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As filed with the Securities and Exchange Commission on June 30, 2000
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, 1999
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Commission file number 0-21218
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GILAT SATELLITE NETWORKS LTD.
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(Exact name of Registrant as specified in its charter)
ISRAEL
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(Jurisdiction of incorporation or organization)
GILAT HOUSE, 21 YEGIA KAPAYIM STREET, DANIV PARK, KIRYAT
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ARYE, PETAH TIKVA, 49130 ISRAEL
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
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(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)
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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, 1999, REGISTRANT HAD 21,147,298 ORDINARY SHARES, NIS 0.01 PAR
VALUE PER SHARE OUTSTANDING.
AS OF JUNE 15, 2000, REGISTRANT HAD 23,061,711 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
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Indicate by check mark which financial statement item the Registrant elected to
follow:
Item 17 Item 18 X
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
General
Gilat Satellite Networks Ltd. ("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 very small aperture terminal ("VSAT")
satellite earth stations, related central station (hub) equipment and software.
We also provide service offerings which include access to satellite transponder
capacity, 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.
Our networks are primarily used for:
- 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
- telephone service in areas that are underserved by the existing
telecommunications services or in remote locations without service
- Internet Protocol ("IP") based networking applications such as corporate
intranets, corporate training and other broadband multicasting
applications, as well as consumer broadband Internet applications.
In 1999, we shipped approximately 41,000 VSATs. According to
Comsys, a leading industry source, in 1999, our market share was approximately
51% of the total interactive VSATs for which contracts were awarded worldwide
that year. Comsys also reported that in 1998 Gilat had approximately 30% of the
worldwide interactive VSAT market based upon the number of VSAT contracts
awarded. Major users of our products and services include the United States
Postal Service, John Deere, ZapMe!, Rite Aid, Peugeot-Citroen and Telkom South
Africa.
Satellite-based communications networks offer several advantages
over ground-based communication facilities. Among these advantages are the
following:
- Ubiquitous reach, providing equal access to bandwidth in urban and remote
areas under a single tier network
- high data transmission speeds
- fixed transmission costs, insensitive to distance or the number of
receiving stations
- a persistent "always on" connection to the Internet, without the need to
dial up to the Internet Service Provider
- cost savings over competing technologies for many applications
- independence from telecommunication companies and other network providers
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- exceptional reliability
- consistent and rapid response time in comparison to dial-up lines
- rapid deployment of networks and flexibility in their configuration,
integration and location
- a versatile platform which allows for the provision of multiple
applications and services
Gilat was incorporated in Israel in 1987. Gilat's corporate
headquarters, executive offices and research and development, engineering and
manufacturing facilities are located at Gilat House, 21 Yegia Kapayim Street,
Daniv Park, Kiryat Arye, Petah Tikva 49130, Israel. The telephone number is
(972) 3-925-2000.
Unless the context otherwise requires, references in this annual
report on Form 20-F to "Gilat", "we", "our" refer to Gilat Satellite Networks
Ltd. and its subsidiaries. Our subsidiaries include Gilat Satellite Networks,
Inc., Gilat Satellite Networks (Europe) S.A., Gilat Satellite Networks (Holland)
B.V. and its subsidiaries, Gilat Satellite Networks (Hong Kong) Ltd., Gilat
Florida Inc. ("Gilat Florida"), Gilat do Brasil Ltda., and Spacenet Inc. and its
subsidiaries, including Servicio Satelital S.A., and certain foreign affiliates
including Gilat Europe GmbH (formerly named Spacenet Europe GmbH) ( "Spacenet
"). We refer to our European operations, including those from Spacenet, as
"Gilat Europe."
The name "Gilat(TM)" and the names "TwoWay(TM)," "OneWay(TM),"
"FaraWay(TM)", "DialAway(R)", SkySurfer(TM), SkyBlaster(TM), SkyWay(TM),
Skydata(R), ISAT(R), WebSat(TM), Clearlink(TM), E-Trunk(TM), and Skystar
Advantage(R) appearing in this report on Form 20-F are trademarks of Gilat and
its subsidiaries. GSAT(R) is a registered trademark of GTECH Corporation. Other
trademarks appearing in this annual report on Form 20-F are owned by their
respective holders.
SPACENET
On December 31, 1998, we completed the acquisition of Spacenet, a
company engaged in providing VSAT-based network services, from GE American
Communications, Inc. ("GE Americom"), a subsidiary of General Electric
Corporation, and certain affiliates. As of June 15, 2000, GE Americom owns
approximately 18.7% of our outstanding ordinary shares, and is our single
largest shareholder. GE Americom has the ability to nominate up to two Directors
to our Board as long as it owns at least 50% of the shares it received as part
of the transaction. GE Americom has also agreed to certain "stand-still"
provisions and restrictions on the transferability of its shares. See "Item 13:
Interest of Management in Certain Transactions -- Merger-Related Agreements -
The Shareholders' Agreement." Prior 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. Aggregate sales to
Spacenet represented approximately 34% and 45% of Gilat's total sales in 1997
and 1998, respectively.
As part of the Spacenet acquisition, we entered into several
significant agreements with GE Americom. See "Item 13: Interest of Management in
Certain Transactions--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. We believe
that this acquisition has greatly enhanced our ability to develop and offer new
products and services and to maintain our position as one of the leaders in the
VSAT industry, especially since our major competitor is also a provider of both
equipment and services. For example, with the Spacenet acquisition, we acquired
certain advanced VSAT technology developed under the name Turbosat. In 1999, we
completed the improvements to Turbosat's functionality and features and
integrated the technology (except certain CDMA technology) into a new product
platform. In order to capitalize on Gilat's brand recognition, we have decided
to name Gilat's and
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Spacenet's operations in Europe "Gilat Europe" and we are currently completing
the formal name change of each of our European entities to Gilat Europe.
GILAT-TO-HOME
In March 2000, we established a joint venture named Gilat-to-Home,
Inc. ("GTH") with The Microsoft Network LLC ("MSN"), EchoStar Communications
Corporation ("EchoStar") and ING Furman Selz Investors ("ING"), to provide
broadband Internet access via satellite to residential, small office/home office
("SOHO") and small business customers in North America. MSN and EchoStar have
invested $50,000,000 each and ING $25,000,000 in cash in GTH in exchange for
both senior convertible preferred and common shares equal to 17.61%, 17.61% and
7.16%, respectively, of the outstanding capital of GTH; Gilat owns approximately
41.09% of GTH's outstanding shares and certain Gilat related parties
collectively own approximately 9.03%. These share holdings are on a fully
diluted basis, including shares reserved for options to be granted to employees
but not including warrants and debt conversion rights issued as part of bank
financing. Gilat and Spacenet entered into certain supply and support agreements
with GTH. See "Marketing, Distribution, and Strategic Alliances - Strategic
Alliances and Joint Ventures", and "Item 13: "Interest of Management in Certain
Transactions".
GLOBAL VILLAGE TELECOM (ANTILLES) N.V. ("GVT ANTILLES")
We initiated our rural telephony project in 1997 through our then
wholly owned subsidiary, Global Village Telecom N.V. ("GVT Antilles"). In April
1998, through a $40 million private placement with international investors (the
"Other Investors"), our interest in GVT Antilles was reduced to a minority.
In April 2000, we completed a share exchange transaction in which
we acquired all the outstanding shares of the Other Investors in GVT Antilles in
exchange for the transfer to a new company organized by the Other Investors of
GVT 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
this 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.
As a result of the transaction, we own substantially all of the
outstanding shares of GVT Antilles with employees of GVT Antilles holding the
balance. We recently renamed GVT Antilles Gilat-To-Home Latin America (Antilles)
N.V. ("GTH LA Antilles"). Subject to certain governmental and other consents and
approvals where needed, and as part of our planned consumer Internet initiative
in Latin America, we are completing the process of renaming the Peru and Chile
subsidiaries of GTH LA Antilles, to Gilat-To-Home Latin America, and the
Colombia subsidiary to Gilat Colombia.
FINANCING TRANSACTIONS
In February 1999 we completed a public offering of 5,456,750
ordinary shares, of which 4,711,750 ordinary shares were sold by Gilat and
745,000 by certain shareholders (the "Offering"). As of June 15, 2000, we have
23,061,711 ordinary shares outstanding.
In February 2000, we completed a private offering of $350 million
of convertible subordinated notes due 2005, to Qualified Institutional Buyers.
The notes are convertible into ordinary shares at a conversion price of $186.18
per share. Each note will bear annual interest of 4.25% payable semiannually.
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In June 2000, we exercised our right to redeem our 6 1/2%
Convertible Subordinated Notes due 2004 that were issued on May 14, 1997 (the
"Notes"). The Notes were redeemable in full at 102 percent of the principal
amount plus accrued and unpaid interest setting the redemption price per $1,000
Note at $1,020.72. All of the Note holders opted to convert their Notes into
Gilat's ordinary shares prior to the redemption date and we consequently issued
1,785,695 ordinary shares to such holders.
INDUSTRY BACKGROUND
VSAT INDUSTRY BACKGROUND
The emergence of the Very Small Aperture Terminal (VSAT) in the
1970s marked the beginning of a new era in satellite communication. A VSAT
network consists of:
- several dozen to several thousand VSAT remote sites with small antennas
- a large central earth station called a hub, which includes a large
antenna and enables the connection of all the VSATs in the network
- satellite transponder capacity
A VSAT remote site 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 circuitry that activates the communications link between
the user's equipment and the satellite. The outdoor unit includes a small
antenna, usually 2 to 6 feet, that can be mounted on an end-user's roof, ground
or wall and electronic equipment that transmits and receives signals to and from
the satellite transponder.
[GRAPHIC]
VSAT on-site equipment
The hub for 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 trans-
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ponder. A hub also includes electronic equipment to provide for satellite
communications, protocol support and network management functions.
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/seconds of
information. This means that if the transponder is accessed for only 90 seconds
per day, more than l billion bytes of data, the equivalent of 865,000
double-spaced pages, would be transmitted.
The current generation of high power Ku-band satellites and
sophisticated VSAT earth stations are 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
expensive, reducing overall network cost.
Before the emergence of VSATs, commercial communication via
satellite was very costly because it required an expensive ground terminal and a
very large dish antenna. Satellite-based communications solutions were therefore
limited to only those large companies which 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:
- High quality and dedicated transmission availability
- The capability of transmitting extremely large data flows
- Fixed transmission costs, insensitive to distance or the number of
receiving stations
- Rapid and cost effective deployment in geographically isolated regions
like mining areas and developing countries
- Direct access to the Internet backbone
MARKET OPPORTUNITY
The market for communication network products and services has
experienced rapid growth in recent years, and we believe that it will continue
to do so into the future. Some of the key factors responsible for this growth
include:
- rapidly growing demand for communications capacity driven by the increase
in bandwidth-intensive applications, including the Internet;
- continuous technological advances which are broadening applications for,
decreasing the cost of, and increasing the capacity of, both satellite
and ground-based networks;
- global deregulation and privatization of government-owned
telecommunications monopolies which allow for greater access to
communications alternatives.
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The above trends have benefited a range of alternative
technologies such as switched digital networks (ISDN service), digital
subscriber line (DSL) connectivity, cable modem connectivity, frame relay and
asynchronous transfer mode systems, as well as VSAT-based systems. 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
500,000 terminals in 1999.
We provide VSAT-based communications solutions to target growth
opportunities in four rapidly expanding market sectors, each of which is further
described below:
- data networks for:
- interactive enterprise networking applications such as consumer
ATM, credit card, debit card and lottery transactions, retailer
and manufacturer inventory control, and utilities' monitoring
and control systems for power lines and pipelines
- unidirectional applications such as data broadcasting and paging systems
- fixed telephone service offerings, including IP applications, in remote
and rural areas and in underserved urban areas, primarily in developing
countries
- broadband and IP-based applications targeted to network dependent
business and private corporate networks for business television, video
teleconferencing, employee training, publishing information and sharing
data among employees, vendors and customers, as well as other web-related
applications
- consumer broadband applications for Internet use; e-commerce, multimedia,
and other consumer web-based applications.
VSAT-BASED DATA NETWORKS
The significant growth in interactive data network services during
the last decade has led to increased demand for satellite-based networks. VSAT
and satellite technology is 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. As a result, VSAT networks are
experiencing significant growth as a substitute for, or complement to,
ground-based services such as frame relay and ISDN.
VSAT-BASED FIXED 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
telecommunications infrastructure. In these areas, VSAT networks are able to
utilize existing satellite infrastructure 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.
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As a result of the above advantages, the market for VSAT-based
fixed telephony products is rapidly growing. This market consists of public
telephone operators that need to fulfill universal service obligations, large
companies which require private networks to provide communications between
branch offices and corporate headquarters, and service providers targeting rural
and residential areas in developing countries.
VSAT-BASED INTERNET APPLICATIONS
As more businesses evolve from establishing an Internet presence
to utilizing securely connected geographically dispersed locations, the demand
for high quality IP-based connectivity and value-added services will grow. New
VSAT market sectors are emerging from web-related applications. One is private
corporate networks that use IP protocol for delivering interactive data and
broadcast information such as training, business television, and intranet.
Another is a group of emerging network dependent enterprises, whose product is
the network, and which is content-based and relies upon an efficient IP network
for delivery and return.
VSAT-BASED CONSUMER BROADBAND SERVICES
The term broadband services refers to networks that provide
high-capacity, high-speed transmission of data that allow users to run
applications faster than is usually possible over standard modems, take
advantage of dynamic multimedia, and have the Internet "always on" at work and
at home. In addition to the satellite broadband solution, there are three
terrestrial means of providing broadband services to consumers: cable, DSL, and
fixed wireless.
The VSAT-based consumer broadband service can be differentiated
from terrestrial competitors by the following characteristics:
- 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 requires the use of hubs which
can be commissioned within a matter of days and can serve thousands of
sites and allows for quick installation of user sites. The VSAT solution
will be widely available upon commercial launch.
- Efficient Distribution. The consumer broadband service has the ability to
broadcast and multicast broadband content to the subscriber without
encountering the last mile bottlenecks of terrestrial networks. Content,
such as stock quotes and live programming can be broadcast to a user
community while the always-on return path enables unicast transactions
(such as stock trading) desired by the user.
PRODUCTS AND SERVICES
We currently offer three VSAT product lines, 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 addition,
Spacenet, Gilat Europe, and Servicio Satelital offer satellite-based network
products and services including private communications networks carrying high
speed two-way data, Internet, intranet, fax and voice transmission. We offer the
full range of end-to-end products and services described below.
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VSAT Products
The following table sets forth our current principal product lines:
PRODUCTS BY VSAT MARKET TYPE
<TABLE>
<CAPTION>
TYPE PRODUCTS/APPLICATION
---- --------------------------------------------------
<S> <C> <C> <C>
Data SkyStar Advantage ISAT SkyWay RF Transceivers
--Interactive --Frame Relay --Data Broadcast
Telephony FaraWay DialAway
and Voice --Satellite Telephony --Rural Telephony
Internet SkySurfer SkyBlaster
--One-way Internet --Two-way Internet Access
Access
</TABLE>
In focusing on providing one platform for interactive VSAT
products and on consolidating our other product offerings to meet current
customer demand we are phasing out production of our SkySurfer product in favor
of our Skystar Advantage and SkyBlaster product lines, although we continue to
support existing customers of that product.
Data Delivery Products:
SKYSTAR ADVANTAGE VSAT. Our Skystar Advantage VSAT product, when
integrated into a network, is used in transaction-oriented, point-to-multipoint
satellite communication networks. The Skystar Advantage VSAT is designed to
enable reliable and cost-effective interactive communications between a central
hub and several tens to several thousand geographically dispersed sites. The
applications currently served by our products include the following: 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 customer 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 well as a video broadcasting
application, both of which are offered by third party vendors.
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[GRAPHIC]
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 ("ODU") and an indoor
electronics unit ("IDU"). The ODU receives signals from a satellite transponder
using a Low Noise Block ("LNB") frequency down-converter and transmits signals
to the satellite transponder using our proprietary frequency up-converter and
power amplifier. The IDU incorporates a satellite modem utilizing digital signal
processing technology and a powerful central processing unit ("CPU"). The CPU
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 IDU,
design and integrate the ODU and supply that part of the software (the
connectivity software) that, among other things, controls the satellite access
scheme.
The hub for the network incorporating our Skystar Advantage VSAT
products consists of a radio frequency terminal ("RFT") and baseband equipment.
The RFT incorporates a large dish antenna (typically 4.5 to 11 meters) and RF
electronics equipment (up and down frequency converters, low noise amplifiers
and high power amplifiers). The baseband equipment is comprised of the hub
satellite processor ("HSP"), hub protocol processor ("HPP") and network
management system ("NMS"). The HSP hardware provides the communication
connectivity to the remote terminals and the HPP provides the interface between
the HSP and the customer host computer running end-user applications. The NMS
monitors and
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controls all the remote terminals and the hub equipment. We design and
manufacture the HSP software and hardware. The RFT is typically provided by
third-party vendors. The HPP and NMS are provided by us in the Skystar Advantage
network, and by GTECH in its VSAT network, which is known as "GSAT."
Features. Our Skystar Advantage VSAT product utilizes a patented
two-dimensional, random satellite access scheme that enables us to use low-cost
ODU hardware and allows the VSAT network to handle momentary peak traffic loads
without any significant degradation of response time. 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); and flexible architecture (support for commonly used
data communications protocols, including X.25, SNA/SDLC, ASYNC and TCP/IP; 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 1999, the research and development of the Turbosat technology
purchased in 1998 from Spacenet progressed, with most of the Turbosat's improved
functionality and features completed and the technology being integrated (other
than the CDMA technology) into a new product platform, Skystar Advantage TG
(Turbo Generation), which is now our main Skystar Advantage platform. Our
current development efforts for the Skystar Advantage VSAT are directed toward
increasing the outbound bit rate capacity, adding MPEG1 and MPEG2 video
multicast capabilities, and improving the current TCP/IP set of features, and
cost reduction.
As of December 31, 1999 we had shipped approximately 92,400
Skystar Advantage VSATs to customers worldwide.
ISAT(TM). Our ISAT networking products are designed to provide
high-end solutions for voice, fax and data communications for small-to-medium
VSAT networks. ISAT uses a sophisticated frame relay switching engine and a
patented satellite access technique to implement full or partial mesh or star
topology networks. A mesh configuration allows "single hop" connection of
subscribers' equipment by which remote terminals can communicate with one
another without going through the hub. In a star configuration, remote terminals
are connected only through the hub, with some delay in communication whenever
two remote terminals communicate with each other. We offer ISAT networks to 2
types of customers. The first typically requires voice and data connectivity
between 3 to 20 stations in a single-hop, full mesh network, usually to
implement a private voice and LAN network between offices or factories to bypass
often unreliable local phone service. The second type of customer requires
similar services, but needs connectivity between 3 to 50 stations and a single
hub location in a star or partial mesh type network.
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[GRAPHIC]
Architecture. As illustrated above, an ISAT network consists of
several remote terminals and a PC-based NMS installed at one of the network
terminals for network status and software control of data rates and other
network parameters. The remote terminal consists of a small outdoor antenna
(typically 1.2 to 3.8 meters), an RF transceiver for Ku-band and C-band
reception and transmission, baseband equipment with a modulator and one or more
demodulators, a control and routing unit incorporating a Multimedia Processor
("MMP") engine supporting voice, data, and LAN interfaces, and a Station
Interface Unit to monitor and control interface between terminal equipment at
each site and the master station network management software. ISAT systems use a
"Frame Relay" protocol for transferring messages over the network. At each
terminal, outgoing packets are statistically multiplexed into a single data
stream by the MMP. The data stream is then converted into a single outbound
modulated carrier and transmitted to the satellite for rebroadcast. Each ISAT
carrier operates on a discrete, assigned satellite frequency.
In a full or partial mesh network, each terminal has demodulator
equipment to receive carriers from each of the other network terminals with
which direct communication is needed. The star equipment configuration is
identical to the full mesh, except remote terminals require a demodulator only
for the master terminal signal. The data rate transmitted over the satellite
from each terminal is set to match the traffic requirements of the station.
Standard ISAT equipment provides software-programmable rates over the range 9.6
kilobits per second to over 2 megabits per second. Different terminals within a
network may have different rates to accommodate unique site traffic
requirements.
Features. ISAT networks can be provided with a Demand Assigned
Multiple Access ("DAMA") overlay, allowing occasional connectivity to be
established as required between star-type remote stations, for voice networks
with only occasional voice requirements between stations. ISAT terminals feature
high hardware reliability; easy installation and maintenance; a variety of
customer interfaces; and flexible architecture.
WebSat(TM) is an enhancement to ISAT, which integrates an IP
accelerator to overcome typical satellite speed limitations for IP data and
manages data flow from multiple connections using Quality of Service bandwidth
controls. We have recently developed E-Trunk(TM), as an enhancement to ISAT.
E-Trunk provides voice carriers with an efficient alternative to terrestrial
trunking. E-Trunk's use of a Frame
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Relay link protocol and patented satellite access technique can eliminate costly
hub facilities and simplify interconnections for both cellular and traditional
wireline telephony systems. A typical E-Trunk network is designed to service 3
to 100 sites, with each remote site servicing from 1 to 20 E1 circuits (30 to
600 lines) of voice traffic, or more for a central site.
Our current development efforts for the ISAT are directed towards
cost reduction and replacement of outsourced components with devices that we
have developed and produced.
As of December 31, 1999, we had shipped approximately 460 ISAT
terminals to customers worldwide.
SKYWAY(TM) SERIES OF RF TRANSCEIVERS. Our 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 C-band, extended C-band, and Ku band and are produced in our
Gilat Florida facility.
Architecture. The SkyWay series of RF transceivers consist of an
IDU, ODU, and depending upon the application, a Low Noise Amplifier down
converter, LNB, or a Solid State Booster ("SSB"). The IDU controls ODU functions
through a front panel keypad and an LCD display.
Features. All the frequency converters use phase-locked
oscillators, locked on the same frequency reference source. An auxiliary
reference output is available for locking external equipment to the same
reference source. The SSB 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 the
user with full control over the transceiver system. Monitor and control
functions include SSB mute, frequency-set, alarm indication, output threshold,
and external fault indication from the SSB. Full access is possible either
through the front panel or an RS232/RS422 port.
As of December 31, 1999, we had shipped approximately 560 SkyWay
transceivers.
Telephony and Voice Products:
FARAWAY VSAT. Gilat and COMSAT RSI (the assets of which were
acquired by ParaGea Communications), are parties to a joint venture for the
development of the FaraWay VSAT, a satellite telephony VSAT which provides mesh
connectivity, voice and data services via satellite to remote locations and
other areas that lack adequate telecommunications infrastructure. See "Strategic
Alliances and Joint Ventures." FaraWay VSATs are intended to provide:
- A reliable telecommunications network (with fax, telephone and data
capabilities) for corporate and business users in developing countries
that have minimal or no telecommunications infrastructure
- Multi-channel toll quality telephone service to geographically isolated
rural residential areas in developing countries
- Cost-effective telephone service that can be installed quickly for
temporary remote installations (e.g., oil and gas exploration sites,
small rural government agencies and new factories) until terrestrial
services are available.
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[GRAPHIC]
Architecture. The FaraWay telephony product employs a unique VSAT
architecture and satellite access scheme and supports either a mesh or star
configuration utilizing DAMA for more efficient use of the satellite. As
illustrated above, the product architecture permits connections to either
private telephone equipment, pay telephones, small private switches or a public
switch, and data terminals, as well as to any combination of this equipment. A
Data Interface Module ("DIM") enables high data rate applications in both star
and mesh configurations.
The remote terminal of the FaraWay includes a dish antenna
(typically 1.8 to 3.7 meters in diameter), an ODU and an IDU. The IDU connects
directly to subscribers' telephone equipment or central office. The FaraWay hub,
which may be connected to a public switch, includes a large dish antenna
(typically 4.6 to 13 meters in diameter), RF electronics, a network resource and
call-processing controller, an NMS, a call accounting computer and traffic
terminal. 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; the call accounting computer provides data for external
network billing; and the traffic terminal provides the hub's interface to the
public switch.
Features. The FaraWay VSAT offers a cost-effective, flexible
solution for connecting 2-40 telephone lines from a public switch to a local
PABX 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 frequency operation; flexible interfaces including different
signaling systems; support of up to 30,000 calls per hour and 8,000 remote
stations; and ITU-approved 16 and 8 kilobit per second voice encoding.
In 1999, we completed the development of a PC Network Terminal
("PC NT")-based NMS for the FaraWay VSAT. Our current development efforts for
the FaraWay VSAT are directed towards continuing development of an enhanced
digital E1 interface module, capable of supporting almost all existing digital
telephony signaling protocols.
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[GRAPHIC]
As of December 31, 1999, we had shipped approximately 1,600
FaraWay VSATs to customers.
DIALAWAY VSAT Our DialAway VSAT product is intended to provide
inexpensive, near toll quality telephone service including voice and fax
communication and high speed Internet access for small businesses and villages
in remote or urban areas lacking an adequate telephone infrastructure. The
product has been designed to offer subscriber or pay telephone and public call
offices with up to 3 lines. Our rural telephony product operates in a mesh or
multi-star configuration in which the remote terminals communicate with each
other in single hop full mesh or with hub and gateway stations. At the same time
the DialAway offers "always on" high speed two way Internet access. We believe
that the cost benefits of the product can meet the telephony needs of the
targeted rural telephony users, as well as such users' current and future needs
for Internet access.
Architecture. As illustrated above, a DialAway network consists of
a central hub, PSTN gateways, satellite channels and remote terminals. A remote
terminal consists of a small outdoor antenna (typically 0.98 to 1.2 meters), an
ODU and our IDU with one to three telephony extension cards. The hub consists of
an RFT and baseband equipment. The RFT incorporates a large dish antenna
(typically 4.5 to 11 meters) and RF electronics equipment (up and down frequency
converters, low noise amplifiers and high power amplifiers). The baseband
includes an HSP, a Hub Voice Processor ("HVP") with voice cards, and an NMS. The
NMS monitors and controls all the remote terminals and the hub equipment. The
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hub design permits easy incorporation of new features, as well as independent
sizing for inbound (remote to hub) and outbound (hub to remote) bandwidths. The
hub station is also the point of presence (POP) for Internet traffic. Telephony
traffic can be also routed to regional gateways which can utilize satellite or
terrestrial infrastructure.
With the DialAway, the analog voice input is digitized and
compressed to 4.8 or 6.4 kilobits per second. The compressed voice is organized
into packets and transmitted to the hub or to another remote VSAT via the
satellite. At the destination, a voice/fax card decodes the incoming voice
packets into digitized voice which is then reconverted into analog form.
Features. Our DialAway VSAT product offers a PC NT-based NMS and
such features as full support of telephone line services; 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 DialAway are directed
towards development of new product features, improving IP support, and
decreasing the product's power consumption.
As of December 31, 1999, we had shipped approximately 13,200
DialAway VSATs.
IP-Based Products:
SKYBLASTER VSAT. The SkyBlaster VSAT, introduced in 1999, is our
latest two-way IP-based product and consists of a DVB receiver card and a
satellite transmitter PCI card as a return channel. The SkyBlaster is targeted
for use in communities of interest, corporations, small to mid-size businesses,
small office/home office and consumer users.
With our unique satellite return access scheme, PC users have
access to fully interactive broadband VSATs on corporate LAN servers or PC
desktops. SkyBlaster provides IP-based communications solutions for broadband
corporate and public networks.
SkyBlaster features an open IP platform which supports
applications developed by us or by third party vendors, such as interactive
corporate training; reliable data and video multicasting; interactive business
television and reliable push-based applications.
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[GRAPHIC]
Architecture. As illustrated above, the SkyBlaster VSAT combines two PCI cards:
- DVB receiver
- Satellite transmitter
The DVB receiver card supports a scalable bit rate of 2 to 40
Mbps. Inbound data can be transmitted at bit rates of 38.4 to 153.6 Kbps, using
a unique Frequency Time Division Multiple Access ("FTDMA") satellite access
scheme, . The cards can be installed in any Gilat-qualified PC server,
supporting data recasting over the LAN, or be provided as a stand-alone IDU.
Research and development efforts are focused on increasing the bit rates to
307.2.
The hub station was designed for installation at the customer
premises as a private hub. Alternately, a shared hub can be located at a service
provider site. Single-tier architecture allows for PC connectivity directly to
the application and media servers. As shown in the diagram, any media server
connected to the hub, such as a video, audio or data push server, is allocated
with a reserved committed bit-
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rate that guarantees high-speed accessibility. Therefore, multiple streams
carrying video, audio and data can operate at the same time without interfering
with one another. The hub station features:
- NMS (Network Management System)
- HTS (Hub Transmission Server)
- DVB IPE (IP Encapsulator)
- DVB Satellite Modulator
- HSP (Hub Satellite Processor)
- Conditional Access (security)
- Scheduling
Satellite Access. SkyBlaster uses a proprietary two-dimensional
access scheme. This enables the use of low-cost ODU hardware, minimizes space
segment use and allows the VSAT network to handle momentary peak traffic loads
without significant degradation in response time. The network is immune to
outages caused by frequency interference.
The unique FTDMA scheme provides no back off in time for
retransmissions and consistent utilization of the entire bandwidth by all remote
sites. The satellite access scheme, coupled with a transmit slot size that can
be optimized to the network, provides superior network throughput stability and
load balancing.
We are currently developing an external stand-alone box for the
SkyBlaster that we expect to introduce by the first quarter of 2001, in order to
enable easy installation of the product. 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.
As of December 31, 1999, we had shipped approximately 7,600 of our
SkyBlaster VSATs to customers worldwide.
SKYSURFER VSAT. Our SkySurfer VSAT receiver product is a PC-based
Digital Video Broadcast ("DVB") satellite receiver used in IP environments to
provide satellite-based multicast and unicast communications. We are currently
phasing out our production of the SkySurfer product in favor of the SkyBlaster
product line, although we continue to support existing SkySurfer customers. The
SkySurfer streams IP traffic from a central site to a large number of
geographically dispersed remote sites. It is an open IP platform that enables
easy integration of any IP-based application. The main applications running on
SkySurfer networks are web-based interactive corporate training and distance
learning, interactive business television, multicast video and audio streaming,
broadband Intranet/Internet access and reliable push based applications.
The SkySurfer remote unit receives high bit-rate traffic via
satellite (from 2 to 40 Mbps) and currently utilizes the user's return path
(terrestrial VSAT) for transmission. The SkySurfer hub provides users with a
scalable 2-40 Mbps channel for IP traffic.
Architecture. The SkySurfer VSAT consists of a central
transmission hub and the remote SkySurfer receiver cards. The central hub
consists of several Hub Transmission Servers ("HTS") which receive the content
from the server at the central site or anywhere over the Internet. Each HTS is a
PC server running applications that we developed. The HTS transmits the data to
the satellite modulator which converts the data to the intermediate frequency
("IF") range. The output of the modulator is transmitted to the
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satellite by standard RF transmission equipment. Our NMS, situated at the
transmission site, controls the parameters of the hub and remote SkySurfer
units.
The remote SkySurfer VSAT consists of (i) a 32-bit PCI adapter
card that fits in any standard PC and enables receipt of high-speed data (up to
40 Mbps) by a PC or LAN server, (ii) a small outdoor antenna and (iii) an LNB. A
return path can be established over any existing terrestrial or two-way VSAT
connection.
As of December 31, 1999, we had shipped approximately 11,500 of
our SkySurfer VSATs to customers worldwide.
Features. For interactive business television and corporate
communications, the SkySurfer VSAT offers IP-based multicast and Intranet
technologies that provide interactive business television with Motion Picture
Expert Group ("MPEG") decoding quality. We have provided turnkey solutions,
beginning with the customer's video source, continuing with the video encoding
server (including the IP multicast data layer) and ending with the video decoder
card.
For corporate training, using third party proprietary training
technology, SkySurfer enables full broadband software video decoding with
multicast capabilities for on-line training to hundreds of employee LANs and PCs
simultaneously.
For push-based applications, SkySurfer, which has been bundled
with third party technology, offers an integrated end-to-end push client server
solution, optimized for satellite delivery and IP multicast. This integrated
solution allows companies to deliver corporate information and software from a
variety of sources and to notify employees and management of its availability.
For broadband Intranet/Internet access, SkySurfer enables data
rates of more than 1 Mbps, while accessing corporate Web servers or Internet
sites. LAN users can also access the global Internet through the SkySurfer
gateway, without installing SkySurfer at their PCs.
VSAT NETWORK SERVICES
In our two primary geographic markets, the United States and
Europe, we now provide full network services through our network management
centers, 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:
- Network Analysis
- Network Implementation
- Shared Hub Services
- Network Operations
- Maintenance
- Customer Technical Services
- Access to Satellite Capacity
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In addition, we also 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 the Gilat program management organization. The 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, and/or wall-supported mounts with lightning
protection, connection of the ODU and IDU 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. We are increasing our installation capabilities
and currently can install approximately 3,500 sites per month in the US.
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, Atlanta, Germany, the Czech Republic or
Argentina. The primary distinction between the two is that a private hub
installation involves more emphasis on site preparation, equipment installation
and training, while a shared hub installation focuses on the compatibility with
the shared hub and the customer's data center.
We currently use in-house personnel for hub installation and third
parties to perform most VSAT installation activity in our service markets. 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.
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 U.S., 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 three network management centers
(NMC). 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 Atlanta, Germany and 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.
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In 1999, Gilat NMCs managed approximately 32,000 data and video
sites in the United States and approximately 36,500 sites worldwide.
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 over 100
warehouses in the U.S., 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 trouble shooting, network
optimization, customer training, and documentation services.
Protocols and Methodologies. The development of new software
protocols and methodologies 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.
Satellite Capacity. Satellite transmission channels are an
integral part of our VSAT network offers in the U.S., Europe and Argentina. We
continually monitor our space segment capacity, all of which we procure from GE
Americom and other third parties, in order to ensure that sufficient
transmission capacity is available for prospective customers, as well as growth
in bandwith for existing networks. The capacity is provided for the term of the
agreement, typically five years, and may be increased under the term as the
customer's traffic grows. For networks in the United States, we primarily use
satellite capacity acquired from GE Americom, which currently operates a fleet
of 12 satellites, as well as from other suppliers. In connection with the
Spacenet acquisition, we entered into a series of agreements with GE Americom
under which GE Americom provides us with backup and additional satellite
services. These agreements are described below under the heading "Certain
Relationships and Related Party Transactions--The Satellite Transponder Service
Agreements." We also use capacity on several regional satellites in Europe and
Latin America.
We believe that there is a large and growing quantity of satellite
capacity available from a number of providers in the United States and in the
rest of the world from whom we can obtain transmitter capacity at competitive
rates, as our business requires.
Service Offerings. Service offerings combine a rental of all
necessary network hardware with all of the above network services into an
end-to-end customer solution. In a service offering, we retain ownership and
operation of the network equipment, delivering to the customer a specified
network speed, response time and network availability for a set price per month
per site. Generally, service offerings contracts have a five-year maturity.
However, we also provide three-year service contracts in response to market
demand.
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Service offerings respond to our customers' needs to outsource
non-core competencies and mitigate technical obsolescence and make the purchase
of satellite network services similar to the procurement of ground-based network
services.
Historically, our main service offerings have been based on the
Skystar Advantage two-way data platform. However, we are also leveraging our
existing network services infrastructure with new service offerings that include
the SkyBlaster product line.
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 covering North America, Europe, Latin
America, Asia and the rest of the world. In North America and Europe, 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 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.
The 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 signature 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 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 signature of the contract.
We have a sales and marketing group of 150 full-time employees (as
of May 1, 2000) who offer our products and services, primarily in the United
States and Europe. Approximately 27% of the sales and marketing group is based
in the United States, approximately 13% is based in Europe, and approximately
39% is based in Israel. Sales of our services generally are substantial in size
and involve a long-term sales process.
We currently have marketing and technical support staff in the
United States, Europe and Israel. In addition, we maintain marketing and support
offices in Argentina, Brazil, Australia, Thailand 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 London
and Beijing to support our marketing efforts and support and coordinate local
marketing offices in Europe and the Far East. We are currently establishing a
representative office in Kazakhstan to provide pre-sales marketing and support
in that region.
We also sell our products and services to postal, telephone and
telegraph organizations ("PTTs") 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.
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The following table sets forth Gilat's revenues by geographic area
for the periods indicated below as a percent of Gilat's total sales:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
United States 49.5%(1) 51.8%(1) 56.4%(3)
Europe 8.9% 6.7% 16.2%(3)
South and Latin America 11.1%(2) 6.9%(2,3) 13.0%(3)
China 4.6%(3) 3.5%(3) 1.7%(3)
Israel 3.3%(3) 2.7%(3) 2.5%(3)
South Africa 0.1%(3) 13.4% 0.4%
Other 22.5% 15.0% 9.8%
Total 100.0% 100.0% 100.0%
</TABLE>
----------------------------------
(1) Includes revenues of 11.6% and 2.8% derived from sales made through GTECH
and Spacenet in the United States with shipments made directly to end-users in
Europe (including regional service operators and distributors) for the years
ended December 31, 1997 and 1998, respectively. See note 15 of Notes to
Consolidated Financial Statements listed in Item 19.
(2) Including revenues from a subsidiary of GTECH in Brazil of 6.8% and 1.1%for
the years ended December 31, 1997 and 1998, respectively.
(3) Includes revenues from related parties of 3.6%, 8.2%, and 15.6% for the
years ended December 31, 1997, 1998, and 1999, respectively. Revenues for 1999
include $15 million from GE Americom, which was paid in accordance with the
Merger-Related Agreements, pursuant to which GE Americom was required to pay us
to the extent it did not meet certain equipment purchase commitments. See note
15 of Notes to Consolidated Financial Statements listed in Item 19.
BACKLOG. In 1999, we received orders for over 70,000 interactive
VSAT units. Our interactive VSAT orders for 1999 are more than twice the orders
received for interactive VSATs in 1998. The 1999 year-end backlog for equipment
sales and revenues from multi-year service contracts for our VSAT products was
over $300 million, an increase of more than 70% from the 1998 backlog of $175
million. The backlog calculation includes, with regard to the previously
announced MCI Worldcom/USPS contract, only expected revenues on that contract
from installations planned through year-end 2000, although this 10-year
contract, which does not require USPS to purchase any specific number of VSATs
by any specific date, could total as many as 26,000 sites.
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:
Gilat-To-Home ("GTH"). In March 2000, we established a joint
venture named Gilat-to-Home, Inc. ("GTH") with MSN, EchoStar and ING, to provide
broadband Internet access via satellite ("Service") to residential, "SOHO" and
small business customers in North America. MSN has entered into a four year
supply agreement with GTH for the Service according to which GTH will supply and
MSN will purchase a minimum quantity of VSAT stand-alone units for MSN customers
after completion of a one year milestone process. MSN has entered into an
additional service agreement with GTH, which will enable MSN and GTH to offer
additional satellite enabled services to MSN customers. MSN will also develop a
GTH-MSN co-branded portal, which will be available to GTH customers.
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EchoStar and GTH will cooperate for the purpose of providing a
broadband Internet access service via satellite to GTH subscribers and
EchoStar's DISH Network subscribers. EchoStar will market GTH's broadband
Internet access services to DISH Network customers and retailers. GTH will
market EchoStar's multichannel video services together with GTH's broadband
Internet access product.
We have entered into an agreement to support the performance by
GTH of the supply agreement with MSN described above. We have agreed not to
compete with GTH in North America. MSN and EchoStar have invested $50,000,000
each and ING $25,000,000 in cash in GTH in exchange for both senior convertible
preferred and common shares equal to 17.61%, 17.61% and 7.16%, respectively, of
the outstanding capital of GTH. The preferred shares are non-voting, have a
liquidation preference, antidilution and preemptive rights, rights of first
refusal, and co-sale and registration rights and carry 12% PIK (paid-in-kind)
dividends. Gilat owns approximately 41.09% of GTH's outstanding shares and Gilat
related parties collectively own approximately 9.03%. These share holdings are
on a fully diluted basis, including shares reserved for options to be granted to
employees but not including warrants and debt conversion rights issued as part
of bank financing. We have the right to appoint two members to the GTH Board of
Directors.
KnowledgeBroadcasting.com. ("KBC") 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"). KBC is a web-based media company formed to distribute knowledge-based
content using interactive broadband satellite and other technologies. We also
received a one-year warrant (the "Warrant") to purchase up to 20 million
additional units in KBC for one dollar per unit ("Warrant Units") and we have
been granted an option to purchase content from KBC at preferred pricing, to the
extent that KBC makes such content available to third parties. In addition, we
have received a five-year right of first refusal, at preferred pricing, for KBC
hardware purchases for broadcast networks and VSAT operating services. We are
also entitled to appoint one director to the board of KBC as long as we hold a
minimum number of KBC units.
As part of this transaction, for five years, KBC may purchase
equipment and services from us at preferred 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 Warrrant
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.
GTECH. Since 1990, we have worked closely with GTECH Corporation
("GTECH") to develop GTECH's GSAT service offering which is used for
computerized on-line state and national lottery applications. GTECH is a leading
operator and supplier of computerized on-line lottery systems. GTECH's lottery
system consists of numerous remote lottery terminals located in retail outlets,
central computer systems and game software, as well as communications equipment
that connects the terminals and the central computer systems.
In December 1994, we executed a seven-year agreement with GTECH
(replacing an agreement executed by the parties in March 1993) pursuant to which
we agreed to sell our VSAT product components to GTECH at agreed-upon prices and
granted GTECH certain non-exclusive marketing and manufacturing rights to our
interactive transaction-oriented VSAT technology for worldwide gaming
applications (except in France), including, among others, lotteries, sports
betting, pari-mutuel betting and horse and other race betting. Purchases by
GTECH of the indoor units (IDUs) from us have been at prices specified in the
agreement, and for IDUs manufactured by GTECH directly or through a
subcontractor, GTECH has been required to acquire the necessary software from us
and to pay us a royalty in respect of each IDU produced.
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The GTECH agreement also provides that until March 31, 2001, we
will not, directly or indirectly, sell our two-way VSAT technology for gaming
applications or supply services similar to those provided to GTECH under the
agreement to any person directly or indirectly in competition with GTECH in the
gaming business. However, we may sell our TwoWay VSAT (i) through Spacenet for
resale to persons or entities involved in the gaming industry, and (ii) to
value-added resellers who may sell the TwoWay VSAT for gaming applications.
Under a memorandum of understanding signed in March 1996, GTECH
agreed to purchase or manufacture 1,500, 2,000, and 3,000 IDUs in 1997, 1998 and
1999, respectively. These commitments were substantially satisfied. Since 1996,
the parties have conducted business pursuant to the memorandum of understanding,
and we are currently negotiating a new agreement to replace the exsiting
arrangement, which expired in March 2000. We believe that we have a good
relationship with GTECH and that the relationship will continue, although we
cannot assure that a new agreement will be reached.
ParaGea. In late 1992, we entered into a ten-year joint venture
with COMSAT RSI, Inc. (the assets of which were sold to ParaGea Communications)
to develop, manufacture and market two-way rural telephone VSAT products. In
March 1997, the parties modified the agreement to apply only to the VSAT-based
telephony product which had been jointly developed and marketed by COMSAT RSI
under the trade name "TerraSat 400" and by Gilat under the name "FaraWay VSAT";
to restructure the product development plans; and to grant each party
non-exclusive marketing rights worldwide. In November 1997, a further amendment
gave Gilat sole responsibility for development of the FaraWay product for a
period of one year, after which both parties have the right to develop the
product. Gilat is continuing the independent development and marketing of the
current FaraWay VSAT.
KSAT. In January 1998, we entered into an investment agreement
with KSAT, a Yukon company listed on the Vancouver Stock Exchange, and Global
Space Investments Limited, a partially owned subsidiary of Keppel
Telecommunications & Transportation Ltd., a Singapore public company involved in
telecommunications activities. Under the agreement, among other things, Global
invested $15 million in KSAT (half as equity and half as a loan convertible into
equity) and we converted to equity certain convertible instruments we held in
KSAT. We also agreed to exchange our direct interests in certain joint ventures
in China for shares of KSAT, subject to Chinese government regulatory approvals.
Those approvals have been obtained and we completed the share exchange in
February 2000. In light of the 1998 KSAT financing and the transfer of our joint
venture interests, we hold approximately 39.0% of KSAT (or 30.8% on a fully
diluted basis). Two of our officers have been appointed to the Board of
Directors of KSAT.
Global Village Telecom N.V. ("GVT Antilles"). We initiated our
rural telephony project in 1997 through our then wholly owned subsidiary, Global
Village Telecom N.V. ("GVT Antilles") (recently re- named Gilat-To-Home Latin
America (Antilles) N.V. ("GTH LA Antilles")). GVT 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. We have been marketing our DialAway VSAT product,
and other voice products, through GVT Antilles and GVT Antilles's local
partners. As of December 31, 1999, we had shipped to GVT Antilles and its
subsidiaries approximately 6,500 DialAway VSATs and three redundant hubs for
rural telephony networks in Chile, Peru, and Colombia where GVT won concessions
to provide rural telephony services.
In April 1998, GVT Antilles completed a $40 million private
placement with an international group of investors (the "Other Investors"), as a
result of which our interest in GVT Antilles was reduced to a minority. We
invested $2.5 million in GVT as part of the private placement. We also provided
a $7.5 million loan convertible into common shares equal to approximately 15% of
GVT Antilles.
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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 GVT 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.
As a result of the transaction, we own substantially all of the
shares of GTH LA Antilles, with employee shareholders of GTH LA Antilles holding
the balance. Subject to certain governmental and other consents and approvals,
where needed, and as part of our planned customer Internet initiative in Latin
America, we are completing the process of renaming the Peru and Chile
subsidiaries of GTH LA Antilles to Gilat-To-Home Latin America, and the Colombia
subsidiary to Gilat Colombia.
CUSTOMERS
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, gas
stations, hotel, brokerage, banking and financial services, communications,
lottery, automotive and governmental. 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.
The Rite Aid drugstore chain uses its VSAT network to reduce
network response time for credit card transactions, to process prescriptions
through its pharmacy system, to broadcast customized music and promotional
programming to its stores on its private radio frequency and to send frequent
corporate communications and sales training updates to employees on its own
business television system. Automaker Peugeot-Citroen of France uses its network
for interactive data applications such as inventory updates, credit
authorizations, and warranty documentation.
USPS TRANSACTION. 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. Although the contract does not
require the USPS to purchase specific quantities at specific dates, the USPS
program is expected to initially link 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 is providing the USPS with
world-class connectivity to all locations, enabling a state-of-the-art customer
service infrastructure. The VSAT network will provide on-line services to as
many as 26,000 locations. An additional 7,000 sites are being installed as
back-up services to the existing MCI WorldCom Frame Relay network at large
associated office locations. As of June 4, 2000, we have installed 1,115 small
associated office locations and 5,009 large associated office locations in 44
U.S. states. We expect to install a total of 4,000 small associated office
locations and 5,500 large associated office locations by December 31, 2000,
although we cannot assure that we will be able to meet that schedule.
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COMPETITION
The data 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 which 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, the 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. See "--Marketing and Distribution"
Our principal competitor in the supply of satellite networks is
Hughes Network Systems, which offers a full line of VSAT products and services
and which obtains 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 from other
satellite network providers, including Loral and its affiliates (such as Orion
Network Systems) and, in certain instances, direct broadcast satellite
companies.
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 announced
the planned 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.
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In addition, with the GTH offering, we believe that we will be
able to compete effectively for consumers and small businesses in rural and
suburban markets initially throughout the United States, and subsequently in
other regions in the world.
TheVSAT-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
to be provided by GTH will be immediately available upon installation of the
equipment at a consumer's home. Additionally, the broadband service to be
offered by GTH 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 as GTECH and COMSAT RSI, by developing new products such as
SkyBlaster, and by emphasizing low-cost product and service features and
functions that meet the needs of customers in the markets in which we compete.
We also believe that our leadership in the consumer satellite broadband arena
through the formation of GTH with market leaders such as Microsoft and EchoStar
has created a new channel to sell our products in potentially greater quantities
beginning toward the end of this year. We are able to provide these product and
service features and functions in part by using our proprietary hardware and
software. See "--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 "Risk Factors--Competition in the
network communications industry."
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. As of May
1, 1999, approximately 39% of our employees in Israel and 14% of our employees
in the United States were employed in research and development activities.
Annual gross research and development expenditures were approximately 8.0%,
10.2% and 10.2% of revenues in the years ended December 31, 1999, 1998 and 1997,
respectively. Approximately 8.7%, 19.2%, and 23.5% of our research and
development expenditures for the years ended December 31, 1999, 1998 and 1997,
respectively, were covered in all three years by the Office of the Chief
Scientist, including funds received or accrued through the research consortia
(as described below), in 1998 from the European Commission
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and in 1999 from the U.S.-Israel Science and Technology Foundation. Our initial
research and development was funded by BIRD, but currently none of our research
and development expenditures is funded by BIRD. We cannot assume that funding at
any level will continue to be available or that funding will be available on
attractive terms.
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 the
Skystar Advantage and FarAway in order to enhance both products' capabilities
and to develop new features.
We have devoted research and development resources to development
of our DialAway VSAT. This product provides inexpensive, near toll quality, dial
tone telephone service for small businesses and villages in remote or urban
areas lacking an adequate telecommunications infrastructure. We intend to
continue development of the DialAway VSAT to develop new features (such as IP
communications), enhance existing features related to the multi-star
configuration and reduce costs.
We have developed the SkyBlaster VSAT product and will 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, which enables 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, small office/home office 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 are currently developing an external
stand-alone box for the SkyBlaster that we expect to introduce by the first
quarter of 2001, in order to enable easy installation of the SkyBlaster product.
Our current products and services typically operate on either the
Ku or C satellite bands. 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 VSAT
product lines. 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.
We regard our software and our internally developed hardware as
proprietary and have implemented protective measures both of a legal and
practical nature. We have obtained and registered several 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 standard
confidentiality agreements with our customers 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 soft ware or hardware or obtain
information which we regard as a trade secret in violation of legal protections.
We periodically receive communications asserting that our products
or applications thereof infringe a third party's patent rights or copyrights. We
also send similar communications to third parties which we believe may be
infringing our patents. In May 2000, Gilat Satellite Networks Ltd. and Spacenet
Inc. were named as defendants in an action filed in the United States District
Court for the District of
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Maryland, entitled Hughes Electronics Corporation v. Gilat Satellite Networks
Ltd. and Spacenet Inc. Plaintiff Hughes Electronics Corporation (the parent of
Hughes Network Systems), alleges the infringement of four patents, and seeks to
enjoin the further infringement. We intend to vigorously defend against these
claims. We do not believe that we are infringing the patents. See "Item 3 --
Legal Proceedings." Other than the litigation with Hughes, there is no pending
litigation against us regarding any infringement claim.
THIRD-PARTY FUNDING. Through December 31, 1999, we accrued a total
of approximately $3,517,000 in grants from the Office of the Chief Scientist for
the development of our OneWay VSAT products, DialAway VSAT product, and mesh
satellite communication network products for voice and data. 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 DialAway 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). Through December 31, 1999,
we paid or accrued royalties of $1,416,000 to the Office of the Chief Scientist
for the DialAway project. The terms of these grants prohibit the manufacture of
developed OneWay products or developed DialAway 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 product for
the China joint ventures. 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 which have not been funded by the Office of the Chief
Scientist.
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.
Through December 31, 1999, we received grants of approximately
$125,000 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.
Through December 31, 1999, we accrued grants of approximately
$68,000 from the U.S.-Israel Science and Technology Foundation ("USISTF") in
connection with a joint research and development project with a U.S. company for
a next generation Internet application. USISTF provides the lesser of $1 million
or 50% of allowable costs actually incurred in the project. Under the terms of
the USISTF funding, royalties of 2% on the sale of products based upon the
developed innovation are payable until 100% of the grant is repaid. To date we
have not made any sales in connection with the USISTF funding and consequently
have not accrued or paid royalties to USISTF.
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 that we have participated in are:
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- the Israel Satellite Earth Station Generic Research and Development
Consortium (devoted to basic technology research for the satellite earth
stations industry) which was completed by the end of 1998;
- the Israel Advanced Digital Communication Generic Research and
Development Consortium (devoted to generic technology research of
advanced digital communication) which was completed by the end of 1998;
- the GaAs MMIC Consortium (devoted to generic technology research of MMIC
components and advanced communications which was completed by the end of
1999);
- the MOST Consortium (devoted to generic technology research for on-line
broadband multimedia services which was completed by March 31, 2000); and
- the ISIS Consortium (devoted to generic technology research for the
information superhighway in space) which began in February 1999.
In addition to these consortia, we have recently received
preliminary grant approval for participation in the Large Scale Rural Telephony
Consortium, which is devoted to generic technology research for satellite-based
rural telephony solutions. Final approval of the consortia is expected by the
fourth quarter of 2000 and we can not be certain that final approval will be
granted in the amounts requested or at all.
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 or
manufacturing of developed products outside of Israel 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, 1999, we have accrued approximately $10.6
million in grants from the Office of the Chief Scientist through the consortia,
including $0.9 million for equipment.
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:
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<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
1997 1998 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gross research and development costs................. $10,615 $15,815 $27,159
Less:
Royalty-bearing grants (the Office of the Chief
Scientist, BIRD and USISTF)....................... (464) (997) (1,340)
Non-royalty-bearing grants (the Consortia and the
European Commission)............................... (2,030) (2,038) (1,028)
------- ------- -------
Acquired research and development costs.............. 80,000
------
Research and development costs--net.................. $8,121 $92,780 $24,791
====== ======= =======
</TABLE>
MANUFACTURING AND OPERATIONS
Our products are primarily designed, assembled, manufactured and
tested at our facility in Petah Tikva, Israel, except for the ISAT frame relay
systems and the SkyWay Series of transceivers, which are designed, assembled,
manufactured and tested at Gilat Florida's facilities in West Melbourne,
Florida.
We have network operations centers at McLean, Virginia; Marietta,
Georgia; Backnang, Germany and Argentina and shared hub facilities in Chicago,
Illinois; Backnang, Germany; Argentina and the Czech Republic, 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 current manufacturing facilities have sufficient capacity to
handle current demand. To provide capacity for continued growth we completed by
the end of 1997 the second phase of our new facility in Israel, as well as the
expansion of the Florida facilities. We have begun a third and fourth phase of
construction to add approximately 93,000 square feet and 79,000 square feet,
respectively; the third phase was completed in 1999 and the fourth phase is
expected to be completed by the end of the first quarter of 2001. We will have
additional manufacturing capacity as a result of such expanded facilities.
However, we cannot assure that the expected construction schedule will be met.
See "Item 2: Description of Property". 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 product.
We have implemented a multifaceted strategy focused on meeting
customer demand for our products and reducing production costs, in light of the
increasing worldwide demand for semiconductor components. Our operations group
together with our research and development group are working with our vendors
and subcontractors to increase development and production efficiency in order to
obtain higher component quantities at reduced prices. We are also increasing our
internal manufacturing capabilities and enlarging our testing capacity by
acquiring additional testing equipment. Finally, we have taken measures to
protect against component supply interruptions. These measures include obtaining
second and third sources of supply of components, thereby reducing dependence on
single sources of supply; providing longer requirements forecasts to our
subcontractors, suppliers, and vendors; purchasing raw materials for component
manufacture for our subcontractors; and securing and developing Israeli-based
sources of supply.
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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 United States patent for a commercial satellite communication system
that allows random access to allotted frequency segments on satellites. The
patented system allows our customers to utilize lower cost networks, while
maintaining sufficient throughput and response times. Through Gilat Florida, we
also hold a United States patent for the ISAT frame relay system. In addition,
we also hold several patents relating to spread spectrum.
We believe that our patents are important to our business. We also
believe, however, 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 and
subcontractors. 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.
On May 8, 2000, Gilat Satellite Networks Ltd. and Spacenet Inc.
were named as defendants in an action filed in the United States District Court
for the District of Maryland. Plaintiff Hughes Electronics Corporation alleges
the infringement of four patents, and seeks to enjoin further alleged
infringement (See "Item 3: Litigation". We intend to vigorously defend against
these claims. We do not believe we are infringing the patents.
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.
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.
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
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the United States, primarily the Federal Communications Commission (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 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 assure 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.
EMPLOYEES
As of May 1, 2000, we had approximately 1191 full-time employees,
including 199 employees in administration and finance, 150 employees in
marketing and sales, 281 employees in engineering, research and development and
560 employees in manufacturing, operations and technical support. Of these
employees, 494 employees were based in our facilities in Israel, 587 were
employed in the United States, 78 in Europe, and 32 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 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
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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. See note 7 to Notes to the
Consolidated Financial Statements. In addition, Israeli employees and employers
are required to pay specified sums to the National Insurance Institute, 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.
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.
POLITICAL AND ECONOMIC CONDITIONS
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, a peace agreement between Israel and Jordan
was signed in 1994 and, since 1993, several agreements between Israel and
Palestinian representatives have been signed. In addition, Israel and several
other Arab States have announced their intention to establish trade and other
relations and are discussing certain projects. As of the date hereof, Israel has
not entered into any peace agreement with Syria or Lebanon, although Israel
recently withdrew all of its forces from South Lebanon. There is substantial
uncertainty about how the "peace process" will develop or what effect it may
have upon us.
Despite the progress towards peace between Israel, its Arab
neighbors and the Palestinians, 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 laws, policies or practices directed towards Israel
or Israeli businesses will not have an adverse impact on the expansion of our
business.
As discussed below (see "Item 9: Management's Discussion and
Analysis of Financial Condition and Results of Operations--Impact of Inflation
and Currency Fluctuations"), the costs of our operations in Israel are generally
incurred in NIS. If the inflation rate in Israel exceeds the rate of devaluation
of the NIS against the dollar in any period, the costs of our Israeli
operations, as measured in dollars, could increase. Israel's economy has, at
various times in the past, experienced high rates of inflation.
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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. 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 ("FTA").
The FTA 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 and nations in Eastern Europe.
RISK FACTORS; FORWARD-LOOKING STATEMENTS
The following factors, in addition to other information contained
in this annual report on Form 20-F should be considered carefully.
This annual report on Form 20-F includes certain statements that
are intended to be, and are hereby identified as, "forward looking statements"
for the purposes of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. We have based these forward-looking statements on
our current expectations and projections about future events. These
forward-looking statements are subject to risks, uncertainties, and assumptions
about Gilat, including, among other things:
- our anticipated growth strategies
- our intention to introduce new products
- anticipated trends in our business, including trends in the market for
communication network products and services
- future expenditures for capital projects
- our ability to continue to control costs and maintain quality
These statements may be found in Item 1: "Description of Business"
and Item 9: "Management's Discussion and Analysis of Financial Condition and
Results of Operations,"and in this annual report on Form 20-F generally. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including all the
risks discussed in "Risk Factors" and elsewhere in this annual report on Form
20-F.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this annual report on Form 20-F might
not occur.
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ABILITY TO MANAGE OUR RAPID GROWTH AND EXPANSION
We have grown significantly in the last few years and expect to
continue to grow rapidly. This growth is likely to place a significant strain on
our resources and systems, as we expand our manufacturing, testing, quality
control, delivery and service operations. In particular, we are in the process
of implementing a new management information system to assist in managing our
anticipated growth.
We cannot assure that we will be able to meet all our product
delivery and service commitments, or that we will be able to implement
successfully the new management information system. Inability to manage our
growth effectively will expose us to potential loss of customers, contractual
penalties, damage to reputation and various costs and expense. This could have a
material adverse effect on our business, financial condition and operating
results.
DEPENDENCE ON A LIMITED NUMBER OF LARGE SALES AND LIMITED NUMBER OF PRODUCTS
A significant portion of our sales are derived from large-scale
contracts with major customers. Generally, we are selected as suppliers of these
customers in a bid process. The number of major bids for VSAT-based networks in
any given year is limited and the competition is intense. Our losing a
relatively small number of bids could have a significant adverse impact on our
operating results. In addition, the USPS contract does not require the USPS to
purchase any specific number of VSATs by any specific date. See "Item 1:
Decription of Business--Customers--USPS Transaction."
In addition, in recent years we have derived the largest portion
of single product sales from the sale of our SkyStar Advantage product. Any
change in the market acceptance of this product, or of other key products such
as our telephony products, could have a material adverse effect on our business.
NEED TO DEVELOP, INTRODUCE AND MARKET NEW PRODUCTS AND SERVICES
Our market is characterized by rapid technological changes,
frequent new product announcements and evolving industry standards. Significant
technological changes could render our existing products and technology
obsolete. To be successful, we must anticipate changes in technology and
industry standards and continuously develop and introduce new products and
services as well as enhancements to existing products and services. If we are
unable to address the needs of our customers successfully and to respond to
technological advances on a cost-effective and timely basis, or if new products
are not accepted by the market, then our business, financial condition and
operating results could be adversely affected.
BACKLOG OF ORDERS MAY NOT BE FILLED AND CONTRACTS MAY NOT BE RENEWED
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. See "Item 1: Marketing, Distribution and Strategic
Alliances - Backlog". We may be unable to fill all the backlog or to fully
recognize the revenues expected from this backlog for any of the following
reasons:
- Existing service contracts can be terminated due to customers'
dissatisfaction with the service we provide
- Existing contracts may be terminated because of our inability to timely
provide and install additional products or requested new applications
The loss of existing contracts and a decrease in the number of
renewals of orders or of new large orders, would have a material adverse effect
on our business, financial condition and operating results. In addition, a
portion of our service contracts are short-term with expiration or cancellation
upon 90 days'
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notice or less. If a substantial number of our service customers choose to
cancel or not to renew their contracts, our business could be adversely
affected.
POTENTIAL DELAYS IN THE SUPPLY OR INCREASE IN PRICE OF COMPONENTS REQUIRED TO
BUILD OUR VSATS
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 can not assure the
continuous availability of key components or our ability to forecast our
component requirements sufficiently in advance. Any interruption in supply would
cause delays in manufacturing and shipping products. Those delays and the cost
of developing alternative sources of supply could have a material adverse effect
on our business, financial condition and operating results.
Our research and development and operations groups are working
with our vendors and subcontractors to obtain components for our products in
higher quantities at reduced prices to enable us to lower the overall price of
our products. If we are unable to obtain the necessary volumes on time, or at
optimally low prices, sales of our products may be lower than expected which
could have a material adverse effect on our business, financial condition and
operating results.
DEPENDENCE ON AVAILABILITY OF SATELLITE TRANSPONDER SPACE
Our VSAT-based services depend on satellite transponder space
purchased from third-party suppliers. For networks in the United States, we
primarily use satellite capacity acquired from GE Americom. We also use capacity
on several regional satellites in Western and Eastern Europe, Latin America,
India and other areas of Asia. In connection with our acquisition of Spacenet,
we entered into a series of agreements with GE Americom. These agreements
provide protected services for customer networks on transponders on three
satellites currently operated by GE Americom and on one satellite to be
constructed, operated and launched by GE Americom, as well as certain
preemptible services for in-house use on an additional satellite operated by GE
Americom. See "Item 1: Description of Business-Satellite Capacity" and Item 13:
"Ineerest of Management in Certain Transactions--The Satellite Transponder
Agreements." We cannot assure that this transponder capacity will be sufficient
to meet our growing needs, or that we will be able to obtain additional
transponder space at competitive prices from GE Americom or from other suppliers
should we need to do so. In addition, our transponder service contracts
generally do not provide for alternative services in the event of satellite
failure, and we do not maintain insurance against such failures. Therefore, if a
satellite becomes inoperable, and alternative services are not available, our
revenues would be adversely affected.
POTENTIAL COMPETITION WITH EXISTING CUSTOMERS
As service providers, we compete with certain existing customers
for our products who provide VSAT-related services to end-users. These customers
could consequently sever their business relationships with us or, alternatively,
we may elect to refrain from selling additional products to them. The loss of
those customers, some of whom may be significant, could have a material adverse
effect on our business, financial condition and operating results.
COMPETITION IN THE NETWORK COMMUNICATIONS INDUSTRY
Gilat operates in a highly competitive industry of network
communications. Many 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 may place us at a disadvantage in responding to our
competitors' pricing strategies, technological advances and other initiatives.
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Gilat's principal competitor in the supply of VSAT networks is Hughes
Network Systems ("Hughes"), which offers a full line of VSAT products and
services. Hughes obtains satellite capacity on the satellite system operated by
its affiliates Hughes Galaxy and PanAmSat.
The following table lists additional competitors of Gilat:
<TABLE>
<CAPTION>
COMPETITOR AREA OF COMPETITION
---------- -------------------
<S> <C>
NEC Corporation FaraWay VSAT system
Comstream Corp. FaraWay VSAT system
ViaSat Inc. FaraWay VSAT system
Titan Information Systems Corp. DialAway VSAT system
STM Wireless, Inc. DialAway VSAT system
ACT Networks, Inc. ISAT Frame relay system
Globe Comm Systems Inc. ISAT Frame relay system
Engineering Technical Services Inc. ISAT Frame relay system
</TABLE>
In addition, Gilat competes with various 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, global consortia of PTTs and others.
DEPENDENCE ON PROPRIETARY VSAT TECHNOLOGY
Proprietary rights are important to our success and our competitive
position. We establish and protect the proprietary rights and technology used in
our products by the use of patents, trade secrets, copyrights and trademarks. We
also utilize non-disclosure and invention assignment agreements.
Our actions to protect our proprietary rights may be insufficient to
prevent others from developing similar products to ours. 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.
DEPENDENCE ON OUR KEY MANAGEMENT AND TECHNICAL PERSONNEL
We believe that our success depends on the continued employment of the
following senior management team:
<TABLE>
<CAPTION>
NAME POSITION EMPLOYMENT AGREEMENT
-------------------- -------------------------------------------------------------------- --------------------
<S> <C> <C>
Yoel Gat Chairman and Chief Executive Officer Year-to-year
Amiram Levinberg President and Chief Operating Officer Year-to-year
Yoav Leibovitch Vice President, Finance and Administration and Chief Financial Year-to-year
Officer
</TABLE>
If any of our key personnel is unable or unwilling to continue in his
present position, our business, financial condition and operating results could
be materially adversely affected.
Competition for personnel, particularly for employees with technical
expertise, is intense. Our business, financial condition and operating results
will be materially adversely affected if we cannot hire and retain suitable
personnel.
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DEPENDENCE ON A SINGLE FACILITY MAKES US SUSCEPTIBLE TO 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. In addition, the particular risks
relating to our location in Israel are described below.
RISKS RELATING TO OUR INTERNATIONAL SALES AND OPERATIONS
We sell and distribute our products and also provide our services
internationally, particularly in the United States, Europe and Latin America. A
component of our strategy is to continue to expand into new international
markets, such as China and South America. Our operations can be limited or
disrupted by various factors known to affect international trade. These factors
include the following:
- imposition of governmental controls and regulations
- export license requirements
- political instability
- trade restrictions and changes in tariffs
- difficulties in staffing and managing foreign operations
- longer payment cycles and difficulties in collecting accounts receivable
- seasonal reductions in business activities
DIFFICULTIES IN OBTAINING REGULATORY APPROVALS FOR OUR TELECOMMUNICATION
SERVICES
Our telecommunication services require licenses and approvals by the FCC
in the United States, and by regulatory bodies in other countries. The approval
process can often take substantial time and require substantial resources, and
any approvals that may be granted may be subject to materially adverse
conditions. In addition, even after obtaining the required approvals the
regulating agencies may, at any time, impose additional requirements. We can not
assure our ability to comply with any new requirements on a timely or economic
basis.
LIMITATION ON PRODUCTION OUTSIDE OF ISRAEL AND ON TRANSFER OF TECHNOLOGY
Because some of our products were developed with Israeli governmental
financial support, we cannot manufacture them or transfer the technology
embodied in them outside of Israel without governmental approval. Those
approvals, if granted, may be conditioned, among other things, upon
significantly higher royalty payments to the Israeli government. See "Item 7:
Taxation."
FLUCTUATIONS IN OPERATING RESULTS AND VOLATILITY OF SHARE PRICE
Our operating results may vary significantly from quarter to quarter.
Historically, we have recognized a greater proportion of our revenues in the
last quarter of each year. The causes of fluctuations include, among other
things:
- the timing, size and composition of orders from customers
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- our timing of introducing new products and product enhancements and the level
of their market acceptance
- the mix of products and services we offer
- the changes in the competitive environment in which we operate
The market price of our ordinary shares has been subject to volatility
and could be subject to wide fluctuations in response to numerous factors, many
of which are beyond our control. These factors include the following:
- actual fluctuations or anticipated variations in our operating results
- announcements of technological innovations
- customer orders or new products or contracts
- competitors' positions in the market
- changes in financial estimates by securities analysts
- conditions and trends in the VSAT and other technology industries
- our earnings releases and the earning releases of our competitors
- the general state of the securities markets (with particular emphasis on the
technology and Israeli sectors thereof)
In addition, the stock market in general, and the market for technology
companies in particular, has been highly volatile. Investors may not be able to
resell their shares following periods of volatility. The trading prices of many
technology-related companies' stocks have recently reached historical highs and
have reflected relative valuations substantially above historical levels. These
trading prices may not be sustained.
THE HUGHES LITIGATION AND THE POTENTIAL FOR FURTHER LITIGATION DUE TO
INTELLECTUAL PROPERTY INFRINGEMENTS
On May 8, 2000, Gilat Satellite Networks Ltd. and Spacenet Inc. were
named as defendants in an action filed in the United States District Court for
the District of Maryland. Plaintiff Hughes Electronics Corporation (the parent
of Hughes Network Systems), alleges the infringement of four patents, and seeks
to enjoin further alleged infringement. We do not believe we are infringing the
patents. However, the litigation may continue for an extended period and,
regardless of the outcome of the litigation, may require the expenditure of
significant sums for legal fees, experts, and other related costs, and may
materially adversely affect our business, financial condition and operating
results. If the plaintiff is successful, we might be required to pay license
fees for using the patented technology. 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 could cause us to incur substantial liabilities and
to suspend the manufacture of the products that utilize the patented technology.
In addition, we may be required to redesign our products so as not to use the
patented technology. Such redesign, if possible, could result in substantial
delays in marketing our products, as well as significant costs. We intend to
vigorously defend against these claims.
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In addition, we may, from time to time, be notified of other 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.
POTENTIAL PRODUCT LIABILITY CLAIMS
We may be subject to legal claims relating to the products we sell or the
services 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. 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.
CONCENTRATION OF CONTROL OVER GILAT
GE Americom beneficially owns approximately 18.7% of our outstanding
ordinary shares as of June 15, 2000. GE Americom and several other principal
shareholders, who beneficially own (including options exercisable within 60
days) an additional approximately 9.49% of our ordinary shares, have entered
into a shareholders' agreement. As a result of this agreement, a group of our
principal shareholders, collectively owning only about 28.17% of our outstanding
ordinary shares, is able to exercise effective control over most of our
business. For a review of the shareholders' agreement including certain
exceptions to the above, see "Item 13: Interest of Management in Certain
Transactions--The Shareholders' Agreement." In addition, Israeli law requires a
minimum 75% of the shareholders to approve certain significant corporate
changes, including merger and consolidation. Consequently, subject to the terms
of the Shareholders' Agreement, GE Americom could block approval of such
resolutions.
NO INTENTION TO PAY DIVIDENDS
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. In addition, the terms of some of
our financing arrangements restrict us from paying dividends to our
shareholders.
OUR STOCK SPLIT MAY RESULT IN A DECREASED COMPANY CAPITALIZATION
In February 2000, we announced our intention to split our stock.. The
share split is subject to the approval of the shareholders at the next annual
meeting and we cannot assure that such approval will be given.
Upon the effective date of our stock split, we may experience a decrease
in the share price of our ordinary shares. This decrease in share price may be
temporary although we cannot assure that the price per Ordinary Share will
return to pre-split price levels.
AVAILABILITY OF ISRAELI GOVERNMENT BENEFITS TO OUR COMPANY
Under the Israeli Law for Encouragement of Capital Investments, 1959,
facilities that meet certain conditions can apply for an "Approved Enterprise"
status. This status confers certain benefits including
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tax benefits. All of our existing facilities have been designated as "Approved
Enterprises." Our historical operating results reflect substantial tax benefits
which amount to approximately $3,872,000, $0, and $10,524,000 for 1997, 1998 and
1999, respectively.
In addition, under the Law for Encouragement of Research and Development,
1984, we have received research and development grants from the Office of the
Chief Scientist of the Ministry of Trade and Industry of the State of Israel
(the "Office of the Chief Scientist"). These grants are repayable from royalties
on sales of products developed with these grants. Under the terms of the grants,
we are required to manufacture these products in the State of Israel unless we
receive a permit from the Office of the Chief Scientist to manufacture abroad.
If we receive a permit to manufacture abroad, we may be required to pay a higher
royalty rate on sales of these products, and we may also be required to repay a
greater overall amount. In addition, we have received grants from research
consortia that are partly funded by the Office of the Chief Scientist. The
consortia grants do not require the payment of royalties.
During 1997, 1998, and 1999 we accrued $2,494,00, $2,910,000 and
$2,300,000, respectively in royalty-bearing and non-royalty-bearing grants from
the Office of the Chief Scientist.
The Government of Israel has indicated its intention to reexamine its
policies in these areas. The Israeli Government has also shortened the period of
the tax exemption applicable to "Approved Enterprises" from four years to two
years. This change only applies to our last four "Approved Enterprises" and to
any future "Approved Enterprises" if any. See "Item 1: Description of
Business--Research and Development; Third-Party Funding."
With respect to repayment of grants from the Office of the Chief
Scientist, in 1997, the Government increased the annual rate of royalties from
between 2% to 3% of associated product sales to between 3% and 5% of associated
product sales (including service and other related revenues). Israeli
authorities have also indicated that the grant program may be further reduced in
the future.
We cannot be sure that these and other governmental programs and tax
benefits will be continued in the future at their current levels or at all.
Recently, a committee appointed by the Israel Finance Minister recommended
reducing certain tax benefits. The termination or reduction of the benefits
available to us would significantly increase our costs and could have a material
adverse effect on our business, financial condition and operation results. See
"Item 7: Taxation."
In addition, in order to maintain our eligibility for the grants and tax
benefits we receive, we must continue to meet certain conditions, including
making certain investments in fixed assets and operations. If we fail to meet
such conditions in the future, we could be required to refund tax benefits
already received, with interest and linkage differences to the Israeli Consumer
Price Index (the "Israeli CPI").
IMPACT OF INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
Our international sales expose us to fluctuations in foreign currencies.
Substantially all of our sales are denominated in US dollars. Conversely, a
significant portion of our expenses, mainly salaries, is incurred in NIS and is
linked to the Israeli CPI. When the Israeli inflation rate exceeds the rate of
the NIS devaluation against the foreign currencies, then 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.
RISKS RELATING TO OUR LOCATION IN ISRAEL
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
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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.
Despite the progress towards peace between Israel and its Arab neighbors and the
Palestinians, major hostilities may revive. Such hostilities 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.
Generally, male adult citizens and permanent residents of Israel under
the age of 51 are obligated to perform 14 to 31 days of military reserve duty
annually, depending on their age. Additionally, all such residents are subject
to being 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. See
"Conditions in Israel."
UNCERTAINTY OF ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
Our directors and officers and the Israeli experts named in this annual
report on Form 20-F reside outside the United States. Service of process upon
them may be difficult to effect within the United States. Furthermore, because
the majority of our assets are located in Israel, any judgment obtained in the
United States against us or any of our directors and officers may not be
collectible within the United States.
ITEM 2: DESCRIPTION OF PROPERTY
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. We have also exercised our contractual option to acquire
approximately 79,000 square feet of space, including parking and commercial
space, at a price of approximately $16.6 million including taxes and related
expenses. Preliminary construction has begun and is expected to be completed by
the end of the first quarter 2001. 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.
We currently maintain a 15,000 square foot facility in Yokneam, Israel
which was recently doubled from 7,500 square feet, for software research and
development. Monthly rent is approximately $8,350; and the lease is for five
years, with an option for an additional five years.
The current facility of Gilat Florida in West Melbourne, Florida is
comprised of approximately 31,000 square feet and houses the Gilat Florida
executive, sales, manufacturing, and research and development activities, under
a ten-year lease which began May 1, 1997. Monthly rent is approximately $15,938.
Our offices in McLean, Virginia originally comprised approximately 70,000
square feet, and were recently expanded by an additional approximately 63,000
square feet at a total current monthly rental of approximately $251,000. These
offices house not only our personnel, but also contain one of our U.S. network
operations centers. In June 2000, we signed an agreement and paid a $1 million
escrow deposit for the purchase of the land and building of Spacenet's current
facilities for a purchase price of $24,325,000. We expect to close this purchase
transaction in the third quarter of 2000, although the closing may be delayed.
We currently lease a facility in Marietta, Georgia comprising approximately
70,000 square feet, which is used for a second U.S. network operations center.
The facilities lease is expected to be assigned to GTH for the GTH network
operations center in July 2000. We also maintain
45
<PAGE> 46
space in Manassas, Virginia, Chicago, Illinois and Houston, Texas for sales and
operations personnel and for equipment storage.
Our German operations center leases a 21,000 square foot facility in
Backnang, Germany at a current monthly rental of approximately $25,000. This
space is used by our German-based management, sales and operations personnel and
contains our European network operations center. We recently purchased
approximately 140,400 square feet of land in Backnang for $500,000, on which we
plan to construct a new operations center. We commenced construction of the new
building in 2000 and expect to complete construction by the fourth quarter of
2001, although completion may be delayed.
We maintain offices in Santa Clara, California, Austin, Texas, Sunrise,
Florida, Atlanta, Georgia, Amsterdam, Paris and Hong Kong, and in South America,
in Brazil, Argentina, Chile, Colombia, Mexico, and Peru, along with
representative offices in Beijing, and Melbourne, Australia, London, Prague,
Pretoria, Sao Paulo, Buenos Aires and New Delhi, and small facilities in other
locations. We are currently establishing a representative office in Almaty,
Kazakhstan to provide pre-sales marketing and support and expect to lease office
space under a multi-year lease commencing in the third quarter of 2000.
ITEM 3: LEGAL PROCEEDINGS
We are a party to various legal proceedings incident to our business,
most of which were assumed in our acquisitions and are still the subject of
various indemnities obtained in such acquisitions. 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.
On May 8, 2000, Gilat Satellite Networks Ltd. and Spacenet Inc. were
named as defendants in an action filed in the United States District Court for
the District of Maryland, entitled Hughes Electronics Corporation v. Gilat
Satellite Networks Ltd. and Spacenet Inc. Plaintiff Hughes Electronics
Corporation (the parent of Hughes Network Systems), alleges the infringement of
four patents, and seeks to enjoin further alleged infringement. We intend to
vigorously defend against these claims. We do not believe we are infringing the
patents.
On January 4, 1999, Gilat Satellite Networks Inc. was named as a
defendant in an action filed in the Circuit Court for Montgomery County,
Maryland entitled Hughes Network Systems v. David Shiff, Sheldon Revkin, and
Gilat Satellite Networks, Inc. Plaintiff Hughes Network Systems sought to enjoin
Sheldon Revkin and David Shiff from working for Gilat in its Spacenet
operations, and to enjoin Gilat from employing them for a limited period of
time. On July 9, 1999, Hughes Network Systems voluntarily withdrew the complaint
and amended complaint thereby terminating the action.
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.
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<PAGE> 47
ITEM 4: CONTROL OF REGISTRANT
The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of June 15, 2000 (including
options exercisable within 60 days) with respect to: (i) each person who is
believed by us to be the beneficial owner of more than 5% of the ordinary
shares; and (ii) 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.
<TABLE>
<CAPTION>
NUMBER OF
ORDINARY
SHARES PERCENT OF
BENEFICIALLY ORDINARY
NAME AND ADDRESS OWNED SHARES OUTSTANDING
---------------- ----- ------------------
<S> <C> <C>
GE Americom(1)............................................... 4,308,000 18.67
3135 Flaston Turnpike
Fairfield, Connecticut 06431-0001
Wellington Management Company, LLP(2)........................ 1,377,430 5.97
75 State Street
Boston, Massachusetts 02109
All officers and directors as a group
(22 persons)(3) ............................................. 1,524,489 6.61
</TABLE>
(1) Excludes 292,699 ordinary shares held indirectly by General Electric Company
through various subsidiary companies, including mutual funds and pension
trusts managed by General Electric Company.
(2) Based on information available to Gilat.
(3) Includes 550,841 ordinary shares for which options to 18 executive officers
are currently exercisable within 60 days but have not yet been exercised,
but does not include 182,418 ordinary shares held by DIC Financial
Management Ltd. ("DICFM") and 746,917 Ordinary Share held by DIC Loans Ltd.
("DIC Loans"). DICFM and DIC Loans, Israeli corporations, are controlled by
Discount Investment Corporation Ltd. ("DIC"), which is in turn controlled by
IDB Development Corporation Ltd. ("IDBD"). Companies controlled by Oudi
Recanati, Elaine Recanati, Leon Y. Recanati and Judith Yovel Recanati and
their children, respectively, together beneficially own approximately 51.95%
of the equity and voting power in IDB Holding Corporation Ltd. ("IDBH"), the
parent of IDBD. Elaine Recanati is the aunt of Oudi Recanati, Leon Y.
Recanati and Judith Yovel Recanati: Leon Y. Recanati and Judith Yovel
Recanati are brother and sister. Leon Y. Recanati is co-Chairman of the
Board of Directors and co-Chief Executive Officer of IDBH and co-Chairman of
the Board of Directors of IDBD. Based on the foregoing, IDBH and IDBD (by
reason of their control of DIC), DIC (by reason of its control of DICFM and
DIC Loans) and Oudi Recanati, Elaine Recanati, Leon Y. Recanati and Judith
Yovel Recanati, may be deemed to share with DICFM and DIC Loans the power to
vote and dispose of the ordinary shares held by such companies. For
information with respect to a voting agreement and shareholders agreement
entered into by certain shareholders, see "Item 13: Interest of Management
in Certain Transactions."
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<PAGE> 48
ITEM 5: NATURE OF THE TRADING MARKET
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:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997:
First Quarter......... $36.500 $26.625
Second Quarter........ $36.750 $27.000
Third Quarter......... $37.063 $31.250
Fourth Quarter........ $40.500 $27.000
1998:
First Quarter......... $36.500 $22.500
Second Quarter........ $39.250 $30.500
Third Quarter......... $46.125 $32.313
Fourth Quarter ...... $56.375 $37.500
1999:
First Quarter......... $63.000 $52.250
Second Quarter ....... $60.750 $47.125
Third Quarter......... $62.375 $42.313
Fourth Quarter ...... $121.125 $43.063
2000:
First Quarter......... $172.000 $103.500
Second Quarter (to June 15) $124.125 $68.563
</TABLE>
As of June 15, 2000 there were 113 record holders of ordinary shares, of
which 101 represented U.S. record holders owning an aggregate of approximately
97.0% of the outstanding ordinary shares.
We have never paid cash dividends to our shareholders and we currently do
not intend to pay dividends for the foreseeable future. We intend to reinvest
earnings in the development and expansion of 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 note 10 of
Notes to the Consolidated Financial Statements listed in Item 19. We may only
pay cash dividends in any fiscal year out of "profits," as determined under
Israeli law. In addition, the terms of certain 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.
In February 2000, we announced our intention to split our stock. The
share split is subject to the approval of the shareholders at the next annual
meeting and we cannot assure that such approval will be given.
ITEM 6: EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
Non-residents of Israel who purchase any of our ordinary shares with
certain non-Israeli currencies (including the dollar) will be able to convert
dividends, liquidation distributions and the proceeds from the sale of such
ordinary shares into freely repatriable non-Israeli currencies at the rate of
48
<PAGE> 49
exchange prevailing at the time of conversion (provided that Israeli Income Tax
has been paid or withheld on such amounts).
ITEM 7: TAXATION
The following is a short summary of certain Israeli tax consequences to
persons holding our ordinary shares. 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.
On May 4, 2000, a special committee appointed by the Israeli Minister of
Finance for the purpose of reviewing the Israeli system of direct taxation
submitted its report. The report makes several recommendations that if enacted
into law by the Israeli Parliament may have substantial tax implications on us
and our shareholders. The Israeli Government adopted the recommendations, with
the intention that the applicable legislation will be effective as of January 1,
2001. During the legislative process, the recommendations contained in the
Report may be subject to substantial changes. References to the recommendations
in their current form are included in the discussion below.
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 United States resident
(as defined in the Treaty) is 25%.
Israeli law imposes a capital gains tax on the sale of securities and
other capital assets. Under current law, however, gains from sales of the
ordinary shares of Gilat are exempt from Israeli capital gains tax for so long
as (i) the shares are quoted on Nasdaq or 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. The report recommends revoking this exemption with the
effect that Israeli and foreign individual investors would generally be subject
to a 25% capital gain tax upon realization of their investment. This
recommendation will not, however, affect the Treaty. Under the Treaty, a holder
of ordinary shares who is a United States resident will be exempt from Israeli
capital gains tax on the sale, exchange or other disposition of such ordinary
shares unless such holder owns, directly or indirectly, 10% or more of the
voting power of Gilat.
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. Israel presently has no estate or gift tax, though the
report recommends introducing these taxes.
In addition, the report recommends increasing to 25% the corporate tax
rate available under the Law for the Encouragement of Capital Investments, 1959,
during certain portions of the Approved Enterprise benefits period to companies
owned in whole or in part by foreign investors. Currently, depending on the
percentage of foreign ownership, this rate can be as low as 10%, , and as high
as 25%, which is the corporate tax rate available to the Approved Enterprises of
companies without any foreign ownership. Furthermore, the Report recommends
revoking a current exemption available to income of Approved Enterprises that is
not distributed as a cash dividend and, setting a corporate tax rate of 10% for
profits generated during certain portions of the Approved Enterprise benefits
period.
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<PAGE> 50
ITEM 8: SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data set forth below
with respect to the years ended December 31, 1995, 1996, 1997, 1998 and 1999 and
the consolidated balance sheet data as of December 31, 1995, 1996, 1997. 1998
and 1999 have been prepared in accordance with Israel GAAP and audited by
Kesselman & Kesselman, independent certified public accountants in Israel and a
member of PricewaterhouseCoopers International Limited. Israeli GAAP varies in
certain aspects from U.S. GAAP as described in notes 7 and 15f to the
Consolidated Financial Statements. The selected consolidated financial data set
forth below should be read in conjunction with Item 9: "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and notes thereto included in Item 19 in this
Form 20-F.
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<PAGE> 51
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1995(1) 1996(1) 1997 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ........................................ $54,532 $74,126 $103,690 $155,335 $337,873
--------- --------- --------- --------- ---------
Cost of Revenues:
Cost of products sold and revenue rendered ... 31,483 42,917 58,742 86,603 220,139
Write-off of inventories associated with
restructuring ................................ 9,495 4,634
--------- --------- --------- --------- ---------
31,483 42,917 58,742 96,098 224,773
--------- --------- --------- --------- ---------
Gross profit .................................... 23,049 31,209 44,948 59,237 113,100
--------- --------- --------- --------- ---------
Research and development costs:
Expenses incurred ........................... 6,532 8,129 10,615 15,815 27,159
Less-grants ................................. 1,066 1,913 2,494 3,035 2,368
--------- --------- --------- --------- ---------
5,466 6,216 8,121 12,780 24,791
Acquired research and development ........... 80,000
--------- --------- --------- --------- ---------
Net research and development costs .............. 5,466 6,216 8,121 92,780 24,791
--------- --------- --------- --------- ---------
Selling, general and administrative expenses .... 9,544 13,945 20,321 29,077 68,414
--------- --------- --------- --------- ---------
8,039 11,048 16,506 (62,620) 19,895
Restructuring charges ........................... 11,989* (356)
Merger expenses ................................. 7,991
--------- --------- --------- --------- ---------
Operating income (loss) ......................... 8,039 3,057 16,506 (74,609) 20,251
Financial income (expenses)--net ................ 575 1,170 538 (1,247) 3,267
Write-off of investments associated with
restructuring ................................... (2,700) (896)
Other income --net .............................. 1,329 30 162
--------- --------- --------- --------- ---------
Income (loss) before taxes on income ............ 8,614 5,556 17,074 (78,394) 22,622
Taxes on income ................................. 84 130 286 2,475
--------- --------- --------- --------- ---------
Income (loss) after taxes on income ............. 8,614 5,472 16,944 (78,680) 20,147
Share in losses of associated companies ......... 703 536
--------- --------- --------- --------- ---------
Net income (loss) ............................... $8,614 $5,472(2) $16,944 ($79,383) $19,611
========= ========= ========= ========= =========
Earnings(loss) per share under U.S. GAAP
Basic ....................................... $0.92 $0.51(2) $1.56 ($7.18)(3) $0.96
========= ========= ========= ========= =========
Diluted...................................... $0.89 $0.50(2) $1.51 ($7.18)(3) $0.92
========= ========= ========= ========= =========
Weighted average number of shares used in
computation of earnings (loss) per share - in
thousands under U.S. GAAP........................
Basic ....................................... 9,413 10,816 10,895 11,059 20,447
========= ========= ========= ========= =========
Diluted ..................................... 9,632 11,049 11,255 11,059 21,429
========= ========= ========= ========= =========
Earnings (loss) per share under Israeli GAAP
Basic ........................................ $0.89 $0.50 $1.50 *($6.37) $0.83
========= ========= =========
Diluted ...................................... $0.89 $0.50 $1.47 *($6.37) $0.83
========= ========= =========
Weighted average number of shares used in
computation of earnings (loss) per share - in
thousands under Israeli GAAP
Basic ........................................ 9,829 11,355 11,448 12,121 25,177
========= ========= ========= ========= =========
Dilluted ..................................... 9,829 11,355 12,152 12,121 25,177
========= ========= ========= ========= =========
</TABLE>
----------
* RESTATED, SEE NOTE 1Q TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
51
<PAGE> 52
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
BALANCE SHEET DATA: ................. 1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital ..................... $61,623 $61,632 $85,081 $89,227* $265,307
Total assets ........................ 97,423 112,201 211,960 401,284* 678,853
Short-term bank credit and current
Maturities of long-term debt ..... 4,806 582 2,719 23,158 6,986
Long-term ........................... 13 - - 284 8,089
liabilities
Convertible subordinated notes....... - - 75,000 75,000 75,000
Shareholders' equity ................ 81,563 89,758 108,338 222,620* 499,823
</TABLE>
--------------------------
(1) Includes the results of Gilat Florida into which a wholly-owned subsidiary
of Gilat was merged on December 30, 1996, and accounted for pursuant to the
pooling-of-interests method.
(2) If the merger expenses associated with the Gilat Florida Merger had not been
included in Gilat's results, net income for the year ended December 31, 1996
would have been approximately $13,463,000 and basic earnings per share for that
year would have been $1.24 and diluted earnings per share would have been $1.22.
(3) If the restructuring charges, write offs associated with restructuring and
expenses related to acquired research and development associated with the
Spacenet Acquisition had not been included in Gilat's results, net income for
the year ended December 31, 1998 would have been approximately $24,801,000 and
basic earnings per share under U.S. GAAP for that year would have been $2.24 and
diluted earnings per share under U.S. GAAP would have been $2.14.
----------
* RESTATED, SEE NOTE 1Q TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE> 53
ITEM 9: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Gilat commenced operations in 1987 and 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 product lines 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.
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 from our OneWay and Skystar
Advantage products. Additionally, we began marketing the FaraWay VSAT in 1994,
the DialAway VSAT at the end of 1996, the SkySurfer VSAT in 1997, and the
SkyBlaster VSAT in 1999. The Skystar Advantage is our largest-selling product,
accounting for approximately 49% of our sales revenue during 1998, and for
approximately 49% of our sales revenue during 1999.
On December 30, 1996, we acquired Gilat Florida (previously named
Skydata, Inc.), a company engaged in the development, manufacturing and
marketing of VSAT-based paging and broadcast products. The transaction was
effected through the merger of a wholly-owned subsidiary of Gilat into Gilat
Florida. The merger was accounted for as a pooling of interests. Accordingly,
Gilat's financial information has been restated to retroactively include the
accounts and operations of Gilat Florida prior to 1996.
On December 31, 1998, we acquired Spacenet. The acquisition was accounted
for by the purchase method. Prior to the acquisition, Gilat and Spacenet had
engaged in a strategic alliance for a number of years. Spacenet was the largest
customer of Gilat's products, with aggregate sales to Spacenet representing
approximately 28%, 34% and 45% of Gilat's total sales in 1996, 1997 and 1998,
respectively. With the acquisition of Spacenet, we have begun to offer
satellite-based network services as well as products. For a discussion of
certain continuing acquisition-related commitments, see "Item 13: Interest of
Management in Certain Transactions"
In February 1999 we completed the offering of 5,456,750 ordinary shares,
of which 4,711,750 ordinary shares were sold by Gilat and 745,000 by certain
shareholders. The proceeds to Gilat, before expenses but after the underwriters
discount, were $257,826,960.
In February 2000, we completed a private offering of $350 million of
4.25% convertible subordinated notes due in 2005. The notes are convertible into
our ordinary shares at a conversion price of $186.18 per share. Each note bears
annual interest of 4.25% payable semiannually.
In March 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"), and a one year warrant to purchase an
additional 20 million units at the same unit price. We also granted KBC a five
year warrant to purchase approximately 191,000 of our ordinary shares at a
purchase price of $157.05 per share, and a five year option to acquire equipment
and services. Acquisitions of equipment and services made pursuant to this
option in the first two years will be paid for by KBC with up to 20 million
units of KBC valued at the original purchase price, and thereafter, on terms to
be agreed by the parties. KBC is a web-based media company that distributes
content using interactive broadband satellite and other technologies.
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<PAGE> 54
In April 2000, we completed the funding and formation of U.S.-based
Gilat-To-Home Inc., a joint venture with Microsoft Corporation, EchoStar
Communications Corporation, and ING Furman Selz. Gilat-To-Home was formed to
provide satellite-based broadband Internet services to consumers in the U.S.
Following the collective investment of $125 million by the other parties to this
joint venture, Gilat, along with certain related parties, holds approximately
51% of Gilat-To-Home, on a fully diluted basis including shares reserved for
options to be granted to employees but not including warrants and debt
conversion rights issued as part of bank financing..
In addition, in April 2000, we completed a share purchase transaction
pursuant to which we, together with certain employees, now hold 100% of GTH LA
(Antilles) (formerly named Global Village Telecom (Netherlands Antilles) N.V
("GVT Antilles")). This transaction is more fully described in "Item 1:
Description of Business -- Strategic Alliances and Joint Ventures". GVT Antilles
was established to operate rural telephony communications networks, mostly in
developing countries and is now part of our planned consumer Internet initiative
in Latin America. This acquisition expands our presence in South America and
provides existing on-ground VSAT networks.
In June 2000, we exercised our right to redeem our 6 1/2% convertible
subordinated notes issued on May 14, 1997 and due on June 1, 2004. The notes
were redeemable in full at 102% of the principal amount plus accrued and unpaid
interest, setting the redemption price per $1,000 note at $1,020.72. All of the
note holders opted to convert their notes into Gilat's ordinary shares prior to
the redemption date and we consequently issued 1,785,695 ordinary shares to such
holders.
We earn revenue from sales of our satellite-based networking products 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, the types of technologies and
protocols employed and the degree of customization or development required to
implement the network.
In the case of product sales, we recognize revenue when the product is
shipped. The present value of payments due under sales-type lease contracts are
recorded as revenues and cost of sales is charged with the book value of
equipment at the time of shipment. Future interest income is deferred and
recognized over the related lease term. We recognize revenues from long-term
contracts on the percentage-of-completion method, measured using the ratio of
material costs incurred to date to estimated total material costs for each
contract. Spacenet generally has two ways of recognizing revenue, depending on
whether or not the customer takes ownership of the network equipment. In the
first type of network services sale, the customer purchases hardware, software,
and satellite capacity and maintenance services, and Spacenet records revenue
when the network is installed and operational (or, in cases where the customer
obtains its own installation services, when the equipment is shipped). In many
of these cases, Spacenet is paid progress payments upon signing, achievement of
certain milestones and installation. For ongoing maintenance, satellite capacity
and support services, customers pay monthly fees, which are recorded as service
revenues.
In the other type of network services sale, Spacenet procures and
installs the equipment and software, obtains the satellite capacity and provides
network operations and monitoring for the customer over the contract term
(generally three to five years). Under this type of network services sale,
Spacenet retains ownership and operation of the network, and receives a monthly
service fee (and recognizes revenue) over the term of the contract. Since our
acquisition of Spacenet, these networking service arrangements have grown and we
expect that they will continue to grow as a percentage of our revenue. As a
result, a growing portion of the VSAT equipment we manufacture is capitalized on
our balance sheet and has resulted in an increase in our capital expenditures.
We also believe that the growth of our business may result in an increase of our
inventory and receivables levels and increased working capital needs. We
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<PAGE> 55
intend to meet such anticipated increases in capital expenditures and working
capital with cash on hand. See "--Liquidity and Capital Resources."
We have started to depreciate the cost of the equipment used in our
network service offerings on a 5-year basis. Our service contracts, however, may
be for periods of as little as 3 years, which may require us to write-off the
unamortized cost of the equipment in the event the contract is not renewed and
we are unable to place such equipment with other customers. We expect, however,
that most of our customers will elect to renew their service contracts and that
we will not be required, in most instances, to effect such write-offs.
Cost of revenues, for both products and services, includes the cost of
system design, equipment, satellite capacity, software customization 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. As a result of the Spacenet
acquisition, we incurred aggregate restructuring expenses of $29.4 million for
the two years ended December 31, 1999. In addition, Spacenet incurred a charge
of approximately $12.4 million to eliminate unnecessary inventory and property,
plant and equipment, which is included in the goodwill and $33.6 million in
expenses related to the replacement and upgrade of certain legacy VSAT network
equipment used by certain Spacenet customers. We replaced approximately 75% of
this legacy equipment in 1999 and expect to replace the remainder in 2000. In
1999, most equipment replacements were accompanied by the customers' entry into
long-term network services contracts.
We devote significant resources to research and development of all our
products. Our initial research and development was funded by the Israel-U.S.
Binational Industrial Research and Development Foundation ("BIRD"), but
currently none of our research and development is funded by BIRD. In Israel, a
portion of our research and development expenditures is funded by the Office of
the Chief Scientist of the Ministry of Industry and Trade (the "Office of the
Chief Scientist"). We have also received, and expect to continue to receive,
grants through participation in research consortia, which are funded by the
Office of the Chief Scientist, as well as grants from research and development
programs sponsored by the European Commission and the U.S.-Israel Science and
Technology Foundation ("USISTF"). We expect, however, that the amount of funding
from the Office of the Chief Scientist will decrease due to Israeli budgetary
constraints.
During 1998 and 1999, approximately 19.2% and 8.7%, respectively, of our
research and development expenditures before acquired research and development,
were covered by the Office of the Chief Scientist, the research consortia,
USISTF, and the European Commission. Under the terms of the funding provided
during these and earlier years by the Office of the Chief Scientist, BIRD, and
USISTF, we are required to pay royalties on sales of the products developed from
the funded project until an amount ranging from 100% to 150% of the grants has
been repaid. Grants received through participation in the research consortia and
under the European Commission program do not require the payment of royalties.
Royalties to the Office of the Chief Scientist and BIRD, which are included in
selling, general and administrative expenses, were $820,000 during 1998 and
$719,000 during 1999. To date, we have not made any sales in connection with the
USISTF project and consequently have not accrued or paid any royalties to
USISTF.
Selling, general and administrative expenses also include sales and
marketing costs, customer support, accounting and administration. We expect that
selling, general and administrative expenses will increase in total amount over
the next few years as sales efforts are expanded.
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Substantially all of our production facilities in Israel are eligible for
certain tax benefits. As a result, we expect that a substantial part of our
income for 2000 and 2001 will be tax exempt, while the balance will be taxed at
rates ranging from of 15% to 36%. See "--Effective Corporate Tax Rate."
As part of the Merger Agreement, GE Americom and certain of its
affiliates were committed to purchase $37.5 million of our products through the
end of 1999. GE Americom agreed to pay us a credit against service fees owed to
GE Americom under certain satellite transponder service agreements, equal to 40%
of any shortfalls in this purchase commitment. GE Americom did not purchase any
of our equipment in 1999 and therefore we were entitled to a credit equal to 40%
of the full amount of $37.5 million, or $15 million, which was recorded as
revenues in 1999. In addition, pursuant to two settlement agreements entered
into by the parties in December 1999, GE Americom paid us $25 million for
post-closing adjustments and undisclosed liabilities related to the Merger, and
for reimbursement of expenses.
The currency of the primary economic environment in which most of our
operations are conducted is the dollar, and as such, we use the dollar as our
functional currency. Transactions and balances originally denominated in dollars
are presented at their original amounts. Gains and losses arising from
non-dollar transactions and balances are included in the determination of net
income.
RESULTS OF OPERATIONS OF GILAT
The following table sets forth, for the periods indicated, the percentage
of revenues represented by certain line items from Gilat's consolidated
statements of income.
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
ADJUSTED ADJUSTED
1997 1998 1998(1) 1999 1999(2)
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues ...................................... 100.0% 100.0% 100.0% 100% 100%
Cost of Revenues .............................. 56.7 61.9 55.8 66.5 55.6
------ ------ ------ ------ ------
Gross profit .................................. 43.3 38.1 44.2 33.5 44.4
------ ------ ------ ------ ------
Research and development costs
Expenses incurred ...................... 10.2 10.2 10.2 8.0 8.0
Less - grants .......................... 2.4 2.0 2.0 0.7 0.7
------ ------ ------ ------ ------
7.8 8.2 8.2 7.3 7.3
Acquired research and development ...... 0.0 51.5 0.0 0.0 0.0
------ ------ ------ ------ ------
Net research and development costs ..... 7.8 59.7 8.2 7.3 7.3
------ ------ ------ ------ ------
Selling, general and administrative expenses .. 19.6 18.7 18.7 20.3 19.9
------ ------ ------ ------ ------
Restructuring charges ......................... 0.0 *7.7 0.0 (0.1) 0.0
Operating income (loss) ....................... 15.9 (48.0) 17.3 6.0 17.2
Financial income (expenses) - net ............. 0.5 (0.8) (0.8) 1.0 1.0
Write-off of investments associated with
restructuring ........................... 0.0 (1.7) 0.0 (0.3)
Other income - net ............................ 0.0 0.1 0.1 0.0 0.0
------ ------ ------ ------ ------
Income (loss) before taxes on income .......... 16.4 (50.4) 16.6 6.7 18.2
Taxes on income ............................... 0.1 0.2 0.2 0.7 0.7
------ ------ ------ ------ ------
Income (loss) after taxes on income ........... 16.3 (50.6) 16.4 6.0 17.5
Share in losses of associated companies ....... 0.0 0.5 0.5 0.2 0.2
------ ------ ------ ------ ------
Net income (loss) ............................. 16.3% (51.1)% 15.9% 5.8% 17.3%
====== ====== ====== ====== ======
</TABLE>
*RESTATED, SEE NOTE 1Q TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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(1) Results of operations for year ended December 31, 1998, excluding the
Spacenet restructuring charges, write-offs associated with restructuring and
expenses related to acquired research and development of approximately
$104.2 million.
(2) Results of operations for year ended December 31, 1999, excluding expenses
associated with the Spacenet acquisition and restructuring of approximately
$38.8 million.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Our revenues increased by 117.5% to approximately $337.9
million in 1999 from approximately $155.3 million in 1998. The growth in
revenues was attributable primarily to the acquisition of Spacenet on December
31, 1998, which allowed us to expand our revenue base from primarily
manufacturing and selling VSAT equipment to service revenues based on the
offering of complete end-to-end telecommunications and data networking
solutions. In addition, we experienced an increase in demand for Skystar
Advantage products, and for SkyBlaster following its introduction in 1999. This
was partly offset by downward pressure on prices in the industry.
GROSS PROFIT. Gross profit increased by 90.9% to approximately $113.1
million in 1999 from approximately $59.2 million in 1998. The gross profit
margin decreased to 33.5% in 1999 from 38.1% in 1998 due to expenses related to
migration from offering Spacenet's Clearlink system to offering our Skystar
Advantage, and a write-off of inventories associated with restructuring. In our
1998 financial statements, goodwill was restated and decreased by $21 million
for expenses related to migration from Clearlink to Skystar Advantage,
inventories were restated and increased by $12 million, accrued expenses were
restated and decreased by $11.3 million, and retained earnings were restated and
increased by $2.3 million. The actual migration expenses were included in the
1999 expenses, mainly in cost of goods sold. If such migration expenses and
write-off of inventories had not been included, our gross profit margin would
have increased to 44.4% in 1999 from 44.2% in 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
1998 included $80 million for a write-off of acquired in-process research and
development associated with the Spacenet acquisition. In-process research and
development expenses arise from new product development projects that are in
various stages of completion at the acquired enterprise at the date of
acquisition. Gross research and development costs without the acquired
in-process research and development increased by 71.7% to approximately $27.2
million in 1999, from approximately $15.8 million in 1998, and as a percentage
of revenues, decreased to 8.0% in 1999 from 10.2% in 1998, mainly due to the
rapid increase in revenues including from services, which by nature do not
require significant R&D resources. The dollar increase in such costs in 1999 was
primarily due to hiring additional research and development personnel; the
further development of the SkyBlaster, Skystar Advantage and FaraWay product
lines; the expansion of research and development to reduce the costs and
increase the functionality of our interactive VSAT product lines, and conducting
generic research relating to our participation in research consortia. Research
and development grants, as a percentage of gross research and development costs,
decreased to 8.7% in 1999 compared to 19.2% in 1998. Research and development
costs, without acquired research and development showed a net increase to
approximately $24.8 million in 1999 from approximately $12.8 million in 1998,
and a decrease as a percentage of sales to 7.3% in 1999 from 8.2 % in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 135.3% in 1999 to approximately $68.4
million from approximately $29.1 million in 1998. As a percentage of revenues,
selling, general and administrative expenses increased to 20.3% in 1999 from
18.7% in 1998. Selling, general and administrative expenses include expenses
related to migration from Clearlink to Skystar Advantage. If such migration
expenses had not been included, the selling, general and administrative expenses
would have increased by 131.0% in 1999 to approximately $67.2 million, or 19.9%
as a percentage of revenues. Increased expenditures in 1999 were primarily
attributable to the consolidation of Spacenet and the expansion of our marketing
and selling efforts through the hiring of personnel, and the opening of new
offices around the world.
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RESTRUCTURING CHARGES AND RELATED EXPENSES. Restructuring expenses as a
result of the Spacenet acquisition other than inventory write-offs and write-off
of investments which are presented in other lines, were $0.4 million lower than
was recorded in 1998. Inventory write-offs relating to rationalization of
product lines which are presented in cost of revenues, were $4.6 million higher
than was recorded in 1998, and write-offs of investments associated with
restructuring were $0.9 million higher than was recorded in 1998. Restructuring
charges in 1998 were restated by a decrease of $2.25 million, as explained in
note 1q to notes to the Consolidated Financial Statements.
OPERATING INCOME (LOSS). Operating income increased to approximately
$20.3 million in 1999 from a loss of approximately $74.6 million after
restatement as explained in the preceding paragraph in 1998, primarily due to
the expenses related to migration from Clearlink to Skystar Advantage,
restructuring charges, write-offs associated with restructuring, and expenses
related to acquired research and development as described above. If expenses
related to the migration, restructuring charges, write-offs associated with
restructuring and expenses related to acquired research and development had not
been included, operating income would have been $58.2 million for the year ended
December 31, 1999, compared to $26.9 million for the year ended December, 1998,
an increase of 116.4%, with the increase due primarily to increased sales.
FINANCIAL INCOME (EXPENSES), NET. Financial income, net amounted to
approximately $3.3 million in 1999, compared to financial expenses, net of
approximately $1.2 million in 1998, mainly due to interest income on bank
deposits from our public offering in February, 1999.
TAXES ON INCOME. Taxes on income were approximately $2.5 million in 1999
compared to approximately $0.3 million in 1998.
SHARE IN LOSSES OF ASSOCIATED COMPANIES. Share in losses of associated
companies was approximately $0.5 million in 1999, compared to approximately $0.7
million in 1998.
NET INCOME (LOSS). As a result of all the foregoing factors, we had net
income of approximately $19.6 million in 1999 compared to a loss of
approximately $79.4 million, after restatement as explained above, in 1998. If
migration expenses, restructuring charges, write-offs associated with
restructuring and expenses related to acquired research and development had not
been included in the results, net income for the year ended December 31, 1999,
would have been $58.4 million compared to $24.8 million for the year ended
December 31, 1998, an increase of 135.6%.
EARNINGS (LOSS) PER SHARE. Basic earnings per share for 1999 under U.S.
GAAP was $0.96 per share ($0.83 per share under Israeli GAAP) as compared to
basic loss per share of $7.18 per share ($6.37 per share under Israeli GAAP) in
1998. Diluted earnings per share for 1999 was $0.92 per share ($0.83 per share
under Israeli GAAP) as compared to diluted loss per share of $7.18 per share
($6.37 per share under Israeli GAAP) in 1998. If migration expenses,
restructuring charges, write-offs associated with restructuring and expenses
related to acquired research and development had not been included in the
results, basic earnings per share for 1999 under U.S. GAAP would have been $2.86
per share as compared to $2.24 in 1998, and diluted earnings per share for 1999
under U.S. GAAP would have been $2.73 per share as compared to $2.14 in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Our revenues increased by 49.8% to approximately $155.3 million
in 1998 from approximately $103.7 million in 1997. The growth in revenues was
attributable primarily to a substantial increase in sales of telephony products
(FaraWay and DialAway) as well as increased sales of Skystar Advantage products
and Internet Protocol ("IP") based products. The increase in revenues was partly
offset by downward pressure on prices in the industry.
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GROSS PROFIT. Gross profit increased by 31.8% to approximately $59.2
million in 1998 from approximately $44.9 million in 1997. Our gross profit
margin decreased to 38.1% in 1998 from 43.3% in 1997 due to write-off of
inventories associated with restructuring. If such write-off had not been
included, our gross profit margin would have increased to 44.2% due primarily to
a relative decrease in our cost of revenues as a result of more efficient
manufacturing processes, lower cost of components and a change in the overall
product mix.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include $80 million for the write-off of acquired in-process research and
development associated with the Spacenet acquisition. In-process research and
development expenses arise from new product development projects that are in
various stages of completion at the acquired enterprise at the date of
acquisition. Gross research and development costs without acquired research and
development increased by 49.0% to approximately $15.8 million in 1998, from
approximately $10.6 million in 1997 and as a percentage of revenues remained at
the same level of 10.2% in 1998 as in 1997. The dollar increase in such costs in
1998 was due primarily to the hiring of additional research and development
personnel, the further development of the FaraWay, SkySurfer and SkyBlaster
product lines for corporate and rural telephony applications, the expansion of
research and development to reduce the costs and increase the functionality of
our unidirectional and interactive VSAT product lines, including IP-based
products, as well as ISAT and paging receiver products and to conducting generic
research relating to the research consortia. Research and development grants, as
a percentage of gross research and development costs, decreased to 19.2% in 1998
compared to 23.5% in 1997. Research and development costs, without acquired
research and development net increased to approximately $12.8 million in 1998
from approximately $8.1 million in 1997, and increased as a percentage of
revenues to 8.2% in 1998 from 7.8% in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 43.1% in 1998 to approximately $29.1
million from approximately $20.3 million in 1997. As a percentage of revenues,
selling, general and administrative expenses decreased to 18.7% in 1998 from
approximately 19.6% in 1997. Increased expenditures in 1998 were primarily
attributable to the expansion of our marketing and selling efforts through the
hiring of personnel, increased commissions paid to sales personnel, agents and
distributors, and the opening of new offices.
RESTRUCTURING CHARGES AND RELATED EXPENSES. As a result of the Spacenet
acquisition, we incurred restructuring charges of $12.0 million after
restatement, as explained in note 1q to Notes to the Consolidated Financial
Statements, for the year ended December 31, 1998, mainly for compensation to
customers and other third parties, $9.5 million of inventory write-offs relating
to rationalization of product lines, which are presented in cost of revenues and
$2.7 million of write-off of investments associated with restructuring.
OPERATING INCOME (LOSS). Our operating income decreased to a loss of
approximately $74.6 million after restatement, as explained in note 1q to Notes
to the Consolidated Financial Statements, in 1998 from an income of
approximately $16.5 million in 1997, primarily due to the restructuring charges,
write offs associated with restructuring and expenses related to acquired
research and development as described above. If restructuring charges, write
offs associated with restructuring and expenses related to acquired research and
development had not been included, operating income would have been $26.9
million for the year ended December 31, 1998, (representing an increase of 62.8%
over 1997) with the increase due primarily to increased revenues.
FINANCIAL INCOME (EXPENSES), NET. Financial expenses, net amounted
approximately to $1.2 million in 1998, compared to financial income, net of
approximately $0.5 million in 1997, mainly due to payment of interest on
subordinated notes while related interest earned on deposits in banks decreased
due to use of funds.
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SHARE IN LOSSES OF ASSOCIATED COMPANIES. Share in losses of associated
companies was approximately $0.7 million in 1998 with no parallel amount in
1997.
NET INCOME (LOSS). As a result of all the foregoing factors, we had a
loss of approximately $79.4 million in 1998, after restatement as explained in
note 1q to Notes to the Consolidated Financial Statements, in comparison to net
income of approximately $16.9 million in 1997. If restructuring charges, write
offs associated with restructuring and expenses related to acquired research and
development had not been included in the Company's results, the net income for
the year ended December 31, 1998, would have been $24.8 million (representing an
increase of 46.4% over 1997).
EARNINGS (LOSS) PER SHARE. Basic loss per share for 1998 under U.S. GAAP
was $ 7.18 per share ($6.37 per share under Israeli GAAP) after restatement, as
explained in note 1q to Notes to the Consolidated Financial Statements, as
compared to basic earnings per share of $1.56 per share ($1.50 per share under
Israeli GAAP) in 1997. Diluted loss per share after restatement for 1998 was
$7.18 per share ($6.37 per share under Israeli GAAP) as compared to diluted
earnings per share of $1.51 per share ($1.47 under Israeli GAAP) in 1997. If
restructuring charges, write offs associated with restructuring and expenses
related to acquired research and development had not been included in the our
results, basic earnings per share for 1998 would have been $2.24 per share and
diluted earnings per share for 1998 under U.S. GAAP would have been $2.14 per
share.
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 the Skystar Advantage and FaraWay
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 us and our competitors. We cannot be sure that the
growth in revenues, gross profit and net income achieved by us in prior quarters
will continue or 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. 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.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, our financing requirements have been met primarily
through cash generated by operations, funds generated by private equity
investments in 1990 and 1991, our public offerings in 1993 (approximately $24.5
million) 1995 (approximately $37.5 million), and 1999 (approximately 254.5
million), and our issuance of convertible subordinated notes in 1997
(approximately $71.8 million) and 2000 (approximately $338.8 million), 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 intend to meet our anticipated increases in capital expenditures and
working capital requirements with cash-on-hand.
We have used available funds primarily for working capital. In 1999,
funds were used to increase trade receivables by approximately $40.0 million,
other receivables by approximately $79.5 million, accrued expenses decreased by
approximately $6.8 million, and approximately $16.2 million were used to
decrease short term bank credit. Funds were also used to increase investment in
companies by approximately $11.9 million and property, plant and equipment by
approximately $92.0 million in 1999. This increase in property, plant and
equipment represents a portion of our investment in our new facility in Petah
Tikva, Israel, as well as additional purchases of computer and electronic
equipment and office furniture and equipment. Approximately $14.7 million was
provided by an increase in trade payables, approximately $13.0 million was
provided by an increase in other payables (including other long-term
liabilities), and approximately $13.9 million was provided by a decrease in
inventories. The decrease in inventories was due to migration from Clearlink to
Skystar Advantage.
As of December 31, 1999, we had approximately $94.9 million in cash, cash
equivalents and short-term bank deposits and approximately $50.0 million of
long-term bank deposits, compared to approximately $7.6 million in cash, cash
equivalents and short-term bank deposits and approximately $40.7 million of
long-term bank deposits as of December 31, 1998. Our ratio of shareholders'
equity to total assets as of December 31, 1999, increased to 73.6% from 55.5%,
after restatement, as explained in note 1q of Notes to the Consolidated
Financial Statements, as of December 31, 1998.
As of December 31, 1999, we had a bank line of credit of approximately
$10 million with Israel Discount Bank Ltd. (an affiliate of one of our major
shareholders), under which approximately $4.6 million of short-term debt was
outstanding as of that date. We also had a bank line of credit of approximately
$24 million with Bank Leumi Le Israel B.M., under which approximately $2.3
million of short-term debt was outstanding as of December 31, 1999. The
short-term bank credits are secured by a negative pledge prohibiting us from
selling or otherwise transferring any assets except in the ordinary course of
business, from placing a lien on our assets without the bank's consent and from
declaring dividends to our shareholders.
In 1998, funds were used to increase inventories by approximately $1.5
million and trade receivables by approximately $35.2 million. The increase in
inventories in 1998 represented increased component purchases to meet higher
production levels and an increase in work-in-process and finished products,
primarily related to customer orders planned for shipment early in the following
quarter including products needed for the migration from Clearlink to Skystar
Advantage. Funds were also used to increase investments by approximately $14.2
million (including $8.5 million in loans to an associated company and $2.7
million used in connection with deconsolidation of the investment in GVT
Antilles) approximately $5.7 million was used to decrease other payables,and
$15.8 million was used to increase property, plant and equipment. This increase
in property, plant and equipment represents a portion of our investment in our
new facility in Petah Tikva, Israel, as well as additional purchases of computer
and electronic equipment and office furniture and equipment. Approximately $3.9
million was provided by an increase in trade payables, approximately $22.3
million after restatement, as explained in note 1q to Notes to the Consolidated
Financial Statements, was provided by a decrease in other receivables and an
increase in accrued expenses, and approximately $20.4 million was provided by
short term bank credit.
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In June 2000, we exercised our right to redeem our 6 1/2% convertible
subordinated notes issued on May 14, 1997 and due on June 1, 2004. The notes
were redeemable in full at 102% of the principal amount plus accrued and unpaid
interest, setting the redemption price per $1,000 note at $1,020.72. All of the
note holders opted to convert their notes into Gilat's ordinary shares prior to
the redemption date. See note 8 of Notes to the Consolidated Financial
Statements.
The convertible subordinated notes that were issued in February 2000
represent unsecured general obligations, are subordinate in right of payment to
certain of our obligations, and are convertible into our ordinary shares. The
notes bear interest at an annual rate of 4.25% and will mature on March 15,
2005, unless:
- redeemed by us on or after March 18, 2003;
- repurchased by us at the option of the holders upon the occurrence
of certain designated events; or
- converted into our ordinary shares at the option of the holders at
a conversion price of $186.18 per ordinary share.
The notes do not impose any financial covenants or any restrictions on
the payment of dividends, the repurchase of securities or the incurrence of
senior indebtedness or other indebtedness. See note 16 of Notes to the
Consolidated Financial Statements.
We expect that the principal uses of our cash during 2000 will be for
working capital, capital expenditures and strategic investments. In addition,
our uses of cash will include the expansion of our manufacturing, testing,
quality control, delivery and service capabilities in Israel, expansion of our
international marketing activities, research and development, and additional
capital investment for our service-based offerings.
ACQUISITION OF SPACENET
On December 31, 1998, we completed the acquisition of Spacenet, a company
engaged in providing VSAT-based network services and prior to the acquisition, a
wholly-owned subsidiary of GE Americom. The transaction was completed pursuant
to an Agreement and Plan of Merger entered into on September 25, 1998, between
Gilat, GE Americom, and Spacenet. We acquired Spacenet from GE Americom in
exchange for 5 million shares of newly issued Gilat ordinary shares. The
acquisition was structured as a merger intended to qualify as a "tax-free"
reorganization. See "Item 13: Interest of Management in Certain
Transactions--Merger-Related Agreements--The Tax Matters Agreement." As part of
the acquisition, we entered into several significant agreements with GE. See
"Item 13: Interest of Management in Certain Transactions--Merger-Related
Agreements."
IN-PROCESS RESEARCH AND DEVELOPMENT.
A major value-enhancing asset acquired in the Spacenet acquisition was
the technology developed by Spacenet as part of its planned new Turbosat
product. At that time, we planned to utilize the Turbosat technology in a new
product.
As part of the process of analyzing the purchase of Spacenet, management
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 the Spacenet research and development effort. We also
considered our own resource allocation and our progress on comparable
technology. Our management expects to use
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the same decision process in the future. The allocation to in-process research
and development of $80 million represents the estimated fair value using the
methodology described under "Valuation Assumptions" below.
At the time of the acquisition, the Turbosat technology, though not yet
fully developed, was intended to increase throughput, expand product features to
serve additional applications and reduce cost. The technology was also expected
to accommodate changes in customer's performance and application requirements
through its ability to be upgraded to a satellite multimedia platform or a
terrestrial router. One of the most important features of the acquired Turbosat
technology is that it enables a wide range of flexibility through the
application of spread spectrum and CDMA technologies as the satellite access
method. Other distinguishing features are its advanced level capability for
data, audio and video broadcasting.
At the time of the acquisition, we expected the full software feature to
be complete in late first quarter 1999 and a fully integrated Turbosat to be
ready for release by June 1999, at which time we expected to begin generating
economic benefits from the value of the completed development associated with
the in-process research and development. At that time, we also expected that if
successfully completed, the new product incorporating the Turbosat feature set
would be marketed by us under the Skystar Advantage trademark while maintaining
backward compatibility.
In 1999, the research and development of Turbosat technology progressed,
with most of Turbosat's improved functionality and features completed and the
technology being integrated (other than CDMA) into a new product platform,
Skystar Advantage TG (Turbo Generation), which is now our main Skystar Advantage
platform and is being implemented for the USPS network and other networks.
Prior to the acquisition, Spacenet had incurred approximately $20 million
in Turbosat development-related costs. At the acquisition date, costs to
complete the research and development efforts related to Turbosat were expected
to be approximately $6 million. In 1999 our gross research and development
expenses were approximately $27 million, which included expenses related to
integration of the Turbosat technology into the Skystar Advantage platform. We
have not completed research and development of the Turbosat CDMA technology,
although we continue to consider potential integration of this technology in our
VSAT products and for which we are directing research and development activities
over the next 12 months.
VALUATION ASSUMPTIONS
In connection with the Spacenet acquisition in 1998, we estimated the
fair value of in-process research and development using an income approach. This
involved estimating the 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. Product
revenues attributable to the Turbosat technology were estimated to be $118
million in 1999 and to grow thereafter through the end of the product's life in
2005 as new product technologies are expected to be introduced by us. Product
revenue growth was expected to decrease gradually from 42% in 2001 to 15% in
2003 and 6.9% in 2005. Service revenues and lease payments were expected to
continue at a declining rate through the year 2011. Revenues were estimated
based on relevant market size and growth factors, expected industry trends,
individual product sales cycles, maintenance and service life and the estimate
life of the product's underlying technology. Product costs included hardware,
installation, space segment fees, and maintenance costs. Estimated operating
expenses included cost of goods sold, selling, general and administrative
expenses and engineering expenses. The estimates were consistent with historical
pricing, margins and expense levels for our other products.
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
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advances, and stage of completion. A risk adjusted discount rate of 40% was
utilized to discount projected cash flows.
Only a proportional value consistent with the technology's already
completed development effort was considered in-process research and development
for financial reporting purposes. Value associated with the technology's
remaining development effort was not included in the valuation. We further
believed that the estimated in process research and development amount
determined represented fair value and did not exceed the amount a third party
would pay for the project.
We allocated anticipated cash flows from an in-process research and
development project to reflect contributions of the core infrastructure
technology. At the date of acquisition, the Turbosat technology for which a
value had been assigned to in-process research and development efforts had not
yet reached technological feasibility and had no alternative future uses.
Accordingly, the value allocated to this R&D project was capitalized and
immediately expensed at acquisition. If the project is not wholly successful or
not fully completed in a timely fashion, management's product pricing and growth
rates may not be achieved and we would not realize the financial benefits
expected from the project at the time of the acquisition.
Based on an independent appraiser's report obtained by management, on
December 31, 1998, we recorded a charge of $80 million for the write-off of
acquired in-process research and development associated with the Spacenet
acquisition. In-process research and development expenses arise from new product
development projects that are in various stages of completion at the acquired
enterprise at the date of acquisition.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Almost all of our sales and service contracts are in dollars and most of
our expenses are in dollars and NIS. The 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 dollar. The influence on the 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.
During 1999, the rate of inflation in Israel was 1.3% while the value of the
dollar against the NIS decreased by 0.17%. During 1997 and 1998 the rate of
devaluation of the NIS against the dollar exceeded the inflation rate in Israel.
In 1997 the rate of inflation was 7.0% and the rate of devaluation was 8.8%. In
1998 the rate of inflation was 8.6% and the rate of devaluation was 17.6%. In
earlier years, there was a reversed trend when the inflation rate exceeded the
rate of devaluation of the NIS against the dollar. For example, during 1995 the
rate of inflation in Israel was 8.1% and during 1996 the rate of inflation was
10.6%, while the NIS was devalued against the dollar by 3.9% in 1995 and by 3.7%
in 1996. If future inflation in Israel exceeds the devaluation of the NIS
against the dollar or if the timing of such devaluation lags behind increases in
inflation in Israel, our results of operations may be materially adversely
affected.
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 a hedging 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 hedge our
Japanese yen exposure.
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
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nine Approved Enterprises, and have applied for approval for a tenth enterprise.
Income derived from the nine Approved Enterprises is entitled to tax benefits
for periods of 7 years (in the case of two of the enterprises) or 10 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 10 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 15% 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 0% in 1993, 2.1% in 1994, 0% in 1995, 1.5% in 1996, 0.8% in 1997, and 10.9%
in 1999. The increase in 1999 was due mainly to one time charges associated with
the restructuring and losses in subsidiaries for which no deferred income taxes
were recorded. In 1998 we had a loss due to restructuring charges, write offs
associated with restructuring and expenses related to acquired research and
development. We anticipate that a substantial part of our income for 2000 will
be tax-exempt, while the balance will be taxed at rates ranging from 15% to 36%.
On May 4, 2000, a committee appointed by the Israeli Finance Minister
known as the "Ben-Bassat Committee" submitted its report on reform of the
Israeli direct tax system (the "Report"). The Report makes several
recommendations that if enacted into law by the Israeli Parliament, may have
substantial tax implications on us and on our shareholders. The Israeli
Government adopted the recommendations, with the intention that the applicable
legislation will be effective as of January 1, 2001. During the legislative
process, the recommendations contained in the Report may be subject to
substantial changes.
The Report recommends increasing to 25% the corporate tax rate available
under the Law for the Encouragement of Capital Investments, 1959, during certain
portions of the Approved Enterprise benefits period to companies owned in whole
or in part by foreign investors. Currently depending on the percentage of
foreign ownership this rate can be as low as 10%, , and as high as 25%, which is
the corporate tax rate available to the Approved Enterprises of companies
without any foreign ownership. Furthermore, the Report recommends revoking a
current exemption available to income of Approved Enterprises that is not
distributed as a cash dividend and, setting a corporate tax rate of 10% for
profits generated during certain portions of the Approved Enterprise benefits
period.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". FAS 133 established new accounting and
reporting standards for derivatives and hedging activities. FAS 133 requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. FAS 133 is effective for
calendar-year companies from January 1, 2000. We are currently evaluating the
impact FAS 133 will have on our financial statements.
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101-"Revenue Recognition in Financial
Statements". SAB 101 summarizes the SEC's interpretation of the application of
GAAP to revenue recognition.
We are currently evaluating the impact that SAB 101 will have on our
financial statements.
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ITEM 9A: 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.
From time to time, we use financial instruments and derivatives in order
to limit our exposure to risks arising from changes in exchange rates between
the dollar and the NIS and other currencies and in interest rates. However, we
cannot assure that the use of such instruments will eliminate our exposure to
additional exchange rate or interest rates risks.
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:
<TABLE>
<CAPTION>
---------------------------------------------------------------
DECEMBER 31, 1999
---------------------------------------------------------------
LIABILITIES - SHORT TERM (IN THOUSANDS)
---------------------------------------------------------------
<S> <C>
Variable rate debt:
In NIS 5,276
Interest rate 11.3%-12.1%
---------------------------------------------------------------
</TABLE>
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.
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The table below details the Balance Sheet Exposure by currency and
interest rates:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
EXPECTED MATURITY DATES
------------------------------------------------------------------------------------------------
2000 2001 MATURITY
UNKNOWN
------------------------------------------------------------------------------------------------
ASSETS: (IN THOUSANDS)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short term- in US
dollars: 61,540
Fixed rate
Interest rate 5.4%-6.69%
Long term - in US
dollars: 50,000 $9,000
Fixed rate
Interest rate 5.71%-5.79% 0%
------------------------------------------------------------------------------------------------
LIABILITIES:
------------------------------------------------------------------------------------------------
1) long-term - in US
dollars: $75,000
fixed rate debt-
In dollars
Interest rate 6.5%
------------------------------------------------------------------------------------------------
2) short-term
variable rate debt-
In dollars 1,710
average interest rate 6.85%
In NIS 5,276
average interest rate 11.3%-12.1%
------------------------------------------------------------------------------------------------
Interest rate option(*) $20,000
------------------------------------------------------------------------------------------------
</TABLE>
(*) In May, 1997 we bought a three year call option to protect us in the event
the Libor interest rate exceeds 7.5%. Upon the exercising of the option, we will
be entitled to the difference between the then Libor interest rate and 7.5%,
multiplied by $20,000,000. This call option was not exercised and expired in May
2000.
In 1998 and 1999, we made long-term loans in the amount of $9,000,000 to
an associated company: $8,500,000 in 1998 and $500,000 in 1999. The loans do not
bear interest and are without a maturity date.
In February 2000, we completed a private offering of $350 million of
convertible subordinated notes due in 2005, to Qualified Institutional Buyers.
The notes are convertible into ordinary shares at a conversion price of $186.18
per share. Each note will bear annual interest of 4.25% payable semiannually.
See also note 16a of the Notes to the Consolidated Financial Statements.
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ITEM 10: DIRECTORS AND OFFICERS OF REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and key executives of our
subsidiaries as of June 16, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------------- --- -------------------------------------------------------------
<S> <C> <C>
Yoel Gat(1)(2)..................... 48 Chairman of the Board of Directors and Chief Executive
Officer
Amiram Levinberg(1)(2)............. 44 President, Chief Operating Officer and Director
Shlomo Tirosh(3)................... 54 Director
Dov Tadmor(1)(3)................... 70 Director
John Connelly(4)................... 56 Director
Dr. Gideon Kaplan.................. 44 Vice President, Technology
Yoav Leibovitch.................... 42 Vice President, Finance and Administration and Chief
Financial Officer
Joshua Levinberg................... 46 Senior Vice President, Business Development
Joann R. Blasberg.................. 48 Vice President and General Counsel
Erez Antebi........................ 40 Vice President, General Manager for Asia, Australia and Africa
Alan Freece........................ 52 Chief Executive Officer and President, Gilat Florida
Sheldon Revkin..................... 56 President and Chief Operating Officer, Spacenet
David R. Shiff..................... 42 Vice President, Sales and Marketing, Spacenet
Robert Givens...................... 54 President, Gilat Europe
</TABLE>
----------
(1) Member of the Stock Option Committee. For approval of stock option grants to
employees who are also directors, the Stock Option Committee also includes
Mr. Tadmor.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
(4) Mr. Connelly is a nominee of GE Americom, pursuant to a voting agreement
among certain of the principal shareholders of Gilat concerning the election
of directors.
YOEL GAT is a co-founder of Gilat and has been its Chief Executive
Officer and 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. Until July 1995, Mr. Gat also served
as the President of Gilat. From 1974 to 1987, Mr. Gat served in the Israel
Defense Forces ( "IDF "). In his last position in service, Mr. Gat was a senior
electronics engineer in the Israel Ministry of Defense ( "IMOD "). 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 is also Chairman of the
Board of Directors of KSAT, in which Gilat holds a minority interest. Mr. Gat
also served as the Chairman of the MOST Consortium and is a director of ILAN-GAT
Engineering Ltd., a civil contracting company whose shares are publicly traded
on the Tel Aviv Stock Exchange and of which members of his family are major
shareholders. Mr. Gat is Chairman of the Board of Directors of Gilat-To-Home,
Inc. Mr. Gat received a bachelor of science degree in electrical engineering and
electronics from the Technion--Israel Institute of Technology and a masters
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 a Director and
Chief Operating Officer since inception, and since July 1995 has served as
President. Mr. Levinberg is a member of the Stock Option and Compensation
Committees of the Board. 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. Mr. Levinberg is also a director of Gilat
Communications. From 1977 to 1987, Mr. Levinberg served in a research and
development unit of the IDF, where he managed a large research and development
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project. He was awarded the Israel Defense Award in 1988. Mr. Levinberg is a
graduate of the Technion, with a bachelor of science degree in electrical
engineering and electronics and masters of science degree in digital
communications.
SHLOMO TIROSH is a co-founder of Gilat and has been a member of the Board
of Directors since inception, serving as Chairman of the Board of Directors
until July 1995. Mr. Tirosh is a member of the Audit Committee of the Board.
Since July 1990, Mr. Tirosh has served as Chairman of the Board, Chief Executive
Officer and President of Gilat Communications. From 1964 to 1987, Mr. Tirosh
served in the IDF, 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 IMOD. In 1988, he received the Israel
Defense Award. Mr. Tirosh holds a bachelor of arts degree (summa cum laude) in
economics from Bar-Ilan University in Ramat Gan.
DOV TADMOR has been a Director of Gilat since July 1994 and is a member
of the Audit and Stock Option Committees of the Board. Mr. Tadmor served as
Managing Director of DIC and DICFM from 1985 until March 1999. Mr. Tadmor holds
a bachelor of law degree from the School of Law and Economics in Tel Aviv.
In August 1999, an indictment was filed by the Tel Aviv District
Attorney's Office in the Tel Aviv Magistrate's Court alleging certain violations
of the Israeli Securities Law by DIC and certain of its officers, including Mr.
Dov Tadmor, in his capacity as the former CEO of DIC. The indictment alleges
that DIC's annual and quarterly financial statements for the period 1990-1995
were misleading in connection with the failure to attach to DIC's financial
statements sent to the Tel Aviv Stock Exchange and the Israel Registrar of
Companies the financial statements of three private Israeli companies of which
DIC was a shareholder. In December 1999, Mr. Tadmor and the other defendants
pleaded not guilty to the charges, although one of the defendants subsequently
entered into a plea agreement with the prosecution. The court commenced
evidentiary proceedings in May 2000.
JOHN CONNELLY was appointed a Director in January 1999. Since 1992, Mr.
Connelly has served as Chairman and Chief Executive Officer of GE Americom. Mr.
Connelly joined the General Electric Company in 1967, and has served in a number
of capacities at General Electric and its affiliates since that time. Mr.
Connelly holds a bachelor of science degree form Niagara University and a
masters in business administration from St. John's University.
GIDEON KAPLAN joined Gilat in 1989 as Vice President of Technology. From
late 1987 to 1989, Dr. Kaplan was employed as a research engineer with QUALCOMM,
Inc., a mobile satellite communications and cellular radio company. From 1978 to
1987, Dr. Kaplan served in a research and development unit of the IDF and
received the Israel Defense Award in 1984. Dr. Kaplan received a bachelor of
science degree in electrical engineering, a master of science degree and
doctorate in electrical engineering from the Technion.
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. He is
a director of GVT. 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 communication company; Clal
Corporation, a major Israeli industrial holding company; and Yediot Aharonot, an
Israeli daily newspaper. Mr. Leibovitch is a graduate of the Hebrew University
of Jerusalem with a bachelor of arts degree in economics and accounting, and a
masters degree in business administration specializing in finance and banking.
Mr. Leibovitch is a Certified Public Accountant in Israel.
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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 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 is a graduate of Tel Aviv University, with a bachelor of science
degree in electrical engineering and electronics. Amiram Levinberg, a director,
President and Chief Operating Officer of Gilat, and Joshua Levinberg are
brothers.
JOANN R. BLASBERG joined Gilat in August 1995 as Vice President and
General Counsel. Prior to joining Gilat, Ms. Blasberg was a partner in the firm
of Kleinhendler & Halevy, Israeli counsel to Gilat, having been associated with
that firm from May 1987. Prior to immigrating to Israel in December 1986, Ms.
Blasberg was an associate with the firms of Siff & Rosen from May 1984 and
Kronish Leib Weiner & Hellman from August 1982 until May 1984. Ms. Blasberg
served as Principal Law Clerk to Chief Judge Lawrence H. Cooke of the New York
State Court of Appeals from 1979 to August 1982. Ms. Blasberg received a law
degree in 1979 from Brooklyn Law School (summa cum laude) and received a
bachelors degree in sociology from Queens College.
EREZ ANTEBI currently serves as Gilat's Vice President, General Manager
for Asia, Australia and Africa. 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 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 IDF, from 1981 to 1987. Mr. Antebi received a bachelor
of science degree and master of science degree in electrical engineering from
the Technion.
ALAN FREECE joined Gilat Florida in July 1997 as President and became
Chief Executive Officer of that company in January 1998. Prior to joining Gilat
Florida, Mr. Freece was Vice President of Marketing and Business Development at
Spacenet from 1995 to 1997. From 1984 to 1994, Mr. Freece served in several
capacities, including Vice President of Marketing and Sales and President for
Scientific Atlanta Private Networks VSAT Division. From 1973 to 1984, he was
with Harris's Satellite Communications Division. Mr. Freece received a bachelor
of science degree in electrical engineering from the University of Illinois and
a masters degree in business administration from the University of Florida.
SHELDON (SHELLY) REVKIN joined Spacenet in January 1999, as President and
Chief Operating Officer. Prior to joining Spacenet, Mr. Revkin was Senior Vice
President and General Manager of the Wireless Networks Division of Hughes
Network Systems, Inc. (HNS). Mr. Revkin joined HNS in 1978 and held several
executive-level marketing, sales and operations positions within the company.
Revkin holds a bachelor of science degree in electrical engineering from Pratt
Institute in New York City, a master of science degree in electrical engineering
from Polytech University in Brooklyn, New York, and a master of business
administration degree in finance and marketing from Lynchburg College in
Lynchburg, VA. Revkin is a member of Eta Kappa Nu, Tau Beta Pi, and the
Institute of Electrical and Electronics Engineering (IEEE).
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
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Electronics. For the last two years he served as Assistant Vice President, North
American Sales, for the Satellite Networks Divisions of HNS. Mr. Shiff holds a
degree in mechanical engineering from the University of Wisconsin.
ROBERT GIVENS joined Gilat in the Spring of 2000 as President of Gilat
Europe. Prior to joining Gilat, Mr. Givens was employed by Global One
Communications S.A. from 1996 until 2000, first as Chief Financial Officer and
then as Executive Vice President and General Manager for Europe and Eastern
Europe. From 1982 to 1996, Mr. Givens operated Profit Development, a transition
management company he founded to provide temporary management for European and
American companies undergoing corporate change. Prior to 1982, he held various
management and financial positions with Groupe Chargeurs from 1977 to 1981,
Corning Glass Works from 1976 to 1977, Fairchild Camera and Instrument Corp.
from 1972 to 1976, Smith Kline Beecham from 1970 to 1972 and Ford Motor Company
from 1968 to 1970. Mr. Givens received a bachelor of science degree in finance
from Miami University, and a masters degree in international business
administration from Columbia University and continued his studies in post
graduate accounting at the Wharton School.
TERMS OF DIRECTORS
Directors are elected at the annual shareholders meeting to serve until
the next annual meeting of the shareholders and until their respective
successors are elected and qualified. Our Articles of Association provide that
the directors may appoint additional directors (whether to fill a vacancy or to
expand the Board). Our Articles of Association provide that the Board may
delegate all of its powers to committees of the Board as it deems appropriate,
subject to the provisions of the Israeli Companies Ordinance (the "Companies
Law"). Officers of Gilat serve at the discretion of the Board or until their
successors are appointed.
ALTERNATE DIRECTORS
Our Articles of Association provide that a director may appoint, by
written notice to Gilat, any individual (whether or not such person is then a
member of the Board) to serve as an alternate director, subject to the consent
of the Board if the alternate is not then a member of the Board. Any 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). The alternate
director may not act at any meeting at which the director appointing him or her
is present. Such alternate may act as the alternate for several directors and
have the corresponding number of votes. 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 the appointing director's term. Currently, no alternate directors
have been appointed.
BOARD COMPENSATION
By resolution of the Board and the shareholders adopted in 1996,
directors who are not executive officers receive annual compensation of $10,000
for their services on the Board or any committee thereof beginning in 1996. All
of the non-management directors are reimbursed for their expenses for each Board
meeting attended.
OUTSIDE DIRECTORS AND AUDIT COMMITTEE
Under the new Israeli Companies Law, which became effective February 1,
2000, public companies are required to elect two outside 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 our company, are treated as public companies with
respect to the outside directors requirement. The outside directors may not have
any economic relationship with us.
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Therefore any person who was an employee of a company or had a commercial or
professional connection with it including controlling shareholders, 25%
shareholders, and their relatives or employees cannot serve as outside
directors.
Outside directors are elected by shareholders. The shareholders voting in
favor of their election must include at least one-third of the shares of the
non-controlling shareholders of the company who are present at the meeting. This
minority approval requirement need not be met if the total shareholdings of
those non-controlling shareholders who vote against their election represent 1%
or less of all of the voting rights in the company. Outside directors serve for
a three-year term, which may be renewed for only one additional three-year term.
Outside directors can be removed from office only by the same special percentage
of shareholders as can elect them, or by a court, and then only if the outside
directors cease to meet the statutory qualifications with respect to their
appointment or if they violate their duty of loyalty to the company. If, when an
outside director is elected, all members of the board of directors of a company
are of one gender, the outside director to be elected must be of the other
gender.
Any committee of the board of directors must include at least one outside
director. An outside 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. Pursuant to regulations promulgated under the Companies Law, our
two independent directors may be deemed to be outside directors.
The Companies Law also 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 outside
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 a controlling shareholder, or with an office holder
(defined below), unless at the time of approval two outside directors are
serving as members of the audit committee and at least one of the outside
directors was present at the meeting in which an approval was granted.
In addition, the Companies Law requires the board of directors of a
public company to appoint an internal auditor nominated by the audit committee.
A person who does not satisfy the Companies Law's independence requirements may
not be appointed as an internal auditor. The role of the internal auditor is to
examine, among other things, the compliance of the company's conduct with
applicable law and orderly business practice.
Pursuant to the listing requirements of the Nasdaq National Market, we
are currently required to have at least two independent directors on our Board
of Directors and to establish an audit committee, at least a majority of whose
members are independent of management. Messrs. Tadmor and Tirosh, both of whom
we believe are independent of management, currently serve on the Audit Committee
of the Board
Nasdaq recently amended its rules to require that listed companies have
at least three independent directors on the audit committee, all of whom are
financially literate and one of whom has accounting or related financial
expertise. We must comply with these amended rules by June 14, 2001.
APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW
The Companies Law codifies the fiduciary duties that "office holders,"
including directors and executive officers, owe to a company. Under the
Companies Law, an "office holder" is a director, general manager, chief business
manager, deputy general manager, vice general manager, other manager directly
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subordinate to the General Manager or any other person assuming the
responsibilities of any of the foregoing positions without regard to such
person's title.
An office holder's fiduciary duties consist of a duty of care and a duty
of loyalty. The duty of care requires an office holder to act at a level of care
which a reasonable office holder in the same position would employ under the
same circumstances. This includes the duty to utilize reasonable means to obtain
(1) information regarding the appropriateness of a given action brought for his
approval or performed by him by virtue of his position and (2) all other
information of importance pertaining to the foregoing actions. The duty of
loyalty includes avoiding any conflict of interest between the office holder's
position in the company and his personal affairs, avoiding any competition with
the company, avoiding the exploitation of any business opportunity of the
company in order to receive personal gain for the office holder or others, and
disclosing to the company any information or documents relating to the company's
affairs which the office holder has received due to his position as an office
holder.
The individuals listed as directors or executive officers in the table
above would be considered office holders. Under the Companies Law, all
arrangements as to compensation of office holders who are not directors require
approval of our Board of Directors, provided, however, that it was not an
extraordinary transaction under the Companies Law, and provided further that
there are no other special requirements under the company's articles of
association. The compensation of office holders who are directors must be
approved by our Audit Committee, Board of Directors and shareholders.
The Companies Law requires that an office holder promptly disclose any
personal interest that he or she may have and all related material information
known to him or her, in connection with any existing or proposed transaction by
us. In addition, if the transaction is an extraordinary transaction, that is, a
transaction other than in the ordinary course of business, other than on market
terms, or likely to have a material impact on our profitability, assets or
liabilities, the office holder must also disclose any personal interest held by
the office holder's spouse, siblings, parents, grandparents, descendants,
spouse's descendants and the spouses of any of the foregoing, or by any
corporation in which the office holder is a 5% or greater shareholder, director
or general manager or in which he or she has the right to appoint at least one
director or the general manager.
Some transactions, actions and arrangements involving an office holder,
or a third party in which an office holder has an interest, must be approved by
the board of directors or as otherwise provided for in a company's articles of
association, as not being adverse to the company's interest. In some cases, such
a transaction must be approved by the audit committee and by the board of
directors itself, with further shareholder approval required in the case of
extraordinary transactions. An office holder who has a personal interest in a
matter, which is considered at a meeting of the board of directors or the audit
committee, may not be present during the board of directors or audit committee
discussions and may not vote on this matter.
The Companies Law also provides that an extraordinary transaction between
a public company and a controlling shareholder, or an extraordinary transaction
in which a controlling shareholder of the company has a personal interest but
which are between a public company and another entity, or the terms of
compensation of a controlling shareholder, if he is an employee of the company,
and the terms of office of a controlling shareholder if he is an officer of the
company must be approved by the audit committee, the board of directors and
shareholders.
The shareholder approval for an extraordinary transaction must include at
least one-third of the shareholders who have no personal interest in the
transaction and are present at this meeting. The transaction can be approved by
shareholders without this one-third approval, if the total shareholdings of
those shareholders who have no personal interest and voted against the
transaction do not represent more than 1% of the voting rights in the company.
In addition, a private placement of securities that will increase the relative
holdings of a shareholder that holds 5% or more of the company's outstanding
share capital or
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that will cause any person to become, as a result of the issuance, a holder of
more than 5% of the company's outstanding share capital, requires approval by
the board of directors and the shareholders of the company.
The Companies Law provides that an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% shareholder of the company. This
rule does not apply if there is already another 25% shareholder of the company.
Similarly, the Companies Law provides that an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 45% shareholder of the company unless
there is another person holding at that time more than 50% 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.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Companies Law provides that an Israeli company cannot exculpate an
office holder from liability with respect to a breach of his duty of loyalty,
but may exculpate 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.
The Companies Law provides that a company may not indemnify an office
holder, nor enter into an insurance contract which would provide coverage for
any monetary liability incurred as a result of, any of the following:
- a breach by the office holder of his duty of loyalty unless the office
holder acted in good faith and had a reasonable basis to believe that the
act would not prejudice the company;
- a breach by the office holder of his duty of care if such breach was done
intentionally or in disregard of the circumstances of the breach of its
consequences;
- any act or omission done with, the intent to, derive an illegal personal
benefit; orA any fine levied against the office holder as a result of a
criminal offense.
In order to allow indemnification in advance for office holders under the
Articles of Association as described, our shareholders shall be required to
amend our Articles of Association to include the following provisions:
- A provision authorizing us to grant in advance an undertaking to indemnify
an office holder, provided that the undertaking is limited to types of
events which the board of directors deems to be anticipated and limited to
an amount determined by the board of directors to be reasonable under the
circumstances.
- A provision authorizing us to retroactively indemnify an office holder.
In addition, pursuant to the Companies Law and our Articles of
Association, indemnification of and procurement of insurance coverage for our
Office Holders must be approved by our audit committee and our Board of
Directors and, in specified circumstances, by our shareholders.
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We provide indemnification to our Office Holders to the fullest extent
permitted by law. Our Articles of Association include a provision to the effect
that, to the extent permitted by the Companies Law, we may (i) procure insurance
for or indemnify any Office Holder, provided that the procurement of any such
insurance or provision of any such indemnification, as the case may be, is
approved by the Audit Committee and otherwise as required by law and (ii)
procure insurance for or indemnify any person who is not an Office Holder,
including, without limitation, any employee, agent, consultant or contractor who
is not an Office Holder. We have obtained directors' and officers' liability
insurance covering our officers and directors and those of our subsidiaries for
certain claims.
ITEM 11: COMPENSATION OF DIRECTORS AND OFFICERS
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, 1999:
<TABLE>
<CAPTION>
SALARIES, FEES, DIRECTORS' FEES, PENSION, RETIREMENT
-------------------------------- -------------------
COMMISSIONS AND BONUSES AND SIMILAR BENEFITS
----------------------- --------------------
<S> <C> <C>
All directors and officers as a group (22 persons*) $7,195,000 $751,000
</TABLE>
*including those directors and executive officers referred to in Item 4 (except
for four persons who became officers in 2000), one person who ceased being an
officer during 1999, and two persons who ceased being directors in 1999.
Through June 15, 2000, we had granted options under the Stock Option
Plans to our then officers and directors for a total of 3,008,727 ordinary
shares, of which 526,341 have been exercised. See "Item 12: Options to Purchase
Securities from Registrant or Subsidiaries."
By Board and shareholder action in July and August 1994, respectively, we
authorized future bonuses to four of our executive officers, two of whom are
also directors. Such bonuses shall be paid as follows: if our consolidated
operating income (as defined in the resolution of the Board and the
shareholders) in any year through December 31, 1999 is greater than $10 million,
we will pay such officers an aggregate one-time bonus in NIS equal to $510,000,
linked to the Israeli CPI (plus an amount equal to any taxes payable on such
bonus). The bonus will be divided among them as set forth in resolutions of the
Board and the shareholders meeting. The bonus, which was to be paid as soon as
practicable after the end of the year in which the operating income exceeded $10
million, was paid in 1998. By Board and shareholder action in June and August
1995, the Board was also authorized to grant annual bonuses to two officers who
are also directors. In February and August 1997, the Board and the shareholders
authorized an amendment to the annual bonus provision, to exclude merger and
acquisition costs in calculating net profit for bonus purposes. In May and
August 1999, the Board and shareholders authorized the grant of a bonus to an
officer who is also a director in recognition of his efforts in completing the
Offering. In February 2000, the Board, subject to shareholder approval at the
next annual meeting, authorized the cancellation of loans to two officers who
are also directors, the amendment of their employment agreements for salary and
bonus adjustments, and the grant of options which will commence vesting over a
three year period.
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 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 extended stays in the
United States expected to result from the
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integration of Spacenet. Among other provisions, such agreements contain
non-competition and confidentiality provisions.
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 implementing our
strategic course of action, as well as fostering contacts with potential
customers for our products. There are currently no appointees to the Advisory
Board.
ITEM 12: OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
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 provides for the granting of incentive and
restricted stock options for the purchase of up to 3,190,000 ordinary shares
(increased by 1,250,000 as a result of resolutions of the Board in August 1999,
and February and May 2000, which are subject to approval by the shareholders at
the next annual meeting of 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
5,120,000 ordinary shares (increased by 3,500,000 as a result of resolutions of
the Board in November 1999 and May 2000; and
(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 (10 years after their adoption), unless terminated
earlier by the Board.
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 and Levinberg for employees and officers who are not directors
and Messrs. Gat, Levinberg and Tadmor for employees who are also directors) 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
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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.
As of June 15, 2000, we granted options to purchase a total of 304,950
ordinary shares under the 1993 Plans and 7,896,424 ordinary shares under the
1995 Plans for an aggregate of 8,201,374 ordinary shares subject to options
under such plans. The exercise prices for such options vary from $8.125 to
$136.50 and all such options expire at various times from September 2003 to May
2010. Of such options, 3,008,727 options were granted to officers and directors.
As of June 15, options under the plans for a total of 727,286 shares had been
exercised.
In December 1992, we granted options outside of any stock option plan to
two then officers. One officer, who has since again become an officer of Gilat,
was granted an option to purchase 24,500 ordinary shares, at an exercise price
of $0.33 per ordinary share, and the other was granted an option to purchase
33,333 ordinary shares at an exercise price of $12.00 per share, both on terms
and conditions comparable to those provided for under the 1993 Plans. As of June
15, 2000, 33,333 of these options 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 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 13: INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
SHAREHOLDER REGISTRATION RIGHTS AGREEMENT. On August 20, 1990, Gilat
entered into a Preferred Stock Purchase Agreement with Yoel Gat, Amiram
Levinberg, Joshua Levinberg, Shlomo Tirosh and Gideon Kaplan (the "Founders"),
Athena Venture Partners L.P. and certain related entities, DICFM, PEC and
certain individual investors (the "Investors") under which the Investors
invested a total of approximately $3.0 million in exchange for Gilat's Preferred
Shares (which Preferred Shares were converted into ordinary shares at the time
of Gilat's initial public offering). PEC has since transferred its shares to DIC
Loans and DIC Loans has replaced PEC as a member of the Investors. In connection
with such agreement, we entered into a Registration Rights Agreement pursuant to
which, among other things,
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(i) we agreed that at any time after the earlier of February 28, 1994 or
six months after the effective date of the first registration statement for our
initial public offering of securities, the holders of at least 10% of the
ordinary shares who were parties to the Preferred Stock Purchase Agreement could
request that we file a registration statement for such shares (a "demand
registration"),
(ii) we agreed to include the Founders' and Investors' ordinary shares in
a registration proposed after one year following the first registration (a
"company registration"),
(iii) we agreed to pay the expenses of a demand or company registration
(subject to certain limitations), and
(iv) the Founders and Investors agreed that during a period to be
specified by us and the underwriter (but not more than one year) following the
effective date of a registration statement for the Company's securities, and to
the extent requested by us and the underwriter, they would not directly or
indirectly sell or offer the shares held by them, except ordinary shares
included in such registration, provided that all officers and directors and all
other persons with registration rights enter into a similar agreement.
Under the Registration Rights Agreement, we agreed to indemnify each of
the selling shareholders and any person who controls any of such shareholders,
to the extent permitted by applicable law, against any losses arising from any
alleged untrue statement of a material fact or any alleged omission of a
material fact in the registration statement or the prospectus for our public
offering in October 1995 or from any violation by Gilat of the Securities Act or
the Exchange Act. Our indemnity does not cover any losses that arise from any
alleged untrue statement or omission or violation made in reliance upon
information provided to us by such selling shareholder. In addition, each of the
selling shareholders agreed to indemnify us and our directors and officers
against any losses arising from any information provided to us by such selling
shareholder for use in the registration statement or the prospectus. We had
obtained insurance covering our officers and directors and the selling
shareholders to the extent permitted by law with respect to certain matters in
connection with the registration statement and prospectus for the October 1995
offering.
TRANSACTIONS WITH GILAT COMMUNICATIONS. In July 1996, we entered into an
agreement with Gilat Communications Ltd. ("Gilat Communications") under which
Gilat Communications has been granted non-exclusive distribution rights to sell
and provide technical support for our products in South Africa. In October 1997,
we and Gilat Communications entered into a 5-year marketing and purchase
agreement (the "1997 Agreement") that replaced and terminated an earlier
agreement entered into in 1993. Pursuant to the 1997 Agreement, Gilat
Communications has been granted the exclusive right to market the lines of
satellite communications products and related components and options, and to
provide services with such products in Israel and areas controlled by the
Palestinian Authority. Under the 1997 Agreement, Gilat Communications is
required to meet certain annual minimum purchase requirements for each of three
specified categories of our products, and during the initial term and any
renewal term, Gilat Communications may not, without our prior written consent,
engage in certain activities competitive with our business. If Gilat
Communications satisfies the annual minimum purchase requirements, the parties
are required to enter into good faith negotiations to renew the 1997 Agreement
three months prior to its expiration. In addition, under the 1997 Agreement,
Gilat Communications was granted non-exclusive rights to distribute and sell our
products worldwide when and only if sold as part of, or to be used in
conjunction with, Gilat Communications' products.
Throughout 1999, we sold approximately $8.1 million in equipment to Gilat
Communications for distribution and as a value added reseller. The sales were in
accordance with our standard sale terms and conditions. Certain of our officers,
directors, principal and other shareholders are also shareholders of Gilat
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Communications. For more information regarding certain transactions between us
and Gilat Communications, see notes 9 and 15 of Notes to Consolidated Financial
Statements listed in Item 19.
MERGER-RELATED AGREEMENTS
In connection with our acquisition of Spacenet, we entered into a Merger
Agreement and a series of related agreements. The parties to those agreements
include GE Americom which as of June 15, 2000 holds approximately 18.7% of our
outstanding ordinary shares. The terms of those agreements, and of certain
important provisions of the Merger Agreement are summarized below.
POST-CLOSING AND OTHER ADJUSTMENTS. The Merger Agreement contemplates
certain post-closing adjustments regarding the possibility of (a) our paying or
receiving certain amounts in cash or (b) our issuing additional ordinary shares
to GE Americom in respect of such adjustments. Most of the post-closing
adjustments relate to an agreement between the parties that the net assets on
the combined closing balance sheet of Spacenet and its subsidiaries should equal
$85 million and that any shortfall or excess, as the case may be, should be
addressed through post-closing adjustments. Other adjustments relate to the
collection of accounts receivable, the sale of specified items of Spacenet
inventory and the allocation of certain tax benefits. Pursuant to two settlement
agreements entered into by the parties in December 1999, GE Americom paid us $25
million for post-closing adjustments and undisclosed liabilities related to the
Merger, and for reimbursement of expenses.
GE AMERICOM EQUIPMENT PURCHASE COMMITMENT. GE Americom and certain of its
affiliates were committed to purchase $37.5 million of our products through the
end of 1999. GE Americom agreed to pay us a credit against service fees we owed
to GE Americom under certain Satellite Transponder Service Agreements, equal to
40% of any shortfalls in this purchase commitment. As a result of this
agreement, in 1999, GE Americom paid us $15 million.
INDEMNIFICATION. Subject to the limitations set forth in the Merger
Agreement, GE Americom has indemnified Gilat and Spacenet, and Gilat has
indemnified GE Americom, from and against any losses arising from indemnified
obligations. The indemnification obligations primarily relate to damages arising
from breaches by the other party of representations and warranties under the
transaction documents, as well as indemnities with respect to specified
obligations of each of the parties. The indemnification obligations were
narrowed as a result of the settlement agreements described above.
THE TRANSITIONAL SERVICES AGREEMENT. Under the Transitional Services
Agreement, in consideration of the issuance of 5,505 ordinary shares, GE
Americom provided Spacenet and its subsidiaries, specified transitional
services, including finance services, accounting services, purchasing services,
cash management services, computer-related services, payroll processing services
and other reasonably necessary services, through August 31, 1999.
THE TRADEMARK AGREEMENT. Under the Trademark Agreement, General Electric
Company has agreed to grant to Gilat, in consideration of 72,496 ordinary
shares, a non-exclusive worldwide license to use the GE symbol in connection
with certain products sold by Spacenet, Spacenet GmbH and Spacenet BV, and
certain services performed by Gilat, Spacenet, Spacenet GmbH and Spacenet BV.
The Trademark Agreement requires that Gilat and Spacenet adhere to certain
specified permitted uses and standards of quality. The Trademark Agreement
provides that Gilat will use the GE symbol only in connection with the specified
products and services, including use in its packaging, labeling, general
publicity, letterheads, signs and other forms of advertising, instructions books
and other literature. In addition, the Trademark Agreement provides that Gilat
will not use the GE symbol as part of a trade name. The term of the Trademark
Agreement is three years and it may be renewed under certain circumstances for
one additional year. Gilat has agreed to indemnify General Electric Company for
all claims arising out of the Trademark Agreement or the manufacture of products
or performance of services by Gilat under the licensed mark.
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THE SHAREHOLDERS' AGREEMENT. At the time of the Spacenet acquisition,
Yoel Gat, Amiram Levinberg, Joshua Levinberg, Shlomo Tirosh and Gideon Kaplan
(collectively, the "Founders Group"), DICFM and PEC (collectively, the "IDB
Group"), and GE, GE Americom, General Electric Finance Holding GmbH and General
Electric Plastics BV (for purposes of the following description, collectively,
"GE") entered into a Shareholders' Agreement. PEC has since transferred its
shares to DIC Loans, and DIC Loans has replaced PEC as a member of the IDB
Group.
Under the Shareholders' Agreement, the Founders Group, the IDB Group and
GE have agreed to vote their ordinary shares in order that the Board of
Directors of Gilat be comprised of seven members, and in favor of the respective
nominees of each of the groups to the following extent:
- The Founders Group will be entitled to nominate three directors, as long as
(i) the Founders Group collectively owns at least 30% of the ordinary shares
owned by them when the Shareholders' Agreement was signed, or (ii) at least
one of the members of the Founders Group is serving as an employee of Gilat;
- The IDB Group will be entitled to nominate two directors, as long as the IDB
Group collectively owns at least 50% of the ordinary shares owned by them
when the Shareholder's Agreement was signed, or one director if the IDB
Group owns between 25% and 50% of those shares; and
- GE will be entitled to nominate two directors, as long as GE owns at least
50% of the ordinary shares owned by GE when the Shareholders' Agreement was
signed, or one director if GE owns between 33% and 50% of those shares.
In addition, each of the shareholders has agreed that it will vote all of
its ordinary shares in accordance with the recommendations of the Board of
Directors in respect of any matter brought to a vote of the shareholders of
Gilat, unless (i) the matter relates to certain significant merger,
restructuring or other transactions or (ii) is directly and materially adverse
to the interests of the shareholder. The shareholders have further agreed, for a
period of three years, to vote in favor of the retention of Gilat's present
senior executive officers in their respective offices.
Under the Shareholders' Agreement, GE has agreed to certain "stand-still"
provisions, including agreements not to acquire any assets, businesses or
properties of Gilat, or any ordinary shares which would result in GE being the
beneficial owner of greater than 33% of the ordinary shares of Gilat, without
the prior approval of the holders of a majority of the ordinary shares held by
the Founders Group or the IDB Group.
GE has also agreed not to solicit proxies, call any special meeting of
shareholders of Gilat, or propose any form of business combination involving
Gilat. GE's standstill agreement is subject to a number of exceptions, including
a release of any restrictions in the event of a bona fide third party tender
offer, or in the event that the Founders Group and the IDB Group no longer
collectively hold at least 50% of the ordinary shares held by them at the time
the Shareholders' Agreement was signed.
Subject to certain exceptions, the Shareholders' Agreement also provides
for restrictions on the transferability or pledge of the ordinary shares held by
the GE parties for a period of three years from the date of the Shareholders'
Agreement, including general restrictions on the disposition of ordinary shares
to certain competitors of Gilat. In addition, the Shareholders' Agreement will
generally provide for pro rata rights of first refusal for the other parties
with respect to the transfer of any ordinary shares by any other affiliated
party to any independent third party.
THE REGISTRATION RIGHTS AGREEMENT. At the time of the Spacenet
acquisition, the holders of the Registrable Securities (as defined below) were
granted certain registration rights by Gilat. The
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"Registrable Securities" generally include the ordinary shares issued to GE and
held by GE or any of its affiliates, or by any other person who is at such time
a holder of Shares originally issued to GE and representing at least 5% of the
then outstanding ordinary shares. Gilat initially agreed to the immediate
registration of all Registrable Securities solely in connection with the
transfer of such shares to one or more affiliates of GE. The Registration Rights
Agreement also provides for certain demand registration rights of GE and the
holders of Registrable Securities. Gilat will not be required to effect any
registration during the pendency of certain blackout periods. GE also has the
right to participate (subject to certain limited exceptions) on a piggy-back
basis in all registrations of Gilat's securities in connection with any offering
of its securities. The Registration Rights Agreement provides that Gilat will
indemnify the selling holders of Registrable Securities, and that the selling
holders of Registrable Securities will indemnify Gilat, in each case, against
certain liabilities and expenses, including liabilities under the Securities
Act, or will contribute to payments that the other may be required to make in
respect thereof.
THE RIGHT OF FIRST REFUSAL AGREEMENT. Under the Right of First Refusal
Agreement, GE Americom has granted to Gilat, for a period of three years, a
limited right of first refusal to be the provider in respect of any proposal by
GE Americom to obtain (i) any VSAT return channel equipment for broadcast
network and (ii) any integration services for the incorporation of VSAT return
channel equipment into a broadcast network. In addition, for a corresponding
period, Gilat has agreed to grant to GE Americom a limited right of first
refusal to be the provider in respect of any proposal by Gilat to obtain any
additional space segment capacity on a communications satellite providing
services within the United States. Gilat has also agreed that certain
integration services performed by Gilat for GE Americom under the
above-described right of first refusal will be at a discount of at least 20%
from the price provided by the relevant third-party provider. Under the Right of
First Refusal Agreement, GE Americom has agreed that if GE Americom commences
offering GE*Star services, GE Americom will create a distribution program and
will offer Gilat the right to become a world-wide distributor of GE*Star
services for a three-year period pursuant to the program terms and conditions
established by GE Americom. In addition, if GE Americom offers any third party
an opportunity to become an exclusive distributor of GE*Star services in any
territory, Gilat will generally be offered an opportunity to act as a
co-exclusive distributor in such territory. If Gilat elects to become a
distributor of GE*Star services, GE Americom will under certain circumstances
provide Gilat a discount on all wholesale GE*Star services.
THE SATELLITE TRANSPONDER SERVICE AGREEMENTS. Under the Satellite
Transponder Service Agreements, GE Americom has agreed to provide to Gilat (i)
certain protected services on four transponders on satellite GSTAR4 operated by
GE Americom, (ii) certain protected services on one transponder on satellite
GE-3 operated by GE Americom, (iii) certain protected services on three
transponders on satellite GE-5 to be constructed, launched and operated by GE
Americom, (iv) certain preemptible testing services relating to specified
bandwidth and downlink EIRP on one transponder on satellite SN-3 operated by GE
Americom, and (v) certain protected Ku-band service on portions of certain
transponders on satellite GSTAR4 operated by GE Americom. The terms of the
services provided under each of the Satellite Transponder Service Agreements are
specified in each such agreement. Generally, the services will be provided until
the earliest of the end of the life, date of replacement or failure of the
relevant satellite, the date on which the relevant transponder fails or is
preempted, or a specified termination date provided in each agreement. Except in
the case of the agreement described in clause (iv) above, Gilat pays GE Americom
a monthly recurring service charge (generally on a per-transponder basis) in
accordance with a schedule provided in each agreement. Subject to certain
exceptions, the Satellite Transponder Service Agreements provide for Gilat to
indemnify GE Americom and certain affiliates for claims arising out of services
provided thereunder.
THE LETTER AGREEMENTS. Under the Transponder Letter Agreement dated
September 25, 1998, GE Americom and Gilat have agreed, among other things, that
(i) Gilat would analyze Spacenet's current space segment use and requirements on
or before December 31, 1998 and will take certain transponder capacity on GE
Americom satellites at the prices set forth in the Spacenet Letter Agreement
described below and (ii) Gilat will receive long-term fixed prices which Gilat
believes are competitive and certain
81
<PAGE> 82
rights of first refusal for additional space segment capacity. Pursuant to a
separate letter agreement, dated September 25, 1998 (the "Spacenet Letter
Agreement"), GE Americom will provide additional bandwidth and power as well as
service protection levels to Spacenet to the extent there is insufficient
bandwidth, power or protection levels available to accommodate existing customer
requirements under Spacenet's existing transponder service agreements with GE
Americom and third party providers.
THE TAX MATTERS AGREEMENT. On September 25, 1998, GE Americom, Spacenet,
the Spacenet subsidiaries and Gilat entered into the Tax Matters Agreement in
connection with the Merger Agreement. The Tax Matters Agreement provides for,
among other , the parties' responsibility for payment of taxes, filing of tax
returns, and control of any audit or other tax proceeding relating to Spacenet
and the Spacenet subsidiaries. The Tax Matters Agreement also contains
representations, covenants and indemnities relating to general tax matters of
the parties.
The Merger was intended to qualify as a "tax-free" reorganization under
Section 368(a) of the Code. The Tax Matters Agreement contains representations
and covenants of the parties relating to the tax-free nature of the Merger. In
addition, GE Americom agreed to enter into a gain recognition agreement (the
"GRA") with the Internal Revenue Service, in which under certain circumstances
during the period ending at the end of the fifth full taxable year following the
Merger, GE Americom will agree to recognize gain as if the Merger were taxable
to GE Americom. In connection with the GRA, Gilat has agreed in the Tax Matters
Agreement not to take certain actions, including, without limitation, the
disposition of the stock of Spacenet and the disposition of "substantially all"
of the assets of Spacenet and the Spacenet subsidiaries, if doing so would cause
GE Americom to recognize gain under the GRA. The Tax Matters Agreement provides
that Gilat, Spacenet and the Spacenet subsidiaries, on the one hand, and GE
Americom, on the other, will indemnify the other party from any tax resulting
from certain breaches of representations and covenants relating to the tax-free
nature of the Merger. Each party's liability for purposes of such
indemnification will be limited in certain respects pursuant to the terms of the
Tax Matters Agreement.
The Tax Matters Agreement provides that the amount of any cash that GE
Americom has a right to receive under the Tax Matters Agreement or any other
agreement related to the Merger will be reduced to the extent that the receipt
of such amount would cause the fair market value of the cash and property other
than ordinary shares received by GE Americom in connection with the Merger, in
exchange for the stock of Spacenet, to exceed 25% of the fair market value of
the ordinary shares delivered by Gilat to GE Americom at Closing, subject to
certain exceptions pursuant to the Tax Matters Agreement.
The Tax Matters Agreement provides that, in certain circumstances, if the
Merger is subject to tax pursuant to Section 367 or Section 368 of the Code
(including, if GE Americom recognizes gain pursuant to the GRA), then GE
Americom shall, subject to applicable United States and Israeli securities laws,
be entitled to sell such number of ordinary shares reasonably necessary in the
opinion of a nationally recognized investment bank to realize net proceeds equal
to the amount of such tax plus the amount of any tax paid by GE Americom in
connection with the sale by GE Americom of such ordinary shares.
82
<PAGE> 83
PART II
ITEM 14: DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 16: CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
Not applicable.
PART IV
ITEM 17: FINANCIAL STATEMENTS
Not applicable.
83
<PAGE> 84
ITEM 18: FINANCIAL STATEMENTS
The Consolidated Financial Statements and related notes thereto required by this
item are contained on pages F-1 through F-43 hereof.
ITEM 19: FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
(a) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
------------------------------------------ ----
<S> <C>
Report of Independent Auditors.........................................................................................F-2
Consolidated Balance Sheets at December 31, 1998 and 1999..............................................................F-3
Consolidated Statements of Income for the Years Ended December 31, 1997, 1998 and 1999.................................F-5
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, F-6
1997, 1998 and 1999.................................................................................................
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999.............................F-7
Notes to Consolidated Financial Statements.............................................................................F-10
Report of Independent Auditors with respect of Gilat Florida ..........................................................F-43
(b) EXHIBITS
--------
2.1 Consent of Kesselman & Kesselman
2.2 Consent of Berman, Hopkins,
Wright & Laham, LLP
</TABLE>
84
<PAGE> 85
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
1999 CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 86
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
1999 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-3-F-4
Statements of income (loss) F-5
Statements of changes in shareholders' equity F-6
Statements of cash flows F-7-F-9
Notes to financial statements F-10-F-42
</TABLE>
The amounts are stated in U.S. dollars ($) in thousands.
F-1
<PAGE> 87
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
GILAT SATELLITE NETWORKS LTD.
We have audited the consolidated balance sheets of Gilat Satellite Networks Ltd.
(the "Company") and its subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of income (loss), changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
Board of Directors and management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We did not audit the financial statements of a certain subsidiary, whose assets
constitute 7.0% and 3.8% of total consolidated assets as of December 31, 1999
and 1998 respectively, and whose revenues constitute 12.9%, 13.4% and 16.7 % of
total consolidated revenues for the years ended December 31, 1999, 1998 and
1997, respectively. The financial statements of the above subsidiary were
audited by other independent auditors, whose report has been furnished to us,
and our opinion, insofar as it relates to amounts included for this subsidiary,
is based solely on the report of the other independent auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and perform
the audits 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 the Company's Board of Directors and management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other independent auditors provide a fair basis for
our opinion.
In our opinion, based on our audits and the report of the other independent
auditors, the aforementioned financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations, changes in shareholders' equity and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles ("GAAP") in Israel.
As applicable to these financial statements Israeli GAAP vary in certain aspects
from U.S. GAAP, as described in notes 7 and 15f.
As described in note 1q, the Company has restated its financial statements for
the year ended December 31, 1998.
/s/ Kesselman & Kesselman
-------------------------
Tel-Aviv, Israel. Kesselman & Kesselman
February 27, 2000, Certified Public
except for notes 8, 10b(5), 16b(1) Accountants (Isr.)
and 16c for which the date is
June 5,2000.
F-2
<PAGE> 88
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1999 1998
---- ----
U.S. $ IN THOUSANDS
-------------------
A S S E T S (note 14e)
<S> <C> <C>
CURRENT ASSETS (note 13):
Cash and cash equivalents 33,381 7,564
Short-term bank deposits and current maturities of long-term
bank deposits (note 14a) 61,540
Accounts receivable (note 14b):
Trade 111,417 71,853
Other 71,982 27,378
Inventories (note 3) 81,060 *84,594
------- -------
T o t a l current assets 359,380 191,389
------- -------
INVESTMENTS AND NON-CURRENT RECEIVABLES:
Long-term bank deposits (note 14c) 50,000 40,701
Investment in associated companies (note 4) 14,054 15,228
Investment in other companies 13,133 1,500
Non-current receivables (note 14d) 31,347 2,173
------- -------
108,534 59,602
------- -------
PROPERTY, PLANT AND EQUIPMENT (note 5):
Cost 198,555 118,357
L e s s - accumulated depreciation and amortization 38,742 23,446
------- -------
159,813 94,911
------- -------
OTHER ASSETS AND DEFERRED CHARGES,
net of accumulated amortization (note 6) 51,126 *55,382
------- -------
T o t a l assets 678,853 401,284
======= =======
</TABLE>
) CHAIRMAN OF THE BOARD OF
) DIRECTORS AND CHIEF
/s/ Yoel Gat
--------------------------------
) EXECUTIVE OFFICER YOEL GAT
) PRESIDENT, CHIEF OPERATING
/s/ Amiram Levinberg
--------------------------------
) OFFICER AND DIRECTOR AMIRAM LEVINBERG
F-3
<PAGE> 89
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1999 1998
---- ----
U.S. $ IN THOUSANDS
-------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES (note 13):
Short-term bank credit (note 14e) 6,986 23,158
Accounts payable and accruals (note 14f):
Trade 39,488 25,102
Accrued expenses 27,833 *39,642
Other 19,766 14,260
-------- --------
T o t a l current liabilities 94,073 102,162
-------- --------
ACCRUED SEVERANCE PAY, net of amount funded (note 7) 1,868 1,218
-------- --------
OTHER LONG-TERM LIABILITIES (note 14g) 8,089 284
-------- --------
CONVERTIBLE SUBORDINATED NOTES (note 8) 75,000 75,000
-------- --------
COMMITMENTS AND CONTINGENT LIABILITY (notes 9 and 16c)
SHAREHOLDERS' EQUITY (note 10):
Share capital and additional paid in capital - ordinary shares of NIS 0.01
par value (authorized - 40,000,000 shares; issued and outstanding:
December 31, 1999 - 21,147,298 shares; December 31, 1998 -
16,162,070 shares) 527,116 266,967
Accumulated other comprehensive income - currency
translation adjustments (2,557)
Accumulated deficit (24,736) *(44,347)
-------- --------
T o t a l shareholders' equity 499,823 222,620
-------- --------
Total liabilities and shareholders' equity 678,853 401,284
======== ========
</TABLE>
* Restated, see note 1q.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-4
<PAGE> 90
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1999 1998 1997
---- ---- ----
U.S. $ IN THOUSANDS
(EXCEPT PER SHARE DATA)
-------------------
<S> <C> <C> <C>
REVENUES (notes 15a and b) 337,873 155,335 103,690
-------- -------- --------
COST OF REVENUES:
Cost of products sold and services rendered (note 15b) 220,139 86,603 58,742
Write-off of inventories associated with restructuring (note 11) 4,634 9,495
-------- -------- --------
224,773 96,098 58,742
-------- -------- --------
GROSS PROFIT 113,100 59,237 44,948
-------- -------- --------
RESEARCH AND DEVELOPMENT COSTS:
Expenses incurred 27,159 15,815 10,615
L e s s - grants (note 15c) 2,368 3,035 2,494
-------- -------- --------
24,791 12,780 8,121
Acquired research and development (note 2a) 80,000
-------- -------- --------
RESEARCH AND DEVELOPMENT COSTS - net 24,791 92,780 8,121
-------- -------- --------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (note 15d) 68,414 29,077 20,321
-------- -------- --------
19,895 (62,620) 16,506
RESTRUCTURING CHARGES (note 11) (356) *11,989
-------- -------- --------
OPERATING INCOME (LOSS) 20,251 (74,609) 16,506
FINANCIAL INCOME (EXPENSES) - net (note 15e) 3,267 (1,247) 538
WRITE-OFF OF INVESTMENTS ASSOCIATED WITH
RESTRUCTURING (note 11) (896) (2,700)
OTHER INCOME - net 162 30
-------- -------- --------
INCOME (LOSS) BEFORE TAXES ON INCOME 22,622 (78,394) 17,074
TAXES ON INCOME (note 12) 2,475 286 130
-------- -------- --------
INCOME (LOSS) AFTER TAXES ON INCOME 20,147 (78,680) 16,944
SHARE IN LOSSES OF ASSOCIATED COMPANIES
(note 4) 536 703
-------- -------- --------
NET INCOME (LOSS) 19,611 (79,383) 16,944
======== ======== ========
EARNINGS (LOSS) PER SHARE (note 15f):
Under U.S. GAAP:
Basic $ 0.96 *$(7.18) $ 1.56
======== ======== ========
Diluted $ 0.92 *$(7.18) $ 1.51
======== ======== ========
Under Israeli GAAP:
Basic $ 0.83 *$(6.37) $ 1.50
======== ======== ========
Diluted $ 0.83 *$(6.37) $ 1.47
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN COMPUTATION OF EARNINGS (LOSS)
PER SHARE - IN THOUSANDS (note 15f):
Under U.S. GAAP:
Basic 20,447 11,059 10,895
======== ======== ========
Diluted 21,429 11,059 11,255
======== ======== ========
Under Israeli GAAP:
Basic 25,177 12,121 11,448
======== ======== ========
Diluted 25,177 12,121 12,152
======== ======== ========
</TABLE>
* Restated, see note 1q.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-5
<PAGE> 91
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED OTHER
<TABLE>
<CAPTION>
SHARE ACCUMULATED OTHER
CAPITAL AND COMPREHENSIVE
ADDITIONAL INCOME - CURRENCY
NUMBER OF PAID-IN TRANSLATION
ORDINARY SHARES CAPITAL ADJUSTMENTS
-------------- ----------- -----------------
IN THOUSANDS U.S.$ IN THOUSANDS
-------------- -----------------------------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 10,822 71,666
CHANGES DURING 1997:
Net income
Employee stock options exercised (note 10b) 168 1,636
------- -------
BALANCE AT DECEMBER 31, 1997 10,990 73,302
CHANGES DURING 1998:
Net loss
Issuance of share capital as consideration
for the acquisition of GE Capital
Spacenet Services, Inc. ("Spacenet") (note 2) 5,000 191,250
Employee stock options exercised (note 10b) 172 2,415
------- -------
BALANCE AT DECEMBER 31, 1998 16,162 266,967
------- -------
CHANGES DURING 1999:
Comprehensive income:
Net income
Other comprehensive income - currency
translation adjustments (2,557)
-------
Total comprehensive income (2,557)
-------
Issuance of share capital in a public
offering in February 1999 (note 10a) 4,711 254,470
------- -------
Employee stock options exercised (note 10b) 274 5,679
------- ------- -------
BALANCE AT DECEMBER 31, 1999 21,147 527,116 (2,557)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
RETAINED
EARNINGS
(ACCUMULATED
DEFICIT) TOTAL
------------ -----
U.S.$ IN THOUSANDS
--------------------------
<S> <C> <C>
BALANCE AT JANUARY 1, 1997 18,092 89,758
CHANGES DURING 1997:
Net income 16,944 16,944
Employee stock options exercised (note 10b) 1,636
------- -------
BALANCE AT DECEMBER 31, 1997 35,036 108,338
CHANGES DURING 1998:
Net loss *(79,383) (79,383)
Issuance of share capital as consideration
for the acquisition of GE Capital
Spacenet Services, Inc. ("Spacenet") (note 2) 191,250
Employee stock options exercised (note 10b) 2,415
------- -------
BALANCE AT DECEMBER 31, 1998 (44,347) 222,620
------- -------
CHANGES DURING 1999:
Comprehensive income:
Net income 19,611 19,611
Other comprehensive income - currency
translation adjustments (2,557)
------- -------
Total comprehensive income 19,611 17,054
------- -------
Issuance of share capital in a public
offering in February 1999 (note 10a) 254,470
-------
Employee stock options exercised (note 10b) 5,679
------- -------
BALANCE AT DECEMBER 31, 1999 (24,736) 499,823
------- -------
------- -------
</TABLE>
* Restated, see note 1q.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-6
<PAGE> 92
(Continued) - 1
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1999 1998 1997
---- ---- ----
U.S. $ IN THOUSANDS
-------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 19,611 *(79,383) 16,944
Adjustments required to reconcile net income (loss) to net
cash used in operating activities (a) (63,352) 71,003 (24,873)
-------- -------- --------
Net cash used in operating activities (43,741) (8,380) (7,929)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net of
related grants (91,966) (15,759) (25,935)
Deferred charges (951)
Deconsolidation of subsidiary consolidated in previous
years (b) (2,680)
Investment in companies (11,885) (3,013) (3,497)
Short-term bank deposit (20,000) 10,000 (10,000)
Long-term bank deposits (50,000) (681) (40,000)
Long-term loans to associated company (500) (8,500)
Acquisition of subsidiary consolidated for the first time (c) 18
Proceeds from disposal of property, plant and equipment 172 1 25
Customer acquisition cost (2,000)
-------- -------- --------
Net cash used in investing activities (174,179) (22,614) (80,358)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of share capital in a public offering in February 1999
(note 10a) 254,470
Employee stock options exercised and paid (note 10b) 5,679 2,415 1,636
Issuance of convertible subordinated notes, net of
issuance expenses of $ 3,182,000 (note 8) 71,818
Short-term bank credit - net (16,172) 20,439 2,137
-------- -------- --------
Net cash provided by financing activities 243,977 22,854 75,591
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (240)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,817 (8,140) (12,696)
BALANCE OF CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 7,564 15,704 28,400
-------- -------- --------
BALANCE OF CASH AND CASH EQUIVALENTS
AT END OF YEAR 33,381 7,564 15,704
======== ======== ========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION - cash paid during the year
for:
Interest 6,096 5,786 2,832
======== ======== ========
Income tax 1,989 127 40
======== ======== ========
</TABLE>
* Restated, see note 1q.
F-7
<PAGE> 93
(Continued) - 2
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1999 1998 1997
---- ---- ----
U.S. $ IN THOUSANDS
-------------------
<S> <C> <C> <C>
(a)ADJUSTMENTS REQUIRED TO RECONCILE NET INCOME (LOSS) TO
NET CASH USED IN OPERATING ACTIVITIES:
Income and expenses not involving cash flows:
Depreciation and amortization 22,652 5,129 3,069
Acquired research and development 80,000
Share in losses of associated companies and
unrealized gains on sales to associated companies 1,674 1,240
Gain on decrease in percentage of shareholding in a
subsidiary (1,344)
Increase in accrued severance pay - net 650 355 256
Interest accrued on bank deposits (3,542) (20) (683)
Write down of investments due to restructuring 1,235
Transaction gain (444)
Capital loss on sale of property, plant and equipment 98
Deferred income taxes - net 265 (3)
Other (7) 574 2
------- ------- -------
21,346 87,169 2,641
------- ------- -------
Changes in certain asset and liability items:
Decrease (increase) in accounts receivable:
Trade (40,013) (35,157) (12,907)
Other (including non-current receivables) (79,452) 10,257 (4,091)
Increase (decrease) in accounts payable and accruals:
Trade 14,655 3,886 1,046
Accrued expenses (6,769) 12,047 2,279
Other (including other long-term liabilities) 13,016 (5,735) 706
Decrease (increase) in inventories 13,865 (1,464) (14,547)
------- ------- -------
(84,698) (16,166) (27,514)
------- ------- -------
(63,352) 71,003 (24,873)
======= ======= =======
(b)DECONSOLIDATION OF SUBSIDIARY CONSOLIDATED IN PREVIOUS
YEARS, SEE ALSO NOTE 4a:
Assets and liabilities of the subsidiary previously
consolidated at date of deconsolidation:
Working capital (excluding cash and cash
equivalents) (2,797)
Property, plant and equipment and deferred charges 1,003
Gain on decrease in percentage of shareholding 1,344
Share in shareholders' equity of the subsidiary
after deconsolidation (2,230)
-------
(2,680)
=======
</TABLE>
F-8
<PAGE> 94
(Concluded) - 3
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-------------------
U.S. $ IN THOUSANDS
-------------------
<S> <C>
(c) ACQUISITION OF SUBSIDIARY CONSOLIDATED FOR THE FIRST TIME,
SEE ALSO NOTE 2:
Assets and liabilities of the subsidiary at date of
acquisition:
Working capital (excluding cash and cash
equivalents) *(30,247)
Property and equipment (35,113)
Other assets (5,396)
Goodwill and identifiable intangible assets arising on acquisition *(46,958)
Acquired research and development (80,000)
Accrued expenses relating to the acquisition 6,759
Issuance of share capital in connection to the
acquisition 190,973
-------
18
=======
</TABLE>
* Restated, see note 1q.
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING
CASH FLOWS
On December 31, 1998, the Company acquired Spacenet. The acquisition was made in
exchange for ordinary shares of the Company, see note 2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-9
<PAGE> 95
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies, applied on a consistent basis,
are as follows (see also q. below):
a. GENERAL:
1) Nature of operations
Gilat Satellite Networks Ltd. (the "Company") and its
wholly-owned subsidiaries (the "Group"), operate in one
business segment - design, development, manufacturing,
marketing and service of very small aperture terminal
("VSAT") satellite earth stations.
As to the principal markets and customers, see note
15a.
2) Functional currency
The currency of the primary economic environment in
which the operations of the Company and most of its
subsidiaries are conducted is the U.S. dollar
("dollar"). Substantially, all the sales of the Group's
products are made outside Israel in non- Israeli
currencies (mainly the dollar). Service income is also
derived mainly in dollars. Thus, the functional
currency of these companies is the dollar.
For the Company and those subsidiaries whose functional
currency is the dollar transactions and balances
originally denominated in dollars are presented at
their original amounts. Balances in non-dollar
currencies are translated into dollars using historical
and current exchange rates for non-monetary and
monetary balances, respectively. For non-dollar
transactions and other items (stated below) reflected
in the income statements, the following exchange rates
are used: (i) for transactions: exchange rates at
transaction dates or average rates and (ii) for other
items (derived from non-monetary balance sheet items
such as depreciation and amortization, changes in
inventories, etc.)-historical exchange rates. The
resulting currency transaction gains or losses are
carried to financial income or expenses, as
appropriate.
The financial statements of certain European
subsidiaries whose functional currency is their local
currency, are translated into dollars in accordance
with the principles set forth in Statement of Financial
Accounting Standards ("FAS") No. 52 of the Financial
Accounting Standards Board of the United States
("FASB"), "Foreign Currency Translation": assets and
liabilities are translated using the year-end rate of
exchange; results of operations are translated at
average exchange rates during the year. The resulting
aggregate translation adjustments are reported as a
component of "accumulated other comprehensive income".
F-10
<PAGE> 96
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
3) Accounting principles
The financial statements are prepared in accordance
with generally accepted accounting principles ("GAAP")
in Israel. As applicable to these financial statements,
Israeli GAAP vary in certain aspects from U.S. GAAP, as
described in notes 7 and 15f.
4) Use of estimates in preparation of financial statements
The preparation of financial statements in conformity
with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses
during the reporting years. Actual results could differ
from those estimates.
b. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Intercompany
balances and transactions have been eliminated in
consolidation.
c. CASH EQUIVALENTS AND SHORT-TERM BANK DEPOSITS
The Group considers all highly liquid investments, which
include short-term bank deposits (up to three months from date
of deposit) that are not restricted as to withdrawal or use,
to be cash equivalents. Bank deposits with an original
maturity of more than three months but less than one year
(from date of deposit) are presented as "short-term bank
deposits".
d. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is determined for specific
debts doubtful of collection.
e. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined as follows: raw materials and components - on the
weighted average basis; labor and overhead - on the basis of
actual manufacturing costs.
F-11
<PAGE> 97
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
f. INVESTMENT IN ASSOCIATED COMPANIES
In these financial statements, associated companies are
companies controlled to the extent of 20% or more (which are
not subsidiaries), or companies less than 20% controlled which
comply with the condition relating to "significant influence".
The investment in associated companies is accounted for by the
equity method. Profits on intercompany sales - not realized
outside the Group - were eliminated.
g. INVESTMENT IN OTHER COMPANIES
The investment in these companies is stated at cost. Any
decrease in value of investments which is other than temporary
is recorded when it becomes known.
h. PROPERTY, PLANT AND EQUIPMENT
These property, plant and equipment are stated at cost.
Property, plant and equipment of acquired subsidiaries are
included at their fair value at date of acquisition of these
subsidiaries.
The assets are depreciated by the straight-line method, on the
basis of their estimated useful life.
Annual rates of depreciation are as follows:
<TABLE>
<CAPTION>
%
-------
<S> <C>
Buildings 2
Computers and electronic equipment 8-33
Office furniture and equipment 6;10;20
Vehicles 15
</TABLE>
Equipment leased to others under operating lease contracts is
depreciated by the straight-line method over the term of the
lease (usually 5 years), which is shorter than the useful life
of the equipment.
Leasehold improvements are amortized by the straight-line
method over the term of the lease or the estimated useful life
of the improvements, whichever is shorter.
i. OTHER ASSETS AND DEFERRED CHARGES:
1) Other assets
Goodwill and other identifiable intangible assets (see
note 2a) are stated at cost and amortized by the
straight-line method over an average period of 15 years.
2) Deferred charges
Issuance costs of the convertible subordinated notes (see
note 8) are amortized by the straight-line method over
the period from issuance date to maturity date. Customer
acquisition cost is amortized by the straight-line method
over the contract term.
F-12
<PAGE> 98
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
j. REVENUE RECOGNITION:
1) Sale of products
Revenue from sales of products is recognized upon
shipment to the customer. Cost of sales includes an
estimate of costs associated with installation and
warranty.
The present values of payments due under sales-type-lease
contracts are recorded as revenues and cost of sales is
charged with the book value of equipment at the time of
shipment. Future interest income is deferred and
recognized over the related lease term.
Revenues from long-term contracts are recognized on the
percentage-of-completion method, measured using the ratio
of material costs incurred to date to estimated total
material costs for each contract.
2) Service revenue
Service revenue is recognized ratably over the
contractual period or as services are preformed.
3) Operating leases
Revenue from lease of equipment is recognized ratably
over the lease period.
k. RESEARCH AND DEVELOPMENT
Research and development expenses are charged to income as
incurred. Grants and participations received from the Israeli
Government for development of approved projects are recognized
as a reduction of expenses when the related cost is incurred.
No liability is recorded for funds received from the Israeli
Government, because the Company is not obligated to repay any
funds regardless of the outcome of the research and
development (see also note 9a).
l. INCOME TAXES:
1) Deferred income taxes are computed for temporary
differences between the assets and liabilities as measured
in the financial statements and for tax purposes, at the
tax rates expected to be in effect when these differences
reverse.
As to the main factors in respect of which deferred income
taxes have been provided, see note 12d.
2) The Company may incur additional tax liability in the
event of intercompany dividend distribution; no additional
tax has been provided, since it is the Company's policy
not to distribute, in the foreseeable future, dividends
which would result in additional tax liability.
3) Taxes which would apply in the event of disposal of
investments in subsidiaries (all of which are non-Israeli
subsidiaries) have not been taken into account in
computing the deferred taxes, as it is the Company's
policy to hold these investments indefinitely.
4) Upon the distribution of dividends from the tax-exempt
income of approved enterprises (see also note 12a(1)), the
amount distributed will be subject to tax at the rate that
would have been applicable had the Company not been
exempted from payment thereof. The Company intends to
permanently reinvest the amounts of tax exempt income.
Therefore, no deferred income taxes have been provided in
respect of such tax-exempt income.
F-13
<PAGE> 99
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
m. COMPREHENSIVE INCOME
The Company presents its comprehensive income in the
consolidated statements of changes in shareholders' equity.
n. IMPAIRMENT OF LONG-LIVED ASSETS
FAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" requires
that long-lived assets, identifiable intangibles and goodwill
related to those assets to be held and used by an entity be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets
may not be recoverable. Under FAS 121, if indicators of
impairment are present, the existence of impairment is
identified by comparing the carrying amount of the potentially
impaired asset to the undiscounted cash flows from use and
eventual disposition of that asset. If the carrying amount of
the asset being evaluated is greater than the undiscounted
cash flows from use and eventual disposition of that asset,
then impairment is measured based on the excess, if any, of
the carrying amount over the fair value of that asset.
o. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
1) In June 1998, the FASB issued FAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". FAS
133 established new accounting and reporting standards
for derivatives and hedging activities. FAS 133 requires
companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those
derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge
accounting. FAS 133 is effective for calendar-year
companies from January 1, 2000. The Company is currently
evaluating the impact FAS 133 will have on its financial
statements.
2) In December 1999, the United States Securities and
Exchange Commission (the "SEC") issued Staff Accounting
Bulletin No.101 ("SAB 101"), "Revenue Recognition in
Financial Statements". SAB 101 summarizes the SEC's
interpretation of the application of GAAP to revenue
recognition.
The Company is currently evaluating the impact that SAB
101 will have on its financial statements.
p. RECLASSIFICATION
Certain prior year figures have been reclassified in order to
conform with the 1999 presentation.
q. RESTATEMENT
In 1999, the Company restated its financial statements as of
December 31, 1998 and for the year then ended, with respect to
the restructuring charges recorded as a result of the
acquisition of Spacenet (see also notes 2 and 11).
F-14
<PAGE> 100
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
The effect of the restatement is as follows:
1) Balance sheet as of December 31, 1998:
<TABLE>
<CAPTION>
AS REPORTED
AS IN THESE
PREVIOUSLY EFFECT OF FINANCIAL
REPORTED RESTATEMENT STATEMENTS
-------- ----------- ----------
U.S. $ IN THOUSANDS
-------------------
<S> <C> <C> <C>
Inventories 72,594 12,000 84,594
Other assets and deferred charges, net
of accumulated amortization 76,382 (21,000) 55,382
Accrued expenses (50,892) 11,250 (39,642)
Shareholders' equity - accumulated deficit 46,597 (2,250) 44,347
</TABLE>
2) Net loss for the year ended December 31, 1998:
<TABLE>
<CAPTION>
U.S. $ IN
THOUSANDS
---------
<S> <C>
Net loss, as previously reported (81,633)
Effect of restatement -
restructuring charges 2,250
--------
Net loss, as reported in these
financial statements (79,383)
========
</TABLE>
3) Loss per share for the year ended December 31, 1998:
<TABLE>
<CAPTION>
a) Under U.S. GAAP:
U.S. $
------
<S> <C>
Loss per share - basic and diluted, as
previously reported (7.38)
Effect of restatement 0.20
------
Loss per share - basic and diluted, as
reported in these financial statements (7.18)
======
b) Under Israeli GAAP:
Loss per share - basic and diluted, as
previously reported (6.55)
Effect of restatement 0.18
------
Loss per share - basic and diluted, as
reported in these financial statements (6.37)
======
</TABLE>
F-15
<PAGE> 101
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITION OF SPACENET:
a. On December 31, 1998, the Company acquired from GE American
Communications, Inc. ("GE Americom") the entire share capital
of GE Capital Spacenet, Inc., which was renamed Spacenet, Inc.
("Spacenet"), as well as the entire share capital of two
European affiliates of Spacenet. Spacenet is a United States
corporation, which offers a wide range of satellite-based
networking products and services through VSAT networks. Prior
to the acquisition, Spacenet was the Company's largest
customer (see note 15a).
In consideration, the Company issued 5,000,000 ordinary shares
of NIS 0.01 par value to GE Americom and its affiliates; these
shares represented approximately 30% of the Company's
outstanding shares at date of issuance (23.6% as of December
31, 1999).
The acquisition of Spacenet was accounted for by the purchase
method. The purchase price - of $ 191 million - is based on an
average market price of the Company's ordinary shares a few
days before and after the announcement of the transaction.
The Company has allocated the excess of the purchase price
over the fair value of net tangible assets acquired; an amount
of $ 80 million out of the total acquisition cost was
attributed to in-process research and development, the
technological feasibility of which has not yet been
established and for which there is no alternative future use.
Consequently, as of December 31, 1998, the Company recorded a
one-time non-cash charge of $ 80 million.
The balance of the excess purchase price in the amount of $ 51
million was attributed to goodwill and other intangible
assets.
Following the acquisition, Spacenet incurred a charge of
approximately $ 12.2 million (the amount is after the effect
of restatement, see note 1q), to eliminate unnecessary
inventory and property, plant and equipment. The charges were
taken into consideration in the allocation of the purchase
price. In 1999, there were no significant adjustments to these
charges, except for the effect of the restatement mentioned
above.
b. Hereafter are the unaudited proforma combined condensed income
statements for the years ended December 31, 1998 and 1997,
assuming that the acquisition of Spacenet had occurred on
January 1, 1998 and 1997, respectively, after giving effect to
certain adjustments, including amortization of identifiable
intangible assets of Spacenet, the elimination of intercompany
transactions and profits not yet realized outside the Group,
and excluding nonrecurring items which are acquired research
and development costs and costs associated with the 1998
restructuring.
F-16
<PAGE> 102
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITION OF SPACENET (continued):
The proforma financial information is not necessarily
indicative of the combined results that would have been
attained had the acquisition taken place at the beginning of
1997, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
*1998 *1997
-----------------------
U.S. $ IN THOUSANDS
-----------------------
(EXCEPT PER SHARE DATA)
(UNAUDITED)
-----------------------
<S> <C> <C>
Revenues 237,642 189,930
======= ========
Net loss (11,286) (14,221)
======= ========
Loss per share - under U.S. GAAP -
basic and diluted $(0.70) $(0.89)
======= =======
</TABLE>
* Restated, see note 1q.
NOTE 3 - INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1999 1998
---- ----
U.S. $ IN THOUSANDS
-------------------
<S> <C> <C>
Raw materials and components 29,431 7,668
Work in process 10,031 9,476
Finished products 24,648 66,553
Cost and estimated earnings in excess of
billings on uncompleted contracts* 16,950 897
------- -------
81,060 84,594
======= =======
* Composed as follows:
Cost incurred on uncompleted contracts 21,839 3,226
Estimated earnings 9,167 3,205
------- -------
31,006 6,431
Less - billings (14,056) (5,534)
------- -------
16,950 897
======= =======
</TABLE>
F-17
<PAGE> 103
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - INVESTMENTS IN ASSOCIATED COMPANIES:
a. In April 1998, a then wholly-owned subsidiary - Global
Village Telecom (Antilles) N.V. ("GVT") - completed a private
placement with an international group of investors, which
invested $ 40 million in GVT and was issued approximately
91.8% of its share capital. The Company invested $ 2.5
million in GVT as part of the private placement. Following
the private placement, the Company's shareholding was reduced
to 5.7%, generating a gain of $ 1,344,000, included in other
income - net, and GVT became an associated company, since the
Company has retained significant influence therein.
Approximately 2.5% of the share capital of GVT is held by the
Company's senior employees and directors.
The Company provided a $ 7.5 million loan convertible into
GVT's common stock which, in the event of conversion, would
confer upon the Company a further 15% shareholding in GVT. The
Company holds warrants upon exercise of which it would obtain
a maximum of 40% of the share capital of GVT, under certain
circumstances.
In April 2000, the Company and the other shareholders in GVT
entered into an agreement pursuant to which the latter are to
exchange all of their rights in GVT for the rights of GVT 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 loan to a new unrelated 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. Following the
transaction, the Company, together with its employees, is to
hold 100% of GVT.
b. THE INVESTMENTS ARE COMPOSED AS FOLLOWS:
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1999 1998
---- ----
U.S. $ IN THOUSANDS
-------------------
<S> <C> <C>
Shares:
Cost 8,508 8,508
Share in accumulated losses (3,454) (1,780)
------- -------
5,054 6,728
Long-term loans* 9,000 8,500
------- -------
T o t a l investments 14,054 15,228
======= =======
</TABLE>
* The loans are denominated in dollars, bear no interest
and maturity dates have not yet been determined.
F-18
<PAGE> 104
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:
a. COMPOSITION OF ASSETS, GROUPED BY MAJOR CLASSIFICATIONS, IS AS
FOLLOWS:
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION
COST AND AMORTIZATION
---- ------------------------
DECEMBER 31 DECEMBER 31
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
U.S. $ IN THOUSANDS U.S. $ IN THOUSANDS
------------------- -------------------
<S> <C> <C> <C> <C>
Buildings and land 34,177 26,094 1,033 644
Computers and electronic equipment 83,325 37,788 21,150 12,780
Equipment leased to others 40,999 31,322 13,741 7,556
Office furniture and equipment 8,603 6,074 1,955 2,194
Leasehold improvements 3,536 1,681 733 163
Vehicles 393 289 130 109
------- ------- ------- -------
171,033 103,248 38,742 23,446
Building under construction 27,522 15,109
------- ------- ------- -------
198,555 118,357 38,742 23,446
======= ======= ======= =======
</TABLE>
b. Depreciation and amortization expenses totaled $ 18,562,000, $
4,650,000 and $ 2,787,000 in 1999, 1998 and 1997,
respectively.
NOTE 6 - OTHER ASSETS AND DEFERRED CHARGES:
<TABLE>
<CAPTION>
ORIGINAL AMOUNTS UNAMORTIZED BALANCE
---------------- -------------------
DECEMBER 31 DECEMBER 31
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
U.S. $ IN THOUSANDS
Goodwill and identifiable intangible assets
resulting from the acquisition of
<S> <C> <C> <C> <C>
Spacenet (see note 2) 51,451 50,573 47,195 50,573
Issuance costs of convertible subordinated
notes (see note 8) 3,182 3,182 1,990 2,445
Deferred income taxes (see note 12d) 141 364 141 364
Other 2,000 2,000 1,800 2,000
------- ------ ------- ------
56,774 56,119 51,126 55,382
======= ====== ======= ======
</TABLE>
F-19
<PAGE> 105
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - SEVERANCE PAY:
a. Israeli law generally requires payment of severance pay upon
dismissal of an employee or upon termination of employment in
certain other circumstances. The Company's severance pay
liability to its Israeli employees, based upon the number of
years of service and the latest monthly salary, is partly
covered by purchase of insurance policies. Under labor
agreements, these insurance policies are, subject to certain
limitations, the property of the employees.
The amounts accrued and the portion funded by the insurance
policies are reflected in the balance sheets as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
---- ----
U.S. $ IN THOUSANDS
-------------------
<S> <C> <C>
Accrued severance pay 4,968 3,608
L e s s - amounts funded 3,100 2,390
----- ------
Unfunded balance 1,868 1,218
===== ======
</TABLE>
The amounts of accrued severance pay as above cover the
severance pay liability of the Company in accordance with
labor agreements in force and based on salary components
which, in management's opinion, create entitlement to
severance pay.
The Company may only make withdrawals from the amounts
funded by insurance policies for the purpose of paying
severance pay.
Under Israeli GAAP, amounts funded by purchase of insurance
policies, as above, are deducted from the related severance
pay liability. Under U.S. GAAP, the amounts funded should be
presented as a long-term investment among the Group's
assets.
b. Severance pay expense totaled $ 1,807,000, $ 1,222,000 and $
838,000 in 1999, 1998 and 1997, respectively.
NOTE 8 - CONVERTIBLE SUBORDINATED NOTES
The notes bear interest at an annual rate of 6.5%, payable June 1
and December 1 of each year, commencing December 1, 1997 and are
due on June 1, 2004. Unless previously redeemed, the notes are
convertible by the holders, at any time through maturity, into
ordinary shares of the Company at a conversion price of $ 42 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 June 5, 2000 at the redemption price, plus
interest accrued to the redemption date.
On May 1, 2000, the Company published a notice of optional
redemption of the notes on June 5, 2000, at 102% of the principal
amount thereof plus interest accrued and unpaid as of the
redemption date.
Through June 5, 2000, the notes have been converted into 1,785,690
ordinary shares.
F-20
<PAGE> 106
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - COMMITMENTS:
a. ROYALTY COMMITMENTS:
1) The Company is committed to pay royalties to the
Israeli Government on proceeds from sale of products in
the research and development of which the Government
participated by way of grants. At the time the
participations were received, successful development of
the related projects was not assured. Under the terms
of the Company's funding from the Israeli Government,
royalties of 3%-5% are payable on sales of products
developed from a project so funded, up to 100% of the
dollar-linked grant received as from January 1, 1999,
with the addition of the annual interest rate based on
LIBOR. In the case of failure of a project that was
partly financed by royalty-bearing Government
participations, the Company is not obligated to pay
such royalties to the Israeli Government.
As of December 31, 1999, the balance of the amount
received which is subject to repayment under these
royalty agreements on future sales, is $ 1.8 million.
2) The Company is committed to pay royalties to the U.S. -
Israel Science and Technology Foundation ("USISTF") on
proceeds from sale of products in the research and
development of which the USISTF participated by way of
grants. At the time the participations were received,
successful development of the related projects was not
assured. Under the terms of the Company's funding from
the USISTF, royalties of 2% per annum are payable on
sales of products developed from a project so funded,
up to 100% of the dollar grant received. In case of
failure of a project that was partly financed by
royalty-bearing USISTF participations, the Company is
not obligated to pay such royalties to the USISTF.
b. COMMITMENT IN RESPECT OF BUILDING UNDER CONSTRUCTION
As of December 31, 1999, the Company is committed to pay an
additional $ 5.1 million to complete the construction of a building.
c. LEASE COMMITMENTS
Minimum lease commitments of certain subsidiaries under
operating lease agreement in respect of premises occupied by them, at rates in
effect as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
$ IN THOUSANDS
--------------
<S> <C>
Year ending December 31:
2000 5,502
2001 3,966
2002 3,489
2003 3,452
2004 and thereafter 5,223
------
21,632
======
</TABLE>
Rent expense totaled $ 4,314,000, $ 208,000 and $ 175,000 in 1999, 1998 and
1997, respectively.
F-21
<PAGE> 107
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - COMMITMENTS (continued):
d. COMMITMENTS IN RESPECT OF SPACE SEGMENT SERVICES
All the required space segment services necessary to meet the
terms of customer contracts are obtained from either GE Americom or unrelated
third parties under long-term contracts ranging from one to eleven years.
Future minimum payments due to mainly GE Americom for space
segment services as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
$ IN THOUSANDS
--------------
<S> <C>
Year ending December 31:
2000 25,952
2001 23,759
2002 22,239
2003 22,587
2004 and thereafter 16,629
-------
111,166
=======
</TABLE>
e. AGREEMENTS RELATING TO THE COMPANY'S PRODUCTS
Under an agreement between Gilat Communications Ltd. ("Gilat
Communications") , a related party, and the Company, Gilat Communications has
been granted an exclusive right to market the lines of the satellite
communications products and related components and options and to provide
services with such products in Israel and areas controlled by the Palestinian
Authority through October 31, 2002. The agreement also provides for Gilat
Communications to be a non-exclusive distributor of the Company in South Africa.
NOTE 10 - SHAREHOLDERS' EQUITY:
a. SHARE CAPITAL:
1) The Company's shares are traded in the United States on
the Nasdaq National Market under the symbol GILTF.
2) The February 1999 Public Offering
Under a prospectus published in the United States on
February 2, 1999, 5,456,750 ordinary shares of NIS 0.01
par value were offered in a public offering (the
"offering"): 4,711,750 ordinary shares by the Company
(including underwriters option which was fully
exercised) and 745,000 ordinary shares by certain
shareholders, for $ 57 per share.
The net proceeds to the Company - approximately $ 254
million - are net of 4% underwriting discount and
offering costs of $ 3.4 million.
F-22
<PAGE> 108
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
b. STOCK OPTIONS:
1) In January 1993, the Company adopted the following 1993
Stock Option Plans (the "1993 Plans"):
a) An Incentive and Restricted Stock Option Plan for
employees who are United States residents (the
"1993 United States Plan"), which provides for the
grant of:
(1) Incentive Stock Options as defined under
Section 422 of the Internal Revenue Code of
1986 (as amended) (the "1993 Incentive
Options"); and
(2) Restricted Stock Options (the "1993
Restricted Options").
b) A Section 102 Stock Option/Stock Purchase Plan
promulgated under section 102 of the Israeli
Income Tax Ordinance (the "1993 Israeli Plan"),
for Israeli employees.
In June 1995, the Company adopted the following 1995
Stock Option Plans, as amended in 1997, 1998 and
1999(the "1995 Plans"):
a) An Incentive and Restricted Stock Option Plan for
employees who are United States residents (the
"1995 United States Plan"), which provides for the
grant of:
(1) Incentive Stock Options as defined under
Section 422 of the Internal Revenue Code of
1986 (as amended) (the "1995 Incentive
Options"); and
(2) Restricted Stock Options (the "1995
Restricted Options").
b) A Section 102 Stock Option/Stock Purchase Plan
promulgated under section 102 of the Israeli
Income Tax Ordinance (the "1995 Israeli Plan"),
for Israeli employees.
c) Advisory Board Stock Option Plan (the "1995
Advisory Board Plan"), which provides for the
grant of options to members of the Advisory Board
who are not eligible for tax benefits under any of
the other plans.
The 1993 and 1995 Plans provide for the grant by the
Company of options and/or rights to purchase ordinary
shares to officers, directors, key employees or
advisors of the Company and any of its subsidiaries.
The 1993 and 1995 Plans will remain in force for 10
years from the dates of approval, unless terminated
earlier by the Board of Directors.
F-23
<PAGE> 109
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
Details of the options and/or rights under the 1993 and
the 1995 Plans (as amended in 1997, 1998 and 1999) are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
-------------------------
NUMBER OF ORDINARY SHARES
-------------------------
<S> <C> <C>
Total number authorized:
The 1993 Plans:
The United States Plan 95,550 95,550
The Israeli Plan 222,950 222,950
--------- ---------
318,500 318,500
--------- ---------
The 1995 Plans:
The United States Plan 2,440,000 1,940,000
The Israeli Plan 2,120,000 1,620,000
The Advisory Board Plan 150,000 150,000
--------- ---------
4,710,000 3,710,000
--------- ---------
5,028,500 4,028,500
Options granted 4,214,385 2,228,961
--------- ---------
Available for future grant 814,115 1,799,539
========= =========
</TABLE>
The exercise price per share under the 1993 and 1995
Incentive Options Plans shall not be less than the
market price of an ordinary share at the date of grant
(and, in the case of an option holder who owns more
than 10% of the voting shares of the Company - 110% of
the market value at the date of grant).
The exercise price per share under the 1993 and 1995
Restricted Options Plans is to be determined by a
committee appointed by the Board of Directors (the
"Stock Option Committee"), in accordance with the terms
of the plan.
The rights of the ordinary shares obtained upon
exercise of the options will be identical to those of
the other ordinary shares of the Company
The exercise and/or purchase price per share under the
1993 and 1995 Israeli Plans is to be determined by the
Stock Option Committee. Section 102 of the Israeli
Income Tax Ordinance and the rules promulgated
thereunder provide that the Company will be allowed to
claim as an expense for tax purposes the amounts
credited to the employees as a benefit when the related
capital gains tax is payable by the employee.
The exercise price per share under the 1995 Advisory
Board Plan is to be determined by the Stock Option
Committee, in accordance with the terms of the plan.
F-24
<PAGE> 110
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
Most of the above options become exercisable over a
vesting period of four years (1/16 of the options every
quarter). The options will expire 10 years after the
date of grant.
2) A summary of the status of the plans as of December 31,
1999, 1998 and 1997, and changes during the years ended
on those dates, is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------
1999 1998 1997
---------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
--------- ----- --------- ----- ------- -----
$ $ $
----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
at beginning of
year 1,886,538 32.93 1,089,203 24.52 597,674 14.00
Changes during the
year:
Granted 2,286,500 52.15 1,027,400 42.84 666,200 30.23
Exercised (256,145) 21.82 (156,565) 14.50 (167,138) 9.86
Repriced*:
Old exercise
price (664,200) 30.26
New exercise
price 664,200 23.25
Forfeited (301,076) 53.46 (73,500) 22.97 (7,533) 19.52
-------- -------- -------
Options outstanding
at end of year 3,615,817 44.16 1,886,538 32.93 1,089,203 24.52
======== ======== ========
Options exercisable
at year-end 816,502 35.82 217,128 17.56 201,268 15.88
======== ======== ========
Weighted average
fair value of
options granted
during the year $24.42 $17.72 $11.90
======== ======== ========
</TABLE>
* In January 1998, 664,200 options awarded in earlier
years, with a weighted average exercise price of $
30.26 per share, were repriced to a weighted average
exercise price of $ 23.25 per share. The revised
exercise price is equal to the price of the shares on
the date of the repricing.
F-25
<PAGE> 111
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
====== ====== ======
Expected volatility 42.6% 24.9% 24.8%
====== ====== ======
Risk-free interest rate 5.0% 5.0% 6.1%
====== ====== ======
Expected average lives - in years 3.0 3.0 3.0
====== ====== ======
</TABLE>
The following table summarizes information about
options outstanding and exercisable at December 31,
1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------- -----------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, EXERCISE
EXERCISE PRICE 1999 CONTRACTUAL LIFE EXERCISE PRICE 1999 PRICE
----------- ----------- ----------- ----------- ----------- -----------
$ YEARS $ $
- ----- - -
<S> <C> <C> <C> <C> <C>
7.5 - 12.0 73,742 5.50 9.45 71,334 9.15
12.5 - 22.0 39,972 6.39 18.73 25,409 19.90
22.5 - 25.0 601,728 7.32 23.29 326,724 23.30
25.5 - 40.0 169,050 8.43 36.03 23,108 35.16
40.5 - 50.0 1,580,375 9.24 46.47 98,296 47.79
50.5 - 77.0 1,150,950 9.16 56.21 271,631 55.11
-------- -------
3,615,817 8.75 44.16 816,502 35.82
======== =======
</TABLE>
3) In December 1992, the Company granted options outside of
any stock option plan to two then officers. One officer,
who has since again become an officer of the Company, was
granted an option to purchase 24,500 ordinary shares, at
an exercise price of $ 0.33 per ordinary share, and the
other was granted an option to purchase 33,333 ordinary
shares at an exercise price of $ 12.00 per share, both on
terms and conditions comparable to those provided for
under the 1993 Plans. As of December 31, 1999, 33,333 of
the options were exercised at an exercise price of $
12.00 per share. The options will expire 10 years after
the date of grant.
4) Accounting treatment of the plans
As permitted by FAS No. 123 - "Accounting for Stock-Based
Compensation", the Company accounts, under Israeli and
U.S. GAAP, for its stock option plans ("the plans") using
the treatment prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under APB 25, compensation cost
for employee stock option plans is measured using the
intrinsic value based method of accounting.
F-26
<PAGE> 112
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
Accordingly, the difference, if any, between the quoted
market price of the shares on the date of the grant of the
options and the exercise price of such options will be
charged to income over the expected service period
(usually - four years). The amount of the difference will
be correspondingly credited to capital surplus.
No compensation cost has been charged against income in
the years ended December 31, 1999, 1998 and 1997, because
the exercise prices of the options granted in these years
were equal to the market value of the shares at the date
of grant.
Had compensation cost for the Company's plans been
determined based on the fair value at the grant dates for
awards granted since 1995, consistent with the method of
FAS 123 the Company's net income (loss) and earnings
(loss) per share would have been reduced to the proforma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- ---------------------
AS REPORTED PROFORMA AS REPORTED PROFORMA AS REPORTED PROFORMA
------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) -
in thousands of
dollars 19,611 (335) *(79,383) *(83,770) 16,944 14,876
======= ======= ======= ======= ====== =======
Earnings (loss) per
under U.S.
GAAP share - in
dollars: Basic 0.96 (0.02) *(7.18) *(7.57) 1.56 1.37
======= ======= ======= ======= ====== =======
Diluted 0.92 (0.02) *(7.18) *(7.57) 1.51 1.32
======= ======= ======= ======= ====== =======
</TABLE>
* Restated, see note 1q.
5) Subsequent to December 31, 1999, the Company increased
the number of options of the 1995 United States Plans
by 3,750,000 options, to 8,460,000 options.
Subsequent to December 31, 1999, the Company granted
approximately 3.3 million options to its employees.
c. DIVIDENDS:
1) In the event of distribution of cash dividends, the
Company would be subject to a 15%, 20% or 25% tax on
virtually all the dividends distributed; the Company is
otherwise exempt from tax due to its "approved
enterprise" status, as explained in note 12a(1).
Effectively, the above mentioned dividend distribution
would be reduced by the amount of the tax. See note
12a(1) and d(4).
F-27
<PAGE> 113
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
2) 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.
3) Pursuant to the terms of a credit line from a bank (see
note 14e), the Company is restricted from paying cash
dividends to its shareholders.
NOTE 11 - RESTRUCTURING CHARGES
At the end of 1998 and during 1999, as a result of the
acquisition of Spacenet, the Group recorded restructuring
charges of $ 24,184,000 (the amount is after the effect of
restatement, see also note 1q) and $ 5,174,000, respectively.
The restructuring consisted of a series of actions taken in
order to move forward with one platform for the interactive
VSAT market as well as to capitalize on current product demand
for other VSAT products. The restructuring charges and the
related write-off associated with the restructuring charges
consist of:
Closing of certain product lines - write-off of
inventory of equipment relating to product lines to be
discontinued.
Compensation to certain customers and suppliers -
consists mainly of costs relating to discontinued
commitments.
Write-off of investments - consists of write-off of two
investments, mainly in distribution channels for the
Company's multimedia products in the United States, as
this activity will be performed in the future by
Spacenet.
The components and the classification of the restructuring
charges and the related write-offs associated with the
restructuring charges are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1999 1998
--------- ---------
U.S. $ IN THOUSANDS
--------------------------
<S> <C> <C>
Cost of sales - write-off of inventories 4,634 9,495
--------- ---------
Restructuring charges:
Compensation (356) 11,091
Other 898
--------- ---------
(356) 11,989
Write-off of investments 896 2,700
--------- ---------
5,174 24,184
========= =========
</TABLE>
Most of the restructuring charges were paid in 1999.
F-28
<PAGE> 114
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - TAXES ON INCOME:
a. THE COMPANY:
1) Tax benefits under the Law for the Encouragement of
Capital Investments, 1959
The Company's production facilities have been granted
"approved enterprise" status under the above law.
Since the Company is a "foreign investors' company" as
defined by the above law it is entitled to a ten-year
period of benefits, for enterprises approved after April
1993. The main tax benefits of that status are a tax
exemption for two or four years and a reduced tax rate of
15%, 20% or 25% (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. As of December 31, 1999, the Company has nine
approved enterprises.
The periods of benefits of the approved enterprises will
expire between 2000 - 2008.
In the event of distribution of cash dividend from income
which was tax exempt as above, the Company would have to
pay the 15%, 20% or 25% tax in respect of the amount
distributed (see d(4) below and note 10c(1)).
The Company is entitled to claim accelerated depreciation
in respect of equipment used by approved enterprises
during the first five years of the operation of these
assets.
The entitlement to the above benefits is conditional upon
the Company's fulfilling the conditions stipulated by the
above law, regulations published thereunder 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
(the "Israeli CPI") and interest.
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
investor's 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.
F-29
<PAGE> 115
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - TAXES ON INCOME (continued):
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 and certain other
intangible property rights.
b. NON-ISRAELI SUBSIDIARIES
Non-Israeli subsidiaries are taxed based upon tax laws in
their countries of residence.
c. CARRYFORWARD TAX LOSSES AND CREDITS
Carryforward tax losses and research and development tax
credits relating to non-Israeli subsidiaries approximate $ 7.4 million at
December 31, 1999. The carryforward amounts expire between 2004-2019.
c. DEFERRED INCOME TAXES:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1999 1998
------- -------
U.S. $ IN THOUSANDS
----------------------
<S> <C> <C>
1) Provided in respect of the following:
Carryforward tax losses and research and
development credits 2,387 2,732
Excess of fair value over cost relating to net
assets of Spacenet at acquisition date 4,870 4,870
Other 932 430
------ ------
8,189 8,032
Less - valuation allowance 7,842 7,420
------ ------
347 612
====== ======
2) Deferred taxes are included in the balance sheets
as follows:
Current assets 785 532
Non-current assets 141 364
Other long-term liabilities (579) (284)
------ ------
347 612
====== ======
</TABLE>
3) Realization of these deferred tax assets is conditional
upon earning, in the coming years, taxable income in an
appropriate amount. The amount of the deferred tax assets,
however, could be changed in the future if estimates of
future taxable income are changed.
4) As stated in a(1) above, most of the Company's income is
tax exempt due to the approved enterprise status granted
to the Company's production facilities. The Company has
decided to permanently reinvest the amount of the said tax
exempt income, and not to distribute such income as
dividends. Accordingly, no deferred taxes have been
provided in respect of the tax exempt income.
F-30
<PAGE> 116
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - TAXES ON INCOME (continued):
e. TAXES ON INCOME INCLUDED IN THE INCOME STATEMENTS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1999 1998 1997
----- ------ ------
U.S $ IN THOUSANDS
----------------------------------
<S> <C> <C> <C>
Current - mainly in respect of non-
Israeli subsidiaries 2,727 286 133
Deferred, see d. above* (252) (3)
----- ------ ------
2,475 286 130
===== ====== ======
</TABLE>
* In respect of non-Israeli subsidiaries.
f. INCOME (LOSS) BEFORE TAXES ON INCOME:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1999 1998 1997
----- ------ ------
U.S $ IN THOUSANDS
----------------------------------
<S> <C> <C> <C>
The Company 38,048 (74,777) 18,233
Non-Israeli subsidiaries (15,426) (3,617) (1,159)
------ ------ ------
22,622 (78,394) 17,074
====== ====== ======
</TABLE>
g. TAX ASSESSMENTS
Final tax assessments have been received by the Company
through the 1994 tax year. The subsidiaries have not received final tax
assessments since incorporation or acquisition.
F-31
<PAGE> 117
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13 - MONETARY BALANCES IN NON-DOLLAR CURRENCIES:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------
ISRAELI CURRENCY* OTHER
---------------------- NON-DOLLAR
LINKED** UNLINKED CURRENCIES
------ ------ ------
U.S. $ IN THOUSANDS
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents 6 9,630
Accounts receivable:
Trade 2,620 11,546
Other 1,382 6,682 4,704
Non-current receivables 5,757
------ ------ ------
1,382 9,308 31,637
====== ====== ======
LIABILITIES:
Current liabilities:
Short-term bank credit 5,276
Accounts payable and accruals:
Trade 60 11,078 1,551
Accrued expenses 797 4,466
Other 1,117 2,618 6,435
------- ------ ------
1,177 19,769 12,452
======= ====== ======
</TABLE>
* The above does not include balances in Israeli currency linked
to the dollar.
** To the Israeli CPI.
NOTE 14 - SUPPLEMENTARY BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
------- -------
U.S. $ IN THOUSANDS
---------------------
<S> <C> <C>
A. SHORT-TERM INVESTMENTS:
Bank deposit* 20,868
Current maturities of long-term bank deposits** 40,672
-------
61,540
=======
* The deposit is denominated in dollars and bears annual
interest of 5.4%.
**The current maturities of long-term bank deposits are
denominated in dollars and bear annual interest of
5.75%-6.69%.
B. ACCOUNTS RECEIVABLE:
1) Trade:
Related parties 26,649 4,688
Other* 84,768 67,165
------- ------
111,417 71,853
======= ======
* Net of allowance for doubtful accounts 4,423 2,000
======= ======
</TABLE>
F-32
<PAGE> 118
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1999 1998
------- ------
U.S. $ IN THOUSANDS
---------------------
<S> <C> <C>
2) Other:
Government departments and agencies:
Value added tax refundable 3,389 4,121
Customs refundable 1,666 834
In respect of research and development
grants (see note 9a) 2,193 1,756
Sundry 516 47
------ ------
7,764 6,758
Employees 1,586 949
Amounts receivable from GE Americom 26,221 13,834
Receivables in respect of capital leases
(see d. below) 16,000
Advances to suppliers 486 592
Prepaid expenses 8,844 2,880
Accrued interest on long-term bank deposits 2,683 292
Deferred income taxes (see note 12d) 785 532
Sundry 7,613 1,541
------- ------
71,982 27,378
======= ======
</TABLE>
c. LONG-TERM BANK DEPOSITS
The deposits are denominated in dollars, bear annual interest
of 5.71%-5.79% and mature on March 12, 2001.
d. 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 minimum future payments to be received by the Group under
these contracts as of December 31, 1999 are as follows
(including unearned interest income in the amount of
$6,646,000):
<TABLE>
<CAPTION>
$ IN THOUSANDS
--------------
<S> <C>
Year ending December 31:
2000 30,517
2001 28,075
2002 22,028
2003 5,112
2004 and thereafter 3,915
</TABLE>
The net investment in capital lease as of December 31, 1999 is
$ 47.3 million.
F-33
<PAGE> 119
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
e. SHORT-TERM BANK CREDIT:
1) Classified by currency and interest rate as follows:
<TABLE>
<CAPTION>
INTEREST RATE DECEMBER 31
AT DECEMBER 31, -----------------------
1999 1999 1998
--------------- ------- ------
% U.S. $ IN THOUSANDS
--- -----------------------
<S> <C> <C> <C>
In dollars 6.85 1,710 10,486
In Israeli currency 11.3-12.1 5,276 12,672
------- ------
6,986 23,158
======= ======
</TABLE>
2) Short-term bank credit is secured by a first priority
floating charge on all the Company's assets and by a fixed
charge on goodwill (intangible assets), unpaid share
capital (shareholders' commitment to inject funds in the
Company) and insurance rights (rights to proceeds on
insured assets in the event of damage).
3) Unutilized credit lines at December 31, 1999 were
approximately $ 23 million.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
-------- -------
U.S. $ IN THOUSANDS
------------------------
<S> <C> <C>
f. ACCOUNTS PAYABLE AND ACCRUALS:
1) Accrued expenses:
Provision in respect of restructuring costs 156 13,008
Provision in respect of direct costs
relating to the acquisition of Spacenet
(see note 2) 277 6,759
Other 27,400 19,875
-------- -------
27,833 39,642
======== =======
2) Other:
Payroll and related expenses 4,895 4,590
Provision for vacation pay 2,816 1,761
Advances from customers 246 1,364
Deferred revenue 2,250 4,050
Current maturities of long-term liabilities
in respect of lease agreements (see g. below) 4,050
Taxes payable 5,058 1,170
Sundry 451 1,325
-------- -------
19,766 14,260
======== =======
</TABLE>
F-34
<PAGE> 120
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
g. OTHER LONG-TERM LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
------- ------
U.S. $ IN THOUSANDS
------------------------
<S> <C> <C>
1) Composed as follows:
Long-term liabilities in respect of lease
agreements (see (2) below) 7,510
Deferred income taxes (see note 12d) 579 284
------- ------
8,089 284
======= ======
</TABLE>
2) The Group purchased some computer equipment under capital
leases. Minimum lease commitments of the Group under
these leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
U.S. $ IN THOUSANDS
-------------------
<S> <C>
Year ending December 31:
2000 4,050
--------
2001 4,120
2002 3,390
--------
7,510
--------
11,560
========
</TABLE>
h. CONCENTRATION OF CREDIT RISKS
Most of the Group's cash and cash equivalents and short-term
and long-term bank deposits at December 31, 1999 and 1998 were
deposited with Israeli and U.S. banks. The Company is of the
opinion that the credit risk in respect of these balances is
remote.
Most of the Group's revenues in the United States, in Europe
and in the Far East are derived from a large number of
customers or from large customers. Consequently, the exposure
to concentrations of credit risk relating to trade receivables
is limited. The Company performs ongoing credit evaluation of
its customers and generally does not require collateral from
its customers in the United States and in Europe. In respect
of certain sales to customers in emerging economies, the
Company requires letters of credit. An appropriate allowance
for doubtful accounts is included in the accounts.
F-35
<PAGE> 121
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
i. FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Group consist mainly of
non-derivative assets and liabilities (items included in
working capital, long-term bank deposits, investment in other
companies, non-current receivables, long-term liabilities in
respect of lease agreements and convertible subordinated
notes).
In view of their nature, the fair value of the financial
instruments included in the working capital of the Group is
identical or close to their carrying amount. The fair value of
long-term bank deposits, non-current receivables and long-term
liabilities in respect of lease agreements also approximates
their carrying value, since they bear interest at rates close
to prevailing market rates. The fair value and the carrying
value of the convertible subordinated notes as of December 31,
1999 is $ 213,187,500 and $ 75,000,000, respectively; December
31, 1998 - $ 108,750,000 and $ 75,000,000, respectively.
NOTE 15 - SELECTED INCOME STATEMENT DATA:
a. SEGMENT INFORMATION AND REVENUES FROM PRINCIPAL CUSTOMERS
The Company adopts FAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which was issued
in June 1997 by the FASB.
Disaggregated financial data are provided below:
1) 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 customers:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1999 1998 1997
---------- --------- ---------
U.S. $ IN THOUSANDS
----------------------------------------
<S> <C> <C> <C>
United States (b)190,609 (a)80,439 (a)51,378
South Africa 1,560 20,810 (b)63
China (b)5,640 (b)5,363 (b)4,739
South and Latin America (b)43,940 (b)10,773 11,497
Europe 54,643 10,418 9,288
Israel (b)8,466 (b)4,209 (b)3,414
Other 33,015 23,323 23,311
---------- --------- ---------
337,873 155,335 103,690
========== ========= =========
2) Revenues from single customers
which exceed 10% of
total revenues in the
relevant year:
Spacenet (see note 2) 69,357 35,135
========= =========
</TABLE>
F-36
<PAGE> 122
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SELECTED INCOME STATEMENT DATA (continued):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
-------- ------ ------
U.S. $ IN THOUSANDS
------------------------------------------
<S> <C> <C> <C>
(a) Including sales made to customers
in the United States, where
shipments were made directly to
final customers in Europe 4,375 12,027
====== ======
(b) Including revenues from related
parties * 52,700 12,686 3,734
======== ====== ======
</TABLE>
* Including $15 million from GE Americom. GE Americom and certain of
its affiliates were committed to purchase products from the Group
through the end of 1999. In 1999, no purchase orders for such
products were received. The amount recorded represents 40% of $
37.5 million - the minimum commitment of GE Americom under this
agreement. This amount was collected subsequent to December 31,
1999.
3) The Group's long lived assets are located in the following
countries:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------
1999 1998 1997
------- ------- -------
U.S. $ IN THOUSANDS
------------------------------------
<S> <C> <C> <C>
Israel 85,615 57,396 47,653
United States 61,304 25,847 902
Europe 8,947 9,634 126
Other 3,947 2,034 85
------- ------- -------
159,813 94,911 48,766
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1999 1998 1997
------- ------- -------
U.S. $ IN THOUSANDS
-------------------------------------
<S> <C> <C> <C>
b. ADDITIONAL DISCLOSURE REGARDING REVENUES
AND COST OF REVENUES:
Revenues:
Sale of products 238,564 147,767 101,309
Services 99,309 7,568 2,381
------- ------- -------
337,873 155,335 103,690
======= ======= =======
Cost of revenues:
Sale of products 146,084 82,198 58,603
Services 74,055 4,405 139
------- ------- -------
220,139 86,603 58,742
======= ======= =======
c. RESEARCH AND DEVELOPMENT GRANTS:
Royalty bearing grants (see note 9a) 1,340 997 464
Other grants 1,028 2,038 2,030
------- ------- -------
2,368 3,035 2,494
======= ======= =======
</TABLE>
F-37
<PAGE> 123
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SELECTED INCOME STATEMENT DATA (continued):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1999 1998 1997
------- ------- ------
U.S. $ IN THOUSANDS
-------------------------------------
<S> <C> <C> <C>
d. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
1) Composed as follows:
Selling 32,988 20,154 14,590
General and administrative *35,426 8,923 5,731
------- ------- ------
68,414 29,077 20,321
======= ======= ======
2) The change in the allowance for doubtful
accounts is composed as follows:
Balance at beginning of year 2,000 160
Increase during the year 2,423 1,840 160
------- ------- ------
Balance at the end of year 4,423 2,000 160
======= ======= ======
* Including amortization of goodwill and identifiable intangible assets.
e. FINANCIAL INCOME (EXPENSES) - NET:
INCOME:
Interest on cash equivalents and
bank deposits 9,991 3,209 3,725
In respect of capital lease 565
Other (mainly non-dollar transaction
gains and losses - net) 189 2,159 590
------- ------- ------
10,745 5,368 4,315
------- ------- ------
EXPENSES:
Interest on convertible subordinated
notes (see note 8) 4,871 4,871 3,047
Amortization of issuance costs of
convertible subordinated notes
(see notes 6 and 8) 455 455 282
In respect of short-term bank credit 1,162 1,179 324
Other (mainly non-dollar transaction
gains and losses - net) 990 110 124
------- ------- ------
7,478 6,615 3,777
------- ------- ------
3,267 (1,247) 538
======= ======= ======
</TABLE>
f. EARNINGS (LOSS) PER SHARE:
1) Under U.S. GAAP
Basic earnings (loss) per share are computed based on the
weighted average number of shares outstanding during each
year. In computing the diluted earnings per share,
account was taken of the dilutive effect of the
outstanding stock options, using the treasury stock
method.
F-38
<PAGE> 124
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SELECTED INCOME STATEMENT DATA (continued):
In computing diluted per share data convertible notes have not
been taken into account because their effect on diluted per
share data is anti-dilutive.
Since in 1998 the Company had a loss per share, the effect of
including the incremental shares from assumed exercise of
options and conversion of convertible notes in the per-share
computation is anti-dilutive, and, accordingly, the basic and
diluted loss per share for that year are the same amount.
Following are data relating to the weighted average number of
shares for the purpose of per-share computations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
------- ------- -------
IN THOUSANDS
--------------------------------------
<S> <C> <C> <C>
Weighted average number of shares
issued and outstanding - used
in computation of basic earnings (losses)
per share 20,447 11,059 10,895
Add - incremental shares from assumed
exercise of options 982 360
------- ------- -------
Weighted average number of shares used
in computation of diluted earning
(loss) per share 21,429 11,059 11,255
======= ======= =======
</TABLE>
2) Under Israeli GAAP
As applicable to the Company, the main difference between
the Israeli GAAP method and the U.S. GAAP method of
earnings per share computation is that shares to be
issued upon exercise of employee stock options and shares
to be issued upon conversion of the convertible
subordinated notes, when such an exercise or
conversion is probable taken into account in the
computation of basic earnings per share under Israeli
GAAP, whereas under U.S. GAAP, in computing basic
earnings per share, only the weighted average number of
Company shares actually outstanding in the reported
period is taken into account, and shares to be issued
upon exercise of options are included in the computation
of diluted earnings per share.
F-39
<PAGE> 125
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SELECTED INCOME STATEMENT DATA (continued):
Following are data relating to the net income (loss) and to
the number of shares (including adjustments to such data) used
for the purpose of computing earnings per share under Israeli
GAAP:
<TABLE>
<CAPTION>
NET INCOME (LOSS) PAR VALUE OF SHARES
---------------------------------- -----------------------------------
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
---------------------------------- -----------------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------- ------- -------
U.S. $ IN THOUSANDS IN THOUSANDS
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) for the
year, as reported in the
income statements 19,611 (79,383) 16,944
Issued and outstanding shares at
beginning of year 16,162 10,990 10,822
Employee stock option
exercised 104 69 73
Shares issued to the public
during the year 4,181
Shares issuable upon
conversion of convertible
notes - conversion of
which is expected 1,786
Shares issuable upon
realization of employee
stock options- exercise of
which is expected 2,944 1,062 553
Real financial expenses
after tax in respect of
convertible notes 5,795
Net after tax imputed income (loss),
assuming receipt - with
retroactive effect - of the
exercise increment in
respect of employee
stock options (4,465) 2,194 269
------- ------- ------- ------- ------- -------
T o t a l - for the purpose of
basic per share
computation 20,941 (77,189) 17,213 25,177 12,121 11,448
A d d:
Realization of employee stock
options - exercise of which
is not expected 704
Net after tax imputed income,
assuming receipt - with
retroactive effect - of the
exercise increment in
respect of employee
stock options 696
------- ------- ------- ------- ------- -------
T o t a l - for the purpose of
diluted per share
computation 20,941 (77,189) 17,909 25,177 12,121 12,152
======= ======= ======= ======= ======= =======
</TABLE>
F-40
<PAGE> 126
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 16 - SUBSEQUENT EVENTS:
a. ISSUANCE OF CONVERTIBLE SUBORDINATED NOTES
Under an Offering Memorandum issued in the end of February
2000, the Company issued $ 350,000,000 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
101.70% to 100.85% depending on the date of redemption.
b. CERTAIN TRANSACTIONS:
1) On March 30, 2000, the Group, 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 are to invest a total of $ 125 million
into Gilat-To - Home, Inc., ("Gilat-To-Home"), the
Company's North American broadband satellite internet
service provider. The Group, along with related party
of the Company, is to hold approximately 50% of
Gilat-To-Home on a fully diluted basis. There are
additional agreements covering, inter alia, the supply
of equipment and services to MSN by Gilat -To-Home.
2) On March 6, 2000, the Company entered into an agreement
to invest $ 10 million in KnowledgeBroadcasting.Com LLC
("KBC"), a media company formed to distribute content
to business and homes using satellite and other
technologies, in return for approximately 10 million
units 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 units at the same purchase
price. The Company also granted KBC (i) a 5 year
warrant to purchase approximately 191,000 of the
Company's ordinary shares at a purchase price of $
157.05 per share, and (ii) a five year option to
acquire equipment and services payable by KBC during
the first two years in up to 20 million units 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.
3) See also note 4a.
F-41
<PAGE> 127
GILAT SATELLITE NETWORKS LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 16 - SUBSEQUENT EVENTS (continued):
c. LEGAL CLAIM
On May 8, 2000, Hughes Electronics Corporation filed a
complaint for patent infringement against the Company and
Spacenet (the "defendant"), in the U.S. District Court for
the District of Maryland. In the Patent Suit, Hughes claims
that the defendant infringes four of its patents in the
United States and requests that the court enjoin the
defendants from infringing its patents and demands an
accounting for damages.
At this early stage of the proceedings, the Company and its
legal advisors are studying the details of the case and are
unable to evaluate the chances of the claim or its effect on
the Company.
F-42
<PAGE> 128
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
Gilat Florida Inc.
West Melbourne, Florida
We have audited the accompanying balance sheets of Gilat Florida Inc. (a
wholly-owned subsidiary of Gilat Satellite Networks Ltd.) as of December 31,
1999 and 1998, and the related statements of operations, changes in
stockholder's deficit and cash flows for each of the three years in the period
ended December 31, 1999, 1998 and 1997. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gilat Florida Inc. as of
December 31, 1999, and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, 1998
and 1997 in conformity with generally accepted accounting principles.
February 4, 2000
Melbourne, Florida
/s/ Berman Hopkins Wright & Lahman, CPAs, LLP
F-43
<PAGE> 129
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GILAT SATELLITE NETWORKS LTD.
By: /s/ Yoel Gat
----------------------------------
Yoel Gat
Chairman and Chief Executive Officer
Date: June 30, 2000
<PAGE> 130
GILAT SATELLITE NETWORKS LTD.
EXHIBITS TO THE ANNUAL REPORT
FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999
AS FILED ON FORM 20-F
<PAGE> 131
EXHIBIT 2.1
<PAGE> 132
Exhibit 2.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Registration Nos. 333-10092, 333-08026 and 333-96630)
and Form F-3 (Registration Nos. 333, 09824, 333-07446 and 333-07440) of our
report dated February 27, 2000 (except for notes 8, 10b(5), 16b(1) and 16c for
which the date is June 5, 2000), relating to the financial statements of Gilat
Satellite Networks, Ltd., included in this Annual Report on Form 20-F of Gilat
Satellite Networks, Ltd., for the year ended December 31, 1999. We also consent
to the reference to our firm under the heading "Selected Consolidated Financial
Data".
/s/ Kesselman & Kesselman
Certified Public Accountants (Isr.)
Tel Aviv, Israel
June 29, 2000
<PAGE> 133
EXHIBIT 2.2
<PAGE> 134
EXHIBIT 2.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Gilat Satellite Networks, Ltd.
21 Yegia Kapayim St.
Daniv Park, Kiryat Arye
Petah Tikva 49130
Israel
We hereby consent to the incorporation by reference of our report dated February
4, 2000 relating to the audits of the financial statements of Gilat Florida Inc.
(a wholly-owned subsidiary of Gilat Satellite Networks, Ltd.) as of December 31,
1999 and 1998 and for the three years ended December 31, 1999, included in this
Annual Report on Form 20-F, into the Registration Statements of Form S-8
(Registration Nos. 333-10092, 333-098026 and 33-96630) and on Form F-3
(Registration Nos. 333-09824, 333-07446 and 333-07440). We also
consent to the reference to our firm under the caption "Selected Consolidated
Financial Data".
June 30, 2000
Melbourne, Florida
/s/ Berman Hopkins Wright & Laham, CPAs, LLP
