Company Quick10K Filing
Cellcom Israel
20-F 2019-12-31 Filed 2020-03-23
20-F 2018-12-31 Filed 2019-03-18
20-F 2017-12-31 Filed 2018-03-26
20-F 2016-12-31 Filed 2017-03-20
20-F 2015-12-31 Filed 2016-03-21
20-F 2014-12-31 Filed 2015-03-16
20-F 2013-12-31 Filed 2014-03-06
20-F 2012-12-31 Filed 2013-03-04
20-F 2011-12-31 Filed 2012-03-07
20-F 2010-12-31 Filed 2011-03-15
20-F 2009-12-31 Filed 2010-03-02

CEL 20F Annual Report

Item 17 [ ]
Item 18 [ ]
Part I
Item 1. Identity of Directors, Senior Management and Advisors
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Note 1 - Reporting Entity
Note 2 - Basis of Preparation
Note 2 - Basis of Preparation (Cont'D)
Note 3 - Significant Accounting Policies
Note 3 - Significant Accounting Policies (Cont'D)
Note 4 - Determination of Fair Values
Note 5 - Financial Risk Management
Note 5 - Financial Risk Management (Cont'D)
Note 6 - Operating Segments
Note 6 - Operating Segments (Cont'D)
Note 7 - Cash and Cash Equivalents
Note 8 - Trade and Other Receivables
Note 9 - Inventory
Note 10 - Property, Plant and Equipment, Net
Note 11 - Intangible Assets, Net
Note 11 - Intangible Assets, Net (Cont'D)
Note 12 - Trade Payables and Accrued Expenses
Note 13 - Provisions
Note 13 - Provisions (Cont'D)
Note 14 - Other Payables, Including Derivatives
Note 15 - Other Long-Term Liabilities
Note 16 - Debentures and Loans From Banks
Note 16 - Debentures and Loans From Banks (Cont'D)
Note 17 - Liability for Employee Rights Upon Retirement, Net
Note 18 - Capital and Reserves
Note 18 - Capital and Reserves (Cont'D)
Note 19 - Share-Based Payments
Note 19 - Share-Based Payments (Cont'D)
Note 20 - Financial Instruments
Note 20 - Financial Instruments (Cont'D)
Note 21 - Revenues
Note 22 - Cost of Revenues
Note 23 - Selling and Marketing Expenses
Note 24 - General and Administrative Expenses
Note 25 - Financing Income and Expenses
Note 26 - Income Tax
Note 26 - Income Tax (Cont'D)
Note 27 - Operating Leases
Note 28 - Commitments
Note 28 - Commitments (Cont'D)
Note 29 - Contingent Liabilities
Note 29 - Contingent Liabilities (Cont'D)
Note 30 - Regulation and Legislation
Note 30 - Regulation and Legislation (Cont'D)
Note 31 - Related Parties
Note 31 - Related Parties (Cont'D)
EX-4.9 dp36423_ex0409.htm
EX-12.1 dp36423_ex1201.htm
EX-12.2 dp36423_ex1202.htm
EX-13.1 dp36423_ex1301.htm
EX-15 dp36423_ex15.htm

Cellcom Israel Earnings 2012-12-31

Balance SheetIncome StatementCash Flow

20-F 1 dp36423_20f.htm FORM 20-F

 
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
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended December 31, 2012
   
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)
 
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, 2012, 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 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  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

 
 
 
   
Page
 
PART I
 
PART II
PART III
 
 
 
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").
 
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 3.733 to $1.00, the representative rate of exchange as of December 31, 2012 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, Merrill Lynch, Brandman Research (survey institute), Strategy Analytics, Informa and Meida Shivuki C.I (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 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
 

 
 
Not applicable.
 
 
Not applicable.
 
 
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, 2012, 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, 2011 and 2012, and for each of the years in the three-year period ended December 31, 2012, 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, 2012 into U.S. dollars solely for the convenience of the reader.
 
The figures for the year 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, 2012, translated using the rate of NIS 3.733 to $1.00, the representative rate of exchange on December 31, 2012 as published by the Bank of Israel.
 
   
Year Ended December 31,
 
   
2008
   
2009
   
2010
   
2011(1)
   
2012
   
2012
 
   
(In NIS millions, except per share data)
   
(In US$ millions)
 
Income Statement Data:
                                   
Revenues
    6,417       6,483       6,662       6,506       5,938       1,591  
Cost of revenues
    3,396       3,333       3,322       3,408       3,463       928  
Selling and marketing expenses
    701       716       756       990       865       232  
General and administrative expenses
    659       660       641       685       629       168  
Other (income) expenses, net
    (29 )     6       5       1       (4 )     (1 )
Operating income
    1,690       1,768       1,938       1,422       985       264  
Financing expense, net
    310       219       230       293       259       70  
Income tax
    391       367       417       304       195       52  
Net income
    989       1,182       1,291       825       531       142  
Basic earnings per share
    10.12       12.01       13.04       8.28       5.34       1.43  
Diluted earnings per share
    9.96       11.90       12.98       8.28       5.33       1.43  
Weighted average ordinary shares used in calculation of basic earnings per share
    97,721,339         98,432,757       98,979,544       99,476,671       99,481,487          
Weighted average ordinary shares used in calculation of diluted earnings per share
    99,279,924         99,306,714       99,480,791       99,511,433       99,609,722          
Other Data:
                                               
EBITDA(2)
    2,482       2,529       2,667       2,167       1,753       470  
Capital expenditures
    633       663       735       520       537       144  
Dividends declared per share
    11.23       11.91       13.85       7.88       1.31       0.35  
Net cash from operating activities
    1,745       2,080       2,380       1,332       1,641       440  
Net cash used in investing activities
    (528 )     (774 )     (889 )     (1,656 )     (708 )     (190 )
Net cash from (used in) financing activities
    (1,853 )     (678 )     (1,861 )     715       (439 )     (118 )
Cellular Subscribers (in thousands)(3)
    3,187       3,292       3,394       3,349       3,199          
Churn rate of cellular subscribers(4)
    18.9 %     19.6 %     20.5 %     25.1 %     31.5 %        
Cellular ARPU (in NIS)(5)
    149       144       144       106       88       23.4  
Balance Sheet Data:
                                   
Cash
    275       903       533       920       1,414       379  
Working capital
    461       1,254       924       679       1,232       330  
Total assets
    5,488       6,379       5,996       8,557       8,787       2,354  
Total equity
    390       374       341       187       500       134  


(1)
The consolidated financial results for the year 2011 include the results of Netvision, our 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 – "Acquisition of Netvision 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 and 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,
 
   
2008
   
2009
   
2010
   
2011
   
2012
   
2012
 
   
(In NIS millions)
   
(In US$ millions)
 
                                     
Net income
    989       1,182       1,291       825       531       142  
Financing expense, net
    310       219       230       293       259       70  
Other expenses (income), net
    (29 )     6       5       1       (4 )     (1 )
Taxes on income
    391       367       417       304       195       52  
Depreciation and amortization
    821       755       724       738       765       205  
Share based payments
    -       -       -       6       7       2  
EBITDA
    2,482       2,529       2,667       2,167       1,753       470  
 
 
(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 and 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 removed approximately 52,000 subscribers from our subscribers base, which included subscribers using our TDMA network who had not requested a transfer to our other networks following the shutdown of our TDMA network as of December 31, 2011, and subscribers who ceased using our services following a change to our policy which previously 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. These changes affected other key performance indicators. We have not restated prior subscriber data to conform with these changes. In the fourth quarter of 2012 we added a revenue generation criterion of at least NIS 1 of accumulated revenues over the six months period, for M2M (machine to machine) subscribers, which means that any M2M subscriber generating less than NIS 1 of accumulated revenues will not be counted as a subscriber. The addition of the NIS 1 generation criterion resulted in the removal of approximately 138,000 M2M subscribers from our subscriber base in the fourth quarter of  2012. We have not restated prior subscriber data to conform with this change. This change had an immaterial effect on our MOU and ARPU for 2012.
 
(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. Churn rate data is excluding the above mentioned removal of subscribers.
 
(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 and hosting services are included even though the number of cellular subscribers in the equation does not include the users of those roaming and hosting services.  Inbound roaming services and hosting services are included because ARPU is meant to capture all service revenues generated by a cellular network.  Revenues from sales of extended warranties are included because they represent recurring revenues generated by cellular subscribers, but revenues from sales of handsets (which for purposes of this report may include other types of cellular end user equipment, such as tablets), 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 cellular ARPU for each of the periods presented:
 

    Year Ended December 31,  
   
2008
   
2009
   
2010
   
2011
   
2012
   
2012
 
   
(In NIS millions, except number of subscribers and months)
   
(In US$ millions)
 
Revenues
    6,417       6,483       6,662       6,506       5,938       1,591  
less revenues from equipment sales 
    745       751       802       1,747       1,356       363  
less other revenues*
    135       162       124       484       1,125       302  
Revenues used in cellular ARPU calculation
    5,537       5,570       5,736       4,275       3,457       926  
Average number of cellular subscribers
    3,105,022       3,215,492       3,322,891       3,361,803       3,291,843       3,291,843  
Months during period
    12       12       12       12       12       12  
Cellular ARPU (in NIS, per month)
    149       144       144       106       88       23  
*      Other revenues include revenues from other communications services such as ISP, transmission services and local and international landline services and repair 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 2012
    4.029       3.887  
October 2012
    3.895       3.792  
November 2012
    3.952       3.810  
December 2012
    3.835       3.726  
January 2013
    3.791       3.714  
February 2013
    3.733       3.663  
 
On March 1, 2013 the daily representative rate of exchange between the NIS and U.S. dollar as published by the Bank of Israel was NIS 3.723 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)
 
       
2008
    3.568  
2009
    3.927  
2010
    3.732  
2011
    3.582  
2012
    3.844  
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. In recent years, regulation in Israel has materially adversely affected our results.
 
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 August 2012, the Communications Law was amended so as 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. This amendment 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 or criminal charges 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 2017 and May 2025, respectively and may be extended for additional five and ten 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, or otherwise intervene in the pricing policies for our products and services, including by: intervening in pricing of bundles of services, roaming services, or prohibiting subscription fees for certain services. In 2011, interconnect tariffs were reduced, and early termination fees in plans which include a commitment to a predefined period, or Early Termination Fees, in cellular pricing plans were reduced to a negligible amount (subsequently annulled as of November 2011), have had an ongoing material adverse effect on our results of operations. In 2013, the amendment to the Communications Law prohibiting cellular operators from linking a cellular services transaction and handset purchase transaction, including by way of offering airtime rebates or refunds for the handsets, have come into effect, which is expected to adversely affect our end-user equipment revenues and our results of operations. Additional rules could further impact us. 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 Communications 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";
 
 
·
award 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. The entry of additional competitors, specifically the launch of two new UMTS operators (using national roaming) in May 2012, had a material adverse effect on our results of operations and is expected to continue to adversely affect our results of operations in the future.  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 in relation to the deployment of a 4G network 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. In January 2013, the Ministry of Communications published a hearing proposing restrictions on the provision of roaming services, including default blockage of the data roaming service to be opened only upon the customer's request and automatic blockage of all roaming services to be reopened again upon such request each time the customer reaches a certain usage threshold. The hearing further proposed applying certain notification procedures;
 
 
·
limit or otherwise intervene with the services or products that we may sell;
 
 
·
set higher service standards;
 
 
·
impose the laws and regulations applicable to charge cards on the clearing services we provide to third party providers, including liability for misuse and liability imposed on internet online and telephonic transactions. The Israeli Attorney General has opined before two separate tribunals (which have not yet ruled on the matter) that such legislation applies to the clearing services we provide to our third party providers;
 
 
·
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 received in March 2012, 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). Further, the Israeli Attorney General filed a request to apply such stricter policy on us with the Israeli court of uniform contracts; or
 
 
·
impose structural or operational separation between our and Netvision's operations (partial or full) or between the different services within each company or otherwise limit our ability to offer bundles of services.  See "Item 4. Information on the Company – B. Business Overview - Government Regulations – Long Distance Services; or set unfavorable regulation regarding the landline wholesale market - see "Item 4. Information on The Company – B. Business Overview – Competition" and "Long Distance Services".
 
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, 2012, 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 30.8% 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. In September 2011, the interim order was relaxed to allow two new UMTS operators, Hot Mobile Ltd. (previously Mirs Communications Ltd. or Mirs), or Hot Mobile, and Golan Telecom Ltd., or Golan, to construct radio access devices in reliance on the exemption until July 31, 2012 and was thereafter extended several times until September 30, 2013. 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 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 and other similar challenges, as well as other claims asserting that those cell sites and other facilities do not meet other legal requirements continue, are still under consideration in the courts.
 

 
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, 2012, 10 criminal and administrative proceedings are outstanding; a demolition order has been granted with respect to four cell sites while the remaining six 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, or Commissioner,  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 will not grant or renew our operating permits for those cell sites and other facilities. Since October 2007, the Commissioner 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, but due to building and planning issues we have received partial environmental permits for single cell sites. 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 communications 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 also 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, 2012, we have provided approximately 349 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. In January 2013, the Ministry of Science and Technology and the Ministry of Environmental Protection announced the establishment of a non-ionizing radiation  information center that will provide information to the public, issue warnings and guidelines for reducing exposure to risks in general and specifically in regards to sensitive populations and perform and coordinate research in that regard. In March 2013, Partner has reportedly agreed to pay NIS 400 thousand to a customer claiming his cancer was caused by cellular phone usage (while disclaiming any responsibility).
 
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 proposed 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 May 2012, the positions of the Ministries of Communications, Health and Environmental Protection in relation to the
 
 
 
various aspects of the provision of 4G services in Israel were published, 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 Ministries held the position that 4G services would involve some increase in the level of non-ionizing radiation the public will be exposed to, and that in order to minimize such increase 4G deployment should be based on current cell sites, additional outdoor and indoor small cell sites, and whenever possible, should use wireline infrastructure so that data traffic shall be carried mostly through wirelines and not cellular infrastructure. The adoption of the inter-ministry team's recommendations, regarding cell site sharing (see "We may not be able to obtain permits to construct and operate cell sites" above for additional details), is a precondition for the deployment of 4G infrastructure. The Ministry of Health further opined that in light of the preventive precaution principle and in order to reduce as much as possible the alleged health risks, 4G usages should be predefined and additional usage, where a landline alternative is available, should be conditioned on further discussion.
 
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, we may be subject to health-related claims for substantial sums; 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; and we may lose revenues due to decreasing usage of our services; we may be subject to increased regulatory costs. We have not obtained insurance for these potential claims. See note 29 to our consolidated financial report for 2012, included elsewhere in this annual  report for additional details on two purported class actions filed against us in that respect (after a third one was dismissed without prejudice). An additional purported class action which was filed against us for not obtaining such insurance was subsequently dismissed without prejudice. An adverse outcome or settlement of any health-related litigation against us or any other provider of cellular services (such as the abovementioned reported payment Partner agreed to pay) 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 four other mobile network operators, or MNOs, and three MVNO operators. While we enjoy the largest subscriber market share, estimated to be 31.9% as of December 31, 2012, two of our competitors, Partner and Pelephone, enjoy estimated market shares of 29.5% and 28% respectively, with Hot Mobile estimated to have a market share of 7.6%, Golan estimated to have a market share of 1.8% and the MVNO operators together, with an estimated market share of approximately 1.2%. The current competitive pressure in the Israeli cellular market results primarily from the entry into the market of additional competitors, specifically the launch of two new UMTS operators in May 2012 - Hot Mobile and Golan, using national roaming on Pelephone's and our networks (respectively) and aiming to win market share by introducing packages which included unlimited usage of certain services, or Unlimited Packages, at significantly lower tariffs than market level at that time. Given the highly penetrated state of the market, this has further increased the already intense competition characterizing the Israeli cellular market before their entry substantially accelerated price erosion, materially increased churn rate, increased subscriber acquisition
 
 
 
and retention costs due to materially increased gross recruitment of subscribers and led to a material decrease in revenues and profitability for us and other MNOs.  Previous regulatory and other changes, which contributed to the intensified competition and increased price erosion during 2011, include the reduction of Early Termination Fees in February 2011 and the formation of communications groups. The intensified competition led to the offering of bundles of services and Unlimited Packages, at lower average revenue per minute, or ARPU, by all competitors. In addition, regulatory changes leading to the entry of additional competitors to the handset market, increased competition in that market significantly and resulted in a decrease in the sale of handsets by us. See also “Item 4. Information on the Company - B. Business Overview" under “The Telecommunications Industry in Israel”, under "Competition" and under "Government Regulations – Mobile Virtual Network Operator" and "Additional UMTS Operators". Should these trends continue to characterize the communications market they shall continue to affect the level of competition and our results of operations. Moreover, should any of them intensify or should any of the following developments materialize in our market, the level of competition may increase even further and may result in a further increase in the churn rate, loss of market share, increased subscriber acquisition and retention costs, further price erosion and ultimately reduced profitability for us:
 
 
·
tariffs decreasing even further. The launch of Hot Mobile and Golan's UMTS operation in May 2012, without having to first invest in building their own network and with prices significantly lower than market level at that time, aiming to win market share in the private sector as quickly as possible (as their commitment to pay the license fee which amounts to approximately NIS 705 and 360 million, respectively, shall be reduced to an immaterial amount, and the bank guarantee guarantying their commitment will be returned to them,  if they each gain a 7% market share in the private sector within 5 years), caused a substantial decrease of prices made by all competitors, including us. As a result and in an attempt to increase customers acquisition rate and gain market share, Golan and Hot Mobile have offered even lower tariffs and free of charge Unlimited Packages for a limited period of time (up to four months), which were matched by other operators in the fourth quarter of 2012 and the beginning of 2013. This has led to a materially increased churn rate, price erosion (including due to a substantial transfer of prepaid customers to postpaid pricing plans) and loss of revenues and profitability to us. If tariffs continue to decrease or if services continue to be offered free of charge, those consequences could continue and result in further loss of market share and loss of revenues and profitability. See "Item 4. Information on The Company –B. Business Overview – Competition" for additional details.
 
 
·  
annulment or further relaxation of  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 and the only groups owning full landline infrastructure in Israel and offering internet infrastructure services to ISP operators, as well as to end-users), more so if not coupled with an effective wholesale landline market, as it will provide these groups a competitive advantage in the sale of bundles of services, including cellular services, and allow them to make more competitive offers than the ones we will be able to make, for example, by cross subsidizing with other services in which they have the capacity to
 
 
 
monopolize the market, which may result in a loss of market share by us in the different communications markets in which we operate, including the cellular market. The formation of communications groups in Israel with the regulatory changes already relaxing the structural separation imposed on each of the Bezeq and Hot groups allowed each of the groups to offer a bundle of services. With the competitive focus shifting from individual services to services to  families, our dependence on the formation of an effective landline wholesale market, to allow us to include television and internet infrastructure in our offer and be competitive, has been accentuated. A policy paper in relation to the wholesale market of landline services in Israel,  published by the Minister of Communications in May 2012,  called for the annulment of certain structural limitations currently imposed on the Bezeq and Hot groups (and the consideration of annulling or relaxing others) after an agreement regarding a landline wholesale market is executed between Bezeq or Hot and another operator which has a significant market share, as well as  the replacement of Bezeq's regulated fixed tariffs with maximum tariffs. We are negotiating the terms of such wholesale agreement with Bezeq. Partner has already reached some understandings with Bezeq and in February 2013, Xfone Communications, an ILD operator that does not have a significant market share, announced entering a wholesale agreement with Bezeq. Bezeq currently offers a bundle of services, including cellular services, under certain limitations. The bundle of services currently offered by Hot does not include cellular services (other than a bundle of cellular services with ISP services recently offered by its subsidiaries Hot Mobile and Hot-Net) although the Ministry of Communications has already allowed Hot and Hot Mobile to sell and market each other's services and exchange information in 2011 and was considering to annul the structural limitations between them, regardless of the wholesale market agreement. The annulment of structural limitations will allow Bezeq and Hot to offer bundles of services, including cellular services, without limitation and may allow them to take advantage of their nationwide presence to market and sell attractive offers. Bundle offerings have accelerated and are expected to accelerate price erosion in each of the services included. With each of the groups having an interest not to erode the prices of its core business, but rather that of its competitors, such erosion is especially expected in those services which are not the core services of the Bezeq and Hot groups. 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" for additional details.
 
 
·
continued transfer of subscribers to Unlimited Packages with lower ARPU, as it increases price erosion and reduces revenues and profitability for us as well as encourages significantly increased usage of the services included therein. Increased data traffic on our network requires us to make substantial investments in the upgrade of our networks to sustain the demand. See also "We may be adversely affected by the significant technological and other changes in the cellular communications industry" below.
 
 
·
continued increased competition in the handsets market. Regulatory changes encouraging the entry of additional players to this market, coupled with the prohibition on any linkage between a cellular services transaction and handsets purchase transaction, resulted in increased competition and substantially reduced handset sales for us. Additional prohibition on such linkage, forbidding the offering of airtime rebates or refunds for the handsets, as of
 
 
 
 
January 1, 2013, reduces further our contact points and therefore sale opportunities with our customers as well as reduces their connection to us. This, together with the increased handset purchases elsewhere, may result not only in decreased handset sales, revenues and profitability to us, but may also increase churn and adversely affect our cellular services results of operations. See "Item 4. Information on The Company –B. Business Overview – Competition" for additional details.
 
 
·
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 or other technologies, such as WiFi, more so following the increased usage of smart phones, tablets and laptops. Under an amendment to the Communications Law enacted in December 2010, any limitation or blocking of internet based services or applications is forbidden, including by differentiating pricing.
 
 
·
Pursuant to the Israeli Restrictive Trade Practices Law, 1988, if the Anti Trust Commissionaire 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 are facing substantial organizational and personnel changes
 
In light of the dramatic changes in our market during 2012 (see "-We face intense competition in all aspects of our business" above and "Item 4. Information on the Company - B. Business Overview –Competition", for additional details) which led to a decrease in our net income, operating profit and EBITDA by 35.6%, 30.7% and 19.1%, respectively, in comparison to 2011, we have made substantial changes in order to adjust our group's operations to the changing market conditions and mitigate the adverse effects. The changes implemented included aggressive reduction of head count, reduction and integration of units, adjustment of procedures, reduction of expenses and investments (see "Item 4. Information on the Company – A. History and Development of the Company – 2012: a year of radical adverse changes", for additional details).  Additional substantial organizational and personnel changes are required in order for us to continue our efforts to mitigate the progressing adverse effects of the changing market conditions. Although to date, those measures did not have a negative effect on our operations, such major changes carry risks and may result in loss of the group's and specifically management's focus, loss of knowledge, dissatisfaction of our employees, and an adverse impact on our services and customer service quality, all of which may lead to damage to our reputation, increased churn by our customers and loss of market share, loss of revenues and reduced profitability for us.
 
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 various preferences of our types of subscribers such as individuals, families or businesses. 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, the frequent changes to our licenses and relevant legislation governing our pricing plans and the scope of the processing tasks. Following our merger with Netvision and the offering of bundles of services of both companies, billing our customers involves information systems of both companies and increases the possibility of errors. 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. As of January 1, 2013, each discrepancy from the customer's pricing plan, remedied after the customer complained, shall award the customer with predefined damages in an insignificant amount, but may aggregate to substantial amounts if paid to numerous customers on multiple occasions.
 
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, 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 three years amounts to over 50% 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.
 
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 offering of bundles of services by us and Netvision, following our merger, increased the number of complex technological systems involved in providing service to our customers. 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 substantial amounts of purported damages. For additional details regarding the lawsuits filed against us in that regard see note 29 to our consolidated financial report for 2012 included elsewhere in this annual report.
 

 
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. Such damages could include our inability to provide certain services without disruptions, if at all, our inability to bill for services rendered or loss of data to us and our customers, all of which may expose us to legal claims and liabilities.
 
There are certain restrictions in our licenses relating to the ownership of our shares.
 
Our cellular license restricts ownership of our ordinary shares and who can serve as our directors as follows:
 
 
·
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);
 
 
·
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, with the Ministry of Communications' approval required for the transfer of shares representing 5% or more of our  (or Netvision, as the case may be) outstanding share capital. 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. Transfer of subscribers to Unlimited Packages of services, MVNO hosting services and national roaming on our network, have contributed to the substantially growing demand for data traffic on our network, as well as to voice and text messages.  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. 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 are constantly upgrading our networks 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 capabilities to our subscribers in many areas outside Israel. As of December 31, 2012, 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.  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, and in other roaming agreements  roaming tariffs for our subscribers have decreased. 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 and in January 2013, published a hearing proposing restrictions on roaming services provision. For further details see "We operate in a heavily regulated industry, which can harm our results of operations" above.  If roaming tariffs continue to decrease including 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, market terms and our financial results may affect our possibilities to raise debt.
 
As of December 31, 2012, our total indebtedness was approximately NIS 6,507 million ($1,743 million), with our net debt at approximately NIS 4,557 million ($1,221 million). For additional details see "Item 5. Operating and Financial Review and Prospects.  – B. Liquidity and Capital resources – General". 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, or resulting in less favorable terms and pricing for, additional financing to operate, develop and expand our business or for refinancing 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. Following these procedures, in 2012 we amended our shelf prospectus to include new limitations and covenants, including a covenant not to issue additional debentures if it involves a rating downgrade, certain financial covenants, negative pledge, cross default, limitation on the distribution of dividends, obligation to pay additional interest in case of certain rating downgrade. These new limitations already apply to our series F and G debentures issued in March 2012 and may apply to any additional debt raising by us. For details regarding such limitations and covenants see "Item 5. Operating and Financial Review and Prospects.  – B. Liquidity and Capital resources – Debt Service – Shelf Prospectus". These limitations and covenants limit our freedom to conduct our business, may impose additional costs on us and may limit our ability to raise additional debt.
 
During 2011 and 2012, we suffered a significant decrease in our operating results, following certain regulatory changes, intensified competition and price erosion (For additional details see "Item 4. Information on the Company – B. Business Overview –Competition" and "-Government Regulations - Tariff supervision", "-Mobile Virtual Network Operators" and "-Additional UMTS Operators") whereas our net debt has increased substantially (from approximately NIS 3,334 million as of December 31, 2010 to approximately NIS 4,557 million as of December 31, 2012). For additional details see "Item 5. Operating and Financial Review and Prospects.  – B. Liquidity and Capital resources – Debt Service". In May 2012, the rating of our debentures was downgraded due to increased leverage and competitive pressure. In November 2012, the rating company reaffirmed that rating. This and any further downgrade in our rating, and any adverse change in our financial results, including any increase in our net leverage (defined in our amended shelf prospectus as the ratio of net debt to EBITDA during a period of 12 consecutive months, excluding onetime influences) may adversely affect the terms and price of debt raising, particularly through the issuance of debentures to institutional investors, which, given the limitation on the ability of Israeli banks to lend money to us pursuant to the “Guidelines for Sound Bank Administration” issued by the Israeli Supervisor of Banks (as we are a member of IDB’s group of borrowers), may limit our ability to obtain additional financing to operate, develop and expand our business or to refinance existing debt.
 
See also the Concentration Committee's recommendations under "Risks Relating to Our Ordinary Shares - Pending legislation in Israel affecting corporate conglomerates, if enacted, could adversely affect us" 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 2010, 2011 and 2012, payments in U.S. dollars or linked to the U.S. dollar represented approximately 33%, 39% and 36%, 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 B, C, D and F 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. The 2012 amendment to our shelf prospectus, under which we have raised additional debt in March 2012, contains a covenant not to distribute more than 95% of the profits available for distribution according to the Israeli Companies Law (“Profits”).  Moreover, under the 2012 amendment, if our net leverage (defined as the ratio of net debt to EBITDA during a period of 12 consecutive months, excluding certain one time effects) exceeds 3.5:1, we may not distribute more than 85% of our Profits and if our net leverage exceeds 4.0:1, we may not distribute more than 70% of our Profits. For additional details see "Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Debt Service – Shelf Prospectus". In addition, 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. In 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. In respect of 2012, a dividend was declared for the first quarter only, constituting 75% of our net income, whereas for the second, third and fourth quarters, our board of directors chose not to declare dividends, given the intensified competition and substantial changes in pricing and their adverse effect on our results of operations and in order to
 
 
 
strengthen our balance sheet.  See “Item 8. Financial Information - A. Consolidated Statements and Other Financial Information - Dividend Policy”.
 
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 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. Should an effective landline wholesale market materialize, we may acquire services from Bezeq and Hot in order to provide internet infrastructure and IPTV to our customers at competitive prices, in which case we would be dependent on Bezeq and Hot for such services. 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, which may result in loss of customers by us and our license may be at risk of revocation for failure to satisfy the required service standards.
 
In addition, our handset sales have been dominated in recent years by Apple and Samsung products, representing over half of our handset sales. See "Item 4. Information on the Company - B. Business Overview - Handsets" for additional details. Should any of theses suppliers (Samsung through its official importer to Israel – Suny Communications (1994) Ltd., or Suny, an affiliate of Scailex Corporation Ltd., or Scailex, which is one of Partner's controlling shareholders) refuse to sell handsets to us or condition such sales on unfavorable terms and condition to us or provide our competitors more favorable terms and conditions, or if these suppliers fail to produce successful and desirable products and no equivalent alternatives will then be available, this could have a material adverse effect on our handset sales and results of operations.
 

 
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. IDB included in its financial statements for the second and third quarters of 2012 a note regarding the existence of significant doubts as to its ability to continue as a going concern due to its liquidity condition. IDB and its debentures holders are currently negotiating proposed outlines for strengthening the financial base of IDB through, among other things, a debt restructuring. As a result of IDB's agreements with its debenture holders, certain events or actions in the IDB group would require IDB either to obtain the approval of the trustees of the debenture holders, or in certain circumstances (including material events or actions in us) to provide advance notice to the trustees. IDB Development included in its financial statements for the second and third quarters of 2012 a note calling attention to its financial condition and to certain restrictions and covenants that, among other things, limit its ability to raise capital. IDB Development's debenture holders are currently considering to take measures against IDB Development, including the possibility to propose a debt restructuring without the cooperation and participation of the current controlling shareholders of IDB. These negotiations and other events that relate to IDB and IDB Development may lead to a change of control of the IDB group. We are unable to predict the outcome of such negotiations, measures and events or the effect on us from any debt restructure that may be implemented. As such, IDB's financial condition could have an adverse effect on our debentures rating and our ability to raise additional debt or the terms of any debt offering that we may effect.
 
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 Concentration Committee's recommendations under "Risks Relating to Our Ordinary Shares - Pending legislation in Israel affecting corporate conglomerates, if enacted, could adversely affect us" below, which if adopted and implemented, 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 February 15, 2013, DIC held, directly and indirectly, approximately 41.91% 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.
 
 
 
Accordingly, our minority shareholders and debenture holders are denied the protection intended to be afforded by such corporate governance standards.
 
Risks Related to our wholly owned subsidiary Netvision
 
  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 landline and ISP markets in November 2011 has increased competition as it has eliminated transfer barriers and resulted in increased churn rate and gross recruitment of subscribers and price erosion.
 
A policy paper in relation to the wholesale market of landline services in Israel, published by the Minister of Communications in May 2012, called for the annulment of certain structural limitations currently imposed on the Bezeq and Hot groups (and the consideration of annulling or relaxing others), following the execution of a wholesale agreement with another operator which has a significant market share. We are negotiating the terms of such wholesale agreement with Bezeq. Partner has already reached some understandings with Bezeq and in February 2013, Xfone Communications, an ILD operator, that does not have a significant market share,  announced entering a wholesale agreement with Bezeq. See "Item 4. Information on the Company - Competition".
 
Permitting telecommunications companies to offer bundled services, annulment of 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, specifically by approaching Netvision's customers in the ISP and landline markets which are Bezeq or Hot's customers in the internet infrastructure market. Moreover, it could specifically give a 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, unlike Netvision. Bezeq and Hot offer bundles of services under certain conditions. Annulment of these conditions and the structural separation, would provide Bezeq and Hot with 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 and Bezeq also significantly lowered its internet infrastructure services tariffs to end-users. This has led to a significant decrease of ISP tariffs. 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".
 
The entry of Hot Mobile and Golan into the ILD market in the second half of 2012 and the beginning of 2013, respectively, could also have an adverse effect on Netvision's results of operations, as customers (specifically their cellular customers) may choose their ILD services over Netvision's. For further details see "We face intense competition in all aspects of our business” above.
 
In addition, the Ministry of Communications published in November 2011 a hearing about 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 deployed an underwater cable in December 2011. 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 competitor which is a Bezeq affiliate.
 
Netvision is exposed to risks relating to network infrastructure and information systems and is dependent on services it receives from its external suppliers; Integration of Netvision's information systems may cause us operating difficulties and expenditures.
 
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, and 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. Should a landline wholesale market materialize, Netvision's dependency on Bezeq and Hot would increase, as Netvision would need to acquire additional services from them  for the provision of internet infrastructure, as well as for the provision of IPTV services at competitive prices to its customers. 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.
 
Our merger with Netvision and the offering of bundles of services provided by both companies, increased the number of information systems involved in the billing process of our customers as well as the duplication of other information systems used by the companies, resulting in some cases in cumbersome procedures, inefficient usage of resources and lack of uniformity. The process of integrating Netvision's information systems into our information systems may result in unforeseen operating difficulties and large expenditures and may require significant management attention that would otherwise be available for our ongoing business. Further, the replacement of systems or change of processes may result in substantial malfunctions in our sales and retention activities, errors in billings or other processes, which may lead to loss of revenues, legal claims and regulatory sanctions.
 
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 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 continued sporadic missile launching from the Gaza strip to Israel. thereafter, In November 2012 there was another armed conflict, involving attacks by hundreds of missiles fired from the Gaza Strip against the Israeli population centers throughout the southern half of Israel and up to and including Tel-Aviv. 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 and 2012 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, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons.  Iran is also believed to have a strong influence among extremist groups in areas that neighbor Israel, such as Hamas in Gaza and Hezbollah in Lebanon. This situation may potentially escalate in the future to violent events which may affect Israel and us.
 
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 telecommunications 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 our ISP licenses) 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 41.91% of our outstanding ordinary shares, as of February 15, 2013. 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 approximately 5% of our outstanding shares outside the United States in 2011 and approximately 1.7% of our outstanding shares in February 2013. 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, 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, 2012 we had  3,019,152 shares reserved for issuance upon the exercise of options. In March 2013, our board of directors resolved to grant an additional 75,000 options. See "Item 6. Directors, Senior Management and Employment – E. Share Ownership – 2006 Share Incentive Plan".
 
Pending legislation in Israel affecting corporate conglomerates, if enacted, could adversely affect us.
 
In July 2012, a bill for the promotion of competition and the mitigation of concentration of the Israeli market, sponsored by the Israeli government, passed the first stage of enactment by the Israeli parliament. The bill incorporates most of the recommendations of the public committee for the enhancement of competition and the maintenance of the financial stability of the Israeli economy, or the Concentration Committee's, final recommendations, published in March 2012. The bill includes the
 
 
following main provisions: (1) impose limitations on the holdings by a significant real corporation in a significant financial corporation or the holdings of both kinds of corporation under common control; (2) impose limitations on the control over public corporations through a pyramidal structures by imposing a limitation on the number of layers in such pyramidal structures to three for existing structures and two for new structures; (3) strengthen the corporate governance rules applicable to public companies in Israel, and in particular set additional limitations on transactions in which a controlling shareholder has a personal interest, and strengthen the independence of  boards of directors of public companies held through pyramidal structures; (4) limit the exposure of financial institutions to issuers, groups of borrowers and the largest borrowers and issuers groups; and (5) require the governmental authorities responsible for the allocation of rights in public assets (including in the communications field) in certain cases to consider competitive and control concentration factors. The bill provides for transition periods of up to six years to implement the new requirements. The IDB group is a pyramidal structure having more than three layers of companies and we are a fourth layer company in the pyramidal structure of the IDB group. The enactment of such legislation could have an adverse effect on us.

 
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. To date, twelve MVNO licenses have been awarded, of which three MVNOs commenced operation in December 2011, April and May 2012 and one returned its license to the Ministry of Communications. 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 41.91% 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.
 
Acquisition of Netvision Ltd. During 2011
 

 
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 ($421 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 is and Clal was at that time, a direct subsidiary 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 2017 and 2025, respectively. In addition, Netvision is engaged in other areas such as custom internet applications and data security products. For further details, see Item 4.B - "Business Overview - Netvision".
 
Netvision has several subsidiaries, some are wholly owned, some are controlled, and  in certain other entities it holds minority stakes. 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".
 
2012: a year of  radical adverse changes
 
2012 and more specifically the second half of 2012, was characterized by additional radical changes in market conditions, which, in turn, resulted in radical adverse effects on our results of operations following the negative changes we encountered in 2010-2011 due to regulatory pressures. The entry of additional competitors in mid 2012 offering Unlimited Packages for substantially lower tariffs than market level at that time, has dramatically increased the competitive pressure, leading the market to offer competing Unlimited Packages with a focus on price at the expense of service quality and resulting in substantial price erosion and decreased profitability for us, which led to a decrease in our net income, operating profit and EBITDA by 35.6%, 30.7% and 19.1%, respectively, in comparison to 2011. These trends have continued into 2013 and are expected to continue to further adversely affect our results of operations. See Item 3. Risk Factors - We face intense competition in all aspects of our business" and "We are facing substantial organizational and personnel changes" and "Item 4. Information on the Company - B. Business Overview – Competition", for additional details.
 

 
During 2012, we have continually implemented aggressive efficiency measures in order to mitigate those adverse effects. Our efforts to adjust our group's operations to the changing market conditions included aggressive reduction of head count, reduction and integration of units, adjustment of procedures, reduction of expenses and investments, reduction of our sales and service lineup, including by closing and uniting points of sale and walk in centers and eliminating duplicates, reducing call centers and transferring to more cost effective distribution channels, transferring units to other locations in order save expenses, cutting our investment in advertising, substantially reducing the amount of calling plans offered to our customers and focusing on Unlimited Packages and reducing investments. Those measures led to an annual saving run rate of approximately NIS 550 million (when comparing fourth quarter 2012 expenses with fourth quarter 2011 expenses). We intend to continue to implement substantial organizational and personnel changes in order to continue our efforts to mitigate the progressing adverse effects of the changing market conditions. We cannot guarantee the success of these measures. Although to date, those measures did not have a negative effect on our operations, further cutbacks and changes may have an adverse effect on our service and customer service quality .
 
Principal Capital Expenditures
 
Our accrual capital expenditure in 2010, 2011 and 2012 amounted to NIS 735 million, NIS 520 million and NIS 537 million, respectively. Accrual capital expenditure is defined as investment in fixed assets and intangible assets, such as spectrum licenses, rights of use of communications 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 3.199 million cellular subscribers for the year ended December 31, 2012. 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, 2012, we provided services to approximately 3.199 million subscribers in Israel with an estimated market share of 31.9 %. Our closest competitors have estimated market shares of 29.5% and 28%, respectively. Hot Mobile is estimated to have a market share of 7.6%, Golan is estimated to have a market share of 1.8% and the MVNOs  together, are estimated to have a market share of 1.2%. In the year ended December 31, 2012, we generated revenues of NIS 5,938 million ($1,591  million), EBITDA of NIS 1,753  million ($470 million), and operating income of NIS 985 million ($264 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 increased competition following the reduction of Early Termination Fees. In 2012 our results of operations were much more adversely affected by the intensified competition following the launch of UMTS services by Hot Mobile and Golan in May 2012, leading to accelerated price
 
 
 
erosion as well as increased churn rate.  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, 2012. 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.
 
Following the completion of the acquisition of Netvision in 2011, we expanded the range of our telecommunications services and 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, cloud services and data protection products solutions based on products and services offered by third party vendors. For further details on Netvision's business and operations, see "NETVISION" in this Item 4.B below.
 
We sell our various cellular services on a stand alone basis or bundled with certain other services offered by Netvision and us.
 
The following table presents our number of cellular subscribers and revenues for each of the last five years:
 
   
Year Ended December 31,
 
   
2008
   
2009
   
2010
   
2011
   
2012
 
Cellular subscribers (end of period) (in thousands)(1)
    3,187       3,292       3,394       3,349       3,199  
Revenues (in NIS millions)
    6,417       6,483       6,662       6,506       5,938  
                                         

 

(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 and 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 removed approximately 52,000 subscribers from our subscribers base, which included subscribers using our TDMA network who had not requested a transfer to our other networks following the shutdown of our TDMA network as of December 31, 2011, and subscribers who ceased using our services following a change to our policy which previously 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. These changes affected other key performance indicators. We have not restated prior subscriber data to conform with these changes. In the fourth quarter of 2012, we added a revenue generation criterion of at least NIS 1 of accumulated revenues over the six months period, for M2M (machine to machine) subscribers, which means that any M2M subscriber generating less than NIS 1 of accumulated revenues will not be counted as a subscriber. The addition of the NIS 1 generation criterion resulted in the removal of 138,000 M2M subscribers from our subscriber base in the fourth quarter of 2012. We have not restated prior subscriber data to conform with this change.  This change had an immaterial effect on our MOU and ARPU for 2012.
 
 
The Telecommunications Industry in Israel
 
The following table sets forth selected macro statistics about Israel at and for the year ended December 31, 2012:
 

 
Population (millions, at end of year)
    8.0  
GDP ($ billions) (1)
    241  
GDP per capita ($ 000) (1)
    30.5  
Exports of goods & services ($ billions) (1)
    91  
CPI change
    1.6 %
Long-term local currency sovereign credit rating by S&P
 
A+(Stable)
 
Unemployment rate (average for nine months ending September 2011)
    6.7 %


(1)
2012 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 2011 was approximately NIS 30 billion.  Telecommunications services consist of several segments, which are highly competitive. Of the total telecommunications services revenues in 2011, approximately 56% was comprised of cellular services, approximately 26% was local landline voice and Internet access services, approximately 5% was international voice services, approximately 13% was multichannel television services. These figures have changed substantially in 2012, reflecting a downsizing of the overall revenues in the cellular market, as a result of the increased competition and accelerated price erosion. For additional details, see "Item 4. Information on the Company – B. Business Overview – Competition". Cellular spending in 2012 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. These ownership changes 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 it 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 with respect to business customers as well, in July 2012. 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. We have offered a bundle of services, including cellular services since mid 2012 and Bezeq has offered a bundle of services, including cellular services, since the end of 2012. Further, the Minister of Communications published in May 2012 a policy document about the wholesale market of landline services in Israel, adopting the main recommendations of a public committee appointed by the Ministry of Communications, in which it decided to annul the structural limitations currently imposed on Bezeq and its subsidiaries when an agreement regarding a
 
 
 
wholesale market of landline services is executed between Bezeq or Hot and the other operators, and to replace Bezeq's regulated fixed tariffs with maximum tariffs. If the structural limitations are annulled, they will allow Bezeq and its subsidiaries to offer bundles of services without limitation. The annulment of limitations in regards to cellular services and multichannel television services will be considered nine months after the agreement is executed. 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 has further requested the Ministry of Communications 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 exchange 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). Hot offers a bundle of services excluding cellular services. Bundle offerings have accelerated and 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, 2012, of approximately 127%, 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,
 
   
2008
   
2009
   
2010
   
2011
   
2012
 
Total subscribers (millions)
    9.2       9.5       9.8       9.8       10.1  
Cellular penetration (%)
    124 %     127 %     128 %     128 %     127 %


Source: Reported by Cellcom, Partner, Pelephone and Hot Mobile.
 
There are currently five MNOs in Israel: Cellcom, Partner, Pelephone, Hot Mobile and Golan; and three active MVNOs: Rami Levy Hashikma Communications Marketing Ltd., or Rami Levy, Home Cellular Ltd., or Home Cellular, and Alon Cellular Ltd., or Alon Cellular. We estimate that the distribution of cellular subscribers among these operators as of December 31, 2012 was: Cellcom 31.9%, Partner 29.5%, Pelephone 28%, Hot Mobile 7.6%, Golan 1.8% and the MVNOs 1.2%. Subscriber data is based on public information as of September 30, 2012, other than with respect to  Golan and the MVNOs, which is based on our estimate. However, there is no uniform method of counting subscribers. Hot Mobile and Golan commenced their UMTS operation in May 2012. Rami Levy, Home Cellular and Alon Cellular, all mobile virtual network operators, commenced operations in December 2011,
 
 
 
April 2012 and May 2012, respectively. An additional nine entities received MVNO licenses during 2010, 2011 and 2013 but to date have not commenced operating. The tenth MVNO licensee has returned its license. We do not know if and when the other MVNO licensees will commence operations.
 
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, 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 an affiliate of Suny, the official importer of Samsung cellular phones to Israel. In January 2013, Scailex sold a major part of the controlling stake in Partner to S.B. Israel Telecom Ltd. (indirectly controlled by the media entrepreneur Haim Saban).
 
Pelephone is a wholly-owned subsidiary of Bezeq, the incumbent landline operator and started operations in 1986. The major controlling shareholder of Bezeq following its privatization in 2005 was F.Sab.Ar Holdings Ltd. (of the 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 Communications 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 Communications Group, or Eurocom, controlled by Shaul Alovich (an Israeli businessman) which includes Eurocom Cellular Communications 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 and in May 2012 launched  UMTS cellular services under the name Hot Mobile. In December 2012, Hot was privatized and its shares were delisted from the TASE.
 
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.
 

 
Rami Levy is a subsidiary of a major Israeli discount supermarket chain. Home Cellular is a subsidiary of a leading 'do it yourself' stores chain. Alon Cellular is owned by Alon Holdings which also controls a leading retail and gas station chain.
 
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
2012
Hot Mobile and Golan commence operation of UMTS network
Home Cellular and Alon Cellular, MVNO operators, commence operations

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, 2012 was 127%.  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 127%. The regulatory reduction to a negligible amount and subsequent annulment, of Early Termination Fees 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 and the entry of additional competitors to the cellular market and the intensified competition, the average voice revenue per minute further declined in 2012 as a result of the offering of Unlimited Packages at significantly lower ARPU 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 (72%) compared to other developed countries.

High potential for mobile data.  We believe that there is a potential for growing mobile data revenues 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 2012 is estimated to be approximately 29%, which is higher than 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 and 2012 such as the regulatory reduction of Early Termination Fees to a negligible amount and national roaming which facilitated the entry of additional competitors focused on gaining market share and offering Unlimited Packages at substantially lower prices.
 
Wireline Services
 
Landline Services
 
Bezeq operates approximately 2.3 million lines (at the end of September 2012) 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.
 
For a policy paper published by the Minister of Communications in May 2012, liaising the creation of a wholesale market of landline services in Israel and the annulment of certain structural limitations currently imposed on the Bezeq and Hot groups see "Competition" below.
 

 
We and Netvision (now our wholly owned subsidiary) entered this market in 2006. Partner entered this market in 2007, Smile Telecom entered this market in 2006 and Bezeq International (VOB only) entered this market in 2009, bringing to a total of seven players.
 
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 2012, there were approximately 1.921 million subscribers, and the household penetration rate was approximately 87%. The only providers of infrastructure in the market are Bezeq through DSL technology and Hot through cable. DSL services were launched by Bezeq in 2000 and currently represent a 52% 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 (New Generation Network) 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, or IEC, allowing it to use its fiber optic infrastructure to provide transmission services to other operators. In January 2013, IEC was formally allowed to engage in communications activity by the Ministry of Finance and in February 2013, it received the approval of the Israeli Ministry of Energy and Water. 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 which may not hold any means of control in another communications company, and the IEC will own the minority interest in this new company. The IEC is expected to begin the deployment in the end of 2013.
 
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 smaller 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. All three major providers are also suppliers of international voice services. Partner entered this market in December 2008.
 
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 December 2011, 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. These additional underwater cables have increased the effective bandwidth of international data connectivity and reduced costs for ISPs. However, proposed regulation published for public comments by the Ministry of Communications 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 eight? players in this market. The three major players are: Bezeq International, Netvision (our wholly owned subsidiary) and Smile Telecom. The other players are: Xfone Communications, Telzar International Communications Services Ltd. and Rami Levy, Golan and Hot (through wholly owned subsidiaries or affiliates). The market share of the three major players is similar, with each having approximately 31-33% 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. 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 5 channels to 16 channels in two years.
 
See "Item 4. Information on the Company – B. Business Overview – Government Regulations – Competition" for the Minister of Communications' policy document regarding its decision to annul structural limitations in the communications market and create a wholesale market for landline services.
 
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:
 
·
Offering our customers comprehensive mobile and wireline solutions. We  offer our customers a wide range of mobile and wireline telecommunications services and comprehensive packages of telecommunications services We offer a one stop shop for the group's portfolio of services, in both customer service and sales and offer a comprehensive communication packages, comprising of services of both companies, as we did with the "Cellcom Total" and "Cellcom Total for businesses" pricing plans. In addition, we intend to continue 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.
 
·
Growing and developing of our Mobile Data. We view Mobile Data as a significant growth engine for our business. Accordingly, during 2012, we upgraded our Carrier Ethernet network in order to enable the provision of data services at higher speed and capacity and enhanced and expanded 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. Also, we put an emphasis on marketing data products which enable data usage and services, including smartphones, tablets and laptops and were the only cellular operator in Israel to market iPad products. 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, which is one of the factors in subscriber selection of, and loyalty to, a cellular operator. In 2013 we plan to continue our efforts in expanding data services usage and revenues, focusing on increasing sales of data-enabled devices such as tablets, modems, laptops and smartphones.

·
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 development of wholesale landline services as decided by the Ministry of Communications in May 2012, if and when becoming available and efficient, 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 where our market share is currently non-material. For details of the wholesale market 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.

·
Offer new services that will complete our offering as a telecommunications group and are synergetic to our core businesses. We continue to develop new complementary businesses which leverage our varied capacities and are synergetic to our core business. We have identified the NFC (Near Field Communication) based cellular credit card services and the television services over the internet (known as Over the Top TV, or OTT TV) as potential synergetic and complementary services to our core business. The cellular credit card services are developed by us in cooperation with major third parties and offer an innovative alternative to the traditional use of credit cards. We have been developing an OTT TV solution, which would allow us, when it is completed and should we decide to launch it, to offer as an attractive alternative to the traditional cable and satellite television services currently offered in Israel by Hot and Yes (a subsidiary of Bezeq).

·
Optimization of cost structure. We continue our efforts to control costs and improve our efficiency. In 2012 we utilized 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, in order to optimize associated costs and improve the service to our business customers by providing them a one stop shop service. We have also taken other aggressive efficiency measures, through adjustments to the existing head count, a reduction in overhead expenses and improvement of work processes. We plan to
 
 
 
 
aggressively continue cost cutting initiatives in 2013, including substantial organizational and personnel changes. .

Cellular Services and Products
 
As of December 31, 2012, we provide cellular communications services to approximately 3.199 million subscribers, including basic cellular telephony services, text and multimedia messaging, data and other value-added services as well as handset sales. Not all services are supported by all handsets or by all of our networks.
 
We offer our cellular subscribers a variety of usage and segment pricing plans and in 2012 we began offering packages combining cellular services with other communications services our group offers, such as the "Cellcom Total" pricing plan, offering a package of unlimited voice and SMS usage, cellular data, ISP, landline and ILD services for home and a similar pricing plan tailored for small and medium businesses, offering a package of unlimited voice and SMS usage, cellular data, extended repair services, IP switchboard, ISP, landline and ILD services for the office. 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 annulment of Early Termination Fees in the cellular market, our new pricing plans do not include a commitment to purchase our services for a predefined period, other than in large business agreements. The marketing of Unlimited Packages for a fixed low monthly sum resulted in the transfer of many pre-paid subscribers into such post-paid Unlimited Packages.
 
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 and conference calling.
 
 
·
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. As of December 31, 2012, 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).  In addition, as of December 31, 2012, we had 3G roaming arrangements with 277 of these operators, in 113 countries, enabling our 3G roamers to use data services abroad.
 
Value-added and data services
 
 
·
In addition to basic cellular telephony services, we offer many value-added services. 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.
 
SMS and MMS services.  These messaging services enable subscribers to send and receive text, photos, multimedia and animation messages.
 
Access to third party application providers.  We provide our subscribers with access to certain services offered by third party application providers.  These services include vehicle-fleet management, remote management of various controllers, location based services, such as a navigator and locating various establishments in their vicinity and information and content services, some also provided by us, using various platform and
 
including news headlines, sports results, and traffic and weather reports.
 
Data services. We offer our subscribers data services  they can use with handsets (in supporting models), cellular modems, laptops and tablets. We provide our customers with a variety of "internet surfing packages" for that purpose.

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.
 
Handsets
 
We sell a wide selection of handsets (which for purposes of this report may include other types of cellular end-user equipment, such as tablets) 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, Nokia, Samsung, Sony, HTC, ZTE, Alcatel and RIM. The vast majority of our handset sales in 2012 have been by Apple and Samsung. 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 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 40 locations, including through our wholly owned dealer. See also "Customer Care" below.
 
We also sell modems, tablets and laptops to promote our data services.
 
In November 2001, we entered an agreement with Suny for the provision of maintenance and repair services which will be provided to us in relation to Samsung products that we shall purchase from Suny. Other conditions, including price of products, are agreed between us and Suny from time to time.
 
In 2009, we entered an agreement with Apple Sales International, for the purchase and distribution of iPhone handsets in Israel. Under the terms of the agreement, we committed to purchase a minimum quantity of handsets over a period of three years. Such commitment was satisfied in 2011.
 

 
In March 2012, we entered into an agreement with Apple Sales International for the purchase and distribution of  iPad products in Israel. Under the terms of the agreement we have committed to purchase a minimum quantity of iPad products over a period of three years, which is expected to represent a significant portion of our expected total tablets purchase amount over that period. The total amount of the iPad products' purchases will depend on their purchase price at the time of purchase.
 
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".
 
An effective 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 competitive terms. The 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 the wireline wholesale market 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. See "Item 3. Risk Factors – Risks related to our wholly owned subsidiary Netvision – Changes in regulatory environment could adversely affect Netvision's business" for risks relating to our landline operations and our ability to grow in that market.
 
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 42 Mbps on the downlink path and up to 4 Mbps on the uplink path. In 2013 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.  Most of our voice traffic uses the GSM/GPRS/EDGE network and most of the data traffic uses 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, although given the adverse effects on results of operations in 2012, which we expect will continue to adversely affect our results of operations, such expenditures are likely to be lower than in previous years. As of December 31, 2012, we had invested an aggregate sum of NIS 9.091 billion ($2.435 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 have enhanced and expanded 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. As of the end of 2012 we had deployed UMTS/HSPA 850 MHz sites through substantially all of
 
 
 
the populated areas of Israel and have substantially completed our UMTS/HSPA 850 MHz deployment.
 
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 partial duplicate back up centers in Kiryat Gat and Ramle, located approximately 80 and 40 kilometers, respectively, south of Netanya and a disaster recovery plan, or DRP, for all 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.
 
We have a DRP for all of our engineering systems, aimed at increasing our network's survivability in case of damage to any of its elements. The DRP also provides our network with additional advantages including increased capacity and advanced qualities. In 2013 we intend to continue to improve our recovery periods.
 
Our primary objective going forward is to continually improve and upgrade our high speed UMTS/HSPA+ network, mainly by enhancing its capacity and increasing its speed, in order to allow for the fast growth of data usage on our network. 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 and enhance our readiness to 4G technology. Actual implementation of 4G technology would be dependent on the allocation of frequencies. See also "Item 3. Risk Factors – We may be adversely affected by significant technological and other changes in the cellular communications industry".
 
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. See also "Item 3. Risk Factors – We may be adversely affected by significant technological and other changes in the cellular communications industry".
 
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 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, 2012, we had deployed approximately 3,000 microwave links to both our cell sites and subscribers.
 
In 2012 we upgraded our transmission network to support a downlink path speed up to 42 Mbps and intend to continue to upgrade it up to 84 Mbps in selected urban areas in 2013. We further upgraded the capabilities of our IP management system, to support data  surfing growth and speed.
 
 
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 and until August 2016 we have an option to terminate the agreement subject to the delivery of a prior written notice and payment of certain amounts decreasing over time. 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 Intec 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 Aman, 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 try to make the purchase of our services as easy and as accessible as possible, while making our sales lineup more cost efficient. Our efforts to adjust our sales operation with the changing market conditions includes closing and uniting points of sale and elimination of duplicates and transfer to more cost effective channels such as the reduction of door to door sales and increase of telephonic sales. We offer pricing plans, value-added services, handsets, accessories and related services through a broad network of direct and indirect sales personnel. We design pricing plans and promotional campaigns aimed at attracting new subscribers and enhancing our ability to retain our existing subscribers. We offer our subscribers rebates and other benefits for handset purchases. Before January, 1, 2013, these rebates were mainly in cellular services.  We pay our independent dealers commissions on sales, while our direct, employee sales personnel receive base salaries plus performance-based incentives. 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, after closing 5 points of sale and service in 2012 and the beginning of 2013, 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 may close additional walk-in centers in 2013.
 
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 120 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 and door-to-door 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. The door-to-door sales team target the door-to-door subscribers based on market surveys that we regularly conduct and database analysis. In 2012 we reduced our door-to-door efforts and switched to more efficient sales channels such as the telephonic sales.
 
Account managers.  Our direct sales force for our business customers maintains regular contact with our medium and large accounts, focusing on sales of cellular and wireline services, customer retention and tailor-made solutions for the specific needs
 
 
of such customers. We are in the process of restructuring our service to small and medium business customers in further reliance on telephone account managers. Sales to larger business customers or governmental and local authorities sometimes involve participation in the customer's tender process.
 
Internet Sales – We offer our customers the ability to purchase our products and services through our internet site and our smartphone application and invest efforts in directing our customers towards self service channels.
 
Marketing
 
Our marketing strategy emphasizes our market leader position, our value for money to  families and small businesses and the offering of a comprehensive solution to their communication needs in such plans as our successful "Cellcom Total" pricing plan, combining a package of unlimited voice and SMS usage, cellular data  , ISP, landline and ILD services for families and "Cellcom Total for Businesses" combining a package of unlimited voice and SMS usage, cellular data , extended repair services, IP switchboard, ISP, landline and ILD services for the office for small and medium businesses. We aim to provide our customers a comprehensive quality experience through the various means of communications that they use, including their mobile handset, tablet and  laptop. Alongside our focus on Unlimited Packages for a fixed sum, we have substantially reduced the number of calling plans available to our customers, thus reducing the back office operation.
 
 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; perceived quality of the network; 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 and attract new subscribers.
 
We leverage our extensive interactions with our customers 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, including in promotional campaigns. We also use "one to one" promotional campaigns such as advertisements in our subscribers' monthly bill and in incoming IVR. Our marketing and branding campaign has been very successful and highly acclaimed among the Israeli public. The campaign promoting "Cellcom Total" pricing plan, focusing on the comprehensive solution proposed for the family, was ranked four times "the most liked commercial of the week" in a survey conducted weekly by "Globes", a leading business newspaper in Israel. In addition, the Netvision campaign, launched at the beginning of 2013, focusing on Netvision's customer service and customer satisfaction, was also ranked "the most liked commercial of the week" by the same survey. We believe that the success and public response that the campaigns generated, is the result of the relevancy of their messages to our customers, indicating the success of our focus and differentiation from our competitors.
 
Cellcom was ranked by Globes as the leading and strongest brand of Israel’s communications market in 2012 for the second year in a row. 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. 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, 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, with a specific focus on bundles of services. We invest large resources in the quality of 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 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 even though we have the highest number of subscribers in the Israeli cellular market.
 
According to Ministry of Communications report for 2010 and 2011, published in March 2012, we have the lowest justified complaint rate among cellular operators, in both 2010 and 2011.
 
In our efforts to adjust our costs to the new market conditions we have closed or unified walk in centers in neighboring locations, reduced call centers and changed the location of others, operating them in a more cost effective fashion, while placing greater focus on self- service channels. In order to 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. 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 2012 we witnessed a decrease in calls to our calls centers. During peak hours our call centers have the capability to respond to 600 customer
 
 
calls simultaneously. We are making efforts to reduce the number of calls to our call centers by offering simple price plans and promoting our self service channels.
 
Walk-in centers.  As of December 31, 2012, we independently operated approximately 30 service and sales centers after closing 5 points of sale and service in 2012 and the beginning of 2013, with approximately 120 additional sale and service points operated by our dealers (including our wholly owned dealer - Dynamica), covering almost all the populated areas of Israel. We may close additional walk-in centers in 2013. 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 handset sales,  accessories sales (by our wholly owned dealer Dynamica), 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.  The repair services are conducted in a central lab.
 
Self-services.  We provide our subscribers and potential subscribers with various self-service channels, such as interactive voice response, or IVR, web-based services, automatic and live chat and mobile phone application where they can receive general and specific information, including pricing plans, account balance, information regarding our various services and products and trouble shooting and handset-operation.  We invest efforts in directing our customers to use self-service channels.
 
Our business sales force and back office personnel also provide customer care to our business customers. We are in the process of restructuring our service to small and medium business customers to further rely on telephone account managers. 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, which intensified further in 2012, and we expect this to continue in the future, due to the highly penetrated state of our market and new competition, aided by regulatory changes. We currently compete for market and revenue share with seven other cellular communications operators: four MNOs ( Partner, Pelephone, Hot Mobile and Golan) and three MVNOs (Rami Levy , Home Cellular and Alon Cellular). For details of changes of ownership in the Israeli communications 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 31.9% as of December 31, 2012. Estimated market shares at such time of Partner, Pelephone, Hot Mobile and  Golan were approximately 29.5%, 28%, 7.6% and 1.8%, respectively and the MVNOs' market share is estimated to be 1.2%.
 
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 intensified following the compulsory reduction of cellular Early Termination Fees to a negligible amount in February 2011 (and their subsequent annulment), which eliminated the transfer barrier between operators and the formation of communications groups. The intensified competition led to the offering of packages at lower average prices per minute, resulting in accelerated price erosion, a materially increased churn rate, and increased subscriber acquisition and retention costs due to a materially increased rate of gross recruitment of subscribers. In May 2012, the competition further drastically intensified following the entry of additional cellular operators to the market, specifically the launch of two new UMTS operations by Hot Mobile and Golan, without having to first invest in building their own network and using national roaming on Pelephone's and our networks (respectively) and aiming to win market share in the private sector as quickly as possible by introducing significantly lower tariffs than market level at that time (as their respective commitments to pay the license fee which amounts to approximately NIS 705 and 360 million, respectively, would be reduced to an immaterial amount, and the bank guarantees of their commitments would be returned to them, if they respectively gain a 7% market share in the private sector (taking into consideration subscribers, revenues and minutes of use market shares) within 5 years. This has caused a substantial decrease of prices made by all competitors, including us. As a result, and in an attempt to increase customers acquisition rate and gain market share, Golan and Hot Mobile have offered even lower tariffs, including free of charge Unlimited Packages for a limited period of time (up to four months), which were matched by other operators in the fourth quarter of 2012 and the beginning of 2013. This has led to a material increase in the churn rate, price erosion (due in part to substantial transfer of prepaid customers to postpaid pricing plans) and a material decrease in revenues and profitability for us.
 
Competition may intensify further as a result of the occurrence of any of the events described under “Item 3. Key Information – D. Risk Factors – Risks related to our Business – We face intense competition in all aspects of our business”.
 
 
In the handsets market, we are competing with numerous vendors, chain stores and importers' stores. Recent regulatory decisions, alleviating the regulatory requirements on the import to and the sale of handsets in Israel, coupled with regulatory decisions preventing cellular operators from making any linkage between handsets sale and cellular services, led to the entry of additional competitors into the market, to significantly increased competition and decreased sales for us. See "Item 4. Information on The Company - Government Regulations – Tariff Supervision" for additional details.
 
We believe that full and comprehensive mobile and wireline solutions would benefit our competitive standing, and are therefore focusing extensive marketing and sales efforts on bundles of cellular and wireline services. 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 have changed 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 was facilitated by technological changes allowing high speed internet surfing and supporting handsets and has changed 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. In addition, the regulatory changes which requires us to block by default content purchasing by our subscribers and allow it only upon a customer's request, resulted in a substantial decrease in our revenues from content in 2012.
 
In the wireline communications market, in May 2012, the Israeli Minister of Communications published a policy document adopting the main recommendations of a public committee previously appointed by the Ministry 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. The policy includes mainly the following: (1) An effective wholesale telecommunications access markets in Israel will be created, as Bezeq and Hot will allow other operators that do not own an infrastructure, to use their infrastructure in order to provide services to end users. (2) The structural separation between an owner of wireline infrastructure and its international landline operator and internet service provider affiliates shall be annulled within nine months from the date of execution of an agreement between such owner of wireline infrastructure and another operator which has a significant market share and shall be replaced by an accounting separation, unless the Minister of Communications finds that such annulment may considerably harm the competition or the public. The Minister of Communications shall consider providing leniencies in relation to or annulment of the structural separation between an owner of wireline infrastructure and its cellular operator affiliate according to the pace of development of a wholesale market and the state of competition in the market. In case an effective wholesale market does not develop within twenty four months from the date of the policy document, the Ministry of Communications shall act to impose a structural separation in the owners of the wireline infrastructure between the infrastructure and the services provided through this infrastructure. (3) The Minister of Communications shall annul the structural separation in relation to
 
 
television broadcasting services if there is a reasonable possibility to provide a basic package of television services through the internet by providers without a national landline infrastructure. The Minister of Communications shall consider imposing a requirement to provide television broadcasting services for the same price within a package of telecommunications services and separately. (4) Change of the supervision on Bezeq retail tariffs to setting maximum tariffs rather than the current setting of fixed tariffs within six months from the date of execution of an agreement between Bezeq and another operator. (5) The wholesale market's tariffs and terms of agreement shall be agreed through negotiations between the owners of the wireline infrastructure (Bezeq and Hot) and the other operators. An infrastructure owner that reaches an agreement with such other operator shall be obligated to offer the same terms, without discrimination, to all operators, including its affiliates. The Ministry of Communications shall intervene in the negotiations or in the terms of the agreement between the parties in case an agreement has not been reached within six months from the date of the policy document or in case the agreement between the parties includes terms that may harm the competition or the public or other operator's affairs. In addition, the Ministry of Communications may intervene in a retail tariff that was set by the owner of wireline infrastructure or its affiliate that may harm the competition, through changing of the wholesale tariff. We are negotiating with Bezeq the terms of such wholesale agreement. Partner has already reached some understandings with Bezeq and in February 2013, Xfone Communications, an ILD operator that does not have a significant market share, announced entering a wholesale agreement with Bezeq.
 
In February 2013, the Ministry of Communications published a hearing regarding interconnect tariffs payable to land line operators in which the Ministry of Communications recommends its reduction by approximately 70% (to NIS 0.0104). The Ministry of Communications noted that the cost model created for that purpose will be used to examine wholesale services costs as well.
 
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 January 2013, the IEC was formally allowed to engage in communication activity by the Ministry of Finance and in February 2013, received the approvals of the Israeli Ministry of Energy and Water to do so. 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, which may not hold any means of control in another communications company, and IEC will own the minority stake in this new company. 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.  The IEC is expected to begin deployment of its network at the end of 2013.
 
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, which were liaised together by the Ministry of communications' policy, may have a material adverse effect on our competitive capabilities and results of operation. For further details see below in this Item 4. B. under the "NETVISION". See also "Item 3. Risk Factors – Risks related to our wholly owned subsidiary Netvision – Changes in regulatory environment could adversely affect Netvision's business" for risks relating to our landline operations and our ability to grow in that market.
 
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 communications group and offering comprehensive bundles of mobile and wireline solutions, such as the very successful "Cellcom Total" price plan.
 
·  
investing significant resources in customer service and retention, as well as supporting information technology systems;
 
·  
introducing innovative value-added services and data products;
 
·  
taking aggressive efficiency measures through adjustments to the existing head count, a reduction in overhead expenses and improvement of work processes, in order to reduce costs and improve our agility;
 
·  
investing in our network technology to ensure our ability to offer quality services and advanced services, both cellular and wireline services;
 
·  
offering attractive pricing plans to subscribers, including cross sale and up sale of our and Netvision's services; and
 
·  
identifying new opportunities to maximize our advantages as a cellular operator,  such as the offering of NFC based cellular credit card services which we intend to offer in 2013 and maximizing our advantages as a communications group, such as by providing television services over the internet, a solution we have been developing and may decide to launch.
 
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 90 domain names and approximately 65 trademarks, the most important of which are "Netvision" and "013 Netvision".  We are also the proprietor of a few registered patents.
 
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 and our 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 , 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; to obtain 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; to maintain 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. In March 2010 a purported class action was filed against us in that regard and subsequently dismissed. 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 August 2012, the Communications Law was amended so as 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. The maximum amount per violation that may be imposed is approximately NIS 1.6 million plus 0.225% of our annual revenue for the
 
 
preceding year. The Ministry of Communications published criteria to be used for determining the sum of the imposed sanctions. Those include the impact on the competition, the duration of the violation, the number of subscribers affected, the benefit to the operator from the violation and prior violations. This amendment 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 communications 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 communications 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 communications services and high-speed transmission services, which is effective until December 2017.  Following the grant of a special general license for the provision of landline telephone communications 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.
 
Services in Judea and Samaria
 
The Israeli Civil Administration in Judea and Samaria granted us non-exclusive licenses for the provision of cellular and landline services to the Israeli-populated areas in Judea and Samaria.  Those licenses are effective until December 31, 2013. We expect we will be able to renew this license without undue burden. The provisions of the cellular and landline licenses described above, including as to its extension, generally apply to those licenses, 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. We expect we will be able to renew this license without undue burden. The provisions regarding the transfer of our shares which are included in the special license for the provision of data and transmission services described above, generally apply to this license.
 
Possible unified license
 
In February 2013, the Ministry of Communications announced its intention to replace the current special general license for the provision of landline communications services, the general license for the provision of international telecommunication services and the MVNO license, with a unified license, which will allow its holder to provide any of those services as well as ISP services (currently provided under an internet service provider license) and installation and maintenance of telecommunication equipment at a customer's or the licensee's premises (currently provided under a 'network end point' 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 Israeli 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 Israeli 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, the current maximum interconnect tariffs are NIS 0.0643 per minute for the completion of a call on another cellular network and NIS 0.0015 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 and 2012 which is expected to continue. For details on the effects of the reduction see Item 5. Operating and Financial Review and Prospects.  – A. Operating Results – Overview –General.
 
In February 2013, the Ministry of Communications published a hearing regarding  interconnect tariffs payable to land line operators in which the Ministry of Communications recommends its reduction by approximately 70% (to NIS 0.0104).
 
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 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 March 2012, the Communications Law was amended so as to prohibit cellular operators to make any linkage between a cellular services transaction and a handset purchase transaction, including by way of offering airtime rebates or refunds for handsets, as of January 1, 2013. This may result in further decreased sales of handsets by us and increased churn.
 
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. In January 2013, the Ministry of Communications published a hearing proposing restrictions on roaming services provision. For further details see "We operate in a heavily regulated industry, which can harm our results of operations" above. 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 were 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 applied 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 March 2012 the Communication Law was amended so as to completely annul Early Termination Fees in relation to new cellular customers with less than a certain number of phone lines (applying retroactively as of November 2011). 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 Communications Law was amended to allow national roaming for new operators and Hot Mobile. For additional details see "Additional UMTS operators" below. Following the amendment, if a new operator or Hot Mobile 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, 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, Hot Mobile 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, may result in material adverse effect on our results of operations. For additional details see "Mobile Virtual Network Operators" below. In 2011 five MVNOs have entered into hosting agreements, one of which (Home Cellular) has entered into an agreement with us. To date, three MVNOs commenced operations and one of them is hosted by us.
 
In December 2010, the Communications Law was amended to prevent any limitation on the usage of any internet service or application, including though differentiating pricing, (network neutrality).
 
In August 2012, the Consumer Protection Law was amended, effective January 1, 2013,  in a manner that obligates us to pay our customers predetermined damages for each discrepancy from the customer's pricing plan, remedied after the customer complained. The damages are in an insignificant amount, but may aggregate to substantial amounts if paid to numerous customers on multiple occasions.
 
In January 2012, the Ministry of Communications published a hearing proposing restrictions on the provision of roaming services, including default blockage of the data roaming service to be opened only upon the customer's request and automatic blockage of all roaming services to be reopened again upon such request each time the customer reaches a certain usage threshold. The hearing further proposed applying certain notification procedures. The adoption of the proposed changes may have an adverse effect on 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 of enactment, 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 note 29 to our consolidated financial report for 2012 included elsewhere in this annual report for details regarding a purported class actions filed against us in connection with cell sites construction and operation (a second purported class action was dismissed without prejudice).
 
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, 2012, we were subject to 10 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  of these sites, we may not be able to obtain 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 communications 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 such recommendations, 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 Hot Mobile and Golan to construct radio access devices in reliance on the exemption, under certain limitations, until July 31, 2012 which was thereafter extended several times until September 30, 2013. 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, 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, due to building and planning issues we have received partial environmental permits for single cell sites.
 
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, also 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.
 
In May 2012, the positions of the Ministries of Communications, Health and Environmental Protection in relation to the various aspects of the provision of 4G services in Israel were published, 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 Ministries held the position that 4G services would involve some increase in the level of non-ionizing radiation the public will be exposed to and that in order to minimize such increase 4G deployment should be based on current cell sites, additional outdoor and indoor small cell sites and, whenever possible, use wireline infrastructure so that data traffic shall be carried mostly through wirelines and not cellular infrastructure. The adoption of the inter-ministry team's recommendations regarding cell site sharing is a precondition for the deployment of 4G infrastructure. Under such guidelines, the public's exposure to non-ionizing radiation level should not increase substantially. The Ministry of Health further opined that in light of the preventive precaution principle and, in order to reduce as much as possible the alleged health risks, 4G fields of usage and specific usage should be predefined and additional usage, where a landline alternative is available, should be conditioned on further discussion. The Ministry of Environmental Protection stated that full deployment of 4G infrastructure, under the guidelines set by the ministries shall decrease the level of exposure from handsets and create a more balanced level of exposure from cell sites, lower than current level in some areas where cellular
 
 
infrastructure is sufficient and somewhat higher in areas where cellular infrastructure is sufficient and in any case much lower than the maximum exposure levels recommended by the international health organization and required under the environmental permits for cell sites in Israel. See "Construction and operating permits from the commissioner of environmental radiation" below for additional details.
 
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 349 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, 2012, 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 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 communications 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.
 
See note 29 to our consolidated financial reports for 2012 included elsewhere in this annual report for details regarding purported class actions filed against us, in respect of non-ionizing radiation.
 
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 handset 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  handset 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, handsets must comply with all relevant standards, including specific absorption rate, or SAR, level standards. We obtained type-approval from the Ministry of Communications for each handset model we started to import prior to November 2012. As of November 2012, we inform the MOC of new models that we start to import and receive the MOC's approval. SAR levels are a measurement of non-ionizing radiation that is emitted by a hand-held cellular handset at its specific rate of absorption by living tissue. SAR tests are performed by the manufacturers on prototypes of each model of handset, not for each and every item. We include the information published by the manufacturer regarding SAR levels as 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 item and throughout  its lifecycle, including in the case of equipment repair. We inform our customers that there may be changes in the SAR levels in the event of equipment repair.
 
 
We are required to provide a warranty for certain end user equipment purchased from us, for certain malfunctions during the first year, and are required to provide repair services for two years and in certain cases, for three years. We are also required to annul equipment sale in certain circumstances, at the request of the customer. See note 29 to our consolidated financial reports for 2012 included elsewhere in this annual report 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 2012 we were required to pay the State of Israel royalties equal to 1.3% of our revenues generated from telecommunications services, less payments transferred to other license holders for interconnect fees or roaming services and losses from bad debt. No royalties are due for sale of handsets. The rate of these royalties has decreased in recent years, from 4.5% in 2002, to 1% in 2010. 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 MVNOs have gained 5% market share. This change was not applied 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.  Following the petition and the launch of UMTS services, using national roaming, by Golan and Hot Mobile in May 2012, the Communications Regulations were amended on August 12, 2012 so that for cellular operators, the 2012 average annual rate would be 1.3% and as of January 1, 2013, would be 0%; and for landline and long distance services (for which the Company paid 1% for 2012), as of January 1, 2013, would be 0%.
 
 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 May 2012, we were rewarded the sum of NIS 5.3 million following a mediation agreement approved by the court in a lawsuit we filed against the Ministry of Communications for the return of the frequencies fees we paid for the TDD spectrum.
 
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 u