Amendment no.4
A7 Amendment no.7
A12 Amendment no.12
A12 Amendment no.12
A16 Amendment no.16
A24 Amendment no.24

Second Schedule – 2
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix C
 
 
Appendix C – DOMESTIC ROAMING

1.       In this Appendix
 

" Handover 4 "
Continuity of a call during its transfer by means of cellular end equipment from the coverage area of a cellular radio center of one licensee to the coverage area of a cellular radio center of another licensee, in a continuous manner, without being disconnected or disrupted.
   
" Call "
Including SMS messages, data communication, cellular Internet surfing, use of applications and the like.
   
" Roaming Licensee's Subscriber " 
Including a subscriber of a cellular licensee on another network, where such licensee utilizes a roaming licensee's network.
   
" Lockdown"
A state in which the end equipment of a roaming licensee's subscriber, who roamed to a host network, continues to receive service on the Licensee's network after the termination of the call, even if the roaming licensee has coverage in that area.
   
" Specifications "
The current 3GPP 5 recommendations regarding domestic roaming as in effect from time to time.
 
2.       The Licensee shall provide by means of its network to a roaming licensee a domestic roaming service, as stated in section 67E, in accordance with the conditions set out below.
 
3.       The Licensee shall provide a domestic roaming service, as stated, by one of the following two methods:
 
(a)     Call transfer – The Licensee shall enable the transfer of a call which is being conducted by means of a subscriber's end equipment from a roaming licensee's network to the Licensee's network, when the roaming operator's network has no coverage in that area. After the transfer, the call shall be conducted on
 
 
4 Handover.
5 3 rd Generation Project Partnership.
Second Schedule—Appendix C – 1
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix C
 
  the Licensee's network up to its termination.
 
(b)     Call setup – The Licensee shall enable the setup of a call on its network, by means of the end equipment of a roaming subscriber's licensee, if the roaming operator's network has no coverage in that area, or due to locking down of the end equipment of the roaming subscriber on the Licensee's network. Following its setup, the call shall be conducted on the Licensee's network up to its termination.
 
4.       The Licensee shall determine the duration of the lockdown time in accordance with the requirement of the roaming licensee.
 
5.       The Licensee shall guarantee reasonable and equal conditions for every roaming licensee, as regards the provisions of cellular services by it, including the following:
 
(1)     Prohibition on discrimination – The scope, nature and quality of the services received by a roaming licensee's subscribers may not be inferior to those provided to the Licensee's subscribers. Insofar as the Licensee creates a distinction between categories of its subscribers, regarding the scope, quality or nature of its services, it shall allow the roaming licensee to maintain the same distinction for its subscribers.
 
(2)     Transfer – The Licensee shall allow a roaming licensee's subscribers a one-way transfer, i.e. – from the roaming licensee's coverage area to the Licensee's coverage area, in a continuous manner, without disconnection or interruption of the call.
 
(3)     Advanced network – The Licensee shall provide domestic roaming services to a roaming licensee by means of its most advanced network 6 and within the lowest frequency utilized by it 7 ; only if it does not have such coverage shall it provide the roaming licensee with domestic roaming services by means of a higher frequency range or by means of an earlier generation network 8 , all according to the same priority as its own subscribers.
 
 
Second Schedule—Appendix C – 2
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix C
 
 
 
 
(4)     Range of services – The Licensee shall enable a roaming licensee to provide the entire range of services the roaming licensee wishes to provide to its subscribers, subject to the host licensee's technical possibilities and provided this does not burden it unreasonably.
 
6.      The Licensee shall cooperate with the roaming licensee, including by -
 
(1)     Blocking sites – The Licensee, at the roaming licensee's request from time to time, shall block the use by the roaming licensee's subscribers in specific coverage areas of sites of the Licensee in which the roaming licensee has coverage.
 
(2)     Dynamic update – The Licensee shall update the roaming licensee on a regular basis regarding the data required for domestic roaming support, according to the roaming licensee's needs and in line with the expansion of its network, and regarding changes in the Licensee's network, including traffic data by sites, records of calls 9 , billing data of the roaming licensee's subscribers, malfunctions, changes in systems, etc., and the Licensee shall also update its systems, as necessary, according to the network data of the roaming licensee.
 
(3)     Location data – The Licensee shall provide to a roaming licensee, on a regular basis, real-time location data of the roaming licensee's subscribers who are within the Licensee's coverage area. Such location data shall not be less than those received for the Licensee's subscribers.
 
(4)     Visibility - The Licensee shall operate, to the extent possible, in such a manner that a roaming licensee's subscribers do not notice that they are receiving service through the Licensee.
 
(5)     Switching – The Licensee shall transfer all the outgoing and incoming calls through the roaming licensee's network, to enable the roaming licensee to provide to its subscribers all the services it wishes to provide to them, including signaling of failed calls.
 
(6)     Intelligent network – The Licensee shall support, to the extent possible, intelligent network services provided by a roaming licensee.
 
 
 
 
9 Call Details Record (CDR).
Second Schedule—Appendix C – 3
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix C
 
 
 
(7)     Calls to emergency centers – The call of a roaming licensee's subscriber to an emergency center set up on the Licensee's network shall be routed directly to the emergency center by the Licensee, unless the roaming licensee is able to route it to the appropriate emergency center according to the subscriber's geographical location.
 
(8)     Compliance with statutory provisions – The Licensee shall cooperate with the roaming licensee for the purpose of complying with any statutory provision issued to any of them, where such cooperation is required by the existence per se of domestic roaming.
 
(9)     Handling malfunctions – The Licensee shall repair malfunctions in its systems which impair or could impair the domestic roaming service level agreed upon between the Licensee and the roaming licensee 10 or determined by the Ministry.
 
(10)   Prevention of information transfer – The Licensee shall keep fully confidential any information relating to a roaming licensee, and shall prevent the transfer of any information relating to the roaming licensee from its employees and representatives who handle the operation of the domestic roaming to any other personnel of the Licensee, and particularly the Licensee's marketing and sales personnel.
 
7.        The Licensee shall operate, with respect to domestic roaming, in accordance with the Specifications. Where any matter is not regulating in the Specifications, the licensees concerned shall act according to the best engineering practice 11 .

10 Service Level Agreement (SLA).
11 Best Engineering Practice.
 
Second Schedule—Appendix C – 4
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E


 
Appendix E – Minimum Requirements and Level of Subscriber Services A16)

1.
System Performance

1.1.
The system and its services will fulfill performances, qualities and measures defined in the Engineering Plan – Appendix B.

1.2.
The system performance and services will not fall, in any event, from the following minimum requirements:

 
1.2.1.
Digital Technology: the system and the services under the extension of the license will be operated using digital technologies, according to relevant international standards.

 
1.2.2.
Service Coverage:
Subject to the provisions of section 60.5 of the license, all services will be provided in the entire coverage area of the system, keeping up minimum requirements in the matter of quality of service, for twenty four (24) months from the date on which the service for pay commences.

 
1.2.3.
Quality of Service :

 
(A)
In this section:

 
(1)
“ Blocked Calls” : calls that cannot be established or messages that cannot be sent immediately upon entering the order to connect because of non-availability of cellular system resources or resources for connection between the cellular system and other systems;

 
(2)
“ Dropped Calls ” – calls stopped not by the initiative of the subscriber caller/connector or that of the receiving subscriber;
 
 
(B)
Quality of service in cellular system will not be less than the following:

 
(1)
the amount of blocked calls during hours of maximum use will not exceed two percent (2%);

 
(2)
The amount of dropped calls during hours of maximum use will not exceed two percent (2%);
 
 
(C)
The system will uphold the requirements set out in sub-sections (A) and (B) ninety-nine percent (99%) of the time during maximum use hours;
 
 
Second Schedule—Appendix E – 1
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E


 
 
(D)
Subject to the provisions of section 60.5 of the license, the system will reach the level of requirements set out above by no later than twenty four (24) months from the date of start of provision of such services for pay; from that time, said quality of service will be upheld in all the system’s coverage areas;

 
(E)
The number of blocked and dropped calls will be measured as follows:

 
(1)
measure will relate to the time span of one hour;
 
(2)
the maximum use hour to which the measure will refer will be the busiest hour of the system, on the day the measure is taken;
 
(3)
The measure will be taken at the maximum use hours on each of five (5) consecutive work days as stated;
 
(4)
The final number indicating the likelihood of blocked and dropped calls will refer to the average of the five (5) measured over the five (5) said consecutive work days, and for each type of service provided by the system;

 
(F)
Measurement and calculation will be performed for each cell separately, for each switch separately, and for the entire system; notwithstanding the aforesaid, at the written request of the Licensee, the Director may allow exceptions to the provisions of section 1.2.3, after having been satisfied that there is a true difficulty in performing the measure and calculations as stated, provided an alternative measuring and calculation system is proposed.

2.
Customer and Subscriber Services Quality Measures

2.1.
Services for provision of information to customers and subscribers: will be given by referral to call centers, at service centers, at the internet site, by e- mail, by telephone and by facsimile.

2.2.
Standards for accessibility and provision of information:

 
(A)
A 56 A call center will be manned   twenty four (24) hours a day, for receiving calls regarding theft or loss of cellular end-equipment, a network malfunction leading to termination of all cellular services to the subscriber and the "roaming service", all days of the week except on Yom Kippur.

 
(B)
A 56 The call center will be manned at least thirteen (13) hours a day Sundays through Fridays, and five (5) hours a day on Fridays and eves of holidays for receiving calls pertaining to a problem in receiving cellular services, which is
 
 
A56 Amendment No. 56
A56 Amendment No. 56
 
Second Schedule—Appendix E – 2
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E


  not a malfunction as stated in subsection (a), and in connection with the Licensee's services.

 
(C)
The reply at the call center will be within a reasonable time. Should the Director observe that the waiting time at the call center is not reasonable, he may set measures for response time.

 
(D)
A caller to a call center during unmanned hours will be referred to a message box to leave a message, and will receive a reply on the following day.

 
(E)
The Licensee will operate additional channel allowing subscribers to contact it for provision of information and for queries, such as:
 
-
Computerized voice system IVR;
 
-
queries via post;
 
-
queries via fax;
 
-
queries via e mail.

 
(F)
The Licensee will publish its service office address and telephone number of the call center in the following ways, among others:
 
-
In the engagement agreement with the subscriber;
 
-
In the bills sent to the subscriber;
 
-
In any document sent on behalf of the Licensee to the subscriber in a matter relating to customer services;
 
-
In telephone directories and in telephone information centers.

 
(G)
A 58 The Licensee may not use a telephone number with a cell phone area code for a fax service for the purpose of receiving complaints from the public.

 
(H)
A 58 Access to all call centers for reporting malfunctions, loss or theft (hereinafter – problem reporting center") will be via a toll-free service (1-800 service). The Licensee will enable access to the problem reporting center from any national domestic network.
 
 
 
(I)
A 58 Subject to that stated in subsection (h), access to all call centers for matters pertaining to the Licensee's services will be by means of each of the following:
(1)           A network number to which access is free of charge;
 
(2)
A split-charge call service (1-700 service) or a toll-free service (1-800 service).

2.3.
Bills to Subscribers
 
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
Second Schedule—Appendix E – 3
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E
 
 
 
 
(A)
Bills to subscribers will set out the relevant details for such bill, out of the following:

 
(1)
monthly charge (fixed charge)
 
(2)
duration of calls or air time (minutes, seconds)
 
(3)
volume of data use (MB,kB) – if the service provided is charge by volume of data transmitted.
 
(4)
Other charges (such as for receipt of data, SMS transmission, mobile electronic commerce).
 
(5)
Combination of the above charge methods.

 
(B)
Structure of the Bill

Bills will be sent in a fixed form, as follows:

 
(1)
Following payment; the bill will serve as a receipt, including: the amount for payment not including VAT, rate of VAT and total for payment including VAT. In this section, the identifying particulars of the Licensee will be specified, and the identifying particulars of the subscriber.

 
(3)
The Licensee may include information regarding deals and personal notices to the subscriber.

 
(C)
Production and delivery of bills

 
(1)
The Licensee will produce monthly bills for its subscribers or at any other time with subscriber’s consent.

 
(2)
A subscriber who wishes to disconnect from the Licensee shall receive a final bill on the nearest possible date, and no later than two months after the disconnection date .   A 61 Where the subscriber and the Licensee agreed on payment in installments for end-equipment purchased by the subscriber from the Licensee, and the subscriber's contract with the Licensee is cancelled before the subscriber has paid all the installments on the end-equipment which he purchased from the Licensee, the Licensee will send the subscriber a final invoice for the Licensee's services, and thereafter the Licensee will be entitled to send the subscriber invoices only in respect of the debit for the end-equipment.   A 58

A final invoice will be titled 'Final Invoice'.
 
 
A61 Amendment No. 61
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
 
 
Second Schedule—Appendix E – 4
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E

 

 
(3)
Void   T 52

2.4.
A43) Measures for Handling Public’s Applications
 
 
(A)
Level of handling a written complaint – The response times for complaints will be up to 14 workdays; the response for 5% of complaints will be within a month.
 
 
(B)
Measures for quality of service of the service centers –
 
-
90% of applications will be handled directly by the service representatives, up to completion.
 
-
Not more than 10% of applications, some due to escalation of complaints, will be referred to more senior levels.
 
 
(C)
Applications clarified by the senior level – In any case where the Public Ombudsman’s reply to a complaint does not satisfy the applicant, the application will be passed on to the managerial level, which will examine the it again and reply directly to the applicant. In any event, the applicant will receive a response within 30 days from the day of his application.

 
  T52) Amendment No. 52.
 
Second Schedule—Appendix E – 5
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E1

Appendix E1 T 52 - Fair Disclosure in Telephone Bills

General

For the purpose of this Appendix, “ telephone bill ” means a bill submitted by a licensee to a subscriber for services it provided to the subscriber itself or for services provided to the subscriber by any other licensee or service provider using the collection services of the licensee for the purpose of collection of payment from the subscriber.

1.
The telephone bill (hereinafter referred to in this Appendix as the “ Bill ”) to be presented by the licensee to a subscriber shall be clear, legible and comprehensible; the Bill shall include accurate details about the components of the charge demanded, as set forth in this Appendix.

2.
The Bill shall include the following parts:

 
A.
“Billing Summary”;

 
B.
“Billing Details” including:

 
1)
Details of fixed charges, variable charges, one-time charges, credits and reimbursements, within the meaning in section 8 E of this Appendix;
 
 
2)
Information on usage patterns;

 
C.
“Call Details”.

 
3.
The Bill shall be constructed using a bottom-up method, with its bottom level being Part C - “Call Details”, above it Part B - “Billing Details” and at the top level Part A - “Billing Summary”.
 
 
4.
The Company name and logo shall be displayed on each page of the Bill, including on the “Call Details”.
 
 
5.
The licensee shall issue a “Billing Summary”, “Billing Details” and “Call Details” for each telephone number separately. The licensee may issue to a subscriber holding several telephone lines one “Billing Summary” to refer to all the telephone numbers in the possession of the subscriber, provided that the “Billing Summary” sets forth each of the telephone numbers to which the Bill relates (see examples 1 and 2). “Call Details” and “Billing Details” shall be issued by the licensee for each telephone number separately. Notwithstanding the above, a subscriber in possession of several telephone numbers may demand from the licensee to receive a
 

T53) Amendment No. 52.
Second Schedule—Appendix E1 – 1
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E1

separate “Billing Summary” for each telephone number in his possession. In this regard, a PRI line shall be deemed one telephone number.
 
 
6.
Amounts in the Bill shall be rounded off and shall be set forth according to the provisions of section 2.2.2 of Israeli Standard 5262 - “Honesty in Billing and Fair Disclosure in Telephone Bills” (hereinafter referred to in this Appendix as the “ Standard ”) and the provisions of the General License on this matter. It should be clarified that in respect of the manner of calculating the billing amount, in contrast to the manner of presenting the “Call Details”, and the “Billing Details”, as determined in the provisions, the licensee must calculate this pursuant to the tariff provided in the Regulations, with no rounding off.
 
 
7.
The Ministry of Communications’ website in the section on “General Licenses” has examples of telephone bills drawn up pursuant to the detailed provisions of this Appendix (hereinafter referred to in this Appendix as the “ Examples ”). The Examples are based on telecommunications agreements and tariff plans marketed in 2008 by the general licensees. The examples are for the sake of illustrating the mode of implementation of the provisions only. In the case of any inconsistency between the provisions and the Examples, the binding version is that in the provisions.
 
 
Part A - “Billing Summary”
 
 
8.
The following details shall be presented in the “Billing Summary”:
 
 
A.
Subscriber Details -
 
 
1)
First name;
 
 
2)
Surname;
 
 
3)
Address;
 
 
4)
Customer number;
 
 
5)
Telephone number and/or PRI line number by means of which the services on account of which the Bill is presented to the subscriber were provided;
 

Second Schedule—Appendix E1 – 2
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E1

 
 
B.
Licensee Details -
 
 
1)
Company name;
 
 
2)
Company management address;
 
 
3)
Customer service telephone and facsimile numbers;
 
 
4)
Company website address.
 
 
C.
Dates -
 
 
1)
Billing date;
 
 
2)
Billing period;
 
 
3)
Last date for payment of Bill - in respect of a Bill not paid by standing order or by credit card.
 
 
D.
Notices to Subscriber
 
 
1)
Notice on the option of filing a complaint to the licensee’s public complaints commissioner, about his powers and the ways of contacting him. To the extent that the licensee is not obligated under the provisions of its license to notify every subscriber about the option of filing a complaint with the licensee’s public complaints commissioner on the telephone bill, the licensee shall present a notice on the option of filing a complaint with the licensee’s telephone call center and about the ways of contacting it.
 
 
2)
The licensee’s address, telephone number, facsimile number and email address by means of which the subscriber may request the licensee to stop the service or deliver the licensee a notice of cancellation, within the meaning in section 13D of the Consumer Protection Law, 5741-1981. To the extent that the licensee is not obligated under the provisions of its license to provide for the sending of a request to stop the service by email, it is not obligated to present such email address.
 
 
3)
Information on offers and personal notices to the subscriber, at the decision of the licensee.
 

Second Schedule—Appendix E1 – 3
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E1

 
 
E.
Billing charge exclusive of VAT, as set forth below:
 
 
1)
Fixed charges - charges applying to the subscriber not dependent on the scope of usage;
 
 
2)
Variable charges - charges applying to the subscriber dependent on the scope of usage;
 
 
3)
One-time charges, such as charges for “Exit Fee”, linkage and interest differentials charge for a monetary debt, charge for collection expenses, etc. (hereinafter referred to in this Appendix as “ One-Time Charges ”);
 
 
4)
Credits, such as credit for return of old terminal equipment, credit for a subsidy on terminal equipment, etc. (hereinafter referred to in this Appendix as “ Credits ”);
 
 
5)
Financial reimbursements for surplus charges (hereinafter referred to in this Appendix as “ Reimbursements ”).
 
 
F.
Total payment amount will be presented as set forth below:
 
 
1)
Total payment amount exclusive of VAT; the amount shall be calculated according to the charges summary presented in the “Subtotals Summary” and the “Billing Summary”;
 
 
2)
VAT amount;
 
 
3)
Total payment amount, plus VAT.
 
 
F.
All charges appearing in the “Billing Summary” shall be presented as a decimal number in New Israeli Shekels to a degree of accuracy of two digits after the decimal point.
 
 
Part B - “Billing Details”
 
 
9.
Part 1 of the “Billing Details” will include information on fixed charges, variable charges, One-Time Charges, Credits and Reimbursements, as set forth below:
 

Second Schedule—Appendix E1 – 4
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E1

 
 
A.
“Billing Details” will include general information on the tariffs plan according to the terms of which the subscriber is charged, including details of its main tariffs, inclusive of VAT. Details of the main tariffs will be presented exclusive of VAT for business subscribers.
 
 
B.
If the subscriber’s agreement includes a commitment period the licensee must note on every bill in the “Billing Details” the following details:
 
 
1)
The duration of the commitment period and its date of expiration; the provisions of this subsection shall not apply in respect of a transaction where there is no obligation to give a collection notice as stated in section 13A(d)(2)(b) of the Consumer Protection Law, 5741-1981.
 
 
2)
The payment the subscriber will be asked to pay if he requests to terminate his agreement with the licensee prior to the expiration of the commitment period to the company or the tariff plan (“ Exit Fee ”) in the course of the billing period following the present billing period (hereinafter referred to in this Appendix as the “ Subsequent Billing Period ”). In the event that the amount of the Exit Fee changes throughout the Subsequent Billing Period, the time point of reference for determining the amount of the Exit Fee shall be the middle of the Subsequent Billing Period (see Example 1).
 
 
3)
To the extent that payment of the Exit Fee also includes payment for subsidizing terminal equipment, the aforesaid payment shall be presented separately. In the event that such payment amount is variable throughout the Subsequent Billing Period, the time point of reference will be the middle of the Subsequent Billing Period (see Example 1).
 
 
4)
The licensee will present to the subscriber written details in respect of the mode of calculation of the Exit Fee within 14 days of the date the subscriber submitted a request to the licensee’s customer service center or the public complaints commissioner.
 
 
C.
“Billing Details shall be presented by means of a table composed of columns and rows, as set forth in the Examples.
 
 
D.
Each service provided to the subscriber in the course of the Billing Period shall be presented in the “Billing Details” in a separate row, with the following details:
 
 
Second Schedule—Appendix E1 – 5
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E1

 
 
1)
Name of service; the name of the service shall identify as clearly and as accurately as possible, the service provided to the subscriber; respecting a service provided to the subscriber not by means of the licensee, the licensee shall present the details of the service provider, including its name and a telephone number by means of which it can be contacted;
 
 
2)
Quantity; quantity measured in time will be presented in the form of mm:ss (minutes: seconds). Quantity measured by data volume will be presented as a decimal number in MB to a degree of accuracy of at least 3 digits after the decimal point. The quantity of internet pages viewed or text messages will be presented as a natural number.
 
 
3)
Tariff; the tariff will be presented as a decimal number in New Israeli Shekels, to a degree of accuracy of at least 3 digits after the decimal point. The tariff is composed of several payment components, such as one tariff for the licensee’s services and a second tariff for reciprocal link or for international phone service, will also be presented as one inclusive tariff (see Examples 1 and 2). Calls in respect of which the tariff varies in the course of performance, such as a transition from off-peak to peak rates and from peak to off-peak rates, a change in tariff in the course of a conversation, including a conversation started within the scope of a “pay as you go” plan and exceeding the minutes in the course of performance, will be presented collectively within the “Calls at Variable Tariff in the Course of a Call” service; the tariff will be presented under the column “Average Tariff” and will be calculated by dividing the charge amount in the “Subtotal Row”, within the meaning in section 11I of the Appendix by the quantity (see Example 5 - Version A). To the extent that a call in the “Calls at Variable Tariff in the Course of a Call” is presented as set forth in the concluding part of section 11L below, the “Average Tariff” will not be required to be presented and the tariff will be presented according to each segment separately (see Example 5 - Version B).
 
 
4)
The charge amount; the charge amount will be calculated by multiplying the quantity by the tariff and it will be identical to the charge amount appearing in the “Call Details” in the “Subtotal Row”; the charge in the “Subtotal Row” in the “Call Details” of each segment of a “Call at a Variable Tariff in the Course of a Call” will be included in the “Account Details” within the scope of the appropriate category of service (see Example 5 - Version B).
 
 
5)
In the event that there is also a fixed charge for each individual call, the number of calls made and the fixed tariff per call shall also be presented in the same row and the charge amount shall be calculated by multiplying the number of calls by the fixed charge tariff per call plus the quantity multiplied by the tariff (see Example 4).
 

Second Schedule—Appendix E1 – 6
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E1

 
 
E.
The “Fixed Charges”, “One-Time charges”, “Credits”, “Reimbursements” and "Linkage differences and interest" as specified in sections 60.8 and 83A   A 58 , shall each be presented in the “Billing Details” in a separate group (see Examples 3 and 5).
 
 
F.
The licensee shall notify the subscriber in the Bill of his option to request written details in respect of the mode of calculation of   A 58 the “One-Time Charge”; the licensee will furnish the subscriber with such written details within 30 days of the date of submission of a request by the subscriber on the matter to the licensee’s customer service center or the customer complaints commissioner (see Examples 3 and 5).
 
 
G.
Charges may also be noted in the “Billing Details” for sale of terminal equipment and charges for services which are not telecommunication services.
 
 
H.
The “Billing Details” shall include subtotals of charge amounts exclusive of VAT, for fixed charges, variable charges, One-Time Charges, Credits and Reimbursements (“ Subtotal Row ”).
 
 
I.
The final charge amount will be presented exclusive of VAT, and alongside such amount will be presented the charge amount inclusive of VAT.
 
 
J.
The licensee must note in the “Billing Details” a comment whereby to the extent that there is a difference between the charge amount and the subtotal of charge amounts set forth in the Subtotal Rows of the “Billing Details”, they originate in the fact that the charge amount was calculated according to tariffs to a higher degree of accuracy than that determined in the provisions of the license and the Standard.
 
 
K.
All charge amounts appearing in the “Billing Details” will be presented as a decimal number in New Israeli Shekels to a degree of accuracy of two digits after the decimal point, unless expressly determined otherwise.
 
 
10.
In Part 2 of the “Billing Details” the licensee shall present in graph form or in any other manner in respect of each telephone number to which the telephone bill relates information about usage patterns, as set forth below:
 
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
A58 Amendment No. 58 (inception: this amendment will come into force on March 13, 2011).
 
Second Schedule—Appendix E1 – 7
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E1

 
 
A.
The rate of utilization of each package of services included in the tariffs plan to which he is a subscriber, including packages of services granted to a subscriber within the scope of the fixed charge;
 
 
B.
Details of charges according to categories of services;
 
 
C.
Distribution of call minutes and text messages according to categories of licensees on whose network the call was completed (internal network, external network according to category of licensee - mobile radio-telephone, internal domestic fixed line telephony).
 
 
Part C - “Call Details”
 
 
11.
The details set forth below shall be presented in the “Call Details”:
 
 
A.
“Call Details” shall include information about all the services provided to the subscriber in the period to which the Bill relates.
 
 
B.
Each “category of service” shall be set forth in a separate group under the heading of the service name, with each item in the “category of service” being presented in a separate row, pursuant to the provisions of subsection 11E. Respecting PTT services, no details are required for each call separately.
 
 
C.
Presentation of data in relation to each “category of service” appearing in the “Call Details” will be carried out in ascending chronological order.
 
 
D.
“Call Details” will be presented in table format pursuant to the details in the Examples.
 
 
E.
In respect of each item appearing in the “Call Details”, at least the following data shall be noted:
 
 
1)
Date of performance of call or text message or internet surfing;
 
 
2)
Time (hh:mm:ss);
 
 
3)
Call destination (if any);
 
 
4)
Quantity;
 
 
Second Schedule—Appendix E1 – 8
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E1

 
 
5)
Tariff exclusive of VAT, to a decimal number in New Israeli Shekels to a degree of accuracy of at least 3 digits after the decimal point.
 
 
6)
Charge amount exclusive of VAT, to a decimal number in New Israeli Shekels to a degree of accuracy of at least 3 digits after the decimal point.
 
 
F.
The tariff presented shall be the tariff according to which the subscriber is charged, viz. , for example, after a discount, if any, the cheaper tariff offered to the subscriber within the scope of any offer, etc.
 
 
G.
The quantity, tariff and charge amount will be presented in adjacent columns if possible, so that the quantity multiplied by the tariff will give the charge amount. If there is also a fixed charge per call the quantity of calls made and the fixed charge per call shall be presented and the charge amount will be calculated by the quantity of calls multiplied by the fixed charge tariff per call plus the quantity multiplied by the tariff (see Example 4).
 
 
H.
Quantity measured by time will be presented in the form of mm:ss (minutes: seconds); quantity measured by data volume will be presented as a digital number in MB to a degree of accuracy of at least 3 digits after the decimal point; the quantity of internet pages viewed or text messages will be presented as a natural number.
 
 
I.
Any “Category of Service” appearing in the “Call Details” will include a summary row in which will be set forth the total quantity for which the subscriber is charged and the total charge amount in respect of such “Category of Service” exclusive of VAT (hereinafter referred to in this Appendix as the “ Subtotal Row ”).
 
 
J.
Any charge amount appearing in the “Subtotal Row” will be presented in the “Billing Details” as a decimal number to a degree of accuracy of two digits after the decimal point, with the quantity presented alongside.
 
 
K.
The presentation of each Subtotal Row shall be made in a prominent manner.
 
 
L.
A call whose tariff is variable in the course of performance thereof, such as a transition from off-peak to peak rate or from peak to off-peak rate, a change in tariff in the course of the conversation, including a conversation starting within the scope of a “pay as you go” program and exceeding the minutes in the course of performance thereof, will be presented within the
 
Second Schedule—Appendix E1 – 9
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E1

 
scope of “Calls at Variable Tariff in the Course of a Call”; the tariff will be presented under the column “Average Tariff” and will be calculated by dividing the charge amount into the quantity (see Example 5 - Version A). A call whose tariff is variable in the course of performance thereof may also be presented in another form in which the charge tariff, the quantity and the charge amount, as well as the total charge of the call will be presented in respect of each segment of such call (see Example 5 - Version B).
 
 
M.
The licensee may provide a subscriber making an express request, with Call Details in chronological order in which the calls were provided with no separation between categories of services, provided that it notifies the subscriber within the scope of the “Call Details” that he may receive “Call Details” also pursuant to the format determined in section 11(b).
 
 
  
Second Schedule—Appendix E1 – 10
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E2

 
 
A 59 APPENDIX E2 – ACCESS TO SERVICES FORM

Form for Access to Services by Means of a Cellular Device Charged in Telephone Statement
 
 
Name of Licensee
Means of Sending the Form:
Address
Email address
Facsimile number
 
Date: _________________
 
I, whose particulars are recorded below, request access to the services set forth below for the telephone number noted in this form, as follows:
 
Subscriber particulars
 
Subscriber name/company name: ___________ I.D/co. no. ________________ Address: _______________ telephone number: _______________
 
Mark X according to your selection and sign. For your attention, failing to mark and sign means blocking the option of receiving the service.
 
No.
Category of service
Blocked
Open
Subscriber signature
1.
Cellular internet surfing service, including on Licensee's cellular portal, by means of a device
 
¨
¨
 
2.
Content and/or information service one-time
A.
Receipt or downloading content via the internet, viewing and/or listening to such content on a one-time basis (such as downloading or viewing a video film, listening to a song, downloading a ringtone, downloading a video film, downloading a game, all on a one-time basis)
 
 
¨
 
¨
 
   
B.
Sending an SMS by special payment for voting within the scope of a program broadcast on television on a one-time
 
¨
 
¨
 
 
 
A59 Amendment No. 59
Second Schedule—Appendix E2 – 1
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix E2

 
      basis (such as voting in a reality program on a one-time basis)      
   
C.
Giving a donation by means of sending an SMS on a one-time basis (such as a donation to an association on a one-time basis)
     
   
D.
Receipt of content and/or information on a one-time basis (such as information on transportation lines, professionals, financial information, all on a one-time basis)
 
¨
 
¨
 
3.
Content and/or information service
continuing – Subscriber
A.
Receipt or downloading of content via the internet, viewing and/or listening to such content not on a one-time basis (such as a subscriber for downloading or viewing a video film, subscriber to a  music service, subscriber for downloading ringtones, subscriber for downloading video films and subscriber for downloading games)
 
 
¨
 
¨
 
   
B.
Receipt of content and/or information not on a one-time basis (such as a subscriber for receipt of news updates, subscriber for receipt of sports results, subscriber for receipt of trivia questions and subscriber for receipt of diet recipes)
 
 
¨
 
¨
 
 Upon agreement in the presence of the Licensee's representative – I declare that this form was marked and signed by me
 
Name of Licensee's representative: ____________ signature of Licensee's representative: ___________
 
Subscriber's signature: ____________________________________
 

 
Second Schedule—Appendix E2 – 2
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix F

  APPENDIX F – ORDERING OF A SERVICE ON THE WEBSITE OF THE LICENSEE OR A SERVICE PROVIDER A 61

 
1.        Ordering a Service from the Licensee
 
 
1.1
Ordering a Service from the Licensee
 
The ordering of a service on the Licensee's website or on its cellular portal (both hereinafter – the " Site ") shall be done according to one of the alternatives detailed in sections 1.2 or 1.3.
 
 
1.2
Random Code
 
 
(a)
The subscriber shall enter on the Site, in the place designated for that purpose, his subscriber number 9 .
 
 
(b)
If the subscriber is blocked for the service, the Licensee shall send the subscriber an SMS notifying him that he is blocked for the type of service that was ordered, and that he can apply to the Licensee to remove the block for that type of service.
 
 
(c)
If the subscriber is not blocked for the service, the Licensee shall send the subscriber an SMS including the following:
 
 
(1)
The name of the service including its classification as "one-time" or as "continuing."
 
 
(2)
The price of the service. The price shall be displayed in a detailed manner, including details concerning a "one-time" payment, a "fixed" payment for a specific period, including specification of the period, and the unit price according to which the payment for the service is measured.
 
 
(3)
A random code of five (5) digits (hereinafter – the " Sent Code ").
 
 
(d)
The subscriber shall enter on the Site, in the place designated for that purpose, the Sent Code.
 
 
(e)
The Licensee shall compare the Sent Code and the code entered by the subscriber as stated in subsection (d) (hereinafter – the " Entered Code ").
 
 
(f)
If the Entered Code is identical to the Sent Code, the Licensee shall send the subscriber an SMS notifying him that his registration for the service was approved, and in the case of a continuing service – information
 
 
A61 Amendment No. 61
12 Mobile Subscriber Number (MSN).
Second Schedule—Appendix F – 1
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix F

 
concerning the manner in which it is possible to cancel the registration for the service.
 
 
(g)
If the Entered Code is not identical to the Sent Code, the Licensee shall send the subscriber an SMS notifying him that his registration for the service failed due to such non-identity.
 
 
1.3
User Code and Password
 
 
(a)
The Licensee shall display on the Site, next to the place designated for ordering the service, prominently and in a clear and legible manner, the following details:
 
 
(1)
The name of the service including its classification as "one-time" or as "continuing." In the case of a continuing service – information concerning the manner in which it is possible to cancel the registration for the service.
 
 
(2)
The price of the service. The price shall be displayed in a detailed manner, including details concerning a "one-time" payment, a "fixed" payment for a specific period, including specification of the period, and the unit price according to which the payment for the service is measured.
 
 
(b)
The subscriber shall enter on the Site the user code and the password set or approved for him by the Licensee (hereinafter – the " Identity Code ").
 
 
(c)
If the subscriber is blocked for the service, the Licensee shall display to the subscriber a message addressed exclusively to him on the Site, notifying him that he is blocked for the type of service that was ordered, and that he can apply to the Licensee to remove the block for that type of service.
 
 
(d)
The Licensee shall compare the Identity Code and the user code and password set by it for the subscriber and saved in its system (hereinafter – the " Saved Code ").
 
 
(e)
If the Identity Code is identical to the Saved Code, the Licensee shall provide the service to the Licensee.
 
 
(g)
If the Identity Code is not identical to the Saved Code, the Licensee shall send the subscriber a message addressed exclusively to him through the Site, notifying him that his registration for the service failed due to such non-identity.
 
 
2.
Ordering a Service from a Service Provider
 
Second Schedule—Appendix F – 2
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix F

 
 
2.1
The ordering of a service on the website of a service provider shall be done in the following manner:
 
 
(a)
The subscriber shall enter on the website of the service provider (hereinafter – the " Service Provider's Site "), in the place designated for that purpose, his subscriber number 1 .
 
 
(b)
The service provider shall send the Licensee a message including the subscriber number, the type of service requested and the details of the service as set out in paragraph (d) below.
 
 
(c)
If the subscriber is blocked for the service, the Licensee shall send the subscriber an SMS notifying him that he is blocked for the type of service that was requested, and that he can apply to the Licensee to remove the block for that type of service. In addition, the Licensee shall notify the service provider that the subscriber is blocked for the service.
 
 
(d)
If the subscriber is not blocked for the service, the Licensee shall send the subscriber an SMS including the following:
 
 
(1)
The name of the service including its classification as "one-time" or as "continuing."
 
 
(2)
The price of the service. The price shall be displayed in a detailed manner, including details concerning a "one-time" payment, a "fixed" payment for a specific period, including specification of the period, and the unit price according to which the payment for the service is measured.
 
 
(3)
A random code of five (5) digits (hereinafter – the " Code ").
 
 
(e)
The subscriber shall enter on the Service Provider's Site, in the place designated for that purpose, the Code.
 
 
(f)
The service provider shall send the Licensee the code that was entered by the subscriber as stated in paragraph (e) (hereinafter – the " Entered Code ").
 
 
(g)
The Licensee shall compare the Code and the Entered Code.
 
 
(h)
If the Entered Code is identical to the Code, the Licensee shall send the subscriber an SMS notifying him that his registration for the service was approved, and in the case of a continuing service – information concerning the manner in which it is possible to cancel the registration for the service. In addition, the Licensee shall notify the service provider that the registration
 
  
1 Mobile Subscriber Number (MSN).
 
Second Schedule—Appendix F – 3
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix F

 
for the service was approved by it.
 
 
(i)
If the Entered Code is not identical to the Code, the Licensee shall send the subscriber an SMS notifying him that his registration for the service failed due to such non-identity. In addition, the Licensee shall notify the service provider that the registration for the service failed.


 

Second Schedule—Appendix F – 4
 
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix J
 
 
Appendix J –Accessibility to International Telecommunications Services A6)

1.
Definitions

1.1
In this document, the following words and terms will have the definitions noted at their sides, unless otherwise deriving from the language or context:


Bezeq International  -
 
The Bezeq International Company Ltd. ;
 
Barak -
 
Barak I.T.C. (1995) Company for International Telecommunications Services;
 
Chance caller -
 
A Licensee subscriber, calling abroad using an international operator, using a three digit dialing code, as set out in section 2;
 
Subscriber number (or telephone number) -
 
A group of numbers in a certain order, including area code, the dialing of which should create a telecommunication’s connection between the reading subscriber’s end user equipment and the reader subscriber’s end user equipment; a reader subscriber number may be a subscriber number of a number to a call answering center of a subscriber or a number to a call answering center of a licensee 2
 
International operator -
 
Anyone providing international telecommunications services to the public in Israel under a general license from the Director;
 
Chosen operator -
 
An international operator chosen by appointment, under the provisions of section 4 3
     
Access code -
 
A group of numbers in a certain order, the dialing of which allows access to a certain telecommunications service of a certain operator; dialing additional codes, as needed, and the subscriber number, should create a telecommunication connection to the subscriber’s end user equipment 4 ; if the access code is a manned call center, the service is given via the operator.
 
2 The phone number is determined by the licensee, according to rules and directives prescribed by the Director.
3 A chosen operator may be Bezeq International, Barak or Golden Lines.
4 for example: dialing an access code for international services, and after a country code, area code in that country and telephone number of the designated subscriber abroad
 
 
Second Schedule – Appendix J  – 1
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix J
 
 
Short dialing code -
 
 
“00” ” and “188” access code, designated to receive international telecommunications services, by direct dialing, or via an operator, as explained in section 2;
 
Golden Lines -
 
The Golden Lines International Communications Services Company;
 
Subscriber ascription
 
The technically defining action an internal operator performs in his switch so that his subscriber’s calls, performed through a shortened dialing code, are channeled into the chosen operator’s switch;
 
Outgoing ITMS calls -
 
  Transferring a verbal message or facsimile message via an international telecommunications service, initiated by a Licensee subscriber;
 
Ingoing ITMS calls -
 
Transferring a verbal message or facsimile message via an international telecommunications service, initiated by an international caller;
 
International Telecommunications Services -
 
Telecommunications services given to the public in Israel, under license from the Director, via an international operator’s international telecommunication services;
 
 ITMS service
 
International telecommunications message service, that is, two-directional simultaneous transfer of talk and simultaneous transfer of facsimile messages, in an international telecommunications system.
 

1.2
Words and expressions in this document not defined above shall have the meaning as defined in the Law, regulations enacted by virtue thereof, in the Interpretation Law, 5741 – 1981, or as set out in the appropriate places in the Licensee’s general license and in the International Operators’ licenses, unless otherwise deriving from the language or context.


2.
Allocation of Access Code

 
2.1
A Licensee will channel subscriber dialing, to the international operators’ switches, for access to international telecommunications’ services, using the following codes:

 
(A)
double-digit access code – the ‘00’ access code, which will serve as short access code for international telecommunications services provided by a
 
 
Second Schedule – Appendix J – 2
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix J
 
chosen operator; the Licensee will channel a subscriber dialing the prefix ‘00’ to the chosen operator;
 
 
(B)
triple-digit access code – an access code of ‘01X’ type, which will serve as an access code for international telecommunications services provided to a chance user; the Licensee will channel any subscriber dialing the prefix ‘01X’ code to the international operator according to the X digit; the X digit is the international operator’s code, according to the following:

 
1.
‘2’ – code for Golden Lines’ services;
 
2.
‘3’ – code for Barak services;
 
3.
‘4’ – code for Bezeq International services;

 
(C)
‘188’ access code – that will serve as a number for operator services ; any subscriber dialing ‘188’ will be channeled by the Licensee to the chosen operator’s operator services;

 
(D)
four - digit access code – numbers of the ‘18XY’ type, that will serve as an access code for various international telecommunications services of any and all international operators; any subscriber dialing ‘18XY’ will be channeled by the Licensee to the international operator according to the X digit; the X digit is the code of the international operator under section 2.1(B); the Y digit is any number from 1 to 9 and the 0 digit; the use of the Y digit will be determined by the Director, under advisement with the international operators, in order to ensure uniformity and fair competition; each international operator will be allocated ten (10) such four digit numbers/ these numbers will be accessible for both the chosen operator’s subscribers and for chance callers.

 
2.2
If the Licensee allows its subscriber the use of another short dial code (such as +), instead of the “00” dial code (hereinafter: a special code), all the provisions and rules applicable to the short “00” dial code will apply to the special code as well.

 
2.3
Dial by pre-paid program for unidentified subscribers who are not blocked for outgoing ITMS calls will be possible only using three-digit access codes of the 01X type, and four-digit access codes of the 18XY type; upon dialing a short access code or a special access code, a voice announcement will be heard referring the customer to dial via said access codes available to him.

2A. A23 Subscriber Access to Outgoing ITMS Calls :

 
2A.1
The Licensee will allow subscribers to act as follows, with regard to outgoing ITMS calls:

 
(D)
as an ascribed subscriber.
 
 
Second Schedule – Appendix J – 3
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix J
 
 
(E)
As blocked
 
(F)
As a chance caller only.


3.
Blocking Outgoing International Calls and Removal of the Blocking

3.1
The Licensee will block outgoing ITMS calls, and may also block collect incoming ITMS calls for any subscriber requesting to block access to international services or subscribers for whom the international service for outgoing ITMS calls has been stopped or cut off, in accordance with the conditions of the License; the licensee may not block incoming ITMS calls except collect calls.

3.2
If a block for outgoing ITMS calls has been implemented at a subscriber’s request, the Licensee will remove the block as follows: A23

 
(A)
If the subscriber has asked to join, he will indicate his choice international operator who shall serve as his “chosen operator”, by his signature on the appropriate form; notice given by means of facsimile  will be deemed notice in writing given to by the subscriber in this matter.

 
(B)
If the subscriber has asked to be a chance caller, he will notify the Licensee of such; if the notice is verbal, the Licensee will verify the requesting party’s identity.

3.3
The Licensee will perform the block for ITMS or removal thereof, performed in accordance with the subscriber’s request, according to the following:

 
(A)
70% - Within one working day of receipt of notice; requests received after 1500 hours will be deemed having been received on the following work day;

 
(B)
20% - within two working days of receipt of notice;

 
(C)
the rest – within 5 working days.

3.4
The Licensee will ensure that a subscriber who has blocked his outgoing ITMS calls cannot make outgoing calls using ‘00’ dialing code, ‘01X’ dialing code, ‘188’ or ‘18XY’ dialing codes, or using any other code that may come in place thereof A23 .
 
3.5
The Licensee may collect reasonable payment for performance of a block for outgoing ITMS calls or for removal of the block.

3.6
Notwithstanding that stated in section 3., the Licensee will allow all its subscribers to block outgoing ITMS calls before initiation of services for such subscriber, free of charge.
 
 
 
Second Schedule – Appendix J – 4
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix J

 
3.7
The Licensee will verify that all subscribers whose access to outgoing ITMS calls has been blocked receive appropriate voice message when dialing access codes or telephone numbers for international services.

3.8
If a subscriber who has chosen a chosen operator asks to block outgoing ITMS calls, the Licensee shall notify such to the chosen operator, within seven (7) working days of the date of performance of the block.
 

4.
Choosing a Chosen Operator

4.1
A Licensee’s subscriber may notify the international operator in writing, on a signed form approved by the Director, regarding his choice of a chosen operator through whom such wishes to receive international telecommunications services using ‘00’ or ‘188’ access codes; the form will including the particulars of the subscriber – first name, last name or name of corporation, ID number of ID number of the corporation, address and telephone numbers the subscriber asks to define the international operator as the chosen operator for, and the date and time when instruction regarding the appointment was given. The form will explain that any phone number may have one chosen operator only, and such will fulfill the requirements prescribed in this matter in the international operator’s license 7 (hereinafter: the ascription form).

4.2
Subscribers may change the chosen operator at any time by written notice on the ascription form; for initial ascription made at the subscriber’s request, the subscriber will not be asked to pay anything, however the subscriber may be charged a reasonable fee for any change in the ascription.

4.3
The chosen operator will send the Licensee notice regarding the subscriber’s having chosen him as the chosen operator (hereinafter: ascription notice); ascription notice will include the subscriber’s particulars - first name and last name, address and telephone numbers the subscriber asked to define the international operator as the chosen operator for, and the date and time of the ascription form on which the subscriber signed; the chosen operator will give ascription notice to the Licensee in accordance with the ascription forms signed by him; ascription notice will be given via magnetic media files, or in any other manner agreed upon between the Licensee and the international operators. If two or more ascription notices are given to the Licensee, relating to the same telephone number, the sc will act in accordance with the ascription notice with the later date and hour.

4.4
If a person has asked to become a new Licensee subscriber, he must make note, in the request to the international operator of his choice to engage with as a chosen operator; the Licensee will allow any new subscriber to choose a chosen operator for himself or to block the outgoing ITMS calls, or will allow the subscriber to receive ITMS services as a chance caller only; ascription services to a chosen operator or
 
 
7 Attention is called to section 52.3 of the Bezeq license, and section 56.4 to the Golden Lines and Barak license.
 
Second Schedule – Appendix J – 5
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix J
 
connection as a chance caller, and blocking outgoing ITMS calls will be given to new subscribers, at the time of initial registration, free of charge A23 .
 
4.5
In order to choose a chosen operator, and without derogating from the aforesaid, the Licensee will act as follows:

 
(A)
the Licensee will allow all subscribers having a subscriber line number to choose one  chosen operator will be for certain subscriber lines, and another for other subscriber lines;

 
(B)
Void A2A23 .

 
(C)
the Licensee will perform ascription of a subscriber within one working day of receipt of ascription notice form the chosen operator A2A23 .

 
(D)
The Licensee will report to the international operator regarding completion of said subscriber ascription as stated in sub-clause (C) above, including change of ascription at the time and under such plan as agreed upon between the Licensee and the international operator; the report will include particulars of the subscriber – first name, last name or name of corporation, address and telephone numbers the subscriber asked to ascribe to the international operator.

 
(E)
A20 The Licensee will send a daily modification file of subscriber ascription to all international operators (hereinafter: the modification file), containing the particulars of the subscribers who ascribed to the international operator or who unsubscribed on that day. The modification file will be handed over at the time and under such procedure as shall be agreed upon between the Licensee and the international operator. The file will include the particulars of the subscriber, including at least the first name, last name or name of corporation, ID number of ID number of the corporation, address and telephone numbers the subscriber asks to define the international operator as the chosen operator for.   e ffect

 
(F)
The Licensee may request that the Director allow in certain cases, all the prescription of rules and limitations on the matter of  subscriber ascription, the Licensee will set out the technical or operational reasons on which such request is based; if the Director consents to the Licensee’s said request, at his professional discretion, the Director will prescribe the time frame for the applicability of said rules and limitation;

 
(G)
The Licensee will submit a written quarterly report to the Director, by the 15 th of the month following the end of the quarter; the information in the report will be correct as of the last day of the calendar quarter preceding the date of the report, and will include the following:
 
 
 
effect This amendment will go into effect by no later than Thursday, the 29 th of Nissan, 5763 (May 1, 2003)
 
 
Second Schedule – Appendix J – 6
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix J

 
 
(1)
The number of subscribers blocked form international telecommunications services;

 
(2)
The number of subscriber engaged for international services using short dialing codes or using special codes, for each of the international operators;

 
(3)
A23 The number of subscribers engaged for international services as chance dialers only.

 
(H)
If there should be any disputes between the international operator or between the Licensee and the international operator on the matter of a subscribers choosing a chosen operator, the matter will resolved by the Director, or resolved by an independent arbitrator appointed by the Director, at his exclusive discretion.

4.6
The Licensee will channel any subscriber dialing using the ‘00’ prefix or any other special prefix for access to international telecommunications services, or channeling a call to a Licensee’s subscriber located abroad using an international operator (follow-me subscriber service) to the chosen operator.

5.
Void A23

6.
Block for short dialing code

6.1
Subject to the provisions of this appendix, the Licensee will perform a block for short dialing code for any subscriber so requesting A23 .
6.2
The Licensee will perform the block for short dialing code as follows: the Licensee will channel the subscriber’s calls using the double-digit ‘00’ prefix and the ‘188’ prefix to an announcer playing a recorded announcement stating the following in Hebrew, English, Arabic and Russian: “This service is blocked, for further details please dial ___ (a telephone number of the announcer under the provisions of section 6.7) A23 .
 
 
6.3
Void A23

6.4
Void A23

6.5
Void A23

6.6
Void A23

6.7
The Licensee will operate the voice announcement  24 hours a day, including Saturdays and holidays, using such method and wording allowing a subscriber to receive an explanation regarding the ascription and overseas dialing, in Hebrew, English, Arabic and Russian; the explanation will include the following matters:
 
 
 
Second Schedule – Appendix J – 7
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix J

 
 
(A)
Performance of ascription – the ascription process and where to call in order to request the ascription form;

 
(B)
How one may make an international call when the subscription is blocked for short dialing codes;

 
(C)
The option of blocking overseas dialing and the option of removing such block;

 
(D)
Where one may call in order to find out about additional matters – telephone numbers of international operators.

7.
Interconnection

7.1
The Licensee will connect its system to all international telecommunications system, directly or indirectly, according to the terms of its license, in a manner allowing provision of international telecommunications services to all subscribers through the international telecommunications services of all international operators, including outgoing and incoming ITMS calls, direct dialing, dialing through an operator (‘188’ service, as stated in section 2.2(A)), “Direct Israel” services, collect service (from abroad to Israel, from Israel abroad), international 1-800 service (incoming and outgoing), calling card services, from any destination abroad and to any destination abroad.

7.2
The technical, operational and commercial arrangements between the Licensee and any international operator will allow the provision of the following to all subscribers:

 
(A)
Quality service, including service quality control and means for investigating and dealing with subscriber’s complaints regarding quality of service;

 
(B)
Accurate and precise billing of subscriber, including control over the billing and means for investigating and dealing with subscriber’s complaints regarding incorrect billing and tools and means of identification and prevention of fraud and deception;

 
(C)
Consumer response to subscriber’s queries and questions, including tools and means of providing an itemized bill for subscribers, and for investigating subscriber’s queries in all matters related to receipt of international services.

7.3
In order to implement the provisions of this appendix, the Licensee will act, inter alia, as follows:

 
(A)
Allow any subscriber who has not blocked outgoing international ITMS calls to make international calls at any time via his chosen international operator or as a chance caller, using dialing methods set out in section 2;
 
 
 
Second Schedule – Appendix J – 8
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix J

 
 
(B)
Allow all subscribers to change their chosen operators; this service will be given in return for a reasonable charge,

 
(C)
Take reasonable measures to prevent subscriber ascription to a chosen operator without his knowledge or against the subscriber’s wishes (“slamming”); these measures will include identification of the subscriber and verification of the subscriber’s right to receive service;

 
(D)
Give all subscribers, free of charge, service allowing them to identify the name of their chosen operators;

 
(E)
The Licensee will offer non-discriminatory conditions to all international operators, including in all matters regarding the commercial conditions, billing and collections arrangements, availability of connection installations and quality of service; without derogating from the generality of the aforesaid, the Licensee will provide service for all international operators under equal conditions including in the matter of interconnection, provision of infrastructure installations and connection services to the network, performance of changes in switching, in installations, protocols and network interface;

 
(F)
The conditions for interconnection between the Licensee’s system and the international operator’s international telecommunications system will be reasonable and non-discriminatory; if the parties have not reached any agreement, the Minister will determine matters between them;

 
(G)
A copy of any agreement between the Licensee and international operator in the matter of interconnection will be delivered to the Director;

 
(H)
Any international operator requesting the particulars of a subscriber refusing to make payments to the Licensee designated for the international operator for services used via the international operator’s international telecommunications system will be given over, whether such subscriber was an ascription subscriber or a chance caller; these particulars will include the first name, last name or name of corporation, ID number of ID number of the corporation, address and telephone number.

 
(I)
A22 Allow international operators to collect payment directly for services from   subscribers ascribed to such international operator, and who have chosen to receive billing and collections services directly; the Licensee will have any vital   information required by the international operator at his disposal allowing the international operator to provide billing and collection services for such aforesaid ascribed subscribers;

 
(J)
A22 Provide services under equal and non-discriminatory conditions and for such charge not discriminating against an ascribed subscriber who has chosen to receive billing and collection services from the international operator.
 

 
 
Second Schedule – Appendix J – 9
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix J
 
 
7.4
The international operators will bear the costs of implementation of the interconnection including the process of survey and blocking short dialing codes, and, if so required, for a subscriber’s initial ascription to a chosen operator; the rate of payments, as stated, will be determined under negotiation between the Licensee and the international operator; the Licensee’s shared expenses that cannot be ascribed to a particular international operator will be divided equally between all international operators; if the parties have not come to an arrangement, the Minister will prescribe instructions in these matters, after giving the parties a fair opportunity to argue their claims before him.

First Schedule – Void A23

Second Schedule – Void A23

 
 
Second Schedule – Appendix J – 10
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix K
 
 
Appendix K – Discontinuation of Service to Cellular End-User Equipment of the IS-54 type t 7


Definitions       1. In this appendix -

“Old technology phone” –
 
A cellular phone operating on IS-54 format;
“New technology phone” -
A cellular phone operating on IS-136 format;
 
“Upgradeable telephone”  -
 
An old technology phone that may be upgraded to a new technology phone;
 
“Date of cessation of service” -
 
The date on which the Licensee ceases to provide cellular services to an old technology phone owner.
 
“Eligible customer” -
 
The Licensee’s subscriber or customer who has lawfully purchased an old technology telephone and has not exchanged or upgraded it to a new technology phone;
 
“Telephone Number” -
 
The number of the cellular telephone given to a subscriber or customer who lawfully purchased an old technology phone and connected to the Licensee’s network;
 
“Upgrade” -
 
Exchanging the software version of the telephone  upgrades the telephone, wherein it becomes a new technology phone.
   
 
Discontinuation of service
 
2.
Notwithstanding the aforesaid in section C of chapter E of the General License, the Licensee may discontinue provision of cellular services to eligible customers, provided all the following provisions apply:
 
Publication
3.
(A)     The Licensee will publish an appropriate notice under these provisions in three of the largest newspapers in Israel, one of which is published in Arabic, on the closest Friday to the date 30 days before the date of cessation of service.
 
(B)      The Licensee will publish an appropriate notice under these provisions in three of the largest newspapers in Israel, one of
 
 
t7 Amendment 7
 
Second Schedule – Appendix K – 1
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix K
 
   
 
which is published in Arabic, on the closest Friday to the date 30 days earlier than the end of six months from the date of cessation of service. 
 
Exchange of telephone
4.
The Licensee will exchange an old technology telephone including all accessories thereto, including a hands-off device, for a new technology telephone, including all accessories thereto, for any eligible customer, on the basis of accessory for accessory, including the installation thereof, provided the new technology telephone is of no lesser features than the new technology telephone’s features, free of any direct or indirect charge to the customer.
 
Upgrade
5.
The Licensee will upgrade an eligible customer’s upgradeable telephone, free of any direct or indirect charge to the customer.
 
Telephone number
6.
The Licensee will keep the telephone number allocated to any eligible customer before the date of cessation of service for a period of six months from the date of cessation of service; after this period the Licensee may exchange the telephone number of an eligible customer who did not exchange the old technology telephone to a new technology telephone or did not upgrade an upgradeable phone during that period.
 
Notice of Application
 
7.
The Licensee shall inform the Director in advance and in writing of the day of Discontinuation of Service and of the days of Publication as detailed in sub-sections 3(A) and (B) above and shall furnish the Director with copies of the notices as published.
 
Period
8.
The Licensee will fulfill the provisions of sections 4 and 5 above starting on the date of publication prescribed in sub-section 3(A) above for a period of 7 years from the date of cessation of service.
 
Conditions of service
9.
The provisions of sections 4, 5 and 6 will be deemed a condition of service, as defined in section 37B.(A)(1) of the Telecommunications Law.

 

 
 
Second Schedule – Appendix K  – 2
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix K-1
 
 
A 63 Appendix K-1 – Discontinuation of Service for Cellular End Equipment in a Cellular System Using the IS-136 (TDMA) technology.


1. 
Definitions
 
In this appendix –
 
" Day of Service Discontinuation "
 
December 31, 2011 or an earlier date, if no initiated calls are made in the system operating by the IS-136 (TDMA) technology (hereinafter – the " old system ") by entitled subscribers during at least 14 consecutive days.
     
" Entitled Subscriber "
 
A subscriber, excluding a dormant subscriber to which the service was discontinued, who prior to the day of service discontinuation held obsolete equipment and has still not replaced or upgraded it to new equipment.
     
" Phone Number "
 
The phone number given to an entitled subscriber holding obsolete equipment.
     
" New Equipment"
 
Cellular end equipment, including a battery and charger, reconditioned or new according to the Licensee's choice, operating at a minimum on a system using the GSM technology, of Nokia 6070 model or another model with features not inferior to those of the said model.
     
" Obsolete Equipment "
 
Cellular end equipment operating on the obsolete system and its accessories, including end equipment which is out of order or missing.
 
2.
The Licensee shall discontinue the provision of cellular service to a subscriber holding obsolete equipment, starting from the service discontinuation day.
 
3.
Publication of Service Discontinuation
 
 
3.1
The Licensee shall publish, in at least three major dailies in Israel one of which is published in Arabic, on the closest Friday to the date 30 days before the service discontinuation, an appropriate notice notifying the public of the discontinuation of activity of the system using the IS-136 (TDMA) technology and the services provided to its subscribers through that system, in accordance with the provisions of this appendix (hereinafter – the " first notice "). In addition, it shall send a written notice similar to the first notice to each entitled subscriber whose address is registered with the Licensee. The Licensee shall submit the contents of the first notice to the Director for approval prior to its publication.
 
 
3.2
The Licensee shall publish, in three major newspapers in Israel, one of which is published in Arabic, on the closest Friday to the date 30 days earlier than the end of six months from the date of service discontinuation, an additional notice, in accordance with the provisions of this appendix (hereinafter: the " second notice "). Notwithstanding the foregoing, the Licensee is entitled not to publish a second notice as stated, if no entitled subscriber exists on that date.
 
 
A63 Amendment no. 63
 
Second Schedule – Appendix K1 – 1
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix K-1
 
 
3.3
The Licensee shall send an entitled subscriber a voice message and an SMS concerning the discontinuation of the service, by one week before the day of service discontinuation.
 
 
3.4
The Licensee shall publish a notice similar to the first notice also on its website, starting from the date of publication of the first notice until 30 days after the publication of the second notice.
 
4.
End Equipment Replacement Process
 
 
4.1
The Licensee shall do the following, without any direct or indirect consideration:
 
 
a.
It shall replace for each entitled subscriber the obsolete equipment with new equipment.
 
 
b.
For an entitled subscriber with a speaker, it shall replace the speaker with a reconditioned or new speaker compatible with the new equipment. In this regard, replacement – including installation of the speaker.
 
 
c.
It shall grant a warranty for the new equipment and for the speaker, as the case may be, for a period of no less than two years from the day of publication of the first notice.
 
 
(All that stated in section 4.1 above – " upgrade ".)
 
 
4.2
The upgrade process shall be carried out at any of the Licensee's service and sales center, during two years from the day of publication of the first notice.
 
 
4.3
An entitled subscriber who is a "prepaid" subscriber with an unutilized payment balance, and who is not interested in upgrading the obsolete equipment held by him, shall receive from the Licensee the balance of the payment. Such a subscriber shall be entitled to a refund of the unutilized balance, after showing the obsolete equipment, from the day of service discontinuation until the end of the validity of such balance.
 
5.
Phone Number
 
 
5.1
The Licensee shall keep the phone number of an entitled subscriber that was allocated to him before the day of service discontinuation, during one year from the day of service discontinuation, before it is returned to the pool of phone numbers of the Licensee, unless the entitled subscriber notifies the Licensee of his wish to keep the number that was allocated to him for an additional year.
 
6.
Notice of Inception
 
 
6.1
Without derogating from that stated in section 3.1, the Licensee shall give the Director prior written notice regarding the day of service discontinuation and the publications days as stated, and shall furnish to the Director photocopies of all the notices, as stated in section 3.

 
 
 
Second Schedule – Appendix K1 – 2
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix O

Appendix O – Erotic Services t 36 e ffect

1. Definitions

1.1   In this appendix –

Licensee -
One who has been given a general license by the Minister for provision of NDO or cellular services;
 
Telephone bill -
A bill given to the subscriber by the Licensee for services provided;
 
Writing -
Including via facsimile or electronic mail;
 
Service number -
A number of digits allocated to an erotic services provider by the Licensee, given by dialing a telephone number, subject to the provisions of the numbering program and administrative provisions in this matter, the dialing of which, following a dialed prefix, allows the subscriber access to the service;
 
Services provider -
One who provides erotic services via the network, and payment for the service is made through the telephone bill; in the matter of erotic services provided through dialing a telephone number, access to the services is achieved through a service number;
 
Erotic promo
Broadcast or presentation of an audio or visual message with sexual content, including a recorded message, given via a telecommunications facility, directly or indirectly, and such message is intended to provide information on a service following or to encourage the use thereof, provided the broadcast of the message or presentation are made without additional charge beyond the charge for a telephone call collected via the telephone bill;
In this matter, “indirectly” – including by way of creating a connection from the subscriber’s end user equipment as a condition of providing the erotic promo.
 
Area code
A national area code in such model as prescribed by the Ministry for erotic services;
 
The network -
The Licensee’s public telecommunications network.
 
Erotic services -
Audio broadcast or presentation of an audio or visual message with sexual content, including recorded messages, given via a telecommunications facility, directly or indirectly, including services for  dating, chats, or sending messages between chance callers, designated or serving, even in part, for sexual purposes,
 
 
A36 Amendment no. 36
effect This amendment will go into effect on the 1 st of Nissan, 5766 (March 30, 2006)
 
 
Appendix O – 1
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix O
 
  which are any of the following:
 
(1)        A service provided through the dialing of a telephone number given by a service provider;
(2)       An access service to a closed data base of contents including multimedia files, held by the Licensee or by another provider of the service with the Licensee’s consent (hereinafter: the “ cellular portal” ).
In this matter, “indirectly” – including by way of creating a connection from the subscriber’s end user equipment as a condition of providing the service or for charging for it;
 
Payment regulations -
The Communications Law (Telecommunications and Broadcasts) (Payment for Telecommunications’ Services), 5765 – 2005;
 
Special payment -
 A price fixed as stated in section 6, which the subscriber is required to pay for erotic services in addition to the regular payment;
 
Payment Per time -
A special payment, the rate of which is determined by the amount of time the subscriber used the erotic service;
 
Regular payment -
One of the following:
 
(A)  For a call within the network – a payment that does not exceed the fixed charge according to the rate agreement between the subscriber and the Licensee regarding a call to another subscriber in the same network;
(B)  For a call from one cellular network to another cellular network or to a NDONDO network – payment as set out in sub-section (A) plus a payment that does not exceed NIS 0.50 per minute (including VAT);
(C)  For a call from the Bezeq company network to a cellular network – a charge that does not exceed that prescribed by the letter D in table A in the First Schedule of the Payment Regulations, plus NIS 0.50 per minute (including VAT);
(D)  For a call from a NDONDO network, except the Bezeq company network, to a cellular network – a charge that does not exceed the fixed charge according to the rate agreement between NDO subscribers and NDO, with respect to another subscriber number within the same network, plus NIS 0.50 per minute.
(E)  For erotic services given via the cellular portal – a charge that does not exceed the fixed charge according to the rate agreement between the subscriber and the Licensee with regard to access service to the cellular portal.
   
2.   Access through Dialing

2.1
Subject to the provisions of section 4, access to erotic services given through dial-up will be made available to subscribers via an area code and service number.
 
 
 
Appendix O – 2
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix O

 
3.
Allocation of Service Number

3.1.
In the matter of erotic services provided by dial-up, the Licensee may allocate a service number to a service provider; in such case, the Licensee will allow the service provider to provide services to both the Licensee’s subscribers as well as subscriber to other licensees.

4.
Blocking Access

 
4.1.
A. A38 A Licensee will block access to erotic services from all end-user equipments connected to the network; without derogating from the aforesaid, for the purpose of blocking access to erotic services given though the cellular portal, the Licensee may make use of a means of blocking, including content filtering programs, provided they efficiently block access to said service.

 
B. A38 Should the Ministry of Communications notify the Licensee that an erotic promo is being given through the Licensee’s telephone line or network, without access through a service number, the Licensee will cut off said line, or block the line from receiving incoming calls;

4.2
A subscriber 18 years of age or more may request the Licensee remove a block imposed as described in section 4.1A A38 from his end user equipment.

4.3
A request for such removal of a block will be made in writing, or verbally, provided the Licensee has prescribed a procedure allowing accurate identification of the requesting subscriber.
 
4.4
If a subscriber has so requested a block removed, the Licensee will remove the block within a reasonable time, in a manner allowing the subscriber access to erotic services via the end user equipment in his possession.

4.5
If a block has been removed for erotic services as stated, and the subscriber requests that his end user equipment again be blocked for such services, the Licensee shall perform the block at the soonest possible opportunity, and by no later than 2 work days from the date of receipt of the subscriber’s request.

4.6
The first removal of a block against erotic services, made at the subscriber’s request as stated in sections 4.2 and 4.3 will be made free of charge; the Licensee may charge the subscriber a reasonable fee for any additional blocking access to erotic services or for additional removal of such block, made at the subscriber’s request.


5.
Early Registration

 
5.1 Notwithstanding that stated in section 4 above, the Licensee may establish a duty of early subscriber registration for receipt of a password, a submission of which will be a precondition for receipt of erotic services. The provisions of this section do not derogate from the provisions of sections  4.2 and 4.3 above.


6.
Special Payment

6.1
If special payment is prescribed for erotic services, the rate shall be fixed by the Licensee or in agreement between the Licensee and the services provider.
 
 
 
Appendix O – 3
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix O

 
7.
Charging the Subscriber

7.1.
If special payment is prescribed for erotic services, the Licensee’s phone bill will show the payment for the service separately from charges for the Licensee’s other services, unless the subscriber has requested otherwise.

7.2.
The Licensee shall provide the subscriber, upon demand and within ten (10) working days, details of the special payment for erotic services as follows:

 
(A)
The service number the service allocated;

 
(B)
The date and time service was provided;
 
 
(C)
Billing time units – when charging per time – the number of time units charged or the total amount of the special payment; in the case of a charge according to traffic volume (such as MB, KB), the number of volume units transferred;

 
(D)
The sum charged for the service.

The Licensee may collect a reasonable fee for specification of the special payment.

8.
Mandatory Tender

8.1
If a special payment has been fixed for erotic services provided through the network, the Licensee, either himself or via the services provider, will play a recorded message at the beginning of the call, containing the following details:

 
A.
The essence of the service;

 
B.
Rate of special payment for the service, according to payment per time or per traffic volume, as the case may be;

 
C.
The option to discontinue the service, without charge, before the signal is heard, as stated in section 8.4.

8.2
The recorded message will be played in the language in which the erotic service is provided, in comprehensible language, at a reasonable pace and without recording defects.

8.3
At the start of erotic services provided in a language not Hebrew, a message will be played announcing the language in which the service is provided, and after, the recorded message will be played, as stated in sections 8.1 and 8.2, in the language in which the service is provided.

8.4
Upon completion of the recorded message, as stated in section 8.1, the caller will have a 5 second interval, at the end of which a signal indicating the start of the erotic services; if the caller disconnected the call before the signal was heard, he will not be charged the special payment. Alternatively, the caller will be asked to press a certain key on his end user equipment in order to confirm that he desires to accept the service, and will be charged the special payment only from the moment he so acts.
 
 
 
Appendix O – 4
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix O

 
8.5
If a special payment is fixed for erotic services provided by access to the cellular portal, the Licensee will notify subscribers regarding the price of the service in an obvious and clear manner, providing the subscriber the option to disconnect from the service without being charged the special payment.

9.
Licensee –Services Provider Relations

9.1
The Licensee may allow a services provider to perform telecommunications  operations via its installations in order to provide erotic services; the services provider will be exempt from the duty of obtaining a license for telecommunications services, under the provisions of section 3(5) of the Law.

9.2
The Licensee will include the provisions of this appendix, mutatis mutandis, in the agreement between the Licensee and the services provider, in such manner that the services provider will be obligated to fulfill said provisions.

9.3
The Licensee will provide the Director with any agreement between such and a services provider, upon demand.

10.
Interconnection

10.1
The conditions for interconnection between the network and the Licensee’s public telecommunications network, in all matters relating to provision of billing and collection services by one Licensee to another licensee, for purposes of provision of erotic services given via the network to another licensee’s subscriber, will be formalized in an agreement between the Licensee and the other licensee; if the parties cannot reach an agreement, the Minister will decide on the matter.

10.2
The Licensee will, upon demand, provide the Director with a signed copy of all agreement it has with other licensees in the matter of said interconnection.

11.
General

11.1
The Licensee will be responsible to handle all erotic services customer complaints, in all matters relating to subscriber access to the service, and problems of billing and collection in connection with the service, and will establish a mechanism for dealing with customer queries for such purpose; the services provider will be responsible to deal with subscriber complaints in regard to service content. If the Licensee himself provides the erotic services, the Licensee will be responsible to handle erotic services customer complaints regarding the service content as well.

11.2
The Licensee may not disconnect, stop or harm the basic telephone services of a subscriber who has used erotic services and refuses to pay for such, however, the Licensee may disconnect such subscriber from continued use of the erotic services.

11.3
The Licensee may not provide a subscriber’s particulars to another services provider or to others, without the subscriber’s written consent , and only after verification of the authenticity of such consent.

11.4
A Licensee shall, within three (3) working days, provide any subscriber so requesting the following particulars regarding the services provider, without charge:
 
 
 
Appendix O – 5
 
Second Schedule for Cellcom Israel Ltd. Company’s General License for Cellular Telephone Network (Cellular) Services. Consolidated Version as of December 12, 2010
 
Appendix O

 
 
A.
The name and address of the provider;
 
B.
The telephone number at which such provider may be reached.

11.5
The provisions of this appendix will apply, mutatis mutandis, to provision of erotic services provided as a network service to the Licensee’s subscribers only.
11.6
The Licensee may himself provide erotic services, and the provisions of this appendix will apply thereto, mutatis mutandis.
 
 
 
 
Appendix O  – 6
Exhibit 4.10
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
MERGER AGREEMENT

Made and signed on June 15, 2011


Between: 
Cellcom Israel Ltd.
Public Company No. 511930125
10 Hagavish St., Netanya 42140, Israel
(hereinafter: " Cellcom ")
of the first part
 
A n d:
Netvision Ltd.
Public Company No. 511930190
Omega Center, MTM Scientific Industries Center, Haifa 31905
(hereinafter: " Netvision ")
of the second part
 
A n d: 
Cellcom Merger 2011 Ltd.
Private Company No. 514619618
10 Hagavish St., Netanya 42140, Israel
(hereinafter: the " Target Company ")
of the third part


Whereas
Cellcom is a public company whose securities are traded on the New York Stock Exchange (NYSE) and on the Stock Exchange (as defined below); and
 
Whereas
the Target Company is a private company wholly owned by Cellcom, formed for the purpose of this Merger Agreement, and no business and/or other activity took place, is taking place or shall take place in it from its formation date until the Closing Date (as defined below), except as required in connection with this Agreement; and
 
Whereas
Netvision is a public company whose securities are traded on the Stock Exchange (as defined below); and
 
Whereas
Netvision wishes to acquire the entire activity, liabilities and assets of the TargetCompany, in accordance with the provisions of Chapter 1 of Part 8 of the Companies Law (as defined below), in such manner that the Target Company be liquidated and Netvision (the acquiring company) shall become a private company wholly owned by Cellcom and its shares be delisted from the Stock Exchange (as defined below), and the Eligible Netvision Shareholders (as defined below) shall be entitled to a cash payment for their shares, all in accordance with the provisions of this Agreement; and
 
Whereas
the boards of directors of Cellcom, of Netvision and of the Target Company, after receiving the approval of the audit committee, insofar as required, have approved the execution of the Merger Transaction (as defined below);
 
 
Now therefore, it is hereby agreed between the parties as follows:
 
 
- 1 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
1. 
Preamble and Interpretation
 
 
1.1  
The preamble to this Agreement forms an integral part hereof.
 
 
1.2  
The division of the Agreement into clauses and assignment of headings to said clauses has been done solely for reasons of convenience, and shall not be used for purposes of interpreting the Agreement.
 
2. 
Definitions and Appendices
 
 
2.1
In this Agreement, the terms below shall have the meaning appearing alongside them:
 
 
" Eligible Shareholders " 
-
The holders of Netvision shares on the Closing Date not being Netvision itself or the Subsidiaries.
       
 
" Interested Party "
-
As the term is defined in the Companies Law (as hereinafter defined).
       
 
" Stock Exchange "
-
The Tel Aviv Stock Exchange Ltd.
       
 
" Netvision's Periodical Reports "
-
Netvision's Annual Report (as defined below and Netvision's First Quarter 2011 Report (as defined below).
       
 
" Nominee Company "
-
The Nominee Company of Bank Hapoalim Ltd.
       
 
" Valuation "
-
The valuation from June 13, 2011 performed by the Appraiser (asdefined below), on the basis of which the Merger Consideration (as defined below) was determined.
       
 
" Subsidiaries "
-
Any company, partnership, and any other corporation in which Netvision holds at least 50% of the voting rights or the issued capital, and jointly with Netvision – the " Netvision Group ."
       
 
" Merging Companies "
-
Netvision (the acquiring company) and the Target Company.
       
 
" Merged Company " 
-
Netvision after the merger of the Target Company into it.
       
 
" Deadline " 
-
December 31, 2011, or a later date to be determined by written agreement between Cellcom and Netvision.
       
 
" Transaction " or 
" Merger Transaction "
-
As defined in clause 3 below.
 
 
- 2 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
" Companies Law "
-
The Companies Law, 5759-1999, and the regulations issued pursuant thereto.
       
 
" Securities Law "
-
The Securities Law, 5728-1968, and the regulations issued pursuant thereto.
       
 
" Closing Date " 
-
The date of closing of the Transaction under this Agreement as stated in clause 14 below, which shall occur on a business day to be determined by the parties, but no later than 10 business days after the date on which all the conditions precedent have been fulfilled, provided at least 30 days have elapsed from the date of the passing of a resolution by the general meeting of each of the Merging Companies and at least 50 days have elapsed from the date of submission of the merger offers to the Registrar of Companies.
       
 
" Execution Date " 
-
The date of execution of this Agreement.
       
 
" Appraiser "
-
Kesselman Finance PriceWaterhouseCoopers Ltd.
       
 
" Per-Share
Consideration "
 
-
As defined in clause 3 below.
       
 
" Interim Period " 
-
The period from the Execution Date until the Closing Date.
       
 
" Transaction with a
Controlling Shareholder Regulations "
-
The Securities Regulations (Transaction between a Registered Company and a Controlling Shareholder Therein), 5761-2001.
       
 
" Merger Regulations " 
-
The Companies Regulations (Merger), 5760-2000.
 
 
2.2  
The following appendices shall be annexed to this Agreement, and they may be annexed by way of reference 1 :
 
 
Appendix 3.3
-
Handling of options allotted by Netvision;
       
 
Appendix 6 .3
-
List of various securities of the Netvision Group as of June 12, 2011;
       
 
Appendix 6.4
-
Copy of Netvision's Annual Report (as defined below) and of Netvision's First Quarter 2011 Report (as defined below);
       
 
Appendix 6.10
-
Material Assets (as defined below);
 
1    The Company agrees to furnish supplementally a copy of these schedules to the Commission upon request.
 
 
- 3 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
Appendix 6.11.2
-
Important agreements.
       
 
Appendix 6.11.3
-
Notices of cancellation or breach of important agreements;
       
 
Appendix 6.12.1
-
Intellectual property;
       
 
Appendix 6.13.2
-
Licenses;
       
 
Appendix 6.13.5
-
Applications for subsidies and grants;
       
 
Appendix 6.14
-
Significant legal proceedings;
       
 
Appendix 6.15.3
-
Employee deductions and contributions;
       
 
Appendix 6.15.4
-
Employees' claims;
       
 
Appendix 6.15.7
-
Employees' and consultants' rights to payments and bonuses deriving from the Transaction;
       
 
Appendix 6.16.1
-
Insurance policies and claims;
       
 
Appendix 12.1.5
-
Third parties' confirmations and consents;
       
 
Appendix 13.3
-
Wording of indemnification letters.
 
3. 
General – the Transaction
 
 
3.1  
Subject to the provisions of this Agreement and to the fulfillment of the conditions precedent, as set forth in clause 12.1 below, on the Closing Date the Target Company shall merge with and into Netvision, in such manner that the entire activity, assets and liabilities of the Target Company shall be transferred into Netvision (the acquiring company), with the result that the Target Company shall be liquidated and removed from the records of the Registrar of Companies, in accordance with section 323 of the Companies Law, and the Eligible Netvision Shareholders shall receive consideration for their shares in Netvision, which shall be paid in cash by Cellcom, as set forth in this Agreement (hereinafter: the " Transaction " or the " Merger Transaction ").
 
 
3.2  
On the Closing Date, each NIS 1 par-value ordinary share of Netvision held by the Eligible Shareholders (including those allotted as a result of the exercise of options in the period between the Execution Date and the Closing Date) shall be automatically transferred to Cellcom in a manner to be coordinated in advance with the Stock Exchange Clearing House, insofar as necessary, and shall entitle its holder to receive, in consideration thereof, the quotient of (a) the sum of NIS 1,538,378 thousand plus effective annual interest at a rate of 5% calculated pro rata from April 1, 2011 until the Closing Date (hereinafter: the " Merger Consideration "), divided by (b) the number of issued Netvision shares held by the Eligible Shareholders on the Closing Date (the quotient of (a) divided by (b) – hereinafter: the " Per-Share Consideration "), in cash. It is hereby clarified that Cellcom shall from the Merger
 
 
- 4 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
Consideration withholding tax according to a mechanism to be coordinated in advance with the Stock Exchange and as set forth in clause 4.4 below.
 
 
3.3  
In addition, on the Closing Date the options which were allotted by Netvision shall be handled in accordance with the principles, the conditions and the times set forth in Appendix 3.3 .
 
 
3.4  
It is hereby clarified that following the closing of the Transaction, Netvision shall become a private company wholly held by Cellcom, and its shares shall be delisted from the Stock Exchange.
 
4. 
Payment of the Merger Consideration
 
The Merger Consideration shall be paid as follows:
 
 
4.1  
The Merger Consideration shall be paid by Cellcom to the Eligible Netvision Shareholders who are registered (either in the company's books or through the Nominee Company) as holders of Netvision shares on the Closing Date.
 
 
4.2  
The Merger Consideration due to each of the Eligible Shareholders shall be paid to such Eligible Shareholder, as stated, after the Closing Date.
 
 
4.3  
Cellcom is responsible for ensuring that registered shareholders receive the consideration from Cellcom and/or its designee by a direct bank transfer or by a check sent by registered mail with confirmation of delivery to their address as it appears in Netvision's shareholders register, according to Cellcom's choice and subject to the instructions of the Stock Exchange, and that shareholders who hold their shares through a Stock Exchange member receive the consideration directly into the bank account through which they hold shares of Netvision, all subject to and in accordance with the rules and regulations of the Stock Exchange and as shall be coordinated in advance with it. Netvision shall submit to Cellcom a complete list of all its registered shareholders (excluding the Nominee Company), including their updated address, as far as known, at least 14 days before the estimated Closing Date, and it shall also submit such an updated list on the Closing Date.
 
 
4.4  
Cellcom shall deduct from the Merger Consideration payable to the Eligible Shareholders withholding tax in accordance with the Income Tax Regulations (Deduction from Consideration, Payment or Capital Gain on the Sale of a Security, the Sale of a Unit in a Mutual fund or a Futures Transaction), 5763-2002 (hereinafter: the " Deduction Regulations ") and any other relevant statute, all in accordance with a mechanism to be coordinated in advance with the Stock Exchange. The deduction of withholding tax from the Merger Consideration with respect to Eligible Shareholders who are not registered shareholders shall be done by the Stock Exchange member through whom such Eligible Shareholders hold shares in Netvision. The deduction of withholding tax with respect to shareholders who are registered in Netvision's shareholders register (excluding the Nominee Company) shall be done by Cellcom on its responsibility. If a confirmation of exemption from withholding tax or a confirmation concerning a reduced rate of withholding tax is not submitted to Netvision or to the relevant Stock Exchange member or to the Target
 
 
- 5 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
Company or to Cellcom, as the case may be, within 10 business days after the Closing Date, Cellcom shall deduct from the Merger Consideration withholding tax at the maximum rate applying under the Deduction Regulations.
 
 
4.5  
Cellcom shall submit all the required vouchers in connection with the deduction of withholding tax by it, so that the Eligible Shareholders who are registered in Netvision's shareholders register are able to take a credit for the tax withheld, in accordance with any statute.
 
 
4.6  
Within three (3) business days after the Closing Date, Cellcom shall send, on the basis of information to be provided to it by Netvision, to Netvision's registered shareholders (excluding the Nominee Company), by registered mail or by personal delivery, detailed instructions as to the documents which Cellcom requires them to complete and sign, and their accepted wording, in connection with the transfer to Cellcom of the shares which are registered in the name of the registered shareholders (including affidavits and indemnification undertakings in the event that share certificates held by them were lost / destroyed / damaged), in exchange for receiving the Per-Share Consideration for each registered share held by them in Netvision. Netvision shall submit to Cellcom a list of registered shareholders as of the Closing Date and shall assist Cellcom, as necessary, in the share and consideration transfer processes which are to be carried out by Cellcom.
 
 
4.7  
If any part of the Merger Consideration remains unclaimed after 12 months from the Closing Date, Cellcom shall be entitled to use such part in any way it sees fit, and any registered shareholder who did not comply with the provisions of article 4.6 above by that time, shall be entitled thereafter to receive from Cellcom his proportionate share of the Merger Consideration solely as an unsecured creditor, without the addition of any interest or linkage differences.
 
5. 
Representations and Declarations of the Target Company
 
The Target Company hereby declares and undertakes as follows:
 
 
5.1  
The Target Company was established and duly incorporated under the laws of the State of Israel on May 24, 2011, it is duly registered with the Registrar of Companies, and there is no pending proceeding for its dissolution or removal from the records of the Registrar of Companies.
 
 
5.2  
The registered capital of the Target Company stands at 40,000 ordinary shares of NIS 1 par value each. The issued capital of the Target Company stands at one ordinary share of NIS 1 par value, and no change shall occur therein until the Closing Date.
 
 
5.3  
From the date of its incorporation until the date of its entry into this Agreement, the Target Company had no business activity, it did not hold any assets or liabilities and it was not a party to any agreements (apart from this Agreement), and therefore it did not prepare financial statements, and it shall not have any business activity or assume any new liabilities until the Closing Date.
 
 
- 6 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
5.4  
There is no undertaking on the part of the Target Company or any of its managers or officers requiring the Target Company to allot shares or convertible securities and/or other rights and/or securities of any nature and kind and/or undertaking to grant rights to shares and/or other securities of any nature and kind to any person, and no such undertaking shall be assumed by the Target Company and any of its managers or officers until the Closing Date.
 
 
5.5  
The Target Company does not act as guarantor for any party and has not undertaken to indemnify any third parties in connection with the undertakings of any interested parties thereof, and it shall not act as guarantor or undertake to indemnify as stated until the Closing Date, and the interested parties thereof do not act as guarantors for any party and have not undertaken to indemnify any third parties in connection with its activity and shall not be guarantors or undertake to indemnify as stated until the Closing Date.
 
 
5.6  
Subject to receipt of the approvals and fulfillment the conditions specified in clause 12.1 below, there is no prohibition, restriction or other preclusion, whether by statute or by virtue of any agreement or undertaking, on its entering into this Agreement and on the performance of all its undertakings hereunder in their entirety, and the transaction under this Agreement does not conflict with its incorporation documents.
 
 
5.7  
Subject to fulfillment of the conditions set out in clause 12.1 below, the persons signing this Agreement on the Target Company's behalf are duly authorized to bind it by their signature, and all resolutions were passed by the Target Company as required by law for its entering into this Agreement.
 
 
5.8  
The board of directors of the Target Company confirmed, inter alia based on data provided to it by Netvision and Netvision's representations in this Agreement, that, considering the financial position of the Merging Companies and considering that the Target Company has no business activity or obligations, there is no reasonable likelihood that following the merger the Merged Company will be unable to meet the Target Company's obligations to its creditors.
 
6. 
Declarations and Undertakings of Netvision
 
Netvision hereby declares and undertakes as follows:
 
 
6.1  
Netvision was established and duly incorporated under the laws of the State of Israel, it is duly registered with the Registrar of Companies, and there is no pending proceeding for its dissolution or removal from the records of the Registrar of Companies. The Subsidiaries were established and duly incorporated under the laws of their country of incorporation, and there is no pending proceeding for their dissolution or removal. True copies of the memorandum of association and articles of Netvision and of any similar incorporation document of all the Subsidiaries were submitted to Cellcom.
 
 
6.2  
As of the date of execution of this Agreement, the registered capital of Netvision stands at 40,000,000 ordinary shares of NIS 1.00 par value each. As of June 12, 2011, the issued capital of Netvision stands at 31,605,667 ordinary shares of NIS
 
 
- 7 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
1.00 par value each. As of the date of execution of this Agreement, Netvision, and to the best of Netvision's knowledge the Subsidiaries, do not hold any shares of Netvision.
 
 
6.3  
Except as set out in Appendix 6.3 to this Agreement: (1) There are no securities convertible into share capital of Netvision (including options), and there is no undertaking of Netvision in effect towards any person requiring it to allot any of its shares or convertible securities and/or other rights and/or securities of any nature and kind and/or undertaking to grant rights to shares and/or other securities of any nature and kind to any person; (2) There are no securities convertible into share capital of the Subsidiaries (including options), and there is no undertaking in effect of any of the Subsidiaries towards any person requiring such Subsidiary to allot any of its shares or convertible securities and/or other rights and/or securities of any nature and kind, excluding a preemptive option or right under the founding agreements of the following Subsidiaries: Internet Rimon Israel 2009 Ltd., Safeway Data Protection Solutions Ltd., Telroaming Advanced Communication Solution Ltd. and Nana 10 Ltd.
 
 
6.4 
Appendix 6.4 to this Agreement includes by reference true copies of: (a) Netvision's Periodical Statement for the year 2010, as published on the distribution site of the Israel Securities Authority Ltd. (Magna) (hereinafter: " Netvision's Annual Report "), which comprises, inter alia, the consolidated financial statements of Netvision as of December 31, 2010, audited by Netvision's auditors, and (2) Netvision's quarterly statement for the first quarter of 2011, as published on the distribution site of the Israel Securities Authority (Magna) (hereinafter: " Netvision's First Quarter 2011 Report ," and jointly with Netvision's Annual Statement: " Netvision's Periodical Reports ").
 
 
6.4.1
The financial statements included in Netvision's Periodical Reports were prepared in conformity with IFRS rules, on a consistent basis with previous years and periods (except for the changes detailed in the notes to those financial statements of Netvision), in accordance with all the rules and regulations applying to companies whose shares are traded on the Stock Exchange.
 
 
6.4.2
Netvision's Periodical Reports reflect the business, financial position, capital, assets, liabilities and financial results of Netvision and its Subsidiaries as of the dates of Netvision's Periodical Reports, in the format required by the Securities Law, and they do not contain any "misstatement" as the term is defined in the Securities Law.
 
 
6.4.3
Without derogating from the foregoing, to the best of its knowledge, Netvision complies with all the provisions of the Securities Law, including the submission of all the reports required thereunder (including under any directives of the Israel Securities Authority), and to the best of Netvision's knowledge, such reports do not contain any "misstatement" as the term is defined in the Securities Law.
 
 
- 8 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
6.5  
From the date of publication of Netvision's First Quarter 2011 Report (May 15, 2011) to the Execution Date, there was no significant event in the Netvision Group in respect of which Netvision did not issue an immediate report. Without derogating from the generality of the above, except as set forth in Netvision's immediate report, from May 15, 2011 until the Execution Date, Netvision does not know of any event that could significantly affect the assets, the position or the operating or business results of the Netvision Group.
 
 
6.6  
Subject to receipt of the approvals and fulfillment the conditions specified in clause 12.1 below, there is no prohibition, restriction or other preclusion, whether by statute or by virtue of any material agreement or undertaking, on its entering into this Agreement and on the performance of all its undertakings hereunder in their entirety, and the transaction under this Agreement does not conflict with its incorporation documents. To the best of Netvision's knowledge, subject to receipt of the approvals as stated in clause 15.1.5 below, its entry into this Agreement and the performance of that stated herein are incapable of causing significant damage to the Netvision Group or an immediate call on credit facilities in a significant amount that were provided to the Netvision Group by financial institutions (subject to receipt of the agreement of the Netvision Group's lending banks), or the cancellation of important agreements (as defined in clause 6.11.4 below) to which the Netvision Group is a party, or significantly impair the terms of such credit facilities or important agreements. It is hereby declared that any impairment of the financial terms of bank credit facilities provided to the Netvision Group shall be deemed significant impairment.
 
 
6.7  
Netvision has made available for Cellcom's inspection a complete, correct and updated copy of the minute books of meetings of the board of directors and board committees of Netvision and of meetings of the shareholders of Netvision, beginning from January 1, 2009, as well as a complete, correct and updated copy of the minute books of meetings of the board of directors and board committees and of meetings of the shareholders of 013 Netvision Ltd. and of meetings of the relevant organs of Veidan Conferencing Solutions Limited Partnership, beginning from January 1, 2009, and all these minutes are a true reflection of all the resolutions passed at Netvision, 013 Netvision Ltd. and Veidan Conferencing Solutions Limited Partnership beginning from that date.
 
 
6.8  
Subject to fulfillment of the conditions set out in clause 12.1 below, the persons signing this Agreement on Netvision's behalf are duly authorized to bind it by their signature, and all resolutions were passed by Netvision as required by law for its entering into this Agreement.
 
 
6.9  
The board of directors of Netvision confirmed that, considering the financial position of the Merging Companies and based on the representations of the Target Company in this Agreement, there is no reasonable likelihood that following the merger the Merged Company will be unable to meet its obligations to its creditors.
 
 
6.10  
Except as set out in Appendix 6.10 , the Netvision Group holds title to or has a right of lease and use of its important equipment and fixed assets, as hereinafter defined (hereinafter: the " Netvision Group's Important Assets "), which are in its possession or use. Except as set out in Appendix 6.10 , all the Netvision Group's
 
 
- 9 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
Important Assets are free from any debt, attachment, charge, pledge, mortgage or lien, preemptive right and right of first refusal. Except as set out in Appendix 6.10 , to the best of Netvision's knowledge, the Netvision Group's Important Assets are in good and serviceable condition as required for carrying out the Netvision Group's business activity as it is presently carried out, and Netvision does not foresee any necessity for investments in assets on the part of the Netvision Group in the course of 2011 in amounts in excess of NIS 10 million beyond the amounts set out in the business plan for 2011, a true copy of which was provided to Cellcom.
 
In this clause, " important asset " means an asset (including a right) with a value of at least NIS 10 million and/or an asset which, if damaged, would or could significantly impair the results of the Netvision Group.
 
 
6.11
Agreements
 
 
6.11.1
True and accurate copies of all the important agreements (as hereinafter defined) of the Netvision Group were provided to Cellcom prior to the Execution Date.
 
 
6.11.2
Except as set out in Appendix 6.11.2 , all the Netvision Group's important agreements are in force. The Netvision Group is in compliance with all the material provisions contained in the important agreements, and, to the best of Netvision's knowledge, the other parties to those agreements are in compliance with all the material provisions thereof, and the Netvision Group and/or its designees were not served by the parties to those agreements or their designees any notice of an intention to cancel any of those important agreements or any warning or notice concerning a breach or a future breach of the provisions thereof, and Netvision is not aware of the existence of a cause or a real likelihood of the existence of a cause for the service of such notice, all except as set out in Appendix 6.11.2 .
 
 
6.11.3
Except as set out in Appendix 6.11.3 , the Netvision Group and/or its designees have not served any of the other parties to those important agreements any notice of cancellation of the agreement or any warning or notice concerning a breach or a future breach of the provisions thereof, and it is not aware of the existence of a cause or a real likelihood of the existence of a cause for the service of such notice. The Netvision Group does not have any significant customer or any material agreement with a customer.
 
 
6.11.4
In this Agreement, " important agreements " denotes any agreement that is required for the continued proper management of the Netvision Group's business, in such manner that the cancellation or modification thereof would or could impair by 1.5% or more one or more of the following parameters: regarding customer agreements – the amount of annual revenues, and regarding supplier agreements – the amount of annual expenses of the Netvision Group. It is hereby clarified that, in this regard, operator interconnection agreements shall not be deemed important agreements.
 
 
6.12
Know-How and Intellectual Property
 
 
- 10 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
6.12.1
The Netvision Group does not possess significant know-how or intellectual property in connection with its activity, except as set out in Appendix 6.12.1 (hereinafter: the " Intellectual Property ").
 
 
6.12.2
To the best of Netvision's knowledge, without having specifically examined the matter, the Netvision Group holds any necessary licenses for using the intellectual property of others, insofar as required by it for the proper management of its existing activity.
 
 
6.12.3
All the registered intellectual property rights of the Netvision Group and all its applications to register intellectual property rights are set out in Appendix 6.12.1 . The Netvision Group has taken generally accepted precautions to protect its Intellectual Property, including its registered intellectual property rights.
 
 
6.12.4  
To the best of Netvision's knowledge, without having specifically examined the matter, the Netvision Group's use of the Intellectual Property does not infringe any right, license or third-party right in a manner that could materially harm the Netvision Group.
 
 
6.12.5  
The Netvision Group is not obligated or liable to pay any royalties, commissions or other payment to any owner or licensee or claimant of any patent, trademark, service mark, trade name, copyright or asset or other intangible right, with respect to the use thereof or otherwise in connection with the management of the business of the Netvision Group, other than payments in the normal course of business in amounts which are not significant in the aggregate.
 
 
6.13  
Permits and Licenses; Compliance with Statutory Provisions; Financing and Grants
 
 
6.13.1  
True and complete copies of all the material licenses, permits and approvals required by the Netvision Group for the management of its business in accordance with the provisions of any law and/or the instructions of any government and/or regulatory authority (hereinafter: the " Licenses ") were provided to Cellcom as part of the due diligence. All the Licenses are full valid, and true and exact copies thereof were provided to Cellcom as part of the due diligence.
 
 
6.13.2  
To the best of Netvision's knowledge, the Netvision Group complies with all the material provisions and requirements existing by virtue of the Licenses, and specifically with any provision or requirement which are a condition for the existence and full validity of the License. Except as provided in Appendix 6.13.2 , Netvision is not aware of any breach or expected breach of the provisions of any of the Licenses that could result in the cancellation of such License or in an adverse change in its terms that could materially harm the Netvision Group or cause the Netvision Group significant financial exposure.
 
 
- 11 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
6.13.3  
Except as provided in Appendix 6.13.2 and in public information on regulatory processes and changes in the communications sector, Netvision is not aware of any examination or of an intention by any relevant authority to change the terms of any of the Licenses in a manner that could significantly harm the Netvision Group. To the best of Netvision's knowledge, subject to the approval of the Ministry of Communications, the execution or performance of the Agreement will not result in the cancellation, restriction, revocation or suspension of any of the Licenses as in effect on the Execution Date.
 
 
6.13.4  
To the best of Netvision's knowledge, the Netvision Group is not in breach of any statutory provision/s that could cause the Netvision Group material harm, and other than legal proceedings and other proceedings that were brought against the Netvision Group as set out in Appendix 6.14 hereto, Netvision has not received any notice of breach of any statutory provision on its part that could cause the Netvision Group material financial exposure and/or materially impair its operating conditions as in effect on the Execution Date.
 
 
6.13.5  
The Netvision Group has not received any grant, incentive or subsidy approval from any source, that is in effect on the Execution Date or that shall be in effect after the Closing Date, including from any government, regulatory, national, local or other authority and from any quasi-government authority (in this clause, jointly: " authority "), and that impose any material liability or limitation on the activity of the Netvision Group, and except as stated in Appendix 6.13.5 , it has not applied to any such authority for receiving such grants or incentives.
 
 
6.14  
Legal Proceedings
 
Except as set out in Appendix 6.14 or in Appendix 6.4 , there are no pending legal proceedings (including arbitration proceedings), including civil proceedings for an amount in excess of NIS 5 million, administrative proceedings or criminal proceedings, to which the Netvision Group or, to the best of Netvision's knowledge, any of its managers, in their position as such, are a party (whether as plaintiffs, defendants or otherwise), and to the best of Netvision's knowledge, except as set out in Appendix 6.14 , the Netvision Group has not been served any written warning of civil claims for an amount in excess of NIS 5 million, and no authorized representative of the Netvision Group has been warned of any investigations or demands against any of them and/or against any other person on behalf of the Netvision Group or of the possibility of such a legal proceeding, and Netvision is not aware of circumstances that could lead to the bringing of such a claim or demand. Except as provided in Appendix 6.14 or in Appendix 6.4 , there are no judgments, arbitration decisions or judicial and/or administrative decisions of any kind against the Netvision Group, and there are no judgments, arbitration decisions or judicial and/or administrative decisions of any kind against any of its officers that are relevant or apply to the Netvision Group and/or to any of its officers, that impose a material liability or limitation on the existing activity of Netvision Group.
 
 
- 12 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
6.15  
Employment Matters
 
 
6.15.1  
A complete and accurate list of officers and of all the employees directly subordinate to the vice presidents in the Netvision Group (hereinafter: " Material Employees "), including their name, position, employment starting date, direct employer, gross monthly salary and employer cost, as of the Execution Date of this Agreement, was submitted to Cellcom prior to the Execution Date, on June 12, 2011. There is no custom or practice in the Netvision Group according to which a bonus in a significant amount is given, individually or cumulatively, to the employees of the Netvision Group. None of the Material Employees have been given an undertaking by a competent person at Netvision concerning a material change in any of said terms of employment.
 
 
6.15.2  
The Netvision Group has paid, and until the Closing Date shall pay, in full to the various authorities any tax and/or levy and/or fee and/or other significant mandatory payment required of it in connection with the employees of the Netvision Group and/or any such tax, levy, fee and mandatory payment the nonpayment of which could materially affect the Netvision Group even if it is not material in its own right.
 
 
6.15.3  
Except as set out in Appendix 6.15.3 , to the best of Netvision's knowledge, the Netvision Group has actually paid its employees or deducted and/or transferred and/or deposited and/or set aside on their behalf the full amounts it was required to pay and/or deduct and/or transfer and/or deposit and/or set aside in accordance with any statute or agreement, in respect of and/or in connection with the period of their employment by the Netvision Group and/or upon the termination of their employment, including salary and social benefits, pension and/or senior employees insurance, redemption of vacation days, sick pay, severance pay, income tax and National Insurance contributions, all with the exception of negligible amounts which failure to deduct and/or transfer and/or deposit and/or set aside such amounts as stated, would not materially affect the Netvision Group or its results.
 
 
6.15.4  
To the best of Netvision's knowledge, the Netvision Group complies substantially and in a manner incapable of causing the Netvision Group significant exposure, with all the labor laws and statutes applying and relevant to the employees of the Netvision Group. Except as set out in Appendix 6.15.4 , Netvision is not aware of any claim and/or demand and/or complaint of any of the employees of the Netvision Group in connection with the fulfillment of such laws and statutes.
 
 
6.15.5  
No member of the Netvision Group is subject to a contractual or legal impediment precluding the employment termination of a material employee or adviser of the Netvision Group by prior notice of up to 90 days (inclusive).
 
 
6.15.6
Except as set out in Appendix 6.15.4 , Netvision (including its Subsidiaries in Israel) is not a member of any employers organization and its employees
 
 
- 13 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
are not represented by any trade union, and to the best of Netvision's knowledge, no collective agreements of any kind apply to it, apart from extension orders which apply to all workers in the economy.
 
 
6.15.7
Except as set out in Appendix 6.15.7 , to the best of Netvision's knowledge, none of the employees of the Netvision Group and none of its advisers are entitled to any payment or other benefit (including the acceleration of options) due to the execution of this Agreement or the closing of the Transaction the subject of this Agreement, with the exception of such rights (if any exist) of various service providers in connection with and against the provision of services to the Transaction in the normal course of business.
 
 
6.16
Insurance Policies
 
 
6.16.1
Appendix 6.16.1 lists all the insurance policies issued in favor of the Netvision Group, including the insurer's name, the parties insured under the policy, the scope of cover, the annual premium and the expiration date. As of the Execution Date, all of said insurance policies are in force and the premiums payable thereon until that date were paid. To the best of Netvision's knowledge, the Netvision Group is in compliance with any condition or limitation reasonably required in said policies for establishing entitlement to the insurance coverage on the occurrence of an insured event. Except as set out in Appendix 6.16.1 , no claims were submitted pursuant to or in connection with said policies during the last three years. To the best of Netvision's knowledge, there is no impediment to the renewal of said policies at the time set therefor. The Netvision Group is not obligated by law to maintain insurance coverage beyond that stated in Appendix 6.16.1 .
 
 
6.17
Taxes
 
 
6.17.1
The Netvision Group does not have any significant tax debt (including withholding tax) for any liability owed by it, including, without derogating from the generality of the above, taxes, National Insurance contributions and other mandatory payments connected with its employees and/or service providers and/or shareholders and/or activity at the rate determined in the relevant statute.
 
 
6.17.2
The Netvision Group has submitted to the relevant tax authorities and/or to any other authority (hereinafter in this clause 6.17: " authorities "), in accordance with the law and at the time stipulated therefor, all the reports which it is obligated to submit. The tax reports submitted by the Netvision Group were prepared in accordance with the provisions of the law. The books of the Netvision Group reflect all the debts to the relevant authorities and all the provisions for mandatory payments, as stated, applying by law and not yet paid by it. Netvision has not been informed of any examination, investigation or proceeding which is being conducted with respect to and/or against the Netvision Group by any of the said authorities, apart from current examinations of assessments which have still not been declared final.
 
 
- 14 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
6.17.3
Netvision has not been informed of any complaint by the tax authorities in connection with a significant liability of the Netvision Group. There is no valid demand or claim on the part of the authorities, and no discussions are taking place with the authorities, in respect of any report which the Netvision submitted and/or should have submitted to the authorities. Netvision is not aware of any examination and/or investigation that is being conducted as of the Execution Date by the tax authorities against or with respect to the Netvision Group.
 
 
6.17.4
Netvision has tax assessments considered final up to and including the 2009 tax year. The subsidiary 013 Netvision Ltd. has tax assessments considered final up to and including the 2005 tax year. Netwise Applications Ltd. has tax assessments considered final up to and including the 2006 tax year. As of the Execution Date, to the best of Netvision's knowledge, the rest of the Subsidiaries do not have final tax assessments.
 
7.
Representations and Declarations of Cellcom
 
Cellcom hereby declares as follows:
 
 
7.1  
It is the owner and holder of the entire issued and allotted capital of the Target Company from the time of its establishment, and the representations and declarations of the Target Company in clause 5 above are true and complete and shall  be true and complete on the Closing Date.
 
 
7.2  
Cellcom was established and duly incorporated under the laws of the State of Israel, it is duly registered with the Registrar of Companies, and there is no pending proceeding for its dissolution or removal from the records of the Registrar of Companies.
 
 
7.3  
Subject to receipt of the approvals and fulfillment the conditions specified in clause 12.1 below, there is no prohibition, restriction or other preclusion, whether by statute or by virtue of any agreement or undertaking, on its entering into this Agreement and on the performance of all its undertakings hereunder in their entirety, and the Transaction under this Agreement does not conflict with its incorporation documents.
 
 
7.4  
Subject to fulfillment of the conditions set out in clause 12.1 below, the persons signing this Agreement on Cellcom's behalf are duly authorized to bind it by their signature, and all resolutions were passed by Cellcom as required by law for its entering into this Agreement.
 
 
7.5  
Cellcom has and/or shall have by the Closing Date the financial means for payment of the Merger Consideration under this Agreement.
 
 
7.6  
Cellcom is a leading Israeli communications company and it is familiar with the communications market and the competition and changes therein. Nothing stated in this clause shall derogate from the validity of Netvision's representations as set out in clause 6 above.
 
 
- 15 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
7.7  
Cellcom has read Netvision's Periodical Reports and the immediate reports issued by it, as it saw fit, and performed a due diligence, including a legal, accounting and business examination of the Netvision Group's business and activity. Cellcom was given an opportunity to request and receive clarifications from Netvision's managers regarding the activity, business, assets and liabilities of Netvision and the Subsidiaries. Nothing stated in this clause shall derogate from the validity of Netvision's representations as set out in clause 6 above.
 
8.
Validity of Representations and Declarations
 
 
8.1  
Each of the parties is relying, when entering into this Agreement, on the above representations of the parties, and except as stated in this Agreement and its appendices, it has not received any additional representation from another party.
 
 
8.2  
If a party to the Agreement (hereinafter: " aggrieved party ") discovers, prior to the Closing Date, that another party to the Agreement (hereinafter: " party in breach ") gave a materially incorrect representation, such that it alone or cumulatively with other representations given and found to be incorrect materially change/s the considerations of the aggrieved party for entering into the Agreement or materially change/s the valuation done for Netvision (hereinafter: " material inconsistency in representations "), the aggrieved party shall notify the party in breach in writing of the breach.
 
 
8.3  
If the party in breach fails to remedy the material inconsistency in representations within 15 days from the date of the aggrieved party's written notice (as stated in clause 8.2 above), insofar as the material inconsistency in representations is remediable (otherwise the aggrieved party shall be entitled to cancel the Agreement immediately by a written notice to the party in breach), the aggrieved party shall be entitled to cancel the Agreement by a written notice to the party in breach, provided that such notice is delivered to the party in breach prior to the Closing Date (hereinafter: "cancellation relief ").
 
 
8.4  
To avoid doubt, it is hereby clarified that the cancellation relief shall be available to the aggrieved party only if it notified the party in breach in writing, prior to the Closing Date, of the existence of a material inconsistency in the representations of the party in breach (all or any of them), and not in any other case of representations which are incorrect, incomplete or inaccurate.
 
 
8.5  
Without derogating from the foregoing, the parties agree that the cancellation relief to which the aggrieved party shall be entitled under this Agreement in respect of a material inconsistency in representations is a sole and exclusive relief, and other than such cancellation relief (up to the Closing Date) and the right not to close the Transaction during the period of 15 days referred to in clause 8.3 above, the aggrieved party and/or its officers and/or shareholders and/or their designees shall not be entitled to any monetary or other relief against the party in breach, its officers, managers, employees, shareholders, advisers and service providers or their designees. Other than the aforesaid cancellation relief, the parties to this Agreement hereby waive irrevocably any complaint and/or demand and/or claim under this Agreement and under any law in respect of an inconsistency in representations,
 
 
- 16 -
 
 
TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
against another party to this Agreement, its officers, managers, employees, shareholders, advisers and service providers or their designees.
 
 
8.6 
The parties agree that immediately after the closing of the Transaction under this Agreement, the validity of the representations set out in clauses 5, 6 and 7 above shall lapse, and none of the parties shall have any claim or complaint or demand against the other parties and/or its officers in respect of incorrectness or incompleteness of all or any of the representations. If a part to the Agreement discovers any inconsistency in the representations of another party to the Agreement after the Closing Date, it and/or its officers and/or designees shall not be vested by reason thereof with any complaint and/or claim and/or demand under this Agreement and under any law against the party in breach, its officers, managers, employees, shareholders, advisers and service providers or their designees.
 
9.
Implementation of the Merger Transaction
 
 
9.1  
Netvision shall act to publish a report on a transaction with a controlling shareholder in accordance with the Transaction with a Controlling Shareholder Regulations and to convene an extraordinary general meeting of its shareholders for the approval of the Merger Transaction in accordance with the Companies Law and the Companies Regulations (Notice of General Meeting and Class Meeting in a Public Company), 5760-2000.
 
 
9.2  
Cellcom shall act to convene a general meeting of its shareholders for the approval of the Merger Transaction in accordance with the Companies Law and in accordance with the provisions of any law applying to it.
 
 
9.3  
Within 3 days from the date of convening of the general meetings for the approval of the Merger, the Merging Companies shall submit to the Registrar of Companies an agreed merger offer in accordance with the Merger Regulations.
 
 
9.4  
Upon the entry of the Merger into effect and the fulfillment of the conditions set out in clause 12.1 below, the Target Company shall merge with and into Netvision, in such manner that the entire activity, assets and liabilities of the Target Company shall be transferred into Netvision, with the result that the Target Company shall be liquidated and removed from the records of the Registrar of Companies, in accordance with section 323 of the Companies Law, and Netvision shall become a private company wholly owned by Cellcom. Following the completion of the merger, Cellcom shall hold the entire issued and paid-up share capital of the Merged Company.
 
 
9.5  
The parties shall act for the fulfillment of all the statutory provisions in connection with the merger, including the submission of notices to the Registrar of Companies concerning the resolution of the general meetings of the Merging Companies and the sending of notices to creditors, all in accordance with the provisions of the Companies Law and the Merger Regulations.
 
 
9.6  
The merger shall be completed on the Closing Date, as stated in clause 14 below.
 
 
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TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
10.
Undertakings in the Interim Period
 
 
10.1
In the Interim Period the parties shall act as follows:
 
 
10.1.1
The parties to this Agreement undertake to perform all actions and to sign all documents as reasonably required for the timely implementation of the provisions of this Agreement, and to make best efforts to receive any approval required for closing the Transaction pursuant to and in accordance with the provisions of this Agreement and all its parts. Without derogating from the generality of the foregoing, none of the parties shall perform any act contrary to the undertakings given by all and/or any of them in this Agreement. Nothing stated in this clause shall derogate from Cellcom's right to object to conditions for closing the Transaction that may be stipulated by a third party whose approval is required for closing the Transaction, as stated in clause 12.3 below.
 
 
10.1.2
Netvision may not perform any action that is outside the normal course of business of the Netvision Group or that could materially affect the assets, business or financial position of the Netvision Group, except with the prior agreement of Cellcom, which may not be withhold other than on reasonable grounds. It is hereby clarified that the provisions of this clause above shall not apply to actions included in Netvision's work plan for 2011 as approved by Netvision's board of directors in the framework of the budget for 2011 and submitted to Cellcom for its inspection as part of the due diligence. Notwithstanding the foregoing, actions on a scope not exceeding NIS 500,000 shall not be considered actions of the Netvision Group outside the normal course of business.
 
 
10.1.3
Without derogating from the generality of the foregoing, during the Interim Period Netvision shall not perform any of the actions setout below, except with Cellcom's prior written agreement, which shall not be withhold other than on reasonable grounds:
 
 
10.1.3.1
Any capital-related action of any nature and kind, including an allotment of shares or convertible securities, distribution of bonus shares, consolidation and division of shares, etc., apart from an issue of shares of Netvision arising from the exercise of options granted prior to the Execution Date. It is hereby clarified that the foregoing shall not apply to a transfer of shares by a shareholder of Netvision in the course of regular trading on the Stock Exchange.
 
 
10.1.3.2
Any alteration to Netvision's memorandum or articles.
 
 
10.1.3.3
Any distribution, including a dividend distribution in cash or in kind, as defined in the Companies Law.
 
 
10.1.4
In the event that Netvision distributes to its shareholders a dividend in cash or in kind during the Interim Period, after receiving Cellcom's agreement as
 
 
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TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
stated, the Merger Consideration shall be reduced by an amount equivalent to the amount of the dividend paid by Netvision for each share multiplied by the number of issued shares of Netvision on the record date for the distribution of the dividend.
 
 
10.2
Without derogating from that stated in clause 10.1 above, Cellcom and Netvision shall act to the best of their ability to schedule their shareholders meetings for approval of the Merger Transaction on the same date.
 
11. 
Material Adverse Change after the Execution of the Agreement
 
 
11.1
In the event that Cellcom or Netvision discover during the Interim Period, prior to the receipt of all the approvals for closing the Merger Transaction except for the issuance of a merger certificate by the Registrar of Companies as stated in clause 12.1.7 below, that any material adverse change (as the term is defined hereinafter) has occurred in the Netvision Group, including in its assets, business or business position, such party shall, immediately following the discovery, furnish to the other party full details to the best of its knowledge of the change that occurred (hereinafter: " notice of adverse change ").
 
For purposes of this clause, " material adverse change " means an event, change or effect occurring during the Interim Period, prior to the receipt of all the approvals for closing the Merger Transaction except for the issuance of a merger certificate by the Registrar of Companies as stated in clause 12.1.7, that was not known and could not have been reasonably foreseen by the aggrieved party prior to the Execution Date, and that could affect the Valuation and its results to the extent that it reduces the Merger Consideration by NIS 60 million or more, excepting only an event, change or effect occurring after the Execution Date and arising from any of the following:
 
(1) general changes in the business or political environment, excluding changes that affect the Netvision Group disproportionately to their effect on other companies in the sector of the Netvision Group; (2) change in IFRS; or (3) any action taken by Netvision at Cellcom's request or with its prior written agreement.
 
The definition of a material adverse change as stated in this clause shall not serve as a criterion for the determination of materiality in any other instance in the Agreement where the term "material," "materiality" and the like is used.
 
 
11.2
If notice of an adverse change (as the term is defined above) is given, Cellcom may demand that the parties apply jointly to the Appraiser, who shall give an opinion as to whether or an event, change or effect has occurred that could constitute a material adverse change, and if such event, change or effect has occurred, he shall reappraise the value of Netvision.
 
 
11.3
The Appraiser shall submit his findings to Cellcom and Netvision in writing within 14 business days, and his response shall be final and conclusive.
 
 
11.4
If the Appraiser determines that Netvision's value has decreased by NIS 60 million or more relative to the Valuation, Cellcom shall be entitled, within 14 days from the date of receipt of the Appraiser's findings, to notify Netvision of its withdrawal from
 
 
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TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
the Transaction (and likewise, for the removal of doubt, it shall not be obligated to close the Transaction during said period of 14 days), and in such case the Agreement shall terminate with immediate effect and all the representations and undertakings therein shall lapse, and none of the parties and/or their officers and/or designees shall have any complaint and/or demand and/or cause of action against the other party, its officers, managers, employees, advisers and service providers or their designees. If Cellcom does not give written notice of cancellation within 14 days, as stated, this shall be deemed as waiver of the right of withdrawal from the Agreement due to such material adverse change, and this Agreement and all its provisions shall continue in effect, and Cellcom and/or its officers and/or designees shall not have any complaint and/or demand and/or cause of action against any party to this Agreement, its officers, managers, employees, advisers and service providers or their designees, in respect of that material adverse change.
 
 
11.5
To avoid doubt, it is hereby clarified that in the event the Appraiser determines that a material adverse change has occurred during the Interim Period, prior to the receipt of all the approvals for closing the Merger Transaction except for the issuance of a merger certificate by the Registrar of Companies as stated in clause 12.1.7 below, that could affect the Valuation and its results, but not to the extent of a decrease of NIS 60 million or more in Netvision's value relative to the Valuation, the provisions of clause 11.4 above shall not apply to such event, change or effect, and this Agreement and its provisions shall continue in full effect and none of the parties and/or their officers and/or designees shall have any complaint and/or demand and/or cause of action against the other party, its officers, managers, employees, advisers and service providers or their designees, in respect of that event, change or effect.
 
 
11.6
Without derogating from that stated in clauses 11.2 to 11.5 above, where an event, change or effect as stated in clause 11.1 above occurs that can be precisely quantified, Cellcom and Netvision may agree mutually not to apply to the Appraiser to determine the effect on Netvision's value and determine between themselves the change in Netvision's value relative to the Valuation, and the provisions of clause 11.4 above shall apply, mutatis mutandis, in respect of Cellcom's right to cancel the Agreement.
 
12. 
Conditions Precedent to Closing the Transaction
 
 
12.1
The conditions set out below are conditions precedent to the closing of the Transaction and the merger pursuant thereto, applying to all the parties to this Agreement, and they must be fulfilled by the Deadline. If all the conditions precedent are not fulfilled by the Deadline, and the Deadline is not extended by the parties expressly in writing, this Agreement shall lapse and none of the parties shall have any complaint, claim or demand by reason thereof against the other party, other than complaints in respect of any breach of the undertakings included in this Agreement:
 
 
12.1.1
Approval of the Merger Transaction by the general meeting of Netvision, by the majority prescribed in section 320(f) and in section 275(a) of the Companies Law.
 
 
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TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
12.1.2
Approval of the Merger Transaction by the general meeting of Cellcom, by the majority prescribed in section 320(f) and in section 275(a) of the Companies Law.
 
 
12.1.3
Receipt of approval from the Ministry of Communications and from the Civil Administration in Judea and Samaria.
 
 
12.1.4
Receipt of approval from the Antitrust Commissioner, insofar as required.
 
 
12.1.5
Receipt of the approval and/or agreement of any third party whose approval and/or agreement is required under any law or under any important agreement (as the term "important agreements" is defined in clause 6.11.4 above) for the completion of the Merger, as set out in Appendix 12.1.5 .
 
 
12.1.6
The purchase by Netvision of runoff insurance to cover the liability of officers and directors, as stated in clause 13.1 below.
 
 
12.1.7
At least 30 days have elapsed from the date on which the general meeting of each of the Merging Companies passed a resolution, and at least 50 days from the date on which the merger notices were submitted to the Registrar of Companies, and the Registrar has issued a merger certificate in accordance with the provisions of section 323 of the Companies Law.
 
 
12.1.8
There is no statute, order or instruction of a competent authority in effect that prevents the completion of the merger.
 
 
12.2
The parties to this Agreement may agree mutually to waive the fulfillment of any condition or any approval stipulated in the provisions of this Agreement for the completion of the Merger, insofar as it is not required by law.
 
 
12.3
If the approval of any of the entities specified above is stipulated on any conditions that could materially harm any of the parties or burden it after the Closing Date, the parties shall act for the removal or limitation thereof, and if they are unable to do so, then Cellcom shall be entitled to object to those conditions, and in such case the approval shall be deemed not to have been given; all with the exception of the conditions prescribed in regulation 12A(a) of the Communications Regulations (Telecommunications and Broadcasts), (Procedures and Conditions for Receiving a General License for the Provision of International Telecommunication Services), 5764-2004, to which the parties agree insofar as the conditions for their existence shall apply on the Closing Date.
 
 
12.4
Subject to any statute, each of the parties shall report to the other party on an ongoing basis on progress in dealing with the conditions precedent for which it is responsible and on any difficulty arising in connection with those conditions and their achievement.
 
13. 
Insurance and Indemnification Undertaking
 
 
13.1
No later than on the Closing Date, Netvision shall purchase runoff insurance to cover the liability of officers and directors on such a scope and such policy terms as are in
 
 
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TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
 
effect up to the Closing Date, for an additional period of seven years from that date. The insurance shall apply to insured events, as the term is defined in the policies, occurring up to the date of completion of the acquisition, and to circumstances which are known to Netvision on that date. The insurance shall include an express clause prohibiting the insurer to cancel the insurance (non-cancellation clause). Prior to purchasing such insurance, Netvision shall forward to Cellcom for comments the quotation for the runoff insurance policy and the policy terms.
 
 
13.2
Cellcom undertakes starting from the Closing Date that Netvision shall comply with all the provisions of the insurance policy referred to in clause 13.1, including as regards any required notices to the insurance company.
 
 
13.3
Cellcom undertakes starting from the Closing Date that Netvision shall honor the indemnification letters issued by Netvision, prior to the Execution Date, to officers and directors of Netvision and the Subsidiaries, according to their terms. Appendix 13.3 sets out all the wordings of such indemnification letters issued by Netvision to officers and directors, past and present, of the Netvision Group. Netvision hereby declares that it did not issue an indemnification letter to any person other than officers and directors of the Netvision Group.
 
14.
Closing of the Transaction
 
 
14.1
The Merger Transaction shall be closed on the Closing Date, subject to fulfillment of the conditions set out in clause 12 above. On the Closing Date the parties shall perform the following actions, which shall be deemed to have been performed simultaneously for the purpose of completing the Merger Transaction:
 
 
14.1.1
Netvision shall furnish to the parties a copy of the resolutions of its audit committee and board of directors approving the Merger Transaction, and the minutes of the general meeting of its shareholders approving the Merger Transaction by the required majority, as stated in clause 12.1.1 above.
 
 
14.1.2
The Target Company shall furnish to the parties a copy of the resolutions of its board of directors and general meeting approving the Merger Transaction.
 
 
14.1.3
Cellcom shall furnish to the parties a copy of the resolutions of its audit committee and board of directors approving the Merger Transaction, and the minutes of the general meeting of its shareholders approving the Merger Transaction by the required majority, as stated in clause 121.2 above.
 
 
14.1.4
The Merging Companies and Cellcom shall furnish to each other written confirmations, signed by their authorized signatories and attached as an integral part of this Agreement, concerning the complete fulfillment of the conditions precedent which are dependent on each of them, as follows:
 
 
14.1.4.1
Netvision shall furnish a confirmation as above regarding the conditions precedent set out in the following clauses: 12.1.1,
 
 
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TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
14.1.4.1
12.1.3, 12.1.5, 12.1.6, 12.1.7 and 12.1.8 with respect to the approvals required of it.
 
 
14.1.4.2
Cellcom shall furnish a confirmation as above regarding the following conditions precedent: 12.1.2, 12.1.3, 12.1.7 and 12.1.8 with respect to the approvals required by it.
 
 
14.1.4.3
Cellcom and Netvision jointly shall be responsible for furnishing the confirmations referred to in clause 12.1.4 above.
 
 
14.1.5
The Merging Companies and Cellcom shall furnish to each other a written confirmation of the absence of any material inconsistency in their representations as given on the Execution Date and as of the Execution Date, and Netvision shall furnish to Cellcom a written confirmation that no material adverse change (as defined in clause 11.1 above) has occurred with respect to the Netvision Group from the Execution Date until the Closing Date. In case notice is given of an adverse material change as stated in clause 11.1 above, such material adverse change shall be excluded from Netvision's confirmation.
 
 
14.1.6
Cellcom shall deposit the Merger Consideration on behalf of the Eligible Shareholders.
 
 
14.1.7
A merger certificate in accordance with section 323 of the Companies Law shall be issued to the Merging Companies.
 
 
14.2
The parties undertake to cooperate with the Stock Exchange and the Stock Exchange Clearing House insofar as necessary for the closing of the Transaction.
 
 
14.3
With the entry of the Transaction into effect following the completion of the actions specified in clause 12.1 above and in clauses 14.1.1 to 14.1.7 above, all the assets and liabilities of the Target Company shall vest and be transferred to Netvision, and the Target Company shall be liquidated without winding up in accordance with the provisions of the Companies Law.
 
15. 
Expenses
 
Each party shall bear all the expenses entailed in its entry into and performance of this Agreement.
 
16. 
Cancellation of the Agreement
 
 
16.1  
Up to the Closing Date the parties may, by joint agreement, cancel the Merger Agreement at any time and for any reason.
 
 
16.2  
Without derogating from the foregoing, the parties agree that the Merger Agreement shall be cancelled upon the occurrence of one or more of the following events:
 
 
16.2.1  
The Closing Date does not occur by the Deadline.
 
 
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TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
16.2.2  
At the shareholders meeting of Netvision (including an adjourned meeting, where relevant) it is resolved by the majority of shareholders prescribed by law not to approve the merger.
 
 
16.2.3  
At the shareholders meeting of Cellcom (including an adjourned meeting, where relevant) it is resolved by the majority of shareholders prescribed by law not to approve the merger.
 
 
16.2.4  
A final and unappealable order is issued that prevents the merger.
 
 
16.2.5  
A law is enacted or regulations are made or a government authority acts in such a manner that the closing of the Transaction is rendered illegal.
 
 
16.3  
In addition to that stated in clause 16.2 above, in the event that any of the parties to the Agreement acts in material breach of its undertakings in the Merger Agreement and fails to cure such breach within 15 days from the date of the other party's written notice concerning the breach, at any time prior to the Closing Date, the aggrieved party shall be entitled to cancel the Agreement by written notice to the party in breach, without derogating from any other relief available to it in law. To avoid doubt, it is hereby clarified that in case of a material inconsistency in representations, the provisions of clauses 8.2 to 8.5 alone shall apply, and the provisions of this clause 16.3 shall not apply.
 
 
16.4
In case of the cancellation of the Agreement as stated in clauses 16.2.1 to 16.2.5 above, the Agreement shall be deemed void ab initio , and the parties, their shareholders or any third party shall not have any cause of action arising from the Agreement or its cancellation, including a cause or right of action against an officer, director or shareholder of any of the parties to the Agreement.
 
17.
Notices and Reports
 
 
17.1
The parties undertake to coordinate in advance any report and announcement to the press and to the various authorities concerning the execution and closing of this Agreement (without derogating from the reporting duties applying to any of the parties by law).
 
18.
Miscellaneous
 
 
18.1
Any delay or abstention by any of the parties in exercising or enforcing any of its rights under this Agreement shall not be deemed as its waiver of or preclusion from exercising its rights in the future, and it shall be entitled to exercise its rights wholly or partly, whenever it sees fit. No waiver, allowance, extension, representation, alteration, addition or subtraction from or pursuant to this Agreement shall be valid unless they are made in writing and signed jointly by the parties.
 
 
18.2
Any alteration, amendment and/or addition to the Agreement shall not be valid and shall be deemed not to have been made, unless made in writing and signed by the parties jointly.
 
 
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TRANSLATION FROM HEBREW
THE BINDING VERSION IS THE HEBREW VERSION
 
 
 
18.3
This Agreement and its appendices reflect the full agreement between the parties in the matters provided for herein. Any representation, consent or draft or prior undertaking, whether direct or in favor of a third between, between the parties in connection with the matters provided for in this Agreement, and any negotiations, summary, understanding or agreement between the parties prior to the execution of the Agreement and connected with the matters provided for herein, shall not be valid, apart from the confidentiality agreement that was signed between Cellcom and Netvision.
 
 
18.4
If it is held that any provision of the Agreement is unenforceable and/or void for any reason, this shall not affect the rest of the provisions of the Agreement, and the parties shall act in good faith to implement the Agreement in spirit and language, including the replacement of such unenforceable and/or void provision with an alternative provision, the result and operation of which is substantially the same and the financial consequences of which are the same in terms of the parties hereto.
 
 
18.5  
This Agreement may be executed in several counterparts, including by fax, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.
 
 
18.6  
This agreement shall be governed by the laws of the State of Israel. The competent court of law in the city of Tel Aviv-Yafo is vested with sole and exclusive jurisdiction to consider the Agreement and any matter connected therewith and/or pertaining thereto and/or arising therefrom.
 
 
18.7  
The parties' addresses and contact details for purposes of the Agreement are as set out in the preamble to this Agreement or any other address in Israel or other contact details of any of the parties concerning which such party gave written notice to the other party hereto.
 
 
18.8  
Any notice of any of the parties in connection with this Agreement shall be sent to the addressee by personal delivery or by registered mail to its address or by fax or by electronic mail, as stated above, and it shall be deemed delivered to the addressee on the day of its delivery by personal delivery, or at the end of 3 days after it was sent by registered mail, as stated above, or on the first business day after the receipt of confirmation of its transmission by fax or by electronic mail, all as the case may be.


In witness whereof the parties have hereunto set their hands:


( - )
 
( - )
 
( - )
Cellcom Israel Ltd.
 
Netvision Ltd.
 
Cellcom Merger 2011 Ltd.
 
 
- 25 -
 
Exhibit 8.1
 

Subsidiaries of the Registrant


As of December 31, 2011
Country
Percentage of voting
share capital held
 
Principal activity
 
Netvision Ltd.
Israel
100%
Holdings Company
013 Netvision Ltd.
Israel
100% (indirectly - through Netvision Ltd.)
Communications

The Companies listed above include only significant subsidiaries of Cellcom Israel Ltd.
 
 
 
 
Exhibit 12.1


I, Nir Sztern, Chief Executive Officer of the Company, certify that:
 
 
1.  
I have reviewed this annual report on Form 20-F of Cellcom Israel Ltd;
 
 
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
 
 
4.  
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
 
 
(a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)   
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)   
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in
 
 
 
 
 
 
 
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)  
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
 
5.  
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
 
 
(a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
 
 
(b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
 

 
Date: March 7, 2012
 
/s/ Nir Sztern
 
 
Nir Sztern
Chief Executive Officer
 
 
 
 
 
 
Exhibit 12.2

 
I, Yaacov Heen, Chief Financial Officer of the Company, certify that:

 
1.  
I have reviewed this annual report on Form 20-F of Cellcom Israel Ltd;
 
 
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
 
 
4.  
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
 
 
 
 
 
 
 
 
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
 
 
5.
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
 
Date: March 7, 2012

 
/s/ Yaacov Heen
 
 
Yaacov Heen
Chief Financial Officer
 

 
 
 
Exhibit 13.1
 

 
The certification set forth below is being submitted in connection with the Annual Report on Form 20-F of Cellcom Israel Ltd. for the year ended December 31, 2011 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
Nir Sztern, the Chief Executive Officer and Yaacov Heen, the Chief Financial Officer of Cellcom Israel Ltd., each certifies that:
 
 
1.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
 
 
2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Cellcom Israel Ltd..
 
Date: March 7, 2012
 
/s/ Nir Sztern
 
Name:  Nir Sztern
 
Chief Executive Officer
 

/s/ Yaacov Heen
 
Name:  Yaacov Heen
 
Chief Financial Officer
 



 
Exhibit 15
 

 
Consent of Independent Registered Public Accounting Firm
 
The Board of Directors
Cellcom Israel Ltd:
 
We consent to the incorporation by reference in the registration statement (No. 333-141639) on Form S-8 of Cellcom Israel Ltd. of our report dated March 6, 2012, with respect to the consolidated statements of financial position of Cellcom Israel Ltd. And subsidiaries (“the Company”), as of December 31, 2011 and 2010, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three year period ended December 31, 2011, and the effectiveness of internal control over financial reporting as of December 31, 2011, which report appears in the December 31, 2011 annual report on Form 20-F of Cellcom Israel Ltd.
 
Cellcom Israel Ltd. acquired Netvision Ltd. during 2011, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, Netvision Ltd.’s internal control over financial reporting associated with total assets of NIS 886 million and total revenues constituting of NIS 381 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2011. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Netvision Ltd.
 
 
Our report refers to the fact that the consolidated financial statements as of and for the year ended December 31, 2011 have been translated into United States dollars (“dollars”) solely for the convenience of the reader. The consolidated financial statements expressed in New Israeli Shekels have been translated into dollars on the basis set forth in Note 2D to the consolidated financial statements..
 

Somekh Chaikin

Certified Public Accountants (Isr.)
Member Firm of KPMG International

Tel Aviv, Israel

March 6, 2012