SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
-------------------------------------------
COMMISSION FILE NUMBER 0-21218
-----------------
GILAT SATELLITE NETWORKS LTD.
-----------------------------
(Exact name of Registrant as specified in its charter)
ISRAEL
------
(Jurisdiction of incorporation or organization)
GILAT HOUSE, 21 YEGIA KAPAYIM STREET, KIRYAT ARYE, PETAH TIKVA, 49130 ISRAEL
----------------------------------------------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
----
(Title of each class)
Securities registered or to be registered pursuant of Section 12(g) of the Act:
ORDINARY SHARES, PAR VALUE NIS 0.01 PER SHARE
---------------------------------------------
(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 at the close of the period covered by the annual report:
AS OF DECEMBER 31, 2002, THE REGISTRANT HAD 23,855,922 ORDINARY SHARES, NIS 0.01
PAR VALUE PER SHARE, OUTSTANDING.
AS OF MARCH 31, 2002, THE REGISTRANT HAD 259,757,196 ORDINARY SHARES, NIS 0.01
PAR VALUE PER SHARE, OUTSTANDING.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ---------
Indicate by check mark which financial statement item the Registrant elected to
follow:
Item 17 Item 18 X
--------- ---------
- 2 -
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Identity of Directors, Senior Management and Advisers.................. Not applicable
Item 2 Offer Statistics and Expected Timetable................................ Not applicable
Item 3 Key Information........................................................ 2
Selected Consolidated Financial Data ............................ 2
Risk Factors .................................................... 4
Item 4 Information on the Company............................................. 16
Item 5 Operating and Financial Review and Prospects........................... 44
Item 6 Directors, Senior Management and Employees............................. 65
Item 7 Major Shareholders and Related Party Transactions...................... 76
Item 8 Financial Information.................................................. 77
Item 9 The Offer and Listing.................................................. 80
Item 10 Additional Information................................................. 81
Item 11 Quantitative and Qualitative Disclosures about Market Risk............. 94
Item 12 Description of Securities Other than Equity Securities................. Not applicable
PART II
Item 13 Defaults, Dividends, Arrearages and Delinquencies...................... Not applicable
Item 14 Material Modifications to the Rights of Security Holders and
Use of Proceeds.................................................. Not applicable
Item 15 Controls and Procedures................................................ -
Item 16 [Reserved].............................................................
PART III
Item 17 Financial Statements................................................... Not applicable
Item 18 Financial Statements................................................... 97
Item 19 Exhibits............................................................... 97
Unless the context otherwise requires, references in this annual report
on Form 20-F to "Gilat," "we," and "our" refer to Gilat Satellite Networks Ltd.
and its subsidiaries.
PRELIMINARY NOTE
THIS FORM 20-F IS DATED APRIL 15, 2003 AND REFLECTS THE CONDITION OF THE COMPANY
PRIOR TO THE CONVENING OF THE ANNUAL GENERAL MEETING OF SHAREHOLDERS SCHEDULED
TO TAKE PLACE ON SUCH DATE. WE EXPECT OUR SHAREHOLDERS TO TAKE CERTAIN ACTION AT
THE ANNUAL GENERAL MEETING, AS FURTHER DESCRIBED IN THIS FORM 20-F. HOWEVER,
THERE CAN BE NO ASSURANCE THAT OUR SHAREHOLDERS WILL TAKE SUCH EXPECTED ACTION.
ANY STATEMENTS MADE IN THIS FORM 20-F WITH RESPECT TO AN EXPECTED NEW BOARD OF
DIRECTORS AND NEW MANAGEMENT REFLECT THE UNDERSTANDINGS AND EXPECTATIONS OF THE
COMPANY'S CURRENT MANAGEMENT PRIOR TO THE CONVENING OF THE ANNUAL GENERAL
MEETING.
- i -
PART I
ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not Applicable.
ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3: KEY INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data set forth below for
the years ended December 31, 2000, 2001 and 2002, and the selected consolidated
balance sheet data as of December 31, 2001 and 2002 are derived from our audited
consolidated financial statements that are included elsewhere in this Report.
These financial statements have been prepared in accordance with U.S. generally
accepted accounting principles.
The selected consolidated statement of operations data set forth below for
the years ended December 31,1998, 1999 and the selected consolidated balance
sheet data as of December 31, 1998, 1999 and 2000 are derived from our audited
consolidated financial statements that are not included in this Report
The selected consolidated financial data set forth below should be read
in conjunction with Item 5: "Operating and Financial Review and Prospects" and
the Consolidated Financial Statements and notes thereto included in Item 18 in
this annual report on Form 20-F for the year ended December 31, 2002.
YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002
------------ ------------ ------------- ------------- ------------
Revenues:
Products $ 147,767 $ 238,564 $ 398,299 $ 279,297 $ 130,011
Services 7,568 99,309 106,263 106,732 78,744
------------ ------------ ------------- ------------- ------------
155,335 337,873 504,562 386,029 208,755
------------ ------------ ------------- ------------- ------------
Cost of revenues:
Products 82,198 146,084 265,259 194,374 107,527
Services 4,405 74,055 79,182 94,665 61,501
Write-off of inventories 9,495 4,634 - 59,790 20,107
------------ ------------ ------------- ------------- ------------
96,098 224,773 344,441 348,829 189,135
------------ ------------ ------------- ------------- ------------
Gross profit 59,237 113,100 160,121 37,200 19,620
------------ ------------ ------------- ------------- ------------
Research and development costs, net 12,780 24,791 31,272 35,634 25,066
Selling, marketing, general and
administrative expenses 27,237 65,991 82,444 121,486 86,227
Provision and write-off for doubtful
accounts and capital lease receivables 1,840 2,423 3,654 134,614 34,714
Impairment of goodwill 50,580 13,049
Impairment of tangible and intangible - - - 42,982 50,666
assets
Acquired in-process research and 80,000 - - - -
development
Restructuring charges 11,989 (356) - 30,284 -
------------ ------------ ------------- ------------- ------------
Operating income (loss) (74,609) 20,251 42,751 (378,380) (190,102)
Financial income (expenses), net (1,247) 3,267 (1,289) (21,334) (21,324)
Write-off of investments associated with
restructuring (2,700) (896) - - -
Write-off of investments - - (9,350) (28,007) (51,379)
Other income, net 162 - - - -
------------ ------------ ------------- ------------- ------------
Income (loss) before taxes on income (78,394) 22,622 32,112 (427,721) (262,805)
Taxes on income 286 2,475 2,003 974 929
------------ ------------ ------------- ------------- ------------
Income (loss) after taxes on income (78,680) 20,147 30,109 (428,695) (263,734)
Equity in losses of affiliated companies (703) (536) (950) (252) (29,334)
2
Acquired in-process research and
development of an affiliated company - - (10,000) - -
Minority interest in losses of a
subsidiaries - - 276 5,889 3,517
------------ ------------ ------------- ------------- ------------
Income (loss) from continuing
operations, before cumulative effect of
a change in an accounting principle $ (79,383) $ 19,611 $ 19,435 $ (423,058) $ (289,551)
Net loss from cumulative effect of a
change in an accounting principle - - - - (56,716)
Loss from discontinued operations - - - (6,054) (1,937)
------------ ------------ ------------- ------------- ------------
Net Income (Loss) $ (79,383) $ 19,611 $ 19,435 (429,112) (348,204)
============ ============= ============= ============= ============
Net Earnings (loss) per share from
continued operation:
Basic $ (7.18) $ 0.96 $ 0.86 $ (18.11) $ (12.28)
============ ============ ============= ============= ============
Diluted $ (7.18) $ 0.92 $ 0.81 $ (18.11) $ (12.28)
============ ============ ============= ============= ============
Basic and diluted loss per share from
discontinued operation - - - $ (0.26) $ (0.08)
============ ============ ============= ============= ============
Basic and diluted net loss per share
from cumulative effect of a change in an
accounting principle - - - - $ (2.41)
============ ============ ============= ============= ============
Net earnings (loss) per share:
Basic $ (7.18) $ 0.96 $ 0.86 $ (18.37) $ (14.77)
============ ============ ============= ============= ============
Diluted $ (7.18) $ 0.92 $ 0.81 $ (18.37) $ (14.77)
============ ============ ============= ============= ============
Weighted average number of shares used in
computing net earnings (loss) per share
(in thousands):
Basic 11,059 20,447 22,516 23,361 23,581
============ ============ ============= ============= ============
Diluted 11,059 21,429 24,099 23,361 23,581
============ ============ ============= ============= ============
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
BALANCE SHEET DATA: 1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(IN THOUSANDS)
Working capital....................... $89,227 $265,307 $542,895 249,572 127,527
Total assets.......................... 412,674 681,953 1,252,332 858,623 474,214
Short-term bank credit and current
maturities of long-term debt....... 23,158 6,986 14,819 29,888 10,023
Convertible subordinated notes........ 75,000 75,000 350,000 350,000 358,648
Other long-term Liabilities........... 3,892 13,057 138,944 161,970 172,745
Shareholders' equity (deficiency)..... 222,620 499,823 608,655 177,320 (172,915)
-------------------------
3
RISK FACTORS
RISKS RELATED TO NEW MANAGEMENT, NEW SHAREHOLDERS AND OUR CREDITORS
WE EXPECT TO HAVE A NEW BOARD OF DIRECTORS AND NEW SENIOR MANAGEMENT.
Our shareholders will be asked to elect a new board of directors at the
Annual General Meeting of Shareholders scheduled for April 15, 2003. On the same
date, the resignation of our President and our Chief Executive Officer, Amiram
Levinberg and Yoel Gat, will become effective, and we expect our new board of
directors to appoint a new President and Chief Executive Officer. The expected
appointees and the majority of the nominees for our board of directors,
including the expected chairman of the board of directors, are new to Gilat and
have not served in the past as directors, officers or employees of the Company.
We cannot assure you that the time that will be required by these new appointees
to successfully enter their offices will not have an adverse effect on our
business.
Messrs. Gat and Levinberg have been with us since our founding in 1987
and have played a key role in the development of our proprietary VSAT
technology. Our business, financial condition and operating results could be
materially adversely affected by their resignation.
OUR NEW SENIOR MANAGEMENT AND BOARD OF DIRECTORS MIGHT MAKE CHANGES TO
OUR BUSINESS PLAN AND BUSINESS STRATEGY.
We expect our new senior management and board of directors to conduct a
thorough review of our company and our business, following their entry into
office. Such review is likely to include different factors that may affect our
economic viability and profitability, such as our business model, our corporate
structure, our cost structure, the inter-company relationships and organization
of our subsidiaries, and other business considerations relevant to our business
plan and business strategy. The results of the expected review of our company
and our business may cause us to shift our focus within our field of business,
or to altogether depart from existing activities and embark in new ones. The
results of that review might also affect the continued implementation of the
business recovery plan initiated by us in the past year.
THE MAJORITY OF OUR SHAREHOLDERS ALSO HOLD OUR CONVERTIBLE NOTES, AND
THEIR INTERESTS AS NOTE HOLDERS MAY CONFLICT WITH THE INTERESTS OF OUR
SHAREHOLDERS THAT DO NOT HOLD OUR CONVERTIBLE NOTES.
The majority of our shareholders hold our 4.00% Convertible Notes due
2012 (the "Notes"). As a result, their interests as shareholders may be affected
by their interests as holders of Notes and may conflict at times with the
interests of our shareholders who do not hold Notes.
TWO OF OUR PRINCIPAL SHAREHOLDERS ARE ALSO MAJOR CREDITORS OF THE
COMPANY.
Two of our principal shareholders, Bank Hapoalim B.M. and Israel
Discount Bank Ltd., have extended loans or credit facilities to the Company that
are outstanding in significant amounts, and are also holders of Notes. Each of
these principal shareholders also has a representative on our nominated board of
directors expected to be elected on April 15, 2003, and is expected to have a
right (as any of our shareholders meeting the shareholding threshold mentioned
below is expected to have) to appoint at every annual general meeting of our
shareholders one director to our board of directors, as long as its holdings of
our ordinary shares does not fall below that certain threshold set forth in the
proposed amendment to our articles of association which is expected to be
adopted by our shareholders on April 15, 2003. The interests of these two
principal shareholders as major creditors of the Company may conflict at times
with the interests of our other shareholders, whether in their capacity as
shareholders or as holders of Notes.
ONE OF OUR PRINCIPAL SHAREHOLDERS IS A MAJOR SERVICE PROVIDER TO AND A
CREDITOR OF GILAT.
One of our principal shareholders, SES Americom Inc. ("SES Americom"),
is a major provider of satellite transponder capacity to Gilat. In addition, SES
Americom is a creditor of Gilat, and Gilat has guaranteed the
4
payment of outstanding amounts when due to SES Americom and its affiliates. SES
Americom is also expected to have a right (as any of our shareholders meeting
the shareholding threshold mentioned below is expected to have) to appoint at
every annual general meeting of our shareholders one director to our board of
directors, as long as its holdings of our ordinary shares does not fall below
that certain threshold set forth in the proposed amendment to our articles of
association which is expected to be adopted by our shareholders on April 15,
2003. The interests of SES Americom as a major service provider to and a
creditor of Gilat may conflict at times with the interests of our other
shareholders.
THE NOTES ARE CONVERTIBLE INTO OUR ORDINARY SHARES AT THE ELECTION OF
THEIR HOLDERS AT ANY TIME FROM MARCH 14, 2004. BEGINNING JANUARY 1, 2005, WE
WILL HAVE AN OPTION TO MANDATORILY CONVERT THE NOTES UPON THE FULFILLMENT OF
CERTAIN CONDITIONS.
The holders of our Notes may convert them into our ordinary shares at a
certain prescribed conversion price, at any time after March 14, 2004 and before
October 1, 2012. In addition, we will have an option to require the conversion
right of the Notes to be exercised mandatorily after January 1, 2005 upon the
fulfillment of certain conditions relating to, among others, the price and daily
trading volume of our ordinary shares. If the Notes will be converted into our
ordinary shares, the holdings of our shareholders will be diluted and the price
per ordinary share could decline as a result of the issuance of a significant
number of shares.
OUR SUCCESS DEPENDS ON THE CONTINUED EMPLOYMENT OF KEY MANAGEMENT AND
TECHNICAL PERSONNEL. IF WE ARE UNABLE TO RETAIN OUR KEY PERSONNEL, OUR BUSINESS
COULD BE MATERIALLY ADVERSELY AFFECTED.
We believe that our success depends on the continued employment of the following
senior management team:
EMPLOYMENT
NAME POSITION AGREEMENT
---- -------- ---------
Erez Antebi Chief Operating Officer Year-to-year
Yoav Leibovitch Vice President, Finance and Year-to-year
Administration and Chief
Financial Officer
Both Messrs. Antebi and Leibovitch joined us in 1991 and have both
played a key role in our business development for the past twelve years. Given
the recent resignation of Messrs. Gat and Levinberg, any additional changes in
key management, or if any of Messrs. Antebi, Leibovitch or any of our other key
personnel is unable or unwilling to continue in his present position, could
materially adversely affect our business, financial condition and operating
results.
We face competition for personnel, particularly for employees with
technical expertise. Our business, financial condition and operating results
could be materially adversely affected if we cannot hire and retain suitable
personnel.
WE ARE DEPENDENT UPON BANK LOANS AND MAY BE SIGNIFICANTLY HARMED IF OUR
BANK LENDERS DECLARE THE LOANS DUE AND PAYABLE.
Pursuant to the terms of our loan agreements with our bank lenders, if
and when an event of default has occurred, our bank lenders may declare the
outstanding loans due and payable and proceed to foreclose on any security
interest granted to them by us. There is no assurance that we will be able to
meet our obligations and covenants, including the financial covenants requiring
us to maintain at all times a ratio of shareholders' equity to total assets of
no less than 15% and a minimum level of cash and cash equivalents of
$30,000,000. Any such failure to meet our obligations and covenants will
constitute an event of default, which will entitle the bank lenders to declare
the loans due and payable. By letter dated April 14, 2003, Bank Hapoalim has
informed us that notwithstanding Gilat's breach of these obligations, Bank
Hapoalim has agreed to wave its rights with regard to these breaches until
January 1, 2004.
RISKS RELATING TO OUR BUSINESS
OUR BUSINESS PLAN RELIES UPON CERTAIN ASSUMPTIONS THAT CANNOT BE
GUARANTEED.
5
Our current business plan contains basic assumptions and risks that
include, among others, a continued demand for our product in the
telecommunications market and the supply and sale of products to our
subsidiaries. Our business plan relies on the sale of products through Spacenet,
our wholly-owned subsidiary in the United States, and other subsidiaries such as
rStar Corporation, our majority owned subsidiary that provides services in Latin
America. Some of our affiliated companies may need additional financing in the
coming year and we cannot guarantee that, given current economic and market
conditions, this financing will be raised.
IN OCTOBER 2002, WE COMMENCED AN ARRANGEMENT TO RESTRUCTURE OUR DEBT,
WHICH WAS CONCLUDED ON MARCH 6, 2003. OUR SUCCESS IN THE MARKET WILL DEPEND
HEAVILY ON OUR ABILITY TO MAINTAIN AND EXPLAIN OUR FINANCIAL POSITION TO OUR
CUSTOMERS AND OTHERS IN THE INDUSTRY.
In October 2002, we commenced the Arrangement to restructure our debt,
which was successfully completed on March 6, 2003. Prior to and while the
Arrangement was under negotiation, our ability to sell our products as well as
our reputation in the market were adversely affected and as such, we lost some
large customers. While we have successfully completed this restructuring
process, our continued success and ability to maintain a presence in our
industry will depend heavily on our ability to ensure and convince the
marketplace, including our customers and suppliers, of our improved financial
position. There is no guarantee that even after having completed the
Arrangement, our customers, present and future, will be confident in our
financial stability going forward.
ECONOMIC CONDITIONS IN THE UNITED STATES AND GLOBALLY, AFFECTING THE
TELECOMMUNICATIONS INDUSTRY, AS WELL AS OTHER TRENDS AND FACTORS AFFECTING THE
TELECOMMUNICATIONS INDUSTRY, ARE BEYOND OUR CONTROL AND MAY RESULT IN REDUCED
DEMAND AND PRICING PRESSURE ON OUR PRODUCTS.
There are trends and factors affecting the telecommunications industry
which are beyond our control and may affect our operations. These trends and
factors include:
o adverse changes in the public and private equity and debt
markets and our ability, as well as the ability of our
customers and suppliers, to obtain financing or to fund
working capital and capital expenditures;
o adverse changes in the credit ratings of our customers and
suppliers;
o adverse changes in the market conditions in our industry and
the specific markets for our products;
o access to, and the actual size and timing of, capital
expenditures by our customers;
o inventory practices, including the timing of product and
service deployment, of our customers;
o the amount of network capacity and the network capacity
utilization rates of our customers, and the amount of sharing
and/or acquisition of new and/or existing network capacity by
our customers;
o the overall trend toward industry consolidation and
rationalization among our customers, competitors, and
suppliers;
o conditions in the broader market for communications products,
including data networking products and computerized
information access equipment and services;
o governmental regulation or intervention affecting
communications or data networking; and
o the effects of war and acts of terrorism, such as disruptions
in general global economic activity, changes in logistics and
security arrangements, and reduced customer demand for our
products and services.
Economic conditions affecting the telecommunications industry, which
affect market conditions in the telecommunications and networking industry, in
the United States and globally, affect our business. Reduced capital spending
and/or negative economic conditions in the North America, Europe, Asia, Latin
America and/or other areas of the world could result in reduced demand for or
pricing pressure on our products.
6
BECAUSE WE DEPEND ON BEING AWARDED LARGE-SCALE CONTRACTS IN COMPETITIVE
BIDDING PROCESSES, LOSING A RELATIVELY SMALL NUMBER OF BIDS COULD HAVE A
SIGNIFICANT ADVERSE IMPACT ON OUR OPERATING RESULTS.
A significant portion of our sales revenue is derived from our being
selected as the supplier of networks based on VSATs, under large-scale contracts
that we are awarded from time to time in a competitive bidding process. These
large-scale contracts typically involve the installation of between 2,000 and
10,000 VSATs. The number of major bids for these large-scale contracts for
VSAT-based networks in any given year is limited and the competition is intense.
Losing a relatively small number of bids each year could have a significant
adverse impact on our operating results.
Specifically, in November 2002, we were awarded two big projects by the
Colombian government, including the installation and operation of 500
telecenters to provide Internet connectivity and telephony services in cities
and towns throughout Colombia and a second 3,000-site fixed rural satellite
telephony network. The total value of the contracts is approximately $65
million. Any early unilateral termination by the Colombian government could have
a significant adverse impact on our operating results.
MANY OF OUR LARGE-SCALE CONTRACTS ARE WITH GOVERNMENTS IN LATIN
AMERICAN COUNTRIES; ANY INSTABILITY IN THE EXCHANGE RATES OR IN THE POLITICAL OR
ECONOMIC SITUATION OR OTHERWISE, COULD HAVE A SIGNIFICANT ADVERSE IMPACT ON OUR
BUSINESS.
In recent years, a significant portion of our revenues has been from
large-scale contracts, including those in Peru, Colombia, China and Tibet and
most recently, in Brazil. Agreements with the governments in these countries
typically include unilateral early termination clauses and other risks such as
the imposition of new government regulations and taxation that could pose
additional financial burdens on us. In addition, the foreign exchange risks in
these countries are often significant due to fluctuations in local currencies
relative to the U.S. dollar. Any termination of business in any of the
aforementioned countries could have a significant adverse impact on our
business.
FAILURE TO MANAGE THE CHANGE OF OUR OPERATIONS COULD HARM OUR BUSINESS
AND STRAIN OUR MANAGERIAL, OPERATION AND FINANCIAL RESOURCES.
We have recently changed our business model and strategy. Specifically,
we consolidated certain areas of our business operations, including program
management and customer care, back to our Israel headquarters. Our employees,
outsourcing arrangements, systems, procedures and controls may be inadequate to
support our future operations in this configuration. We may therefore experience
difficulties meeting a high demand for services in the future or encounter
problems in dealing with the demands of customers from Israel. In order to meet
this demand, we will need to hire, train and retain the appropriate personnel,
as well as the third-party service providers we depend on for customer service,
to manage our operations. We will also need to adapt our financial and
management controls, billing and information systems, reporting systems and
operating systems. Our failure to manage growth and expansion effectively, or
the failure by one of our service providers to adequately perform its services,
could harm our ability to retain or grow our customer base that in turn would
harm our business, financial condition and results of operations.
In addition, our senior management and board of directors are expected
to change significantly as of April 15, 2003. We cannot guarantee that the
current business model and strategy will not be changed again and, if it is,
what the outcome on our business, financial condition, and operating results
will be.
IF WE ARE UNABLE TO DEVELOP, INTRODUCE AND MARKET NEW PRODUCT
APPLICATIONS AND SERVICES ON A COST EFFECTIVE AND TIMELY BASIS, OUR BUSINESS
COULD BE ADVERSELY AFFECTED.
The network communications market, to which our services and products
are targeted, is characterized by rapid technological changes, new product
announcements and evolving industry standards. If we fail to stay abreast of
significant technological changes, our existing products and technology could be
rendered obsolete. Historically, we have enhanced the applications of our
existing products to meet the technological changes and industry standards. For
example, our initial product, the OneWay VSAT, which we introduced in 1989, was
used primarily to facilitate one-way transmission of information. In 1992, we
began marketing our TwoWay VSAT that enabled two-way communication. In 1999, we
began marketing our SkyBlaster product that uses advanced technology to provide
two-
7
way high speed Internet access and video broadcasting via satellite. To remain
competitive in the network communications market, we must continue to be able to
anticipate changes in technology and industry standards and to develop and
introduce new products and services, as well as enhancements to our existing
products and services. If we are unable to respond to technological advances on
a cost-effective and timely basis, or if our new products or applications are
not accepted by the market, then our business, financial condition and operating
results could be adversely affected.
IF WE ARE NOT ABLE TO FILL OUR BACKLOG OF ORDERS, OUR BUSINESS WILL BE
ADVERSELY AFFECTED.
At present, we have a substantial backlog of orders, consisting of
network service contracts, generally for three to five years, and of new orders
for products and services. As of December 31, 2002, our backlog for equipment
sales and for services under service contracts for our VSAT products was $250
million. If we are unable to satisfy the entire backlog of orders, we will not
be able to fully recognize the revenues expected from this backlog and we could
lose the contracts from which these backlog of orders arise, either of which
could have a material adverse effect on our business. In addition, an inability
to supply equipment and services could lead to our default on contracts and the
subsequent exercise of performance guarantees by customers.
IF WE LOSE EXISTING CONTRACTS AND ORDERS FOR OUR PRODUCTS ARE NOT
RENEWED, OUR ABILITY TO GENERATE REVENUES WILL BE HARMED.
Our existing contracts could be terminated due to any of the following
reasons:
o dissatisfaction of our customers with the services we provide or
our inability to timely provide or install additional products or
requested new applications;
o customers' default on payments due;
o unilateral termination clauses imposed in certain government
contracts
o customer's lack of confidence in our financial condition.; or
o the loss of existing contracts or a decrease in the number of
renewals of orders or of new large orders could have a material
adverse effect on our business, financial condition and operating
results.
WE ARE DEPENDENT UPON A LIMITED NUMBER OF SUPPLIERS FOR KEY COMPONENTS
TO BUILD OUR VSATS, AND WE MAY BE SIGNIFICANTLY HARMED IF THESE SUPPLIERS FAIL
TO MEET OUR PRODUCTION REQUIREMENTS ON A TIMELY BASIS.
Several of the components required to build our VSATs are manufactured
by a limited number of suppliers. In the past, we have not experienced any
difficulties with our suppliers. However, we cannot assure you of the continuous
availability of key components or our ability to forecast our component
requirements sufficiently in advance.
WE ARE DEPENDENT UPON A LIMITED NUMBER OF SUPPLIERS FOR KEY COMPONENTS
TO BUILD OUR VSATS, AND MAY BE SIGNIFICANTLY HARMED IF WE ARE UNABLE TO OBTAIN
THE HARDWARE NECESSARY FOR OUR VSATS ON FAVORABLE TERMS.
As indicated above, several of the components we require to build our
VSATs are manufactured by a limited number of suppliers. Our research and
development and operations groups are continuously working with our vendors and
subcontractors to obtain components for our products on favorable terms in order
to reduce the overall price of our products. If we are unable to obtain the
necessary volumes of components at desired favorable terms or prices, we may be
unable to produce our products at desired favorable terms or prices. As a
result, sales of our products may be lower than expected, which could have a
material adverse effect on our business, financial condition and operating
results.
The terms on which we are able to obtain components for our products
are also affected by our relationship with our suppliers. In connection with the
general slowdown in the telecommunications market, we canceled orders for
components, or postponed delivery dates for components. Three of our suppliers
have initiated legal action against us as a result of our actions, and we may be
subject to additional legal actions by other suppliers. Two of these actions
have been settled. While we do not anticipate that the outcome of any of these
legal actions will have a direct material effect on our business income, they
will likely have an adverse impact on our reputation and future
8
relationship with these suppliers, which could affect the terms on which we may
be able to obtain the necessary components for our products.
WE OPERATE IN THE HIGHLY COMPETITIVE NETWORK COMMUNICATIONS INDUSTRY.
WE MAY BE UNSUCCESSFUL IN COMPETING EFFECTIVELY AGAINST MANY OF OUR COMPETITORS
WHO HAVE SUBSTANTIALLY GREATER FINANCIAL RESOURCES AND EXPERIENCE.
We operate in a highly competitive industry of network communications,
both in the sales of our products and our services. As a result of the rapid
technological changes that characterize our industry, we face intense worldwide
competition to capitalize on new opportunities, to introduce new products and to
obtain proprietary technologies that are perceived by the market as being
superior to those of our competitors. Some of our competitors have substantially
greater financial resources, providing them with greater research and
development and marketing capabilities. These competitors are also more
experienced in obtaining regulatory approvals for their products and services
and in marketing them. Our relative position in the network communications
industry may place us at a disadvantage in responding to our competitors'
pricing strategies, technological advances and other initiatives.
Our principal competitor in the supply of VSAT networks is Hughes
Network Systems, Inc. Hughes Network Systems obtains the majority of its
satellite capacity on the satellite system operated by PanAmSat. An additional
competitor to our entire product line is ViaSat, Inc. There are other
manufacturers of products that compete with one or more of our products such as
STM Wireless Inc., which competes with our DialAway VSAT, and our Faraway VSAT
system, and Nera Telecommunications Ltd. and EMS Technologies, Inc. which
compete with our Skystar 360E line of products.
In addition, there is currently a developing trend for product
standardization of satellite communications, known as DVB-RCS (Digital Video
Broadcasting, Return Channel Satellite). While at present there are only a small
number of such units installed throughout the world, it is possible that this
trend could become a standard for the satellite communication industry, and pose
a serious threat to the continued acceptance of our products in the market.
Another trend for product standardization is known as DOCSIS (Data Over
Cable Service Interface Specification) for satellite communications. SurfBeam by
ViaSat is a potential DOCSIS product, under development by ViaSat, Inc.
scheduled to be launched in 2003. If deployed, this standardization could pose a
threat to the acceptance of our products in the market.
If either of the above trends were to become a standard for our
industry, we would need to adapt our products accordingly.
We also compete with various mobile satellite communications companies
such as Asia Cellular Satellite and Thuraya Satellite Communications Company and
companies that offer communication network systems based on other non-satellite
technologies such as terrestrial lines (including cable, DSL, fixed wireless,
ISDN lines and fiber optics), frame relay, radio and microwave transmissions.
These technologies can often be cheaper than VSAT technology while still
providing a sufficient variety of the features required by customers.
Competitors of this type include major established carriers such as AT&T, MCI
WorldCom, Sprint, British Telecom, Deutsche Telekom, France Telecom, a global
consortium of postal, telephone and telegraph organizations ("PTTs") and others.
OUR ACTIONS TO PROTECT OUR PROPRIETARY VSAT TECHNOLOGY MAY BE
INSUFFICIENT TO PREVENT OTHERS FROM DEVELOPING PRODUCTS SIMILAR TO OUR PRODUCTS.
Our business is based on our proprietary VSAT technology and related
products and services. We establish and protect proprietary rights and
technology used in our products by the use of patents, trade secrets, copyrights
and trademarks. We also utilize non-disclosure and intellectual property
assignment agreements. Because of the rapid technological changes and innovation
that characterize the network communications industry, our success will depend
in large part on our ability to protect and defend our intellectual property
rights. Our actions to protect our proprietary rights in our VSAT technology and
related products may be insufficient to prevent others from developing products
similar to our products. In addition, the laws of many foreign countries do not
protect our intellectual property rights to the same extent as the laws of the
United States. If we are unable to protect our intellectual property, our
ability to operate our business and generate revenues as expected may be harmed.
9
WE DEPEND ON A SINGLE FACILITY IN ISRAEL AND ARE SUSCEPTIBLE TO ANY
EVENT THAT WOULD ADVERSELY AFFECT ITS CONDITION.
Most of our manufacturing capacity, our principal offices and principal
research and development facilities are concentrated in a single location in
Israel.
Fire, natural disaster or any other cause of material disruption in our
operation in this location could have a material adverse effect on our business,
financial condition and operating results. As discussed above, to remain
competitive in the network communications industry, we must respond quickly to
technological developments. Damage to our facility in Israel could cause serious
delays in the development of new products and services and, therefore, could
adversely affect our business. In addition, the particular risks relating to our
location in Israel are described below.
OUR INTERNATIONAL SALES EXPOSE US TO CHANGES IN FOREIGN REGULATIONS AND
TARIFFS, POLITICAL INSTABILITY AND OTHER RISKS INHERENT TO INTERNATIONAL
BUSINESS, ANY OF WHICH COULD ADVERSELY AFFECT OUR OPERATIONS.
We sell and distribute our products and provide our services
internationally, particularly in the United States, Asia, Africa, Europe and
Latin America. A component of our strategy is to continue to expand into new
international markets. Our operations can be limited or disrupted by various
factors known to affect international trade. These factors include the
following:
o imposition of governmental controls, regulations and taxation
which might include a government's decision to raise import
tariffs or license fees in countries in which we do business;
o government regulations that may prevent us from choosing our
business partners or restrict our activities. For example, a
particular Latin American country may decide that high-speed data
networks used to provide access to the Internet should be made
available generally to Internet service providers and may require
us to provide our wholesale service to any Internet service
providers that request it, including entities that compete with
us. If we become subject to any additional obligations such as
these, we would be forced to comply with potentially costly
requirements and limitations on our business activities. This
could result in a substantial reduction in our revenue;
o political instability in countries in which we do or desire to do
business. For example, economic instability in Indonesia has led
to a decrease in the value of the Indonesian Rupiah. If such
decrease continues, this could adversely affect the ability of
the Indonesian market to finance VSAT projects. We also face
similar risks from potential or current political and economic
instability in countries such as Russia, Angola, Kenya and
Argentina;
o trade restrictions and changes in tariffs which could lead to an
increase in costs associated with doing business in foreign
countries;
o difficulties in staffing and managing foreign operations that
might mandate employing staff in the United States and Israel to
manage foreign operations. This change could have an adverse
effect on the profitability of certain projects;
o longer payment cycles and difficulties in collecting accounts
receivable;
o seasonal reductions in business activities;
o foreign exchange risks due to fluctuations in local currencies
relative to the U.S. dollar; and
o relevant zoning ordinances that may restrict the installation of
satellite antennas that might also reduce market demand for our
service. Additionally, authorities may increase regulation
regarding the potential radiation hazard posed by transmitting
earth station satellite antennas' emissions of radio frequency
energy that may negatively impact our business plan and revenues.
Any decline in commercial business in any country can have an adverse
effect on our business as these trends often lead to a decline in technology
purchases or upgrades by private companies. We expect that in difficult economic
periods, countries in which we do business will find it more difficult to raise
financing from investors for the further development of the telecommunications
industry. Any such changes, could adversely affect our business in these and
other countries.
WE MAY FACE DIFFICULTIES IN OBTAINING REGULATORY APPROVALS FOR OUR
TELECOMMUNICATION SERVICES, WHICH COULD ADVERSELY AFFECT OUR OPERATIONS.
10
Our telecommunication services require licenses and approvals by the
Federal Communications Commission, or FCC, in the United States, and by
regulatory bodies in other countries. In the United States, the operation of
satellite earth station facilities and VSAT systems such as ours are prohibited
except under licenses issued by the FCC. We must also obtain approval of the
regulatory authority in each country in which we propose to provide network
services or operate VSATs.
The approval process can often take a substantial amount of time and
require substantial resources. For instance, Spacenet Services License Sub,
Inc., our indirect wholly owned subsidiary, obtained authorization from the FCC
to provide two-way data communications services on a specific frequency band six
months after Spacenet Services License Sub filed the required regulatory
application. Moreover, the license for Spacenet Services License Sub required
approximately four months of technical and legal preparation to complete the
application.
In addition, any approvals that are granted may be subject to
conditions that may restrict our activities or otherwise adversely affect our
operations. Also, after obtaining the required approvals, the regulating
agencies may, at any time, impose additional requirements on our operations. We
cannot assure you that we will be able to comply with any new requirements or
conditions imposed by such regulating agencies on a timely or economic basis.
OUR VARIED SALES CYCLES COULD HARM OUR RESULTS OF OPERATIONS IF
FORECASTED SALES ARE DELAYED OR DO NOT OCCUR.
The length of time between the date of initial contact with a potential
customer or sponsor and the execution of a contract with the potential customer
or sponsor may vary significantly and may depend on the nature of the
arrangement. During any given sales cycle, we may expend substantial funds and
management resources and not obtain significant revenue, resulting in harm to
our operating results.
OUR OPERATING RESULTS MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER
AND THESE QUARTERLY VARIATIONS IN OPERATING RESULTS, AS WELL AS OTHER FACTORS,
MAY CONTRIBUTE TO THE VOLATILITY OF THE MARKET PRICE OF OUR ORDINARY SHARES.
Our operating results may vary significantly from quarter to quarter.
The causes of fluctuations include, among other things:
o the timing, size and composition of orders from customers;
o our timing of introducing new products and product enhancements
and the level of their market acceptance;
o the mix of products and services we offer; and
o the changes in the competitive environment in which we operate.
The quarterly variation of our operating results, may, in turn, create
volatility in the market price for our ordinary shares. Other factors that may
contribute to wide fluctuations in our market price, many of which are beyond
our control, include:
o announcements of technological innovations;
o customer orders or new products or contracts;
o competitors' positions in the market;
o changes in financial estimates by securities analysts;
o conditions and trends in the VSAT and other technology
industries;
o our earnings releases and the earnings releases of our
competitors; and
o the general state of the securities markets (with particular
emphasis on the technology and Israeli sectors thereof).
In addition to the volatility of the market price of our ordinary
shares, the stock market in general and the market for technology companies in
particular have been highly volatile. Investors may not be able to resell their
shares following periods of volatility.
11
WE MAY AT TIMES BE SUBJECT TO CLAIMS BY THIRD PARTIES ALLEGING THAT WE
ARE INFRINGING THEIR INTELLECTUAL PROPERTY RIGHTS. IT MAY ALSO BE NECESSARY FOR
US TO COMMENCE LITIGATION TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. ANY
INTELLECTUAL PROPERTY LITIGATION MAY CONTINUE FOR AN EXTENDED PERIOD AND MAY
MATERIALLY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING
RESULTS.
There are numerous patents, both pending and issued, in the network
communications industry. We may unknowingly infringe a patent. We may from time
to time be notified of claims that we are infringing on the patents, copyrights
or other intellectual property rights owned by third parties. While we do not
believe we are currently infringing any intellectual property rights of third
parties, we cannot assure you that we will not, in the future, be subject to
such claims.
In addition, it may be necessary to commence litigation to protect our
intellectual property rights and trade secrets, to determine the validity of and
scope of the proprietary rights of others or to defend against third-party
claims of invalidity. Any such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our business,
financial condition and operating results.
POTENTIAL PRODUCT LIABILITY CLAIMS RELATING TO OUR PRODUCTS COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We may be subject to product liability claims relating to the products
we sell. Potential product liability claims could include those for exposure to
electromagnetic radiation from the antennas we provide. Our agreements with our
business customers generally contain provisions designed to limit our exposure
to potential product liability claims. We also maintain a product liability
insurance policy. However, our insurance may not cover all relevant claims or
may not provide sufficient coverage. To date, we have not experienced any
material product liability claims. Our business, financial condition and
operating results could be materially adversely affected if costs resulting from
future claims are not covered by our insurance or exceed our coverage.
GILAT IS INVOLVED IN LITIGATION ALLEGING VIOLATIONS OF THE FEDERAL
SECURITIES LAWS THAT MAY HAVE AN ADVERSE EFFECT ON ITS BUSINESS.
A number of securities class action lawsuits were announced against
Gilat and certain of its officers and directors. The litigation includes actions
filed in the United States District Court for the Eastern District of New York
and in the United States District Court for the Eastern District of Virginia as
well as a request to file a class action lawsuit in the Tel Aviv, Israel,
District Court. These complaints were brought on behalf of purchasers of Gilat's
securities between May 16, 2000 and October 2, 2001 inclusive, and allege
violations of the federal securities laws and claim that we issued material
misrepresentations to the market. The actions in the U.S. have been consolidated
into one lawsuit in the District Court of Eastern District of New York and is
proceeding. Pursuant to a motion brought by Gilat with the Israeli Court, the
action brought in Israel has been stayed pending the outcome of the class action
proceedings in the United States. Gilat believes the allegations against it and
its officers and directors are without merit and intends to contest them
vigorously. However, these legal proceedings are in the preliminary stages and
Gilat cannot predict their outcome. The litigation process is inherently
uncertain. If Gilat is not successful in defending these legal proceedings, it
could incur substantial monetary judgments or penalties in excess of available
insurance coverage or result in damage to our reputation, and whether or not
Gilat is successful, the proceedings could result in substantial costs and may
occupy a significant amount of time and attention of Gilat's senior management.
RISKS REGARDING OUR ORDINARY SHARES AND CAPITAL STRUCTURE
OUR ORDINARY SHARES MAY BE DELISTED FROM NASDAQ. IF THEY ARE DELISTED THE
ABILITY TO SELL SHARES MAY BE LIMITED AND THE VALUE OF THE ORDINARY SHARES COULD
DECLINE SIGNIFICANTLY.
Our ordinary shares are currently traded on the Nasdaq National Market.
On September 3, 2002, we received a deficiency notice from the Nasdaq Listing
Qualifications stating that our ordinary shares may be delisted because for the
previous 30 consecutive trading days our ordinary shares had closed below the
minimum $1.00 per share requirement for continued listing under the Nasdaq
National Marketplace Rules. Subsequent to that notice, we were parties to a
hearing in front of the Nasdaq Qualifications Panel. In March 2003, following a
hearing held in January 2003, the Qualifications Panel determined to continue
our listing status.
12
The Panel's decision is subject to the following exceptions: (1) on or
before March 28, 2003, we must file a proxy statement with the SEC and Nasdaq
evidencing our intent to hold the annual general meeting for fiscal 2001,
including a proposal for the implementation of a reverse stock split; (2) on or
before April 30, 2003, we must submit documentation to Nasdaq evidencing that
the annual meeting for fiscal 2001 was held as planned; (3) on or before April
30, 2003, we must demonstrate a closing bid price of at least $1.00 per share,
and immediately thereafter, demonstrate a closing bid price of $1.00 per share
for a minimum of ten consecutive trading days.
On March 19, 2003, we filed and distributed a proxy statement relating
to an annual general meeting of our shareholders which is scheduled for April
15, 2003. At the general meeting, our shareholders will receive and consider our
financial statements for 2001, and will be asked to approve, among other things,
a 1-for-20 reverse stock split that will become effective on April 16, 2003. The
expected reverse stock split will reduce the number of our outstanding shares to
approximately 12,987,860 shares, based on the amount of 259,757,196 ordinary
shares outstanding as of March 31, 2003.
We cannot assure that the reverse stock split will enable us to
demonstrate, as required by Nasdaq, a closing bid price of at least $1.00 per
share on or before April 30, 2003, and immediately thereafter for a minimum of
ten consecutive trading days.
In addition, on April 7, 2003, we received an additional letter from the
Nasdaq with respect to our inability to regain and sustain compliance with the
audit committee composition requirement as set forth in Nasdaq Marketplace Rule
4350(d)(2) by no later than the close of business on April 14, 2003. On April
14, 2003,we responded with a letter to Nasdaq stating that following the annual
meeting of shareholders scheduled for April 15, 2003, the new board of directors
of Gilat will meet for the first time on April 15 and will, among other things,
appoint an audit committee that complies with the audit committee composition
requirements of the Nasdaq Marketplace Rules.
IF DELISTED, OUR ORDINARY SHARES MAY BE CHARACTERIZED AS PENNY STOCK,
WHICH MAY SEVERELY HARM THEIR LIQUIDITY.
The SEC has adopted regulations that define a penny stock to be any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, these rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
relating to the penny stock market. Disclosure is also required to be made about
current quotations for the securities and about commissions payable to both the
broker-dealer and the registered representative. Finally, broker-dealers must
send monthly statements to purchasers of penny stocks disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Although we are not currently considered a penny
stock, the foregoing penny stock restrictions will apply to our ordinary shares
if our ordinary shares are deemed to be "penny stock." Our ordinary shares may
not qualify for an exemption from the penny stock restrictions. If our ordinary
shares were subject to the rules on penny stocks, the liquidity of our ordinary
shares would be severely harmed.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE, HAS EXPERIENCED A SIGNIFICANT
DECLINE, AND MAY CONTINUE TO BE VOLATILE AND DECLINE.
The trading price of our ordinary shares has fluctuated widely in the
past and is expected to continue to do so in the future as a result of a number
of factors, many of which are outside our control. In addition, the stock market
has experienced extreme price and volume fluctuations that have affected the
market prices of many technology companies, particularly telecommunication and
Internet-related companies, and that have often been unrelated or
disproportionate to the operating performance of these companies. These broad
market fluctuations could adversely affect the market price of our ordinary
shares. In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. Securities class action litigation could
result in substantial costs and a diversion of our management's attention and
resources.
WE HAVE NEVER PAID CASH DIVIDENDS AND HAVE NO INTENTION TO PAY
DIVIDENDS IN THE FORESEEABLE FUTURE.
13
We have never paid cash dividends on our ordinary shares and do not
anticipate paying any cash dividends in the foreseeable future. We intend to
continue retaining earnings for use in our business, in particular to fund our
research and development, which are important to capitalize on technological
changes and develop new products and applications. In addition, the terms of
some of our financing arrangements restrict us from paying dividends to our
shareholders.
RISKS RELATED TO REGULATORY MATTERS
WE HAVE HISTORICALLY RELIED, AND IN THE FUTURE INTEND TO RELY, UPON TAX
BENEFITS FROM THE STATE OF ISRAEL ON OUR TAXABLE INCOME. THE TERMINATION OR
REDUCTION OF THESE TAX BENEFITS WOULD SIGNIFICANTLY INCREASE OUR COSTS AND COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION.
Under the Israeli Law for Encouragement of Capital Investments, 1959,
some of our Israeli facilities qualify as "Approved Enterprises." As a result,
we have been eligible for tax benefits for the first several years in which we
generated taxable income. Our historical operating results reflect substantial
tax benefits, including tax exemptions and decreased tax rates up to December
31, 2000. In 2001 and 2002 we had substantial losses and therefore could not
realize any tax benefits. The Israeli government has shortened the period for
which tax exemptions are applicable to Approved Enterprises from four to two
years. This change only applies to our last five Approved Enterprises and to any
future Approved Enterprises, if any. Our financial condition could suffer if the
Israeli government terminated or reduced the current tax benefits available to
us.
In addition, in order to receive these tax benefits, we must comply
with two material conditions. We must (1) invest specified amount in fixed
assets in Israel, and (2) finance a portion of these investments with the
proceeds of equity capital we raise. We believe we have complied with these
conditions, but we have not received confirmation of our compliance from the
government. If we have failed or fail in the future to comply in whole or in
part with these conditions, we may be required to pay additional taxes and would
likely be denied these tax benefits in the future, which could harm our
financial condition.
WE BENEFIT FROM ISRAELI GOVERNMENT GRANTS. THE TERMINATION OR REDUCTION
OF THESE GRANTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY TO DEVELOP
NEW PRODUCTS AND APPLICATIONS.
Research and development grants from the Office of the Chief Scientist
of the Israeli Ministry of Industry and Commerce during 2000, 2001 and 2002
amounted to $1,990,000, $4,393,000 and $3,639,000 respectively. These grants
enable us to develop new products and applications. However, they also impose
certain restrictions on us, as discussed below. Israeli authorities have
indicated that the grant program may be reduced in the future. The termination
or reduction of these grants to us could have a material adverse effect on our
ability to develop new products and applications, which could harm our business.
THE TRANSFER AND USE OF SOME OF OUR TECHNOLOGY ARE LIMITED BECAUSE OF
THE RESEARCH AND DEVELOPMENT GRANTS WE RECEIVED FROM THE ISRAELI GOVERNMENT TO
DEVELOP SUCH TECHNOLOGY. SUCH LIMITATIONS MAY RESTRICT OUR BUSINESS GROWTH AND
PROFITABILITY.
Our research and development efforts associated with the development of
our OneWay VSAT product and our DialAw@y IP product and our SkyBlaster product
have been partially financed through grants from the Office of the Chief
Scientist of the Israeli Ministry of Industry and Commerce. Under the terms of
these Chief Scientist grants, we are required to repay these grants from the
revenue we generate from the sale of the products we developed with the
financing provided by the grants.
Moreover, we are subject to certain restrictions under the terms of the
Chief Scientist grants. Specifically, the products developed with the funding
provided by these grants may not be manufactured, nor may the technology which
is embodied in our products be transferred outside of Israel without appropriate
governmental approvals. These restrictions do not apply to the sale or export
from Israel of our products developed with this technology. These restrictions
will continue to apply after we pay the full amount of royalties payable to the
Israeli government in respect of these grants. Further, if the Chief Scientist
consents to the manufacture of our products outside Israel, we will be required
to pay a higher royalty rate on the sale of these products and we will also be
required to pay a higher overall amount, ranging from 120% to 300% of the amount
of the Chief Scientist grant, depending on the percentage
14
of foreign manufacture. These royalty payment obligations and restrictions could
limit or prevent our growth and profitability.
RISKS RELATED TO DOING BUSINESS IN ISRAEL
CONDITIONS IN ISRAEL MAY LIMIT OUR ABILITY TO PRODUCE AND SELL OUR
PRODUCTS. THIS COULD RESULT IN A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS AND
BUSINESS.
We are incorporated under the laws of the State of Israel, where we
also maintain our headquarters and most of our manufacturing facilities.
Political, economic and military conditions in Israel directly influence us.
Since the establishment of the State of Israel in 1948, Israel and its Arab
neighbors have engaged in a number of armed conflicts. A state of hostility,
varying in degree and intensity, has led to security and economic problems for
Israel. Major hostilities between Israel and its neighbors may hinder Israel's
international trade and lead to economic downturn. This, in turn, could have a
material adverse effect on our operations and business.
Since October 2000, there has been substantial deterioration in the
relationship between Israel and the Palestinian Authority that has resulted in
increased violence. The future effect of this deterioration and violence on the
Israeli economy and our operations is unclear. Ongoing violence between Israel
and the Palestinians as well as tension between Israel and the neighboring Syria
and Lebanon may have a material adverse effect on our business, financial
conditions or results of operations.
Generally, male adult citizens and permanent residents of Israel under
the age of 51 are obligated to perform up to 36 days of military reserve duty
annually. Additionally, these residents may be called to active duty at any time
under emergency circumstances. The full impact on our workforce or business if
some of our officers and employees are called upon to perform military service
is difficult to predict.
YOU MAY NOT BE ABLE TO ENFORCE CIVIL LIABILITIES IN THE UNITED STATES
AGAINST MOST OF OUR OFFICERS AND DIRECTORS.
Most of our directors and executive officers are non-residents of the
United States. A significant portion of our assets and the personal assets of
most of our directors and executive officers are located outside the United
States. Therefore, it may be difficult to effect service of process upon any of
these persons within the United States. In addition, a judgment obtained in the
United States against us, and most of our directors and executive officers,
including but not limited to judgments based on the civil liability provisions
of the U.S. federal securities laws, may not be collectible in the United
States.
Generally, it may also be difficult to bring an original action in an
Israeli court to enforce liabilities based upon the U.S. federal securities laws
against us and most of our directors and executive officers. Subject to
particular time limitations, executory judgments of a United States court for
liquidated damages in civil matters may be enforced by an Israeli court,
provided that:
o the judgment was obtained after due process before a court of
competent jurisdiction, that recognizes and enforces similar
judgments of Israeli courts, and according to the rules of
private international law currently prevailing in Israel;
o adequate service of process was effected and the defendant had a
reasonable opportunity to be heard;
o the judgment and its enforcement are not contrary to the law,
public policy, security or sovereignty of the State of Israel;
o the judgment was not obtained by fraud and does not conflict with
any other valid judgment in the same matter between the same
parties;
o the judgment is no longer appealable; and
o an action between the same parties in the same matter is not
pending in any Israeli court at the time the lawsuit is
instituted in the foreign court.
Furthermore, if a foreign judgment is enforced by an Israeli court, it
will be payable in Israeli currency.
CURRENT TERRORIST ATTACKS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
OPERATING RESULTS.
15
Terrorist attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001, terrorist attacks in Israel and other
acts of violence or war may affect the markets on which our ordinary shares
trade, the markets in which we operate, and our operations and profitability. We
cannot assure you that there will not be further terrorist attacks against the
United States or Israel, or against American or Israeli businesses. These
attacks or subsequent armed conflicts resulting from or connected to them may
directly impact our physical facilities or those of our suppliers or customers.
Furthermore, these terrorist attacks may make travel and the transportation of
our supplies and products more difficult and more expensive and ultimately
affect the sales of our products in the United States and overseas. Also, the
recent armed conflict entered into by the United States and other countries in
Iraq could have a further impact on our sales, our profitability, our supply
chain, our production capability and our ability to deliver product and services
to our customers.
OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED IF INFLATION IN
ISRAEL IS NOT OFFSET ON A TIMELY BASIS BY A DEVALUATION OF THE NIS (NEW ISRAELI
SHEKEL) AGAINST THE U.S. DOLLAR.
Our international sales expose us to fluctuations in foreign
currencies. Substantially all of our sales are denominated in U.S. dollars.
Conversely, a portion of our expenses in Israel, mainly salaries, is incurred in
NIS and is linked to the Israeli Consumer Price Index. When the Israeli
inflation rate exceeds the rate of the NIS devaluation against the foreign
currencies, our NIS expenses increase to the extent of the difference between
the rates. A significant disparity of this kind may have a material adverse
effect on our operating results.
ITEM 4: INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
Gilat Satellite Networks Ltd. is a leading provider of products and
services for satellite-based communications networks. In its most recent
available report published in 2001, Comsys, a specialized consulting company
that analyzes the satellite communications industry, reported that Gilat is the
second-largest manufacturer of very small aperture terminals, referred to in the
network communications industry as VSATs. Gilat was incorporated in Israel in
1987 and is subject to the laws of the State of Israel. Gilat's corporate
headquarters, executive offices and research and development, engineering and
manufacturing facilities are located at Gilat House, 21 Yegia Kapayim Street,
Kiryat Arye, Petah Tikva 49130, Israel. The telephone number is (972)
3-925-2000.
The name "Gilat(TM)" and the names "TwoWay(TM)," "OneWay(TM),"
"FaraWay(TM)," "DialAw@y IPTM," "SkySurfer(TM)," "SkyWay(TM)," "Skydata(R),"
"Clearlink(TM)" and "Skystar Advantage(R)" appearing in this annual report on
Form 20-F are trademarks of Gilat and its subsidiaries. GSAT(R) is a registered
trademark of GTECH Corporation ("GTECH"). StarBand(TM) is a trademark belonging
to StarBand , ISAT(R) is a trademark which Gilat sold to and is now owned by L-3
Communications Inc. See Item 4: "Information on the Company -- Products and
Services." Other trademarks appearing in this annual report on Form 20-F are
owned by their respective holders.
Gilat shipped its initial product, a first generation OneWay VSAT, in
1989. Since that time, we have devoted significant resources to developing and
enhancing our VSAT applications and establishing strategic alliances primarily
with major telecommunications companies and equipment suppliers. We have also
broadened our marketing strategy by providing a full range of VSAT services and
by emphasizing sales to customers directly and through new distribution
channels.
In 1991, we began marketing our second generation OneWay VSAT. In 1992,
we began marketing our TwoWay VSAT with Spacenet as part of Spacenet's Skystar
Advantage VSAT service offering and we began marketing our TwoWay VSATs to GTECH
as part of GTECH's GSAT lottery networks. Over the years, we experienced
significant growth in orders, sales and earnings including from our OneWay and
Skystar Advantage products. By an agreement in 1992, COMSAT RSI, Inc. became our
joint venture partner to develop, manufacture and market two-way rural telephone
VSAT products. We began marketing the FaraWay VSAT in 1994. We began marketing
the DialAw@y IP VSAT, another rural telephony product outside of the scope of
that joint venture, at the end of 1996. Additionally, we began marketing the
SkySurfer VSAT in 1997 and the SkyBlaster VSAT in 1999. The Skystar Advantage is
our largest-selling product, accounting for approximately 58%, 50% and 63% of
our sales revenue during 2000, 2001 and 2002 respectively.
16
We initiated a rural telephony project in 1997 through a wholly owned
subsidiary, Gilat-to-Home Latin America (Netherlands Antilles) N.V., formerly
known as Global Village Telecom N.V. ("GTH LA Antilles"). In April 1998, we
reduced our holdings in GTH LA Antilles to a minority holding through a $40
million private placement with international investors. In April 2000, we
acquired substantially all of this company, as more fully described under "GTH
LA Antilles" below. Through GTH LA Antilles, we were able to establish rural
telephony projects in countries such as Chile, Peru and Colombia.
In 1999, we began marketing our SkyBlaster VSAT product. The SkyBlaster
product is a two-way IP-based product with which broadband Internet services via
satellite are provided. One of the first SkyBlaster products developed was the
360 model, designed for consumers and home offices and small business users. In
2001, we completed development of the Skystar 360E, a two-way satellite-based
communication geared toward the enterprise market, that enables networking
between a central hub and thousands of locations. The Skystar 360E was launched
in 2002, and approximately 10,000 have shipped since.
In October 2002, to permit completion of a detailed restructuring
arrangement and its submission to holders of the our 4.25% Convertible
Subordinated Notes due 2005 (the "old notes"), and certain other creditors, we
filed with the Israeli Court a petition under Section 350 of the Israeli
Companies Law - 1999 for a stay of proceedings only on actions by holders of the
old notes and the bank lenders. In March 2003, after negotiating with both the
holders of the old notes and our major creditors, we received the approval of
the Israeli courts, and completed a plan of arrangement (the "Arrangement") with
our bank lenders, holders of the old notes and certain other creditors. Pursuant
to the Arrangement, our old notes were cancelled and the holders of the old
notes were issued a combination of 4.00% Convertible Notes due 2012, referred to
herein as Notes, and ordinary shares. Additional Notes and ordinary shares were
also issued in exchange for a portion of our bank debt and debt to another
financing creditor.
As of March 31, 2003, 259,757,196 of our ordinary shares were
outstanding. The Arrangement reduced our principal debt by approximately US$300
million, secured new agreements with our banking creditors, and significantly
reduced overall financing costs.
As part of the Arrangement, we entered into a new agreement with SES
Americom, our major supplier of satellite transponder capacity. Under the
agreement, SES Americom agreed to terminate its transponder capacity agreements
with Spacenet that relate to StarBand (which is partially held by Spacenet) and
to enter into a new transponder capacity agreement directly with StarBand. SES
Americom also agreed to allow Spacenet to defer an outstanding debt of $3.5
million to 2003, and to defer payment of certain transponder capacity charges
due in 2003 and 2004, with payment of those deferred charges to commence in
2005. The agreement reduced the aggregate amount payable to SES Americom in
2003, from $26.9 million to $16.5 million (including the $3.5 million which was
deferred from 2002 to 2003). As part of this agreement, we issued SES Americom a
number of ordinary shares equal to approximately 5.5% of our ordinary shares,
that, together with our ordinary shares already held by an affiliate of SES
Americom, constitute approximately 7.2% of our outstanding ordinary shares as of
March 31, 2003.
On March 19, 2003, we distributed a proxy statement to our shareholders
of record as of March 17, 2003, in connection with an annual general meeting of
shareholders scheduled for April 15, 2003. At the annual general meeting, our
shareholders will be asked to elect nine directors to our board of directors
(including two external directors), receive and consider our financial
statements for the year ended December 31, 2001, and ratify the appointment of
our independent public accountants for 2002 and reelect our independent public
accountants until the next annual general meeting of shareholders. In accordance
with the Arrangement, our shareholders will also be asked to approve (i) an
increase of our authorized share capital, (ii) a 1-for-20 reverse stock split to
be effective as of April 16, 2003, and (iii) an amendment to our Articles of
Association providing for new terms for the election and removal of directors.
If approved, the reverse stock split that will be effective as of April 16,
2003, will reduce the number of the outstanding shares of the Company to
approximately 12,987,860 shares, based on the amount of ordinary shares
outstanding as of March 31, 2003.
SPACENET INC.
On December 31, 1998, we completed the acquisition of Spacenet Inc., a
company engaged in providing VSAT-based network services, from SES Americom
(formerly known as GE Americom) and certain affiliates. Prior
17
to the acquisition, Spacenet was our single largest customer. Spacenet purchased
our VSAT products in order to incorporate them into Spacenet's VSAT-based
network service offerings.
As part of the Spacenet acquisition, we entered into several
significant agreements with SES Americom. See Item 7: "Major Shareholders and
Related Party Transactions -- Related Party Agreements; Spacenet Merger-Related
Agreements." The acquisition of Spacenet has enabled Gilat to expand from
primarily manufacturing and selling VSAT equipment to becoming a provider of
complete end-to-end telecommunications and data networking solutions based on
VSAT satellite earth stations. Currently, Spacenet provides two-way,
satellite-based, broadband networking solutions for a wide range of
organizations throughout North America. These solutions serve as a "one-stop
shop" for businesses with product sales and services that include provision of
all equipment, bandwidth, implementation and ongoing network and field support
on a full outsource basis. These network solutions are traditionally for large
enterprises that require hundreds or sometimes thousands of VSATs with
high-speed Internet access and communication between the VSATs. Most service
contracts through Spacenet are for a five year period and enterprises pay on a
per site, per month basis in addition to upfront installation and hardware and
software fees. Customers of Spacenet include the United States Postal Service,
GTECH, and Dollar General. In 2002, Spacenet expanded its market to include a
satellite network solution product for small to mid-sized enterprises. This
business offers standard services, hardware and software for enterprises that
want a network comprising of up to 50 VSATs. In the year 2001, Spacenet's
revenues accounted for approximately one-third of our total revenues, and in
2002, Spacenet's revenues accounted for approximately one-half of our total
revenues.
STARBAND
In March 2000, we established StarBand, formerly known as
Gilat-to-Home, Inc., with MSN, EchoStar and ING, to provide broadband Internet
access via satellite to residential, small office/home office ("Soho") and small
business customers in North America.
StarBand currently has approximately 40,000 subscribing customers.
These customers receive full Internet services and connectivity from StarBand,
including our SkyBlaster 360. We have entered into a master supply and services
agreement with StarBand. In the years 2001 and 2002, the revenues from sales to
StarBand accounted for approximately 11.5% and 1.5% of our total revenues,
respectively.
On May 31, 2002, StarBand filed a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. Since that time, we have provided
to StarBand approximately $7 million of "debtor in possession" financing, the
majority of which has been in the form of transponder capacity, and additional
financing of approximately $18 million. There is no guarantee that StarBand will
emerge from bankruptcy, and therefore in 2002, we recognized equity losses in
the amount of $25 million, representing the total financing provided to
StarBand. See below: "Strategic Alliances and Joint Ventures; StarBand."
GTH LA ANTILLES
In April 2000, we completed a share exchange transaction in which we
acquired all the outstanding shares of certain other investors in GTH LA
Antilles, in exchange for the transfer to a new company organized by these other
investors of GTH LA Antilles' entire right and interest in two Brazilian
subsidiaries, and a cash payment of $5.3 million. The Brazilian subsidiaries
were formed to provide telephone and other telecommunications services in South
Central Brazil.
As a result of the transaction, we own substantially all of the
outstanding shares of GTH LA Antilles and we renamed the company "Gilat-To-Home
Latin America (Antilles) N.V." from its previous name Global Village Telecom
(Antilles) N.V. See below: "Strategic Alliances and Joint Ventures; GTH LA
Antilles."
GTH LA Antilles' business focused on the provision in Latin America of
interactive data communications and corporate communications products and
services and satellite-based rural telephony. These subsidiaries, in Colombia,
Peru, Brazil, Costa Rica, Mexico and Argentina offer various VSAT network
services, primarily for telephony but more recently also for high-speed Internet
access. In many instances, we have won government bids which have enabled us to
install telephone services (both public and private) in rural areas. Some of
these subsidiaries have been sold to StarBand Latin America as described below.
See "Item 4: rStar".
18
RSTAR CORPORATION
In January 2001, following a tender offer, we became the owners of 51%
of the outstanding shares of rStar Corporation (formerly named ZapMe!
Corporation) ("rStar"), a corporation listed on the Nasdaq SmallCap market, at a
cost of approximately $51 million. At that time, rStar changed the focus of its
business from building an advertiser supported network for the educational
markets to implementing and managing industry-specific private networks for
businesses to communicate with their vendors and customers via bi-directional
satellite-delivered Internet connections.
In August 2002, we completed a transaction with rStar pursuant to which
we became the owners of approximately 85% of rStar's stock. As part of the
transaction, we sold to rStar a wholly owned subsidiary, StarBand Latin America
(Holland) B.V. StarBand Latin America was created to provide, through local
subsidiaries, two-way always on, high-speed Internet access and telephony to
residential and Soho customers in Latin America. This business acquired by rStar
currently operates satellite-based rural telephony networks in Colombia, Peru
and other Latin American countries. See below "Strategic Alliances and Joint
Ventures rStar".
SATLYNX S.A.
In April 2002, we completed agreements to form Satlynx S.A., a company
that provides two-way satellite broadband communications services to
enterprises, consumers and Soho users throughout Europe. Satlynx was formed with
SES Global, a leading satellite provider and an affiliate of SES Americom. As
part of the agreement, we contributed to Satlynx one of our subsidiaries in
Holland and sold to Satlynx our existing European operations which included
enterprise customers in France, Italy, Germany, England and Czechoslovakia. We
own 50% of the shares of Satlynx, but we do not control Satlynx. See "Item 4:
Strategic Alliances and Joint Ventures - Satlynx S.A.".
DETERMINISTIC NETWORKS INC.
In July 2000, we acquired all of the shares of Deterministic Networks,
Inc. ("Deterministic"), a privately held company based in California.
Deterministic is a supplier of policy-based networking products and toolkits to
several major technology companies, providing quality of service, network
management and Internet security capabilities that enhance the products and
services of its customers. In exchange for Deterministic's stock, the
shareholders of Deterministic received 218,422 ordinary shares of Gilat valued
at approximately $7.8 million. A total of $7.2 million of this price was
attributed to goodwill which was amortized at an annual rate of 20% up to
December 2001, with the balance impaired in 2002 and recorded as a cumulative
effect of change in accounting principle in the first quarter of 2002.
Currently, Deterministic has approximately ten employees and continues to
develop software-networking products for us and for other major technology
companies.
FINANCING TRANSACTIONS
In February 2000, we completed a private offering of $350 million of
convertible subordinated notes due 2005. The notes were convertible into
ordinary shares at a conversion price of $186.18 per share. In March 2003,
pursuant to the Arrangement, we cancelled these notes and issued to the holders
of these notes an aggregate of (i) 202,083,908 ordinary shares; and (ii)
$83,254,000 in principal amount of 4.00% convertible notes due 2012. See Item 5:
"Operating and Financial Review and Prospects - Commitments and Contingencies."
In May 2000, we exercised our right to redeem our 6 1/2% convertible
subordinated notes due 2004 that were issued on May 14, 1997 for a total amount
of $75 million. These notes were redeemable in full at 102% of the principal
amount plus accrued and unpaid interest, setting the redemption price per $1,000
notes at $1,020.72. All of the holders of our 6 1/2% convertible subordinated
notes due in 2004 opted to convert their notes into Gilat's ordinary shares
prior to the redemption date and we consequently issued 1,785,690 ordinary
shares to such holders.
In December 2000, we entered into a facility agreement with Bank
Hapoalim, under which we borrowed $108 million to finance our general corporate
activities and the increase in our working capital. The loan bore interest at
LIBOR plus 0.8% per annum and the principal was repayable in six semi-annual
payments commencing June 2002. In June 2002, we paid part of the initial payment
due of $6 million in principal.
19
In March 2003, as part of the Arrangement, we amended our agreement
with Bank Hapoalim. Of the $102 million in principal amount due from us to Bank
Hapoalim, (i) $25.5 million was converted into 18,488,590 ordinary shares, (ii)
$5.1 million was converted into Notes of the same principal amount and (iii) the
remaining debt amount of $71.4 million remains as a loan on revised terms. The
revised terms include equal semiannual installments of principal of $4.463
million beginning on July 2, 2005, with a last installment of $8.925 million on
July 2, 2012. The loan bears interest at the six-month LIBOR rate plus 2.5% and
is payable semiannually together with the installments of principal.
In September 2001, Bank Leumi lent us $30 million to be repaid in a
single installment on April 5, 2003. This loan bore interest at LIBOR plus 2.5%
per annum. The loan is secured by a lien on our buildings in Petah Tikvah,
Israel. In March 2003, as part of the Arrangement, the terms of the loan made by
Bank Leumi were revised. The revised terms of the restructured loan include
principal payments in the amount of $1 million annually during each of 2003 and
2004, and principal payments of $4 million annually during each of the years
2005 through 2011. The loan bears interest at the six-month LIBOR rate plus
2.5%. In addition, Bank Leumi agreed to maintain its line of credit utilized for
performance guarantees for our benefit and for our direct and indirect
subsidiaries in the existing aggregate amount of $15 million for at least one
year, subject to the limitation that continued availability of the line of
credit may be affected by the overall collateral made available by us in support
of credit used by us in the future for the issuance of guarantees. The loan
remains secured by a lien on our buildings in Petah Tikvah, Israel.
In March 2003, as part of the Arrangement, Israel Discount Bank agreed
to maintain its performance guarantees for our benefit and our subsidiaries in
the existing amount of $13.3 million for at least one year.
For more details on the Arrangement, see "Item 5: Operating and
Financial Review and Prospects -- Commitments and Contingencies."
CAPITAL EXPENDITURES AND DIVESTITURES
In June 2000, we purchased the land and building facilities that are
Spacenet's headquarters and operations center. The purchase price was
approximately $24.3 million, which was paid in cash. In order to increase our
available cash flow, we subsequently sold these premises for approximately $31.5
million (net of related costs of approximately $1.5 million) and Spacenet
currently leases this space pursuant to a lease for 15 years, at an initial
annual rent of approximately $3.5 million.
In 2000, 2001 and 2002, Gilat's property and equipment purchases
amounted to approximately $147,907,000, $59,235,000 and $9,739,000,
respectively. These capital expenditures were financed primarily from Gilat's
February 2000 convertible subordinate notes offering described above.
In addition, during 2000 and 2001, we invested approximately $13
million in the purchase and development of a facility for a new operations
center in Backnang, Germany. In June 2001, we entered into a mortgage and loan
agreement with a German bank, secured by our Backnang facilities. The mortgage
was for an original amount of approximately $5.3 million, of which (i)
approximately $0.9 million bears interest at 5.86% and is repayable over 5 years
commencing July 2001 and (ii) approximately $4.4 million bears interest at 6.3%
and is repayable quarterly over 20 years commencing July 2006. As of December
31, 2002, the amount of the mortgage is approximately $6.1 million. Under the
agreement with SES Global, this facility has been leased to Satlynx. See below:
"Strategic Alliances and Joint Ventures - SES Global".
BUSINESS OVERVIEW
GENERAL
Gilat is a leading provider of products and services for
satellite-based communications networks. We design, develop, manufacture, market
and service products that enable complete end-to-end telecommunications and data
networking solutions, as well as broadband Internet solutions, based on
satellite earth stations, a related central station known as a hub, hardware
equipment and software. The satellite earth stations are known in this industry
as very small aperture terminals or VSATs. These small units, which attach to
communication equipment, such as personal computers, telephones, etc., enable
the transmission of data, voice and images to and from certain satellites. The
services we provide include access to and communication with satellites
("satellite transponder capacity"),
20
installation of network equipment, on-line network monitoring and network
maintenance and repair services. We distribute our products and services
worldwide through our own direct sales force, service providers and agents and,
in certain circumstances, joint ventures, alliances and affiliated companies.
According to the 2001 Comsys Report, which is the most recent available Comsys
report, we were the second largest manufacturer of VSATs and had a 43% share of
the VSAT market based upon the number of VSATs shipped in the year 2000.
The networks we establish are primarily used for:
o Internet-based networking applications such as networks within
corporations (known as corporate intranets), corporate training
and other corporate applications which enable the transmission of
audio and video by high-speed Internet connections (known as
broadband), as well as consumer broadband Internet uses;
o on-line data delivery and transaction-oriented applications
including point-of-sale (for example, credit and debit card
authorization), inventory control and real time stock exchange
trading; and
o telephone service in areas that are underserved by the existing
telecommunications services or in remote locations without
service.
Among our largest customers are the United States Postal Service,
GTECH, and Dollar General in the United States, Fondo de Inversion en
Telecomunicaciones del Peru (Fitel) in Peru, and the Ministries of Communication
in Brazil and Colombia.
Satellite-based communications networks such as those Gilat has
developed offer several advantages over ground-based communication facilities.
Among these advantages are the following:
o ubiquitous reach, providing equal access to users in urban and
remote areas under a single tier network;
o fixed transmission costs, insensitive to distance or the number
of receiving stations;
o a persistent "always on" connection to the Internet without the
need to dial up to an internet service provider;
o cost savings over competing technologies such as ground telephone
lines and digital subscriber lines (commonly known as "DSLs") in
remote areas and suburbs;
o independence from telecommunication companies and other network
providers;
o less terrestrial infrastructure thus making satellite-based
technology less susceptible to local disasters such as fires and
earthquakes that adversely affect ground-based communication;
o consistent and rapid response time in comparison to dial-up
lines;
o Internet acceleration technologies, enhancing user experience and
improving satellite communication effectiveness;
o rapid installment of networks and flexibility in their
configuration, integration and location; and
o a versatile platform, which allows for the provision of multiple
applications and services.
VSAT INDUSTRY BACKGROUND
The emergence of the Very Small Aperture Terminal in the 1970s marked
the beginning of a new era in satellite communication. A VSAT network consists
of:
o several dozen to several thousand VSAT remote sites with small
antennas;
21
o a large central earth station called a hub, which includes a
large antenna and enables the connection of all the VSATs in the
network; and
o the capability to communicate with a specified satellite.
A VSAT includes an indoor unit and an outdoor unit (see figure below).
The indoor unit usually fits on a desktop (much like a modem) and contains the
technology that enables communication between the user's equipment and the
satellite. The outdoor unit includes a small antenna, usually two to six feet in
diameter, that can be mounted on a user's roof, ground or wall and electronic
equipment that transmits and receives signals to and from a satellite
transponder. A transponder is the technical term for the space on a satellite
designated to communicate with a specific user's equipment.
[PICTURE]
VSAT on-site equipment
The control station or hub, which enables the connection of all VSATs
into a VSAT network, consists of a large dish antenna (4.5 to 11 meters) and
radio frequency electronics equipment to allow signals to be transmitted between
the hub and the satellite transponder. A hub also includes electronic equipment
to provide for satellite communications, protocol support and network management
functions. Protocol is a technical term, which refers to the standards and
methods by which computers communicate with one another.
Satellite transponder capacity is available on existing satellites
positioned in geostationary orbit (at 35,800 km above the equator). Once in
orbit, a satellite beam can cover a geographic area the size of the continental
United States or Western Europe. This coverage area is known as the satellite's
footprint. The satellite receives information from a VSAT, amplifies it and
transmits it back to earth on a different frequency. A single satellite
transponder has a capacity of approximately 100 million bits/second ("Mbps").
This means that if the transponder is accessed for only 90 seconds per day, more
than one billion bytes of data, the equivalent of 865,000 double-spaced pages,
would be transmitted.
The current generation of high power satellites is known as Ku-band
satellites, because they use the Ku-band frequencies. This type of frequency
band together with the sophisticated VSAT earth stations is particularly well
suited to provide high-speed business communications services as well as
broadband web-based services. The use of the Ku-band frequencies (as opposed to
the C-band used by older generations of satellites) offers reduced interference
with ground communications. This enables satellites to use the higher
broadcasting power necessary to support VSAT earth stations and makes it
cost-effective to transmit to or among numerous locations. With increasing
satellite power and the latest generation of VSAT software, VSAT earth stations
are becoming smaller and less
22
expensive, reducing overall network costs. Our technology is compatible with
both Ku-band and C-band satellites. In addition, special extended C-band and
extended Ku-band satellites are also supported by our technology, where needed.
Before the emergence of VSATs, commercial communication via satellite
was very costly because it required an expensive ground terminal, dedicated
staff specialists and a very large dish antenna. Satellite-based communications
solutions were therefore limited to only those large companies that could afford
them. In contrast, VSATs are significantly less expensive than other satellite
solutions partly because they do not require end-users to dedicate staff
specialists or make a sizable infrastructure investment.
VSAT networks also offer several advantages compared to ground-based
communications networks:
o high quality and dedicated transmission availability;
o the capability of transmitting extremely large data flows;
o fixed transmission costs, insensitive to distance or the number
of receiving stations;
o rapid and cost effective installation in geographically isolated
regions like mountainous mining areas and developing countries;
and
o direct access to the Internet.
MARKET OPPORTUNITY
The market for communications network products and services experienced
growth during the years 1996 through 2000 and a slowdown in 2001 and 2002, which
was largely caused by the recession in the global economy and a reduction of
telecommunications business in particular. We believe that when the economy
improves, the market for communications network products will continue to grow.
Some of the key factors that we believe will foster such growth in a healthy
economy include:
o growing demand for communications capacity driven by the increase
in bandwidth-intensive applications, including the Internet;
o continuous technological advances which are broadening
applications for and decreasing the cost of both satellite and
ground-based networks;
o global deregulation and privatization of government-owned
telecommunications monopolies, which allow for the growth of new
methods of communication.
o government investments in the development of communications
technologies for populations outside of the city centers, thereby
leading to increased telephony and Internet access for rural
businesses, communities and education facilities.
Development of the telecommunications market in the past ten years has
led to the growth of a range of alternative technologies such as switched
digital networks, which are referred to as ISDN service, DSL, cable modems,
frame relay wireless technologies, cellular data services, as well as VSAT-based
systems. All of these technologies enable high-speed access to the Internet in
various forms that allows for the transfer of data at various speeds as well as
telephony with advanced services. Despite a slowdown in the telecommunications
market in the past year, the growth in the use of VSATs has been strong and
consistent. According to industry sources, the installed worldwide VSAT base
grew from 8,000 terminals in 1986 to over 600,000 terminals in 2001.
We provide VSAT communication solutions to each of the following three
expanding markets: Enterprise, Telephony and Consumer Broadband and Internet
access.
VSAT-BASED PRODUCTS FOR ENTERPRISES
In the past decade, there has been significant growth in services,
which require interactive data networks such as automatic teller machines, which
are referred to as ATMs, and credit and debit card machines that enable
23
businesses to receive "instant" approval of consumer purchases. This growth has
led to increased demand for satellite-based networks. VSAT and other satellite
technology are particularly well suited to those data networks which need to (i)
reach many locations over vast distances simultaneously, (ii) solve a "last
mile" or congestion problem, allowing high bandwidth access in areas currently
limited to slow connections like copper wire, (iii) transmit to remote locations
and to emerging markets where the terrestrial telecommunications infrastructure
is not well developed, and (iv) rapidly provide services across a large
geographic area served by multiple terrestrial providers. Due to the above
advantages, corporate users are increasingly realizing the benefits of VSAT
networks. Additional uses of the VSAT-based data networks for enterprises
include lottery card transactions (whereby chosen lottery numbers of consumers
are transmitted via VSATs located in various stores and stations to a control
hub), retailer and manufacturer inventory control and utilities' monitoring and
control systems for power lines and pipe lines.
VSAT-BASED TELEPHONY PRODUCTS
In a large number of remote, rural and urban areas, primarily in
developing countries, there is limited or no telephone service due to inadequate
ground telecommunications infrastructure. In these areas, VSAT networks are able
to utilize existing satellites to rapidly provide high quality cost-effective
telecommunications solutions. In contrast to ground-based networks, VSAT
networks are simple to reconfigure or expand, relatively immune to difficulties
of topography and can be located almost anywhere. Additionally, VSATs can be
installed and connected to a network in a matter of hours and seldom require
maintenance.
As a result of the above advantages, the market for VSAT-based fixed
telephony products is growing. This market consists of public telephone
operators that need to fulfill service obligations worldwide, large companies
that require private networks to provide inter-office communications between
branch offices and corporate headquarters, and service providers targeting rural
and residential areas in developing countries that do not have a ground-based
telecommunications infrastructure.
VSAT-BASED BROADBAND AND INTERNET PRODUCTS FOR CONSUMERS
The term broadband services refers to networks that provide
high-capacity, high-speed transmission of data. Broadband networks allow for
multimedia transmissions and can provide high-speed "always on" Internet
connectivity. A multimedia transmission (also known as "multimedia streaming")
is a distribution process that allows simultaneous broadcasting and playback of
video and audio content. The terrestrial Internet infrastructure was not
designed to support the traffic load created by broadcasting full motion video
or high-fidelity audio. Currently, there are three terrestrial means of
providing broadband services to consumers: cable, DSL and fixed wireless. The
VSAT-based consumer broadband service that we offer is differentiated from
terrestrial competitors by the following characteristics:
o rapid availability - cable and DSL providers must install the
appropriate infrastructure at a high investment and with an
extensive time to market delay. In contrast, the satellite
solution relies upon the use of hubs that can be installed within
a matter of days and can serve thousands of sites and allows for
quick installation of user sites.
o efficient distribution - the consumer broadband service has the
ability to broadcast content to subscribers without encountering
any last-mile bottlenecks of terrestrial networks. Content, such
as stock quotes and live multimedia transmissions can be
broadcast to a network of users while the always-on return path
enables unicast transactions desired by any user. A unicast
transaction, or unicasting, involves the transmission of
information to a single location. Stock trading over the
Internet, for instance, is considered a unicast transaction.
OUR PRODUCTS AND SERVICES
We currently offer VSATs to the three markets described above
(Enterprise, Telephony and Consumer), each of which is generally incorporated
into a VSAT network consisting of a remote terminal linked to a central hub or
control center via a satellite. In the year 2002, we offered the following VSATs
and services, as described below.
24
PRODUCTS BY VSAT MARKET TYPE
TYPE PRODUCTS/APPLICATION
----------------- ----------------------------------------------------------------------------------------
Data Network Skystar Advantage - ISAT* Skystar 360E SkyWay RF **
Applications for Interactive Data - Frame Relay Transceivers
Enterprises Multiple Protocols
- Two-way Internet - Data Broadcast
Access for Small
Offices and Home
Offices
Telephony FaraWay DialAw@y IP
Applications - Satellite - Rural Telephony
Telephony
Consumer SkyBlaster 360
Applications - Two-way Internet
Access for Consumers
-------------------------
* Gilat no longer offers this product application.
** This product application is no longer marketed by Gilat but is available upon
request.
In 2001, we sold our ISAT product to L-3 Communications, Inc. as part
of our strategy to eliminate our secondary product applications and to enable us
to focus on our core activities of interactive data, networking between VSATs
and providing high-speed Internet access connections and public telephony
access.
DATA DELIVERY VSATS FOR ENTERPRISES
SKYSTAR ADVANTAGE is a private VSAT network designed for data,
multimedia and voice applications, providing highly reliable communication
between a central hub and almost any number - tens or thousands - of
geographically dispersed sites. Skystar Advantage integrates the features of
several different applications into a single platform. The same network can be
used for interactive data and voice, as well as for multicasting multimedia over
an Internet service provider. Its modular 3-slot plug-in card enables a service
operator to customize for each remote site according to their specific and
changing needs.
Gilat's Skystar Advantage is already implemented in numerous markets,
such as: Internet access, banking, multimedia, Supervisory Control and Data
Acquisition ("SCADA" - a technical term for computer systems that collect and
summarize data from up to thousands of computers into reports for operators and
management), retail and gas stations. The applications currently served by the
Skystar Advantage include credit and debit card authorization for retail sales,
point-of-sale information and ATM networks, on-line recording and validation of
lottery tickets, prescription verification, inventory control and review of
customers profiles, inventory control and delivery scheduling at the
manufacturing level, supervisory control and data acquisition networks for oil
and gas pipelines, on-line remote stock exchange trading for brokers, distance
learning and Internet access. Additional voice channel add-ons are available, as
are video and audio broadcasting applications.
25
[PICTURE]
SKYSTAR ADVANTAGE NETWORK ARCHITECTURE
ARCHITECTURE. As illustrated above, our Skystar Advantage VSAT product
consists of remote terminals, hub equipment and related software. Our remote
terminal consists of a small outdoor antenna (typically 0.55 to 1.2 meters in
diameter for the Ku-band frequency and 1.8 to 2.4 meters in diameter for the
C-band frequency), an outdoor electronics unit and an indoor electronics unit.
The outdoor unit receives signals from a satellite transponder using a Low Noise
Block frequency down-converter that converts between the higher frequency a
satellite uses and the lower frequency used by the antenna and the indoor unit.
The outdoor unit then transmits signals to the satellite transponder using our
proprietary frequency up-converter that converts the low frequency into the high
frequency used by the satellite and power amplifier. The indoor unit
incorporates a satellite modem utilizing digital signal processing technology
and a powerful central processing unit. The central processing unit controls
communications through the satellite (including the satellite access scheme) and
provides the platform for interface to the end-user's remote terminal equipment.
The small antenna typically is supplied by a third-party vendor or purchased
directly by our customer. We design and manufacture the indoor unit, design and
integrate the outdoor unit and supply that part of the software that, among
other things, controls the satellite access scheme and the end-user interfaces.
The Skystar Advantage's modular configuration includes intrinsic
flexibility with three indoor unit slots for plug-in cards. This architecture
enables field upgradability by the addition of plug-and-play cards, which are
able to support a variety of interfaces and applications such as LAN (local area
networks), Universal Serial Bus port (USB port), a standard port used in PCs to
connect a computer with external applications such as modems, VSATs and digital
cameras, serial ports that are used as standard interface to many devices, such
as ATM's and lottery machines, and video and voice cards.
The hub for the network incorporating our Skystar Advantage VSAT
products consists of a radio frequency terminal and baseband equipment. The
radio frequency terminal incorporates a large dish antenna (typically 4.5 to 11
meters) and radio frequency electronics equipment (up and down frequency
converters, low noise amplifiers and high power amplifiers). The baseband
equipment is comprised of the hub satellite processor, hub protocol processor
and network management system ("NMS"). The hub satellite processor hardware
provides the communication connectivity to the remote terminals and the hub
protocol processor provides the interface between the hub satellite processor
and the customer host computer running end-user applications. The NMS monitors
and controls all the
26
remote terminals and the hub equipment. We design and manufacture the hub
satellite processor, hub protocol processor and NMS software and hardware.
Third-party vendors typically provide the radio frequency terminal.
Our Skystar Advantage VSAT product utilizes a patented technology that
enables us to use low-cost outdoor unit hardware and allows the VSAT network to
handle momentary peak traffic loads without any significant degradation of
response time.
FEATURES. The Skystar Advantage VSAT now offers a feature enabling
Internet connectivity and additional voice channel capability, enabling voice
communication between the hub site and a remote location. A VSAT network
incorporating our Skystar Advantage VSAT product can offer features including:
low-cost terminal equipment; rapid response time; high network availability;
small antenna size which allows for easy installation and maintenance; very low
transmission error rate; high hardware reliability; a variety of customer
interfaces such as local area networks ("LAN") (e.g., Token-Ring and Ethernet);
support for commonly used data communications protocols, including and, if
required, simultaneously X.25, SDLC, TCP/IP IP routing, MPEG1, MPEG2 and video;
easy integration of additional value-added services such as data, audio and
video broadcasting, and modular design that enables easy and staged network
expansion.
In 2002 our development efforts for the Skystar Advantage VSAT
continued toward further enhancing the equipment reliability, flexibility in
transferring features between Gilat's products through modular design, lower
power consumption that makes the Skystar Advantage ideal for SCADA and other
outdoor use, integrating additional applications to further suit our customers'
needs and cost reduction.
SKYSTAR 360E VSAT. The Skystar 360E VSAT offers two-way satellite based
communication-enabling broadband and digital video broadcast applications. The
Skystar 360E is designed for networking between a central hub and tens of
thousands of locations across wide geographical areas. The Skystar 360E is to be
used by companies that control their own dedicated hub or that work with shared
hub operators. Applications for companies using the SkyBlaster 360E include the
following:
o Enterprises - Two-way interactive Internet Protocol
communications, reliable software distribution, Internet and
Intranet access, which means communicating between and among
VSATs, video conferencing, corporate training and voice over IP
enabling an integrated telephony and data solution over the same
platform;
o Retail Businesses - credit, debit and check authorizations,
point-of-sale transactions, inventory management and check
authorizations, point-of-sale transactions, inventory management
and hotel and airlines or other reservations systems;
o Banking and Financial Services - stock market and financial
transactions, ATM's, financial data broadcasts and a electronic
or "floorless" stock exchange; and
o Government Uses - lottery transactions, long-distance training
and SCADA line monitoring.
27
[PICTURE]
Skystar 360E Network Architecture
ARCHITECTURE. The Skystar 360E star network consists of a central hub,
many VSAT terminals based in remote locations, and a satellite channel. The hub
consists of base band equipment and a radio frequency terminal. Each remote
terminal is composed of a small outdoor antenna, an outdoor unit and an indoor
unit. The indoor unit is a stand-alone box that connects to the user's PC via an
Ethernet LAN.
At the hub, the base band equipment controls the satellite transmission
and interfaces with the customer's data equipment. An advanced, user friendly
Network Management System (NMS) provides centralized monitoring and control,
using statistics, alarms, network configuration and report generation. Corporate
content is sent from the company's headquarters to the hub where it is uploaded
and distributed to remote locations via satellite. Information can be sent to a
single location, a group of locations or all locations. Delivery confirmation
and other data, including file uploads, are sent back to headquarters via the
satellite return channel.
KEY FEATURES
o Star Topology - The Skystar 360E is designed to support
connectivity from a central hub to many remote locations.
o DVB Outbound - The Skystar 360E outbound carrier complies with
DVB standards.
o Superior Inbound Coding - Intelligent coding algorithms and
modulation techniques enable efficient usage of satellite
bandwidth.
o Stand Alone Remote Unit - Client software is already embedded in
the box. There is no need for external software for terminal
operation.
o Extensive Internet Protocol Capabilities - The Skystar 360E can
function in a variety of Internet Protocol environments and
supports a wide range of Protocols and applications.
o Centralized Network Management - Network management is carried
out from the hub. Remote terminals can be monitored from a
central location.
o Rapid Deployment - Terminals can be set up easily across multiple
locations.
o Proven Technology - Gilat's interactive VSAT terminals have
already been installed and are operating
28
successfully in thousands of locations worldwide.
SKYWAY(TM) SERIES OF RF TRANSCEIVERS. A transceiver is a radio
transmitter-receiver that uses many of the same components for both transmission
and reception. The SkyWay high-power series of transceivers provide a solution
for Single Channel Per Carrier and Multiple Channel Per Carrier VSAT terminals,
and small-to-medium and medium-to-large Internet, voice, data, and video VSAT
networks. This series of transceivers operate in the following frequencies:
C-band, extended C-band and Ku band.
ARCHITECTURE. The SkyWay series of RF transceivers consist of an indoor
unit, an outdoor unit, a low noise amplifier down converter that converts
between the high frequency for satellite and the lower frequency used by the
indoor unit, a low noise block and, depending upon the application, a Solid
State Booster indoor unit controls outdoor unit functions through a front panel
keypad.
FEATURES. All the frequency converters use phase-locked oscillators,
locked on the same frequency reference source. The Solid State Booster contains
a high power amplifier. The industry standard 70 MHz modem interface provides a
straightforward connection to most modems. Auxiliary outputs for transmit and
receive signals permit direct monitoring of intermediate frequency signals. The
built-in processors and software provide full control over the transceiver
system. Monitor and control functions include transmit mute, frequency-set,
alarm indication, output threshold, and external fault indication from the Solid
State Booster. Full access is possible either through the front panel or an
RS232/RS422 port.
VSATS AS TELEPHONY PRODUCTS
FARAWAY VSAT. Gilat and COMSAT RSI were parties to a joint venture for
the development of the FaraWay VSAT, a satellite telephony VSAT, which provides
voice and data services via satellite to remote locations and other areas that
lack adequate telecommunications infrastructure. FaraWay VSATs are intended to
provide:
o a reliable telecommunications network (with fax, telephone and
data capabilities) for corporate, governmental and business users
in developing countries that have minimal or no
telecommunications infrastructure;
o multi-channel toll-quality telephone or digital trunking service
to geographically isolated rural residential areas in developing
countries; and
o cost-effective telephone and data service that can be installed
quickly for remote installations (e.g., oil and gas exploration
sites, small rural government agencies, public call offices and
new factories).
29
[PICTURE}
ARCHITECTURE. The FaraWay telephony product employs a unique VSAT
architecture and satellite access scheme. As illustrated above, the product
architecture permits connections to either private telephone equipment, pay
telephones, private or public switches connecting the product to a single
telephone line or a public switch connecting the product to many lines and data
terminals, as well as to any combination of this equipment. High-speed data
links can be established on a permanent basis or on demand, in a full mesh
configuration.
The remote terminal of the FaraWay includes a dish antenna (typically
1.8 to 3.7 meters in diameter), an outdoor unit and an indoor unit. The indoor
unit connects directly to subscribers' telephone equipment central office or
data networks. The FaraWay hub, which may be connected to a public switch
telephony network ("PSTN") or data networks, such as Internet access or
connection to other servers), includes a large dish antenna (typically 3.7 to 13
meters in diameter), radio frequency electronics, a network resource and
call-processing controller, and a Network Management System ("NMS") which
includes call accounting files. The network resource controller assigns
satellite frequencies to the equipment at both ends of the communication link;
the NMS monitors and controls the overall network and also provides data for
external network billing; and the traffic terminal provides the hub's interface
to the public switch, voice or data network.
FEATURES. The FaraWay VSAT offers a cost-effective, flexible solution
for connecting multiple telephone lines from a public switch to a local switch
or directly to subscribers' premises via satellite and to support voice, fax and
high data rate applications. The product features include: Ku-band and C-band
and extended Ku-band and C-band frequency operation; flexible interfaces and
telephony signaling support; support of up to 330,000 calls per hour; and
ITU-approved 16 and 8 kilobit per second voice encoding.
In 2002, we developed an integration between the high rate models and
our FaraWay VSAT, allowing the FaraWay network to support on-demand data links
of up to 5 Mbps. This development has enabled high-rate data applications such
as video conferencing and high volume file transfers. We also completed the
development of a new voice card that supports four voice channels on a single
card, reducing the price of each telephony line per VSAT and expanding the
capacity of voice channels per VSAT to up to sixteen.
DIALAW@Y IP VSAT. Our DialAw@y IP VSAT product is intended to provide
inexpensive, toll quality telephone service including voice and fax
communication bundled simultaneously with high speed Internet access. This
product is targeted for small businesses and villages in remote or urban areas
lacking an adequate telephone infrastructure. The product has many applications:
30
o Public Telecommunications - offering telecommunication services
to remote locations such as: public call offices, pay phones and
"always-on" internet access;
o Private Telephones - offering telephone, fax and Internet access
for small offices and home offices, referred to in the industry
as small office/home office users, remote businesses, farms and
remote tourist sites;
o Standalone Phones - for emergency or rescue operations, rural
roads and remote highways and as back up for ground-based
telephony networks.
The DIALAW@Y has been designed to offer subscriber or pay telephone and
public call offices with up to six lines. Our rural telephony product operates
in a mesh configuration, in which the remote terminals communicate with one
another in single satellite hop (meaning that the connection between the
terminals passes only once through the satellite), or multi-star configuration,
which involves several interconnection points to the public network. At the same
time the DialAw@y IP offers "always on" high speed two-way Internet access. We
believe that the cost benefits of the product meet the telephony needs of the
targeted non-urban telephony users, as well as such users' current and future
needs for Internet access.
[PICTURE]
31
ARCHITECTURE. As illustrated above, a DialAw@y IP network consists of a central
hub, PSTN and ISP gateways, satellite channels and remote terminals. A remote
terminal consists of a small outdoor antenna (typically 0.98 to 1.2 meters), an
outdoor unit and our indoor unit with one to six telephone lines. The hub
consists of a radio frequency terminal and baseband equipment. The radio
frequency terminal incorporates a large dish antenna (typically 3.7 to 11
meters) and radio frequency electronics equipment (up and down frequency
converters, low noise amplifiers and high power amplifiers). The baseband
includes a Hub Satellite Processor handling the satellite communications, a Hub
Voice Processor be connected to the PSTN using a digital E1 line, a Hub Protocol
Processor connected to an internet service provider, and an NMS. The NMS
monitors and controls all the remote terminals and the hub equipment. The hub
design permits easy incorporation of new features. The hub station is the point
of presence for Internet traffic, which means that it is the gateway to the
user's connection to the Internet. Telephony traffic can be also routed to
regional gateways, which can utilize satellite or terrestrial infrastructure.
FEATURES. Our DialAw@y IP VSAT product offers full support of telephone
line services, including flexible adjustment to various payphones, an integrated
telephony prepaid platform, high speed Internet access, full mesh architecture,
call data processing, low cost, simple installation and operation, high hardware
reliability, remote control and monitoring; and low power consumption.
Our current development efforts for the DialAw@y IP are directed toward
solutions such as voicemail integration, prepaid cards for internet usage,
improving IP features, quality of service and the user experience for DialAw@y
IP customers.
VSATS FOR CONSUMERS
SKYBLASTER 360 VSAT. The SkyBlaster line of products VSAT replaced the
SkySurfer VSAT. Unlike the SkySurfer, which provided only one direction of
connectivity via a satellite and the other via a dial-up modem, the SkyBlaster
360 provides two-way connectivity, with both directions of connectivity via
satellite. The SkyBlaster 360 is designed for consumers and home offices and
small business offices that want high bandwidth services and do not have a
terrestrial high-speed infrastructure available to them. Our VSAT technology is
ideal outside metropolitan centers because geographic distances do not hinder
our ability to provide the high-speed infrastructure that is unavailable
otherwise. The SkyBlaster 360 consists of a DVB receiver card and a satellite
transmitter as a return channel. The satellite transmitter is in the form of a
stand-alone external modem. The external modem is substantially easier to
install than the Personal Computer card used in previous models. We previously
released to StarBand a preliminary model of this external modem.
The consumer-friendly external modem (approximately 12 inches x 12
inches x 4 inches wide) sits near a user's personal computer and provides
two-way connectivity for Internet access as well as for content delivery and
other multicast and interactive applications.
The SkyBlaster 360 features adaptable capacity of up to 52.5 megabits
per second ("Mbps") downstream and 153.6 kilobits per second ("Kpbs") for the
return channel. It can be used with either an Ethernet connection or a USB port,
and is compatible with Windows 98SE, Windows Me, Windows 2000 and Windows XP.
The SkyBlaster 360 enables reliable, high-speed, bandwidth-intensive
content delivery applications including the following:
o Consumer Internet access;
o High-speed Intranet and Extranet. Extranet enables sources
outside an enterprise such as suppliers, access to only select
portions of a network and Internet connections;
o High-speed Internet access;
o Business TV such as conferences, classes and seminars; and
o Interactive learning that enables companies to conduct a single
class to employees located throughout a single continent.
32
[PICTURE]
ARCHITECTURE. A SkyBlaster 360 star network consists of a central hub, many VSAT
terminals, and a two-way satellite channel. The hub consists of base-band
equipment and a radio frequency terminal. Each remote terminal is composed of a
small outdoor antenna, an outdoor unit and an indoor unit. The indoor unit is a
stand-alone box that connects to the user's PC.
At the hub, the base-band equipment controls the satellite transmission
and interfaces with the Internet and various servers. An advanced, user friendly
Network Management System provides centralized monitoring and control of the
entire system including statistics, alarms, status reports, network
configuration and trouble-shooting of all the hub components and remote VSATs.
Content from the Internet or from the various servers at the hub is transmitted
from the hub to the remote stations. Information can be sent simultaneously to a
single location, which is referred to as unicasting, a group of locations, which
is referred to as multicasting, or all locations, which is referred to as
broadcasting. Delivery confirmation and other data, including file uploads, are
sent back to headquarters via the satellite return channel.
KEY FEATURES
o STAR TOPOLOGY - Specially designed to support connectivity from a
central hub to thousands of remote locations.
o DVB-S OUTBOUND - The outbound carrier is DVB-S (MPE) compliant
and is scalable from 2.5Mbps to 52.5Mbps. It can also be
multiplexed into an existing Direct to Home (DTH) carrier.
o VSAT IN A PC - The VSAT houses the transmitter and receiver. A
USB or 10 base-T Ethernet interface connects the VSAT to the PC.
o CENTRALIZED NETWORK MANAGEMENT - Network management is carried
out from the hub. Remote terminals can be monitored from a
central location.
o EXTENSIVE IP CAPABILITIES - The VSAT can function in a variety of
IP environments and supports a wide range of IP protocols and
applications.
33
o RAPID DEPLOYMENT - Any site within the satellite footprint can be
immediately connected to the network. The unique design allows a
single team to install up to three remote sites per day.
o PROVEN TECHNOLOGY - Gilat's VSAT terminals have already been
installed and are operating successfully in thousands of
locations worldwide.
o HOST SOFTWARE - Performance enhancing client applications
implemented on the PC accelerate traffic at both the TCP and HTTP
layers.
We introduced the SkyBlaster 360 in June 2000.
VSAT NETWORK SERVICES
In our two primary geographic markets, the United States and Europe, we
provide full network services through our network management centers ("NMC"), in
addition to product sales. We offer a full spectrum of services, from
installation and maintenance services to comprehensive service offerings in
which we package the VSAT system with installation, network operations,
maintenance and access to satellite transponder capacity. Our services include
the following, as further detailed below:
o network analysis;
o network implementation;
o shared hub services;
o network operations;
o maintenance;
o customer technical services; and
o access to satellite capacity.
In addition, we provide network services in Argentina and support for
network services in India.
NETWORK ANALYSIS. Network analysis involves designing the system in
response to specific customer needs, determining critical system parameters,
such as data protocols and network response times, assisting in generating
component and subsystem specifications for the network's hardware, hub
requirements (private or shared) and satellite capacity.
NETWORK IMPLEMENTATION. The network implementation process covers hub
installation and network rollout, which entails installing and connecting all of
the remote VSAT locations to the network. Network rollouts are planned and
managed by Gilat's program management teams. A program manager serves as the
customer's single point of contact and is responsible for delivering the network
on time, on budget and to specification.
Many of the activities for installing a VSAT network take place at the
customer's facilities, such as site survey, site preparation and installation of
ground, roof, or wall-supported mounts with lightning protection, connection of
the outdoor unit and the indoor unit to the antenna and Inter-Facility Link
("IFL") cable, powering up the system, pointing the antenna, initializing the
VSAT and confirming proper operation with the hub, connecting the VSAT with the
customer's local equipment (such as LAN or point-of-sale), and providing an
orientation to the local customer personnel. A typical installation can be
completed in four to six hours.
Hub installation services vary depending on whether the customer's
network involves a private hub or use of one of our shared hub facilities in
McLean, Virginia, Chicago, Illinois, Atlanta, Georgia, Germany, the Czech
Republic or Argentina.
We currently use in-house personnel for hub installation and third
parties to perform most VSAT installations. The program manager, working with
our in-house implementation staff, insures that our third-party installation
teams arrive at the customer's site on schedule and are equipped with the
necessary equipment to complete the installation. The third-party installers are
trained and certified on the Gilat hardware platforms.
34
SHARED HUB SERVICES. The hub is the most costly and complex component
of a VSAT system. Some customers prefer to outsource the management and
operation of the hub, either by leveraging our competency in managing networks
or by gaining additional cost efficiencies through sharing the hub hardware and
operations costs with multiple customers. Gilat presently staffs its primary
shared hubs in the United States, Germany and Argentina with a highly
specialized technical staff on a 24-hour basis. Our shared hub service typically
includes use of hardware, maintenance, ground-based backhaul circuits, satellite
uplinking and operations for which the customer pays a monthly fee.
NETWORK OPERATIONS. Our network operations services coordinate and
manage the operations of customers' networks and monitor the quality of services
delivered on a 24-hour basis from one of our two NMCs. Our largest NMC is
located in McLean, Virginia, and is staffed by over 40 technicians who are
trained in network fault isolation, problem resolution and customer service. We
also have NMCs in Argentina. When customers experience an outage on their
network, they call the NMC, where a trained professional, using proprietary
monitoring and control technology, will work to restore service. In instances in
which service cannot be restored through the troubleshooting process, the NMC
technician will dispatch one of our third-party field service technicians to
repair or replace the on-site hardware and restore operations to the site.
MAINTENANCE. Once an NMC technician determines that a field service
dispatch is required to fix a problem, our maintenance and logistics
organizations provide service to the customer. We offer a variety of maintenance
plans to support our customer networks. All of the plans include toll-free
trouble reporting service from one of our NMCs, field service, replacement of
equipment, warehousing of spare parts, shipping and repairs. The objective is to
provide an on-site response within an average of four hours for most sites. In
the United States, we have contracted with IBM-TSS, a third-party repair service
provider, to operate nationwide service centers that are staffed with
Gilat-trained and certified field service technicians. Other trained and
certified third-party vendors are contracted in our international service
markets.
Our maintenance services are supported by our internal logistics and
repair organization, which is responsible for stocking parts [in warehouses in
the United States, Europe and Argentina.]
CUSTOMER TECHNICAL SERVICES. Our technical services group includes
engineering test and support services during the project implementation phase
and on-going telephone and on-site support for complex networking issues. The
customer technical services group provides application troubleshooting, network
optimization, customer training, and documentation services.
PROTOCOLS AND METHODOLOGIES. The development of new software protocols
has resulted in improved use of available network capacity and decreased delays
in transmission of information. Our networks support multiple protocols
simultaneously, including SDLC, Bisync, X.25, X.3/X.28/X.29 PAD, Token Ring LLC,
Ethernet LLC, X.25 Broadcast and TCP/IP. The performance of these protocols
across satellite bandwidth is optimized by techniques such as TCP/IP "spoofing,"
which improves data throughput efficiency. In addition, our VSAT networks have
built-in protocol conversion capabilities, including X.25 to Async PAD, SDLC to
Token Ring, Bisync to Token Ring, X.25 to Bisync, X.25 to SDLC and TCP/IP over
Ethernet to TCP/IP over Token Ring, which allow our VSAT networks to operate
with multiple protocols without the purchase of additional equipment.
MARKETING, DISTRIBUTION AND STRATEGIC ALLIANCES
MARKETING AND DISTRIBUTION
We use both direct and indirect sales channels to market our products
and services. Our marketing activities are organized geographically, with
groups, subsidiaries or affiliates covering North America, Europe, Latin
America, Asia and the rest of the world. In North America most of our revenues
are generated by our direct sales force, although value-added resellers and
distributors account for some of our largest networks. In Europe, we rely
primarily on Satlynx, our joint venture with SES Global. In Latin America, we
generate revenues of equipment sales and service revenues directly and through
rStar. In Asia and the rest of the world, we rely primarily on local agents and
distributors. In all markets, we occasionally work with system integration
companies for large and complex projects.
35
Our sales teams are comprised of account managers and sales engineers,
who are the primary account interfaces and work to establish account
relationships and determine technical and business requirements for the network.
These teams also support the other distribution channels with advanced technical
capabilities and application experience. Sales cycles in the VSAT network market
are lengthy and it is not unusual for a sale to require 18 months from initial
lead through signing of the contract. The sales process includes several network
design iterations, network demonstrations, pilot networks comprised of a few
sites, and in some cases special software development, integrations with third
party equipment for complete solution offerings, which is completed before
contract signing. For VSAT networks sold as a complete service offering, the
sale cycle is typically shorter and can be as low as 90 days from the initial
lead through the signing of the contract. Some of the larger government bids in
Latin America include service provision for up to six years.
As of December 31, 2002, we had a sales and marketing group of 100
full-time employees. Approximately 20% of the sales and marketing group is based
in the United States, and approximately 33% is based in Israel. We currently
have marketing and technical support staff in the United States and Israel. In
addition, we maintain marketing and support offices in Colombia, Peru, Brazil,
Mexico, South Africa, Australia, Philippines, Thailand, Kazakhstan and India,
which provide ongoing marketing and technical support for our products for our
strategic partners and their customers. These offices also work with our
strategic partners to identify target markets and applications and define
products to meet those needs. In addition, we have established representative
offices in Beijing, Indonesia and the Ukraine to support our marketing efforts
and support and coordinate local marketing offices in Europe and the Far East.
We also sell our products and services to postal, telephone and
telegraph organizations and other major carriers, resellers and other companies
in the United States and internationally who purchase network products and
services from us for resale to their customers. PTTs and other major carriers
employ substantial sales forces and have the advantage of being existing
providers to many of our target customers, which makes marketing easier and
increases awareness of customer needs.
The following table sets forth Gilat's revenues by geographic area for
the periods indicated below as a percent of Gilat's total sales:
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
---- ---- ----
United States 57.4%(1) 39.1%(1) 52.8%(1)
South and Central Latin America 21.5%(1) 30.5% 19.4%
Asia 12.6%(1) 13.1%(1) 11.8%
Europe 6.2% 12.6% 7.0%(1)
Africa 1.6% 4.3% 8.3%
Israel 0.1% 0.3% 0.6%
Other 0.6% 0.1% 0.1%
Total 100.0% 100.0% 100%
-------------------------
(1) Includes revenues from related parties of 29.8%, 13.0% and 3.2% for the
years ended December 31, 2000, 2001 and 2002, respectively.
STRATEGIC ALLIANCES AND JOINT VENTURES
In addition to our direct and indirect sales channels, we have
established certain key strategic marketing relationships and joint ventures,
including the following:
SATLYNX S.A.. In April 2002, together with SES Global (SES Americom's
affiliate), we announced the formation of a new company that provides two-way
satellite broadband communications services to enterprises, consumers and Soho
users throughout Europe. We and SES Global contributed cash and in kind
contributions, which included one of our subsidiaries in Holland, existing
facilities, transponders, hubs, terminals, other technology and technical as
well as marketing
36
assistance. Gilat transferred six of its European subsidiaries (in Italy,
Germany, Czechoslovakia, England, Holland and France) such that substantially
all of the service-providing business of Gilat in Europe has been transferred to
this joint venture. The transaction between Gilat and SES Global was completed
on May 24, 2002. We recognized equity losses in the amount of $4.1 million,
representing the investment in Satlynx, certain receivables and guarantees
provided to Satlynx. The future of Satlynx is contingent upon its ability to
raise additional financing.
STARBAND. In March 2000, we established a joint venture named StarBand
(formerly known as Gilat-to-Home, Inc.) with MSN, EchoStar and ING, to provide
broadband Internet access via satellite to residential, Soho and small business
customers in North America. MSN and EchoStar originally invested $50,000,000
each and ING has invested $25,000,000 in cash in StarBand in exchange for both
senior convertible preferred and common shares equal to 17.7%, 17.7% and 7.2%,
respectively, of the outstanding capital of StarBand. Following an additional
investment by EchoStar, Gilat, through Spacenet, owns approximately 35.0% of
StarBand's outstanding shares.
We have entered into a master supply and services agreement to support
the performance by StarBand of a supply agreement with MSN. Under this
agreement, we provide StarBand with, among other things, the following:
o network operations equipment and software necessary for StarBand'
network to operate;
o use of facilities in Virginia and Georgia; and
o certain research and development support in connection with
hardware, equipment and software maintenance.
StarBand purchases most of the equipment and services necessary for its
business exclusively from us, and we grant it exclusive rights to use the
technology that it requires to provide its service to its customers in the
United States and Canada. We have agreed not to compete with StarBand's business
in the North American residential, Soho and small business market, and StarBand
has agreed not to compete with us in the area of data delivery for enterprise
network applications for our VSATs.
On May 31, 2002, StarBand filed a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. Since that time, we have provided
to StarBand approximately $7 million of "debtor in possession" financing, the
majority of which has been in the form of transponder capacity, and additional
financing of approximately $18 million. There is no guarantee that StarBand will
emerge from bankruptcy.
KNOWLEDGEBROADCASTING.COM. On March 6, 2000, we completed a $10 million
investment transaction with Knowledge Net Holdings LLC, a subsidiary of
Knowledge Universe, Inc., in exchange for 10 million common units (approximately
5.6% of the outstanding units) of KnowledgeBroadcasting.com LLC ("KBC"),
warrants and certain commercial and other rights. KBC was formed to distribute
knowledge-based content using interactive broadband satellite and other
technologies. We are also entitled to appoint one director to the board of KBC
as long as we hold a minimum number of KBC units. KBC is currently focusing on
developing and marketing a new technology platform for content delivery and
presentation.
As part of this transaction, for five years, KBC may purchase equipment
and services from us at favorable prices. For up to two years, to the extent
that we do not exercise the Warrant, KBC may pay for up to $20 million of
equipment and/or services with KBC common units valued at one dollar per unit
(such number of units to be deducted from the total available number of Warrant
Units). We also provided KBC with a five-year warrant to purchase approximately
191,000 of our ordinary shares at a purchase price of $157.05 per share. This
warrant becomes effective only when KBC provides certain knowledge-based content
Gilat. Such content has not yet been made available to Gilat.
In June 2001, we received $2.5 million from KBC as a result of a cash
distribution to shareholders. In September 2001, we wrote-off the $7.5 million
investment. For more information, please see Item 5: "Operating and Financial
Review and Prospects - General - Restructuring, Write-offs and Other Significant
Charges."
GTH LA ANTILLES. We initiated our rural telephony project in 1997
through our then wholly owned subsidiary, GTH LA Antilles, previously named
Global Village Telecom N.V. GTH LA Antilles was established to design, deploy,
manage and operate, alone or with local partners, rural telephony communications
networks to provide fixed-site, basic telephony service to rural and remote
markets in developing countries, as well as other markets for public telephony
service.
37
In April 1998, GTH LA Antilles completed a $40 million private
placement with an international group of investors (the "Other Investors"), as a
result of which our interest in GTH LA Antilles was reduced to a minority. We
invested $2.5 million in GTH LA Antilles as part of the private placement. We
also provided a $7.5 million loan convertible into common shares equal to
approximately 15% of GTH LA Antilles.
In April 2000, we completed a share exchange transaction in which we
acquired all the outstanding shares of the Other Investors in exchange for the
transfer to a new company organized by the Other Investors of GTH LA Antilles'
entire right and interest in two Brazilian subsidiaries, which were formed to
provide telephone and other telecommunications services in South Central Brazil.
All other agreements among the parties under the original private placement
transaction were terminated and the Other Investors were given the right to the
name and marks "GVT" and "Global Village Telecom." As part of the April 2000
transaction, we also provided the Other Investors' new company with a $40
million loan in exchange for a note convertible into common shares equal to
approximately 9.1% of this new company's then outstanding shares.
In 2002, the Company recognized an impairment of the above long term
loan in an amount of 39.4 million. For more information please see Item 5:
"Operating and Financial Review and Prospects-General-Restructuring Changes,
Write-offs and Other Significant Charges."
As a result of the transaction, we own substantially all of the
outstanding shares of GTH LA Antilles. We also renamed the company
"Gilat-To-Home Latin America (Netherlands Antilles) N.V." from its previous name
Global Village Telecom (Netherlands Antilles) N.V. We have been marketing our
DialAw@y IP VSAT product, and other voice products in Latin America, through GTH
LA Antilles and GTH LA Antilles' local partners. Subject to certain governmental
and other consents and approvals where needed, and subject, further, to the sale
of certain portions of our Latin America business to rStar, we operate in Latin
America through subsidiaries.
RSTAR. In January 2001, following a tender offer, we became the owners
of 51% of the outstanding shares of rStar at a cost of approximately $51
million. In May 2001, rStar issued and delivered to Gilat 19,396,552 shares of
rStar Common Stock, in full satisfaction of rStar's outstanding capital lease
obligations to Spacenet in the amount of approximately $ 45 million, which
resulted in Gilat increasing its share holdings in rStar to approximately 66%.
In August 2002, we completed a transaction in which we acquired additional
shares of rStar and became approximately 85% of rStar. As part of this
transaction, we sold to rStar the exclusive rights in Latin American countries
(excluding Mexico, but including, among others, Brazil, Argentina, Colombia,
Peru and, subject to certain restrictions, Chile) (i) to implement, operate and
market broadband Internet access services and voice services to residential
consumers and Soho subscribers, (ii) to provide a bundled product with
direct-to-home television service using a single satellite dish, and (iii) to
provide such new technologies and products related to the foregoing as Gilat may
in the future develop or make available to StarBand, which shall be offered to
rStar upon commercially reasonable terms. In Mexico, rStar received only
non-exclusive rights.
Under the acquisition agreement, rStar purchased the outstanding
capital stock of StarBand Latin America in exchange for 43,103,448 shares of
rStar common stock. StarBand Latin America was created to provide, through local
subsidiaries, two-way always on, high-speed Internet access and telephony to
residential and Soho customers in Latin America.
The acquisition agreement also provides that rStar stockholders,
excluding Gilat and its corporate affiliates, will be entitled to a pro rata
share of a special cash distribution that may equal, in the aggregate, $10
million if the Latin American business transferred to rStar does not achieve
certain earnings targets during each of the twelve-month periods ended June 30,
2003 and June 30, 2004.
In September 2001, the Company wrote off goodwill related to rStar in
an amount of $50.6 million. The Company recorded an impairment in 2002 of the
remaining goodwill of $3.1 million and an additional goodwill acquired during
2002 in the amount of $13.1 million. For more information, please see Item 5:
"Operating and Financial Review and Prospects - General - Restructuring Charges,
Write-Offs and Other Significant Charges".
BACKLOG
The 2002 year-end backlog for equipment sales and revenues from
multi-year service contracts for our VSAT products was approximately $250
million, up from approximately $230 million at the year-end 2001. Approximately
$65 million of this backlog is related to two bids awarded to us by the Ministry
of Communications in Colombia.
38
PATENTS AND INTELLECTUAL PROPERTY
We currently rely on a combination of patent, trade secret, copyright
and trademark law, together with non-disclosure agreements and technical
measures, to establish and protect proprietary rights in our products. We hold a
U.S. patent for a commercial satellite communication system that allows random
access to allotted frequency and time segments on satellites. The patented
system allows our customers to utilize lower cost networks, while maintaining
sufficient throughput and response times. We have filed applications for
registration of additional patents that include improvements to our satellite
access scheme.
We believe that our patents are important to our business. We also
believe that the improvement of existing products, reliance upon trade secrets
and unpatented proprietary know-how as well as the development of new products
are generally as important as patent protection in establishing and maintaining
a competitive advantage. We believe that the value of our products is dependent
upon our proprietary software and hardware remaining "trade secrets" or subject
to copyright protection. Generally, we enter into non-disclosure and invention
assignment agreements with our employees, subcontractors and certain customers
and other business partners. However, we cannot assure that our proprietary
technology will remain a trade secret, or that others will not develop a similar
technology or use such technology in products competitive with those offered by
us.
We periodically receive communications asserting that our products or
applications thereof infringe third party patent copyright or other intellectual
property rights. We also send similar communications to third parties which we
believe may be infringing our patents. See "Item 8: Financial Information -
Legal Proceedings".
While we do not believe we are currently infringing any intellectual
property rights of third parties, we cannot assure that other companies will
not, in the future, pursue claims against us with respect to the alleged
infringement of patents, copyrights or other intellectual property rights owned
by third parties. In addition, litigation may be necessary to protect our
intellectual property rights and trade secrets, to determine the validity of and
scope of the propriety rights of others, or to defend against third-party claims
of invalidity. Any litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on Gilat's business,
financial condition and operating results.
We cannot assure that additional infringement, invalidity, right to use
or ownership claims by third parties, or claims for indemnification resulting
from infringement claims will not be asserted in the future. If any claims or
actions are asserted against us, we may seek to obtain a license under a third
party's intellectual property rights. We cannot assure, however, that a license
will be available under terms that are acceptable to us, if at all. The failure
to obtain a license under a patent or intellectual property right from a third
party for technology used by us could cause us to incur substantial liabilities
and to suspend the manufacture of the product covered by the patent or
intellectual property right. In addition, we may be required to redesign our
products to eliminate infringement if a license is not available. Such redesign,
if possible, could result in substantial delays in marketing of products and in
significant costs. In addition, should we decide to litigate such claims, such
litigation could be extremely expensive and time consuming and could materially
adversely affect our business, financial condition and operating results,
regardless of the outcome of the litigation.
CUSTOMERS
The majority of the customers for our products and services are large
retail and consumer-oriented businesses, including retail and consumer
distribution, convenience stores, restaurants and hospitality establishments,
gas stations, hotels, brokerage, banking and financial services providers,
communications companies, lotteries, automotive and governmental institutions.
We sell our products directly to these customers or indirectly through
resellers. In general, networks for these customers range from approximately 100
to 4,000 sites, although some customers have satellite data networks
considerably smaller and others, considerably larger than this range. For
example, GTECH, a lottery provider in the United States, has deployed more than
25,000 Skystar Advantage VSATs about the world. In Peru, Gilat has deployed
6,000 Dial@way IP VSATs providing telephony and Internet services. In South
Africa, Gilat has been contracted to deploy up to 26,000 Skystar 360E Broadband
VSATs over the next five years.
As of December 2002 StarBand had approximately 40,000 subscribers and
is currently the biggest customer of our SkyBlaster 360 VSAT.
39
During 1998, we were selected as subcontractor, under a prime contract
awarded to MCI Corporation, for the provision of VSAT services to the United
States Postal Service (the "USPS"). Although the contract does not require the
USPS to purchase specific quantities at specific dates, the USPS program is has
initially linked 10,000 small associated office locations throughout the United
States, with potential growth to 26,000 sites during the ten-year program. Our
VSAT services are providing the USPS with a comprehensive upgrade to existing
terrestrial dial-up services now in use at post offices across the United
States. The network supports a wide range of applications, including
point-of-sale and credit card processing, package delivery confirmation, remote
monitoring, software and data file downloading, IP multicasting, and multimedia
broadcast. The network provided the USPS with world-class connectivity to all
locations, enabling a state-of-the-art customer service infrastructure. As of
December 2002, we have installed VSATs at approximately 11,000 small associated
office locations. In addition, approximately 7,000 VSATs are being installed as
back-up services to the existing MCI WorldCom Frame Relay network at large
associated office locations. At present, MCI WorldCom is under reorganization in
accordance with Chapter 11 of the U.S. Bankruptcy Code.
COMPETITION
The network communications industry is highly competitive and the level
of competition is increasing. As a provider of data network products and
services in the United States and internationally, we compete with a large
number of telecommunications service providers. Many of these competitors have
significant competitive advantages, including long-standing customer
relationships, close ties with regulatory and local authorities and control over
connections to local telephone networks. This increasingly competitive
environment has put pressure on prices and margins. To compete effectively, we
emphasize the price competitiveness of our products as compared to products
offered by ground-based and other satellite service providers, the advantages of
satellite data networks in general, our network quality, our customization
capability, our offering of networks as a turnkey service rather than as an
equipment sale and our provision of a single point of contact for products and
services.
We have encountered strong competition from major established carriers
such as AT&T, MCI WorldCom, Sprint, British Telecom, France Telecom, Deutsche
Telekom and global consortia of PTTs and other major carriers, which provide
international telephone, private line and private network services using their
national telephone networks and those of other carriers. Such carriers also
offer technological solutions for customer networks, including ISDN lines and
frame relay networks. Fiber optic cable is increasingly available for wide
bandwidth networks in the United States and Western Europe and competitive
issues often involve tradeoffs among price, various features and customer needs
for specialized services or technologies. We are facing increasing competition
from ground-based telecommunications service providers that use frame relay,
fiber optic networks and digital network switching to provide competitive
network offerings.
Our VSAT networks generally have an advantage over terrestrial networks
where the network must reach many locations over large distances, where the
customer has a "last mile" or congestion problem that cannot be solved easily
with terrestrial facilities and where there is a need for transmission to remote
locations or emerging markets, as discussed more fully above. By comparison,
ground-based facilities (e.g., fiber optic cables) often have an advantage for
carrying large amounts of bulk traffic between a small number of fixed
locations. However, a customer's particular circumstances, the pricing offered
by suppliers and the effectiveness of the marketing efforts of the competing
suppliers also play a key role in this competitive environment.
The major telecom carriers also serve as resellers of our products and
services, and are an increasingly important distribution channel in Asia and
Latin America.
Our principal competitor in the supply of VSAT satellite networks is
Hughes Network Systems, which offers a full line of VSAT products and services
and which obtains most of its satellite capacity on the satellite system
operated by its affiliates Hughes Galaxy and PanAmSat. In competing with Hughes
Network Systems, we emphasize particular technological features of our products
and services, our ability to customize networks and perform desired development
work, the quality of our customer service and our willingness to be flexible in
structuring arrangements for the customer. In addition, we face competition on
all of our product lines from ViaSat, Inc.
We expect our principal competition in the VSAT-based consumer
broadband arena to come from three terrestrial broadband service technologies:
cable, DSL and fixed wireless. Recently, potential competitors have
40
announced the introduction of two-way satellite Internet products and services.
We believe that our more mature product will allow us to compete effectively in
this market.
The VSAT-based broadband solution can be differentiated from the
terrestrial competition by two primary characteristics: rapid availability and
more efficient distribution. Unlike cable and DSL, the satellite-based solution
provided by StarBand is immediately available upon installation of the equipment
at a consumer's home. Additionally, the broadband service offered by StarBand is
expected to offer subscribers broadcast and multicast broadband content without
last-mile bottlenecks often experienced with terrestrial networks.
We may experience increased competition in the future from existing or
new competitors in the hardware, services and the consumer broadband spheres
that may adversely affect our ability to continue to market our products and
services successfully. We believe that we have been able to compete successfully
with larger telecommunications companies in part by entering into strategic
joint development and marketing relationships with major companies such asSES
Global, by developing new products such as Skystar 360E and by emphasizing
low-cost product and service features and functions that meet the needs of
customers in the markets in which we compete. See Item 4: "Information on the
Company -- Patents and Intellectual Property."
We believe that our major competitors have the resources available to
develop products with features and functions competitive with or superior to
those offered by us. In addition, the entry of new companies into the market or
the expansion by existing competitors of their product lines could have an
adverse effect on us. However, we believe that our primary competitive advantage
is our ability to provide products with relatively low overall cost and high
functionality. We also compete on the basis of the performance characteristics
of our products and our ability to customize certain network functions. We
cannot assure that our competitors will not develop such features or functions,
that we will be able to maintain a cost advantage for these products or that new
companies will not enter these markets.
We also compete with other companies that offer communications networks
and services based on other technologies (e.g., ground-based lines and frame
relay, radio transmissions, point-to-point microwave) that can be competitive in
terms of price and performance with our products. For example, there is a
competing technology for a unidirectional VSAT system that uses a lower-cost
remote terminal but requires more satellite space segments capacity than our
unidirectional VSAT products. See Item 3: "Key Information -- Risk Factors;
Competition in the network communications industry."
GOVERNMENT REGULATION
REGULATORY OVERVIEW
The international telecommunications environment is highly regulated.
As a provider of communications services in the United States, we are subject to
the regulatory authority of the United States, primarily the FCC. We are also
subject to regulation by the national communications authorities of other
countries in which we provide service. Each of these entities can potentially
impose operational restrictions on us. The changing policies and regulations of
the United States and other countries will continue to affect the international
telecommunications industry. We cannot predict the impact that these changes
will have on our business or whether the general deregulatory trend in recent
years will continue. We believe that continued deregulation would be beneficial
to us, but also could reduce the limitations facing many of our existing
competitors and potential new competitors.
We are required to obtain approvals from numerous national and local
authorities in the ordinary course of our business in connection with most
arrangements for the provision of services. The necessary approvals generally
have not been difficult for us to obtain in a timely manner. However, the
failure to obtain particular approvals has delayed, and in the future may delay
our provision of services. Moreover, it is possible that any approvals that may
be granted may be subject to materially adverse conditions.
UNITED STATES REGULATION
All entities that use radio frequencies to provide communications
services in the United States are subject to the jurisdiction of the FCC under
the Communications Act of 1934, as amended (the "Communications Act"). The
Communications Act prohibits the operation of satellite earth station facilities
and VSAT systems such as those
41
operated by us except under licenses issued by the FCC. Major changes in earth
station or VSAT operations require modifications to the FCC licenses, which must
also be approved by the FCC. The licenses we hold are granted for ten-year
terms. The FCC generally renews satellite earth station and VSAT licenses
routinely, but we cannot guarantee that our licenses will be renewed at their
expiration dates or that such renewals will be for full terms. In addition,
certain aspects of our business may be subject to state and local regulation
including, for example, local zoning laws affecting the installation of
satellite antennas.
INTERNATIONAL REGULATION
We must comply with the applicable laws and obtain the approval of the
regulatory authority of each country in which we propose to provide network
services or operate VSATs. The laws and regulatory requirements regulating
access to satellite systems vary from country to country. Some countries have
substantially deregulated satellite communications, while other countries
maintain strict monopoly regimes. The application procedure can be
time-consuming and costly, and the terms of licenses vary for different
countries. In addition, in some countries there may be restrictions on our
ability to interconnect with the local switched telephone network.
POLITICAL AND ECONOMIC CONDITIONS IN ISRAEL
We are incorporated under the laws of, and our offices and
manufacturing facilities are located in, the State of Israel. Accordingly, we
are directly affected by political, economic and military conditions in Israel.
Our operations would be materially adversely affected if major hostilities
involving Israel should occur or if trade between Israel and its present trading
partners should be curtailed.
Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors and a
state of hostility, varying from time to time in intensity and degree, has led
to security and economic problems for Israel. However, a peace agreement between
Israel and Egypt was signed in 1979 and, a peace agreement between Israel and
Jordan was signed in 1994. Since 1993, several agreements between Israel and
Palestinian representatives have been signed but since October 2000, there has
been substantial deterioration in the relationship between Israel and the
Palestinian Authority, which has resulted in increased violence. The future
effect of this deterioration and violence on the Israeli economy and our
operations is unclear. As of the date hereof, Israel has not entered into any
peace agreement with Syria, Lebanon or other Arab countries except those
mentioned above, and no prediction can be made as to whether any other
agreements will be entered into between Israel and its neighboring countries.
The ongoing violence between Israel and the Palestinians and tension between
Israel and neighboring Syria and Lebanon may have a material adverse effect on
our business, financial conditions or results of operations. Generally, male
adult citizens and permanent residents of Israel under the age of 51 are, unless
exempt, obligated to perform up to 43 days of military reserve duty annually
(from May 2003, such obligation will be generally reduced to 36 days).
Additionally, all such residents are subject to being called to active duty at
any time under emergency circumstances. Some of our officers and employees are
currently obligated to perform annual reserve duty. While we have operated
effectively under these requirements since we began operations, no assessment
can be made as to the full impact of such requirements on our workforce or
business if conditions should change, and no prediction can be made as to the
effect on us of any expansion or reduction of such obligations.
In addition, in the event and to the extent the recent armed conflict
entered into by the United States and other countries in Iraq will impact
Israel, our operations may adversely affected.
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has, for these and other reasons,
intervened in various sectors of the economy employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
control of wages, prices and foreign currency exchange rates. The Israeli
government has periodically changed its policies in all these areas.
In addition, certain countries, companies and organizations continue to
participate in a boycott of Israeli firms. We do not believe that the boycott
has had a material adverse effect on us, but there can be no assurance that
restrictive law, policies or practices directed toward Israel or Israeli
businesses will not have an adverse impact on the expansion of our business.
42
TRADE AGREEMENTS
Israel is a member of the United Nations, the International Monetary
Fund, the International Bank for Reconstruction and Development and the
International Finance Corporation. Israel is a member of the World Trade
Organization and is a signatory of the General Agreement on Trade in Services
and to the Agreement on Basic Telecommunications Services. Israel is a signatory
to the General Agreement on Tariffs and Trade, which provides for the reciprocal
lowering of trade barriers among its members. In addition, Israel has been
granted preferences under the Generalized System of Preferences from the United
States, Australia, Canada and Japan. These preferences allow Israel to export
the products covered by such programs either duty-free or at reduced tariffs.
Israel and the European Union concluded a Free Trade Agreement in July
1975 that confers certain advantages with respect to Israeli exports to most
European countries and obligates Israel to lower its tariffs with respect to
imports from these countries over a number of years. In June 2000, Israel was
admitted as an Associate Member of the European Union. In 1985, Israel and the
United States entered into an agreement to establish a Free Trade Area that has
eliminated all tariff and certain non-tariff barriers on most trade between the
two countries. On January 1, 1993, Israel and the European Free Trade
Association ("EFTA") entered into an agreement establishing a free-trade zone
between Israel and the EFTA nations. In recent years, Israel has established
commercial and trade relations with a number of other nations, (including
Russia, the People's Republic of China, India and nations in Eastern Europe and
Asia) with which Israel had not previously had such relations.
ORGANIZATIONAL STRUCTURE
We own a number of subsidiaries that provide marketing sale support,
sell our VSAT products or provide related services. The following table sets
forth our significant subsidiaries, as of December 31, 2002:
PLACE OF OWNERSHIP
COMPANY INCORPORATION INTEREST
------------------ ----------------- -----------
Spacenet Inc. United States 100%
rStar Corporation Delaware 85%
Gilat Satellite Networks (Holland) B.V. Holland 100%
Satlynx S.A. Luxembourg 50%
PROPERTY AND EQUIPMENT
Our products are primarily designed, assembled, manufactured and tested
at our facility in Petah Tikva, Israel. In April 1996, we moved to approximately
62,000 square feet of office, manufacturing and warehousing facilities in Petah
Tikva, Israel, which was expanded by an additional 57,000 square feet at the end
of 1997. We purchased approximately 93,000 square feet of additional facilities
in 1997 for a contract price of approximately $17.4 million, including taxes and
related expenses. We have paid the full amount of the purchase price and the
construction was completed in 1999. In addition we have (i) purchased 34,120
square feet of additional space in an adjoining building, at a price of
approximately $3.2 million; and (ii) acquired an additional 65,000 square feet
of adjoining real property for future expansion. In 2000, we exercised our
contractual option to acquire approximately 79,000 square feet of additional
space, including parking and commercial space, at a price of approximately $16.6
million including taxes and related expenses. Our products are primarily
designed, assembled, manufactured and tested at our facility in Petah Tikva,
Israel. In April 1996, we moved to approximately 62,000 square feet of office,
manufacturing and warehousing facilities in Petah Tikva, Israel, which was
expanded by an additional 57,000 square feet at the end of 1997. We purchased
approximately 93,000 square feet of additional facilities in 1997 for a contract
price of approximately $17.4 million, including taxes and related expenses. We
have paid the full amount of the purchase price and the construction was
completed in 1999. In addition we have (i) purchased 34,120 square feet of
additional space in an adjoining building, at a price of approximately $3.2
million. In 2000, we exercised our contractual option to acquire approximately
79,000 square feet of additional space, including parking and commercial space,
at a price of approximately $16.6 million including taxes and related expense.
The net book value of the facilities in Petah Tikvah is $71.5 million and such
amount appears in the audited financial statements incorporated as part of this
Annual Report on Form 20F. A recent valuation of the land and facilities valued
the property at approximately $48.5 million. In accordance with SFAS 144, since
the property is not presently for sale, the Company tested the recoverability of
its facilities as part of a group of assets and determined that no impairment
charge should be recorded as of December 31, 2002. If the Company is to put the
facilities up for sale, it will in all likelihood realize the valued amount and
in the fiscal year that it is put up for sale, will be required to record the
difference between the carrying amount and the fair value as an impairment in
the statement of operations, all in accordance with SFAS 144.
Our current manufacturing facilities have sufficient capacity to handle
current demand. We continuously adjust our capacity based on our production
requirements. We also work with third party vendors for the development and
manufacture of components integrated into our products, as well as for assembly
of components for our products. We have implemented a multifaceted strategy
focused on meeting customer demand for our products
43
and reducing production costs. Our operations group, together with our research
and development group, is working with our vendors and subcontractors to
increase development and production efficiency in order to obtain higher
component quantities at reduced prices.
We currently lease warehouse space in Petah Tikva (approximately 7,200
square feet) and in Kanot (approximately 12,200 square feet) at an aggregate
monthly fee of $7,600.We have network operations centers at McLean, Virginia and
Argentina and shared hub facilities in Chicago, Illinois, Argentina, Brazil,
Peru and Colombia, from which we perform network services and customer support
functions 24 hours a day, 7 days a week, 365 days a year. The network operations
centers allow us to perform diagnostic procedures on customer networks and to
reconfigure networks to alter data speeds, change frequencies and provide
additional bandwidth.
Our facilities in Florida are located in Sunrise. In West Melbourne we
lease approximately 31,000 square feet under a ten-year lease, which began May
1, 1997. Monthly rent is approximately $15,938. In Sunrise we lease
approximately 9,000 square feet under a five-year lease agreement that
terminates in February 2005. The Sunrise office serves our sale, finance and
operations teams.
Our offices in McLean, Virginia originally comprised approximately 133,000
square feet, portions of which we sublease, such that the current monthly rental
cost is approximately $239,000. These offices house our personnel and also
contain one of our U.S. network operations centers. In June 2000 we purchased
the land and building facilities used by Spacenet for a purchase price of
approximately $24.3 million. In March 2001 we sold these premises for
approximately $31.5 million (net obf related costs of approximately $1.5
million) and entered into a 15-year lease for this space, at an initial annual
rent of approximately $3.5 million. In addition, we lease additional office
space in McLean for Spacenet personnel comprising approximately 60,000 square
feet at monthly rental of approximately $182,000. We also maintain space in
Manassas, Virginia (through March 2003), Chicago, Illinois and Houston, Texas
for sales and operations.
In 2000 and 2002, we purchased and developed facilities on
approximately 140,400 square feet of land in Backnang, Germany, for
approximately $13 million. As of May 24, 2002, these facilities are leased to
Gilat Europe GmbH, one of the six Gilat subsidiaries sold to Satlynx. In June
2001, we entered into a mortgage and loan agreement with a German bank, secured
by our Backnang facilities. The mortgage is for approximately $5.3 million, of
which (i) approximately $0.9 million bears interest at 5.86% and is repayable
over 5 years commencing July 2001 and (ii) approximately $4.4 million bears
interest at 6.3% and is repayable quarterly over 20 years commencing July 2006.
In addition, Satlynx has been granted an option to purchase the Backnang
facility. See Item 4: "Information on the Company - Strategic Alliances and
Joint Venture - SES Global".
We maintain offices in Santa Clara, California; Austin, Texas; Sunrise,
Florida; Atlanta, Georgia; and in South America in Brazil, Argentina, Chile,
Colombia, Mexico, and Peru, along with representative offices in Beijing, and
Melbourne, Prague, Pretoria, Sao Paulo, Buenos Aires, New Delhi, Almaty,
Kazahkstan, and small facilities in other locations.
ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
We commenced operations in 1987 and shipped our initial product, a
first generation OneWay VSAT, in 1989. Since that time, we have devoted
significant resources to developing and enhancing our VSATs and establishing
strategic alliances primarily with major telecommunications companies and
equipment suppliers. We have also broadened our marketing strategy to emphasize
sales to customers directly and through new distribution channels.
44
We generate revenue from sales of our satellite-based networking
applications and services to our customers worldwide. The charges to customers
for satellite networking products and services vary with the number of sites,
the length of the contract, the amount of satellite capacity and the types of
technologies and protocols employed.
Gilat's discussion and analysis of its financial condition and results
of operations are based upon our audited consolidated financial information
included in this annual report on Form 20F, which assumes that we will continue
as a going concern and which has been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of the
financial information requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, account receivables, inventories, intangible assets,
restructuring, revenues, and contingencies. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The currency of the primary economic environment in which most of our
operations are conducted is the U.S. dollar and, therefore, we use the U.S.
dollar as our functional and reporting currency. Transactions and balances
originally denominated in U.S. dollars are presented at their original amounts.
Gains and losses arising from non-U.S. dollar transactions and balances are
included in the determination of net income. We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our unaudited consolidated financial information included in
this proxy solicitation.
Gilat believes the following critical accounting policies reflect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements included in this annual report on Form 20-F:
REVENUE RECOGNITION
We recognize revenues from product sales when shipment has occurred,
persuasive evidence of an arrangement exists, the vendor's fee is fixed or
determinable, no future significant obligations exist and collection is
probable. We do not grant rights of return. Determination of the probability of
collection is based on management's judgments regarding the payment of fees for
services rendered and products delivered. Should changes in conditions cause
management to determine that these criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely
affected.
We recognize revenues from long-term contracts on the
percentage-of-completion method based upon the ratio of actual costs incurred to
total costs estimated to be incurred over the duration of the contract.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are first determined, in the amount of the estimated loss
on the entire contract. If we do not accurately estimate the resources required
or the scope of work to be performed, or do not manage our projects properly
within the planned periods of time or satisfy our obligations under contracts,
then our future margins may be significantly and negatively affected or losses
on existing contracts may need to be recognized. Any such resulting reductions
in margins or contract losses could be material to our results of operations.
We generally have two ways of recognizing leasing revenue, depending on
whether the customer takes ownership of the network equipment or not. In one
type of network services sale, the customer leases the hardware, software,
satellite capacity and maintenance services, and we record revenue for the
hardware and the software in cases where such leases qualify as capital leases
in accordance with the provision of SFAS 13 "Accounting for Leases" in an amount
equal to the present values of payments due under these contracts only when the
network is installed and operational (or, in cases where the customer obtains
its own installation services, when the equipment is shipped). Future interest
income is deferred and recognized over the related lease term. Our revenue in
respect of satellite capacity, maintenance and other recurring network
management services is recognized over the period of the related
maintenance/service contract or over the period in which the services are
provided.
Arrangements that include installation services are evaluated to
determine whether those services are an integral component of the equipment
used. When installation services are considered integral, revenues from products
and installation services are recognized only upon installation. When services
are not considered integral,
45
revenues from products sales are recognized upon shipment and the service
revenues are recognized when the services are performed.
In the other type of network services sale, we procure and install the
equipment and software, obtain the satellite capacity and provide network
operations and monitoring for the customer over the contract term. Under this
type of network services sale, we retain ownership and operation of the network
and receive a monthly service fee (and recognizes revenue) over the term of the
contract in accordance with the provision for operating leases of SFAS 13. In
this instance, we depreciate the cost of the equipment used in our network
service offerings over the life of the asset.
We recognize service revenues ratably over the contractual period or as
services are performed. Where arrangements involve multiple elements, revenue is
allocated to each element based on the relative fair value of the element when
sold separately.
COST OF REVENUES
Cost of revenues, for both products and services, includes the cost of
system design, equipment, satellite capacity, and third party maintenance and
installation. For equipment contracts, cost of revenues is expensed as revenues
are recognized. For network service contracts, cost of revenues is expensed as
revenues are recognized over the term of the contract. For maintenance
contracts, cost of revenues is expensed as the maintenance cost is incurred or
over the term of the contract.
ACCOUNTS RECEIVABLE
We are required to estimate our ability to collect our trade
receivables. A considerable amount of judgment is required in assessing their
ultimate realization. In 2001 and 2002, we provided allowance for our
receivables relating to customers that were specifically identified by our
management as having difficulties paying their respective receivables. As a
result, management created a reserve for capital lease receivables, increased
its bad debt provision and wrote off an amount of approximately $134.6 million
(including $75 million related to StarBand) in 2001, and $34.7 million in 2002.
For more details please refer to "Restructuring Charges, Write-Offs and Other
Significant Charges" below.
INVENTORY
We are required to state our inventories at the lower of cost or market
price. In assessing the ultimate realization of inventories, we are required to
make judgments as to future demand requirements and compare that with the
current or committed inventory levels. We have recorded significant changes in
required reserves in recent periods due to changes in strategic direction, such
as discontinuation of product lines and due to changes in market conditions such
as altered demands for product specifications. In 2001 and 2002 we wrote-off and
marked down inventory in the amount of approximately $59.8 million and $20.1
million, respectively. It is possible that changes in required inventory
reserves may continue to occur in the future due to the current market
conditions.
IMPAIRMENT OF GOODWILL, INTANGIBLE ASSETS LONG LIVED ASSETS, AND INVESTMENT IN
AFFILIATES
Our business acquisitions typically result in goodwill and other
intangible assets. We periodically evaluate our intangible assets for potential
impairment indicators. Our judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and operational
performance of our acquired businesses.
In 2001, we recorded an impairment of goodwill in the amount of
approximately $50.6 million, in accordance with Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS No.
142), effective January 1, 2002, indefinite life intangible assets and goodwill
are subject to annual impairment testing. As of December 31, 2002, all of the
goodwill set forth in our financial statements in the amount of approximately
$69.7 million was impaired (of which $13.0 million was acquired during 2002 and
was recorded in our operating expenses and $56.7 million was recorded as a
cumulative effect of a change in accounting principle in the first quarter of
2002).
46
In 2001, we recorded an impairment of intangible assets and long-lived
assets in the amount of approximately $43.0 million. In accordance with SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." the
carrying value of finite life intangible assets and long lived assets should be
reviewed periodically, and if this review indicates that the carrying amount is
not recoverable, the carrying amount is reduced to its estimated fair value. In
2002 we recorded an impairment of intangible assets in the amount of $8.3
million, and impairment of other long lived assets in the amount of $42.4
million.
In 2001, we also recorded an impairment of investments in affiliated
and other companies in the amount of approximately $28.0 million. In accordance
with Accounting Principle Board Opinion ("APB") No. 18 "The Equity Method of
Accounting for Investments in Common Stock" ("APB 18"), investments in other
companies are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an investment may not be
recoverable. In 2002, we recorded an impairment of our investments in other
companies and long-term notes in the amount of $51.4 million
Future events could cause us to conclude that impairment indicators
exist and that additional intangible assets associated with our acquired
businesses and our long-lived assets are impaired. Any resulting impairment loss
could have a material adverse impact on our financial condition and results of
operations.
RESTRUCTURING CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES
During the year ended December 31, 2001, we did not meet our projected
sales, primarily because of the negative impact on the communications industry.
As such, we began to experience a slowdown in orders and sales in virtually all
of our markets - vertical, consumer and enterprise. As a result, Gilat
management adjusted the forecast of revenues for the years 2001 and 2002 and
decided to discontinue selling certain products, to reduce our costs and to
improve profitability.
Furthermore, certain circumstances such as the global decrease in
investments in telecommunications companies and depressed market conditions
indicated that the carrying amount of our investments would not be recoverable.
As a result, our management recorded the following charges:
o In March and September 2001, we recorded restructuring charges of
approximately $10 million and $20.3 million, respectively. The
restructuring costs consisted of employee termination benefits
associated with involuntary termination of approximately 650
employees including potential claims, compensation to certain
suppliers and customers, costs associated with termination of
lease commitments in respect of premises occupied by Gilat and
other costs. The employee terminations resulted from our strategy
to reduce costs and improve profitability.
o In September 2001, as a result of adjusted forecast of revenues
for the years 2001 and 2002, and the decision to discontinue
selling certain products, we (i) wrote off excess inventories in
order to adjust the inventory level to the new revenue
expectations, in the amount of approximately $14 million; (ii)
wrote off the products that were discontinued in accordance with
the restructuring plan, in the amount of approximately $37
million; and (iii) marked down inventory that is expected to be
sold at a price lower than the carrying value, in an amount of
approximately $9 million.
o In 2001, we provided allowance for our capital lease receivables
relating to vertical market customers that were specifically
identified by our management as having difficulties paying their
respective receivables. In the third quarter of 2001, it became
clear that these customers had been significantly adversely
affected by the recession, evidenced in an abrupt drop in
consumer spending, intensifying business lay-offs and an
acceleration of the downsizing of businesses. Furthermore, in the
third and fourth quarters of 2001 we increased our allowance for
bad debt provision since certain circumstances such as the global
decrease in the valuation of telecommunication companies,
depressed market conditions and difficulties in collections from
certain customers indicated that the carrying amount of the
receivables may not be recoverable. As a result, our management
created a reserve for capital lease receivables, increased our
bad debt provision and wrote off an amount of approximately
$134.6 million, including $75 million related to StarBand.
47
o In 2001, we recorded an impairment of goodwill relating to rStar
in an amount of $50.6 million as a result of the following
factors: (i) the continued deterioration in market conditions in
general and in the communication markets in particular; (ii) the
permanent decrease in the expected income from rStar's target
markets (primarily Latin America); (iii) the significant decrease
of rStar's share price; and (iv) rStar's continued low share
price for two fiscal quarters since the $45 million investment in
May 2001, which indicated other than temporary impairment. In
addition, in 2001, we recorded an impairment of intangible assets
in an amount of $28.2 million. At this time, we also recorded
impairment of property, equipment and current assets in an amount
of $14.8 million.
o During 2001, our management identified the following factors
pertaining to companies in which we had invested: (i) some of the
negotiations for additional funding were not successful or,
subsequent investments were at very low valuations; (ii) a
planned merger for one of the companies did not occur; (iii)
weakness in the capital markets continued and intensified after
the September 11, 2001 terrorist events; (iv) decreased levels of
cash curtailed future financing prospects which are needed in
order to finance our business; and (v) a growing weakness in the
target markets of these companies was confirmed. The indicators
specified above led us to conclude that these depressed market
conditions were not temporary and needed to be considered in our
financial statements. As a result, management decided to record a
write off of the investment in KSAT in an amount of approximately
$8.4 million and of other investments in an amount of $19.6
million in the year ended December 31, 2001.
In the year ended December 31, 2002, the recession in the
communications industry and the slowdown in orders continued. Furthermore,
certain circumstances such as the global decrease in telecommunication companies
and depressed market conditions indicated that the carrying amount of our
investments would not be recoverable. In addition, in October 2002, we commenced
the Arrangement to restructure our debt, which was successfully completed on
March 6, 2003. Prior to and while the Arrangement was under negotiation, our
ability to sell products and retain customers declined. As a result of the
above, the Company's management recorded the following charges:
o During 2002, as a result of an additional slowdown in orders and
sales to our customers and the decision to discontinue selling
certain products, we (i) wrote off excess inventories in order to
adjust the inventory level to the new revenue expectations, in
the amount of approximately $7.0 million; (ii) wrote off
discontinued products in the amount of approximately $8.8
million; and (iii) marked down inventory that is expected to be
sold at a price lower than the carrying value, in an amount of
approximately $4.3 million.
o During 2002, we increased our allowance for bad debt provision
since certain circumstances such as the depressed market
conditions and difficulties in collections from certain customers
indicated that the carrying amount of the receivables may not be
recoverable. As a result, we increased our bad debt provision and
wrote off an amount of approximately $34.7 million.
o In 2002, we recorded an impairment of all of the goodwill
relating to our subsidiaries in an amount of $69.7 million. The
impairment was prompted by the continued deterioration in market
conditions in general and in the communication market in
particular and the decrease in the projected income of our
subsidiaries. The impairment of goodwill recognized at adoption
of FASB 142 in the amount of $56.7 million is presented under
"cumulative effect of a change in an accounting principle" and
the impairment of goodwill recognized after adoption in the
amount of $13.0 million is presented in our operating expenses.
o Our management periodically reviews the carrying value of long
lived assets in accordance with SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." If this review
indicates that the cost is not recoverable, the carrying value is
reduced to its estimated fair value. Based on this reviews we
recorded the following impairments:
(i) In 2002, we recorded an impairment of intangible assets in
the amount of $7.0 million and other intangible assets
relating to technology that we no longer use in an amount of
$1.3 million. The impairment consists of technology
purchased by us in 2000 which is no longer in use and
intangible assets from the purchase of Spacenet.
(ii) We identified the following factors pertaining to property,
plant and equipment: (i) decreased levels of
48
cash has curtailed future financing prospects which are
needed in order to finance our business; and (ii) a growing
weakness in our target markets. In 2002 we recorded
impairment of our property, plant and equipment in an amount
of $42.4 million for adjustments of the carrying value of
assets which are not used to generate our revenues to their
fair value, and for adjustments of the carrying value of
productive assets to their fair value according to the
specifications of FASB 144.
(iii)In light of our review of GVT's auditors' report in
connection with the financial statements of GVT as of
September 30 and December 31, 2002 which noted that GVT may
not be able to retain its existence as a going concern if
they are unable to raise additional funding or otherwise
generate sufficient revenues and other factors, and the fact
that GVT did not repay the investment at maturity in
December 2002, we concluded that these conditions are not
temporary and need to be considered in our financial
statements. As a result, we have recorded an impairment of
our investment in GVT in an amount of approximately $39.4
million; and
(iv) Our management identified the following factors pertaining
to Communicacion y Telefonia Rural S.A. ("CTR") a company in
Chile in which we had invested: (i) financial press releases
from CTR's public parent company indicate that CTR's
revenues continue to decrease; (ii) during 2002,the Chilean
currency devalued significantly resulting in a decrease in
EBITDA and a poor economic environment; (iii) although CTR
has a positive EBITDA, it has a substantial amount of third
party and related party debt and with these payments and the
deflation in Chile CTR is not generating any cash flow; and
(iv) based on adjustment provisions in the investment
agreement, our ownership percentage was decreased at
December 31, 2002 from 13% to 4% due to lower than
anticipated earnings of the assets sold by Gilat to CTR. As
a result of all of the above, we have recorded an impairment
of our investment in CTR in an amount of approximately $11.2
million. In addition, we recorded an impairment of other
investments in the amount of $0.8 million.
COMMITMENTS AND CONTINGENCIES
On March 6, 2003, the Israeli court approved a restructuring of our
debts which included the following changes to our current commitment and the
creation of new commitments:
NEW NOTES
We exchanged our old notes which had a principal amount of $350 million
for (i) 202,083,908 ordinary shares; and (ii) $83.254 million in
principal amount of 4.00% convertible notes due in 2012.
BANK HAPOALIM
Of the $102 million due from us to Bank Hapoalim, (i) $25.5 million was
converted into 18,488,590 ordinary shares; (ii) $5.1 million was
converted into Notes of the same principal amount; and (iii) the
remaining debt of $71.4 million remains as a loan with revised terms.
The revised terms of the loan include equal semiannual installments of
principal of $4.463 million beginning on July 2, 2005, with a last
installment of $8.926 million on July 2, 2012. The loan bears interest
at the six-month LIBOR rate plus 2.5% and is payable semiannually
together with the installments of principal.
Bank Leumi Le-Israel B.M.
We revised the terms of the loan owed by us to Bank Leumi Le-Israel
B.M. in the principal amount of $30 million. The revised terms of the
restructured loan include principal payments in the amount of $1
million annually during each of 2003 and 2004, and principal payments
of $4 million annually during each of the years 2005 through 2011. The
loan bears interest at the six-month LIBOR rate plus 2.5%. In addition,
Bank Leumi agreed to maintain its line of credit utilized for
performance guarantees for the benefit of Gilat in the existing
aggregate amount of $15 million for at least one year, subject to the
limitation that continued availability of the line of credit may be
affected by the overall collateral made available by us in support of
credit used by us in the future for the issuance of guarantees.
That amount does not include additional guarantees that have been or
may be granted by Bank Leumi
49
and are or will be secured by specific charges on our deposits at Bank
Leumi.
ISRAEL DISCOUNT BANK LTD.
Israel Discount Bank Ltd. agreed to maintain its performance guarantees
for the benefit of Gilat in the amount of $13.3 million for at least
one year. Such amount does not include additional guarantees that have
been or may be granted by Discount Bank and are or will be secured by
specific charges on our deposits at Discount Bank.
SES AMERICOM
SES Americom agreed to terminate its transponder agreements with
Spacenet Inc., which related to StarBand. In addition, SES Americom
agreed to defer payments by Spacenet in connection with other
agreements. As part of the arrangement, we issued to SES Americom an
additional 14,261,048 shares.
As part of the Arrangement approved by the Israeli court, we granted to
the banks referred to above, in addition to existing security interests in favor
of the banks, a first priority security interest consisting of a floating charge
on all of our assets and we pledged for their benefit all of the shares that we
own in Spacenet. We granted to holders of the Notes a second priority security
interest in the same collateral.
In December 2002, we were awarded two substantial contracts for the
provision of equipment and services in Colombia. In order to secure these
contracts, we provided a bank guarantee from Bank Hapoalim in the amount of $10
million.
In addition, in August 2002, we concluded the acquisition of rStar,
increasing our ownership in this entity to approximately 85%. Under the terms of
the acquisition, we may be required to pay rStar shareholders a special
consideration of up to $10 million, $5 million of which may become due in June
2003 and $5 million of which may become due in June 2004. The Company estimates
that no provision is needed for the first distribution as of December 31, 2002.
The Company has provided a provision for the second distribution as of December
31, 2002 as management's current assessment is that with the current level of
sales in 2003 and with the uncertainties in the markets in which rStar operates,
it is probable that the special distribution will be paid in 2004. However, if
rStar is successful in growing its business and increasing its net income during
2003, the special distribution may not need to be paid in part or at all.
We are subject to proceedings, lawsuits and other claims related to
labor, products, intellectual property, security fraud and other matters. We are
required to assess the likelihood of any adverse judgments or outcomes to these
matters as well as the potential ranges of probable losses. A determination of
the amount of reserves required, if any, for these contingencies are made after
careful analysis of each individual issue. The required reserves may change in
the future due to new developments in each matter or changes in approach such as
a change in settlement strategy in dealing with these matters.
EMPLOYEE SEVERANCE FUND
Our intention in 2003 is to continue our current policy of depositing
quarterly cash amounts in the severance pay funds of our employees. The amounts
that we plan to deposit are intended to cover the difference between the
severance pay amounts required to be paid to employees by Israeli law in case of
termination of their employment and the current balance of the personal
severance funds of our employees. We will deposit an amount of $350,000 in the
severance pay funds during the third quarter of 2003. In the fourth quarter, we
will deposit an additional amount, if and to the extent necessary to satisfy any
shortfall, provided that in no event will such amount exceed $350,000.
RESULTS OF OPERATIONS OF GILAT
The following table sets forth, for the periods indicated, the
percentage of revenues represented by certain line items from our audited
consolidated statements of income.
PERCENTAGE OF REVENUES
50
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 2001 2002
-------------- -------------- --------------
Revenues:
Products *) % 78.9 % 72.4 % 62.3
Services *) 21.1 27.6 37.7
-------------- -------------- --------------
% 100.0 % 100.0 % 100.0
-------------- -------------- --------------
Cost of revenues:
Products 52.6 50.4 51.5
Services *) 15.7 24.5 29.5
Write-off of inventories 15.5 9.6
-------------- -------------- --------------
68.3 90.4 90.6
-------------- -------------- --------------
Gross profit 31.7 9.6 9.4
-------------- -------------- --------------
Research and development costs, net *) 6.2 9.2 12.0
Selling, marketing, general and administrative expenses 16.4 31.5 41.3
Provision and write-off for doubtful accounts and capital lease
receivables **) 0.7 34.9 16.6
Impairment of tangible and intangible assets 11.1 24.3
Impairment of Goodwill 13.1 6.3
Restructuring charges 7.8
-------------- -------------- --------------
Operating income (loss) 8.4 (98.0) (91.1)
Financial income (expenses), net (0.3) (5.5) (10.2)
Write-off of investments (1.9) (7.3) (24.6)
-------------- -------------- --------------
Income (loss) before taxes on income 6.2 (110.8) (125.9)
Taxes on income 0.4 (0.3) (0.4)
-------------- -------------- --------------
Income (loss) after taxes on income 5.8 (111.1) (126.3)
Equity in losses of affiliated companies (0.2) (0.1) (14.1)
Acquired in-process research and development of an affiliated company (2.0)
Minority interest in losses of subsidiaries 0.1 1.6 1.7
-------------- -------------- --------------
Net income (loss) from continuing operations, before cumulative
effect of a change in an accounting principle 3.7 (109.6) (138.7)
Net loss from cumulative effect of a change in an accounting
principle (27.2)
Loss from discontinued operations (1.6) (0.9)
-------------- -------------- --------------
Net income (loss) % 3.7 % (111.2) % (166.8)
============== ============== ==============
51
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUES. Our product revenues decreased by 53.4% to approximately
$130.0 million in 2002 from approximately $279.2 million in 2001. Our service
revenues decreased by 26.2% to approximately $78.7 million in 2002 from
approximately $106.7 million in 2001. The decline in revenues can be attributed
to the following factors: (i) in October 2002, we commenced the Arrangement to
restructure our debt, which was successfully completed on March 6, 2003. Prior
to and while the Arrangement was under negotiation, our ability to sell products
and retain customers declined; (ii) we did not win any bids in Latin America
until September 30, 2002, and despite our being awarded two large contracts in
Colombia and a third in Brazil in the fourth quarter of 2002, no revenues were
recognized in 2002 on the bids we won in Latin America after September 30, 2002;
and (iii) our sale of six European entities to our joint venture, Satlynx S.A.
caused a decline in service-related revenues. In addition, we have also
experienced a slowdown in orders and sales in all of our markets and are
affected, like all others in our industry, by economic conditions in the United
States which are globally affecting the telecommunications industry.
GROSS PROFIT. Gross profit decreased by 47.3% to approximately $19.6
million in 2002 from approximately $37.2 million in 2001. The gross profit
margin decreased to 9.4% in 2002 from 9.6 % in 2001. The decrease in our gross
profit margin was due to the decrease in revenues, a limited ability to decrease
fixed costs and a downward pressure on prices in the industry. The decrease was
offset by excess inventory and discontinued products that were written off in
2002 in an amount of approximately $20.1 million compared with $59.8 million
during 2001.
RESEARCH AND DEVELOPMENT COSTS. Gross research and development costs
decreased by 34.8% to approximately $29.0 million in 2002, from approximately
$44.5 million in 2001, and as a percentage of revenues, increased to 13.9% in
2002 from 11.5% in 2001, mainly due to our decreased revenues. Research and
development grants and funding, as a percentage of gross research and
development costs, decreased to 13.6% in 2002 compared to 19.9% in 2001. This
increase is primarily attributable to payments required to be made by StarBand
in 2001, which did not exist in 2002. Net research and development costs,
decreased to approximately $25.1 million in 2002 from approximately $35.6
million in 2001, and increased as a percentage of sales to 12.0% from 9.2%
respectively, mainly due to the decrease in revenues. The dollar decrease in
such costs in 2002 was primarily due to implementation of restructuring plans,
which led to a decrease in research and development personnel and management's
decision to stop further development of the rStar browser technology.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
marketing, general and administrative expenses decreased by 29.1% in 2002 to
approximately $86.2 million from approximately $121.5 million in 2001. The
dollar decrease in such expenses was attributed mainly to: (i) the sale of some
of our European entities to our joint venture, Satlynx S.A., enabling a
significant reduction in headcount and payroll; (ii) according to SFAS 142 we no
longer amortize goodwill, in contrast to our amortization of goodwill in 2001 in
the amount of $15.1 million; and (iii) implementation of restructuring plans,
which led to a decrease in personnel and other general and administrative
expenses. As a percentage of revenues, selling and marketing, general and
administrative expenses increased to 41.3% in 2002 from 31.5% in 2001 mainly due
to the decrease in revenues.
PROVISION AND WRITE-OFF OF DOUBTFUL DEBTS AND CAPITAL LEASE
RECEIVABLES. Provision and write-off of doubtful debts and capital lease
receivables decreased to $34.7 million in 2002 from approximately $134.6 million
in 2001. This decrease was attributable mainly to our reserves for capital lease
receivables and for StarBand receivables, which existed only in 2001. For more
information please see "Restructuring Charges, Write-Offs and Other Significant
Charges" above.
IMPAIRMENT OF GOODWILL, TANGIBLE AND INTANGIBLE ASSETS. In 2001 and
2002 we did not meet our projected sales and came to realize the adverse effects
that the economic recession was having on the communications industry. For more
details, please see "Restructuring Charges, Write-Offs and Other Significant
Charges" above.
RESTRUCTURING CHARGES. In 2001 we recorded restructuring charges of
approximately $30.3 million. The restructuring cost consists of employee
termination benefits associated with involuntary terminations of employees,
compensation to certain suppliers and customers, and other costs associated with
termination of lease commitments
52
in respect of premises occupied by Gilat. The terminations resulted our decision
to further reduce costs and improve profitability.
OPERATING LOSS. In 2002 we had an operating loss of approximately
$190.1 million compared to an operating loss of approximately $378.4 million in
2001. The decrease in 2002 is due to a reduction in write-offs relating to
doubtful debts, capital lease receivables and inventory as well as a decrease in
impairment of intangible and tangible assets and restructuring charges.
FINANCIAL EXPENSES, NET. Financial expenses, net amounted to
approximately $21.3 million in 2002 and in 2001. Financial expenses are
comprised mainly of interest expenses on our convertible subordinated notes and
long term loans.
WRITE-OFF OF INVESTMENTS. Our management periodically reviews the
carrying value of its investments as required by APB18. As a result of assessing
the recoverability of the carrying amount of investments in companies in 2002,
an amount of $ 51.4 million was impaired from our investments and other
non-operating charges ($39.4 million of which was impaired from the long term
note to GVT in accordance with FAS 114). We wrote-off $28.0 million of
investments in affiliated and other companies in 2001. For more information
please see "Restructuring Charges, Write-offs, and Other Significant Charges"
above.
TAXES ON INCOME. Taxes on income were approximately $0.9 million in
2002 compared to approximately $1.0 million in 2001.
EQUITY IN LOSSES OF AFFILIATED COMPANIES. Equity in losses of
affiliated companies was approximately $29.2 million in 2002, compared to
approximately $0.3 million in 2001. The increase is attributed mainly to the
equity losses in StarBand resulting from the estimated cost of the settlement
with SES Americom relating to transponders used by StarBand and losses
associated with the "debtor in possession" financing and other financing
provided to StarBand, and equity losses related to Satlynx S.A.
MINORITY INTEREST IN LOSSES OF A SUBSIDIARY. Minority interest in
losses of a subsidiary was approximately $3.5 million in 2002, compared to
approximately $5.9 million in 2001. The decrease was mainly due to the decrease
of the minority shareholding in rStar.
LOSS FROM CONTINUING OPERATIONS, BEFORE CUMULATIVE EFFECT OF A CHANGE
IN AN ACCOUNTING principle. As a result of all of the above mentioned factors,
we had losses of approximately $289.6 million in 2002, compared to a loss of
approximately $423.1 million in 2001.
NET LOSS FROM CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE.
As of December 31, 2002, all of the goodwill set forth in our financial
statements that existed in the beginning of 2002 in the amount of approximately
$56.7 million was impaired. Under SFAS No. 142 "Goodwill and Other Intangible
Assets". For more information please see "Restructuring Charges, Write-offs, and
Other Significant Charges" above.
LOSS FROM DISCONTINUED OPERATIONS. In 2002, rStar discontinued all of
its operating businesses, mainly consisting of AutoNetworks, resulting in a loss
of approximately $1.9 million and $6.1 million in 2002 and 2001, respectively.
NET LOSS. As a result of the above-mentioned factors, we had losses of
approximately $348.2 million in 2002, compared to losses of approximately $429.1
million in 2001.
LOSS PER SHARE. Basic and diluted loss per share in 2002 was $12.28
from continued operation, $0.08 from discontinued operation, and $2.41 from
cumulative effect of a change in an accounting principle which comprises basic
and diluted loss per share of $14.77 as compared to basic and diluted loss of
$18.37 per share in 2001, $18.11 per share from continued operations and $0.26
per share from discontinued operations.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUES. Our product revenues decreased by 29.9% to approximately
$279.3 million in 2001 from approximately $398.3 million in 2000. Our service
revenues increased by 0.4% to approximately $106.7 million in
53
2001 from approximately $106.3 million in 2000. The decrease in revenues was
caused primarily due to the decrease in sales to StarBand to approximately $44
million in 2001 from $128 million in 2000, and also due to a slowdown in orders
and sales in virtually all of our markets, consumer, enterprise and telephony
(see note 1c to the consolidated financial statements)
GROSS PROFIT. Gross profit decreased by 76.8% to approximately $37.2
million in 2001 from approximately $160.1 million in 2000, mainly due to the
decrease in revenues and no ability to decrease fixed costs accordingly and due
to write off and mark down of excess inventory and discontinued products in an
amount of approximately $59.8 million. The gross profit margin decreased to 9.6%
in 2001 from 31.7% in 2000.
RESEARCH AND DEVELOPMENT COSTS, NET. Gross research and development
costs increased by 25.0% to approximately $44.5 million in 2001, from
approximately $35.6 million in 2000, and as a percentage of revenues, increased
to 11.5% in 2001 from 7.1% in 2000, mainly due to the decrease in revenues. The
dollar increase in such costs in 2001 was primarily due to the acquisition of
Deterministic in June, 2000; the further development of the SkyBlaster, Skystar
Advantage and FaraWay and DialAw@y IP; the expansion of research and development
to reduce the costs and increase the functionality of our interactive VSATs ,
the conducting of generic research relating to our participation in research
consortia. Research and development grants and funding, as a percentage of gross
research and development costs, increased to 19.9% in 2001 compared to 12.1% in
2000, mainly attributable to payments required to be made by StarBand. See Item
4: "Information on the Company -- Marketing, Distribution and Strategic
Alliances; Strategic Alliances and Joint Ventures; StarBand." Net research and
development costs, increased to approximately $35.6 million in 2001 from
approximately $31.3 million in 2000, and increased as a percentage of sales to
9.2% in 2001 from 6.2 % in 2000.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
marketing, general and administrative expenses increased by 47.4% in 2001 to
approximately $121.5 million from approximately $82.4 million in 2000. As a
percentage of revenues, selling, marketing, general and administrative expenses
increased to 31.5% in 2001 from 16.4% in 2000. The dollar increase was due to
consolidation of rStar selling and marketing, general and administrative
expenses from January 1, 2001, in the amount of $10.8 million, amortization of
rStar goodwill in the amount of $8.5 million and the acquisition of GTH LA in
April 2000.
PROVISION AND WRITE-OFF OF DOUBTFUL DEBTS AND CAPITAL LEASE
RECEIVABLES. Provision and write-off of doubtful debts and capital lease
receivables increased significantly from $3.7 million in 2000 to $134.6 million
in 2001. This increase was attributed mainly to the increase in our reserve for
capital lease receivables and increase in bad debt provision by approximately
$59.6 million and the reserve for StarBand receivables of approximately $75
million. For more information please see Item 5: "Operating and Financial Review
and Prospects - General - Restructuring Charges, Write-Offs and Other
Significant Charges."
IMPAIRMENT OF GOODWILL, TANGIBLE AND INTANGIBLE ASSETS. In 2001, we did
not meet our projected sales and came to realize the adverse effects that the
economic recession was having on the communications industry. For more details,
please see "Restructuring Charges, Write-offs and Other Significant Charges"
above.
RESTRUCTURING CHARGES. In the year ended December 31, 2001, we
announced two restructuring plans that involved, among other things, reducing
workforce worldwide, streamlining physical facilities and moving to a wholesale
model for the international consumer segment. In connection with this
restructuring, we recorded, in 2001, restructuring charges of approximately
$30.3 million. See above "Restructuring Charges, Write-offs and Other
Significant Charges".
OPERATING INCOME (LOSS). In the year ended December 31, 2001 we had an
operating loss of approximately $378.4 million compared to an operating income
of approximately $42.8 million in the comparable period of 2000.
FINANCIAL EXPENSES, NET. Financial expenses, net amounted to
approximately $21.3 million in 2001, compared to financial expenses of
approximately $1.3 million in 2000. The increase is mainly attributed interest
expenses on our long-term loans, currency translation adjustments, mainly in the
Company's subsidiaries located in Latin America, and a decrease in interest
received from our bank deposits.
IMPAIRMENT OF INVESTMENTS IN COMPANIES. As a result of our assessing
the recoverability of the carrying amount of investments, in the year ended
December 31, 2001 Gilat wrote-off approximately $8.4 million and
54
approximately $19.6 million of the investments in affiliated and other
companies, respectively, and approximately $9.4 in the year ended December 31,
2000. The decision to write-off these investments was based on certain
circumstances, including the global decrease in the valuation of
Internet-related companies, which indicated that part of the carrying amount of
the investments might not be recoverable.
TAXES ON INCOME. Taxes on income were approximately $1.0 million in
2001 compared to approximately $2.0 million in 2000.
EQUITY IN LOSSES OF AFFILIATED COMPANIES. Equity in losses of
affiliated companies was approximately $0.3 million in 2001, compared to
approximately $1.0 million in 2000.
MINORITY INTEREST IN LOSSES OF A SUBSIDIARY. Minority interest in
losses of a subsidiary was approximately $5.9 million in 2001, compared to
approximately $0.3 million in 2000. The increase was mainly due to the
consolidation of rStar beginning January 1, 2001.
INCOME (LOSS) FROM CONTINUING OPERATIONS, BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE. As a result of all the foregoing factors, we had
losses of approximately $423.1 million in 2001, compared to a net income of
$19.4 million in 2000.
LOSS FROM DISCONTINUED OPERATIONS. rStar discontinued all of its
operating businesses, mainly consisting of AutoNetworks business in 2002,
resulting in a loss of approximately $6.1 million in 2001.
NET INCOME (LOSS). As a result of all of the above-mentioned factors,
we had losses of approximately $429.1 million in 2001, compared to net income of
approximately $19.4 million in 2000.
EARNINGS (LOSS) PER SHARE. Basic loss per share for 2001 was $18.37
($18.11 from continued operation and $0.26 from discontinued operation) as
compared to earnings per share of $0.86 in 2000. Diluted loss per share for 2001
was $18.37 ($18.11 from continued operation and $0.26 from discontinued
operation) as compared to diluted earnings per share of $0.81 in 2000.
VARIABILITY OF QUARTERLY OPERATING RESULTS
Our revenues and profitability may vary from quarter to quarter and in
any given year, depending primarily on the sales mix of our family of products
and the mix of the various components of the products (i.e., the volume of sales
of remote terminals versus hub equipment and software and add-on enhancements),
sale prices, and production costs, as well as entry into new service contracts,
the termination of existing service contracts, or different profitability levels
between different service contracts. Sales of our products to a customer
typically consist of numerous remote terminals and related hub equipment and
software, which carry different sales prices and margins.
Annual and quarterly fluctuations in our results of operations may be
caused by the timing and composition of orders by our customers. Our future
results also may be affected by a number of factors, including our ability to
continue to develop, introduce and deliver enhanced products on a timely basis
and expand into new product offerings at competitive prices, to anticipate
effectively customer demands and to manage future inventory levels in line with
anticipated demand. These results may also be affected by currency exchange rate
fluctuations and economic conditions in the geographical areas in which we
operate. In addition, our revenues may vary significantly from quarter to
quarter as a result of, among other factors, the timing of new product
announcements and releases by our competitors and us. We cannot be sure that
revenues, gross profit and net income in any particular quarter will not be
lower than those of the preceding quarters, including comparable quarters. Our
expense levels are based, in part, on expectations as to future revenues. If
revenues are below expectations, operating results are likely to be adversely
affected. In addition, a substantial portion of our expenses is fixed (i.e.
space segment, lease payments) and adjusting the expenses in cases where
revenues drop unexpectedly often takes considerable time. As a result, we
believe that period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Due to all of the foregoing factors, it is likely that in some
future quarters our revenues or operating results will be below the expectations
of public market analysts or investors. In such event, the market price of our
ordinary shares would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
55
Since inception, our financing requirements have been met primarily
through cash generated by operations, funds generated by private equity
investments, public offerings, issuances of convertible notes as well as funding
from research and development grants. In addition, we also financed our
operations through borrowings under available credit facilities as discussed
below. We have used available funds primarily for working capital, capital
expenditures and strategic investments.
Since March 2000, we have not raised additional financing other than
through limited credit facilities and bank loans. As of December 31, 2002, we
had cash and cash equivalents of $48.1 million, short term bank deposits of $1.6
million, short term and long term restricted cash of $22.9 million and short
term bank credit of $1.8 million. As of December 31, 2001, we had cash and cash
equivalents of $97.3 million, short term bank deposit of $12.9 million, short
term and long term restricted cash of $13.0 million and short term bank credit
of $4.7 million. Our cash balances, as described above, decreased by $47.7
million, reflecting payment of approximately $11 million relating to the rStar
acquisition (mainly payment to the minority shareholders), principal payments on
loans net of new loans received of approximately $12.2 million (approximately
half of which is to Bank Hapoalim), financing of StarBand of approximately $13.5
million (mainly the payment of space segment obligations and cash contribution
as part of the "debtor in possession" financing), expenses relating to the
restructuring of our debt in the amount of approximately $2.2 million and
purchases of property, plant and equipment and other assets, net of proceeds
from sale, in the amount of approximately $10 million, all of which was offset
by an increase in cash that resulted from the sale of some of our European
entities to our joint venture, Satlynx S.A in a net amount of approximately $7.7
million (net of expenses associated with the transaction). In our cash balance,
an additional decrease in an amount of $6.5 million was used to finance our
operating activities and is comprised of amounts provided by (i) a decrease in
our trade receivables in the amount of $27.8 million, (ii) a decrease in
inventories in the amount of $24.7 million, (iii) a decrease in other accounts
receivable and prepaid expenses, including long term receivables in the amount
of $13.7 million, and (iv) receipt of interest payment for the convertible note
in GVT in the amount of $3 million, net of (i) amounts used for interest payment
on loans and on our convertible notes of approximately $15.0 million, (ii)
decrease in trade payables, accrued expenses, other accounts payable and other
long term liabilities in the amount of $19.1 million, (iii) cash used for
discontinued operations in the amount of $1.2 million, and (iv) net cash used in
operating activities in the amount of $40.4 million.
As of December 31, 2002, we had long term contractual obligations and
current maturities totaling approximately $691 million.
In March 2003, we completed a restructuring of our debt with our bank
lenders, holders of our 4.25% Convertible Subordinated Notes due 2005, and
certain other creditors, which significantly strengthens our balance sheet and
reduces and defers our financing costs. See "Commitments and Contingencies"
above.
The Arrangement, as approved by the Israeli courts, enhanced our
liquidity resources since amounts owing were reduced by approximately $305
million to approximately $386 million. In addition, interest accrued on the
Notes will be deferred and paid beginning April 2005.
56
As of December 31, 2002, our short and long term contractual
obligations were as follows:
--------------------------------------- -----------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
CONTRACTUAL OBLIGATIONS
--------------------------------------- ------------------ ------------------- ------------------- ------------------
TOTAL 2003 2004-2006 2007 AND BEYOND
--------------------------------------- ------------------ ------------------- ------------------- ------------------
Long-Term Debt $153,337 $8,197 $139,802 $5,338
--------------------------------------- ------------------ ------------------- ------------------- ------------------
Convertible Subordinated Notes 358,648 - 358,648 -
--------------------------------------- ------------------ ------------------- ------------------- ------------------
Capital Lease Obligations 5,224 1,810 3,414 -
--------------------------------------- ------------------ ------------------- ------------------- ------------------
Operating Lease 159,542 21,861 52,646 85,035
--------------------------------------- ------------------ ------------------- ------------------- ------------------
Other Long-Term Debt 5,593 925 4,195 473
--------------------------------------- ------------------ ------------------- ------------------- ------------------
SES Americom Obligation 5,700 5,700 - -
--------------------------------------- ------------------ ------------------- ------------------- ------------------
Total Contractual Cash Obligations $688,044 $38,493 $558,705 $90,846
--------------------------------------- ------------------ ------------------- ------------------- ------------------
After giving effect to restructuring of our debts and as of March 31,
2003, our short and long term contractual obligations which were as follows:
---------------------------------------- -----------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
CONTRACTUAL OBLIGATIONS
---------------------------------------- -----------------------------------------------------------------------------
TOTAL 2003 2004-2006 2007 AND BEYOND
---------------------------------------- ----------------- ------------------- ------------------ --------------------
Long-Term Debt $118,353 $4,945 $28,311 $85,097
---------------------------------------- ----------------- ------------------- ------------------ --------------------
Convertible Notes 88,335 - - 88,335
---------------------------------------- ----------------- ------------------- ------------------ --------------------
Capital Lease Obligations 5,224 1,810 3,414 -
---------------------------------------- ----------------- ------------------- ------------------ --------------------
Operating Lease 159,542 21,861 52,646 85,035
---------------------------------------- ----------------- ------------------- ------------------ --------------------
Other Long-Term Debt 5,593 925 4,195 473
---------------------------------------- ----------------- ------------------- ------------------ --------------------
SES Americom Obligation - - - -
---------------------------------------- ----------------- ------------------- ------------------ --------------------
Total Contractual Cash Obligations $ 377,047 $ 29,541 $ 88,566 $ 258,940
---------------------------------------- ----------------- ------------------- ------------------ --------------------
CAPITALIZATION
The following table sets forth:
o our actual consolidated capitalization as of December 31, 2002;
and
o our consolidated capitalization as of December 31, 2002, as
adjusted to give effect to the arrangement (based on share price
of $0.24 at the actual closing date - March 14 2003).
You should read this information together with "Item 5: Management's
Discussion and Analysis of Results of Operation and Financial Condition," the
selected consolidated financial information included elsewhere in this proxy
solicitation, the consolidated financial information incorporated by reference
herein and "The Proposed Plan of Arrangement-Accounting Treatment of the
Transaction."
57
DECEMBER 31, 2002
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
(UNAUDITED)
(IN THOUSANDS)
----------------------------
Current maturities of long-term loans1 $ 8,197 $ 8,197
============= =============
Long-term loans, net of current maturities1 145,140 132,472
------------- -------------
Existing notes2 358,648
New notes1 . 126,191
Shareholders' equity:
Share Capital3 70 568
Additional paid-in capital 617,797 669,351
Accumulated other comprehensive loss (8,165) (8,165)
Retained earnings (accumulated deficit) (782,617) (605,639)
------------- -------------
============= =============
Total shareholders' equity (172,915) 56,115
============= =============
Total capitalization $ 339,070 $ 322,975
============= =============
----------------
1 Includes future accrued interest for restructured debts as follows:
$3.252 million, $19.062 million and $37.848 million for current maturities,
long-term loans and new notes respectively. For more detail, see "The Proposed
Plan of Arrangement--Accounting Treatment of the Transaction."
2 Includes accrued interest as of December 31, 2002 in an amount of $8.648
million (Actually accrued interest of $11.9 in deduct of accrued interest of
current maturities amounted to $3.252 as required by FAS 6).
3 Consisting of ordinary shares par value NIS 0.01 per share, 300,000,000
authorized and 23,855,922 issued and outstanding as of December 31, 2002 and
259,757,793 issued and outstanding as adjusted to give effect to the
arrangement.
OFF BALANCE SHEET ARRANGEMENTS
At December 31 2002, we have guaranteed the performance of our work to our
customers (usually government entities). Such guarantees are required by
contract for our performance during the installation and operational period of
long-term rural telephony projects in Latin America (mainly in Peru and
Colombia) and for the performance of other projects (government and corporate)
throughout the rest of the world. The guarantees for installation typically
expire soon after certain milestones are met and guarantees for operations
typically expire proportionally over the contract period. Our maximum potential
amount of future payments the Company could be required to make under its
guarantees at December 31, 2002 is $47.4 million. This figure includes
guarantees of performance for our subsidiary in Peru in the amount of $30
million and guaranties for two projects in Colombia in the amount of $10
million. We have restricted cash as a collateral for the performance guarantees
in an amount of $11.4 million. We have not recorded any liability for such
amounts, as we expect that our performance will be acceptable and to date, no
guarantees were exercised against Gilat. In addition, we have provided
guarantees in relation to certain satellite transponder agreements in the amount
of up to $3.4 million. We have also guaranteed certain property leases in
McLean, Virginia, Melbourne, Florida and London in amounts of up to $24.3
million. We have restricted cash as a collateral for the guarantees in an amount
of $6.3 million.
IN-PROCESS RESEARCH AND DEVELOPMENT
In 1998, Gilat purchased approximately 1.25% then outstanding shares of
the common stock of rStar (formerly known as ZapMe! Corporation). By December
31, 2000, Gilat purchased an additional 47.8% of the common stock of rStar for
over $49 million and in early January 2001, Gilat completed an additional
purchase to own a total of 51.0% of the common stock of rStar. At the time of
the acquisition, rStar was involved in the development of a new browser
interface known as "Managed Desk Console." Gilat allocated a charge of $10
million of the total purchase price to in-process research and development. The
allocation was based on an evaluation performed using the income approach. As
part of the process of analyzing this acquisition, Gilat made a decision to buy
technology that had not yet been commercialized rather than develop the
technology internally. Our management based this decision on factors such as the
amount of time it would take to bring the technology to market and the quality
of rStar's research and development effort. We also considered our own resource
allocation and our progress on comparable technology. Our management expects to
use the same decision process in the future.
Gilat estimated the fair value of in-process research and development
using an income approach. This involved estimating the fair value of the
in-process research and development using present value of the estimated
after-tax cash flows expected to be generated by the purchased in-process
research and development, using risk adjusted discount rates and revenue
forecasts as appropriate. The selection of the discount rate was based on
consideration of a weighted average cost of capital, as well as other factors
including the technology's useful life, profitability level, uncertainty of
advances that were known at that time, and stage of completion of each
technology. Gilat believes that the estimated in-process research and
development amount so determined represents fair value and does not exceed the
amount a third party would pay for the project.
58
Product revenues attributable to the Managed Desk Console technology were
estimated to be approximately $11 million in 2001 and $52 million in 2002 and to
grow thereafter through the end of the estimated life expectancy for the Managed
Desk Console technology in 2005. Product revenue growth was expected to decrease
gradually from 134% in 2004 to 86% in 2005. Revenues were estimated based on
relevant market size and growth factors, expected industry trends, maintenance
and service and the estimated useful life for the underlying the Managed Desk
Console technology. Product costs estimated consist of installation, space
segment fees, and payment network access. Estimated operating expenses included
cost of services, general and administrative expenses and engineering expenses.
Discounted cash flows considering the risk of the project in the discount
rate (using a discount rate of 45%), as well as discounted cash flows which
considered the proportional value consistent with the completed development work
were utilized. Both approaches gave a value for Gilat's portion of the Managed
Desk Console technology at approximately $10 million.
Where appropriate Gilat deducted an amount reflecting the contribution of
the core technology from the anticipated cash flows from an in-process research
and development project. At the date of the acquisition, the in-process research
and development project had not yet reached technological feasibility and had no
alternative future uses. Accordingly, the value allocated to this project was
capitalized and immediately expensed at acquisition.
As of the acquisition date, the Managed Desk Console technology was in
its final stage of development and was estimated to be 85% complete. Only final
integration and additional testing of this technology remained for completion.
Final stage of development for the Managed Desk Console technology, including
improved functionality and features, was estimated to be completed late in the
second quarter of 2001. Product release was estimated by June 2001, at which
time we expected to begin generating economic benefits. Eventually, the product
was completed and deployed in September 2001.
Prior to the acquisition, rStar had incurred approximately $4.5 million
in development-costs related to the Managed Desk Console. At the acquisition
date, costs to complete the research and development efforts related to the
Managed Desk Console were expected to range from $0.6 to 0.9 million. In 2001,
the gross research and development expenses attributed to this technology were
approximately $1.2 million.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Almost all of our sales and service contracts are in U.S. dollars and
most of our expenses are in U.S. dollars and New Israeli Shekels (NIS). The U.S.
dollar cost of our operations in Israel is influenced by the extent to which any
increase in the rate of inflation in Israel is not offset (or is offset on a
lagging basis) by a devaluation of the NIS in relation to the U.S. dollar. The
influence on the U.S. dollar cost of our operations in Israel relates primarily
to the cost of salaries in Israel, which are paid in NIS and constitute a
substantial portion of our expenses in NIS. In 2002, the rate of inflation in
Israel was 6.5% while the NIS depreciated in relation to the U.S. dollar, from
NIS 4.416 per $1 on December 31, 2001 to NIS 4.737 per $1 on December 31, 2002.
In 2001 the inflation in Israel was 1.4% while the NIS depreciated in relation
to the U.S. dollar at a rate of 9.3%. In 2000, inflation in Israel exceeded
devaluation of the NIS in relation to the U.S. dollar. In 2000, the rate of
inflation that exceeded the devaluation of the NIS in relation to the U.S.
dollar did not have a material adverse impact on our operation results or on our
financial condition. If future inflation in Israel exceeds the devaluation of
the NIS against the U.S. dollar or if the timing of such devaluation lags behind
increases in inflation in Israel, our results of operations may be materially
adversely affected.
Regarding the changes in the value of other foreign currencies ("other
currencies") in relation to the U.S. dollar, we did not incur any material
effects caused by foreign currency fluctuations for the years 2001 and 2002. In
2002 the depreciation of the value of foreign currencies in relation to the U.S.
dollar, the functional currency of Gilat and its subsidiaries, created financial
expenses. There can be no assurance that in the future our results of operations
may not be materially adversely affected by other currency fluctuations.
59
EFFECTIVE CORPORATE TAX RATE
Israeli companies are generally subject to income tax at the rate of
36% of taxable income. However, substantially all of our production facilities
in Israel have been granted Approved Enterprise status under the Law for
Encouragement of Capital Investments, 1959, and consequently are eligible for
certain tax benefits for the first several years in which they generate taxable
income. We currently have nine Approved Enterprises, and have applied for
approval of an additional investment program, part of which is expected to be
considered an increase of the investment in the ninth Approved Enterprise and
another part is expected to be considered a replacement of previously approved
equipment. Income derived from the nine Approved Enterprises is entitled to tax
benefits for periods of seven years (in the case of two of the enterprises) or
ten years (for the remaining seven enterprises), from the first year in which we
generate income from the respective Approved Enterprise, on the basis of the
nature of the incentives selected by us. The period of reduced tax for the tenth
enterprise, if approved, is expected to be ten years, although the terms of the
approval may provide for a different period. The main tax benefits are a tax
exemption for two or four years and a reduced tax rate of 10% to 25% for the
remainder of the benefits period depending upon the level of foreign ownership
of the company.
As a result of these programs, our effective corporate tax rate was
6.2% in 2000. In 2001, we had a loss mainly due to restructuring expenses and
write offs associated with restructuring. In 2002, we had a loss mainly due to
decreased revenues as a result of a slowdown in orders and sales in all of our
markets and the effect of deteriorating marketing conditions in the United
States which are globally affecting the telecommunications industry. We
anticipate that we will not have to pay taxes in 2003 due to current and
carry-forward tax losses.
RESEARCH AND DEVELOPMENT
PRODUCT DEVELOPMENT
We devote significant resources to research and development projects
designed to enhance our VSAT products, to expand the applications for which they
can be used and to develop new products. In 2001, we entered into an agreement
with the Office of the Chief Scientist for the early payment of all royalties
arising from future sales with respect to previous Office of the Chief Scientist
grants we received. We recorded a one-time operating charge of $3.4 million.
This amount is payable over a period of up to five years and bears an interest
rate to be agreed upon between the Office of the Chief Scientist and us. This
agreement enables us to participate in a new program under which we will be
eligible to receive future research and development grants for generic research
and development projects without any royalty repayment obligations.
We intend to continue to devote research and development resources to
complete development of certain features, to improve functionality, including
supporting greater bandwidth, to improve space segment utilization, to increase
throughput and to reduce the cost of our products. We continue to devote
substantial research and development efforts to the hardware and software of our
products.
We have devoted research and development resources to development of
our DialAw@y IP VSAT. This product provides inexpensive, toll quality, dial tone
telephone service as well as high speed Internet access for small businesses and
villages in remote or urban areas lacking an adequate telecommunications
infrastructure. We intend to continue development of new features for the
DialAw@y IP VSAT.
We have developed the SkyBlaster VSAT product and continue development
of this product in order to enhance the product features and effect cost
reductions. This product is an interactive VSAT that incorporates a satellite
return channel, thereby enabling two-way access to multimedia services via the
Internet. The SkyBlaster is targeted for use in communities of interest,
corporations, small to mid-size businesses, Soho and consumer users. The
SkyBlaster is designed to offer improved access through better response time and
faster downloading of large files, such as audio and video clips. We have
devoted considerable research and development efforts in order to improve the
functionality of the SkyBlaster for consumer use, as well as to reduce the costs
of the product. We have developed an external stand-alone box for the SkyBlaster
VSAT in order to enable easy installation of the product and introduced this
unit, named SkyBlaster 360. We are also involved in extensive research and
development efforts aimed to reduce the price and increase the efficiency of the
technical components of the SkyBlaster product.
60
We have developed the Skystar 360E product, which is aimed at the Soho
and enterprise markets, and is based on a similar platform to the 360 model. The
first version, the SkyBlaster 360, supports only IP networks. We continue to
develop several add-ons and enhancement to this product. It is designed to
improve higher data rates and higher satellite efficiency compared to the
SkyStar Advantage product, and is therefore a lower cost and modern solution to
shared hub service providers.
In addition we continue to enhance all of our products (including
SkyStar Advantage and FaraWay) by adding several new features, and supporting
the needs of existing or potential customers.
Our current products and services typically operate on either the Ku or
C satellite bands. We have also developed extensive Ku band capabilities. We are
currently involved in exploring the possible utilization of the Ka satellite
band with our products and services in the future.
We develop our own network software and software for our VSATs. We
generally license our software to customers as part of the sale of our network
products and services. We also license certain third party software for use in
our products.
Our software and our internally developed hardware are proprietary and
we have implemented protective measures both of a legal and practical nature. We
have obtained and registered patents in the United States and in various other
countries in which we offer our products and services. We rely upon the
copyright laws to protect against unauthorized copying of the object code of our
software and upon copyright and trade secret laws for the protection of the
source code of our software. We derive additional protection for our software by
licensing only the object code to customers and keeping the source code
confidential. In addition, we enter into confidentiality agreements with our
customers and other business partners to protect our software technology and
trade secrets. We have also made copyright, trademark and service mark
registrations in the United States and abroad for additional protection of our
intellectual property. Despite all of these measures, it is possible that
competitors could copy certain aspects of our software or hardware or obtain
information that we regard as a trade secret in violation of our legal rights.
THIRD-PARTY FUNDING
Through December 31, 2002, we accrued a total of approximately $9,591,657
in grants from the Office of the Chief Scientist for the research and
development of next generation satellite products. Through that date, we have
repaid all the royalties we are required to repay with respect to grants
totaling $345,000 for the OneWay VSAT. Under the terms of our funding from the
Office of the Chief Scientist for the DialAw@y IP and the mesh satellite
communications network product, royalties of 3% to 5% are payable on sales of
these products developed from the funded project, up to 100% of the
dollar-linked grant received in respect of the project (from January 1, 1999,
annual interest based on LIBOR also began to accrue). The average interest rate
for grants received since 2002 is 4%. Through December 31, 2002, we paid or
accrued royalties of $2,377,995 to the Office of the Chief Scientist for all of
the awarded projects. The terms of these grants prohibit the manufacture of
OneWay products or DialAw@y IP products outside of Israel and the transfer of
technology developed pursuant to the terms of these grants to any person without
the prior written consent of the Office of the Chief Scientist. We received such
consent in connection with the OneWay VSAT product for the KSAT joint venture.
These restrictions do not apply to the sale or export from Israel of products
developed with that know-how. Also, these limitations do not apply to products
that have not been funded by the Office of the Chief Scientist.
In 2001, we entered into an agreement with the Office of the Chief
Scientist for the early payment of all royalties arising from future sales with
respect to previous Office of the Chief Scientist grants we received. The
Company recorded a one-time operating charge of $3.4 million. This amount is
payable over a period up to five years and bears an interest rate to be agreed
upon between the Office of the Chief Scientist and us. This agreement enables us
to participate in a program under which we are eligible to receive future
research and development grants for generic research and development projects
without any royalty repayment obligations.
Through December 31, 2002, we received grants of approximately $580,671
from the European Commission in connection with a joint research and development
project with a number of European high technology companies for a
satellite-based interactive television platform. These grants are non-royalty
bearing.
61
Through December 31, 1999, we received or accrued grants of approximately
$1.0 million from BIRD for the development of the Skystar Advantage VSAT and
FaraWay VSAT products. Under the terms of BIRD funding, generally royalties of
2.5% to 5% on sales of products whose development is so funded are payable until
150% of the dollar amount funded (linked to the Consumer Price Index of the
United States is repaid. As of December 31, 1999, we have paid or accrued to
BIRD approximately $1.7 million in royalties. As of that date, we have completed
repayment of royalties to BIRD with respect to our Skystar Advantage VSAT
products and our FaraWay VSAT product. In 2000, 2001 and 2002, we did not
receive funding from BIRD.
RESEARCH AND DEVELOPMENT CONSORTIUM PARTICIPATION
In addition to royalty-bearing grants from the Office of the Chief
Scientist and BIRD, we have received non-royalty bearing grants from the Office
of the Chief Scientist through participation in generic research consortia, each
comprised of several major high technology companies in Israel, with
participation of one or more representatives from Israeli academic institutions.
We expect to receive further grants through participation in those consortia
that are continuing. The consortia in which we participated in 2002 are:
o the ISIS Consortium (devoted to generic technology research for
the information superhighway in space), which began in February
1999; and
o the LSRT Consortium (devoted to generic technology research for
satellite-based rural telephony solutions), which began in August
2000.
In general, any member of a consortium that develops technology in the
framework of that consortium retains the intellectual property rights to
technology developed and all the members of the consortium have the right to
utilize and implement any such technology without having to pay royalties to the
developing consortium member. Transfer of consortium-developed technology is
subject to restrictions and the approval of the Office of the Chief Scientist
and, in certain projects, of the management of the consortium.
Under each of the research consortia, the Office of the Chief Scientist
reimburses 66% of the approved budget for that consortium and each individual
member of the consortium contributes the remaining 34% for such individual
member's research and development activities. No royalties are payable with
respect to this funding. Expenses in excess of the approved budget are borne by
the consortia members.
As of December 31, 2002, we have accrued approximately $17,652,349
million in grants from the Office of the Chief Scientist through the consortia.
The following table sets forth, for the years indicated, our gross
research and development expenditures, the portion of such expenditures which
was funded by royalty-bearing and non-royalty bearing grants, acquired research
and development and the net cost of our research and development activities:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2000 2001 2002
---- ---- ----
(IN THOUSANDS)
Gross research and development costs............................. $35,576 $47,097 $29,012
Less:
Royalty-bearing grants (the Office of the Chief Scientist).... (926) (2,058) -
Non-royalty-bearing grants (the Consortia and the European (3,946)
Commission)................................................... (3,378) (6,791)
------- -------
Research and development costs-- net............................. 31,272 38,248 25,066
====== ====== ======
TREND INFORMATION
Gilat, like other businesses in the technology sector, is experiencing
significant reductions in revenues and production. For example, we have
significantly reduced our purchase of new inventory and production due to a
62
decrease in overall demand for product in the consumer market and due to excess
inventory caused by the business slowdown that StarBand has experienced.
StarBand is currently under Chapter 11 of the U.S. Bankruptcy Code.
Our revenues in the year 2002 decreased. The primary decrease in sales in
2002 can be attributed to the overall depressed global economy, which has
already affected the telecommunications industry. An additional reason can be
attributed to the restructuring of our debt which caused uncertainty as to our
stability in the market. For much of the fiscal year, customers expressed
uncertainty regarding Gilat's ability to successfully restructure its debt. The
decrease can also be attributed to the sale of our European subsidiaries to our
joint venture with SES Global, Satlynx. Pursuant to the joint venture, we have
sold six of our European subsidiaries Satlynx, an entity that is not
consolidated into our financial statements as of May 2002.
For the year 2003, we estimate that the political environment in Israel
could prevent certain countries from doing business with Gilat and this, in
addition to the downturn in the telecommunications industry overall, may have
adverse effects on our business. We expect that in 2003, with our debt
restructuring complete, our sales will not be hindered by our financial
situation. Nonetheless, given that we have new shareholders, and expect to have
a new board of directors and a new Chief Executive Officer, we cannot guarantee
or predict what our sales will be, what trend will develop and if any changes in
business and marketing strategy will be implemented.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4,
44 and 64, Amendment of SFAS No. 13, and Technical Corrections," ("SFAS No.
145")which rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," and an amendment of that Statement, and SFAS No. 64, "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 amends SFAS No.
44, "Accounting for Intangible Assets for Motor Carriers." SFAS No. 145 amends
SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS No. 145
is effective for fiscal years beginning May 15, 2002. The Company does not
expect the adoption of SFAS No. 145 will have a material impact on the its
results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit of Disposal Activities," ("SFAS No. 146") which addresses
significant issues regarding the recognition, measurement and reporting of costs
associated with exit and disposal activities, including restructuring
activities. SFAS No. 146 requires that costs associated with exit or disposal
activities be recognized when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is effective for all exit
or disposal activities initiated after December 31, 2002. The Company does not
expect the adoption of SFAS No. 146 to have a material impact on our results of
operations or financial position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of SFAS No. 5,
57 and 107 and Rescission of FASB Interpretation No. 34 ("FIN No. 34")." FIN No.
45 elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN No. 45 does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. It also incorporates, without change, the
guidance in FIN No. 34, "Disclosure of Indirect Guarantees of Indebtedness to
Others," which is being superseded. The disclosure provisions of FIN No. 45 are
effective for financial statements of interim or annual periods that end after
December 15, 2002 and the provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantor's year-end. The Company
does not expect the adoption of FIN No. 45 to have a material impact on its
results of operations or financial position
The Company is currently evaluating the ultimate impact of this statement
on our results of operations or financial position.
63
In January 2003, the FASB issued Interpretation No. 46 (or FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
variable interest entity is a corporation, partnership, trust, or any other
legal structures used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. The consolidation requirements of FIN
46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company is
evaluating the impact of the new interpretation.
64
ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
On April 15, 2003, the Company will hold its Annual General Meeting of
Shareholders (the "ANNUAL GENERAL MEETING"). At the Annual General Meeting, the
Company's shareholders will be asked to elect nine directors, two of whom are
external directors in accordance with Israeli law, as set forth below. Two of
the directors that are nominated for election, Mr. Gat and Mr. Levinberg, serve
as directors at present.
On April 15, 2003, the resignations of our Chief Executive Officer and
our President will become effective. Following this election at the Annual
General Meeting. our newly elected board of directors is expected to appoint a
new Chief Executive Officer and President.
Below is a description of (i) our directors and officers as of April
15, 2003, prior to the Annual General Meeting, and (ii) the nominees for the
board of directors at the Annual General Meeting.
I. DIRECTORS AND EXECUTIVE OFFICERS AND KEY EXECUTIVES OF OUR SUBSIDIARIES
PRIOR TO THE ANNUAL GENERAL MEETING:
NAME AGE POSITION
---- --- --------
Yoel Gat(1)(2)................ 51 Chief Executive Officer and Chairman of the board of directors, until April 15, 2003
Amiram Levinberg(1)(2)(3)..... 47 President until April 15, 2003, and Director
Shlomo Tirosh(4).............. 57 Director
Lori Kaufmann(1)(4)........... 43 Director
Erez Antebi(5)................ 43 Chief Operating Officer
Gideon Kaplan................. 47 Vice President, Technology
Yoav Leibovitch............... 44 Vice President, Finance and Administration and Chief Financial Officer
Joshua Levinberg.............. 48 Senior Vice President, Business Development
William I. Weisel............. 49 Vice President and General Counsel
Nick Supron................... 47 President and Chief Executive Officer, Spacenet
David R. Shiff................ 45 Vice President, Sales and Marketing, Spacenet
Samer Salameh................. 38 Chairman of the board of directors and Chief Executive OffICEr, rStar Corporation
(1) Member of the Stock Option Committee.
(2) Member of the Compensation Committee.
(3) Served as Chief Operating Officer until May 2002.
(4) Member of the Audit Committee.
(5) As of May 2002.
YOEL GAT is a co-founder of Gilat and has been Gilat's Chief Executive
Officer since Gilat's inception until his resignation on April 15, 2003. Mr. Gat
has been a director since Gilat's inception and, since July 1995, has served as
the Chairman of the board of directors. Mr. Gat is a member of the Stock Option
and Compensation Committees of the board of directors. Until July 1995, Mr. Gat
also served as the President of Gilat. From 1974 to 1987, Mr. Gat served in the
Israel Defense Forces. In his last position in service, Mr. Gat was a senior
electronics engineer in the Israel Ministry of Defense. Mr. Gat is a two-time
winner of the Israel Defense Award (1979 and 1988), Israel's most prestigious
research and development award. Mr. Gat also served as the Chairman of the MOST
Consortium and is a director of rStar Corporationand StarBand. Mr. Gat holds a
B.Sc. (Electrical Engineering and Electronics) from the Technion -- Israel
Institute of Technology and a master's degree in management science from the
Recanati Graduate School of Business Administration of Tel Aviv University,
where he concentrated on information systems.
AMIRAM LEVINBERG is a co-founder of Gilat and has been Gilat's
President from July 1995 until his resignation on April 15, 2003. Mr. Levinberg
has been a director since Gilat's inception. Until October 2002, Mr. Levinberg
also served as the Company's Chief Operations Officer. Mr. Levinberg is a member
of the Stock Option
65
and Compensation Committees of the board of directors. Until July 1995, he
served as Vice President of Engineering. In this capacity, he supervised the
development of Gilat's OneWay and Skystar Advantage VSATs. From 1977 to 1987,
Mr. Levinberg served in a research and development unit of the Israel Defense
Forces, where he managed a large research and development project. He was
awarded the Israel Defense Award in 1988. Mr. Levinberg holds a B.Sc.
(Electrical Engineering and Electronics) and a M.Sc. (Digital Communications)
from the Technion -- Israel Institute of Technology.
SHLOMO TIROSH is a co-founder of Gilat and has been a member of the
board of directors from its inception until April 15, 2003, serving as Chairman
of the board of directors until July 1995. Mr. Tirosh was a member of the Audit
Committee of the Board until April 15, 2003. Since July 1990, Mr. Tirosh has
been serving as Chairman of the Board and President of Mentergy, and from 1990
to 2001 as Chief Executive Officer of Mentergy. From 1964 to 1987, Mr. Tirosh
served in the Israel Defense Forces, where he held a variety of professional and
field command positions (retiring with the rank of colonel). From 1980 to 1985,
he headed a large research and development unit and, from 1985 to 1987, he
managed a large-scale technology project for the Israel Ministry of Defense. In
1988, he received the Israel Defense Award. Mr. Tirosh holds a B.A. (summa cum
laude) (Economics) from Bar-Ilan University.
LORI KAUFMANN has been a director of Gilat from November 2000 to April
15, 2003, and until that date was a member of the Audit, Compensation and Stock
Option Committees. Ms. Kaufmann has been an independent consultant in Israel and
the United States since 1993. From October 1998 to October 2000, Ms. Kaufmann
was vice president of MainXchange, an Internet-based financial services company.
In 1991, Ms. Kaufmann co-founded HK Associates, an Israeli marketing and
management-consulting firm that served many of Israel's leading high technology
companies, including, in 1991, Gilat. Ms. Kaufmann was employed by HK Associates
until 1993. From 1989 to 1990, Ms. Kaufmann was a senior economist at Israel
Chemicals Ltd., an Israeli chemicals firm. Ms. Kaufmann holds a B.A (magna cum
laude) (International Relations) from Princeton University and a MBA from
Harvard Business School.
EREZ ANTEBI has served as Gilat's Chief Operating Officer since October
2002. From the beginning of 1998 until being appointed Gilat's Chief Operating
Officer, Mr. Antebi served as Gilat's Vice President, General Manager for Asia,
Africa and Pacific Rim. From September 1994 until the beginning of 1998, he
served as Vice President and General Manager of Gilat Inc. Mr. Antebi joined
Gilat in May 1991 as product manager for the Skystar Advantage VSAT product.
From August 1993 until August 1994, he served as Vice President of Engineering
and Program Management of Gilat Inc. Prior to joining Gilat, Mr. Antebi worked
for a private importing business from 1989 to 1991, after having served as
marketing manager for high frequency radio communications for Tadiran Limited, a
defense electronics and telecommunications company, from 1987 to 1989, and as a
radar systems development engineer at Rafael, the research and development and
manufacturing arm of the Israel Defense Forces, from 1981 to 1987. Mr. Antebi
holds a B.Sc. and an M.Sc. Electrical Engineering from the Technion -- Israel
Institute of Technology.
GIDEON KAPLAN joined Gilat in 1989 as Vice President of Technology.
From late 1987 to mid-1989, Mr. Kaplan was employed as a research engineer with
Qualcomm, Inc., a mobile satellite communications and cellular radio company.
From 1978 to 1987, Mr. Kaplan served in a research and development unit of the
Israel Defense Forces and received the Israel Defense Award in 1984. Mr. Kaplan
holds a B.Sc., a M.Sc. and a Ph.D. (Electrical Engineering) from the Technion --
Israel Institute of Technology.
YOAV LEIBOVITCH joined Gilat in early 1991 as Vice President of Finance
and Administration and Chief Financial Officer. Since joining Gilat, Mr.
Leibovitch has also served as acting Chief Financial Officer of Gilat Inc. From
1989 to 1990, Mr. Leibovitch worked in the United States at Doubleday Books and
Music Clubs as special advisor for new business development. From 1985 to 1989,
he was the Financial Officer of a partnership among Bertelsmann, A.G., a large
German media and communications company; Clal Corporation, a major Israeli
industrial holding company; and Yediot Aharonot, an Israeli daily newspaper. Mr.
Leibovitch holds a B.A. (Economics and Accounting) and a M.B.A. (Finance and
Banking) from the Hebrew University of Jerusalem. Mr. Leibovitch is a Certified
Public Accountant in Israel.
JOSHUA LEVINBERG is a co-founder of Gilat and, since June 1999, serves
as Senior Vice President for Business Development of Gilat, having previously
served in that position from 1994 to April 1998. At that time, Mr. Levinberg
became Chief Executive Officer of GTH LA Antilles, the parent company of Global
Village Telecom
66
(GVT), until June 1999. From 1989 until September 1994, he served as Executive
Vice President and General Manager of Gilat Satellite Networks, Inc. From 1987
until the formation of Gilat Satellite Networks, Inc. in 1989, Mr. Levinberg was
Vice President of Business Development of Gilat. From 1985 to 1987, Mr.
Levinberg held various positions, including Manager of System Development and
Marketing Manager at the Israeli subsidiary of DSP Group Inc., a U.S. company
specializing in digital signal processing. From 1979 to 1985, he worked in the
Communications Engineering Department of Elrisa Ltd., a manufacturer of
sophisticated weapons and communications systems. Mr. Levinberg serves as
chairman of the board of directors of Satlynx S.A. Mr. Levinberg holds a B.Sc.
(Electrical Engineering and Electronics) from the Tel Aviv University. Amiram
Levinberg, and Joshua Levinberg are brothers.
WILLIAM I. WEISEL joined Gilat on December 18, 2001 as Vice President
and General Counsel. Prior to joining Gilat, Mr. Weisel was the Legal Affairs
Director, Israel for ADC Telecommunications Israel Ltd (April 1999-December
2001), Corporate Legal Counsel of Scitex Corporation Ltd (January 1995-March
1999), Legal Counsel for the logistics department of Scitex Corporation Ltd
(October 1992-December 1994), was in private business in Israel (November
1987-September 1992), and an associate with the Law Offices of Shraga Biran
(November 1986-November 1987). Prior to immigrating to Israel in April 1986, Mr.
Weisel was an associate with Jeffer, Mangels, Butler & Marmaro from March 1982,
and with Freeman, Freeman, Freeman & Hernand from January 1980 in Los Angeles,
California. Mr. Weisel holds a J.D. degree from Loyola Law School of Los Angeles
(1979) and a B.A., magnum cum laude from the University of California, Los
Angeles in political science (1976). He is licensed to practice law in, and is a
member of the Bars of the State of California and Israel.
NICK SUPRON joined Spacenet in January 2001 as President and Chief
Executive Officer. Prior to joining Spacenet and since 1999, Mr. Supron was a
private investor and management consultant. Between 1984 and 1999, he served in
various positions with Gtech Corporation, commencing as a senior corporate
consultant to the CEO and culminating as Senior Vice President of worldwide
operations. From 1982 to 1984, Mr. Supron was a Senior Corporate Consultant for
Tenneco Oil Company and he served as a senior project manager engineer between
1978 and 1980 for Brown & Root. Mr. Supron holds a MBA from Harvard Business
School and a BSME from the Rice University in Houston.
DAVID R. SHIFF joined Spacenet in December 1998 as Vice President of
Sales and Marketing. Prior to joining Spacenet, Mr. Shiff spent 15 years with
Hughes Network Systems, a division of Hughes Electronics. During his tenure at
Hughes, Mr. Shiff held a succession of business development, sales and sales
management positions. He served as Assistant Vice President, North American
Sales, for the Satellite Networks Division of Hughes Network Systems for the two
years immediately prior to joining Spacenet. Mr. Shiff holds a degree in
Mechanical Engineering from the University of Wisconsin.
SAMER SALAMEH joined rStar in November 2002, as Chief Executive Officer
and Chairman of the board of directors. Mr. Salameh most recently served as
President and Chief Executive Officer of Telmex North America Ventures, where he
managed a portfolio of companies. From 1997 to 2000, he served as Chairman and
Chief Executive Officer of Prodigy Communications Corp. where he led efforts to
take the company public in 1999, grew revenues from $20 million to over $300
million in two years, and transformed the company into one of the nation's
largest consumer DSL Internet service providers. Mr. Salameh has a Masters in
Administration in International Business from The Fletcher School, Tufts
University and a B.Sc. (Management and Economics) from Polytechnic University.
II NOMINEES TO THE BOARD AT THE ANNUAL GENERAL MEETING:
NAME AGE POSITION
---- --- --------
Shlomo Rodav (1).............. 54 Director
Yoel Gat(2) .................. 51 Director
Amiram Levinberg(3) .......... 47 Director
Gideon Chitayat(4)............ 64 Director
Meir Shamir................... 52 Director
Doron Steiger ................ 45 Director
Shalom Shally Tshuva(5)....... 36 Director
Linda E. Harnevo.............. 48 External Director
David Milgrom................. 45 External Director
67
(1) Mr. Rodav is expected to be appointed as the Chairman of the board of
directors. In addition to the traditional duties of the Chairman of the
board, which duties include convening and managing the annual
shareholders' meetings and meetings of the Company's board of
directors, Mr. Rodav, as Active Chairman, will have an overall
executory role in carrying out the decisions of the Company's board of
directors. Mr. Rodav will be responsible for supervising Company
management. He will also supervise and manage the implementation of the
Company's strategic development programs.
(2) Mr. Gat serves until April 15, 2003, as Gilat's Chief Executive Officer
and Chairman of the board of directors, and a member of the Stock
Option Committee and of the Compensation Committee of Gilat. Mr. Gat's
background information is set forth in Section I (A) above.
(3) Mr. Levinberg serves until April 15, 2003, as Gilat's President and
director, and a member of the Stock Option Committee and of the
Compensation Committee of Gilat. Mr. Levinberg's background information
is set forth in Section I (A) above.
(4) Mr. Chitayat currently serves on the board of directors of Bank
Hapoalim B.M. and of its subsidiary, Hapoalim U.S. Holding. Bank
Hapoalim B.M. is a principal shareholder and a creditor of Gilat.
Pursuant to the amendment of Articles 38 and 39 of our Articles of
Association which will be proposed at the Annual General Meeting, Bank
Hapoalim B.M. is expected to have the right to appoint a director to
our board of directors. Mr. Chitayat was nominated to be elected at the
Annual General Meeting at the request of Bank Hapoalim B.M.
(5) Mr. Tshuva currently serves as the Managing Director of Foresight
Technology Investments and Consulting Ltd. Foresight's major
shareholder, which holds 70% of its shares, is Discount Capital
Markets, a wholly owned subsidiary of Israel Discount Bank Ltd. which
is a principal shareholder and a creditor of Gilat. Pursuant to the
amendment of Articles 38 and 39 of our Articles of Association which
will be proposed at the Annual General Meeting, Israel Discount Bank
Ltd. is expected to have the right to appoint a director to our board
of directors. Mr. Tshuva was nominated to be elected at the Annual
General Meeting at the request of Israel Discount Bank Ltd.
SHLOMO RODAV is the indirect owner, director, chairman and/or Chief
Executive Officer of numerous companies in the investment, environment,
infrastructure, food, hi-tech and other areas. Mr. Rodav has served as a
director since 1996 of Israel Coldstorage & Supply Co. Ltd., a public company,
and in an array of private companies including Torrel Investments Ltd. and
Torrel-Crown (Israel) Ltd., Metzad Ateret Ltd., Waste Management (W.M.) Israel
Ltd., Nymphaea A.A. Ltd., Tapoogan Industries Ltd., Jaf-Ora Ltd., Jafora-Tabori
Ltd. and others. Mr. Rodav served in the past as a director in numerous other
companies, including, among others, Extent and Cellonet for which a receiver has
been appointed. Mr. Rodav holds an MBA from Columbia University and a B.A. from
the Tel Aviv University.
GIDEON CHITAYAT has served as the President and Chief Executive Officer
of General Management and Business Strategy Consultant (GMBS) Ltd. since 1985.
Mr. Chitayat serves and served in the past as a consultant to Chief Executive
Officers and to Chairmen of boards of directors of several leading Israeli
companies and entities in diversified fields in Israel, and his main area of
consultancy is competitive strategy. Among those companies and entities are Teva
Pharmaceutical Industries Ltd., Amdocs Israel, Bank Mizrahi Ltd., Pele-Phone
Cellular Communication Ltd., Ackerstein Ltd., Israel Railways, El-Op Electro
Optics Industries Ltd., Israel Electric Corporation Ltd., Bank Leumi Le-Israel
B.M., Osem Food Corporation Ltd. and Israel Chemicals Ltd. Mr. Chitayat
currently serves on the board of directors of Bank Hapoalim B.M. and Mishkan
Mortgages Bank, both of which are public companies, as well as of Israel
Aircraft Industries and Hapoalim U.S. Holding. Mr. Chitayat served in the past
on the boards of directors of many leading public and private companies and
entities, including Cellcom Israel Ltd., Africa-Israel Investment Company and
its subsidiaries, Oil Refineries Ltd., Ihud Insurance Ltd., Tadiran Consumer and
Electric Products Ltd., Migdal Insurance Company, Bezeq - Israel Telephone
Corporation and others. Mr. Chitayat holds a Ph.D. and an M.A. in Business and
Applied Economics from the Wharton School of the University of Pennsylvania, and
a MBA (with honors) and B.A. (Economics) from the Hebrew University in
Jerusalem. Mr. Chitayat was Senior Adjunct Professor at the Recanati Graduate
School of Business Administration in the Tel Aviv University and held numerous
academic positions in the past, including at the Wharton School of the
University of Pennsylvania, at the Jerusalem School of Business Administration
of the Hebrew University in Jerusalem and at Harvard Business School. Mr.
Chitayat has published numerous articles and a book on corporate, boards of
directors and business issues.
MEIR SHAMIR founded Mivtach Shamir Holdings Ltd., which invests
extensively in Israeli and foreign companies, and has served as its Chairman and
Chief Executive Officer since 1992. Mr. Shamir serves as a director in several
public companies, including Lipman Electronics Engineering Ltd. and Wizcom
Technologies Ltd. in the field of electronics, the venture capital firm
Technoplus Ventures Ltd., Mivtach Shamir Finance Ltd. in the area of
68
finance and pension funds, and Digal Investment and Holdings Ltd. in real
estate. In addition, Mr. Shamir is the owner of and serves as a director in
numerous private companies. Mr. Shamir holds a B.A. (Management and Economics)
from Bar-Ilan University.
DORON STEIGER has been the Chief Executive Officer and has served as a
director since 1998 of Dirad Holdings Ltd., a company owned by Mr. Steiger, and
has been the Managing Director of Dirad Investments Ltd. since 1999 and of Dirad
Technologies Management (2000) Ltd. since 2000. These companies are engaged in
consultancy and investments. Mr. Steiger has served since 2001 as a director of
Taagid Hamichzur Ltd., engaged in collection and recycling, and as the Chairman
of the board of directors of Newlog Ltd., which is the result of a merger of
several subsidiaries of Zim Israel Maritime Company Ltd., Israel's major
maritime freight company. Mr. Steiger has recently been appointed as a director
of Leadertech Ltd., pursuant to an agreement with Leadertech Ltd., which
appointment is pending and contingent upon a shareholders' approval. Leadertech
Ltd. is a public venture capital firm. Mr. Steiger is also serving as a director
of several start-up, R&D and financing companies in the hi-tech field. Mr.
Steiger was the Chief Executive Officer of Israel Corporation Ltd. from April
1997 to March 1998. Mr. Steiger holds an MBA and a B.A. (Economics) from the Tel
Aviv University.
SHALOM SHALLY TSHUVA has been the Managing Director of Foresight
Technology Investments and Consulting Ltd. since 1994. Mr. Tshuva also has
served as a director, since 1999, of the investment firms Forstech Holdings
(1999) Ltd. and Hadar Tshuva Holdings (1999) Ltd. Mr. Tshuva served as a
director in Taya-Net Ltd., for which company a liquidator was appointed by the
court in 2001. Mr. Tshuva holds a MBA (Finance) and a B.Sc. (Mathematics and
Computer Science) from the Tel Aviv University.
LINDA E. HARNEVO is the founder and General Manager of the technology
solutions company RedZebra Ltd., and has served on its board of directors. Ms.
Harnevo has also recently founded Global Medical Networks, which is engaged in
the field of mobile medical information, and serves on its board of directors.
Ms. Harnevo has recently been appointed as a director of Lipman Electronics
Engineering Ltd., a public company in the field of electronics. Ms. Harnevo
holds a Ph.D and an M.Sc. from the Weizmann Institute and a B.Sc. from Bar-Ilan
University.
DAVID MILGROM currently serves as the Chief Executive Officer of Gmul
Investment Ltd., dealing mainly with investments in high-tech, real-estate and
infrastructure, and will serve as the Chief Executive Officer of The Israel
Credit Insurance Company Ltd. as of May 1, 2003. From 1997 to 2000 Mr. Milgrom
served as the Budget Director in the Israeli Ministry of Finance and was
responsible for Israel's budget preparation and structural reforms in the
Israeli economy. Mr. Milgrom was the Chief Financial Officer of Pele-Phone
Cellular Communication Ltd. Mr. Milgrom serves as an external director in the
investment committee of Menora, a public company which is one of the largest
insurance companies in Israel. His term of office in Menora will expire on 2005.
Mr. Milgrom holds a MBA and a B.A. (Economics and Political Science) from the
Hebrew University in Jerusalem.
COMPENSATION OF DIRECTORS AND OFFICERS
The following table sets forth the aggregate compensation paid to or
accrued on behalf of all of our directors and officers as a group for the year
ended December 31, 2002:
SALARIES, FEES, DIRECTORS' FEES, PENSION, RETIREMENT AND SIMILAR
COMMISSIONS AND BONUSES BENEFITS
All directors and officers as a group (29 $6,105,600 $1,744,634
persons)
MANAGEMENT EMPLOYMENT AGREEMENTS
Yoel Gat and Amiram Levinberg, two of our co-founders, are currently
employed under employment agreements renewable annually on December 31 of each
year. The employment agreements are subject to earlier termination by each
officer upon 60 days' notice to us. The agreements provide, amongst other
things, for an adjustment to the annual bonuses payable to Messrs. Gat and
Levinberg under their employment agreements and Mr. Gat's agreement provides for
a personal annual allowance benefit of $150,000 to cover personal expenses
related to
69
extended stays in the United States expected to result from the integration of
Spacenet. Among other provisions, such agreements contain non-competition and
confidentiality provisions. Both Mr. Gat and Mr. Levinberg have resigned,
effective on April 15, 2003. The terms of their resignation are still under
negotiation.
BOARD COMPENSATION
By a resolution adopted in 1996 by our board of directors and
shareholders, the directors of Gilat who are not executive officers receive
annual compensation of $10,000 for their services on the board of directors or
any committee of the board of directors. In addition, by resolution of our board
of directors and shareholders which was adopted in November 2001, each current
and future non-employee director shall receive options to purchase 20,000 of our
ordinary shares. All of the non-management directors are reimbursed for their
expenses for each board of directors meeting attended.
We expect the Compensation Committee, following its institution by our
new board of directors, to recommend a change in the compensation of our
directors. Such a recommendation will be brought to the approval of the
shareholders at the next general meeting of our shareholders.
BOARD COMPOSITION AND PRACTICES
Our Articles of Association provide that our directors, except for the
external directors, shall be elected at the annual general meeting of our
shareholders by the vote of the holders of a majority of the voting power
represented at such meeting in person or by proxy. The elected directors are to
serve until the next annual meeting of the shareholders, unless any office is
vacated earlier under any relevant provisions of our Articles of Association.
Our Articles of Association further provide that our board of directors shall
consist of such number of directors that is not less than two nor more than
fourteen, as shall be determined from time to time by our shareholders at the
general meeting.
Pursuant to an amendment to our Articles of Association which we expect
will be adopted at the Annual General Meeting scheduled for April 15, 2003, our
board of directors shall consist of not less than five and not more than nine
directors as shall be determined from time to time by a majority vote at the
general meeting of our shareholders. Unless resolved otherwise by our
shareholders, our board of directors will be comprised of (i) nine directors, if
four directors are appointed by beneficial owners of 7% or more of our issued
and outstanding ordinary shares (as set forth below), or (ii) seven directors,
if fewer than four directors are so appointed by beneficial owners of 7% or more
of our ordinary shares.
Pursuant to the proposed amendment to our Articles of Association, each
beneficial owner of 7% or more of our issued and outstanding ordinary shares
will be entitled to appoint, at each annual general meeting of our shareholders,
one member to our board of directors, provided that a total of not more than
four directors are so appointed. In the event that more than four qualifying
beneficial owners notify us that they desire to appoint a member to our board of
directors, only the four shareholders beneficially owning the greatest number of
shares shall each be entitled to appoint a member to our board of directors. So
long as our ordinary shares are listed for trading on Nasdaq, we may require
that any such appointed director qualify as an "independent director" as
provided for in the Nasdaq rules then in effect. Our board of directors will
have the right to remove any such appointed director when the beneficial
ownership of the shareholder who appointed such director falls below 7% of our
ordinary shares.
Under the proposed amendment, a majority of the voting power at the
annual general meeting of our shareholders will elect the remaining members of
the board of directors, including external directors as required under the
Companies Law. At any annual general meeting at which directors are appointed
pursuant to the preceding paragraph, the calculation of the vote of any
beneficial owner who appointed a director pursuant to the preceding paragraph
shall not take into consideration, for the purpose of electing the remaining
directors, ordinary shares constituting 7% of our issued and outstanding
ordinary shares held by such appointing beneficial owner.
Under the proposed amendment, each of our directors (except external
directors) shall serve, subject to early resignation or vacation of office in
certain circumstances as set forth in our Articles of Association, until the
adjournment of the next annual general meeting of our shareholders next
following the general meeting in which such director was elected. The holders of
a majority of the voting power represented at a general meeting of our
shareholders in person or by proxy will be entitled to (i) remove any
director(s), other than external directors and
70
directors appointed by beneficial holders of 7% or more of our issued and
outstanding ordinary shares as set forth above, (ii) elect directors instead of
directors so removed, or (iii) fill any vacancy, however created, in the board
of directors. Our board of directors may also appoint additional directors,
whether to fill a vacancy or to expand the board of directors, who will serve
until the next general meeting of our shareholders following such appointment.
Our Articles of Association further provide that the board of directors
may delegate all of its powers to committees of the board of directors as it
deems appropriate, subject to the provisions of applicable law.
We expect our board of directors to agree to appoint Mr. Robert
Bednarek as an observer to the board of directors. In such capacity, Mr.
Bednarek will be invited to participate in every meeting of the board of
directors and given the opportunity to express his views on the matters
discussed, but will not have any voting rights at the meetings. Mr. Bednarek
will have the same access to the Company's books and records as the directors of
the Company and will be subject to customary confidentiality and non-disclosure
undertakings. Mr. Bednarek served as a director of Gilat from April 2002 to
September 2002. Mr. Bednarek is the Executive Vice President Corporate
Development and a member of the Executive Committee of SES GLOBAL S.A., the
parent company of SES Americom Inc. which is a principal shareholder of Gilat
and a major supplier of satellite transponder capacity to Gilat. Mr. Bednarek
previously was the Executive Vice-President and Chief Technology Officer of
PanAmSat Corporation and holds a B.Sc. (Engineering) from the University of
Florida.
ALTERNATE DIRECTORS
Our Articles of Association provide that a director may appoint, by
written notice to us and subject to the consent of the board of directors, any
person qualified to serve as a director to serve as an alternate director
(provided such person does not already serve as a director or an alternate
director). An alternate director shall have all of the rights and obligations of
the director appointing him or her, except the power to appoint an alternate
(unless otherwise specifically provided for in the appointment of such
alternate). An alternate director may not act at any meeting at which the
director appointing him or her is present. Unless the time period or scope of
any such appointment is limited by the appointing director, such appointment is
effective for all purposes and for an indefinite time, but will expire upon the
expiration of term or vacation of office of the appointing director. Currently,
no alternate directors have been appointed.
EXTERNAL DIRECTORS
Under the Companies Law, public companies are required to elect two
external directors who must meet specified standards of independence. Companies
that are registered under the laws of Israel and whose shares are listed for
trading on a stock exchange outside of Israel, such as Gilat, are treated as
public companies with respect to the external directors requirement. External
directors may not have during the 2 years preceding their appointment, directly
or indirectly through a relative, partner, employer or controlled entity, any
affiliation with (i) the public company, (ii) those of its shareholders who are
controlling shareholders at the time of appointment, or (iii) any entity
controlled by the company or by its controlling shareholders. The term
"affiliation" includes an employment relationship, a business or professional
relational maintained on a regular basis, control and services as an office
holder. No person can serve as an external director if the person's other
positions or business creates or may create conflicts of interest with the
person's responsibilities as an external director. Until the lapse of two years
from termination of office, a company may not engage an external director as an
employee or otherwise.
External directors serve for a three-year term, which may be renewed
for only one additional three-year term. External directors can be removed from
office only by the court or by the same special percentage of shareholders that
can elect them, and then only if the external directors cease to meet the
statutory qualifications with respect to their appointment or if they violate
their fiduciary duty to the company. The court may additionally remove external
directors from office if they were convicted of certain offenses by a
non-Israeli court or are permanently unable to fulfill their position. If, when
an external director is elected, all members of the board of directors of a
company are of one gender, the external director to be elected must be of the
other gender.
If delegated any authority of the board of directors, any committee of
the board of directors must include at least one external director. An external
director is entitled to compensation as provided in regulations adopted under
the Companies Law and is otherwise prohibited from receiving any other
compensation, directly or indirectly, in connection with such service.
71
The Companies Law requires external directors to submit to the company,
prior to the date of the notice of the general meeting convened to elect the
external directors, a declaration stating their compliance with the requirements
imposed by Companies Law for the office of external director.
The election of external directors requires the affirmative vote of a
majority of our ordinary shares voted on in person or by proxy at a meeting of
the shareholders, provided that such majority includes at least one-third of the
votes of the non-controlling shareholders of the company who are voting on this
matter at the meeting. This approval requirement need not be met if the
aggregate shareholdings of those non-controlling shareholders who vote against
the election of the external directors represent one percent or less of all the
voting power of the company. "Controlling" for the purpose of this provision
means the ability to direct the acts of the company. Any person holding one half
or more of the voting power of the company or of the right to appoint directors
or the Chief Executive Officer is presumed to have control of the company.
The nominees for external directors at the Annual General Meeting
scheduled for April 15, 2003, are Ms. Linda E. Harnevo and Mr. David Milgrom.
AUDIT COMMITTEE
The Companies Law provides that publicly traded companies must appoint
an audit committee. The responsibilities of the audit committee include
identifying irregularities in the management of the company's business and
approving related party transactions as required by law. An audit committee must
consist of at least three members, and include all of the company's external
directors. However, the chairman of the board of directors, any director
employed by the company or providing services to the company on a regular basis,
any controlling shareholder and any relative of a controlling shareholder may
not be a member of the audit committee. An audit committee may not approve an
action or a transaction with an officer or director, a transaction in which an
officer or director has a personal interest, a transaction with a controlling
shareholder and certain other transactions specified in the Companies Law,
unless at the time of approval two external directors are serving as members of
the audit committee and at least one of the external directors was present at
the meeting in which an approval was granted.
Pursuant to the current listing requirements of the Nasdaq National
Market, we are required to establish an audit committee, at least a majority of
whose members are independent of management. Pursuant to the Sarbanes-Oaxley Act
of 2002, the Securities and Exchange Commission (the "SEC") has issued new rules
which would, among other things, require Nasdaq to impose independence
requirements on each member of the audit committee. Nasdaq has proposed rules
that would comply with the SEC's requirements and which are expected to be
applicable to us in 2004.
The proposed requirements would implement two basic criteria for
determining independence: (i) audit committee members would be barred from
accepting any consulting, advisory or other compensatory fee from the issuer or
an affiliate of the issuer, other than in the member's capacity as a member of
the board of directors and any board committee, and (ii) audit committee members
of an issuer that is not an investment company may not be an "affiliated person"
of the issuer or any subsidiary of the issuer apart from his or her capacity as
a member of the board and any board committee.
The SEC has proposed to define "affiliate" for non-investment companies
as "a person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person
specified." The term "control" is proposed to be consistent with the other
definitions of this term under the Securities Exchange Act of 1934, as "the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a person, whether through the ownership of voting
securities, by contract, or otherwise." A safe harbor has been proposed by the
SEC, under which a person who is not an executive officer, director or 10%
shareholder of the issuer would be deemed not to have control of the issuer.
Under the final rules adopted by the SEC, an issuer is required to
disclose in its annual report, beginning with the annual report for 2003,
whether or not such issuer has at least one audit committee financial expert. If
it does, the issuer must disclose the name of the expert. If not, the issuer
must disclose why it does not have an audit committee financial expert.
72
Presently, our audit committee consists of Ms. Kaufman and Mr. Tirosh.
As of April 15, 2003, we expect our new board of directors to appoint the
expected external directors, Mr. Milgrom and Ms. Harnevo, to serve on our audit
committee, together with one of the remaining independent directors. We believe
that this appointment will comply with the requirements of the Companies Law and
with the proposed SEC rules, and that Mr. Milgrom is qualified to serve as the
audit committee's financial expert, as required by the SEC.
INDEPENDENT DIRECTORS
Pursuant to the current listing requirements of the Nasdaq National
Market, we are required to have at least two independent directors on our board
of directors. Under rules proposed by Nasdaq, the majority of the members of the
board directors will need to be independent. These proposals have not yet been
approved by the SEC.
An "independent director" for these purposes has been proposed to mean
a person other than an officer or employee of a company or its subsidiaries or
any other individual having a relationship, which, in the opinion of the
company's board of directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
The following persons are not considered independent under the proposed
rules:
(a) a director who is or was employed by the company or by
any parent or subsidiary of the company within the last three
years;
(b) a director who accepts or has family member (by blood,
marriage or adoption or has the same residence) who accepts
any payments from the company or any of its affiliates in
excess of $60,000 during the current fiscal year or any of the
past three fiscal years, other than compensation for board
service, compensation paid to family members who are employees
(other than executive officers of the company, its parent
company or its subsidiaries) or benefits under a qualified
plan or non-discretionary compensation;
(c) a director who is a family member of an individual who
is, or within the past three years was, employed by the
company or by any parent or subsidiary of the company as an
executive officer;
(d) a director who is a partner in, or a controlling
shareholder or an executive officer of, any organization to
which the company made, or from which the company received,
payments (other than those arising solely from investments in
the company's securities) that exceed 5% of the recipient's
consolidated gross revenues for that year, or $200,000,
whichever is more, in the current fiscal year or any of the
past three fiscal years;
(e) a director of the listed company who is employed as an
executive officer of another entity where any of the executive
officers of the listed company serve on the compensation
committee of such other entity, or if such relationship
existed within the last three years; or
(f) a director who was a partner or employee of the
company's outside auditor, and worked on the company's audit,
within the last three years.
This independence requirement does not apply to a company of which more
than 50% of the voting power is held by an individual, a group or another
company.
Of the nominees for directors at the Annual General Meeting, we believe
that Mr. Milgrom, Ms. Harnevo Mr. Shamir, Mr. Steiger and Mr. Radav will comply
with the independence standards set forth above.
ADVISORY BOARD
We have authorized an Advisory Board to be composed of senior members
of the business and technology community with expertise in areas of our
business, who will be expected to advise and assist us in determining and
73
implementing our strategic course of action, as well as in fostering contacts
with potential customers for our products. There are currently no appointees to
the Advisory Board.
EMPLOYEES
As of December 31, 2002, we had approximately 909 full-time employees,
including 111 employees in administration and finance, 100 employees in
marketing and sales, 180 employees in engineering, research and development and
322 employees in manufacturing, operations and technical support. Of these
employees, 395 employees were based in our facilities in Israel, 300 were
employed in the United States, and 213 in Asia, the Far East and other parts of
the world.
We also utilize temporary employees, as necessary, to supplement our
manufacturing and other capabilities. We believe that our relations with our
employees are satisfactory.
We and our employees are not parties to any collective bargaining
agreements. However, certain provisions of the collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel) ("Histadrut") and
the Coordination Bureau of Economic Organizations (including the Manufacturers'
Association of Israel) are applicable to all Israeli employees by order (the
"Extension Order") of the Israeli Ministry of Labor and Welfare. These
provisions principally concern the length of the work day and the work week,
minimum wages for workers, contributions to a pension fund, insurance for
work-related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment. Furthermore, pursuant to such
provisions, the wages of most of our employees are automatically adjusted based
on changes in the Israeli CPI. The amount and frequency of these adjustments are
modified from time to time.
Israeli law generally requires severance pay upon the retirement or
death of an employee or termination of employment without due cause. Our ongoing
severance obligations are partially funded by making monthly payments to
approved severance funds or insurance policies, with the remainder accrued as a
long-term liability in our financial statements. In addition, Israeli employees
and employers are required to pay specified sums to the National Insurance
Institute, which is similar to the U.S. Social Security Administration. Since
January 1, 1995, such amounts also include payments for national health
insurance. The payments to the National Insurance Institute are approximately
14.6% of wages (up to a specified amount), of which the employee contributes
approximately 66% and the employer contributes approximately 34%. The majority
of our permanent employees are covered by life and pension insurance policies
providing customary benefits to employees, including retirement and severance
benefits. For Israeli employees, we contribute 13.33% to 15.83% (depending on
the employee) of base wages to such plans and the permanent employees contribute
5% of base wages.
SHARE OWNERSHIP
See table under Item 7: "Major Shareholders and Related Party
Transactions" below.
STOCK OPTION PLANS
In January 1993, we adopted the Stock Option Plan (Incentive and
Restricted Stock Options) (the "1993 ISO/RSO Plan") and Section 102
Option/Restricted Stock Purchase Plan (the "1993 Section 102 Plan")
(collectively, the "1993 Plans"). The 1993 Plans provide for the granting of
options and/or rights to purchase (in the case of the 1993 Section 102 Plan) up
to an aggregate of 318,500 ordinary shares to our officers, directors, key
employees or consultants or any of our subsidiaries.
In June 1995, we adopted the following plans, referred to together as
the "1995 Plans":
(i) the 1995 Stock Option Plan (Incentive and Restricted Stock Options)
(the "1995 ISO/RSO Plan"), which currently provides for the granting of
incentive and restricted stock options for the purchase of up to 3,940,000
ordinary shares (increased by 3,820,000 as a result of several resolutions of
the board of directors, which were approved by the shareholders);
(ii) the 1995 Section 102 Stock Option/Stock Purchase Plan (the "1995
Section 102 Plan"), which provides for the granting of options to purchase up to
5,920,000 ordinary shares (increased by 4,300,000 as a result of resolutions of
the Board in November 1999, May 2000 and March 2001); and
74
(iii) the 1995 Advisory Board Stock Option Plan (the "1995 Advisory
Board Plan"), which provides for the granting of options to purchase up to
150,000 ordinary shares.
The purpose of the 1993 Plans and 1995 Plans is to enable us to attract
and retain qualified persons as employees, officers, directors, consultants and
advisors and to motivate such persons by providing them with an equity
participation in Gilat. In addition, the 1993 and 1995 ISO/RSO Plans are
designed to afford qualified optionees certain tax benefits available under the
United States Internal Revenue Code of 1986, as amended (the "Code"). The 1993
and 1995 Section 102 Plans are designed to afford qualified optionees certain
tax benefits under the Israel Income Tax Ordinance. The 1995 Advisory Board Plan
is designed to allow for the granting of options to members of the Advisory
Board. The 1993 Plans will expire on January 27, 2003 and the 1995 Plans will
expire on June 29, 2005 (ten years after their adoption), unless terminated
earlier by the board of directors.
Each of the 1993 Plans and the 1995 Plans is administered by a Stock
Option Committee appointed by the Board. The Stock Option Committee (comprised
of Messrs. Gat, Levinberg and Ms. Kaufmann) has broad discretion, subject to
certain limitations, to determine the persons entitled to receive options or
rights to purchase under the 1993 Plans and 1995 Plans, the terms and conditions
on which options or rights to purchase are granted and the number of shares
subject thereto. The Stock Option Committee also has discretion to determine the
nature of the consideration to be paid upon the exercise of an option and/or
right to purchase granted under the 1993 Plans and the 1995 Plans. Such
consideration generally may consist of cash or, at the discretion of the Board,
cash and a recourse promissory note.
Stock options issued as incentive stock options pursuant to both the
1993 and 1995 ISO/RSO Plans will only be granted to the employees of Gilat or
its subsidiaries. The exercise price of incentive stock options issued pursuant
to both the 1993 and 1995 ISO/RSO Plans must be at least equal to the fair
market value of the ordinary shares as of the date of the grant (and, in the
case of optionees who own more than 10% of the voting stock, the exercise price
must equal at least 110% of the fair market value of the ordinary shares as of
the date of the grant). The exercise price of restricted stock options issued
pursuant to the 1993 and 1995 ISO/RSO Plans and the 1995 Advisory Board Plan
must not be less than the lower of (i) 50% of the book value of the ordinary
shares as of the end of the fiscal year immediately preceding the date of such
grant or (ii) 50% of the fair market value per share of ordinary shares as of
the date of the grant. The price per share under options awarded pursuant to the
1993 and 1995 Section 102 Plans may be any price determined by the Stock Option
Committee.
Options are exercisable and restrictions on disposition of shares lapse
according to the terms of the individual agreements under which such options
were granted or shares issued. Ordinary shares as to which the rights associated
with such shares have not vested will be held by a trustee designated by us.
In April 2001, Gilat initiated a voluntary stock option exchange
program for its employees (the "Option Exchange Program"). Under the program,
employees of Gilat and its subsidiaries who were granted options under Gilat's
stock option plans were given the opportunity to cancel outstanding stock
options previously granted to them in exchange for an equal number of new
options to be granted at a future date pursuant to the terms of Gilat's Plans.
The exercise price of these new options is equal to the fair market value of
Gilat's ordinary shares as reported by Nasdaq on the date the options were
granted. In November 2001, the Company granted the new options under the Option
Exchange Program. Options for a total of 6,443,668 ordinary shares were tendered
for cancellation and were cancelled as of May 24, 2001.
In November 2001, the Board and Shareholders of Gilat approved the
allocation of an option for 20,000 shares for each current and future
non-employee director.
As of December 31, 2002, we granted options to purchase a total of
299,198 ordinary shares under the 1993 Plans and 8,490,955 ordinary shares under
the 1995 Plans The exercise prices for such options vary from $0.39 to $159.875
and all such options expire at various times from November 2003 to February
2013. As of December 31, 2002, options under the plans for a total of 870,381
shares have been exercised.
In May 1999, the Board approved the establishment of a new stock option
plan under Section 102 of the Israel Income Tax Ordinance with 500,000 ordinary
shares to be reserved for issuance. Management was directed to prepare the plan
and obtain the necessary regulatory approvals. The plan was approved by the
shareholders at the
75
1999 annual meeting, but the request for regulatory approval was withdrawn and
there are no current plans to activate the plan in the near future.
ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of March 31, 2003 (including
options exercisable within 60 days of March 31, 2003) with respect to: (i) each
person who is believed by us to be the beneficial owner of more than 5% of the
ordinary shares; (ii) each director or officer who holds more than 1% of the
ordinary shares, and (iii) all directors and officers as a group. Except where
otherwise indicated, we believe, based on information furnished by the owners,
that the beneficial owners of the ordinary shares listed below have sole
investment and voting power with respect to such shares, subject to any
applicable community property laws. The shareholders listed below do not have
any different voting rights from any other shareholders of Gilat, except to the
extent that they hold more than 7% and as such, if the proposed amendment to the
Articles of Association is adopted at the April 15, 2003 Annual General Meeting,
they will have a right to appoint a director, subject to certain conditions.
Except as disclosed below, none of the directors, officers or key executives
listed in the Directors and Senior Management table appearing in Item 6 above,
owns 1% or more of Gilat's outstanding share capital.
NUMBER OF PERCENT OF
ORDINARY ORDINARY
SHARES SHARES
BENEFICIALLY OUTSTANDING
OWNED
Bank Hapoalim B.M (1)(2) 35,636,853 13.72
Israel Discount Bank Ltd. (1)(3) 23,095,304 8.89
SES Global S.A. (4) 18,596,048 7.16
Eliezer Fishman (1)(5) 43,303,642 16.67
MW Post Advisory Group, LLC (6) 14,126,240 5.44
All officers and directors as a group 3,232,156 1.24
(6 persons)
(1) Based on a Schedule 13D filing made with the United States
Securities and Exchange Commission.
(2) Bank Hapoalim B.M. also holds Notes in the principal amount of
$12,164,739. The Company has an outstanding loan to Bank Hapoalim B.M. in the
approximate amount of $71.4 million. Bank Hapoalim became a principal
shareholder as a result of the Arrangement.
(3) Israel Discount Bank Ltd. also holds Notes in the principal
amount of $9,514,743. Israel Discount Bank Ltd. has issued performance
guarantees to the Company in the approximate aggregate amount of $13.3 million.
Israel Discount Bank became a principal shareholder as a result of the
Arrangement.
(4) SES Global S.A. holds 14,261,048 ordinary shares through SES
Americom Inc., a wholly owned subsidiary, and 4,308,000 ordinary shares through
SES Capital Belgium S.A., an indirectly wholly owned subsidiary. Prior to the
Arrangement, SES Global S.A. held, indirectly through SES Capital Belgium S.A.,
4,308,000 ordinary shares which constituted immediately prior to the Arrangement
18.44% of the ordinary shares then outstanding. The information is based on data
available to us as of the date of our filing.
(5) Mr. Fishman, directly and through members of the Fishman family,
beneficially owns Gilat ordinary shares through the following entities (which
hold Gilat ordinary shares directly or indirectly through other companies):
Fishman Family Properties Management (1988) Ltd. ("FFPM"), Fishman Chains Ltd.
("FC"), Fishman Mifalei Kerur Ltd. ("FMK"), E.T. Fishman Properties (1998) Ltd.
("ETFP"), Hashkaot Kedaiot Ltd. ("HK"), and Fish Et Ltd. ("FE"), all of whom are
incorporated in Israel. Mr. Fishman, directly and through members of the Fishman
family, is the sole shareholder of FFPM, ETFP, HK, and FE and owns 97.5% of FC
and 98% of FMK. Mr. Fishman, directly and through members of the Fishman family,
also holds Notes in the aggregate principal amount of $17,697,422. Mr. Fishman,
directly and indirectly, became a principal shareholder as a result of the
Arrangement.
(6) Lawrence A. Post holds 14,126,240 ordinary shares through M.S.
Post Advisory Group, LLC, an entity indirectly owned by Mr. Post and in which he
serves as President. The information is based on Schedule 13G filing made with
the Securities and Exchange Commission. Mr. Post became a principal shareholder
as a result of the Arrangement.
RELATED PARTY TRANSACTIONS
SPACENET NOTES
76
In April 2000, Spacenet issued notes to four trusts that were established
for the benefit of family members of Yoel Gat, Amiram Levinberg, Joshua
Levinberg and Yoav Leibovitch, respectively (the "Officers"). These notes were
issued in consideration for the payment of principal amounts ranging between
$159,091 and $318,182; they carry a 5% annual interest and are due in April
2005. Each note is convertible at a predetermined conversion price. Conversion
is at the option of the holders at any time prior to maturity, into a number of
up to between 1.81% and 3.63% of the issued and outstanding share capital and
vested options of StarBand (including the amount of such share capital and
vested options already held by the note holder). The Officers expressly disclaim
beneficial ownership of the shares issuable upon conversion of the notes. The
Notes were repaid in 2002 at a discounted value.
As part of the Arrangement, we entered into the following agreements with our
shareholders:
AMENDMENT TO LOAN AGREEMENT WITH BANK HAPOALIM.
According to the terms of the amendment signed in March, 2003, of the
$102 million in principal amount due from us to Bank Hapoalim, (i) $25.5 million
was converted into 18,488,590 ordinary shares, (ii) $5.1 million was converted
into Notes of the same principal amount and (iii) the remaining debt amount of
$71.4 million remains as a loan on revised terms. The revised terms include
equal semiannual installments of principal of $4.463 million beginning on July
2, 2005, with a last installment of $8.925 million on July 2, 2012. The loan
bears interest at the six-month LIBOR rate plus 2.5% and is payable semiannually
together with the installments of principal.
AGREEMENT WITH SES AMERICOM
Under the agreement, SES Americom agreed to terminate its transponder
agreements with Spacenet that relate to StarBand (which is partially held by
Spacenet) and to enter into a new transponder capacity agreement directly with
StarBand. SES Americom also agreed to allow Spacenet to defer an outstanding
debt of $3.5 to 2003, and to defer payment of certain transponder capacity
charges due in 2003 and 2004, with payment of those deferred charges to commence
in 2005. The agreement reduced the aggregate amount payable to SES Americom in
2003, from $26.9 million to $16.5 million (including the $3.5 million which was
deferred from 2002 to 2003). As part of this agreement, we issued SES Americom a
number of ordinary shares equal to approximately 5.5% of our ordinary shares,
that, together with our ordinary shares already held by an affiliate of SES
Americom, constitute approximately 7.2% of our outstanding ordinary shares. In
addition, as part of this agreement, Gilat provided SES Americom with a parental
guarantee, guaranteeing (i) Spacenet's obligations incurred or arising in 2003
under the agreement, and (ii) repayment of $3.4 million by Spacenet. After
giving effect to the agreement, our overall liability as of December 31, 2002
decreased to $110 million.
ITEM 8: FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS
See Item 18: "Financial Statements."
EXPORT SALES
Gilat's manufacturing facilities are based in Israel. Most of our
products are exported out of Israel. For information on Gilat's revenues
breakdown by geographic market for the past three years, see Item 5:
"Operating and Financial Review and Prospects."
LEGAL PROCEEDINGS
We are a party to various legal proceedings incident to our business.
Except as noted below, there are no material legal proceedings pending or, to
our knowledge, threatened against us or our subsidiaries, and we are not
involved in any legal proceedings that our management believes, individually or
in the aggregate, would have a material adverse effect on our business,
financial condition or operating results.
77
On March 7, 2001, rStar (then known as ZapMe! Corporation) filed an
action against a software vendor, ON Technology Corporation ("OTC"), by which
rStar alleged that OTC breached a software license agreement and defrauded rStar
concerning the capabilities of the software. By its complaint, rStar seeks
recovery of $390,160 rStar paid to OTC in connection with the software, as well
as other damages. On or about March 29, 2001, OTC filed a counterclaim against
rStar, alleging that the principal sum of $307,528 is due from rStar for
additional license fees, maintenance fees, and professional fees in connection
with OTC's software. rStar denies the allegations contained in the counterclaim,
and is pursuing its claims against OTC in this matter.
On June 11, 2001, an action was filed against Gilat in the District
Court of Tel Aviv, Israel by Terayon Ltd. (formerly Combox Ltd.) ("Terayon")
alleging Gilat's breach of contract in connection with purchase orders issued by
Gilat. Terayon is claiming it is owed approximately $2.4 million. The parties
have agreed to arbitrate the case and the matter is proceeding accordingly. We
do not believe that we are in breach of these purchase orders and are vigorously
defending against these claims.
On June 12, 2001, we received a letter from a supplier, Celeritek,
Inc., demanding payment of approximately $6.1 million, in response to our
termination of certain purchase orders. We do not believe that this claim has
merit and intend to vigorously defend against it.
Gilat claims that KSAT Satellite Networks Inc. is obligated to pay to
Gilat approximately $2,787,832 in principal and interest on an outstanding
shareholder loan that became due on October 17, 2002; and KSAT
Telecommunications Ltd, a subsidiary of KSAT Satellite Networks Inc. claims that
Gilat owes it approximately $562,000 for services rendered, which claim Gilat
denies, and in any case, Gilat has claimed a setoff against the amount owed to
Gilat above. We do not believe that KSAT Telecommunications' claim has merit and
intend to vigorously defend against it.
The Israeli customs authority is examining certain imports to determine
whether Gilat has paid the appropriate duty for certain components. The
investigation may result in administrative proceedings to recover approximately
$1 million from the Company, which we will have the right to challenge. We
maintain that we have made all required payments.
On November 13, 2001 Gilat was named as a defendant in an amended
complaint for patent infringement that was filed by the Lemelson Foundation in
the U.S. The lawsuit alleges that Gilat's integration and sale of certain
components in its products violates one or more of the Lemelson patents. The
complaint does not state the amount claimed from Gilat. The amended complaint
has not been formally served on Gilat. Settlement discussions with plaintiff's
counsel have taken place without resolution of the matter, but no further action
has been taken by plaintiff. Gilat intends to vigorously defend itself in this
action.
On February 1, 2002, an action was filed by Recovar Group ("Recovar")
against Gilat Florida, Inc. to collect monies allegedly owed to Test Equipment
Solutions Today, Inc. for goods supplied to Gilat Florida between January 31,
2001 and December 28, 2001. The alleged receivable was assigned to Recovar.
Gilat Florida is vigorously defending against such claims.
In 2002, a number of securities class action lawsuits were filed
against us and certain of our officers and directors in the United States
District Court for the Eastern District of New York and in the United States
District Court for the Eastern District of Virginia ("class action suits") and a
request to file a class action lawsuit was filed in the Tel-Aviv, Israel
District Court. The class action suits were brought on behalf of parties who
purchased our securities between May 16, 2000 and October 2, 2001, inclusive,
and allege violations of the federal securities laws and claim that we issued
material misrepresentations to the market. The class action suits in the US have
been consolidated into a single action in the United States District Court for
the Eastern District of New York. The Israeli court granted a motion to stay the
proceedings of the Israeli action pending the outcome of the US class action
proceeding. We believe the allegations against us and our officers and directors
in the class action suits are without merit and we intend to contest them
vigorously.
In the early part of 2002, a third party issued a letter to the Company
claiming that it has rights to a portion of one of our subsidiaries based upon a
document and certain partial payments made. The Company rejects the legal bases
for such claims and intends to vigorously defend any action if brought by the
third party but does intend to seek a mutually acceptable resolution to this
dispute.
78
On January 7, 2002, Gilat received a letter from the Syndia Corporation
("Syndia") alleging Gilat's possible infringement of a Lemelson patent that is
owned by Syndia. The claimed infringement involves the alleged integration by
Gilat of certain semiconductor components procured from unlicensed third party
manufacturers. Gilat intends to vigorously dispute such claim.
In July 2002 an arbitration proceeding was commenced in England by
Global Manufacturers' Services Valencia S.A. ("GMS") pursuant to an arbitration
clause in a supply agreement between Gilat and GMS. GMS claimed that
approximately $13.2 million was owed by Gilat for certain inventory allegedly
purchased on Gilat's behalf under the agreement. In March 2003, an agreement to
settle the matter was reached between the parties. The final settlement is in
the process of completion.
On November 15, 2002 an action was filed against Spacenet Inc. in the
United States District Court for the District of Connecticut by Linda Thompson,
a former employee of Spacenet, seeking sales commissions allegedly owed in the
amount of $500,000 plus compensatory damages for an alleged wrongful termination
of employment. The court ordered Spacenet to post a pre-judgment bond of
$275,000 pending the outcome of the trial. Spacenet is vigorously disputing such
claims and has filed a motion to dismiss the wrongful termination claim.
In addition, from time to time, we may be notified of claims that we
may be infringing patents, copyrights or other intellectual property rights
owned by third parties. While we do not believe we are currently infringing any
intellectual property rights of third parties, we cannot assure that other
companies will not, in the future, pursue claims against us with respect to the
alleged infringement of patents, copyrights or other intellectual property
rights owned by third parties. In addition, litigation may be necessary to
protect our intellectual property rights and trade secrets, to determine the
validity of and scope of the propriety rights of others or to defend against
third-party claims of invalidity. Any litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
Gilat's business, financial condition and operating results.
If any claims or actions are asserted against us, we may seek to obtain
a license under a third party's intellectual property rights. We cannot assure,
however, that a license will be available under terms that are acceptable to us,
if at all. The failure to obtain a license under a patent or intellectual
property right from a third party for technology used by us could cause us to
incur substantial liabilities and to suspend the manufacture of the product
covered by the patent or intellectual property right. In addition, we may be
required to redesign our products to eliminate infringement if a license is not
available. Such redesign, if possible, could result in substantial delays in
marketing of products and in significant costs. In addition, should we decide to
litigate such claims, such litigation could be extremely expensive and time
consuming and could materially adversely affect our business, financial
condition and operating results, regardless of the outcome of the litigation.
We are also a party to various regulatory proceedings incident to our
business. To the knowledge of our management, none of such proceedings is
material to us or to our subsidiaries.
DIVIDENDS POLICY
We have never paid cash dividends on our ordinary shares and do not
anticipate paying any cash dividends in the foreseeable future. We intend to
retain any earnings for use in our business. We have decided to reinvest
permanently the amount of tax-exempt income derived from our "Approved
Enterprises" and not to distribute such income as dividends. See notes 11 and 13
of the notes to consolidated financial statements included in this annual report
on Form 20-F. We may only pay cash dividends in any fiscal year out of
"profits," as determined under Israeli law. In addition, the terms of some of
our financing arrangements restrict us from paying dividends to our
shareholders.
In the event we declare dividends in the future, we will pay those
dividends in NIS. Because exchange rates between NIS and the dollar fluctuate
continuously, a U.S. shareholder will be subject to currency fluctuation between
the date when the dividends are declared and the date the dividends are paid.
SIGNIFICANT CHANGES
On January 24, 2003 an action was filed by Spacenet Inc. against
Creative Resources Solutions L.L.C.
79
(CRS) in the Circuit Court for Fairfax County, Virginia in the amount of $1.5M
seeking payment of unpaid service charges and contract damages. After Spacenet
rejected CRS' offer to settle the lawsuit for a cash payment by CRS, CRS filed a
counterclaim for $4.7million alleging contract non-performance by Spacenet.
Spacenet is vigorously pursuing its claim against CRS and disputing CRS'
counterclaim, which it believes has no merit.
In February 2003, a letter was received from a former employee alleging
that Gilat owes him approximately $400,000 in compensation as a result of his
employment with and services rendered to Gilat. Gilat denies that it owes any
amounts to him and intends to vigorously dispute such claims.
In March 2003, we concluded the Arrangement with our bank lenders,
holders of our old notes and certain other creditors. See: "Item 5: Operating
and Financial Review and Prospects - Commitments and Contingencies".
Concurrent with the closing of the Arrangement, Messrs. Gat and
Levinberg, Chief Executive Officer and President of the Company, resigned from
their respective positions as officers, effective April 15, 2003. See "Item 6:
Directors, Senior Management and Employees".
ITEM 9: THE OFFER AND LISTING
Our ordinary shares are quoted on the Nasdaq National Market under the
symbol "GILTF." The following table sets forth, for the periods indicated, the
range of high and low closing sale price for the ordinary shares, as reported by
Nasdaq:
AVERAGE DAILY TRADING
PRICE VOLUME
----- ------
HIGH LOW
---- ---
YEAR ENDING DECEMBER 31, 1998: $56.38 $22.50 165,016
YEAR ENDING DECEMBER 31, 1999: $125.25 $41.75 226,233
YEAR ENDING DECEMBER 31, 2000:
First Quarter................... $181.50 $103.00 433,984
Second Quarter.................. $128.75 $64.00 378,984
Third Quarter................... $93.38 $67.50 233,381
Fourth Quarter.................. $77.50 $25.38 506,111
YEAR ENDING DECEMBER 31, 2001:
First Quarter................... $43.75 $11.25 691,983
Second Quarter................. $16.03 $9.36 423,825
Third Quarter .................. $14.01 $5.02 268,101
Fourth Quarter.................. $4.43 $2.00 673,734
YEAR ENDING DECEMBER 31, 2002:
First Quarter................... $6.26 $3.30 244,432
Second Quarter.................. 3.49 1.00 155,600
Third Quarter................... 1.15 0.45 194,124
Fourth Quarter.................. 0.69 0.33 210,176
80
AVERAGE DAILY TRADING
PRICE VOLUME
----- ------
HIGH LOW
---- ---
YEAR ENDING DECEMBER 31, 2003:
First Quarter 0.47 0.19 697,020
MOST RECENT SIX MONTHS:
October 2002 0.69 0.43 93,730
November 2002 0.62 0.39 331,065
December 2002 0.55 0.33 205,733
January 2003 0.47 0.33 140,480
February 2003 0.44 0.34 133,947
March 2003 0.39 0.19 1,816,633
As of March 31, 2003, there were 259,757,196 ordinary shares
outstanding, and 176 record holders of ordinary shares, of which 142 represented
U.S. record holders owning an aggregate of approximately 86.9% of our
outstanding ordinary shares.
ITEM 10: ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
REGISTRATION AND PURPOSES
Gilat Satellite Networks Ltd. is an Israeli company registered with the
Israel companies register, registration no. 52-003893-6.
Under the Companies Law, a company may define its purposes as to engage
in any lawful business and may broaden the scope of its purposes to the grant of
reasonable donations for any proper charitable cause, even if the basis for any
such donation is not dependent upon business considerations. Article 3A of our
Articles of Association provides that Gilat's purpose is to engage in any
business permitted by law and that Gilat can also grant reasonable donations for
any proper charitable cause.
AMENDMENT OF THE ARTICLES
Under the Companies Law, a company may amend its articles of
association by the affirmative vote of a majority of the shares voting and
present at the general meeting of shareholders or by a different voting if so
provided by the company's articles of association. Article 3 of our Articles of
Association provides that the Articles of Association may be amended by a
resolution approved by holders of a majority of the shares represented at a
general meeting and voting on such resolution, if such amendment is recommended
by the board of directors; in any other case, by a resolution approved by
holders of at least 75% of the shares represented at a general meeting and
voting on such resolution.
Israeli law further provides that any amendment to the articles of
association of a company that obligates a shareholder to acquire additional
shares or to increase the extent of his liability shall not obligate the
shareholder without his prior consent.
81
AMENDMENT OF THE MEMORANDUM
Companies that were incorporated prior to the effective date of the
Companies Law, such as Gilat, may amend their memorandum of association to
authorize future amendments to the memorandum of association by any required
voting. On November 9, 2000, Gilat's shareholders approved an amendment to
Gilat's Memorandum of Association, by adding a provision that will authorize
Gilat to amend its Memorandum of Association by the affirmative vote of a
majority of the ordinary shares present and voting at the meeting. This
amendment to the Memorandum of Association is included as an exhibit to this
annual report on Form 20-F.
RECORD DATE FOR NOTICES OF GENERAL MEETING AND OTHER ACTION
Under the Companies Law, for the purpose of a shareholder vote, the
record date for companies traded outside of Israel, such as Gilat, can be set
between four and forty days before the date of the meeting. Article 20 of our
Articles of Association therefore provides that the board of directors may set
in advance a record date, which shall not be more than forty nor less than four
days before the date of such meeting (or any longer or shorter period permitted
by law).
NOTICE OF GENERAL MEETINGS; OMISSION TO GIVE NOTICE
The Companies Law provides that a company whose shares are traded on an
exchange must give notice of a general meeting to its shareholders of record at
least twenty-one days prior to the meeting, unless the company's articles
provide that a notice need not be sent. Accordingly, Article 25(a) of our
Articles of Association provides that not less than 21 days' prior notice shall
be given to shareholders of record of every General Meeting (i.e. Annual General
Meetings and Special General Meetings). It further provides that notice of a
General Meeting shall be given in accordance with any law and otherwise as the
board of directors may determine. In addition, Article 25(c) of our Articles of
Association provides that no shareholder present, in person or by proxy, at the
commencement of a General Meeting shall be entitled to seek the revocation of
any proceedings or resolutions adopted at such General Meeting on grounds of any
defect in the notice of such meeting relating to the time or the place thereof.
ANNUAL GENERAL MEETINGS AND SPECIAL GENERAL MEETINGS
Under the Companies Law, an annual meeting of the shareholders should
be held once in every calendar year and not more than fifteen months from the
last annual meeting. The Companies Law Israeli provides that a special meeting
of shareholders must be called by the board of directors upon the written
request of (i) two directors, (ii) one-fourth of the serving directors, (iii)
one or more shareholders who hold(s) at least five percent of the issued share
capital and at least one percent of the voting power of the company, or (iv) one
or more shareholders who have at least five percent of the voting power of the
company. Within twenty one days of receipt of such demand, the board of
directors is required to convene the special meeting for a time not later than
thirty five days after notice has been given to the shareholders. Article 24 of
our Articles of Association provide that our board of directors may call a
special meeting of the shareholders at any time and shall be obligated to call a
special meeting as specified above.
QUORUM AT GENERAL MEETINGS
Under Article 6(b) of our Articles of Association, the required quorum
for any general meeting of shareholders and for any class meeting is two or more
shareholders present in person or by proxy and holding at least thirty-three and
one-third percent (331/3%) of the issued shares (or of the issued shares of such
class in the event of a class meeting). The required quorum in a meeting that
was adjourned because a quorum was not present, shall be two shareholders
present in person or by proxy. Under Article 26(c) of our Articles of
Association, if the adjourned meeting was called by a shareholder(s), the quorum
in the adjourned meeting shall be one or more shareholders, present in person or
by proxy and holding the number of shares required to call a meeting.
82
ADOPTION OF RESOLUTIONS AT GENERAL MEETINGS
Article 28(b) of our Articles of Association provides for voting by a
written ballot only. In addition, Article 28(c), in accordance with the
Companies Law, provides that the declaration of the Chairman of the Meeting as
to the results of a vote are not considered to be conclusive, but rather prima
facie evidence of the fact.
Under our Articles of Association, any resolution of the shareholders,
except a resolution for a voluntary liquidation of the company and, in certain
circumstances, a resolution to amend our Articles of Association, shall be
deemed adopted if approved by the vote of the holders of a majority of the
voting power represented at such meeting in person or by proxy.
VOTING POWER
Article 31 of our Articles of Association provides that every
shareholder shall have one vote for each share held by him of record or, in
accordance with the definition of "shareholder" in the Companies Law, in his
name with an "exchange member" and held of record by a "nominee company", as
such terms are defined in the Companies Law.
We do not have cumulative voting provisions for the election of
directors or for any other matter.
ELECTION AND REMOVAL OF DIRECTORS
Under our Articles of Association, the ordinary shares do not have
cumulative voting rights in the election of directors. A director is not
required to retire at a certain age and need not be a shareholder of Gilat.
Under the Companies Law, a person cannot serve as a director if convicted of
certain offenses or been declared bankrupt. Article 39 of our Amended Articles
provides that the affirmative vote of a majority of the shares then represented
at a general meeting of shareholders shall be entitled to remove a director from
office (for any reason), to elect directors instead of the directors so removed
or to fill any vacancy, however created, in the board of directors. The
directors may, at any time and from time to time, appoint a director to
temporarily fill a vacancy on the board of directors, except that if the number
of directors then in office at the time of such vacancy constitutes less than a
majority of the entire Board, they may only act in an emergency, or to fill the
vacancy up to the minimum number required to effect corporate action.
Our board of directors has recommended to our shareholders to amend
Articles 38 and 39 of our Articles of Association, and our shareholders are
expected to vote on such proposal on April 15, 2003. Under the proposed
amendment, our board of directors shall consist of not less than five and not
more than nine directors as shall be determined from time to time by a majority
vote at the general meeting of our shareholders. Unless resolved otherwise, the
proposed amendment states that our board of directors will be comprised of nine
directors, if four directors are appointed by beneficial owners of seven percent
or more of our issued and outstanding ordinary shares as set forth below, or
seven directors, if fewer than four directors are appointed by beneficial owners
of seven percent or more of our issued and outstanding ordinary shares as set
forth below.
The proposed amendment further provides that each beneficial owner of
seven percent or more of our issued and outstanding ordinary shares shall be
entitled to appoint, at each annual general meeting of our shareholders, one
member to our board of directors (an "Appointed Director"), provided that a
total of not more than four Appointed Directors are so appointed. In the event
more than four such qualifying beneficial owners notify us that they desire to
appoint an Appointed Director, only the four shareholders beneficially owning
the greatest number of shares shall each be entitled to appoint an Appointed
Director.
For the purposes of the preceding paragraph, a "beneficial owner" of
ordinary shares means any person or entity who, directly or indirectly, has the
power to vote, or to direct the voting of, such ordinary shares. All ordinary
shares beneficially owned by a person or entity, regardless of the form which
such beneficial ownership takes, shall be aggregated in calculating the number
of ordinary shares beneficially owned by such person or entity. All persons and
entities that are affiliates (as defined below) of each other shall be deemed to
be one person or entity for the purposes of this definition. For the purposes of
the preceding paragraph, an "affiliate" means, with respect to any person or
entity, any other person or entity controlling, controlled by, or under common
control with such person or
83
entity. "Control" shall have the meaning ascribed to it in the Israeli
Securities Law - 1968, i.e. the ability to direct the acts of a company. Any
person holding one half or more of the voting power of a company of the right to
appoint directors or to appoint the Chief Executive Officer is presumed to have
control of the company.
The proposed amendment further stipulates that as a condition to the
appointment of an Appointed Director, any appointing shareholder that delivers
to the Company a letter of appointment shall, prior to such delivery, be
required to file with the SEC a Schedule 13D, or an amendment to its Schedule
13D if there is any change in the facts set forth in its Schedule 13D already on
file with the SEC which discloses any such change in its holdings of ordinary
shares, regardless of whether any filing or amendment is required to be filed
under the rules of the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder. In addition, any Appointing
Shareholder shall be obligated to notify the Company in writing of any sale,
transfer, assignment or other disposition of any kind of ordinary shares by such
appointing shareholder that results in the reduction of its beneficial ownership
to below the percentage indicated above, immediately after the occurrence of
such disposition of shares but in any event not later than the earliest of (i)
ten (10) days thereafter, or (ii) the next Annual General Meeting. Without
derogating from the foregoing, so long as an Appointed Director serves on the
board of directors, the appointing shareholder which appointed such Appointed
Director shall provide the Company, upon its written request at any time and
from time to time, with reasonable evidence of its beneficial ownership in the
Company.
Under the proposed amendment, so long as our ordinary shares are listed
for trading on Nasdaq, we may require that any Appointed Director qualify as an
"independent director" as provided for in the Nasdaq rules then in effect. In
addition, in no event may a person become an Appointed Director unless such
person does not, at the time of appointment, and did not, within two years prior
thereto, engage, directly or indirectly, in any activity which competes with the
Company, whether as a director, officer, employee, contractor, consultant,
partner or otherwise.
Under the proposed amendment of Articles 38 and 39 of our Articles of
Association, the annual general meeting of our shareholders, by the vote of the
holders of a majority of the voting power represented at such meeting in person
or by proxy, will elect the remaining members of the board of directors. At any
annual general meeting at which Appointed Directors are appointed as set forth
above, the calculation of the vote of any beneficial owner who appointed a
director pursuant to the preceding paragraph shall not take into consideration,
for the purpose of electing the remaining directors, ordinary shares
constituting seven percent of our issued and outstanding ordinary shares held by
such appointing beneficial owner.
Appointed Directors, as set forth above, may be removed by our board of
directors when the beneficial ownership of the shareholder who appointed such
Appointed Director falls below seven percent of our ordinary shares. In
addition, the office of an Appointed Director will expire upon the removal of
the Appointed Director by the shareholder who appointed such Appointed Director
or when the Appointed Director ceases to qualify as an "independent director" as
set forth above.
The proposed amendment to Article 39 of our Articles of Association
further provides that the affirmative vote of a majority of the shares then
represented at a general meeting of shareholders shall be entitled to remove
director(s) other than Appointed Directors from office (unless pursuant to
circumstances or events prescribed under the Companies Law), to elect directors
instead of directors so removed or to fill any vacancy, however created, in the
board of directors. Subject to the foregoing and to early resignation or ipso
facto termination of office as provided in Article 42 of our Articles of
Association, each director shall serve until the adjournment of the of the
Annual General Meeting next following the Annual General Meeting or General
Meeting at which such director was elected.
Our directors may, at any time and from time to time, appoint a
director to temporarily fill a vacancy on the board of directors or in addition
to their body (subject to the number of directors in the board of directors as
set forth above), except that if the number of directors then in office
constitutes less than a majority of the number provided for entire board of
directors, as set forth above, they may only act in an emergency, or to fill the
vacancy up to the minimum number required to effect corporate action or in order
to call a general meeting for the purpose of electing directors.
84
ALTERNATE DIRECTORS
See "Item 6: Directors, Senior Management and Employees - Alternate
Directors".
EXTERNAL DIRECTORS
See "Item 6: Directors, Senior Management and Employees - External
Directors".
QUALIFICATION OF DIRECTORS
Article 40 of our Articles of Association provides that no person shall
be disqualified to serve as a director by reason of him not holding shares in
the Company or by reason of him having served as director in the past. Our
directors are not subject under the Companies Law or our Articles of Association
to an age limit requirement. Under the Companies Law, a person cannot serve as a
director if he been convicted of certain offenses, unless specifically
authorized by the court, or has been declared bankrupt.
PROCEEDINGS OF THE BOARD OF DIRECTORS
Article 46 of our Articles of Association provides that the board of
directors may meet and adjourn its meetings and otherwise regulate such meetings
and proceedings as the directors think fit. Any director may convene a meeting
of the board of directors, upon notice of not less than 7 days.
Consistent with the Companies Law, Article 46 of our Articles of
Association provides that no director present at the commencement of a meeting
of the board of directors shall be entitled to seek the revocation of any
proceedings or resolutions adopted at such meeting on account of any defect in
the notice of such meeting relating to the time or the place thereof.
Article 47 of our Articles of Association provides that unless
unanimously decided otherwise by the board of directors, a majority of the
directors then in office shall constitute a quorum for meetings of the board of
directors. No business shall be transacted at a meeting of the board of
directors unless the requisite quorum is present.
Our board of directors may elect directors as a Chairman and a
Co-Chairman. The Companies Law provides that the Chairman of the Board of a
company shall have a casting vote in the event of a tied vote, unless the
company's articles of association provides otherwise. Article 48 of 46 of our
Articles of Association provides that neither the Chairman nor the Co-Chairman
of the Board shall have a casting or additional vote.
BORROWING POWERS
The Companies Law authorizes the board of directors of a company, among
other things, to determine the credit limit of the company and to issue bonds.
Article 35(b) of our Articles of Association states that our board of directors
may, from time to time, at its discretion, cause Gilat to borrow or secure the
payment of any sum or sums of money, and may secure or provide for the repayment
of such sum or sums in such manner, at such times and upon such terms and
conditions as it deems fit.
POWERS OF CHIEF EXECUTIVE OFFICER
The Companies Law provides that transactions between a company and its
"office holders", which are not "extraordinary transactions" (as both terms are
defined below), require the approval of the board of directors, unless another
manner of approval is provided by the articles of association. See "Item 10:
Additional Information--Interested Parties Transactions." Accordingly, to
provide Gilat's Chief Executive Officer flexibility in hiring officers (other
than directors), Article 50(b) of our Articles of Association authorizes Gilat's
Chief Executive Officer to appoint the officers and employees of Gilat (other
than directors) and to determine their remuneration as long as the board of
directors did not do so, and provides further that the remuneration of the four
highest salaried personnel of the Company shall be approved by either the board
of directors, the Audit Committee or the Compensation Committee.
85
An "extraordinary transaction" is defined in the Companies Law as a
transaction which is not in the company's ordinary course of business, or is not
on market terms, or that may materially affect the company's profitability,
assets or liabilities.
An "office holder" is defined in the Companies Law as a director,
general manager, chief business manager, deputy general manager, or any other
person assuming the responsibilities of any of the foregoing positions without
regard to such person's title, and any other manager directly subordinate to the
general manager.
TRANSFER OF SHARES
Fully paid ordinary shares are issued in registered form and may be
freely transferred pursuant to the Articles of Association, unless such transfer
is restricted or prohibited by another instrument.
ACQUISITION OF SHARES OVER CERTAIN THRESHOLDS
The Companies Law provides that an acquisition of shares in the Company
must be made by means of a tender offer, if, as a result of the acquisition, the
purchaser would become a holder of twenty five percent or more of the voting
rights in the Company. This rule does not apply if there is already another
holder of twenty five percent of the voting rights. Similarly, the Companies Law
provides that an acquisition of our shares must be made by means of a tender
offer, if, as a result of the acquisition, the purchaser would become a holder
of forty five percent of the voting rights in the Company, unless there is
another person holding at that time more than fifty percent of the voting rights
of the Company.
Regulations under the Companies Law provide that the Companies Law's
tender offer rules do not apply to a company whose shares are publicly traded
either outside of Israel or both in and outside of Israel if, pursuant to the
applicable foreign securities laws and stock exchange rules, there is a
restriction on the acquisition of any level of control of the company or if the
acquisition of any level of control of the company requires the purchaser to
make a tender offer to the public shareholders.
REPURCHASE OF SHARES
The Companies Law, subject to certain limitations, allows companies
under certain circumstances to repurchase their own shares. Article 10(b) of our
Articles of Association provides that Gilat may at any time, and from time to
time, subject to the Companies Law, purchase back or finance the purchase of any
shares or other securities issued by Gilat, in such manner and under such terms
as the board of directors shall determine, whether from one or more
shareholders. Such purchase shall not be deemed a payment of dividends and no
shareholder will have the right to require Gilat to purchase his shares or offer
to purchase shares from any other shareholders.
FOREIGN OWNERSHIP
Neither our Articles of Association nor Israeli law restrict in any way
the ownership of our ordinary shares by nonresidents of Israel, or restrict the
voting or other rights of nonresidents of Israel. Notwithstanding, nationals of
certain countries that are, or have been, in a state of war with Israel may not
be recognized as owners of ordinary shares, without a special government permit.
MERGERS
The Companies Law provides for mergers between Israeli companies, if
each party to the transaction obtains the appropriate approval of its board of
directors and shareholders. A "merger" is defined in the Companies Law as a
transfer of all assets and liabilities (including conditional, future, known and
unknown liabilities) of a target company to another company, the consequence of
which is the dissolution of the target company in accordance with the provisions
of the Companies Law. For purposes of the shareholder vote of each merging
entity, unless a court rules otherwise, the merger requires the approval of a
majority of the shares of that entity that are not held by the other entity or
are not held by any person who holds 25% or more of the shares or the right to
appoint 25% or more
86
of the directors of the other entity. Article 69A of our Articles of Association
provides that a merger requires the approval of the holders of a majority of the
shares voting thereon.
DISTRIBUTION OF DIVIDENDS AND LIQUIDATION RIGHTS
Our ordinary shares are entitled to the full amount of any cash or
share dividend declared, in proportion to the paid up nominal value of their
respective holdings. In the event of liquidation, after satisfaction of
liabilities to creditors, our assets will be distributed to the holders of our
ordinary shares in proportion to the paid up nominal value of their respective
holdings. Such rights may be affected by the grant of preferential dividend or
distribution rights to the holders of a class of shares with preferential rights
that may be authorized in the future by the shareholders.
Generally, pursuant to the Companies Law, the decision to distribute
dividends and the amount to be distributed, whether interim or final, is made by
the board of directors. Accordingly, under Article 52 of our Articles of
Association, our board of directors has the authority to determine the amount
and time for payment of interim dividends and final dividends.
Under the Companies Law, dividends may be paid only out of its net
profits for the two years preceding the distribution of the dividends,
calculated in the manner prescribed in the Companies Law. Pursuant to the
Companies Law, in any distribution of dividends, our board of directors is
required to determine that there is no reasonable concern that the distribution
of dividends will prevent us from meeting our existing and foreseeable
obligations as they become due. Our Articles of Association provide that no
dividends shall be paid otherwise than out of our profits and that any such
dividend shall carry no interest. In addition, upon the recommendation of our
board of directors, approved by the shareholders, we may cause dividends to be
paid in kind.
MODIFICATION OF CLASS RIGHTS
The rights attached to any class of shares (unless otherwise provided
by the terms of issue of such class), such as voting, dividends and the like,
may be modified by the affirmative vote of a majority of the issued shares of
the class at a general meeting of the holders of the shares of such class.
INTERESTED PARTIES TRANSACTIONS
The Companies Law requires that certain transactions, actions and
arrangements be approved by the Audit Committee as well as by our board of
directors. In certain circumstances, in addition to Audit Committee and board of
directors approval, approval by our shareholders at a general meeting is also
required. Specifically, the approval of our Audit Committee, board of directors
and shareholders is required with respect to the following:
(1) a director's terms of service and employment, including, among
other things, grant of exemptions, insurance and indemnification;
(2) extraordinary transactions (as defined above) with (i) controlling
shareholders, or (ii) another person or entity in which transaction
a controlling shareholder has a personal interest, including a
private placement which is an extraordinary transaction; and
(3) the terms of engagement or employment with a controlling
shareholder who is also an office holder or an employee of the
Company.
The approval of our shareholders would be required in addition to the
approval of our board of directors, in (i) any transaction in which the majority
of our directors have a personal interest, and (ii) a private placement of
securities that will increase the holdings of a shareholder that holds five
percent or more of our outstanding share capital, or that will cause any person
to become, as a result of the issuance, a holder of more than five percent of
our outstanding share capital.
For the purpose of approvals of interested parties transactions, a
"controlling shareholder" is defined under the Companies Law as: (i) a
shareholder having the ability to direct the acts of the company (for this
purpose, any person
87
holding one half or more of the voting power of the company or of the right to
appoint directors or the Chief Executive Officer is presumed to have control of
the company); or (ii) the holder of twenty five percent or more of the voting
rights at the general meeting of the company, if there is no other person
holding more than fifty percent of such rights (for this purpose, two or more
holders having a personal interest in the transaction shall be deemed to be
joint holders).
The Companies Law requires a special majority of shareholder votes in
approving the transactions with a controlling shareholder referenced in
paragraphs (2) and (3) above. The special majority approval must comply with one
of the following: (a) it must include at least one-third of all of the votes of
the shareholders voting at the meeting who do not have a personal interest in
the transaction, or (b) the total number of opposing votes from amongst the
shareholders who do not have a personal interest in the transaction does not
exceed one percent of all of the voting power of the Company.
The disclosure provisions of the Companies Law require certain
disclosure to be made to the Company in connection with interested parties
transactions, as follows:
o an office holder or a controlling shareholder promptly disclose
any direct or indirect personal interest (excluding personal
interest caused by the holding of Company shares) that he may
have, and all related information known to him, in connection
with any existing or proposed transaction by the Company;
o in the event of a private placement that will increase the
holdings of any shareholder holding more than five percent of our
outstanding share capital, or that will cause any person to
become, as a result of the issuance, a holder of more than five
percent of our outstanding share capital, such shareholder must
promptly disclose to the Company any personal interest he may
have in such private placement; and
o any of our shareholders voting on any transaction with a
controlling shareholder as set forth above must inform the
Company prior to the voting, or on the proxy card if applicable,
of any personal interest he has in the transaction. The vote of a
shareholder who does not inform the Company with respect to any
such interest shall not be counted.
In addition, a director who has a personal interest in a transaction,
except a transaction with an office holder or in which an office holder has a
personal interest but which is not an extraordinary transaction, may not be
present or vote at a meeting of the Audit Committee or the board of directors,
unless a majority of directors in the Audit Committee or the board of directors,
as applicable, have a personal interest in the transaction.
EXEMPTION, INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS
The Companies Law describes the fiduciary duty of an office holder as a
duty to act in good faith and for the benefit of the company, including by
refraining from actions in which he has a conflict of interest or that compete
with the company's business, refraining from exploiting a business opportunity
of the company in order to gain a benefit for himself or for another person, and
disclosing to the company any information and documents which are relevant to
the company and that were obtained by him in his or her capacity as an office
holder. The duty of care is defined as an obligation of caution of an office
holder that requires the office holder to act at a level of competence at which
a reasonable office holder would have acted in the same position and under the
same circumstances, including by adopting reasonable means for obtaining
information concerning the profitability of the act brought for his approval.
Under the Companies Law, a company may not exempt an office holder from
liability with respect to a breach of his fiduciary duty, but may exempt in
advance an office holder from his liability to the company, in whole or in part,
with respect to a breach of his duty of care.
Pursuant to the Companies Law, a company may indemnify an office holder
against a monetary liability imposed on him by a court, including in settlement
or arbitration proceedings, and against reasonable legal expenses in a civil
proceeding or in a criminal proceeding in which the office holder was found to
be innocent or in which he was convicted of an offense which does not require
proof of a criminal intent. The indemnification of an office
88
holder must be expressly allowed in the articles of association, under which the
company may (i) undertake in advance to indemnify its office holders with
respect to categories of events that can be foreseen at the time of giving such
undertaking and up to an amount determined by the board of directors to be
reasonable under the circumstances, or (ii) provide indemnification
retroactively at amounts deemed to be reasonable by the board of directors.
A company may also procure insurance of an office holder's liability in
consequence of an act performed in the scope of his office, in the following
cases: (a) a breach of the duty of care of such office holder, (b) a breach of
the fiduciary duty, only if the office holder acted in good faith and had
reasonable grounds to believe that such act would not be detrimental to the
company, or (c) a monetary obligation imposed on the office holder for the
benefit of another person.
A company may not indemnify an office holder against, nor enter into an
insurance contract which would provide coverage for, any monetary liability
incurred as a result of any of the following:
o a breach by the office holder of his fiduciary duty unless the
office holder acted in good faith and had a reasonable basis to
believe that the act would not prejudice the company;
o a breach by the office holder of his duty of care if such breach
was done intentionally or recklessly;
o any act or omission done with the intent to derive an illegal
personal gain; or
o any fine or penalty levied against the office holder as a result
of a criminal offense.
In addition, under the Companies Law, indemnification of, and
procurement of insurance coverage for, a company's office holders must be
approved by the company's audit committee and board of directors and, in
specified circumstances, by the company's shareholders.
Our Articles of Association allow us to exempt any office holder to the
maximum extent permitted by law, before or after the occurrence giving rise to
such exemption. Our Articles of Association also provide that we may indemnify
any past or present office holder, to the maximum extent permitted by law,
against any liabilities he or she may incur in such capacity, limited with
respect (i) to the categories of events that can be foreseen in advance by our
board of directors when authorizing such undertaking and (ii) to the amount of
such indemnification as determined retroactively by our board of directors to be
reasonable in the particular circumstances. Similarly, we may also agree to
indemnify an office holder for past occurrences, whether or not we are obligated
under any agreement to provide such indemnification. We have obtained directors'
and officers' liability insurance covering our officers and directors and those
of our subsidiaries for certain claims.
Our Articles of Association also allow us to procure insurance covering
any past or present officer holder against any liability which he or she may
incur in such capacity, to the maximum extent permitted by law. Such an
insurance may also cover the Company for indemnifying such office holder.
ISRAELI TAXATION
The following is a short summary of certain Israeli tax consequences to
persons holding our ordinary shares, including the legislation of a tax reform
approved by the Knesset in July 2002, which is effective from January 1, 2003,
and on administrative and judicial interpretations, all as currently in effect,
and all of which are subject to change (possibly with retroactive effect) and to
differing interpretations. Regulations relating to the tax reform have not yet
been promulgated and might be different than what is currently expected and
assumed in the following discussion. Therefore, there might be changes in the
tax rates and in the circumstances in which they apply, and other modifications
which might change the tax consequenses to you. The discussion is not intended
and should not be construed as legal or professional tax advice and is not
exhaustive of all possible tax considerations.
THIS SUMMARY DOES NOT DISCUSS ALL ASPECTS OF ISRAELI INCOME AND CAPITAL
GAIN TAXATION THAT MAY BE APPLICABLE TO INVESTORS IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES OR TO INVESTORS WHO ARE SUBJECT TO SPECIAL STATUS OR TREATMENT
UNDER ISRAELI TAX LAW. FOR THE FOREGOING AND OTHER REASONS, YOU ARE URGED TO
CONSULT YOUR OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF YOUR HOLDINGS.
89
GILAT IS NOT MAKING ANY REPRESENTATIONS REGARDING THE PARTICULAR TAX
CONSEQUENCES AS TO ANY HOLDER, NOR IS GILAT OR ITS ADVISORS RENDERING ANY FORM
OF LEGAL OPINION OR PROFESSIONAL TAX ADVICE AS TO SUCH TAX CONSEQUENCES.
TAX CONSEQUENCES TO NONRESIDENTS OF ISRAEL
Nonresidents of Israel are subject to income tax on income accrued or
derived from sources in Israel or received in Israel. These sources of income
include passive income such as dividends, royalties and interest, as well as
non-passive income from services rendered in Israel. Gilat is required to
withhold income tax at the rate of 25% (15% for dividends generated by an
Approved Enterprise) on all distributions of dividends other than bonus shares
(stock dividends), unless a different rate is provided in a treaty between
Israel and the shareholder's country of residence. Under the income tax treaty
between the United States and Israel (the "Treaty"), the maximum tax on
dividends paid to a holder of ordinary shares who is a U.S. resident (as defined
in the Treaty) is 25%. Israel presently has no estate or gift tax.
CAPITAL GAINS
Israeli law imposes a capital gains tax on capital gains derived from
the sale of securities and other Israeli capital assets, including shares. The
capital gain or loss amount is equal to the consideration received by the holder
for the shares less the holder's tax basis in the shares. It is expected that
gains from sales of our ordinary shares will be tax exempted for nonresidents of
Israel if the shares are listed for trading on a stock exchange recognized by
the Israeli Ministry of Finance. If the gains from sales of our ordinary shares
are not tax exempt for nonresidents of Israel according to regulations to be
promulgated, they are expected to be (A) tax exempt for the portion accrued
until December 31, 2002, for so long as (1) the ordinary shares are listed for
trading on a stock exchange recognized by the Israeli Ministry of Finance and
(2) Gilat qualifies as an Industrial Company or Industrial Holding Company under
the law for Encouragement of Industry (Taxes) 1969, and (B) subject to 15% tax
for the part commencing January 1, 2003, if the ordinary shares are listed on a
stock exchange recognized by the Israeli Ministry of Finance. Under current
legislation the exemption applies for stock exchanges in Israel. It is expected
that it will apply also to stock exchanges outside of Israel (if recognized by
the Israeli Ministry of Finance) but it is not assured and subject to secondary
legislation. The purchase price for purposes of capital gains commencing January
1, 2003, will be the higher of the tax basis or the average market value in the
three days before January 1, 2003. We believe that we qualify as an Industrial
Company under the law for Encouragement of Industry (Taxes)- 1969. There is
uncertainty as to whether the Nasdaq will be regarded as a recognized stock
exchange for this purpose. If the Nasdaq will not be regarded as a recognized
stock exchange for this purpose or our shares are delisted, gains from sales of
ordinary shares will be subject to 25% capital gain tax on the capital gain
derived since December 31, 2002, and 36% capital gain tax for companies and up
to 50% capital gain tax for individuals on the capital gain derived until
December 31, 2002, while the allocation of the gain between the two periods is
proportional to the holding periods until December 31, 2002, and after December
31, 2002.
For residents of the United States holding less than 10% of our shares
at any time in the twelve months before the sale, under the treaty between
Israel and the U.S., capital gains from the sale of capital assets are generally
exempt from Israeli capital gains tax with respect to the exeptions stated in
the treaty. For residents of other countries, the purchaser of the shares may be
required to withhold capital gains tax at a rate of 30% on all amounts received
for the sale of our ordinary shares, for so long as the capital gain from such a
sale is not exempt from Israeli capital gains tax, and unless a different rate
is provided in a treaty between Israel and the stockholder's country of
residence.
DIVIDENDS
Nonresidents of Israel are subject to income tax on income accrued or
derived from sources in Israel. These sources of income may include dividends on
our ordinary shares. For residents of the United States, under the treaty
between Israel and the U.S., the maximum tax on dividends paid to a U.S.
resident (as defined in the treaty) holding Gilat ordinary shares that Gilat is
required to withhold is 25%. For residents of other countries, unless a
different rate is provided in a treaty between Israel and the stockholder's
country of residence, Gilat may be required to withhold income tax at the
maximum rate of 25% on all distributions of dividends other than stock
dividends.
FILING OF TAX RETURNS IN ISRAEL
90
A nonresident of Israel who receives interest, dividend or royalty
income derived from or accrued in Israel, from which tax was withheld at the
source, is generally exempt from the duty to file tax returns in Israel with
respect to such income, provided such income was not derived from a business
conducted in Israel by the taxpayer.
TAX CONSEQUENCES TO RESIDENTS OF ISRAEL
CAPITAL GAINS
Israeli law imposes a capital gains tax on capital gains derived from
the sale of securities and other Israeli capital assets, including shares. The
capital gain or loss amount is equal to the consideration received by the holder
for the shares less the holder's tax basis in the shares. Under current law,
effective commencing January 1, 2003, gains from sales of ordinary shares
incurred after December 31, 2002, are subject to 15% capital gains tax for
individuals and Israeli companies not subject to the Income Tax Law (Inflation
Adjustments) - 1985 (the "Adjustment Law") and 36% capital gain tax for Israeli
companies subject to the Adjustment Law if the ordinary shares are listed on a
stock exchange recognized by the Israeli Ministry of Finance. Under current
legislation the 15% tax rate applies for securities, which are listed for
trading on a stock exchange in Israel. It is expected that it will apply also to
stock exchanges outside of Israel (if recognized by the Israeli Ministry of
Finance) but it is not assured and subject to secondary legislation. For
individuals and Israeli companies not subject to the Adjustment Law the purchase
price for purposes of capital gains commencing January 1, 2003, will be the
higher of the tax basis or the average market value in the three days before
January 1, 2003 . Gains incurred until December 31, 2002, are exempt from
capital gains tax for so long as (i) the ordinary shares are listed on a stock
exchange recognized by the Israeli Ministry of Finance and (ii) Gilat Qualifies
as an Industrial Company or Industrial Holding Company under the law for
Encouragement of Industry (Taxes)- 1969. We believe that we qualify as an
Industrial Company under the law for Encouragement of Industry (Taxes)- 1969. If
we do not qualify as an Industrial Company under that law, the tax rate on
capital gains derived until December 31, 2002, might be 35% for individuals or
36% for companies. There is uncertainty as to whether the Nasdaq will be
regarded as a recognized stock exchange for this purpose. If the Nasdaq will not
be regarded as a recognized stock exchange for this purpose or our shares are
delisted, gains from sales of ordinary shares will be subject to 25% capital
gain tax on the capital gain derived since December 31, 2002, and 36% capital
gain tax for companies and up to 50% capital gain tax for individuals on the
capital gain derived until December 31, 2002, while the allocation of the gain
between the two periods is proportional to the holding periods until December
31, 2002, and after December 31, 2002.
DIVIDENDS
The distribution of dividend income, other than bonus shares (stock
dividends), to Israeli residents who purchased our Shares will generally be
subject to income tax at a rate of 25% for individuals and will be exempt from
income tax for corporations. Gilat may be required to withhold income tax at the
maximum rate of 25% (0% for corporations) on all such distributions.
U.S. TAXATION
The following discussion is a general summary of the material U.S.
federal income tax considerations applicable to U.S. Holders (as defined below)
of ordinary shares, who hold such instruments as capital assets (generally,
property held for investment). This summary is based on provisions of the Code,
existing and proposed U.S. Treasury regulations and administrative and judicial
interpretations in effect as of the date of this annual report. All of these
authorities are subject to change (possibly with retroactive effect) and to
differing interpretations. In addition, this summary does not discuss all
aspects of U.S. federal income taxation that may be applicable to investors in
light of their particular circumstances or to investors who are subject to
special treatment under U.S. federal income tax law, including:
o life insurance companies;
o dealers in stocks or securities;
o financial institutions;
o tax-exempt organizations;
91
o persons subject to the alternative minimum tax;
o persons holding their shares as part of a straddle, hedging,
conversion or integrated transactions;
o persons having a functional currency other than the U.S. dollar;
or
o direct, indirect or constructive owners of 10% or more of the
outstanding voting shares of Gilat.
EACH U.S. HOLDER IS URGED TO CONSULT WITH ITS TAX ADVISOR REGARDING THE
TAX CONSEQUENCES OF ITS HOLDINGS, INCLUDING THE EFFECTS OF FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
As used herein, the term "U.S. Holder" means a beneficial owner of an
ordinary share who is, for U.S. federal income tax purposes:
o a citizen or resident of the United States;
o a corporation created or organized in or under the laws of the
United States or any political subdivision thereof;
o an estate, the income of which is subject to U.S. federal income
taxation regardless of its source; or
o a trust if (i) (A) a U.S. court is able to exercise primary
supervision over the trust's administration and (B) one or more
U.S. persons have the authority to control all of the trust's
substantial decisions, or (ii) (A) it was in existence on August
20, 1996, (B) it was properly treated as a U.S. person on and
before that date, and (C) it validly elected to continue to be so
treated.
DIVIDENDS PAID ON ORDINARY SHARES
Subject to the discussion of the passive foreign investment company
notes below, a U.S. Holder generally will be required to include in gross income
as ordinary dividend income the amount of any distributions paid on the ordinary
shares (including the amount of any Israeli taxes withheld) to the extent that
such distributions are paid out of Gilat's current or accumulated earnings and
profits as determined for U.S. federal income tax purposes. Distributions in
excess of Gilat's earnings and profits as so determined will be applied against
and will reduce the U.S. Holder's tax basis in its ordinary shares and, to the
extent they are in excess of such tax basis, will be treated as gain from a sale
or exchange of such ordinary shares. Gilat's dividends will not qualify for the
dividends-received deduction otherwise available to U.S. corporations. In the
event that Gilat pays cash dividends, such dividends will be paid in Israeli
currency. Dividends paid in Israeli currency (including the amount of any
Israeli taxes withheld therefrom) will be includible in the income of a U.S.
Holder in a U.S. dollar amount calculated by reference to the exchange rate in
effect on the day they are received by the U.S. Holder. Any gain or loss
resulting from currency exchange fluctuations during the period from the date
the dividend is includible in the income of the U.S. Holder to the date such
payment is converted into U.S. dollars generally will be treated as U.S. source
ordinary income or loss.
Any dividends paid by Gilat to a U.S. Holder on the ordinary shares
generally will be treated as foreign source passive income for U.S. foreign tax
credit purposes. Subject to the limitations set forth in the Code, U.S. Holders
may elect to claim a foreign tax credit against their U.S. federal tax liability
for Israeli income tax withheld from dividends received on ordinary shares. A
U.S. Holder will be denied a foreign tax credit with respect to Israeli income
tax withheld from dividends received on ordinary shares if the U.S. Holder has
not held the ordinary shares for a certain minimum period or to the extent such
U.S. Holder is under an obligation to make certain related payments with respect
to substantially similar or related property. The rules relating to the
determination of the foreign tax credit are complex, and each U.S. Holder should
consult with its tax advisor to determine whether and to what extent it is
entitled to such credit. U.S. Holders who do not elect to claim a foreign tax
credit may instead claim a deduction from the gross income for Israeli income
tax withheld, but only for a year in which the U.S. Holder elects itemize
deductions.
92
DISPOSITION OF ORDINARY SHARES
Subject to the discussion of passive foreign investment company notes
below, upon the sale or other disposition of ordinary shares, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
the amount realized on the disposition and such holder's adjusted tax basis in
the ordinary shares disposed of which is generally the U.S. dollar cost of such
shares. Gain or loss upon the disposition of ordinary shares will be long-term
capital gain or loss if, at the time of the disposition, the U.S. Holder's
holding period for the ordinary shares disposed of exceeds one year. Long-term
capital gains realized by individual U.S. Holders generally are subject to a
lower marginal U.S. federal income tax rate than ordinary income. The
deductibility of capital losses by a U.S. Holder is subject to limitations.
In general, any gain recognized by a U.S. Holder on the sale or other
disposition of ordinary shares will be U.S. source income for U.S. foreign tax
credit purposes. However, pursuant to the Treaty, gain from the sale or other
disposition of ordinary shares by a U.S. holder who is a U.S. resident (for
Treaty purposes) and who sells or otherwise disposes of the ordinary shares in
Israel may be treated as foreign source income for U.S. foreign tax credit
purposes. Any loss on such sale or other disposition of ordinary shares may be
required to be allocated against foreign source income for U.S. foreign tax
credit limitation purposes.
PASSIVE FOREIGN INVESTMENT COMPANY
Special U.S. federal income tax rules apply to U.S. Holders owning
shares of a so-called "passive foreign investment company" ("PFIC"). A foreign
corporation generally will be considered a PFIC for any taxable year in which
75% or more of its gross income consists of passive income, or 50% or more of
the average value of its assets consists of "passive assets" (generally, assets
that generate passive income). Based upon an analysis of Gilat's financial
position, Gilat has not ever been a PFIC and does not expect to become a PFIC
for its current taxable year. While Gilat intends to manage its business so as
to avoid PFIC status, to the extent consistent with its other business goals, no
assurances can be made that the business plans of Gilat will not change in a
manner which affects its PFIC status determination in the current or any future
taxable year. If Gilat were classified as a PFIC, a U.S. Holder generally would
be subject to additional federal income tax liability (including an interest
charge) upon the sale or other disposition of ordinary shares or upon the
receipt of amounts treated as "excess distributions." U.S. holders are urged to
consult their tax advisors concerning the U.S. federal income tax consequences
of holding ordinary shares if Gilat were considered a PFIC in any year.
BACKUP WITHHOLDING
A U.S. Holder may be subject to backup withholding with respect to
dividends on, and the proceeds of dispositions of, ordinary shares. In general,
backup withholding will apply to a U.S. Holder only if the U.S. Holder fails to
comply with certain identification procedures or fails to report properly
payments of dividends. Backup withholding will not apply with respect to
payments made to certain exempt recipients, such as corporations and tax-exempt
organizations. Backup withholding is not an additional tax and may be claimed as
a credit against the U.S. federal income tax liability of a U.S. Holder,
provided that the required information is timely furnished to the Internal
Revenue Service.
DOCUMENTS ON DISPLAY
We file reports and other information with the SEC. These reports
include certain financial and statistical information about us, and may be
accompanied by exhibits. You may read and copy any document we file with the SEC
at the SEC's Public Reference Room at 450 Fifth Street, Washington D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. The SEC maintains an Internet website at HTTP://WWW.SEC.GOV
that contains reports, proxy statements, information statements and other
material that are filed through the SEC's Electronic Data Gathering, Analysis
and Retrieval ("EDGAR") system. We began filing through the EDGAR system
beginning in November 2002.
Information about us is also available on our website at
HTTP://WWW.GILAT.COM. Such information on our website is not part of this annual
report. You may also visit us on the World Wide Web at www.gilat.com.
93
ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
The currency of our primary economic environment is the dollar.
However, we have balances and activities in other currencies. We are therefore
exposed to market risks arising from changes in currency exchange rates. We are
also exposed to market risks arising from changes in interest rates.
EXCHANGE RATE RISK MANAGEMENT
Our functional currency and that of most of our subsidiaries is the
dollar. Accordingly, we attempt to protect ourselves against exposure arising
from the difference between assets and liabilities in each currency other than
the dollar ("Balance Sheet Exposure"). We strive to limit our exposure through
"natural" hedging, i.e., attempting to maintain similar levels of assets and
liabilities in any given currency, to the extent possible. However, this method
of "natural" hedging is not always achievable.
The table below details the balance of the Balance Sheet Exposure by
currency:
--------------------------------- --------------------------------
DECEMBER 31, 2002
--------------------------------- --------------------------------
(IN THOUSANDS)
LIABILITIES - SHORT TERM
--------------------------------- --------------------------------
Variable rate debt:
In NIS $21
Weighted average interest rate 17.1%
In other currencies $5
Weighted average interest rate 10.0%
--------------------------------- --------------------------------
In addition, we pay for the purchase of certain components of our
products in Japanese yen. As a result, an increase in the value of the Japanese
yen in comparison to the dollar could increase the cost of revenues. We have
entered into an agreement with our principal Japanese supplier in an effort to
reduce the effects of fluctuations in the exchange rate, although there can be
no assurance that such agreement will effectively eliminate our Japanese yen
exposure.
94
INTEREST RATE RISK MANAGEMENT
Due to the existence of assets and liabilities with different interest
rates and maturity dates, we are exposed to changes in interest rates.
The table below details the Balance Sheet Exposure by currency and
interest rates:
------------------------------ -------------------------------------------------------
EXPECTED MATURITY DATES
------------------------------ ----------------- ----------------- -------------------
2003 2004 2005 AND
THEREAFTER
------------------------------ ----------------- ----------------- -------------------
(IN THOUSANDS)
ASSETS:
------------------------------ -------------------------------------------------------
Short-term - in U.S.
dollars: $1,663
Fixed rate
Weighted interest rate 1.15%
Long-term loans - in
U.S. dollars: $1,000,000
Weighted interest rate 5%
------------------------------ ----------------- ----------------- -------------------
LIABILITIES:
------------------------------ ----------------- ----------------- -------------------
1) Long-term - in U.S.
dollars: $358,648
Fixed rate debt
Weighted interest rate 4.25%
------------------------------ ----------------- ----------------- -------------------
2) Long-term loans - in
U.S. dollars $8,197 $121,426 $23,713
Weighted average
interest rate 3.09% 3.00 3.00%
------------------------------ ----------------- ----------------- -------------------
3) Short-term
Variable rate debt - in
U.S. dollars $1,801
Weighted average
interest rate 1.47%
In NIS $21
Weighted average
interest rate 17.1%
------------------------------ ----------------- ----------------- -------------------
4) Other $5
Weighted average
interest rate
------------------------------ ----------------- ----------------- -------------------
In February 2000, we completed a private offering of $350 million of
convertible subordinated notes due 2005. The notes are convertible into ordinary
shares at a conversion price of $186.18 per share. Each note bears annual
interest of 4.25% payable semiannually, on March 15 and September 15, commencing
September 15, 2000.
95
In March 2003, we exchanged the old notes and we issued (i) 202,083,908
ordinary shares and (ii) $83.254 million in principal amount of 4.00%
convertible notes due 2012, also called Notes.
In December 2000, we entered into a facility agreement with an Israeli
bank, under which we borrowed $108 million to finance our general corporate
activities. The loan bears interest at LIBOR plus 0.8% per annum and the
principal is repayable in six semi-annual payments commencing June 2002. As of
March 2003, of the $102 million in principal amount still due from us to Bank
Hapoalim, (i) $25.5 million was converted into 18,488,590 ordinary shares, (ii)
$5.1 million was converted into Notes of the same principal amount and (iii) the
remaining debt amount of $71.4 million remains as a loan on revised terms. The
revised terms include equal semiannual installments of principal of $4.463
million beginning on July 2, 2005, with a last installment of $8.925 million on
July 2, 2012. The loan bears interest at the six-month LIBOR rate plus 2.5% and
is payable semiannually together with the installments of principal.
ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II
ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable.
ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
Not Applicable.
ITEM 15: CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer have evaluated
our disclosure controls and procedures (as defined in Rule 13a-14(c) to the
Securities and Exchange Act of 1934) within 90 days prior to the filing of this
Annual Report on Form 20-F and have determined that such disclosure controls and
procedures are effective to ensure that information required to be disclosed in
our filings under the Securities Exchange Act of 1934 with respect to the
Company and its consolidated subsidiaries is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
We evaluate our internal controls for financial reporting purposes on a
regular basis. If we identify a problem in our internal controls during the
course of our evaluations, we consider what revision, improvement and/or
correction to make in order to ensure that our internal controls are effective.
We are currently in the process of enhancing our internal controls. We
anticipate that implementation of these enhancements may continue through the
end of the year. Pending full implementation of these enhancements, we have
instituted additional procedures and policies to preserve our ability to
accurately record, process and summarize financial data and prepare financial
statements for external purposes that fairly present our financial condition,
results of operations and cash flows.
Internal controls, no matter how designed, have limitations. It is the
Company's intent that the internal controls be conceived to provide adequate,
but not absolute, assurance that the objectives of the controls are met on a
consistent basis. Management plans to continue its review of internal controls
and disclosure procedures on an ongoing basis.
We have made no other significant changes in internal controls, or
other factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies or material
weaknesses. We intend to continue to refine our internal controls on an ongoing
basis as we deem appropriate with a view towards making improvements.
96
PART III
ITEM 16: [RESERVED]
Not Applicable.
ITEM 17: NOT APPLICABLE
ITEM 18: FINANCIAL STATEMENTS
The Consolidated Financial Statements and related notes, as well as the
Interim Condensed Consolidated Financial Statements and related notes, required
by this item are contained on pages F-1 through F-___ hereof.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
------------------------------------------ ----
Reports of Independent Auditors................................................................. F-2
Consolidated Balance Sheets at December 31, 2001 and 2002....................................... F-3 to F-4
Consolidated Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002...... F-5
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31,
2000, 2001 and 2002.......................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002...... F-7 to F-9
Notes to Consolidated Financial Statements...................................................... F-10 to F-62
Reports of Independent Auditors with respect to consolidated subsidiaries....................... F-63 to F-65
ITEM 19: EXHIBITS
1.1 Memorandum of Association, as amended. Previously filed as Exhibit 1.1 to
Gilat's Annual Report on Form 20-F for the fiscal year ending December
31, 2000, which Exhibit is incorporated herein by reference.
1.2 Articles of Association, as amended and restated. Previously filed as
Exhibit 1.2 to Gilat's Annual Report on Form 20-F for the fiscal year
ending December 31, 2000, which Exhibit is incorporated herein by
reference.
2.1 Indenture, dated as of March 7, 2000, between Gilat Satellite Networks
Ltd. and The Bank of New York. Previously filed as Exhibit 4.2 to the
Registration Statement on Form F-3 (No. 333-12242), which Exhibit is
incorporated herein by reference.
2.2 Form of 4.25% Convertible Subordinated Note due 2005. Previously filed as
Exhibit 4.3 to the Registration Statement on Form F-3 (No. 333-12242),
which Exhibit is incorporated herein by reference.
2.3 Form of 4.00% convertible subordinated note due 2012. Previously filed as
Exhibit T3C to the Registration Statement on Form F-3 (No. 022-38667)
which Exhibit is incorporated herein by reference.
4.1 Agreement between the Company and Bank Hapoalim B.M. dated March 6, 2003.
4.2 Share Issuance Agreement between the Company and SES Americom, Inc. dated
December 30, 2002.
4.3 Parental Guarantee executed by the Company dated December 30, 2002.
4.4 Master Agreement dated as of September 29, 2000, by and among StarBand,
Gilat Satellite Networks Ltd. and Spacenet Inc. Previously filed as
Exhibit 4.1 to Gilat's Annual Report on Form 20-F/A (Amendment No. 2) for
the fiscal year ending December 31, 2000, which Exhibit is incorporated
herein by reference. *
4.5 Tender Offer Agreement dated as of October 3, 2000, by and among Gilat
Satellite Networks Ltd., rStar Corporation (formerly named ZapMe!
Corporation) and the Stockholders Listed on Schedules A and B thereto.
Previously filed as Exhibit (d) to Schedule TO filed with the Securities
and Exchange Commission on October 17, 2000, which Exhibit is
incorporated herein by reference.
4.6 Agreement dated April 23, 2001, by and between rStar Corporation and
Spacenet Inc. regarding a capital lease obligation. Previously filed as
Exhibit 4.4 to Gilat's Annual Report on Form 20-F for the fiscal year
ending December 31, 2000, which Exhibit is incorporated herein by
reference.
97
4.7 Second Amended and Restated Acquisition Agreement dated as of December
31, 2001, by and among Gilat-to-Home Latin America (Holland) N.V., rStar
Corporation and Gilat Satellite Networks Ltd. relating to the acquisition
of StarBand Latin America (Holland) B.V. Previously filed as Exhibit 2.1
to Amendment No. 1 to the Registration Statement on Form F-4 (No.
333-71422), which Exhibit is incorporated herein by reference.
4.8 Form of master agreement, by and among StarBand Latin America (Holland)
B.V., Gilat-to-Home Latin American (Holland) N.V., Gilat-to-Home Latin
America, Inc., and Gilat Satellite Networks Ltd. Previously filed as
Exhibit 10.1 to Amendment No. 1 to the Registration Statement on Form F-4
(No. 333-71422), which Exhibit is incorporated herein by reference. *
4.9 Sublease and Master Deed of Lease dated as of March 28, 2001 by and among
BP III Leasco, LLC as Sublessor, BP Tysons, LLC as Landlord and Spacenet
Real Estate Holdings, LLC as Sublessee and Master Tenant. Previously
filed as Exhibit 4.7 to Gilat's Annual Report on Form 20-F for the fiscal
year ending December 31, 2000, which Exhibit is incorporated herein by
reference.
4.10 Acquisition Agreement, among Gilat Satellite Networks (Holland) BV, Gilat
Satellite Networks Ltd., Spacenet International Holdings Inc., Spacenet
International Ventures Inc., Gilat Satellite Networks (Luxembourg) S.A.
dated April 2002. Previously filed as Exhibit 4.8 to the Annual Report on
Form 20-F for the fiscal year ending December 31, 2001, which Exhibit is
incorporated herein by reference.
8.1 List of subsidiaries. Previously filed as Exhibit 8.1 to the Annual
Report on Form 20-F for the fiscal year ending December 31, 2001, which
Exhibit is incorporated herein by reference.
10.1 Consent Kost Forer & Gabbay, a member of Ernst & Young Global.
10.2 Consent of KPMG Accountants N.V.
10.3 Consent of Berman Hopkins Wright & LaHam, CPAs LLP.
10.4 Consent of Grant Thorton LLP.
12.(a).1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
------------------
* Portions of this exhibit were omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
98
SIGNATURE
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
GILAT SATELLITE NETWORKS LTD.
By: /s/ Yoel Gat
----------------------------------------
Yoel Gat
Chairman and Chief Executive Officer
Date: April 15, 2003
99
CERTIFICATIONS
I, Yoel Gat, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 20-F of Gilat Satellite Networks
Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: ___________ _______________________
Yoel Gat
Chief Executive Officer
100
CERTIFICATIONS
I, Yoav Leibovitch, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 20-F of Gilat Satellite Networks
Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: d.
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
e. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
f. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function): c. all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
d. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: ___________ _______________________
Yoav Leibovitch
Chief Financial Officer
101
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
IN U.S. DOLLARS
INDEX
PAGE
------------------
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEETS F-3 - F4
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7 - F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 - F-62
- - - - - - - - - -
F-1
[LOGO] ERNST & YOUNG
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
GILAT SATELLITE NETWORKS LTD.
We have audited the accompanying consolidated balance sheets of Gilat
Satellite Networks Ltd. ("the Company") and its subsidiaries as of December 31,
2001 and 2002, and the related consolidated statements of operations, changes in
shareholders' equity (deficiency) and cash flows for each of the three years in
the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements, based on our audits. We did not audit the
financial statements of certain consolidated subsidiaries, which statements
reflect total assets of approximately 25% as of December 31, 2001, and total
revenues of approximately 8% and 25% for the years ended December 31, 2000 and
2001, respectively, of the related consolidated totals. Those financial
statements were audited by other auditors, whose reports have been furnished to
us, and our opinion, insofar as it relates to amounts included for these
subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2001 and 2002, and the consolidated results of
their operations and cash flows, for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
Tel-Aviv, Israel KOST FORER & GABBAY
April 14, 2003 A Member of Ernst & Young Global
F - 2
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
------------------------------------
2001 2002
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 97,325 $ 48,072
Short-term bank deposits 12,900 1,663
Short-term restricted cash 3,520 12,151
Trade receivables, (net of allowance for doubtful accounts 2001 -
$ 114,703; 2002 - $ 17,041) *) 125,059 55,459
Inventories 123,372 74,978
Other accounts receivable and prepaid expenses 46,090 47,113
---------------- ----------------
TOTAL current assets 408,266 239,436
---------------- ----------------
LONG-TERM INVESTMENTS AND RECEIVABLES:
Long-term restricted cash 9,521 10,733
Investment in other companies 12,182 -
Severance pay fund 5,784 7,664
Long-term note 43,430 1,000
Long-term trade receivables and other receivables, net 40,279 31,427
---------------- ----------------
111,196 50,824
---------------- ----------------
PROPERTY AND EQUIPMENT, NET 247,200 162,905
---------------- ----------------
INTANGIBLE ASSETS AND DEFERRED CHARGES, NET 35,280 21,049
---------------- ----------------
GOODWILL 56,681 -
---------------- ----------------
TOTAL assets $ 858,623 $ 474,214
================ ================
*) Includes the following balances resulting from transactions with related parties as of December 31, 2001
and 2002: trade receivables - $ 1,102 and $ 1,402, respectively;
The accompanying notes are an integral part of the consolidated financial statements.
F - 3
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)
DECEMBER 31,
-------------------------------------
2001 2002
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Short-term bank credit $ 4,664 $ 1,826
Current maturities of long-term loans 25,224 8,197
Trade payables *) 46,927 26,507
Accrued expenses *) 51,737 37,592
Other accounts payable 30,142 37,787
---------------- ----------------
TOTAL current liabilities 158,694 111,909
---------------- ----------------
LONG-TERM LIABILITIES:
Accrued severance pay 8,831 8,412
Long-term loans, net of current maturities *) 136,073 145,140
Other long-term liabilities 17,066 19,193
Convertible subordinated notes 350,000 358,648
---------------- ----------------
TOTAL long-term liabilities 511,970 531,393
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 10,639 3,827
---------------- ----------------
SHAREHOLDERS' EQUITY (DEFICIENCY):
Share capital - Ordinary shares of NIS 0.01 par value -Authorized:
300,000,000 as of December 31, 2001 and 2002; Issued and
outstanding: 23,388,613 and 23,855,922 shares as of December 31,
2001 and 2002, respectively 69 70
Additional paid in capital 617,374 617,797
Accumulated other comprehensive loss (5,710) (8,165)
Accumulated deficit (434,413) (782,617)
---------------- ----------------
TOTAL shareholders' equity (deficiency) 177,320 (172,915)
---------------- ----------------
TOTAL liabilities and shareholders' equity (deficiency) $ 858,623 $ 474,214
================ ================
*) Includes the following balances resulting from transactions with related parties as of December 31,
2001 and 2002: Trade payables - $ 842 and $ 3,211, respectively, Accrued expenses - $0 and $5,706,
respectively, Other accounts payable - $0 and $3,281, respectively, Long-term loans, net of current
maturities - $ 962 and $ 0, respectively.
The accompanying notes are an integral part of the consolidated financial statements.
F - 4
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 2001 2002
-------------- ------------- ------------
Revenues:
Products *) $ 398,299 $ 279,297 $ 130,011
Services *) 106,263 106,732 78,744
-------------- ------------- ------------
504,562 386,029 208,755
-------------- ------------- ------------
Cost of revenues:
Products 265,259 194,374 107,527
Services *) 79,182 94,665 61,501
Write-off of inventories - 59,790 20,107
-------------- ------------- ------------
344,441 348,829 189,135
-------------- ------------- ------------
Gross profit 160,121 37,200 19,620
-------------- ------------- ------------
Research and development costs, net *) 31,272 35,634 25,066
Selling, marketing, general and administrative expenses *) 82,444 121,486 86,227
Provision and write-off of doubtful accounts and capital lease
receivables **) 3,654 134,614 34,714
Impairment of goodwill - 50,580 13,049
Impairment of tangible and intangible assets - 42,982 50,666
Restructuring charges - 30,284 -
-------------- ------------- ------------
Operating income (loss) 42,751 (378,380) (190,102)
Financial expenses, net (1,289) (21,334) (21,324)
Write-off of investments in affiliated and other companies (9,350) (28,007) (51,379)
-------------- ------------- ------------
Income (loss) before taxes on income 32,112 (427,721) (262,805)
Taxes on income 2,003 974 929
-------------- ------------- ------------
Income (loss) after taxes on income 30,109 (428,695) (263,734)
Equity in losses of affiliated companies (950) (252) (29,334)
Acquired in-process research and development of an affiliated company (10,000) - -
Minority interest in losses of subsidiaries 276 5,889 3,517
-------------- ------------- ------------
Income (loss) from continuing operations, before cumulative effect of a
change in an accounting principle 19,435 (423,058) (289,551)
Loss from cumulative effect of a change in an accounting principle - - (56,716)
Loss from discontinued operations - (6,054) (1,937)
-------------- ------------- ------------
Net income (loss) $ 19,435 $ (429,112) $ (348,204)
============== ============= ============
Earnings (loss) per share from continued operation:
Basic $ 0.86 $ (18.11) $ (12.28)
============== ============= ============
Diluted $ 0.81 $ (18.11) $ (12.28)
============== ============= ============
Basic and diluted Loss per share from discontinued operation: - $ (0.26) $ (0.08)
============== ============= ============
Basic and diluted Loss per share from cumulative effect of a change in
an accounting principle $ - $ - $ (2.41)
============== ============= ============
Net earnings (loss) per share:
Basic $ 0.86 $ (18.37) $ (14.77)
============== ============= ============
Diluted $ 0.81 $ (18.37) $ (14.77)
============== ============= ============
Weighted average number of shares used in computing net earnings (loss)
per share (in thousands):
Basic 22,516 23,361 23,581
============== ============= ============
Diluted 24,099 23,361 23,581
============== ============= ============
*) Includes the following income (expenses) resulting from transactions with related parties for the years ended
December 31, 2000, 2001 and 2002: product revenues - $ 105,708, $ 24,947 and $ 5,300, respectively; service
revenues - $ 44,526, $ 25,070 and $ 1,450, respectively; cost of services - $ (16,126), $ (36,078) and $ (19,695),
respectively; research and development costs, net - $ (2,000), $ (4,000) and $ 0, respectively selling, marketing,
general and administrative - $0, $0, and $253, respectively.
**) In 2001, Primarily Starband (see note 1d)
The accompanying notes are an integral part of the consolidated financial statements
F - 5
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NUMBER OF
ORDINARY ACCUMULATED
SHARES ADDITIONAL OTHER
(IN SHARE PAID-IN COMPREHENSIVE
THOUSANDS) CAPITAL CAPITAL LOSS
--------------- ------------ ------------- ----------------
Balance as of January 1, 2000 21,147 $ 64 $ 527,052 $ (2,557)
Conversion of convertible subordinated notes,
net 1,786 4 75,095 -
Issuance of shares in consideration for the
acquisition of DNI 218 1 7,682 -
Exercise of options 204 (* - 7,498 -
Comprehensive loss - Foreign currency
translation adjustments - - - (883)
Net income - - - -
--------------- ------------ ------------- ----------------
Total comprehensive income
Balance as of December 31, 2000 23,355 69 617,327 (3,440)
Exercise of options, net 34 (* - 47 -
Comprehensive loss - Foreign currency
translation adjustments - - - (2,270)
Net loss - - - -
--------------- ------------ ------------- ----------------
Total comprehensive loss
Balance as of December 31, 2001 23,389 69 617,374 (5,710)
Exercise of options, net 1 (* 5 -
Stock compensation related to options issued
to non employees - - 107 -
Issuance of shares in consideration for the
acquisition of rStar 466 1 311 -
Foreign currency translation adjustments from
the disposal of European subsidiaries - - - 2,117
Comprehensive loss - Foreign currency
translation adjustments - - - (4,572)
Net loss - - - -
--------------- ------------ ------------- ----------------
Total comprehensive loss
Balance as of December 31, 2002 23,856 $ 70 $ 617,797 $ (8,165)
=============== ============ ============= ================
(CONTINUED)
TOTAL
TOTAL SHAREHOLDERS'
ACCUMULATED COMPREHENSIVE EQUITY
DEFICIT INCOME (LOSS) (DEFICIENCY)
--------------- ----------------- ---------------
Balance as of January 1, 2000 $ (24,736) $ - $ 499,823
Conversion of convertible subordinated notes,
net - - 75,099
Issuance of shares in consideration for the
acquisition of DNI - - 7,683
Exercise of options - - 7,498
Comprehensive loss - Foreign currency
translation adjustments - (883) (883)
Net income 19,435 19,435 19,435
--------------- ----------------- ---------------
Total comprehensive income $ 18,552
=================
Balance as of December 31, 2000 (5,301) - 608,655
Exercise of options, net - - 47
Comprehensive loss - Foreign currency
translation adjustments - (2,270) (2,270)
Net loss (429,112) (429,112) (429,112)
--------------- ----------------- ---------------
Total comprehensive loss $ (431,382)
=================
Balance as of December 31, 2001 (434,413) - 177,320
Exercise of options, net - - 5
Stock compensation related to options issued
to non employees - - 107
Issuance of shares in consideration for the
acquisition of rStar - - 312
Foreign currency translation adjustments from
the disposal of European subsidiaries - - 2,117
Comprehensive loss - Foreign currency
translation adjustments (4,572) (4,572)
Net loss (348,204) (348,204) (348,204)
--------------- ----------------- ---------------
Total comprehensive loss $ (352,776)
=================
Balance as of December 31, 2002 $ (782,617) $ (172,915)
=============== ===============
*) Represents an amount lower than $ 1.
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 2001 2002
---------------- ---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 19,435 $ (429,112) $ (348,204)
Less loss for the year from discontinued operations - 6,054 1,937
Adjustments required to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 42,431 61,273 46,230
Stock compensation relating to options issued to non-employees - - 107
Impairment of goodwill - 50,580 69,765
Impairment of intangible assets - 28,229 8,255
Write off of investments 9,350 28,007 11,989
Write off of long-term note - - 39,390
Impairment of property and equipment and other tangible and intangible
assets - 14,753 42,411
Acquired in-process research and development of an affiliated
company 10,000 - -
Equity in losses of affiliated companies 950 252 29,334
Accrued severance pay, net 1,206 7 (1,568)
Interest accrued on short and long-term bank deposits 2,204 1,344 (163)
Exchange differences on long-term loans 983
Interest received (accrued) on long term loan to an affiliated
company - (242) -
Minority interest in losses of subsidiaries - (5,424) (3,517)
Capital gain from disposal of property and equipment - - (177)
Deferred income taxes, net (3,575) (1,058) (40)
Decrease (increase) in trade receivables (104,068) 25,053 62,484
Decrease (increase) in other accounts receivable and prepaid
expenses (including long-term receivables) (65,300) 43,513 13,737
Decrease (increase) in inventories (75,318) (9,119) 24,742
Write-off of inventories - 59,790 20,107
Increase (decrease) in trade payables 42,112 (36,727) (19,797)
Increase (decrease) in accrued expenses (355) 13,265 (16,825)
Increase (decrease) in other accounts payable and other long-term
liabilities (3,003) (8,526) 13,196
Other 16 40 -
Cash used for discontinued operation - (5,574) (1,185)
---------------- ---------------- ---------------
Net cash used in operating activities (123,915) (163,622) (6,809)
---------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (147,907) (59,235) (9,739)
Return of investment in a company - 2,500 -
Investment in affiliated companies (49,680) - (13,461)
Investment in other companies (17,012) (2,578) -
Investment in short-term bank deposits (198,300) (12,900) -
Proceeds from short-term bank deposits 218,000 303 11,400
Proceeds from long-term bank deposits 56,678 34,000 -
Long-term note (40,000) - -
Long-term loans to affiliated company (5,150) - -
Deconsolidation of subsidiaries (a) - - 7,671
Acquisition of rStar (b) - 51,379 -
Acquisition of DNI (c) 278 - -
Acquisition of GTHLA (d) 3,558 - -
Proceeds from sale of property and equipment 34 32,549 -
Proceeds from disposal of property and equipment - - 832
Investment in short-term restricted cash - (3,520) (11,035)
Investment in long-term restricted cash - (8,944) (1,460)
Investment in other assets (2,556) (5,364) (2,098)
Proceeds from short-term restricted cash - - 2,652
---------------- ---------------- ---------------
Net cash provided by (used in) investing activities $ (182,057) $ 28,190 $ (15,238)
================ ================ ===============
The accompanying notes are an integral part of the financial statements.
F - 7
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
---------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of options, net $ 7,498 $ 47 $ 5
Issuance of convertible subordinated notes, net of issuance
expenses of $ 10,609 339,391 - -
Prepaid expenses related to restructuring of debts - - (2,240)
Short-term bank credit, net 6,984 (9,320) (2,838)
Proceeds from long-term loans 111,413 54,158 1,220
Cash paid to minority shareholders of a subsidiary - - (9,997)
Repayment of long-term loans - (4,535) (13,443)
---------------- ---------------- ---------------
Net cash provided (used in) by financing activities 465,286 40,350 (27,293)
---------------- ---------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (224) (64) 87
---------------- ---------------- ---------------
Increase (decrease) in cash and cash equivalents 159,090 (95,146) (49,253)
Cash and cash equivalents at the beginning of the year 33,381 192,471 97,325
---------------- ---------------- ---------------
Cash and cash equivalents at the end of the year $ 192,471 $ 97,325 $ 48,072
================ ================ ===============
Supplementary cash flows activities:
(a) Cash paid during the year for:
Interest $ 8,979 $ 21,436 $ 15,101
================ ================ ===============
Income taxes $ 8,845 $ 1,218 $ 329
================ ================ ===============
(b) Non-cash transactions:
Conversion of convertible subordinated notes, net $ 75,099 $ - $ -
================ ================ ===============
Acquisition of rStar shares in exchange for satisfaction of
capital lease obligation (see Note 2a) $ - $ 45,000 $ -
================ ================ ===============
Investment in other companies (see Note 6a) $ - $ 3,100 $ -
================ ================ ===============
Arrangement with SES Americom (see Note 18a) $ - $ - $ 5,706
================ ================ ===============
Issuance of shares in consideration for the acquisition of
RStar $ - $ - $ 312
================ ================ ===============
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED
DECEMBER 31,
2002
-----------------
(a) Deconsolidation of European subsidiaries consolidated in previous
periods (see also Note 1e)
Assets and liabilities of the subsidiaries at date of deconsolidation:
Working capital (excluding cash and cash equivalents) $ 1,385
Equity investment (3,114)
Long-term trade receivables and other receivables 1,439
Property, plant and equipment and deferred charges 7,404
Other long-term liabilities (1,560)
Foreign currency translation 2,117
-----------------
$ 7,671
=================
YEAR ENDED
DECEMBER 31,
2001
-----------------
(b) Acquisition of rStar (see also Note 2a)
Estimated net fair value of assets acquired and liabilities assumed at
the date of acquisition was as follows:
Working capital deficiency (excluding cash and cash equivalents) $ 39,956
Equity investment 42,187
Long-term trade receivables and other receivables (2,288)
Property and equipment (4,507)
Other long-term liabilities 20,545
Net assets of discontinued operations (12,458)
Minority interest 6,267
Goodwill (38,323)
-----------------
$ 51,379
=================
F - 9
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED
DECEMBER 31,
2000
-----------------
(c) Acquisition of DNI (see also Note 2c)
Estimated net fair value of assets acquired and liabilities assumed at the date of
acquisition was as follows:
Working capital (excluding cash and cash equivalents) (160)
Property and equipment (72)
Goodwill (7,173)
Less - amounts acquired by issuance of shares 7,683
-----------------
$ 278
=================
(d) Acquisition of GTHLA (see also Note 2b)
Estimated net fair value of assets acquired and liabilities assumed at the date of
acquisition was as follows:
Working capital deficiency (excluding cash and cash equivalents) 28,054
Less equity investment and long-term loan to an affiliated company 10,958
Long-term trade receivables and other receivables (544)
Property and equipment (17,682)
Other long-term liabilities 16,808
Goodwill (34,036)
-----------------
$ 3,558
=================
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1:- GENERAL
a. Organization:
Gilat Satellite Networks Ltd. ("the Company") and its
wholly-owned subsidiaries ("the Group"), are providers of
products and services for satellite-based communications
networks. The Group designs, develops, manufactures, markets
and sells products and provides services for products that
enable complete end-to-end telecommunications and data
networking solutions, based on very small aperture terminal
("VSAT") satellite earth stations and related central
station (hub) equipment.
In March 2003, the Company completed a plan of arrangement
with the Company's bank lenders, holders of the Company's
4.25% Convertible Subordinated Notes due 2005 (the "old
notes"), and certain other creditors. According to the
arrangement, the Company's obligation under the old notes in
the amount of $362.0 million (including accrued interest in
the amount of $12.0 million) was cancelled and the holders
of the old notes were issued a combination of $83.3 million
of 4.00% Convertible Notes due 2012 (the "new notes") and
202,083,908 Ordinary shares. Additional shares and notes
were issued to Bank Hapoalim and to certain creditors as
follows: (i) $25.5 million of the long-term to the Company's
debt to Bank Hapoalim was converted into 18,488,590 Ordinary
shares; (ii) $5.1 million of the Company's debt to Bank
Hapoalim was converted into new notes of the same principal
amount: (iii) 14,261,048 shares were issued to SES Americom
as part of an agreement for reduction of the Company's
overall liability and deferral of certain payments; (iv)
1,067,728 shares were issued to IBM as part of an amended
agreement with them; and (v) $0.2 million new notes were
issued to each of the two advisors for services rendered in
the arrangement. As part of the agreement, debt to another
financing creditor and loan agreements with bank creditors
were amended (See Note 18). Under the new arrangement
principal payments, except for $1 million to other financing
creditor, would commence only in 2004.
For a description of principal markets and customers, see
Note 17.
b. StarBand Communications Inc.:
On March 30, 2000, the Company and Spacenet, Microsoft
Network LLC ("MSN"), EchoStar Communications Corporation
("EchoStar") and ING Furman Selz Investment ("ING"), entered
into an agreement, pursuant to which MSN, EchoStar and ING
invested a total of $ 125 million in, and the Company and
Spacenet contributed certain intangible assets, including
exclusive marketing rights, trademarks, technology, know-how
and other to a newly formed joint venture, StarBand
Communications Inc. ("StarBand" or the "JV"), a North
American broadband satellite internet service provider. As a
result of the above investment, the Company through
Spacenet, MSN, EchoStar and ING owned 42.1%, 17.7%, 17.7%
and 7.2%, respectively, of the outstanding capital stock of
StarBand. In addition, certain related parties of StarBand
held 8% of its outstanding share capital.
F - 11
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1:- GENERAL (CONT.)
There are additional agreements covering, inter-alia, the supply
of equipment and services to MSN by StarBand. The Company and
Spacenet have entered into a master supply and services agreement
under which the Company and Spacenet provide StarBand with, among
other things, network operations, equipment, use of facilities
and certain research and development support.
The Company accounted for the transaction as a contribution of
assets to the newly formed entity at the transferors' basis which
was zero, in accordance with FASB's Emerging Issues Task Force
89-7 "Exchange of assets or Interest in a Subsidiary for a
Non-Controlling Equity Interest in a New Entity" ("EITF 89-7")
(as subsequently codified in EITF 01-2: "Interpretation of APB
29" ("EITF 01-2")) and Accounting Principle Board Opinion No. 18
"The Equity Method of Accounting for Investments in Common Stock"
("APB No. 18").
In September 2001, EchoStar invested an additional $ 50 million
in StarBand, increasing its equity ownership to 29.2% (decreasing
the Company and Spacenet ownership to 34.9%). The agreement
allowed for an additional increase in ownership by EchoStar of up
to 56.8 % (decreasing the Company ownership to 20.9%) upon
EchoStar's fulfillment of its undertaking to launch a next
generation satellite. The Company, Spacenet and StarBand agreed
in conjunction with the investment agreement that StarBand would
pay its outstanding receivable to the Company in the amount of
$75 million as of December 31, 2001, by way of quarterly $5
million installments commencing in January 2002. However, at the
beginning of 2002: (a) Echostar announced that it would not
provide additional funds to Starband; (b) Starband had not
fulfilled its obligation to pay $5 million in the first quarter
of 2002; and (c) Starband's cash position had deteriorated. In
accordance with Statement of Financial Accounting Standard No. 5
"Accounting for Contingencies" ("SFAS No. 5"), the Company
identified the above conditions as a type I event and
accordingly, recorded in 2001, a bad debt provision of $75
million, which is included in provision and write off of doubtful
accounts and capital lease receivables and reversed $3 million in
revenues. In 2002, revenues from sales to Starband in the amount
of $3.2 million were recognized on a cash basis.
On May 31, 2002, StarBand filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Court.
During 2002, the Company provided StarBand approximately $7
million of debtor in possession financing, the majority of which
has been in the form of transponder capacity and additional
financing of approximately $18.2 million. All amounts provided
including "debtor in possession" were recorded as equity in
losses of affiliated companies in the amount of approximately
$25.2 million.
All of the above ownership percentages are presented on a fully
diluted basis.
c. Restructuring charges, write offs and other significant charges:
1. In the year 2001, the Group did not meet its projected
sales. The recession had a negative impact on the
communications industry. The Group began to experience a
slowdown in orders and sales in virtually all of its
markets- vertical, consumer and enterprise.
F - 12
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1:- GENERAL (CONT.)
The Group realized that its corporate sales would indeed be
heavily impacted. In addition to the corporate enterprise market,
the consumer market also experienced its first slowdown in sales.
Furthermore, certain circumstances such as the global decrease in
telecommunication companies and depressed market conditions
indicated that the carrying amount of the investments in other
companies and in affiliated company would not be recoverable.
As a result of the above, the Company's management recorded in
2001 the following charges:
a) Restructuring charges of approximately $ 30.3 million. (See
Note 13).
b) Write off and mark down of excess inventory, inventory
expected to be sold at prices lower than their carrying
value and discontinued products in an amount of
approximately $ 59.8 million, which is included in cost of
revenues. (See Note 4b).
c) Reserve for capital lease receivables, increase in bad debt
provision and write-offs in an amount of approximately $
134.6 million of which $ 75 million related to StarBand. The
provisions are included in provision and write off for
doubtful account and capital lease receivables. (See Note
16c).
d) Impairment of tangible, intangible assets and goodwill as
follows:
1) Property and equipment and current assets in an amount
of approximately $14.8 million. (See Note 7c).
2) Goodwill in an amount of approximately $50.6 million.
(See Note 9c).
3) Intangible assets in an amount of approximately $28.2
million. (See Note 8c)
e) Impairment of investments in other companies in an amount of
approximately $ 19.6 million. The impairment was recorded as
a write off of investments in the statement of operations.
(See Note 6).
f) Impairment of investment in affiliated company in an amount
of approximately $ 8.4 million. The impairment was recorded
as a write off of investments in the statement of
operations. (See Note 5b).
F - 13
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1:- GENERAL (CONT.)
2. In the year 2002, the recession in the communications
industry and the slowdown in orders continued. Furthermore,
certain circumstances such as the global decrease in
telecommunication companies and depressed market conditions
indicated that the carrying amount of the certain assets
would not be recoverable. In October 2002, the Company
commenced the Arrangement to restructure its debt, which was
successfully completed on March 6, 2003. Prior to and while
the Arrangement was under negotiation, the Company's ability
to sell products and retain customers declined. As a result
of the above, the Company's management recorded in 2002 the
following charges:
a) Write off and mark down of excess inventory, inventory
expected to be sold at prices lower than their carrying
value and discontinued products in an amount of
approximately $ 20.1 million, which is included in cost
of revenues. (See Note 4b).
b) Increase in bad debt provision and write offs in an
amount of approximately $ 34.7 million. The provisions
are included in provision and write off for doubtful
account and capital lease receivables. (See Note 16c).
c) Impairment of tangible, intangible assets and goodwill
as follows:
1) Property and equipment and current assets in an
amount of approximately $ 42.4 million.
(See Note 7d).
2) Intangible assets in an amount of approximately
$8.3 million. (See Note 8d).
3) Goodwill in an amount of approximately $69.7
million that is presented under "Cumulative effect
of a change in an accounting principle" and
impairment of goodwill in the operating expense.
(See Note 9d).
Impairment of investments in other companies in an
amount of approximately $ 12.0 million. The
impairment was recorded as a write off of
investments in the statement of operations.
(See Note 6).
Impairment of long-term note in an amount of
approximately $ 39.4 million. The impairment was
recorded as a write-off of investments in the
statement of operations. (See Note 2b).
d) Discontinued operations of rStar:
During the third quarter of 2002, the Company's
management decided to suspend activities relating to
all operational components of rStar, which was mainly
AutoNetworks, Inc., a 85% subsidiary of the Company.
F - 14
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1:- GENERAL (CONT.)
The loss from discontinued operations consists of the following
(in thousands):
YEAR ENDED DECEMBER 31,
2001 2002
----------------- ----------------
Cost and expenses:
Cost of revenues $ - $ 152
Sales and marketing 2,960 866
General and administrative 480 404
Research and development 2,614 515
----------------- ----------------
Loss from discontinued operations $ 6,054 $ 1,937
================= ================
e. Satlynx S.A.:
In May 2002, the Company completed an agreement with SES
Global to form Satlynx S.A. (Satlynx"), a company that
provides two-way satellite broadband communications services
to enterprises, consumers and Soho users in Europe. The
Company and SES Global contributed cash and in kind
contributions, which included existing facilities,
transponders, hubs, terminals, technology and technical and
marketing assistance (some of these assets were immediately
purchased by Satlynx from SES Global and from Gilat with the
cash investment). As part of the agreement, the Company sold
to Satlynx its existing European operations and enterprise
customers in France, Italy, Germany, Holland, England and
Czechoslovakia for $ 12 million in cash and approximately $
2.5 million in a note (the "Satlynx Note"). The future of
Satlynx is contingent upon its ability to raise additional
funding.
The Company accounted for the transaction as a contribution
of assets to the newly formed entity at the transferors'
basis which was equal to the amount of the Satlynx Note, in
accordance with FASB's Emerging Issues Task Force 89-7
"Exchange of Assets or Interest in a Subsidiary for a
Non-Controlling Equity Interest in a New Entity" ("EITF
89-7") (as was codified into EITF 01-2: "Interpretation of
APB 29" ("EITF 01-2")) and Accounting Principle Board
Opinion No. 18 "The Equity Method of Accounting for
Investments in Common Stock" ("APB 18"). The Company does
not control Satlynx and therefore ceased to consolidate its
European operations as of May 1, 2002, and recognized equity
losses in the amount of $4.1 million , representing the
investment in Satlynx certain receivables and guaranties
provided to Satlynx. As of December 31, 2002 investment in
Satlinx amounted to $ 0.
The Company has determined that it does not control Satlynx
for the following reasons: (i) the Company owns 50% of the
outstanding shares which comprises just under a majority of
the shares; (ii) the CEO of Satlynx has been appointed by
SES Global (the other 50% shareholder); and (iii) the
shareholders agreement entered into between the Company and
SES provided SES with certain veto and management rights
which enable SES to participate in significant financial and
operating decisions that would normally be made in the
ordinary course of business. As such, SES has the ability to
block significant business decisions that the Company might
otherwise choose to undertake.
F - 15
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2:- ACQUISITIONS
a. Until October 2000, the Company held 1.2% of the Common
stock of rStar Corporation Inc. ("rStar" (formerly: ZapMe!
Corporation)), a public company traded on the Nasdaq
National Market, which had been acquired for total
consideration of approximately $ 2.5 million. This primary
investment was recorded under the cost method.
In November and December 2000, the Company's subsidiary,
Gilat Satellite Networks (Holland) BV ("Gilat BV") acquired
47.8% of rStar's Common stock for $ 49.7 million in cash,
under a tender offer dated October 3, 2000.
In 2000, after the additional investment, the investment in
rStar was accounted for using the equity method. The Company
identified the cost of each investment, the fair value of
the underlying assets acquired, and the goodwill related to
each step of the investment. An amount of $ 10 million out
of the total investment was attributed to in-process
research and development. The technological feasibility of
rStar's in-process research and development had not yet been
established, and there was no alternative future use for it.
During 2000, Gilat BV did not record equity losses with
respect to rStar results of operations due to immateriality.
During January 2001, Gilat BV acquired an additional 2%
interest in rStar for approximately $ 2 million, reaching
51%, of the outstanding share capital of rStar pursuant to
the tender offer mentioned above. As a result, Gilat
consolidated rStar's financial statements from January 1,
2001. The additional acquisition was treated on the basis of
the purchase method of accounting, and accordingly, the
purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair value at
the dates of acquisition. The Company included both the
goodwill previously included with its investment in an
affiliated company and the goodwill from the additional
purchase in the balance sheet caption "Goodwill".
During May 2001, rStar issued and delivered to Gilat BV
19,396,552 shares of rStar Common stock, in full
satisfaction of rStar's outstanding capital lease
obligations to Spacenet in the amount of approximately $ 45
million, which resulted in the Group increasing its share
equity in rStar from 51% to approximately 66%. The Company
determined the cost of this acquisition based on the fair
value of rStar's capital lease obligation, and accounted for
the acquisition based on the purchase method of accounting
in accordance with Accounting Principles Board Opinion No.
16 "Business Combination" ("APB 16"). This transaction
resulted in recording additional goodwill.
In April 2001, the Group signed an agreement with rStar,
which was amended in September 2001 and again in December
2001. According to the amended agreement, rStar acquired
StarBand Latin America (Holland) BV ("StarBand Latin
America"), a wholly owned subsidiary, from the Group in
exchange for 43,103,448 shares of rStar Common stock. rStar
also reacquired approximately 29% of its Common stock from
its shareholders (other than the Group) in exchange for
466,105 Ordinary shares of Gilat and cash consideration in
the amount of $10 million.
F - 16
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2:- ACQUISITIONS (CONT.)
Pursuant to the first and the second amendments of the
agreement, in the event of StarBand Latin America reaching
certain net income levels in the next few years, Gilat would
be entitled to receive additional shares of rStar Common
stock. In the event StarBand Latin America does not reach
certain net income levels in the next few years, rStar
shareholders will be entitled to receive in each of the two
years in the period ending June 2004 cash consideration in
the amount of $2.5 million or $5 million per year, subject
to those results. The terms of the special cash
consideration and the additional share issuance will be
canceled in the event of a rStar public offering or in the
event rStar closes a sale of its Common Stock, in a single
transaction, with a party other than the Group that raises
gross proceeds to rStar of at least $100 million, at a price
of rStar Common Stock equal to $1 per share. Under the
revised terms, only 60% of these proceeds need to be in the
form of cash.
The Company guarantees the payment of the Special
Distribution. The Company estimates that no provision is
needed for the first distribution as of December 31, 2002.
During 2002, the Company provided a provision for the second
distribution as of December 31, 2002 as management's current
assessment is that with the current level of sales in 2003
and with the uncertainties in the markets in which rStar
operates, it is probable that the special distribution will
be paid in 2004. However, if rStar is successful in growing
its business and increasing its net income during 2003, the
special distribution may not need to be paid in part or at
all. The acquisition and the tender offer described above
consummated on August 2, 2002. As such, the Group holds
approximately 85% of rStar's outstanding stock
In September 2001, the Company wrote off goodwill and other
intangible assets related to rStar in an amount of $ 50.6
million (See Notes 1c, 8c and 9c). The Company recorded an
impairment of the remaining goodwill of $3.1 million as of
January 1, 2002 upon the adoption of SFAS 142 and included
in the cumulative effect of a change in an accounting
principle. A subsequent additional impairment of rStar
goodwill in the amount of $13 million is recorded in
operating expenses.
The following represents the unaudited pro-forma results of
operations for the year ended December 31, 2000, assuming
that the rStar acquisition had been consummated as of
January 1, 2000 (in thousands except per share data):
YEAR ENDED
DECEMBER 31,
2000
-----------------
(UNAUDITED)
-----------------
Total revenues $ 477,820
=================
Net loss from continuing operations $ (3,093)
=================
Basic and diluted net loss per share
from continuing operations: $ (0.14)
=================
F - 17
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2:- ACQUISITIONS (CONT.)
b. In April 2000, Gilat BV and the other shareholders of Gilat
To Home Latin America (Antilles) N.V. (formerly - "Global
Village Telecom (Antilles) N.V.") ("GTHLA") entered into an
agreement, pursuant to which the latter were to exchange all
of their rights in GTHLA for the rights that GTHLA held in
two Brazilian entities formed to provide telephone and other
communications services in south central Brazil, and a cash
payment of $ 5.3 million. As part of the transaction, the
Company granted a $ 40 million long-term loan ("Original
Note"), to a new entity formed by those investors, in
exchange for a note convertible into Common shares of the
new entity equal to approximately 9.1% of the then
outstanding shares of the new entity. The note bore interest
at 5% per annum and was to mature in May 2002. Following the
transaction, Gilat BV, together with certain other
shareholders, holds 100% of GTHLA. The operations of GTHLA
are included in the Company's consolidated results of
operations from April 14, 2000. The acquisition was
accounted for by the purchase method, and accordingly, the
purchase price has been allocated to the fair value of the
assets acquired and liabilities assumed of GTHLA and
resulted in recording of goodwill in the amount of
approximately $ 34 million, which was being amortized over
10 years until December 2001.
The note was presented in long-term investments and
receivables in 2000 and 2001. On May 14, 2002, Gilat
accepted an Amendment and Restatement of the Convertible
Subordinated Note. Under the terms of the Restated Note, the
note was to mature on December 27, 2002 and a portion of the
interest ($3 million) was due in installments, the last of
which was paid on September 30, 2002. In addition, the
Amended Note improved the conversion terms for Gilat and
also provides for a cash pre-payment of certain amounts to
Gilat in certain events. Due to financial difficulties of
the debtors, the note was not repaid.
The Company recognized an impairment of the above long-term
loan in the amount of $39.4 million in accordance with
Accounting Standard No. 114 "Accounting by Creditors for
Impairment of a Loan" ("SFAS 144").
In 2002, the balance of the goodwill was written-off in
accordance with SFAS No. 142 as cumulative effect of a
change in an accounting principle (see Note 9), resulting
in a charge of $28 million.
F - 18
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2:- ACQUISITIONS (CONT.)
The following unaudited pro forma information presents the
results of operations for the Group and GTHLA for the year
ended December 31, 2000, as if the acquisition had been
consummated as of January 1, 2000 (in thousands, except per
share data):
YEAR ENDED
DECEMBER 31,
2000
------------------
(UNAUDITED)
------------------
Total revenues $ 496,351
==================
Net loss $ (5,568)
==================
Basic and diluted net loss per share $ (0.25)
==================
c. On July 12, 2000, the Company acquired all of the shares of
Deterministic Networks, Inc. ("DNI"), a privately held
company based in California, which is a supplier of
Policy-Based Networking products and, providing quality of
service (QoS), network management, and Internet security
capabilities that enhance the products and services of its
customers. The total consideration was approximately $ 7.8
million, which was paid, in 218,422 Ordinary shares of the
Company. The operations of DNI are included in the
consolidated statements from July 1, 2000. The acquisition
was treated on the basis of the purchase method of
accounting. Accordingly, the purchase price has been
allocated to the fair value of the assets acquired and
liabilities assumed of DNI and resulted in recording
goodwill in the amount of approximately $ 7.2 million, which
was being amortized over 5 years until December 2001. The
purchase price was based on the market price of the
Company's Ordinary shares on the announcement date of the
transaction. In 2002, the goodwill has been written-off in
accordance with FAS No. 142 as cumulative effect of a change
in an accounting principle, see Note 9.
Pro-forma information in accordance with APB No. 16 has not
been provided as the net income and earnings per share of
DNI for 2000 were not material in relation to total
consolidated net income and net earnings per share.
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the
United States ("US GAAP").
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F - 19
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
b. Financial statements in U.S. dollars:
The majority of the revenues of the Company and certain of
its subsidiaries are generated in U.S. dollars ("Dollar") or
linked to the Dollar. In addition, a substantial portion of
the Company's and certain of its subsidiaries' costs is
incurred in dollars. Company's management believes that the
Dollar is the primary currency of the economic environment
in which the Company, its affiliated companies, reported
under the equity method, and certain of its subsidiaries,
operate. Thus, the functional and reporting currency of the
Company, certain of its subsidiaries, and its affiliates is
the Dollar.
Accordingly, monetary accounts maintained in currencies
other than the Dollar are remeasured into U.S. Dollars in
accordance with Statement of Financial Accounting Standard
No. 52 "Foreign Currency Translation"("SFAS No.52"). All
transaction gains and losses of the remeasurement of
monetary balance sheet items are reflected in the statements
of operations as financial income or expenses, as
appropriate.
The financial statements of foreign subsidiaries, whose
functional currency has been determined on their local
currency, have been translated into U.S. dollars. Assets and
liabilities have been translated using the exchange rates in
effect at the balance sheet date. Statement of operations
amounts have been translated using the average exchange rate
for the period. The resulting translation adjustments are
reported as a component of shareholders' equity in
accumulated other comprehensive income (loss).
c. Principles of consolidation:
The consolidated financial statements include the accounts
of the Company and its wholly owned and majority-owned
subsidiaries. Intercompany balances and transactions,
including profits from inter-company sales not yet realized
outside the Group, have been eliminated upon consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments
that are not restricted as to withdraws or use with original
maturities of three months or less at the date acquired.
e. Short-term bank deposits:
Bank deposits with maturities of more than three months but
less than one year are included in short-term bank deposits.
Such bank deposits are stated at cost.
f. Short-term restricted cash:
Restricted cash is primarily invested in certificates of
deposit, which mature within one year, linked to the U.S
dollar, bear interest at rates of 0.9% - 4.5% and is used as
collateral for the lease of the Group's offices, a sale and
lease back transaction and performance guarantees to
customers.
F - 20
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
g. Inventories:
Inventories are stated at the lower of cost or market value.
Inventory write-offs are provided to cover risks arising
from slow-moving items, excess inventories, discontinued
products, and for market prices lower than cost. In 2001 and
2002, the Company wrote off approximately $ 59.8 million and
$20.1 million, respectively, of excess inventory,
discontinued products, and for market prices lower than
cost, which has been included in cost of revenues (See Notes
1d and 4b).
Cost is determined as follows:
Raw materials, parts and supplies - using the average cost
method with the addition of allocable indirect manufacturing
costs.
Work-in-progress - represents the cost of manufacturing with
the addition of allocable indirect manufacturing costs.
Finished products - on the basis of direct manufacturing
costs with the addition of allocable indirect manufacturing
costs.
Inventories include amounts related to long-term contracts
as determined by the percentage of completion method of
accounting. Such amounts are recorded as "cost and estimated
earnings in excess of billings".
h. Long-term restricted cash:
Restricted cash is primarily invested in certificates of
deposit, which mature in more than one year, linked to the
U.S dollar, bear interest at a rate of 0.9%-4.5% and used as
collateral for the lease of the Group's offices, a sale and
lease back transaction and performance guarantees to
customers.
i. Investment in affiliated companies:
In these financial statements, affiliated companies are
companies held to the extent of 20% or more (which are not
subsidiaries) , where the Company can exercise significant
influence over operating and financial policies of the
affiliate. The investment in affiliated companies is
accounted for by the equity method. Profits on intercompany
sales, not realized outside the Group, were eliminated.
The excess of the purchase price over the fair value of net
tangible assets acquired has been attributed to goodwill,
acquired in-process research and development and other
identifiable assets.
Acquired in-process research and development related to
investments in affiliated companies is expensed when the
technological feasibility has not yet been established, and
for which there is no alternative future use.
F - 21
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company's investments in affiliates are reviewed for
impairment, in accordance with APB 18 whenever events or
changes in circumstances indicate that the carrying amount
of an investment may not be recoverable. In 2001, impairment
losses were identified in the amount of $ 8.4 million (See
Notes 1d and 5b).
j. Investment in other companies:
The investment in these companies is stated at cost, since
the Company does not have the ability to exercise
significant influence over operating and financial policies
of the investees.
The Company's investments in other companies are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an investment may not
be recoverable in accordance with Accounting Principle Board
Opinion No. 18 "The equity Method of Accounting for
Investments in Common Stock" ("APB 18"). During the years
ended December 31, 2001 and 2002, impairment losses have
been identified in the amounts of $ 19.6 million and $ 12
million, respectively. (See Notes 1d and 6).
k. Long term trade receivables:
Long-term receivables from extended payment agreements are
recorded at estimated present values determined based on
current rates of interest and reported at the net amounts in
the accompanying financial statements. Imputed interest is
recognized, using the effective interest method as a
component of interest income in the accompanying statements.
l. Property and equipment, net:
Property and equipment are stated at cost, net of
accumulated depreciation. Depreciation is calculated by the
straight-line method over the estimated useful lives of the
assets as follows:
YEARS
--------------------------------------------------
Buildings 50
Computers and electronic equipment 3 - 12.5
Office furniture and equipment 5 - 17
Vehicles 7
Leasehold improvements Over the term of the lease or the useful life of
the improvements, by whichever is shorter
Equipment leased to others under operating leases is carried
at cost less accumulated depreciation and depreciated using
the straight-line method over the useful life of the assets.
The Group accounts for costs of computer software developed
or obtained for internal use in accordance with Statement of
Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP
98-1"). SOP 98-1 requires the capitalization of certain
costs incurred in connection with developing or obtaining
internal use software.
F - 22
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
m. Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of:
The Company's long-lived assets are reviewed for impairment
in accordance with Statement of Financial Accounting
Standard No. 144 "Accounting for the Impairment or Disposal
of Long- Lived Assets" ("SFAS No. 144") whenever events or
changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the assets. If such assets
are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
The impairment loss shall be reduced the carrying amount of
the long-lived assets of a Group covered by the Statement on
a pro-rata basis using the relative carrying amounts of
those assets. However, the carrying amount of a long-lived
asset of the Group would not be reduced below its fair
value, if determinable. Assets to be disposed of are
reported at the lower of the carrying amount or fair value
less costs to sell.
The Company recorded losses from write-off of property and
equipment, which it ceased to use in operations, adjustment
to the carrying amount of property and equipment and
impairment losses in the amount of $ 0, $ 10.2 million and $
42.4 million in 2000, 2001 and 2002, respectively. (See
Notes 1d and 7c and 7d).
n. Intangible assets and deferred charges:
Issuance costs, customer acquisition costs and other
intangible assets are stated at amortized cost.
Intangible assets subject to amortization that arose from
acquisitions prior July 1, 2001, are being amortized on a
straight-line basis over their useful life in accordance
with APB Opinion No. 17 "Intangible Assets". Issuance costs,
customer acquisition costs and other intangible assets are
amortized using the straight-line method over their
estimated useful life, which are five to fifteen years (See
Notes 1dc, 2a and 8c).
Before the adoption of SFAS No. 144 the Group evaluated the
recoverability of intangible assets and deferred charges
annually and the appropriateness of the amortization period
based on the estimated future undiscounted cash flows
derived from the asset in 2002, the Company evaluated the
recoverability of intangible assets and deferred charges in
accordance with SFAS No. 144 (see Note 3l above). Any
impairment loss is recognized in the statement of
operations.
In 2001 and 2002, such impairments were indicated and the
Group recognized impairment loss in the amounts of $ 28.2
million and $8.3 million, respectively, which was included
in the impairment of tangible and intangible assets in the
statements of operations. (See Notes 1d, 2a and 8c and 8d).
F - 23
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
o. Goodwill:
Goodwill represents the excess of the costs over the net
assets of businesses acquired. Goodwill that arose from
acquisitions prior to July 1, 2001, was amortized until
December 31, 2001, on a straight-line basis over five to
fifteen years. Under SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") goodwill acquired in a
business combination for which date is on or after July 1,
2001, shall not be amortized.
SFAS No. 142 requires goodwill to be tested for impairment
on adoption and at least annually thereafter or between
annual tests in certain circumstances, and written down when
impaired, rather than being amortized as previous accounting
standards required. Goodwill is tested for impairment by
comparing the fair value of each of the Company's reporting
unit with its carrying value. Fair values are determined
using discounted cash flows, market multiples and market
capitalization. Significant estimates used in the
methodologies include estimates of future cash flows, future
short-term and long-term growth rates, weighted average cost
of capital and estimates of market multiples.
Before the adoption of SFAS No. 142 the Group evaluated the
recoverability of goodwill annually and the appropriateness
of the amortization period based on the estimated future
undiscounted cash flows derived from the asset. In those
cases in which quoted market price in an active market
exist, the Company used the market price as the measure for
the fair value Any impairment loss was recognized in the
statement of operations. In 2001, such impairments were
indicated and the Group recognized impairment loss in the
amount of $ 50.6 million, which was included in the
impairment of goodwill in the statements of operations. (See
Notes 1c, 2a and 9).
During 2002, the Company performed the transitional and
annual impairment tests and accordingly recognized an
impairment of $ 69.7 million, out of which $ 56.7 million is
presented under "Net loss from cumulative effect of a change
in an accounting principle" and $ 13.0 million is presented
in impairment of goodwill in the operating expenses. (see
Note 9d)
Before the adoption of SFAS No. 142 the Group evaluated the
recoverability of goodwill annually and the appropriateness
of the amortization period based on the estimated future
undiscounted cash flows derived from the asset. In those
cases in which quoted market price in an active market
exist, the Company used the market price as the measure for
the fair value Any impairment loss was recognized in the
statement of operations. In 2001, such impairments were
indicated and the Group recognized impairment loss in the
amount of $ 50.6 million, which was included in the
impairment of goodwill in the statements of operations. (See
Notes 1d, 2a and 9c).
F - 24
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
p. Revenue recognition:
The Group generates revenues mainly from sale of products
and services for satellite-based communications networks.
Sale of products includes mainly the sale of VSAT's and
services include access to and communication with satellites
("space segment"), installation of network equipment,
consulting, on-line network monitoring and network
maintenance and repair services.
Revenues from product sales are recognized in accordance
with SEC Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB No. 101"), when
shipment has occurred, persuasive evidence of an arrangement
exists, the vendor's fee is fixed or determinable, no
further obligation remains and collectibility is probable.
The Group does not grant rights of return. The Group sells
its products primarily through its direct sales force and
indirectly through resellers, both of whom are considered
end users.
Revenues from products under sales-type-lease contracts are
recognized in accordance with SFAS No. 13, "Accounting for
Leases" ("SFAS No. 13") upon installation or upon shipment,
in cases where the customer obtains its own or others
installation services. The present values of payments due
under sales-type-lease contracts are recorded as revenues at
the time of shipment or installation, as appropriate. Future
interest income is deferred and recognized over the related
lease term as financial income. The net investments in
sales-type-lease are discounted at the interest rates
implicit in the leases.
Revenue from products and services under operating leases of
equipment is recognized ratably over the lease period.
Arrangements that include installation services are
evaluated to determine whether those services are an
integral component of the equipment used. When installation
services are considered integral, revenues from products and
installation services are recognized only upon installation.
When services are not considered integral, revenues from
products sales are recognized upon shipment and the service
revenues are recognized when the services are performed.
Revenues from services under long-term contracts are
recognized based on Statement Of Position No. 81-1
"Accounting for Performance of Construction - Type and
Certain Production - Type Contracts" ("SOP 81-1"), using
contract accounting on a percentage of completion method
based on the ratio of actual costs incurred to total costs
estimated to be incurred over the duration of the contract.
Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are first
determined, in the amount of the estimated loss on the
entire contract.
Service revenues are recognized ratably over the contractual
period or as services are performed. Where arrangements
involve multiple elements, revenue is allocated to each
element based on the relative fair value of the element when
sold separately.
Deferred revenue includes unearned amounts received under
services contracts, and amounts received from customers but
not yet recognized as revenues.
F - 25
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
q. Research and development:
Research and development expenses, net of grants received,
are charged to expenses as incurred.
r. Grants:
The Company received royalty-bearing grants and
non-royalty-bearing grants from the Government of Israel,
U.S.-Israel Science and Technology Foundation ("USISTF") and
from other funding sources for funding approved research and
development projects. These grants are recognized at the
time the Company is entitled to such grants on the basis of
the costs incurred and included as a deduction from research
and development costs.
Research and development grants amounted to $ 4,304,000, $
8,849,000, and $ 3,946,000 in 2000, 2001 and 2002,
respectively.
As for one-time expense related to the settlement with the
Office of the Chief Scientist in the Israeli Ministry of
Industry and Trade ("OCS") program, see Note 15g.
s. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB No. 25") and FASB Interpretation No. 44
"Accounting for Certain Transactions Involving Stock
Compensation" in accounting for its employee stock option
plans. Under APB No. 25, when the exercise price of the
Company's share options is less than the market price of the
underlying shares on the date of grant, compensation expense
is recognized.
The Company applies SFAS No. 123, and Emerging Issues Task
Force Consensus 96-18, "Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring in
Conjunction with Selling Goods or Services" ("EITF 96-18")
with respect to warrants issued to non-employees. SFAS No.
123 requires the use of option valuation models to measure
the fair value of the warrants at the date of grant.
Under Statement of Financial Accounting Standard No. 148
"Accounting for Stock-Based Compensation- Transition and
Disclosure" ("SFAS 148") that amended SFAS 123 "Accounting
for Stock-Based Compensation", pro forma information
regarding net income (loss) and net earnings (loss) per
share is required and has been determined as if the Company
had accounted for its employee share options under the fair
value method of SFAS No. 123. The fair value of these
options is amortized over their vesting period and estimated
at the date of grant using a Black-Scholes multiple option
pricing model with the following weighted average
assumptions; risk-free interest rates of 5%, 3% and 3% for
2000, 2001 and 2002, respectively; a dividend yield of 0%
for each of those years; a volatility factor of the expected
market price of the Company's Ordinary shares of 0.94 for
2000, 2.27 for 2001 and 0.73 for 2002; and a weighted
average expected life of the option of 3 years for each of
those years.
F - 26
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Weighted average fair value of options granted at their
grant date were $ 64, $ 4.2 and $ 1.9 during 2000, 2001 and
2002, respectively. All options were granted at fair market
value.
The following table illustrates the effect on the net income
(loss) and net earnings (loss) per share, assuming that the
Company had applied the fair value recognition provision of
SFAS No. 123 on its stock-based employee compensation.
YEAR ENDED DECEMBER 31,
------------------------------------------------
2000 2001 2002
--------------- --------------- ----------------
U.S. DOLLARS IN THOUSANDS
(EXCEPT PER SHARE DATA)
------------------------------------------------
Net income (loss) as reported $ 19,435 $ (429,112) $ (348,204)
Deduct: total stock-based employee compensation
expense determined under fair value based method (99,846) (32,014) (9,715)
--------------- --------------- ----------------
Pro forma net loss $ (80,411) $ (461,126) $ (357,919)
=============== =============== ================
Pro forma basic and diluted net loss per share $ (3.57) $ (19.74) $ (15.18)
=============== =============== ================
t. Income taxes:
The Group accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 prescribes the use of the liability method
whereby deferred tax assets and liability account balances
are determined based on differences between financial
reporting and tax based assets and liabilities and are
measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The
Group provides a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable
value.
u. Concentrations of credit risks:
Financial instruments that potentially subject the Group to
concentrations of credit risk consist principally of cash
and cash equivalents, short-term bank deposits, short-term
and long-term restricted cash, trade receivables and
long-term trade receivables.
The majority of the Group's cash and cash equivalents,
short-term and long-term restricted cash and short-term bank
deposits are invested in U.S dollars with major banks in
Israel and in the United States. Such deposits in the United
States may be in excess of insured limits and are not
insured in other jurisdictions. Management believes that the
financial institutions that hold the Group's investments are
financially sound and, accordingly, minimal credit risk
exists with respect to these investments.
F - 27
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The trade receivables and long-term trade receivables of the
Group derive from sales to major customers located in the
U.S., Europe, South America (Mainly Peru) and the Far East.
The Group performs ongoing credit evaluations of its
customers and obtains letters of credit and bank guarantees
for certain receivables. An allowance for doubtful accounts
is determined with respect to those amounts that the Group
has determined to be doubtful of collection and a general
allowance is provided to cover additional potential
exposures.
A significant portion of our trade receivable are from a
single government entity in Latin America. Any instability
in the political or economic situation or otherwise in that
country, could have a significant adverse impact on the
Company's business.
The Group has no significant off-balance-sheet concentration
of credit risk such as foreign exchange contracts, option
contracts or other foreign hedging arrangements.
v. Severance pay:
The Company's liability for severance pay for its Israeli
employees is calculated pursuant to Israeli severance pay
law based on the most recent salary of the employees
multiplied by the number of years of employment, as of the
balance sheet date. Employees are entitled to one month's
salary for each year of employment or a portion thereof. The
Company's liability for all of its Israeli employees, is
partly provided by monthly deposits for insurance policies
and by an accrual. The value of these policies is recorded
as an asset in the Company's balance sheet.
The deposited funds made to the Company's employees include
profits accumulated up to the balance sheet date. The
deposited funds may be withdrawn only upon the fulfillment
of the obligation pursuant to Israeli severance pay law or
labor agreements. The value of the deposited funds is based
on the cash surrendered value of these policies, and
includes immaterial profits.
Severance pay expenses for the years ended December 31,
2000, 2001 and 2002, amounted to approximately $ 2,494,000 $
2,933,000 and $1,896,000 respectively.
w. Fair value of financial instruments:
The following methods and assumptions were used by the Group
in estimating their fair value disclosures for financial
instruments:
The carrying amounts of cash and cash equivalents,
short-term restricted cash, short-term bank deposits, trade
receivables, short term bank credit and trade payables
approximate their fair value due to the short-term maturity
of such instruments.
F - 28
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The carrying amounts of the Group's long-term borrowing
arrangements (other than the arrangement included in the
debt restructuring, mainly the subordinated notes, see Note
18a), long-term note, long-term trade receivables and
long-term restricted cash approximate their fair value. The
fair value was estimated using discounted cash flow
analyses, based on the Group's incremental borrowing rates
for similar type of borrowing arrangements.
The fair value of the subordinated notes, which was
determined according to market value, and the carrying
amount of the Group's convertible subordinated notes was
$91.0 million and $350 million as of December 31, 2001,
respectively and $87.5 million and $350 million as of
December 31, 2002, respectively.
x. Basic and diluted net earnings (loss) per share:
Basic net earnings (loss) per share is computed based on the
weighted average number of Ordinary Shares outstanding
during each year. Diluted net earnings per share is computed
based on the weighted average number of Ordinary Shares
outstanding during each year, plus dilutive potential
Ordinary Shares considered outstanding during the year, in
accordance with SFAS No. 128 "Earnings per Share"
The difference between the weighted average number of shares
used in computing basic net earnings per share and the
weighted average number of shares used in computing diluted
net earnings per share for the year ended December 31, 2000
derives from potential Ordinary Shares considered
outstanding as a result of options outstanding during the
year. In 2000, 2001 and 2002, the shares attributable to the
convertible subordinated notes have been excluded from the
calculation of the diluted net loss per Ordinary Share
because such securities were anti-dilutive. In addition, for
the three years ended December 31, 2002, there were no
adjustments to net income (loss) in computing diluted
earnings (loss) per share.
Convertible subordinate notes, outstanding stock options and
warrants have been excluded from the calculation of the
diluted net earnings (loss) per Ordinary share when such
securities are anti-dilutive for the periods presented. The
total weighted average number of shares related to the
convertible subordinated notes, outstanding options and
warrants excluded from the calculations of diluted net
earnings (loss) per share was 2,132,405, 1,960,283 and
2,024,792 for the years ended December 31, 2000, 2001 and
2002, respectively.
F - 29
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
y. Impact of recently issued accounting standards:
In April 2002, the FASB issued SFAS No. 145, "Rescission of
SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and
Technical Corrections," ("SFAS No. 145") which rescinds SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," and an amendment of that Statement, and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS No. 145 amends SFAS No. 44, "Accounting
for Intangible Assets for Motor Carriers." SFAS No. 145
amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. SFAS No. 145
also amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. SFAS
No. 145 is effective for fiscal years beginning May 15,
2002. As a result of adopting SFAS 145, the gain from the
restructuring of the company's liabilities will not be
recorded as an extraordinary item but as a financing income.
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit of Disposal Activities," ("SFAS
No. 146") which addresses significant issues regarding the
recognition, measurement and reporting of costs associated
with exit and disposal activities, including restructuring
activities. SFAS No. 146 requires that costs associated with
exit or disposal activities be recognized when they are
incurred rather than at the date of a commitment to an exit
or disposal plan. SFAS No. 146 is effective for all exit or
disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of SFAS No. 146 to have
a material impact on the Company's results of operations or
financial position.
In November 2002, the FASB issued Interpretation No. 45
("FIN No. 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others, an interpretation of SFAS No. 5,
57 and 107 and Rescission of FASB Interpretation No. 34
("FIN No. 34")." FIN No. 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN No. 45 does not prescribe a
specific approach for subsequently measuring the guarantor's
recognized liability over the term of the related guarantee.
It also incorporates, without change, the guidance in FIN
No. 34, "Disclosure of Indirect Guarantees of Indebtedness
to Others," which is being superseded. The disclosure
provisions of FIN No. 45 are effective for financial
statements of interim or annual periods that end after
December 31, 2002 and the provisions for initial recognition
and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31,
2002, irrespective of a guarantor's year-end. The Company
does not expect the adoption of FIN No. 45 to have a
material impact on its results of operations or financial
position.
F - 30
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
In January 2003, the FASB issued Interpretation No. 46 (or
FIN 46), "Consolidation of Variable Interest Entities." FIN
46 requires a variable interest entity to be consolidated by
a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual
returns or both. A variable interest entity is a
corporation, partnership, trust, or any other legal
structures used for business purposes that either (a) does
not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial
resources for the entity to support its activities. A
variable interest entity often holds financial assets,
including loans or receivables, real estate or other
property. A variable interest entity may be essentially
passive or it may engage in research and development or
other activities on behalf of another company. The
consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in
the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply to
all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was
established. The Company is evaluating the possible impact
of the new interpretation and does not expect it to have a
material effect on its financial position or result of
operations.
z. Reclassification:
Certain 2001 figures have been reclassified to conform with
the 2002 presentation.
NOTE 4:- INVENTORIES
a. The inventory is comprised of the following:
DECEMBER 31,
---------------------------------------
2001 2002
------------------ -----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------
Raw materials, parts and supplies $ 35,040 $ 29,255
Work in progress 5,103 6,757
Finished products 79,583 38,966
Cost and estimated earnings in excess of billings on
uncompleted contracts *) 3,646 -
------------------ -----------------
$ 123,372 $ 74,978
================== =================
*)Composed as follows:
Cost incurred on uncompleted contracts 7,410 $ -
Estimated earnings 627 -
------------------ -----------------
8,037 -
Less - billings (4,391) -
------------------ -----------------
$ 3,646 $ -
================== =================
F - 31
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4:- INVENTORIES (CONT.)
b. The Group periodically assesses its inventory valuation in
accordance with its revenues forecasts, technological
obsolescence, and the market conditions.
c. In September 2001, as a result of adjusted forecast of
revenues for the years 2001 and 2002, and the decision to
discontinue selling certain products, the Group (i) wrote
off excess inventories in order to adjust the inventory
level to the new revenue expectations, in the amount of
approximately $14 million (ii) wrote off the products that
were discontinued in accordance with the restructuring plan,
in the amount of approximately $37 million and (iii) marked
down inventory that is expected to be sold at a price lower
than the carrying value, in an amount of approximately $9
million. These amounts include provision for canceled
purchase orders and legal claims in the amount of $5.8
million, of which approximately $1.8 million are still
provided for as of December 31, 2002. (See Note 11.e.14).
In 2002, as a result of adjusted forecast of revenues for
the years 2002 and 2003, and the decision to discontinue
selling certain products, the Group (i) wrote off excess
inventories in order to adjust the inventory level to the
new revenue expectations, in the amount of approximately $
7.0 million (ii) wrote off the products that were
discontinued in the amount of approximately $ 8.8 million
and (iii) marked down inventory that is expected to be sold
at a price lower than the carrying value, in an amount of
approximately $ 4.3 million.
NOTE 5:- INVESTMENTS IN AFFILIATED COMPANIES
a. The investments in affiliated companies comprise as follows:
DECEMBER 31,
--------------------------------------
2001 2002
----------------- ------------------
U.S. DOLLARS IN THOUSANDS
--------------------------------------
Cost $ - $ 29,334
Share in accumulated losses - (29,334)
----------------- ------------------
TOTAL investments $ - $ -
================= ==================
b. The Company equity ownership in KSAT, a Canadian company, as
of December 31, 2002 is 23.4% on a fully diluted basis. As a
result of assessing the recoverability of the carrying
amount of investments, the Company's management decided in
the year 2001, to write-off its investment in KSAT including
the long term loan in the total amount of $ 8.4 million
since circumstances such as the global decrease in
telecommunication companies, depressed market conditions and
difficulties in raising additional capital, indicated that
the carrying amount of the investment may not be
recoverable. The impairment charge is included in write off
of investments.
c. For investment in Starband, see Note 1d.
d. For investment in Satlynx, see Note 1f.
F - 32
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6:- INVESTMENTS IN OTHER COMPANIES
a. On June 30, 2001, the Company's subsidiary, GTHLA completed
a transaction with Communication y Telefonia Rural S.A.
("CTR") via Rural Telecommunications Chile S.A. ("RT"), an
entity formed by CTR to facilitate this transaction, whereby
GTHLA transferred to RT its Chilean rural telephony network,
comprised of property and equipment totaling approximately
$4.7 million, capitalized software totaling approximately
$3.4 million, and inventory totaling approximately $3.1
million, in exchange for 13% of the outstanding shares of
CTR. The transaction was accounted for under APB No. 29
"Accounting for Non-monetary Transactions" and as a result
no gain or loss was recognized for the exchange of property
and equipment and capitalized software for shares of CTR as
the fair market value of the property and equipment and
capitalized software approximated the book value on the date
of the transaction. In 2001, the Company recorded revenues
of $3.1 million relating to the sale of inventory to CTR. In
2002, the Company wrote-off the investment in CTR, in the
amount of $11.2 million, which is included in write-off of
investments in the statements of operation of 2001. Since
certain circumstances, such as the global decrease in the
telecommunication companies, low capital valuation, and
cumulative losses, indicated that the carrying amount of the
investment may not be recoverable.
b. On March 6, 2000, the Company entered into an agreement to
invest $ 10 million in Knowledge Broadcasting. Com LLC
("KBC"), a multi-media company formed to distribute content
to businesses and homes, using satellite and other
technologies, in return for approximately 10 million shares
of KBC, equal to approximately 5.6% of the total number of
KBC units, and a one-year warrant to purchase an additional
20 million shares at the same purchase price. The Company
also granted KBC (i) a five-year warrant to purchase
approximately 191,000 of the Company's Ordinary Shares, at a
purchase price of $ 157.05 per share conditioned on KBC
providing specific content as stipulated in the agreement.
(ii) a five-year option to acquire equipment and services
payable by KBC during the first two years for up to 20
million shares of KBC (if the Company does not exercise its
warrant), and thereafter, in cash or such other form as may
be agreed between the parties.
In June 2001, the Company received $2.5 million as a result
of KBC reduction of capital by distribution of cash to its
shareholders. In September 2001, the Company's management
decided to write-off the investments in an amount of $7.5
million since certain circumstances, such as the global
decrease in the internet and telecommunication companies,
low capital valuation, and depressed market conditions,
indicated that the carrying amount of the investment may not
be recoverable. The impairment is included in write off of
investments in the statement of operations of 2001.
c. During 2000, 2001 and 2002, the Company's management
identified the following factors pertaining to other
companies in which the Company had invested: (i) some of the
negotiations for additional funding were not successful or
ended with very low valuations; (ii) a planned merger for
one of the companies did not occur; (iii) weakness in the
capital markets continued and intensified after the
September 11, 2001 terrorist events; (iv) decreased levels
of cash curtailed future financing which is needed in order
to finance their business and achieve a scale; and (v) a
growing other than temporary weakness in the target markets
of these companies was confirmed.
F - 33
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6:- INVESTMENTS IN OTHER COMPANIES (CONT.)
The indicators specified above led the Company to conclude
that these depressed market conditions were not temporary
and needed to be considered in the Company's financial
statements. As a result, the Company's management decided to
record a write off of the investments and related
receivables in an amount of $ 9.4 million, $12.1 million and
$ 0.8 million in the year ended December 31, 2000, 2001 and
2002, respectively. The impairment has been recorded as
write-off of investments in the statements of operations.
NOTE 7:- PROPERTY AND EQUIPMENT, NET
a. Composition of property and equipment, grouped by major
classifications, is as follows:
DECEMBER 31,
--------------------------------------
2001 2002
------------------ ------------------
U.S. DOLLARS IN THOUSANDS
--------------------------------------
Cost:
Buildings and land $ 93,623 $ 92,614
Computers and electronic equipment 164,517 138,634
Equipment leased to others 59,543 40,734
Office furniture and equipment 15,856 12,122
Leasehold improvements 13,073 4,823
Vehicles 305 244
------------------ ------------------
346,917 289,171
------------------ ------------------
Accumulated depreciation 99,717 126,266
------------------ ------------------
Depreciated cost $ 247,200 $ 162,905
================== ==================
b. Depreciation expenses totaled $ 33,532,000 $ 41,182,000 and
$ 41,731,000 in 2000, 2001 and 2002, respectively.
c. In 2001, as a result of the Group's restructuring plan and
the Group's strategy to reduce costs and improve
profitability, the Group discontinued certain of its
operations and products, which resulted in impairment of
property and equipment in an amount of approximately $ 10.2
million.
d. In 2002, the Company recorded an impairment of property and
equipment in an amount of $ 42.4 million to reduce the
carrying value of property and equipment. The impairment was
a result of the continued deterioration in market conditions
in general, in the communication market in particular and
the decrease in the projected income and the losses of the
Company. The impairments are included as impairment of
tangible and intangible assets, in the statement of
operations.
e. As for pledges and securities, see Note 11e.
F - 34
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8: - INTANGIBLE ASSETS AND DEFERRED CHARGES, NET
a. Composition of intangible assets and deferred charges,
grouped by major classifications, is as follows:
DECEMBER
31,
---------------------------------------
2001 2002
------------------ -------------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------
Cost:
Identifiable intangible assets resulting from
acquisitions of subsidiaries $ 21,800 $ 21,800
Issuance costs of convertible subordinated notes (see
Note 10) 10,621 10,621
Deferred income taxes (see Note 14d) 2,324 374
Customer acquisition costs 2,910 2,000
Other 5,533 4,637
------------------ -------------------
43,188 39,432
Accumulated amortization and provision for impairment 7,908 18,383
------------------ -------------------
Amortized cost $ 35,280 $ 21,049
================== ===================
b. Amortization expenses amounted to $ 4,036,000, $ 5,037,000
and $4,499,000 for the years ended December 31, 2000, 2001
and 2002, respectively.
c. In 2001, as a result of the circumstances which indicated
that the carrying amount of certain intangible assets would
not be recoverable, the Company reassessed the fair value of
its intangible assets, which resulted in impairment in an
amount of approximately $ 28.2 million.
d. In 2002, the Company recorded an impairment of intangible
assets in an amount of $8.3 million to reduce the carrying
value of intangibles assets of the reporting units to its
implied fair value. The impairment was a result of the
circumstances prompted by the continued deterioration in
market conditions in general, in the communication market in
particular and the decrease in the projected income of the
Company. The impairments are included as impairment of
tangible and intangible assets, in the statement of
operations.
e. Estimated amortization expenses for the years ended:
YEAR ENDED DECEMBER 31, IN THOUSANDS
------------------
2003 $ 6,736
2004 2,089
2005 2,787
2006 1,257
2007 and thereafter 8,180
------------------
$ 21,049
==================
F - 35
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9:- GOODWILL
a. The changes in the carrying amount of goodwill for the year
ended December 31, 2002, are as follows:
GOODWILL
--------------------
U.S. DOLLARS
IN THOUSANDS
--------------------
Balance as of January 1, 2002 $ 56,716
Goodwill acquisitions and additions during the year 13,049
Cumulative effect of a change in an accounting principle (56,716)
Impairment of goodwill (13,049)
--------------------
Balance as of December 31, 2002 $ -
====================
b. Amortization expenses amounted to $ 4,863,000 $ 15,054,000
and $ 0 for the years ended December 31, 2000, 2001 and
2002, respectively.
c. As of September 30, 2001, the Company's management assessed
the carrying value of its goodwill resulting from the
acquisition of rStar. The Company identified the following
factors (i) the continued deterioration in market conditions
in general and in the communication markets in particular;
(ii) the permanent decrease in the expected income from
rStar's target markets (primarily North America); (iii) the
significant decrease of rStar's share price and (iv) rStar's
continued low share price for two fiscal quarters since the
$ 45 million investment in May 2001, which indicated other
than temporary impairment.
As a result, the Company's management decided to record an
impairment of goodwill in an amount of $ 50.6 million in the
year 2001. The impairment is included as impairment of
goodwill in the statement of operations.
d. In 2002, the Company recorded an impairment of the goodwill
in an amount of $69.7 million to reduce the carrying value
of goodwill to its implied fair value. The impairment was
prompted by the continued deterioration in market conditions
in general, in the communication market in particular and
the decrease in the projected income of the Company. The
impairment adjustment recognized at adoption of the new
rules in the amount of $56.7 million was recorded as a
cumulative effect of change in accounting principle in the
first quarter of 2002 statement of operations. The
impairment adjustments recognized after adoption, in the
amount of $13.0 million, was recorded as impairment of
goodwill in the operating expenses.
F - 36
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9:- GOODWILL (CONT.)
e. The unaudited results of operations presented below for the
three years ended December 31, 2000, 2001 and 2002,
respectively, reflect the impact on results of operations
had the Company adopted the non-amortization provisions of
SFAS No. 142 effective January 1, 2000:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 2001 2002
-------------- -------------- ---------------
U.S. DOLLARS IN THOUSANDS
(EXCEPT PER SHARE DATA)
----------------------------------------------------
Reported net income (loss) $ 19,435 $ (429,112) $ (348,204)
Cumulative effect of a change in an
accounting principle - - 56,716
Goodwill amortization 4,863 15,054 -
-------------- --------------- ---------------
Adjusted net income (loss) $ 24,298 $ (414,058) $ (291,488)
============== =============== ===============
Basic net income (loss) per share:
Reported net income (loss) $ 0.86 $ (18.37) $ (14.77)
Cumulative effect of a change in an
accounting principle - - 2.41
Goodwill amortization 0.22 0.64 -
-------------- --------------- ---------------
Adjusted net income (loss) per share $ 1.08 $ (17.73) $ (12.36)
============== =============== ===============
Diluted net income (loss) per share:
Reported net income (loss) $ 0.81 $ (18.37) $ (14.77)
Cumulative effect of a change in an
accounting principle - - 2.41
Goodwill amortization 0.20 0.64 -
-------------- --------------- ---------------
Adjusted net income (loss) per share $ 1.01 $ (17.73) $ (12.36)
============== =============== ===============
F - 37
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10:- CONVERTIBLE SUBORDINATED NOTES
a. Issuance of convertible subordinated notes:
Under an Offering Memorandum issued at the end of February
2000, the Company issued on March 7, 2000, $ 350 million
convertible subordinated notes ("the Notes"), traded in the
United States on the Private Offerings, Resales and Trading
through Automated Linkages ("PORTAL") market and due March
15, 2005. The Notes bear interest at an annual rate of
4.25%, payable March 15 and September 15 of each year,
commencing September 15, 2000. Unless previously redeemed,
the Notes are convertible by the holders, at any time
through maturity, beginning 90 days following issuance of
the Notes, into Ordinary shares of the Company, at a
conversion price of $ 186.18 per share, subject to
adjustment under certain circumstances. The Notes are
redeemable at the option of the Company, in whole or in
part, at any time on or after March 18, 2003, at the
redemption price, plus interest accrued to the redemption
date. The redemption price will range from 100.85% to
101.70%, depending on the date of redemption. In accordance
with EITF 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Continently Adjustable
Conversion Ratios" no recognition of a beneficial conversion
feature was required.
In March 2003, the Company completed a plan of arrangement
for the reorganization with its bank lenders, holders of the
company's 4.25% Convertible Subordinated Notes due 2005 (the
"old notes"), and certain other creditors. In 2002, in
accordance with Statement of Financial Accounting Standard
No. 6 "Classification of Short-Term Obligations Expected to
Be Refinanced" ("SFAS No. 6"), the Company presented the
principal amount along with accrued interest. See also Note
18.
b. On May 1, 2000, the Company published a notice of optional
conversion of the $ 75 million convertible subordinated
notes, which had been issued on May 14, 1997, on June 5,
2000, at 102% of the principal amount thereof, plus interest
accrued and unpaid as of the conversion date. At June 5,
2000, all notes were converted into 1,785,690 Ordinary
shares.
NOTE 11:- COMMITMENTS AND CONTINGENCIES
a. On March 29, 2001, Spacenet completed a transaction for the
sale and leaseback of its corporate headquarters building.
The sale price of the property was approximately $ 31.5
million net of certain fees and commissions. Concurrent with
the sale, Spacenet entered into an operating leaseback
contract for a period of fifteen years at an initial annual
rental of approximately $3.5 million plus escalation. The
capital gain resulting from the sale and leaseback amounting
to $5.6 million was deferred and will be amortized over the
15 year term of the lease. In accordance with the lease
terms, Spacenet made a security deposit consisting of a $
5.5 million fully cash collateralized letter of credit for
the benefit of the lessor. The lease is accounted for as an
operating lease in accordance with Statement of Financial
Accounting Standard No. 13 "Accounting for Leases".
F - 38
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11:- COMMITMENTS AND CONTINGENCIES (CONT.)
b. Lease commitments:
Minimum lease commitments of certain subsidiaries under
non-cancelable operating lease agreements in respect of
premises occupied by them, at rates in effect subsequent to
December 31, 2002, are as follows:
U.S. DOLLARS
YEAR ENDED DECEMBER 31, IN THOUSANDS
--------------------
2003 $ 4,922
2004 4,699
2005 4,210
2006 4,020
2007 and thereafter 30,642
--------------------
$ 48,493
====================
Rent expenses totaled $ 8,165,000, $ 8,050,000 and
$5,059,000 in 2000, 2001 and 2002, respectively.
c. Commitments with respect to space segment services:
All the required space segment services necessary to meet
the terms of customer contracts are obtained from either SES
Americom or from unrelated third parties under long-term
contracts ranging from one to twelve years. (See Note 18 ).
Future minimum payments due for space segment services
mainly to SES Americom, a related party, subsequent to
December 31, 2002, are as follows:
U.S. DOLLARS
YEAR ENDED DECEMBER 31, IN THOUSANDS
--------------------
2003 $ 16,939
2004 14,663
2005 13,195
2006 11,859
2007 and thereafter 54,393
--------------------
$ 111,049
====================
The minimum payment schedule above was prepared based on the
agreement signed with SES in December 31, 2002, which was
subject to the completion of the debt restructuring. See
also Note 18.
Space segment services expense, mainly to SES Americom,
totaled $ 24,387,000, $ 46,855,000 and $ 25,480,000 in 2000,
2001 and 2002, respectively.
F - 39
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11:- COMMITMENTS AND CONTINGENCIES (CONT.)
d. In August 2002, the Company concluded the acquisition of
rStar, increasing the ownership in this entity to
approximately 85%. Under the terms of the acquisition, the
Company may be required to reimburse rStar shareholders a
special consideration of up to $10 million, $5 million of
which may become due in June 2003 and $5 million of which
may become due in June 2004. (See Note 2a).
e. Legal claims:
1. On June 11, 2001, an action was filed against Gilat in
the District Court of Tel Aviv, Israel by Terayon Ltd.
(formerly Combox Ltd.) ("Terayon") alleging Gilat's
breach of contract in connection with purchase orders
issued by Gilat. Terayon is claiming it is owed
approximately $2.4 million. The parties have agreed to
arbitrate the case and the matter is proceeding
accordingly. We do not believe that we are in breach of
these purchase orders and are vigorously defending
against these claims.
2. A supplier has demanded a payment of approximately $6.1
million, alleging a breach of contract in relation to
purchase orders. The Company has asserted defenses and
intends to defend against the claim.
3. An arbitration proceeding was commenced in July 2002 in
England by a former supplier of the Company pursuant to
an arbitration clause in a supply agreement between
Gilat and the supplier. The supplier claimed that
approximately $13.2 million was owed by Gilat for
certain inventory allegedly purchased on Gilat's behalf
under the agreement. In March 2003, an agreement to
settle the matter was reached between the parties. The
final settlement is in the process of completion.
4. During September 2001, the Israeli customs authority
began examining certain imports to determine whether
the Company paid the appropriate duty for certain
equipment. The investigation may result in
administrative proceedings to recover approximately $1
million from the Company. The Company maintains that it
has made all required payments.
5. On November 13, 2001, Gilat was named as a defendant in
a complaint for patent infringement that was filed by
the Lemelson Foundation in the U.S.. The lawsuit
alleges that Gilat's integration and sale of certain
components in its products violates one or more of the
Lemelson patents. The complaint does not state the
amount claimed from Gilat. An amended complaint has not
been formally served on Gilat. Settlement discussions
with plaintiff's counsel have taken place without
resolution of the matter, but no further action has
been taken by plaintiff. Gilat intends to vigorously
defend itself in this action.
6. On January 7, 2002, Gilat received a letter from the
Syndia Corporation ("Syndia") alleging Gilat's possible
infringement of a Lemelson patent that is owned by
Syndia due to the alleged integration by Gilat of
certain semiconductor components procured from
unlicensed third party manufacturers. Gilat intends to
vigorously dispute such claim.
F - 40
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11:- COMMITMENTS AND CONTINGENCIES (CONT.)
7. A number of securities class action lawsuits have been
filed against Gilat and certain of its officers and
directors. The litigation includes actions filed in the
United States District Court for the Eastern District
of New York and in the United States District Court for
the Eastern District of Virginia ("class actions
suits") and a request to file a class action lawsuit in
the Tel-Aviv, Israel District Court. The class action
suits, alleging violations of the federal securities
laws and claim that Gilat issued material
misrepresentations to the market, were brought on
behalf of parties who purchased Gilat securities
between May 16, 2000, and October 2, 2001, inclusive.
The class action suits in the U.S. have been
consolidated into a single action in the United States
District Court for the Eastern District of New York.
The Israeli court granted a motion to stay the
proceedings in the Israeli action pending the outcome
of the U.S. class action proceeding. Gilat believes the
allegations against it and its officers and directors
in the class action suits are without merit and intend
to contest them vigorously.
8. On March 7, 2001, rStar (then known as ZapMe!
Corporation) filed action against a software vendor, ON
Technology Corporation ("OTC"), by which rStar alleged
that OTC breached a software license agreement and
defrauded rStar concerning the capabilities of the
software. By its complaint, rStar seeks recovery of
approximately $390,000 rStar paid to OTC in connection
with the software, as well as other damages. On or
about March 29, 2001, OTC filed a counterclaim against
rStar, alleging that the principal sum of approximately
$308,000 is due from rStar for additional license fees,
maintenance fees, and professional fees in connection
with OTC's software. The Company has asserted defenses
and intends to defend against the claim.
9. In the early part of 2002, a third party issued a
letter to the Company claiming that it has rights to a
portion of one of our subsidiaries based upon a
document and certain partial payments made. The Company
rejects the legal bases for such claims and intends to
vigorously defend any action if brought by the third
party but does intend to seek a mutually acceptable
resolution to this dispute.
10. An action was filed on February 1, 2002, by Recovar
Group ("Recovar") against Gilat Florida, Inc. to
collect monies allegedly owed to Test Equipment
Solutions Today, Inc. for goods supplied to Gilat
Florida between January 31, 2001, and December 28,
2001. The alleged receivable was assigned to Recovar.
Gilat Florida is vigorously defending against such
claims.
11. Gilat claims that KSAT Satellite Networks Inc. is
obligated to pay to Gilat approximately $2,788,000 in
principal and interest on an outstanding shareholder
loan that became due on October 17, 2002; and KSAT
Telecommunications Ltd, a subsidiary of KSAT Satellite
Networks Inc. claims that Gilat owes it approximately
$562,000 for services rendered, which claim Gilat
denies, and in any case, Gilat has claimed a setoff
against the amount owed to Gilat above. We do not
believe that KSAT Telecommunications' claim has merit
and intend to vigorously defend against it.
F - 41
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11:- COMMITMENTS AND CONTINGENCIES (CONT.)
12. On November 15, 2002, an action was filed against
Spacenet Inc. in the United States District Court for
the District of Connecticut by Linda Thompson, a former
employee of Spacenet, seeking sales commissions
allegedly owed in the amount of $500,000 plus
compensatory damages for an alleged wrongful
termination of employment. The court ordered Spacenet
to post a pre-judgment bond of $275,000 pending the
outcome of the trial. Spacenet is vigorously disputing
such claims and has filed a motion to dismiss the
wrongful termination claim.
13. In accordance with SFAS No. 5 "Accounting for
Contingencies", the Company with the advise of its
legal counsel has accrued approximately $ 4 million for
the expected implication of the such legal proceedings.
f. Charges:
1. Spacenet granted a lender, a security interest of
approximately $12.7 million in certain of its computer,
machinery, and hub equipment.
2. The Company granted a lender a security interest of
approximately $30.0 million in certain of its
facilities in Israel.
3. A Dutch subsidiary of the Company entered into a
mortgage and loan agreement with a German bank. The
amount of the mortgage as of December 31, 2002, is Euro
5.9 million, collateralized by the facilities in
Germany.
4. Short-term bank credit and long-term loans are secured
by a negative pledge agreement
F - 42
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11:- COMMITMENTS AND CONTINGENCIES (CONT.)
g. Guarantees:
The Company guaranteed the performance to customers (usually
government entities). Such guarantees are required by
contract for our performance during the installation and
operational period of long-term rural telephony projects in
Latin America and for the performance of other projects
(government and corporate) throughout the rest of the world.
The guarantees typically expire when certain milestones are
met. The maximum potential amount of future payments that
the Company could be required to make under its guarantees
at December 31, 2002, is $ 47.4 million. This amount
includes guarantees of performance for our subsidiary in
Peru in the amount of $30 million and guaranties for two
projects in Colombia in the amount of $10 million. The
Company has restricted cash as a collateral for the
performance guarantees in an amount of $11.4 million. The
Company has not recorded any liability for such amounts, as
the Company does expect that its performance will be
acceptable. To date, no guarantees were exercised against
the Company.
The Company has provided guarantees in relation to certain
satellite transponder agreements in the amount of up to $
3.4 million.
The Company guaranteed certain property leases in McLean,
Virginia, Melbourne, Florida and London in amounts of up to
$24.3 million. The Company has restricted cash as a
collateral for the guarantees in an amount of $6.3 million.
NOTE 12:- SHAREHOLDERS' EQUITY (DEFICIENCY)
a. Share capital:
Ordinary shares confer upon their holders voting rights, the
right to receive cash dividends and the right to share in
excess assets upon liquidation of the Company.
b. Stock Option Plans:
The Company has two stock option plans, the 1993 and the
1995 Stock Option and Incentive Plans ("the Plans"). The
1995 plan was amended in 1997, 1998 and 1999. Under the
Plans, options may be granted to employees, officers,
directors and consultants of the Group. Pursuant to the
plans, as of December 31, 2002, the Company reserved for
issuance a total of 10,328,500 Ordinary shares. As of
December 31, 2002, an aggregate of 1,837,545 Ordinary shares
of the Company are still available for future grant.
F - 43
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12:- SHAREHOLDERS' EQUITY (DEFICIENCY) (CONT.)
Options granted under the Plans generally vest quarterly
over 4 years, 50% pf the options granted under the tender
offer on November 27, 2001, vested immediately and the
reminder vest quarterly over two years. Those options will
expire ten years from the date of grant. Any options which
are forfeited or canceled before expiration become available
for future grants. The exercise price per share under the
Plans shall not be less than the market price of an Ordinary
share at the date of grant. No compensation cost in
connection with options that were granted to employees has
been charged against income in the years ended December 31,
2000, 2001 and 2002. On April 24, 2001, the Company filed a
tender offer with the Securities and Exchange Commission
allowing employees of the Group, if they so choose, to
cancel outstanding options previously granted to them. In
exchange, the employees were to receive an equal number of
new options to be granted at a date, more than six months
following the cancellation of the old options, with a per
share exercise price equal to the fair market value of the
Company's shares on the date of grant of the new options.
Such transaction did not affect the Company's results of
operations.
On November 27, 2001, the Company granted 6.2 million new
options to the 737 employees that chose to cancel their
options under the tender. The option exercise price was the
market price as of the date of the grant. 50% of the options
granted under the tender offer vested immediately and the
remainder vest quarterly over 2 years.
In January 2002, the Company's Board of Directors resolved
to accelerate the vesting period for all Gilat employees
whose employment was to be terminated as part of the change
of control of six European subsidiaries sold to Satlynx S.A.
(See Note 1f). In addition to immediate vesting of all
options, effective upon the change of control. The exercise
period of the options was modified such that such Satlynx
employees have a 60-day period to exercise their options in
the event their employment is terminated by Satlynx. The
Company did not record any compensation expenses in
accordance with FIN No. 44.
A summary of the status of the plans as of December 31,
2000, 2001 and 2002, and changes during the years ended on
those dates, is presented below:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2000 2001 2002
-------------------------- -------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------ ------------- ------------- ------------ ------------ -------------
$ $ $
------------- ------------ -------------
Options outstanding at the 3,615,817 44.16 8,089,003 72.85 7,354,131 7.63
beginning of the year
Changes during the year:
Granted 4,991,088 92.88 6,953,423 5.11 923,325 3,89
Exercised (203,103) 37.47 (34,077) 2.77 (1,300) 3.86
Forfeited and cancelled (314,799) 80.15 (7,654,218) 74.3 (655,582) 11.90
------------ ------------- ------------- ------------ ------------ -------------
Options outstanding at the
end of the year 8,089,003 72.85 7,354,131 7.63 7,620,574 6.81
============ ============= ============= ============ ============ =============
Options exercisable at the
end of the year 1,689,570 43.84 2,321,762 12.16 4,744,059 8.05
============ ============= ============= ============ ============ =============
F - 44
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12:- SHAREHOLDERS' EQUITY (DEFICIENCY) (CONT.)
The options outstanding as of December 31, 2002, have been
separated into ranges of exercise price as follows:
WEIGHTED
OPTIONS WEIGHTED OPTIONS AVERAGE
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE EXERCISE
RANGES OF AS OF REMAINING AVERAGE AS OF PRICE OF
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISABLE
PRICE 2002 LIFE PRICE 2002 OPTIONS
------------------ ----------------- -------------- ------------ ----------------- -----------------
(YEARS)
--------------
$ 0.46-3.69 131,529 8.97 $ 2.87 33,120 $ 2.95
$ 3.86-3.95 6,509,200 8.94 $ 3.87 3,898,693 $ 3.87
$ 7.98-12.02 242,806 7.42 $ 11.68 124,797 $ 11.37
$ 13-19.5 50,463 7.13 $ 13.97 30,348 $ 14.61
$ 20.63-24.38 444,789 4.23 $ 23.19 444,789 $ 23.19
$ 32.25-48.00 151,575 6.34 $ 44.47 131,916 $ 44.63
$ 49.5-68.56 84,612 6.52 $ 58.21 76,238 $ 57.55
$ 136.5-159.86 5,600 7.11 $ 138.17 4,158 $ 138.04
----------------- ------------ ----------------- -----------------
7,620,574 $ 6.81 4,744,059 $ 8.05
================= ============ ================= =================
c. Dividends:
1. In the event that cash dividends are declared by the
Company, such dividends will be declared and paid in
Israeli currency. Under current Israeli regulations,
any cash dividend in Israeli currency paid in respect
of Ordinary shares purchased by non-residents of
Israel with non-Israeli currency, may be freely
repatriated in such non-Israeli currency, at the rate
of exchange prevailing at the time of repatriation.
2. Pursuant to the terms of a credit line from a bank
(see Note 15d), the Company is restricted from paying
cash dividends to its shareholders without initial
approval from the bank.
NOTE 13:- RESTRUCTURING CHARGES
a. In March and September 2001, the Group recorded
restructuring charges of approximately $10 million and $
20.3 million, respectively, pursuant to restructuring plans
committed to by management, of which in 2001, $13.0 million
was paid in cash, $6.3 million was a non-cash expense and
$11 million was accrued as a short-term liability. In 2002,
$7.4 million was paid in cash. The restructuring costs
consist of employee termination benefits associated with
involuntary termination of approximately 650 employees
including potential claims (see Note 11e), compensation to
certain suppliers and customers, costs associated with
termination of lease commitments in respect of premises
occupied by the Group and other costs. The terminations
resulted from the Group's strategy to reduce costs and
improve profitability.
F - 45
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 13:- RESTRUCTURING CHARGES (CONT.)
Restructuring charges were accounted for in accordance with
FASB's Emerging Issues Task Force 94-3, "Liability
Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)" ("EITF 94-3") and Staff
Accounting Bulletin No. 100, "Restructuring and Impairment
Charges" ("SAB No. 100").
RESTRUCTURING
CHARGES IN THE ACCRUED
YEAR ENDED LIABILITY AS OF
DECEMBER 31, DECEMBER 31,
-------------------- ------------------
2001 2002
-------------------- ------------------
U.S. DOLLARS IN THOUSANDS
------------------------------------------
Employee terminations, including potential claims $ 11,785 $ 895
Termination of lease commitments 7,826 755
Compensation to customers and suppliers 9,167 583
Other 1,506 1,405
-------------------- ------------------
$ 30,284 $ 3,638
==================== ==================
For additional description of restructuring charges, write
off and other significant charges, see Note 1c.
NOTE 14:- TAXES ON INCOME
a. The Company:
1. Tax benefits under the Law for the Encouragement of
Capital Investments, 1959:
The Company has been granted an "Approved Enterprise"
status for nine investment programs in the alternative
program, by the Israeli Government under the Law for
Encouragement of Capital Investments, 1959 ("the Law").
In 2002, the Company applied for approval of an
additional investment program, part of which is
expected to be considered an increase of the investment
in the ninth Approved Enterprise and another part is
expected to be considered a replacement of previously
approved equipment.
Since the Company is a "foreign investors' company", as
defined by the above-mentioned law, it is entitled to a
ten-year period of benefits, for enterprises approved
after April 1993. The main tax benefits from said
status, are a tax exemption for two to four years, and
a reduced tax rate (based on the percentage of foreign
shareholding in each tax year) on income from all of
its approved enterprises, for the remainder of the
benefit period. These tax benefits are subject to a
limitation of the earlier of twelve years from
commencement of operations, or fourteen years from
receipt of approval. The periods of benefits of the
approved enterprises will expire between 2003 and 2009.
F - 46
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14:- TAXES ON INCOME (CONT.)
The tax-exempt profits that will be earned by the Company's
"Approved Enterprises" can be distributed to shareholders,
without imposing tax liability on the Company only upon its
complete liquidation. If these retained tax-exempt profits
are distributed in a manner other than in the complete
liquidation of the Company it would be taxed at the
corporate tax rate applicable to such profits as if the
Company had not elected the alternative system of benefits
(depending on the level of foreign investment in the
Company) currently between 10% to 25% for an "Approved
Enterprise".
The Company is entitled to claim accelerated depreciation in
respect of equipment used by "Approved Enterprises" during
the first five years of the operations of these assets.
The entitlement to the above mentioned benefits is
conditional upon the Company's fulfilling the conditions
stipulated by the above mentioned law, regulations published
there under and the certificates of approval for the
specific investments in approved enterprises. In the event
of failure to comply with these conditions, the benefits may
be canceled and the Company may be required to refund the
amount of the benefits, in whole or in part, with the
addition of linkage differences to the Israeli Consumer
Price Index ("CPI") and interest.
Income from sources other than the "Approved Enterprise"
during the benefit period will be subject to tax at the
regular corporate tax rate of 36%.
2. Measurement of results for tax purposes under the Income Tax
(Inflationary Adjustments) Law, 1985:
Under this law, results for tax purposes are measured in
real terms, in accordance with the changes in the Israeli
CPI, or in the exchange rate of the dollar for a "foreign
investors' company". The Company has elected to measure its
results for tax purposes on the basis of the changes in the
exchange rate of the dollar, which as stated in Note 3b, is
the Company's reporting currency, and therefore results in
no differences.
3. The Law for the Encouragement of Industry (Taxes), 1969:
The Company is an "industrial company", as defined by this
law and, as such, is entitled to certain tax benefits,
mainly accelerated depreciation, as prescribed by
regulations published under the Inflationary Adjustments
Law, and amortization of patents, certain other intangible
property rights and deduction of share issuance expenses.
F - 47
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14:- TAXES ON INCOME (CONT.)
4. Israeli tax reform:
On January 1, 2003, a comprehensive tax reform took
effect in Israel. Pursuant to the reform, resident
companies are subject to Israeli tax income accrued or
derived in Israel or abroad. In addition, the concept
of "controlled foreign corporation" was introduced,
according to which an Israeli company may become
subject to Israeli taxes on certain income of a
non-Israeli subsidiary if the subsidiary's primary
source of income is passive income (such as interest,
dividends, royalties, rental income or capital gains).
The tax reform also substantially changed the system of
taxation of capital gains.
b. Non-Israeli subsidiaries:
Non-Israeli subsidiaries are taxed based on tax laws in
their countries of residence.
c. Carryforward tax losses and credits:
At December 31, 2002, the Company had net operating loss
carryforwards for Israeli income tax purposes of
approximately $64.3 million, which are available to offset
against future taxable income.
In addition, the Group had carryforward tax losses and
research and development tax credits relating to non-Israeli
subsidiaries, mainly in the U.S, of approximately $ 399
million as of December 31, 2002. The carryforward amounts
expire between 2013 and 2021.
Utilization of U.S. net operating losses may be subject to
substantial annual limitation due to the "change in
ownership" provisions of the Internal Revenue Code of 1986
and similar state provisions. The annual limitations may
result in the expiration of net operating losses before
utilization. In connection with the debt restructuring
described in Note 18a, the Company expects the expiration of
a significant portion of the carryforward tax losses.
F - 48
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14:- TAXES ON INCOME (CONT.)
d. Deferred income taxes:
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components
of the Groups' deferred tax liabilities and assets are as
follows:
DECEMBER 31,
-------------------------------------
2001 2002
----------------- -----------------
U.S. DOLLARS IN THOUSANDS
-------------------------------------
1. Provided with respect of the following:
Carryforward tax losses and research and
development credits $ 155,619 $ 192,106
Intercompany profits 2,152 -
Other 23,539 42,010
----------------- -----------------
Deferred tax assets before valuation allowance 181,310 234,116
Valuation allowance (176,256) (229,021)
----------------- -----------------
Net deferred tax assets $ 5,054 $ 5,095
================= =================
Domestic $ 4,587 $ 4,560
Foreign 467 535
----------------- -----------------
$ 5,054 $ 5,095
================= =================
2. Deferred taxes are included in the balance sheets,
as follows:
Current assets $ 2,763 $ 4,721
Non-current assets 2,324 374
Other long-term liabilities (33) -
----------------- -----------------
$ 5,054 $ 5,095
================= =================
3. As of December 31, 2002, the Group has increased the
valuation allowance by approximately $ 39.9 million
with respect to deferred tax assets resulting from tax
loss carryforwards and other temporary differences.
Management currently believes that it is more likely
than not that the deferred tax regarding the loss
carryforwards and other temporary differences will not
be realized in the foreseeable future.
e. The main reconciling items between the statutory tax rate of
the Company and the effective tax rate are the
non-recognition of tax benefits from accumulated net
operating losses carryforward and other temporary
differences among the various subsidiaries worldwide due to
the uncertainty of the realization of such tax benefits and
the effect of approved enterprise.
F - 49
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14:- TAXES ON INCOME (CONT.)
f. Taxes on income included in the statements of operations:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- --------------- ---------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Provision for income tax:
Current $ 7,912 $ 2,467 $ 970
Previous years (2,334) (361) -
--------------- --------------- ---------------
5,578 2,106 970
Deferred income taxes (3,575) (1,132) (41)
--------------- --------------- ---------------
$ 2,003 $ 974 $ 929
=============== =============== ===============
Domestic $ 2,879 $ (2,001) $ 604
Foreign (876) 2,975 325
--------------- --------------- ---------------
$ 2,003 $ 974 $ 929
=============== =============== ===============
g. Income (loss) before taxes on income from continuing
operations:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- --------------- ---------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Domestic $ 61,880 $ (168,956) $ (103,351)
Foreign (29,768) (258,765) (159,454)
--------------- --------------- ---------------
$ 32,112 $ (427,721) $ (262,805)
=============== =============== ===============
NOTE 15:- SUPPLEMENTARY BALANCE SHEET INFORMATION
a. Other accounts receivable and prepaid expenses:
DECEMBER 31,
------------------------------------
2001 2002
---------------- ----------------
U.S. DOLLARS IN THOUSANDS
------------------------------------
Government authorities $ 11,147 $ 15,704
Employees 1,881 1,843
Receivables in respect of capital leases (see c below) 15,450 14,075
Prepaid expenses 5,609 7,085
Deferred income taxes (see Note 14d) 2,763 4,721
Other 9,240 3,685
---------------- ----------------
$ 46,090 $ 47,113
================ ================
F - 50
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15:- SUPPLEMENTARY BALANCE SHEET INFORMATION (CONT.)
b. Long-term trade receivables and other receivables:
DECEMBER 31,
------------------------------------
2001 2002
---------------- ----------------
U.S. DOLLARS IN THOUSANDS
------------------------------------
Long term trade receivables in respect of capital lease $ 25,264 $ 22,229
Other long term trade receivables 13,556 9,029
Other receivables 1,459 169
---------------- ----------------
$ 40,279 $ 31,427
================ ================
c. Receivables in respect of capital and operating leases:
The Group's contracts with customers contain long-term
commitments, for remaining periods ranging from one to five
years, to provide network services, equipment, installation
and maintenance.
The aggregate minimum future payments to be received by the
Group under these contracts as of December 31, 2002, are as
follows (including unearned interest income in the amount of
$ 4.6 million):
YEAR ENDED DECEMBER 31, U.S DOLLARS
IN THOUSANDS
------------------
2003 $ 14,075
2004 11,374
2005 8,934
2006 5,466
2007 and thereafter 1,070
------------------
$ 40,919
==================
The net investments in capital lease receivables, as of
December 31, 2002, are $ 36.3 million. Total revenues from
capital and operating leases amounted to $ 45.7 million and
$19.9 million in the year ended December 31, 2001 and 2002,
respectively.
F - 51
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15:- SUPPLEMENTARY BALANCE SHEET INFORMATION (CONT.)
d. Short-term bank credit:
1. The following is classified by currency and interest
rates:
WEIGHTED AVERAGE
INTEREST RATE
-----------------------------
DECEMBER 31, DECEMBER 31,
----------------------------- --------------------------------
2001 2002 2001 2002
----------------------------- --------------- ----------------
% U.S. DOLLARS IN THOUSANDS
----------------------------- --------------------------------
In dollars 3.06 7.16 $ 3,376 $ 1,801
In Israeli NIS and other
currencies 4.7-23.15 10.0-17.1 1,288 25
============= ============= ---------------- ---------------
10.3 7.28 $ 4,664 $ 1,826
============= ============= ================ ===============
Short-term bank credit is secured by a negative pledge
agreement.
2. As of December 31, 2002, the Company has utilized all
its available credit line, which includes guarantees
for future performance obligations.
e. Other accounts payable:
DECEMBER 31,
-------------------------------------
2001 2002
----------------- -----------------
U.S. DOLLARS IN THOUSANDS
-------------------------------------
Payroll and related employees accruals $ 2,981 $ 3,464
Provision for vacation pay 4,838 4,836
Advances from customers 643 7,862
Deferred revenue 7,277 6,904
Current maturities of long-term liabilities with respect
to capital lease agreements 8,069 1,810
Sale taxes payable 5,676 7,536
Related parties - 3,281
Other 658 2,094
----------------- -----------------
$ 30,142 $ 37,787
================= =================
F - 52
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15:- SUPPLEMENTARY BALANCE SHEET INFORMATION (CONT.)
f. Long-term loans:
DECEMBER 31,
RATE OF -----------------------------
INTEREST FOR
2001 AND 2002 MATURITY 2001 2002
---------------- ------------- ------------- --------------
LINKAGE % U.S. DOLLARS IN THOUSANDS
----------- ---------------- -----------------------------
Restructured loans (a):
Loan from bank Hapoalim Dollar Libor+0.8% $ 108,000 $ 105,147
Loan from bank Leumi Dollar Libor + 2.0% 30,000 30,000
Other long-term loans (b) Dollar Libor+1.0% 9,266 6,579
------------- --------------
147,266 141,726
------------- --------------
Other loans:
Loans from a bank DM 5.86%-6.3% 2003-2021 5,380 6,140
Loans from a bank Dollar 6.75% 2003 - 539
Other long-term loans (b) Dollar Libor+1.0% 2003-2004 7,689 4,677
Other long-term loans Dollar 5.0% 2005 - 255
Loans from related parties Dollar 5% 2005 962 -
------------- --------------
14,031 11,611
------------- --------------
161,297 153,337
Less - current maturities 25,224 8,197
------------- --------------
$ 136,073 $ 145,140
============= ==============
(a) Subsequent to the balance sheet date, the Company
entered into a restructuring process reaching an
agreement with the banks and other creditors which
revised the loan terms. (See Note 18).
(b) The Company granted the lender a security interest on
certain of its computer, machinery, and hub equipment
assets.
Long-term debt maturities for loans that were not
restructured after December 31, 2002, are as follows:
U.S DOLLARS
YEAR ENDED DECEMBER 31, IN THOUSANDS
----------------------- ------------------
2003 $ 3,946
2004 1,697
2005 329
2006 302
2007 and thereafter 5,337
------------------
$ 11,611
==================
Interest expenses on the long-term loans amounted to $ 0,
$7,717,000 and $6,784,000 for the years ended December 31,
2000, 2001 and 2002, respectively.
As for amendment of terms of certain loans see Note 18 .
F - 53
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15:- SUPPLEMENTARY BALANCE SHEET INFORMATION (CONT.)
g. Other long-term liabilities:
DECEMBER 31,
------------------------------------
2001 2002
---------------- ----------------
U.S. DOLLARS IN THOUSANDS
------------------------------------
Deferred revenue $ 7,859 $ 6,099
Long term liability in respect of OCS agreement *) 2,758 2,775
Provision for cash distribution to rStar minority, see
Note 2a - 5,000
Long-term liabilities with respect to capital lease
agreements **) 3,140 3,415
Other 3,309 1,904
---------------- ----------------
$ 17,066 $ 19,193
================ ================
*) The Company was committed to pay royalties to the
Government of Israel at rate of 3%-5% on sales proceeds
from products for which the Government participates in
the research and development by way of grants. The
obligation to pay these royalties is contingent on
actual sales of the products and, in the absence of
such sales, no payment is required. The royalty amount
was determined up to the amount of the grants received
(the grants are linked to the U.S. dollar and part of
the grants bear interest at LIBOR rate).
Royalties paid or accrued for the years ended December
31, 2000, 2001 and 2002 to Office of the Chief
Scientist in the Israeli Ministry of Industry and Trade
("the OCS") amounted to $ 138,000, $ 1,269,000 and $0,
respectively.
In October 2001, the Company filed a request with the
OCS for the commitment to pay all royalties arising
from future sales with respect of previous OCS grants.
The Company recorded expenses in the amount of $ 3.4
million payable over a period of up to five years,
which bears interest at a rate to be agreed between the
Company and the OCS. The amount was recorded in
selling, marketing, general and administrative. This
agreement will enable the Company to participate in a
new OCS program under which it will be eligible to
receive future research and development grants for
generic research and development projects without any
royalty repayment obligations.
F - 54
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15:- SUPPLEMENTARY BALANCE SHEET INFORMATION (CONT.)
**) Future minimum lease payments in respect of capital
lease agreements:
YEAR ENDED DECEMBER 31, U.S DOLLARS
IN THOUSANDS
------------------
2003 $ 1,810
2004 1,534
2005 2,038
------------------
5,382
Less amount representing interest 158
------------------
Present value of minimum lease payments $ 5,224
==================
NOTE 16:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development costs, net:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- ---------------- ----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Total cost $ 35,576 $ 44,483 $ 29,012
Less:
Royalty bearing grants 926 2,058 -
Non - royalty bearing grants 3,378 6,791 3,946
--------------- ---------------- ----------------
$ 31,272 $ 35,634 $ 25,066
=============== ================ ================
b. Selling, marketing, general and administrative expenses:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- ---------------- ----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Selling and marketing (1) $ 41,575 $ 54,313 $ 35,990
General and administrative (2) 40,869 67,173 50,237
--------------- ---------------- ----------------
$ 82,444 $ 121,486 $ 86,227
=============== ================ ================
(1) Including shipping expenses in the amounts of $1.9
million, $ 5.4 million and $ 3.8 million for the years
ended December 31, 2000, 2001 and 2002, respectively.
(2) Including amortization of goodwill and other
identifiable intangible assets.
F - 55
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 16:- SELECTED STATEMENTS OF OPERATIONS DATA (CONT.)
c. Allowance for doubtful accounts:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- ---------------- ----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Balance at beginning of year $ 4,423 $ 8,077 $ 114,703
Increase during the year 3,654 134,614 34,714
Write-off of bad debts - (27,988) (132,376)
--------------- ---------------- ----------------
Balance at the end of year $ 8,077 $ 114,703 $ 17,041
=============== ================ ================
In 2001, the Company provided allowance for its capital
leases receivables relating to vertical market customers
that were specifically identified by the management of the
Company as having difficulties paying their respective
receivables. Those customers were significantly adversely
affected by the recession which was indicated in the third
quarter and was accompanied in the United States by an
abrupt drop in consumer spending, intensifying business
lay-offs of workers and by an acceleration of the downsizing
of businesses. Furthermore, the Company increased its
allowance for bad debt provision since certain circumstances
such as the global decrease in the Telecommunication
companies, depressed market conditions and difficulties in
collections from certain customers indicated that the
carrying amount of the receivables may not be recoverable.
Management estimated potential recovery of the identified
capital lease receivables and other trade receivables and
allocated reserves for the difference between the receivable
balance and the estimated recovery amount to be $134.6
million (including $75 million relating to StarBand, see
Note 1b) for 2001.
During 2002, we increased our allowance for bad debt
provision since certain circumstances such as the depressed
market conditions and difficulties in collections from
certain customers indicated that the carrying amount of the
receivables may not be recoverable. As a result, we
increased our bad debt provision and wrote off an amount of
approximately $34.7 million.
F - 56
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 16:- SELECTED STATEMENTS OF OPERATIONS DATA (CONT.)
d. Financial income (expenses), net:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- ---------------- ----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Income:
Interest on cash equivalents and bank
deposits and restricted cash $ 14,264 $ 8,165 $ 1,798
Interest with respect to capital lease 4,923 2,615 4,625
Other (mainly translation adjustments) 741 1,734 1,276
--------------- ---------------- ----------------
19,928 12,514 7,699
--------------- ---------------- ----------------
Expenses:
Interest on Convertible Subordinated Notes
(see Note 10) 13,972 14,875 14,936
Amortization of issuance costs of
convertible subordinated notes (see Notes
8 and 10) 1,978 2,124 2,127
Interest with respect to short-term bank
credit and trade payables and other 704 2,113 1,484
Interest with respect to long-term loans - 7,717 6,784
Interest with respect to capital lease - 1,135 1,912
Other (mainly translation adjustments) 4,563 5,884 1,780
--------------- ---------------- ----------------
21,217 33,848 29,023
--------------- ---------------- ----------------
$ (1,289) $ (21,334) $ (21,324)
=============== ================ ================
F - 57
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17:- CUSTOMERS AND GEOGRAPHIC INFORMATION
The Group operates in one business segment - the design,
development, manufacturing, marketing and providing of services
for very small aperture terminal ("VSAT") satellite earth
stations. The Group has adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information".
a. Revenues by geographic area:
Following is a summary of revenues by geographic area.
Revenues are attributed to geographic area, based on the
location of the end customers, as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- ---------------- ----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
United States $ (* 289,744 $ (* 151,100 $ (* 110,256
South America and Central America (* 108,463 117,551 40,486
Asia (* 63,665 (* 50,562 24,629
Europe 31,309 48,554 (* 14,577
Africa 8,194 16,855 17,325
Israel 719 1,019 1,205
Other 2,468 388 277
--------------- ---------------- ----------------
$ 504,562 $ 386,029 $ 208,755
=============== ================ ================
*)Including revenues from related parties as follows:
StarBand revenues $ 128,544 $ 44,288 $ 3,220
Others 21,690 5,729 3,530
--------------- ---------------- ----------------
$ 150,234 $ 50,017 $ 6,750
=============== ================ ================
b. Revenues from single customers, which exceed 10% of total
revenues in the reported years, as a percentage of total
revenue:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- ---------------- ----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Customer A - related party (see Note 1b) 25.48% 11.47% 1.54%
Customer B - - 10.52%
=============== ================ ================
F - 58
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17:- CUSTOMERS AND GEOGRAPHIC INFORMATION (CONT.)
c. The Group's long-lived assets are located in the following
countries:
DECEMBER 31,
-------------------------------------
2001 2002
----------------- -----------------
U.S. DOLLARS IN THOUSANDS
-------------------------------------
United States $ 140,551 $ 50,938
Israel 117,458 94,014
Latin America 98,033 15,441
Europe 26,928 17,237
Other 404 789
----------------- -----------------
$ 383,374 $ 178,419
================= =================
NOTE 18:- SUBSEQUENT EVENTS (UNAUDITED)
a. In March 2003, the Company completed a plan of arrangement
with its bank lenders, holders of the Company's 4.25%
Convertible Subordinated Notes due 2005 (the "old notes"),
and certain other creditors.
A part of the arrangement, the Company amended the following
agreements, as detailed herein:
4.25% Convertible Subordinated Notes due 2005:
In exchange for the old notes which had a principal amount
of $350 million, the Company issued (i) 202,083,908 ordinary
shares and (ii) $83.3 million in principal amount of 4.00%
Convertible Notes due 2012, also called new notes. The
Company will pay interest on the new notes semiannually in
arrears on April 1 and October 1 of each year, beginning on
April 1, 2005. The first interest payment shall be payable
with respect to the period from January 1, 2005 to April 1,
2005. Prior to January 1, 2005, interest will be accrued and
compounded semi-annually. The Company will pay $2.5 million
of the principal amount of the new notes on each of April 1
and October 1, in both 2010 and 2011, and the remaining
principal amount at maturity. The new notes are convertible
at the option of the holder into the Company's Ordinary
shares at a conversion price of $0.87 per Ordinary share at
any time after one year from the date of issuance of the new
notes and before close of business on October 1, 2012,
unless the new notes have been mandatory converted
previously. Commencing January 1, 2005, the Company may, at
its option, require the conversion right to be exercised if
the average closing bid price of its Ordinary shares exceeds
$1.00 per Ordinary share for 60 consecutive calendar days
and the average daily trading volume in its Ordinary shares
during that period is not less than $100,000 or such smaller
amount, if any, as may be set forth in the indenture
governing the new notes. The collateral for the new notes is
a second priority security interest consisting of a floating
charge on all of the Company's assets and a pledge of all of
the shares of Spacenet that the Company owns. The interest
of the holders of the new notes in the collateral will be
subordinated to the security interest granted for the
benefit of the bank lenders.
F - 59
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 18:- SUBSEQUENT EVENTS (UNAUDITED) (CONT.)
Bank Hapoalim:
Of the $102 million in principal amount due from the
Company to Bank Hapoalim, (i) $25.5 million was converted
into 18,488,590 Ordinary shares, (ii) $5.1 million was
converted into new notes of the same principal amount and
(iii) the remaining debt amount of $71.4 million remains as
a loan on revised terms. The revised terms include equal
semiannual installments of principal of $ 4.5 million
beginning on July 2, 2005, with a last installment of $8.9
million on July 2, 2012. The loan bears interest at the
six-month LIBOR rate plus 2.5% and is payable semiannually
together with the installments of principal.
Bank Leumi:
The revised terms of the restructured loan include
principal payments in the amount of $1 million annually
during each of 2003 and 2004, and principal payments of $4
million annually during each of the years 2005 through
2011. The loan bears interest at the six-month LIBOR rate
plus 2.5%. In addition, Bank Leumi agreed to maintain its
line of credit utilized for performance guarantees for the
Company's benefit and for its direct and indirect
subsidiaries in the existing aggregate amount of $15
million for at least one year, subject to the limitation
that continued availability of the line of credit may be
affected by the overall collateral made available by the
Company in support of credit used by the Company in the
future for the issuance of guarantees.
Bank Discount:
Israel Discount Bank agreed to maintain its performance
guarantees for the Company's benefit and its subsidiaries
in the existing amount of $13.3 million for at least one
year.
SES:
The Company entered into a new agreement with SES Americom,
its major supplier of satellite transponder capacity.
According to the agreement, SES Americom agreed to allow
Spacenet to defer payment of certain transponder capacity
charges due in 2003 and 2004, with payment of those
deferred charges to commence in 2005. As part of this
agreement, the Company will issue SES Americom 14,261,048
Ordinary shares equal to approximately 5.5% of the
Company's Ordinary shares. The agreement reduced the
Company's liability to SES Americom from an aggregate
amount of $26.9 million to have been paid in 2003 to an
aggregate amount of $13.5 million. In addition, a $3.5
million payment was deferred from 2002 to 2003. In 2002,
the Company recorded a provision for the settlement in the
amount of $5.7 million, representing the fair value of the
shares issued at the closing date of the arrangement.
As of March 31, 2003, 259,757,196 of the Company's Ordinary
shares are outstanding. The arrangement reduced the
Company's principal debt by approximately $ 293 million and
the interest accrued on the convertible note by
approximately $12 million and significantly reduced overall
financing costs.
F - 60
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 18:- SUBSEQUENT EVENTS (UNAUDITED) (CONT.)
On March 19, 2003, the Company distributed a proxy statement
relating to a shareholders meeting to be held on April 15 of
this year, to approve, among other things (i) the
implementation of a 1-for-20 reverse stock split, (ii) an
increase of the Company's share capital, and (iii) the
election of a slate of directors. The expected reverse stock
split will reduce the number of the Company's Outstanding
shares of the Company to approximately 12,987,860 shares,
based on the amount of outstanding shares as of March 31,
2003.
The Company will account for the troubled debt restructuring
included in the arrangement on the basis of Combination of
Types of Restructuring and on the basis of Modification of
Terms in lieu of troubled debt restructuring pursuant to FAS
15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings" and EITF 02-4 "Debtor's Accounting for a
Modification or an Exchange of Debt Instruments in
Accordance with FASB Statement No. 15, Accounting by Debtors
and Creditors for Troubled Debt Restructurings." and SFAS
No. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of
SFAS No. 13, and Technical Corrections," ("SFAS No. 145").
Tax Consequences of the Arrangement to the Company:
The Company obtained a ruling from the Israeli Tax
Authorities regarding the tax treatment of the arrangement
described above. According to the ruling (i) a payment of
approximately $ 1.1 million will be due after the completion
of the arrangement; (ii) the capital gain for tax purposes
in according with the ruling will be decreased from the tax
basis of the Company's assets as of January 1, 2001; (iii)
an amount equal to the difference between the part of our
debt to Bank Hapoalim that will be converted into the
Company's Ordinary shares under the arrangement and the
value of the Company's Ordinary shares that will be issued
in consideration for that part will be considered as taxable
income in tax year 2003; (iv) the value of the Company's
Ordinary shares for the purposes of the ruling is expected
to be approximately $0.5 per share; (v) the Company's tax
returns beginning with the 2001 tax year will be submitted
according to the ruling; (vi) the ruling can not be used by
the holders of the existing notes as approval of their
losses by the Israel Tax Authorities and the ruling shall
not otherwise apply to the holders of the existing notes;
and (vii) the Company will commit not to transfer its
activities abroad or, for tax purposes, cease to be
considered an Israeli resident.
In addition, the Company may be subject to payment of
Israeli stamp tax if and to the extent required by law.
b. On January 24, 2003 an action was filed by Spacenet Inc.
against Creative Resources Solutions L.L.C. (CRS) in the
Circuit Court for Fairfax County, Virginia in the amount of
$1.5 million seeking payment of unpaid service charges and
contract damages. After Spacenet rejected CRS' offer to
settle the lawsuit for a cash payment by CRS, CRS filed a
counterclaim for $4.7 million alleging contract
non-performance by Spacenet. Spacenet is vigorously pursuing
its claim against CRS and disputing CRS; counterclaim, which
it believes has no merit.
F - 61
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 18:- SUBSEQUENT EVENTS (UNAUDITED) (CONT.)
c. In February 2003, a letter was received from a former
employee alleging that the Company owes him approximately
$400,000 in compensation as a result of his employment with
and services rendered to the Company. The Company denies
that it owes any amounts to him and intends to vigorously
dispute such claims.
- - - - - - - - - -
F - 62