ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
We commenced operations in 1987 and shipped our initial product, a
first generation OneWay VSAT, in 1989. Since that time, we have devoted
significant resources to developing and enhancing our VSATs and establishing
strategic alliances primarily with major telecommunications companies and
equipment suppliers. We have also broadened our marketing strategy to emphasize
sales to customers directly and through new distribution channels.
44
We generate revenue from sales of our satellite-based networking
applications and services to our customers worldwide. The charges to customers
for satellite networking products and services vary with the number of sites,
the length of the contract, the amount of satellite capacity and the types of
technologies and protocols employed.
Gilat's discussion and analysis of its financial condition and results
of operations are based upon our audited consolidated financial information
included in this annual report on Form 20F, which assumes that we will continue
as a going concern and which has been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of the
financial information requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, account receivables, inventories, intangible assets,
restructuring, revenues, and contingencies. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The currency of the primary economic environment in which most of our
operations are conducted is the U.S. dollar and, therefore, we use the U.S.
dollar as our functional and reporting currency. Transactions and balances
originally denominated in U.S. dollars are presented at their original amounts.
Gains and losses arising from non-U.S. dollar transactions and balances are
included in the determination of net income. We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our unaudited consolidated financial information included in
this proxy solicitation.
Gilat believes the following critical accounting policies reflect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements included in this annual report on Form 20-F:
REVENUE RECOGNITION
We recognize revenues from product sales when shipment has occurred,
persuasive evidence of an arrangement exists, the vendor's fee is fixed or
determinable, no future significant obligations exist and collection is
probable. We do not grant rights of return. Determination of the probability of
collection is based on management's judgments regarding the payment of fees for
services rendered and products delivered. Should changes in conditions cause
management to determine that these criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely
affected.
We recognize revenues from long-term contracts on the
percentage-of-completion method based upon the ratio of actual costs incurred to
total costs estimated to be incurred over the duration of the contract.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are first determined, in the amount of the estimated loss
on the entire contract. If we do not accurately estimate the resources required
or the scope of work to be performed, or do not manage our projects properly
within the planned periods of time or satisfy our obligations under contracts,
then our future margins may be significantly and negatively affected or losses
on existing contracts may need to be recognized. Any such resulting reductions
in margins or contract losses could be material to our results of operations.
We generally have two ways of recognizing leasing revenue, depending on
whether the customer takes ownership of the network equipment or not. In one
type of network services sale, the customer leases the hardware, software,
satellite capacity and maintenance services, and we record revenue for the
hardware and the software in cases where such leases qualify as capital leases
in accordance with the provision of SFAS 13 "Accounting for Leases" in an amount
equal to the present values of payments due under these contracts only when the
network is installed and operational (or, in cases where the customer obtains
its own installation services, when the equipment is shipped). Future interest
income is deferred and recognized over the related lease term. Our revenue in
respect of satellite capacity, maintenance and other recurring network
management services is recognized over the period of the related
maintenance/service contract or over the period in which the services are
provided.
Arrangements that include installation services are evaluated to
determine whether those services are an integral component of the equipment
used. When installation services are considered integral, revenues from products
and installation services are recognized only upon installation. When services
are not considered integral,
45
revenues from products sales are recognized upon shipment and the service
revenues are recognized when the services are performed.
In the other type of network services sale, we procure and install the
equipment and software, obtain the satellite capacity and provide network
operations and monitoring for the customer over the contract term. Under this
type of network services sale, we retain ownership and operation of the network
and receive a monthly service fee (and recognizes revenue) over the term of the
contract in accordance with the provision for operating leases of SFAS 13. In
this instance, we depreciate the cost of the equipment used in our network
service offerings over the life of the asset.
We recognize service revenues ratably over the contractual period or as
services are performed. Where arrangements involve multiple elements, revenue is
allocated to each element based on the relative fair value of the element when
sold separately.
COST OF REVENUES
Cost of revenues, for both products and services, includes the cost of
system design, equipment, satellite capacity, and third party maintenance and
installation. For equipment contracts, cost of revenues is expensed as revenues
are recognized. For network service contracts, cost of revenues is expensed as
revenues are recognized over the term of the contract. For maintenance
contracts, cost of revenues is expensed as the maintenance cost is incurred or
over the term of the contract.
ACCOUNTS RECEIVABLE
We are required to estimate our ability to collect our trade
receivables. A considerable amount of judgment is required in assessing their
ultimate realization. In 2001 and 2002, we provided allowance for our
receivables relating to customers that were specifically identified by our
management as having difficulties paying their respective receivables. As a
result, management created a reserve for capital lease receivables, increased
its bad debt provision and wrote off an amount of approximately $134.6 million
(including $75 million related to StarBand) in 2001, and $34.7 million in 2002.
For more details please refer to "Restructuring Charges, Write-Offs and Other
Significant Charges" below.
INVENTORY
We are required to state our inventories at the lower of cost or market
price. In assessing the ultimate realization of inventories, we are required to
make judgments as to future demand requirements and compare that with the
current or committed inventory levels. We have recorded significant changes in
required reserves in recent periods due to changes in strategic direction, such
as discontinuation of product lines and due to changes in market conditions such
as altered demands for product specifications. In 2001 and 2002 we wrote-off and
marked down inventory in the amount of approximately $59.8 million and $20.1
million, respectively. It is possible that changes in required inventory
reserves may continue to occur in the future due to the current market
conditions.
IMPAIRMENT OF GOODWILL, INTANGIBLE ASSETS LONG LIVED ASSETS, AND INVESTMENT IN
AFFILIATES
Our business acquisitions typically result in goodwill and other
intangible assets. We periodically evaluate our intangible assets for potential
impairment indicators. Our judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and operational
performance of our acquired businesses.
In 2001, we recorded an impairment of goodwill in the amount of
approximately $50.6 million, in accordance with Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS No.
142), effective January 1, 2002, indefinite life intangible assets and goodwill
are subject to annual impairment testing. As of December 31, 2002, all of the
goodwill set forth in our financial statements in the amount of approximately
$69.7 million was impaired (of which $13.0 million was acquired during 2002 and
was recorded in our operating expenses and $56.7 million was recorded as a
cumulative effect of a change in accounting principle in the first quarter of
2002).
46
In 2001, we recorded an impairment of intangible assets and long-lived
assets in the amount of approximately $43.0 million. In accordance with SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." the
carrying value of finite life intangible assets and long lived assets should be
reviewed periodically, and if this review indicates that the carrying amount is
not recoverable, the carrying amount is reduced to its estimated fair value. In
2002 we recorded an impairment of intangible assets in the amount of $8.3
million, and impairment of other long lived assets in the amount of $42.4
million.
In 2001, we also recorded an impairment of investments in affiliated
and other companies in the amount of approximately $28.0 million. In accordance
with Accounting Principle Board Opinion ("APB") No. 18 "The Equity Method of
Accounting for Investments in Common Stock" ("APB 18"), investments in other
companies are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an investment may not be
recoverable. In 2002, we recorded an impairment of our investments in other
companies and long-term notes in the amount of $51.4 million
Future events could cause us to conclude that impairment indicators
exist and that additional intangible assets associated with our acquired
businesses and our long-lived assets are impaired. Any resulting impairment loss
could have a material adverse impact on our financial condition and results of
operations.
RESTRUCTURING CHARGES, WRITE-OFFS AND OTHER SIGNIFICANT CHARGES
During the year ended December 31, 2001, we did not meet our projected
sales, primarily because of the negative impact on the communications industry.
As such, we began to experience a slowdown in orders and sales in virtually all
of our markets - vertical, consumer and enterprise. As a result, Gilat
management adjusted the forecast of revenues for the years 2001 and 2002 and
decided to discontinue selling certain products, to reduce our costs and to
improve profitability.
Furthermore, certain circumstances such as the global decrease in
investments in telecommunications companies and depressed market conditions
indicated that the carrying amount of our investments would not be recoverable.
As a result, our management recorded the following charges:
o In March and September 2001, we recorded restructuring charges of
approximately $10 million and $20.3 million, respectively. The
restructuring costs consisted of employee termination benefits
associated with involuntary termination of approximately 650
employees including potential claims, compensation to certain
suppliers and customers, costs associated with termination of
lease commitments in respect of premises occupied by Gilat and
other costs. The employee terminations resulted from our strategy
to reduce costs and improve profitability.
o In September 2001, as a result of adjusted forecast of revenues
for the years 2001 and 2002, and the decision to discontinue
selling certain products, we (i) wrote off excess inventories in
order to adjust the inventory level to the new revenue
expectations, in the amount of approximately $14 million; (ii)
wrote off the products that were discontinued in accordance with
the restructuring plan, in the amount of approximately $37
million; and (iii) marked down inventory that is expected to be
sold at a price lower than the carrying value, in an amount of
approximately $9 million.
o In 2001, we provided allowance for our capital lease receivables
relating to vertical market customers that were specifically
identified by our management as having difficulties paying their
respective receivables. In the third quarter of 2001, it became
clear that these customers had been significantly adversely
affected by the recession, evidenced in an abrupt drop in
consumer spending, intensifying business lay-offs and an
acceleration of the downsizing of businesses. Furthermore, in the
third and fourth quarters of 2001 we increased our allowance for
bad debt provision since certain circumstances such as the global
decrease in the valuation of telecommunication companies,
depressed market conditions and difficulties in collections from
certain customers indicated that the carrying amount of the
receivables may not be recoverable. As a result, our management
created a reserve for capital lease receivables, increased our
bad debt provision and wrote off an amount of approximately
$134.6 million, including $75 million related to StarBand.
47
o In 2001, we recorded an impairment of goodwill relating to rStar
in an amount of $50.6 million as a result of the following
factors: (i) the continued deterioration in market conditions in
general and in the communication markets in particular; (ii) the
permanent decrease in the expected income from rStar's target
markets (primarily Latin America); (iii) the significant decrease
of rStar's share price; and (iv) rStar's continued low share
price for two fiscal quarters since the $45 million investment in
May 2001, which indicated other than temporary impairment. In
addition, in 2001, we recorded an impairment of intangible assets
in an amount of $28.2 million. At this time, we also recorded
impairment of property, equipment and current assets in an amount
of $14.8 million.
o During 2001, our management identified the following factors
pertaining to companies in which we had invested: (i) some of the
negotiations for additional funding were not successful or,
subsequent investments were at very low valuations; (ii) a
planned merger for one of the companies did not occur; (iii)
weakness in the capital markets continued and intensified after
the September 11, 2001 terrorist events; (iv) decreased levels of
cash curtailed future financing prospects which are needed in
order to finance our business; and (v) a growing weakness in the
target markets of these companies was confirmed. The indicators
specified above led us to conclude that these depressed market
conditions were not temporary and needed to be considered in our
financial statements. As a result, management decided to record a
write off of the investment in KSAT in an amount of approximately
$8.4 million and of other investments in an amount of $19.6
million in the year ended December 31, 2001.
In the year ended December 31, 2002, the recession in the
communications industry and the slowdown in orders continued. Furthermore,
certain circumstances such as the global decrease in telecommunication companies
and depressed market conditions indicated that the carrying amount of our
investments would not be recoverable. In addition, in October 2002, we commenced
the Arrangement to restructure our debt, which was successfully completed on
March 6, 2003. Prior to and while the Arrangement was under negotiation, our
ability to sell products and retain customers declined. As a result of the
above, the Company's management recorded the following charges:
o During 2002, as a result of an additional slowdown in orders and
sales to our customers and the decision to discontinue selling
certain products, we (i) wrote off excess inventories in order to
adjust the inventory level to the new revenue expectations, in
the amount of approximately $7.0 million; (ii) wrote off
discontinued products in the amount of approximately $8.8
million; and (iii) marked down inventory that is expected to be
sold at a price lower than the carrying value, in an amount of
approximately $4.3 million.
o During 2002, we increased our allowance for bad debt provision
since certain circumstances such as the depressed market
conditions and difficulties in collections from certain customers
indicated that the carrying amount of the receivables may not be
recoverable. As a result, we increased our bad debt provision and
wrote off an amount of approximately $34.7 million.
o In 2002, we recorded an impairment of all of the goodwill
relating to our subsidiaries in an amount of $69.7 million. The
impairment was prompted by the continued deterioration in market
conditions in general and in the communication market in
particular and the decrease in the projected income of our
subsidiaries. The impairment of goodwill recognized at adoption
of FASB 142 in the amount of $56.7 million is presented under
"cumulative effect of a change in an accounting principle" and
the impairment of goodwill recognized after adoption in the
amount of $13.0 million is presented in our operating expenses.
o Our management periodically reviews the carrying value of long
lived assets in accordance with SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." If this review
indicates that the cost is not recoverable, the carrying value is
reduced to its estimated fair value. Based on this reviews we
recorded the following impairments:
(i) In 2002, we recorded an impairment of intangible assets in
the amount of $7.0 million and other intangible assets
relating to technology that we no longer use in an amount of
$1.3 million. The impairment consists of technology
purchased by us in 2000 which is no longer in use and
intangible assets from the purchase of Spacenet.
(ii) We identified the following factors pertaining to property,
plant and equipment: (i) decreased levels of
48
cash has curtailed future financing prospects which are
needed in order to finance our business; and (ii) a growing
weakness in our target markets. In 2002 we recorded
impairment of our property, plant and equipment in an amount
of $42.4 million for adjustments of the carrying value of
assets which are not used to generate our revenues to their
fair value, and for adjustments of the carrying value of
productive assets to their fair value according to the
specifications of FASB 144.
(iii)In light of our review of GVT's auditors' report in
connection with the financial statements of GVT as of
September 30 and December 31, 2002 which noted that GVT may
not be able to retain its existence as a going concern if
they are unable to raise additional funding or otherwise
generate sufficient revenues and other factors, and the fact
that GVT did not repay the investment at maturity in
December 2002, we concluded that these conditions are not
temporary and need to be considered in our financial
statements. As a result, we have recorded an impairment of
our investment in GVT in an amount of approximately $39.4
million; and
(iv) Our management identified the following factors pertaining
to Communicacion y Telefonia Rural S.A. ("CTR") a company in
Chile in which we had invested: (i) financial press releases
from CTR's public parent company indicate that CTR's
revenues continue to decrease; (ii) during 2002,the Chilean
currency devalued significantly resulting in a decrease in
EBITDA and a poor economic environment; (iii) although CTR
has a positive EBITDA, it has a substantial amount of third
party and related party debt and with these payments and the
deflation in Chile CTR is not generating any cash flow; and
(iv) based on adjustment provisions in the investment
agreement, our ownership percentage was decreased at
December 31, 2002 from 13% to 4% due to lower than
anticipated earnings of the assets sold by Gilat to CTR. As
a result of all of the above, we have recorded an impairment
of our investment in CTR in an amount of approximately $11.2
million. In addition, we recorded an impairment of other
investments in the amount of $0.8 million.
COMMITMENTS AND CONTINGENCIES
On March 6, 2003, the Israeli court approved a restructuring of our
debts which included the following changes to our current commitment and the
creation of new commitments:
NEW NOTES
We exchanged our old notes which had a principal amount of $350 million
for (i) 202,083,908 ordinary shares; and (ii) $83.254 million in
principal amount of 4.00% convertible notes due in 2012.
BANK HAPOALIM
Of the $102 million due from us to Bank Hapoalim, (i) $25.5 million was
converted into 18,488,590 ordinary shares; (ii) $5.1 million was
converted into Notes of the same principal amount; and (iii) the
remaining debt of $71.4 million remains as a loan with revised terms.
The revised terms of the loan include equal semiannual installments of
principal of $4.463 million beginning on July 2, 2005, with a last
installment of $8.926 million on July 2, 2012. The loan bears interest
at the six-month LIBOR rate plus 2.5% and is payable semiannually
together with the installments of principal.
Bank Leumi Le-Israel B.M.
We revised the terms of the loan owed by us to Bank Leumi Le-Israel
B.M. in the principal amount of $30 million. The revised terms of the
restructured loan include principal payments in the amount of $1
million annually during each of 2003 and 2004, and principal payments
of $4 million annually during each of the years 2005 through 2011. The
loan bears interest at the six-month LIBOR rate plus 2.5%. In addition,
Bank Leumi agreed to maintain its line of credit utilized for
performance guarantees for the benefit of Gilat in the existing
aggregate amount of $15 million for at least one year, subject to the
limitation that continued availability of the line of credit may be
affected by the overall collateral made available by us in support of
credit used by us in the future for the issuance of guarantees.
That amount does not include additional guarantees that have been or
may be granted by Bank Leumi
49
and are or will be secured by specific charges on our deposits at Bank
Leumi.
ISRAEL DISCOUNT BANK LTD.
Israel Discount Bank Ltd. agreed to maintain its performance guarantees
for the benefit of Gilat in the amount of $13.3 million for at least
one year. Such amount does not include additional guarantees that have
been or may be granted by Discount Bank and are or will be secured by
specific charges on our deposits at Discount Bank.
SES AMERICOM
SES Americom agreed to terminate its transponder agreements with
Spacenet Inc., which related to StarBand. In addition, SES Americom
agreed to defer payments by Spacenet in connection with other
agreements. As part of the arrangement, we issued to SES Americom an
additional 14,261,048 shares.
As part of the Arrangement approved by the Israeli court, we granted to
the banks referred to above, in addition to existing security interests in favor
of the banks, a first priority security interest consisting of a floating charge
on all of our assets and we pledged for their benefit all of the shares that we
own in Spacenet. We granted to holders of the Notes a second priority security
interest in the same collateral.
In December 2002, we were awarded two substantial contracts for the
provision of equipment and services in Colombia. In order to secure these
contracts, we provided a bank guarantee from Bank Hapoalim in the amount of $10
million.
In addition, in August 2002, we concluded the acquisition of rStar,
increasing our ownership in this entity to approximately 85%. Under the terms of
the acquisition, we may be required to pay rStar shareholders a special
consideration of up to $10 million, $5 million of which may become due in June
2003 and $5 million of which may become due in June 2004. The Company estimates
that no provision is needed for the first distribution as of December 31, 2002.
The Company has provided a provision for the second distribution as of December
31, 2002 as management's current assessment is that with the current level of
sales in 2003 and with the uncertainties in the markets in which rStar operates,
it is probable that the special distribution will be paid in 2004. However, if
rStar is successful in growing its business and increasing its net income during
2003, the special distribution may not need to be paid in part or at all.
We are subject to proceedings, lawsuits and other claims related to
labor, products, intellectual property, security fraud and other matters. We are
required to assess the likelihood of any adverse judgments or outcomes to these
matters as well as the potential ranges of probable losses. A determination of
the amount of reserves required, if any, for these contingencies are made after
careful analysis of each individual issue. The required reserves may change in
the future due to new developments in each matter or changes in approach such as
a change in settlement strategy in dealing with these matters.
EMPLOYEE SEVERANCE FUND
Our intention in 2003 is to continue our current policy of depositing
quarterly cash amounts in the severance pay funds of our employees. The amounts
that we plan to deposit are intended to cover the difference between the
severance pay amounts required to be paid to employees by Israeli law in case of
termination of their employment and the current balance of the personal
severance funds of our employees. We will deposit an amount of $350,000 in the
severance pay funds during the third quarter of 2003. In the fourth quarter, we
will deposit an additional amount, if and to the extent necessary to satisfy any
shortfall, provided that in no event will such amount exceed $350,000.
RESULTS OF OPERATIONS OF GILAT
The following table sets forth, for the periods indicated, the
percentage of revenues represented by certain line items from our audited
consolidated statements of income.
PERCENTAGE OF REVENUES
50
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 2001 2002
-------------- -------------- --------------
Revenues:
Products *) % 78.9 % 72.4 % 62.3
Services *) 21.1 27.6 37.7
-------------- -------------- --------------
% 100.0 % 100.0 % 100.0
-------------- -------------- --------------
Cost of revenues:
Products 52.6 50.4 51.5
Services *) 15.7 24.5 29.5
Write-off of inventories 15.5 9.6
-------------- -------------- --------------
68.3 90.4 90.6
-------------- -------------- --------------
Gross profit 31.7 9.6 9.4
-------------- -------------- --------------
Research and development costs, net *) 6.2 9.2 12.0
Selling, marketing, general and administrative expenses 16.4 31.5 41.3
Provision and write-off for doubtful accounts and capital lease
receivables **) 0.7 34.9 16.6
Impairment of tangible and intangible assets 11.1 24.3
Impairment of Goodwill 13.1 6.3
Restructuring charges 7.8
-------------- -------------- --------------
Operating income (loss) 8.4 (98.0) (91.1)
Financial income (expenses), net (0.3) (5.5) (10.2)
Write-off of investments (1.9) (7.3) (24.6)
-------------- -------------- --------------
Income (loss) before taxes on income 6.2 (110.8) (125.9)
Taxes on income 0.4 (0.3) (0.4)
-------------- -------------- --------------
Income (loss) after taxes on income 5.8 (111.1) (126.3)
Equity in losses of affiliated companies (0.2) (0.1) (14.1)
Acquired in-process research and development of an affiliated company (2.0)
Minority interest in losses of subsidiaries 0.1 1.6 1.7
-------------- -------------- --------------
Net income (loss) from continuing operations, before cumulative
effect of a change in an accounting principle 3.7 (109.6) (138.7)
Net loss from cumulative effect of a change in an accounting
principle (27.2)
Loss from discontinued operations (1.6) (0.9)
-------------- -------------- --------------
Net income (loss) % 3.7 % (111.2) % (166.8)
============== ============== ==============
51
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUES. Our product revenues decreased by 53.4% to approximately
$130.0 million in 2002 from approximately $279.2 million in 2001. Our service
revenues decreased by 26.2% to approximately $78.7 million in 2002 from
approximately $106.7 million in 2001. The decline in revenues can be attributed
to the following factors: (i) in October 2002, we commenced the Arrangement to
restructure our debt, which was successfully completed on March 6, 2003. Prior
to and while the Arrangement was under negotiation, our ability to sell products
and retain customers declined; (ii) we did not win any bids in Latin America
until September 30, 2002, and despite our being awarded two large contracts in
Colombia and a third in Brazil in the fourth quarter of 2002, no revenues were
recognized in 2002 on the bids we won in Latin America after September 30, 2002;
and (iii) our sale of six European entities to our joint venture, Satlynx S.A.
caused a decline in service-related revenues. In addition, we have also
experienced a slowdown in orders and sales in all of our markets and are
affected, like all others in our industry, by economic conditions in the United
States which are globally affecting the telecommunications industry.
GROSS PROFIT. Gross profit decreased by 47.3% to approximately $19.6
million in 2002 from approximately $37.2 million in 2001. The gross profit
margin decreased to 9.4% in 2002 from 9.6 % in 2001. The decrease in our gross
profit margin was due to the decrease in revenues, a limited ability to decrease
fixed costs and a downward pressure on prices in the industry. The decrease was
offset by excess inventory and discontinued products that were written off in
2002 in an amount of approximately $20.1 million compared with $59.8 million
during 2001.
RESEARCH AND DEVELOPMENT COSTS. Gross research and development costs
decreased by 34.8% to approximately $29.0 million in 2002, from approximately
$44.5 million in 2001, and as a percentage of revenues, increased to 13.9% in
2002 from 11.5% in 2001, mainly due to our decreased revenues. Research and
development grants and funding, as a percentage of gross research and
development costs, decreased to 13.6% in 2002 compared to 19.9% in 2001. This
increase is primarily attributable to payments required to be made by StarBand
in 2001, which did not exist in 2002. Net research and development costs,
decreased to approximately $25.1 million in 2002 from approximately $35.6
million in 2001, and increased as a percentage of sales to 12.0% from 9.2%
respectively, mainly due to the decrease in revenues. The dollar decrease in
such costs in 2002 was primarily due to implementation of restructuring plans,
which led to a decrease in research and development personnel and management's
decision to stop further development of the rStar browser technology.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
marketing, general and administrative expenses decreased by 29.1% in 2002 to
approximately $86.2 million from approximately $121.5 million in 2001. The
dollar decrease in such expenses was attributed mainly to: (i) the sale of some
of our European entities to our joint venture, Satlynx S.A., enabling a
significant reduction in headcount and payroll; (ii) according to SFAS 142 we no
longer amortize goodwill, in contrast to our amortization of goodwill in 2001 in
the amount of $15.1 million; and (iii) implementation of restructuring plans,
which led to a decrease in personnel and other general and administrative
expenses. As a percentage of revenues, selling and marketing, general and
administrative expenses increased to 41.3% in 2002 from 31.5% in 2001 mainly due
to the decrease in revenues.
PROVISION AND WRITE-OFF OF DOUBTFUL DEBTS AND CAPITAL LEASE
RECEIVABLES. Provision and write-off of doubtful debts and capital lease
receivables decreased to $34.7 million in 2002 from approximately $134.6 million
in 2001. This decrease was attributable mainly to our reserves for capital lease
receivables and for StarBand receivables, which existed only in 2001. For more
information please see "Restructuring Charges, Write-Offs and Other Significant
Charges" above.
IMPAIRMENT OF GOODWILL, TANGIBLE AND INTANGIBLE ASSETS. In 2001 and
2002 we did not meet our projected sales and came to realize the adverse effects
that the economic recession was having on the communications industry. For more
details, please see "Restructuring Charges, Write-Offs and Other Significant
Charges" above.
RESTRUCTURING CHARGES. In 2001 we recorded restructuring charges of
approximately $30.3 million. The restructuring cost consists of employee
termination benefits associated with involuntary terminations of employees,
compensation to certain suppliers and customers, and other costs associated with
termination of lease commitments
52
in respect of premises occupied by Gilat. The terminations resulted our decision
to further reduce costs and improve profitability.
OPERATING LOSS. In 2002 we had an operating loss of approximately
$190.1 million compared to an operating loss of approximately $378.4 million in
2001. The decrease in 2002 is due to a reduction in write-offs relating to
doubtful debts, capital lease receivables and inventory as well as a decrease in
impairment of intangible and tangible assets and restructuring charges.
FINANCIAL EXPENSES, NET. Financial expenses, net amounted to
approximately $21.3 million in 2002 and in 2001. Financial expenses are
comprised mainly of interest expenses on our convertible subordinated notes and
long term loans.
WRITE-OFF OF INVESTMENTS. Our management periodically reviews the
carrying value of its investments as required by APB18. As a result of assessing
the recoverability of the carrying amount of investments in companies in 2002,
an amount of $ 51.4 million was impaired from our investments and other
non-operating charges ($39.4 million of which was impaired from the long term
note to GVT in accordance with FAS 114). We wrote-off $28.0 million of
investments in affiliated and other companies in 2001. For more information
please see "Restructuring Charges, Write-offs, and Other Significant Charges"
above.
TAXES ON INCOME. Taxes on income were approximately $0.9 million in
2002 compared to approximately $1.0 million in 2001.
EQUITY IN LOSSES OF AFFILIATED COMPANIES. Equity in losses of
affiliated companies was approximately $29.2 million in 2002, compared to
approximately $0.3 million in 2001. The increase is attributed mainly to the
equity losses in StarBand resulting from the estimated cost of the settlement
with SES Americom relating to transponders used by StarBand and losses
associated with the "debtor in possession" financing and other financing
provided to StarBand, and equity losses related to Satlynx S.A.
MINORITY INTEREST IN LOSSES OF A SUBSIDIARY. Minority interest in
losses of a subsidiary was approximately $3.5 million in 2002, compared to
approximately $5.9 million in 2001. The decrease was mainly due to the decrease
of the minority shareholding in rStar.
LOSS FROM CONTINUING OPERATIONS, BEFORE CUMULATIVE EFFECT OF A CHANGE
IN AN ACCOUNTING principle. As a result of all of the above mentioned factors,
we had losses of approximately $289.6 million in 2002, compared to a loss of
approximately $423.1 million in 2001.
NET LOSS FROM CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE.
As of December 31, 2002, all of the goodwill set forth in our financial
statements that existed in the beginning of 2002 in the amount of approximately
$56.7 million was impaired. Under SFAS No. 142 "Goodwill and Other Intangible
Assets". For more information please see "Restructuring Charges, Write-offs, and
Other Significant Charges" above.
LOSS FROM DISCONTINUED OPERATIONS. In 2002, rStar discontinued all of
its operating businesses, mainly consisting of AutoNetworks, resulting in a loss
of approximately $1.9 million and $6.1 million in 2002 and 2001, respectively.
NET LOSS. As a result of the above-mentioned factors, we had losses of
approximately $348.2 million in 2002, compared to losses of approximately $429.1
million in 2001.
LOSS PER SHARE. Basic and diluted loss per share in 2002 was $12.28
from continued operation, $0.08 from discontinued operation, and $2.41 from
cumulative effect of a change in an accounting principle which comprises basic
and diluted loss per share of $14.77 as compared to basic and diluted loss of
$18.37 per share in 2001, $18.11 per share from continued operations and $0.26
per share from discontinued operations.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUES. Our product revenues decreased by 29.9% to approximately
$279.3 million in 2001 from approximately $398.3 million in 2000. Our service
revenues increased by 0.4% to approximately $106.7 million in
53
2001 from approximately $106.3 million in 2000. The decrease in revenues was
caused primarily due to the decrease in sales to StarBand to approximately $44
million in 2001 from $128 million in 2000, and also due to a slowdown in orders
and sales in virtually all of our markets, consumer, enterprise and telephony
(see note 1c to the consolidated financial statements)
GROSS PROFIT. Gross profit decreased by 76.8% to approximately $37.2
million in 2001 from approximately $160.1 million in 2000, mainly due to the
decrease in revenues and no ability to decrease fixed costs accordingly and due
to write off and mark down of excess inventory and discontinued products in an
amount of approximately $59.8 million. The gross profit margin decreased to 9.6%
in 2001 from 31.7% in 2000.
RESEARCH AND DEVELOPMENT COSTS, NET. Gross research and development
costs increased by 25.0% to approximately $44.5 million in 2001, from
approximately $35.6 million in 2000, and as a percentage of revenues, increased
to 11.5% in 2001 from 7.1% in 2000, mainly due to the decrease in revenues. The
dollar increase in such costs in 2001 was primarily due to the acquisition of
Deterministic in June, 2000; the further development of the SkyBlaster, Skystar
Advantage and FaraWay and DialAw@y IP; the expansion of research and development
to reduce the costs and increase the functionality of our interactive VSATs ,
the conducting of generic research relating to our participation in research
consortia. Research and development grants and funding, as a percentage of gross
research and development costs, increased to 19.9% in 2001 compared to 12.1% in
2000, mainly attributable to payments required to be made by StarBand. See Item
4: "Information on the Company -- Marketing, Distribution and Strategic
Alliances; Strategic Alliances and Joint Ventures; StarBand." Net research and
development costs, increased to approximately $35.6 million in 2001 from
approximately $31.3 million in 2000, and increased as a percentage of sales to
9.2% in 2001 from 6.2 % in 2000.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
marketing, general and administrative expenses increased by 47.4% in 2001 to
approximately $121.5 million from approximately $82.4 million in 2000. As a
percentage of revenues, selling, marketing, general and administrative expenses
increased to 31.5% in 2001 from 16.4% in 2000. The dollar increase was due to
consolidation of rStar selling and marketing, general and administrative
expenses from January 1, 2001, in the amount of $10.8 million, amortization of
rStar goodwill in the amount of $8.5 million and the acquisition of GTH LA in
April 2000.
PROVISION AND WRITE-OFF OF DOUBTFUL DEBTS AND CAPITAL LEASE
RECEIVABLES. Provision and write-off of doubtful debts and capital lease
receivables increased significantly from $3.7 million in 2000 to $134.6 million
in 2001. This increase was attributed mainly to the increase in our reserve for
capital lease receivables and increase in bad debt provision by approximately
$59.6 million and the reserve for StarBand receivables of approximately $75
million. For more information please see Item 5: "Operating and Financial Review
and Prospects - General - Restructuring Charges, Write-Offs and Other
Significant Charges."
IMPAIRMENT OF GOODWILL, TANGIBLE AND INTANGIBLE ASSETS. In 2001, we did
not meet our projected sales and came to realize the adverse effects that the
economic recession was having on the communications industry. For more details,
please see "Restructuring Charges, Write-offs and Other Significant Charges"
above.
RESTRUCTURING CHARGES. In the year ended December 31, 2001, we
announced two restructuring plans that involved, among other things, reducing
workforce worldwide, streamlining physical facilities and moving to a wholesale
model for the international consumer segment. In connection with this
restructuring, we recorded, in 2001, restructuring charges of approximately
$30.3 million. See above "Restructuring Charges, Write-offs and Other
Significant Charges".
OPERATING INCOME (LOSS). In the year ended December 31, 2001 we had an
operating loss of approximately $378.4 million compared to an operating income
of approximately $42.8 million in the comparable period of 2000.
FINANCIAL EXPENSES, NET. Financial expenses, net amounted to
approximately $21.3 million in 2001, compared to financial expenses of
approximately $1.3 million in 2000. The increase is mainly attributed interest
expenses on our long-term loans, currency translation adjustments, mainly in the
Company's subsidiaries located in Latin America, and a decrease in interest
received from our bank deposits.
IMPAIRMENT OF INVESTMENTS IN COMPANIES. As a result of our assessing
the recoverability of the carrying amount of investments, in the year ended
December 31, 2001 Gilat wrote-off approximately $8.4 million and
54
approximately $19.6 million of the investments in affiliated and other
companies, respectively, and approximately $9.4 in the year ended December 31,
2000. The decision to write-off these investments was based on certain
circumstances, including the global decrease in the valuation of
Internet-related companies, which indicated that part of the carrying amount of
the investments might not be recoverable.
TAXES ON INCOME. Taxes on income were approximately $1.0 million in
2001 compared to approximately $2.0 million in 2000.
EQUITY IN LOSSES OF AFFILIATED COMPANIES. Equity in losses of
affiliated companies was approximately $0.3 million in 2001, compared to
approximately $1.0 million in 2000.
MINORITY INTEREST IN LOSSES OF A SUBSIDIARY. Minority interest in
losses of a subsidiary was approximately $5.9 million in 2001, compared to
approximately $0.3 million in 2000. The increase was mainly due to the
consolidation of rStar beginning January 1, 2001.
INCOME (LOSS) FROM CONTINUING OPERATIONS, BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE. As a result of all the foregoing factors, we had
losses of approximately $423.1 million in 2001, compared to a net income of
$19.4 million in 2000.
LOSS FROM DISCONTINUED OPERATIONS. rStar discontinued all of its
operating businesses, mainly consisting of AutoNetworks business in 2002,
resulting in a loss of approximately $6.1 million in 2001.
NET INCOME (LOSS). As a result of all of the above-mentioned factors,
we had losses of approximately $429.1 million in 2001, compared to net income of
approximately $19.4 million in 2000.
EARNINGS (LOSS) PER SHARE. Basic loss per share for 2001 was $18.37
($18.11 from continued operation and $0.26 from discontinued operation) as
compared to earnings per share of $0.86 in 2000. Diluted loss per share for 2001
was $18.37 ($18.11 from continued operation and $0.26 from discontinued
operation) as compared to diluted earnings per share of $0.81 in 2000.
VARIABILITY OF QUARTERLY OPERATING RESULTS
Our revenues and profitability may vary from quarter to quarter and in
any given year, depending primarily on the sales mix of our family of products
and the mix of the various components of the products (i.e., the volume of sales
of remote terminals versus hub equipment and software and add-on enhancements),
sale prices, and production costs, as well as entry into new service contracts,
the termination of existing service contracts, or different profitability levels
between different service contracts. Sales of our products to a customer
typically consist of numerous remote terminals and related hub equipment and
software, which carry different sales prices and margins.
Annual and quarterly fluctuations in our results of operations may be
caused by the timing and composition of orders by our customers. Our future
results also may be affected by a number of factors, including our ability to
continue to develop, introduce and deliver enhanced products on a timely basis
and expand into new product offerings at competitive prices, to anticipate
effectively customer demands and to manage future inventory levels in line with
anticipated demand. These results may also be affected by currency exchange rate
fluctuations and economic conditions in the geographical areas in which we
operate. In addition, our revenues may vary significantly from quarter to
quarter as a result of, among other factors, the timing of new product
announcements and releases by our competitors and us. We cannot be sure that
revenues, gross profit and net income in any particular quarter will not be
lower than those of the preceding quarters, including comparable quarters. Our
expense levels are based, in part, on expectations as to future revenues. If
revenues are below expectations, operating results are likely to be adversely
affected. In addition, a substantial portion of our expenses is fixed (i.e.
space segment, lease payments) and adjusting the expenses in cases where
revenues drop unexpectedly often takes considerable time. As a result, we
believe that period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Due to all of the foregoing factors, it is likely that in some
future quarters our revenues or operating results will be below the expectations
of public market analysts or investors. In such event, the market price of our
ordinary shares would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
55
Since inception, our financing requirements have been met primarily
through cash generated by operations, funds generated by private equity
investments, public offerings, issuances of convertible notes as well as funding
from research and development grants. In addition, we also financed our
operations through borrowings under available credit facilities as discussed
below. We have used available funds primarily for working capital, capital
expenditures and strategic investments.
Since March 2000, we have not raised additional financing other than
through limited credit facilities and bank loans. As of December 31, 2002, we
had cash and cash equivalents of $48.1 million, short term bank deposits of $1.6
million, short term and long term restricted cash of $22.9 million and short
term bank credit of $1.8 million. As of December 31, 2001, we had cash and cash
equivalents of $97.3 million, short term bank deposit of $12.9 million, short
term and long term restricted cash of $13.0 million and short term bank credit
of $4.7 million. Our cash balances, as described above, decreased by $47.7
million, reflecting payment of approximately $11 million relating to the rStar
acquisition (mainly payment to the minority shareholders), principal payments on
loans net of new loans received of approximately $12.2 million (approximately
half of which is to Bank Hapoalim), financing of StarBand of approximately $13.5
million (mainly the payment of space segment obligations and cash contribution
as part of the "debtor in possession" financing), expenses relating to the
restructuring of our debt in the amount of approximately $2.2 million and
purchases of property, plant and equipment and other assets, net of proceeds
from sale, in the amount of approximately $10 million, all of which was offset
by an increase in cash that resulted from the sale of some of our European
entities to our joint venture, Satlynx S.A in a net amount of approximately $7.7
million (net of expenses associated with the transaction). In our cash balance,
an additional decrease in an amount of $6.5 million was used to finance our
operating activities and is comprised of amounts provided by (i) a decrease in
our trade receivables in the amount of $27.8 million, (ii) a decrease in
inventories in the amount of $24.7 million, (iii) a decrease in other accounts
receivable and prepaid expenses, including long term receivables in the amount
of $13.7 million, and (iv) receipt of interest payment for the convertible note
in GVT in the amount of $3 million, net of (i) amounts used for interest payment
on loans and on our convertible notes of approximately $15.0 million, (ii)
decrease in trade payables, accrued expenses, other accounts payable and other
long term liabilities in the amount of $19.1 million, (iii) cash used for
discontinued operations in the amount of $1.2 million, and (iv) net cash used in
operating activities in the amount of $40.4 million.
As of December 31, 2002, we had long term contractual obligations and
current maturities totaling approximately $691 million.
In March 2003, we completed a restructuring of our debt with our bank
lenders, holders of our 4.25% Convertible Subordinated Notes due 2005, and
certain other creditors, which significantly strengthens our balance sheet and
reduces and defers our financing costs. See "Commitments and Contingencies"
above.
The Arrangement, as approved by the Israeli courts, enhanced our
liquidity resources since amounts owing were reduced by approximately $305
million to approximately $386 million. In addition, interest accrued on the
Notes will be deferred and paid beginning April 2005.
56
As of December 31, 2002, our short and long term contractual
obligations were as follows:
--------------------------------------- -----------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
CONTRACTUAL OBLIGATIONS
--------------------------------------- ------------------ ------------------- ------------------- ------------------
TOTAL 2003 2004-2006 2007 AND BEYOND
--------------------------------------- ------------------ ------------------- ------------------- ------------------
Long-Term Debt $153,337 $8,197 $139,802 $5,338
--------------------------------------- ------------------ ------------------- ------------------- ------------------
Convertible Subordinated Notes 358,648 - 358,648 -
--------------------------------------- ------------------ ------------------- ------------------- ------------------
Capital Lease Obligations 5,224 1,810 3,414 -
--------------------------------------- ------------------ ------------------- ------------------- ------------------
Operating Lease 159,542 21,861 52,646 85,035
--------------------------------------- ------------------ ------------------- ------------------- ------------------
Other Long-Term Debt 5,593 925 4,195 473
--------------------------------------- ------------------ ------------------- ------------------- ------------------
SES Americom Obligation 5,700 5,700 - -
--------------------------------------- ------------------ ------------------- ------------------- ------------------
Total Contractual Cash Obligations $688,044 $38,493 $558,705 $90,846
--------------------------------------- ------------------ ------------------- ------------------- ------------------
After giving effect to restructuring of our debts and as of March 31,
2003, our short and long term contractual obligations which were as follows:
---------------------------------------- -----------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
CONTRACTUAL OBLIGATIONS
---------------------------------------- -----------------------------------------------------------------------------
TOTAL 2003 2004-2006 2007 AND BEYOND
---------------------------------------- ----------------- ------------------- ------------------ --------------------
Long-Term Debt $118,353 $4,945 $28,311 $85,097
---------------------------------------- ----------------- ------------------- ------------------ --------------------
Convertible Notes 88,335 - - 88,335
---------------------------------------- ----------------- ------------------- ------------------ --------------------
Capital Lease Obligations 5,224 1,810 3,414 -
---------------------------------------- ----------------- ------------------- ------------------ --------------------
Operating Lease 159,542 21,861 52,646 85,035
---------------------------------------- ----------------- ------------------- ------------------ --------------------
Other Long-Term Debt 5,593 925 4,195 473
---------------------------------------- ----------------- ------------------- ------------------ --------------------
SES Americom Obligation - - - -
---------------------------------------- ----------------- ------------------- ------------------ --------------------
Total Contractual Cash Obligations $ 377,047 $ 29,541 $ 88,566 $ 258,940
---------------------------------------- ----------------- ------------------- ------------------ --------------------
CAPITALIZATION
The following table sets forth:
o our actual consolidated capitalization as of December 31, 2002;
and
o our consolidated capitalization as of December 31, 2002, as
adjusted to give effect to the arrangement (based on share price
of $0.24 at the actual closing date - March 14 2003).
You should read this information together with "Item 5: Management's
Discussion and Analysis of Results of Operation and Financial Condition," the
selected consolidated financial information included elsewhere in this proxy
solicitation, the consolidated financial information incorporated by reference
herein and "The Proposed Plan of Arrangement-Accounting Treatment of the
Transaction."
57
DECEMBER 31, 2002
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
(UNAUDITED)
(IN THOUSANDS)
----------------------------
Current maturities of long-term loans1 $ 8,197 $ 8,197
============= =============
Long-term loans, net of current maturities1 145,140 132,472
------------- -------------
Existing notes2 358,648
New notes1 . 126,191
Shareholders' equity:
Share Capital3 70 568
Additional paid-in capital 617,797 669,351
Accumulated other comprehensive loss (8,165) (8,165)
Retained earnings (accumulated deficit) (782,617) (605,639)
------------- -------------
============= =============
Total shareholders' equity (172,915) 56,115
============= =============
Total capitalization $ 339,070 $ 322,975
============= =============
----------------
1 Includes future accrued interest for restructured debts as follows:
$3.252 million, $19.062 million and $37.848 million for current maturities,
long-term loans and new notes respectively. For more detail, see "The Proposed
Plan of Arrangement--Accounting Treatment of the Transaction."
2 Includes accrued interest as of December 31, 2002 in an amount of $8.648
million (Actually accrued interest of $11.9 in deduct of accrued interest of
current maturities amounted to $3.252 as required by FAS 6).
3 Consisting of ordinary shares par value NIS 0.01 per share, 300,000,000
authorized and 23,855,922 issued and outstanding as of December 31, 2002 and
259,757,793 issued and outstanding as adjusted to give effect to the
arrangement.
OFF BALANCE SHEET ARRANGEMENTS
At December 31 2002, we have guaranteed the performance of our work to our
customers (usually government entities). Such guarantees are required by
contract for our performance during the installation and operational period of
long-term rural telephony projects in Latin America (mainly in Peru and
Colombia) and for the performance of other projects (government and corporate)
throughout the rest of the world. The guarantees for installation typically
expire soon after certain milestones are met and guarantees for operations
typically expire proportionally over the contract period. Our maximum potential
amount of future payments the Company could be required to make under its
guarantees at December 31, 2002 is $47.4 million. This figure includes
guarantees of performance for our subsidiary in Peru in the amount of $30
million and guaranties for two projects in Colombia in the amount of $10
million. We have restricted cash as a collateral for the performance guarantees
in an amount of $11.4 million. We have not recorded any liability for such
amounts, as we expect that our performance will be acceptable and to date, no
guarantees were exercised against Gilat. In addition, we have provided
guarantees in relation to certain satellite transponder agreements in the amount
of up to $3.4 million. We have also guaranteed certain property leases in
McLean, Virginia, Melbourne, Florida and London in amounts of up to $24.3
million. We have restricted cash as a collateral for the guarantees in an amount
of $6.3 million.
IN-PROCESS RESEARCH AND DEVELOPMENT
In 1998, Gilat purchased approximately 1.25% then outstanding shares of
the common stock of rStar (formerly known as ZapMe! Corporation). By December
31, 2000, Gilat purchased an additional 47.8% of the common stock of rStar for
over $49 million and in early January 2001, Gilat completed an additional
purchase to own a total of 51.0% of the common stock of rStar. At the time of
the acquisition, rStar was involved in the development of a new browser
interface known as "Managed Desk Console." Gilat allocated a charge of $10
million of the total purchase price to in-process research and development. The
allocation was based on an evaluation performed using the income approach. As
part of the process of analyzing this acquisition, Gilat made a decision to buy
technology that had not yet been commercialized rather than develop the
technology internally. Our management based this decision on factors such as the
amount of time it would take to bring the technology to market and the quality
of rStar's research and development effort. We also considered our own resource
allocation and our progress on comparable technology. Our management expects to
use the same decision process in the future.
Gilat estimated the fair value of in-process research and development
using an income approach. This involved estimating the fair value of the
in-process research and development using present value of the estimated
after-tax cash flows expected to be generated by the purchased in-process
research and development, using risk adjusted discount rates and revenue
forecasts as appropriate. The selection of the discount rate was based on
consideration of a weighted average cost of capital, as well as other factors
including the technology's useful life, profitability level, uncertainty of
advances that were known at that time, and stage of completion of each
technology. Gilat believes that the estimated in-process research and
development amount so determined represents fair value and does not exceed the
amount a third party would pay for the project.
58
Product revenues attributable to the Managed Desk Console technology were
estimated to be approximately $11 million in 2001 and $52 million in 2002 and to
grow thereafter through the end of the estimated life expectancy for the Managed
Desk Console technology in 2005. Product revenue growth was expected to decrease
gradually from 134% in 2004 to 86% in 2005. Revenues were estimated based on
relevant market size and growth factors, expected industry trends, maintenance
and service and the estimated useful life for the underlying the Managed Desk
Console technology. Product costs estimated consist of installation, space
segment fees, and payment network access. Estimated operating expenses included
cost of services, general and administrative expenses and engineering expenses.
Discounted cash flows considering the risk of the project in the discount
rate (using a discount rate of 45%), as well as discounted cash flows which
considered the proportional value consistent with the completed development work
were utilized. Both approaches gave a value for Gilat's portion of the Managed
Desk Console technology at approximately $10 million.
Where appropriate Gilat deducted an amount reflecting the contribution of
the core technology from the anticipated cash flows from an in-process research
and development project. At the date of the acquisition, the in-process research
and development project had not yet reached technological feasibility and had no
alternative future uses. Accordingly, the value allocated to this project was
capitalized and immediately expensed at acquisition.
As of the acquisition date, the Managed Desk Console technology was in
its final stage of development and was estimated to be 85% complete. Only final
integration and additional testing of this technology remained for completion.
Final stage of development for the Managed Desk Console technology, including
improved functionality and features, was estimated to be completed late in the
second quarter of 2001. Product release was estimated by June 2001, at which
time we expected to begin generating economic benefits. Eventually, the product
was completed and deployed in September 2001.
Prior to the acquisition, rStar had incurred approximately $4.5 million
in development-costs related to the Managed Desk Console. At the acquisition
date, costs to complete the research and development efforts related to the
Managed Desk Console were expected to range from $0.6 to 0.9 million. In 2001,
the gross research and development expenses attributed to this technology were
approximately $1.2 million.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Almost all of our sales and service contracts are in U.S. dollars and
most of our expenses are in U.S. dollars and New Israeli Shekels (NIS). The U.S.
dollar cost of our operations in Israel is influenced by the extent to which any
increase in the rate of inflation in Israel is not offset (or is offset on a
lagging basis) by a devaluation of the NIS in relation to the U.S. dollar. The
influence on the U.S. dollar cost of our operations in Israel relates primarily
to the cost of salaries in Israel, which are paid in NIS and constitute a
substantial portion of our expenses in NIS. In 2002, the rate of inflation in
Israel was 6.5% while the NIS depreciated in relation to the U.S. dollar, from
NIS 4.416 per $1 on December 31, 2001 to NIS 4.737 per $1 on December 31, 2002.
In 2001 the inflation in Israel was 1.4% while the NIS depreciated in relation
to the U.S. dollar at a rate of 9.3%. In 2000, inflation in Israel exceeded
devaluation of the NIS in relation to the U.S. dollar. In 2000, the rate of
inflation that exceeded the devaluation of the NIS in relation to the U.S.
dollar did not have a material adverse impact on our operation results or on our
financial condition. If future inflation in Israel exceeds the devaluation of
the NIS against the U.S. dollar or if the timing of such devaluation lags behind
increases in inflation in Israel, our results of operations may be materially
adversely affected.
Regarding the changes in the value of other foreign currencies ("other
currencies") in relation to the U.S. dollar, we did not incur any material
effects caused by foreign currency fluctuations for the years 2001 and 2002. In
2002 the depreciation of the value of foreign currencies in relation to the U.S.
dollar, the functional currency of Gilat and its subsidiaries, created financial
expenses. There can be no assurance that in the future our results of operations
may not be materially adversely affected by other currency fluctuations.
59
EFFECTIVE CORPORATE TAX RATE
Israeli companies are generally subject to income tax at the rate of
36% of taxable income. However, substantially all of our production facilities
in Israel have been granted Approved Enterprise status under the Law for
Encouragement of Capital Investments, 1959, and consequently are eligible for
certain tax benefits for the first several years in which they generate taxable
income. We currently have nine Approved Enterprises, and have applied for
approval of an additional investment program, part of which is expected to be
considered an increase of the investment in the ninth Approved Enterprise and
another part is expected to be considered a replacement of previously approved
equipment. Income derived from the nine Approved Enterprises is entitled to tax
benefits for periods of seven years (in the case of two of the enterprises) or
ten years (for the remaining seven enterprises), from the first year in which we
generate income from the respective Approved Enterprise, on the basis of the
nature of the incentives selected by us. The period of reduced tax for the tenth
enterprise, if approved, is expected to be ten years, although the terms of the
approval may provide for a different period. The main tax benefits are a tax
exemption for two or four years and a reduced tax rate of 10% to 25% for the
remainder of the benefits period depending upon the level of foreign ownership
of the company.
As a result of these programs, our effective corporate tax rate was
6.2% in 2000. In 2001, we had a loss mainly due to restructuring expenses and
write offs associated with restructuring. In 2002, we had a loss mainly due to
decreased revenues as a result of a slowdown in orders and sales in all of our
markets and the effect of deteriorating marketing conditions in the United
States which are globally affecting the telecommunications industry. We
anticipate that we will not have to pay taxes in 2003 due to current and
carry-forward tax losses.
RESEARCH AND DEVELOPMENT
PRODUCT DEVELOPMENT
We devote significant resources to research and development projects
designed to enhance our VSAT products, to expand the applications for which they
can be used and to develop new products. In 2001, we entered into an agreement
with the Office of the Chief Scientist for the early payment of all royalties
arising from future sales with respect to previous Office of the Chief Scientist
grants we received. We recorded a one-time operating charge of $3.4 million.
This amount is payable over a period of up to five years and bears an interest
rate to be agreed upon between the Office of the Chief Scientist and us. This
agreement enables us to participate in a new program under which we will be
eligible to receive future research and development grants for generic research
and development projects without any royalty repayment obligations.
We intend to continue to devote research and development resources to
complete development of certain features, to improve functionality, including
supporting greater bandwidth, to improve space segment utilization, to increase
throughput and to reduce the cost of our products. We continue to devote
substantial research and development efforts to the hardware and software of our
products.
We have devoted research and development resources to development of
our DialAw@y IP VSAT. This product provides inexpensive, toll quality, dial tone
telephone service as well as high speed Internet access for small businesses and
villages in remote or urban areas lacking an adequate telecommunications
infrastructure. We intend to continue development of new features for the
DialAw@y IP VSAT.
We have developed the SkyBlaster VSAT product and continue development
of this product in order to enhance the product features and effect cost
reductions. This product is an interactive VSAT that incorporates a satellite
return channel, thereby enabling two-way access to multimedia services via the
Internet. The SkyBlaster is targeted for use in communities of interest,
corporations, small to mid-size businesses, Soho and consumer users. The
SkyBlaster is designed to offer improved access through better response time and
faster downloading of large files, such as audio and video clips. We have
devoted considerable research and development efforts in order to improve the
functionality of the SkyBlaster for consumer use, as well as to reduce the costs
of the product. We have developed an external stand-alone box for the SkyBlaster
VSAT in order to enable easy installation of the product and introduced this
unit, named SkyBlaster 360. We are also involved in extensive research and
development efforts aimed to reduce the price and increase the efficiency of the
technical components of the SkyBlaster product.
60
We have developed the Skystar 360E product, which is aimed at the Soho
and enterprise markets, and is based on a similar platform to the 360 model. The
first version, the SkyBlaster 360, supports only IP networks. We continue to
develop several add-ons and enhancement to this product. It is designed to
improve higher data rates and higher satellite efficiency compared to the
SkyStar Advantage product, and is therefore a lower cost and modern solution to
shared hub service providers.
In addition we continue to enhance all of our products (including
SkyStar Advantage and FaraWay) by adding several new features, and supporting
the needs of existing or potential customers.
Our current products and services typically operate on either the Ku or
C satellite bands. We have also developed extensive Ku band capabilities. We are
currently involved in exploring the possible utilization of the Ka satellite
band with our products and services in the future.
We develop our own network software and software for our VSATs. We
generally license our software to customers as part of the sale of our network
products and services. We also license certain third party software for use in
our products.
Our software and our internally developed hardware are proprietary and
we have implemented protective measures both of a legal and practical nature. We
have obtained and registered patents in the United States and in various other
countries in which we offer our products and services. We rely upon the
copyright laws to protect against unauthorized copying of the object code of our
software and upon copyright and trade secret laws for the protection of the
source code of our software. We derive additional protection for our software by
licensing only the object code to customers and keeping the source code
confidential. In addition, we enter into confidentiality agreements with our
customers and other business partners to protect our software technology and
trade secrets. We have also made copyright, trademark and service mark
registrations in the United States and abroad for additional protection of our
intellectual property. Despite all of these measures, it is possible that
competitors could copy certain aspects of our software or hardware or obtain
information that we regard as a trade secret in violation of our legal rights.
THIRD-PARTY FUNDING
Through December 31, 2002, we accrued a total of approximately $9,591,657
in grants from the Office of the Chief Scientist for the research and
development of next generation satellite products. Through that date, we have
repaid all the royalties we are required to repay with respect to grants
totaling $345,000 for the OneWay VSAT. Under the terms of our funding from the
Office of the Chief Scientist for the DialAw@y IP and the mesh satellite
communications network product, royalties of 3% to 5% are payable on sales of
these products developed from the funded project, up to 100% of the
dollar-linked grant received in respect of the project (from January 1, 1999,
annual interest based on LIBOR also began to accrue). The average interest rate
for grants received since 2002 is 4%. Through December 31, 2002, we paid or
accrued royalties of $2,377,995 to the Office of the Chief Scientist for all of
the awarded projects. The terms of these grants prohibit the manufacture of
OneWay products or DialAw@y IP products outside of Israel and the transfer of
technology developed pursuant to the terms of these grants to any person without
the prior written consent of the Office of the Chief Scientist. We received such
consent in connection with the OneWay VSAT product for the KSAT joint venture.
These restrictions do not apply to the sale or export from Israel of products
developed with that know-how. Also, these limitations do not apply to products
that have not been funded by the Office of the Chief Scientist.
In 2001, we entered into an agreement with the Office of the Chief
Scientist for the early payment of all royalties arising from future sales with
respect to previous Office of the Chief Scientist grants we received. The
Company recorded a one-time operating charge of $3.4 million. This amount is
payable over a period up to five years and bears an interest rate to be agreed
upon between the Office of the Chief Scientist and us. This agreement enables us
to participate in a program under which we are eligible to receive future
research and development grants for generic research and development projects
without any royalty repayment obligations.
Through December 31, 2002, we received grants of approximately $580,671
from the European Commission in connection with a joint research and development
project with a number of European high technology companies for a
satellite-based interactive television platform. These grants are non-royalty
bearing.
61
Through December 31, 1999, we received or accrued grants of approximately
$1.0 million from BIRD for the development of the Skystar Advantage VSAT and
FaraWay VSAT products. Under the terms of BIRD funding, generally royalties of
2.5% to 5% on sales of products whose development is so funded are payable until
150% of the dollar amount funded (linked to the Consumer Price Index of the
United States is repaid. As of December 31, 1999, we have paid or accrued to
BIRD approximately $1.7 million in royalties. As of that date, we have completed
repayment of royalties to BIRD with respect to our Skystar Advantage VSAT
products and our FaraWay VSAT product. In 2000, 2001 and 2002, we did not
receive funding from BIRD.
RESEARCH AND DEVELOPMENT CONSORTIUM PARTICIPATION
In addition to royalty-bearing grants from the Office of the Chief
Scientist and BIRD, we have received non-royalty bearing grants from the Office
of the Chief Scientist through participation in generic research consortia, each
comprised of several major high technology companies in Israel, with
participation of one or more representatives from Israeli academic institutions.
We expect to receive further grants through participation in those consortia
that are continuing. The consortia in which we participated in 2002 are:
o the ISIS Consortium (devoted to generic technology research for
the information superhighway in space), which began in February
1999; and
o the LSRT Consortium (devoted to generic technology research for
satellite-based rural telephony solutions), which began in August
2000.
In general, any member of a consortium that develops technology in the
framework of that consortium retains the intellectual property rights to
technology developed and all the members of the consortium have the right to
utilize and implement any such technology without having to pay royalties to the
developing consortium member. Transfer of consortium-developed technology is
subject to restrictions and the approval of the Office of the Chief Scientist
and, in certain projects, of the management of the consortium.
Under each of the research consortia, the Office of the Chief Scientist
reimburses 66% of the approved budget for that consortium and each individual
member of the consortium contributes the remaining 34% for such individual
member's research and development activities. No royalties are payable with
respect to this funding. Expenses in excess of the approved budget are borne by
the consortia members.
As of December 31, 2002, we have accrued approximately $17,652,349
million in grants from the Office of the Chief Scientist through the consortia.
The following table sets forth, for the years indicated, our gross
research and development expenditures, the portion of such expenditures which
was funded by royalty-bearing and non-royalty bearing grants, acquired research
and development and the net cost of our research and development activities:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2000 2001 2002
---- ---- ----
(IN THOUSANDS)
Gross research and development costs............................. $35,576 $47,097 $29,012
Less:
Royalty-bearing grants (the Office of the Chief Scientist).... (926) (2,058) -
Non-royalty-bearing grants (the Consortia and the European (3,946)
Commission)................................................... (3,378) (6,791)
------- -------
Research and development costs-- net............................. 31,272 38,248 25,066
====== ====== ======
TREND INFORMATION
Gilat, like other businesses in the technology sector, is experiencing
significant reductions in revenues and production. For example, we have
significantly reduced our purchase of new inventory and production due to a
62
decrease in overall demand for product in the consumer market and due to excess
inventory caused by the business slowdown that StarBand has experienced.
StarBand is currently under Chapter 11 of the U.S. Bankruptcy Code.
Our revenues in the year 2002 decreased. The primary decrease in sales in
2002 can be attributed to the overall depressed global economy, which has
already affected the telecommunications industry. An additional reason can be
attributed to the restructuring of our debt which caused uncertainty as to our
stability in the market. For much of the fiscal year, customers expressed
uncertainty regarding Gilat's ability to successfully restructure its debt. The
decrease can also be attributed to the sale of our European subsidiaries to our
joint venture with SES Global, Satlynx. Pursuant to the joint venture, we have
sold six of our European subsidiaries Satlynx, an entity that is not
consolidated into our financial statements as of May 2002.
For the year 2003, we estimate that the political environment in Israel
could prevent certain countries from doing business with Gilat and this, in
addition to the downturn in the telecommunications industry overall, may have
adverse effects on our business. We expect that in 2003, with our debt
restructuring complete, our sales will not be hindered by our financial
situation. Nonetheless, given that we have new shareholders, and expect to have
a new board of directors and a new Chief Executive Officer, we cannot guarantee
or predict what our sales will be, what trend will develop and if any changes in
business and marketing strategy will be implemented.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4,
44 and 64, Amendment of SFAS No. 13, and Technical Corrections," ("SFAS No.
145")which rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," and an amendment of that Statement, and SFAS No. 64, "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 amends SFAS No.
44, "Accounting for Intangible Assets for Motor Carriers." SFAS No. 145 amends
SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS No. 145
is effective for fiscal years beginning May 15, 2002. The Company does not
expect the adoption of SFAS No. 145 will have a material impact on the its
results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit of Disposal Activities," ("SFAS No. 146") which addresses
significant issues regarding the recognition, measurement and reporting of costs
associated with exit and disposal activities, including restructuring
activities. SFAS No. 146 requires that costs associated with exit or disposal
activities be recognized when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is effective for all exit
or disposal activities initiated after December 31, 2002. The Company does not
expect the adoption of SFAS No. 146 to have a material impact on our results of
operations or financial position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of SFAS No. 5,
57 and 107 and Rescission of FASB Interpretation No. 34 ("FIN No. 34")." FIN No.
45 elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN No. 45 does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. It also incorporates, without change, the
guidance in FIN No. 34, "Disclosure of Indirect Guarantees of Indebtedness to
Others," which is being superseded. The disclosure provisions of FIN No. 45 are
effective for financial statements of interim or annual periods that end after
December 15, 2002 and the provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantor's year-end. The Company
does not expect the adoption of FIN No. 45 to have a material impact on its
results of operations or financial position
The Company is currently evaluating the ultimate impact of this statement
on our results of operations or financial position.
63
In January 2003, the FASB issued Interpretation No. 46 (or FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
variable interest entity is a corporation, partnership, trust, or any other
legal structures used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. The consolidation requirements of FIN
46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company is
evaluating the impact of the new interpretation.
64
ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
On April 15, 2003, the Company will hold its Annual General Meeting of
Shareholders (the "ANNUAL GENERAL MEETING"). At the Annual General Meeting, the
Company's shareholders will be asked to elect nine directors, two of whom are
external directors in accordance with Israeli law, as set forth below. Two of
the directors that are nominated for election, Mr. Gat and Mr. Levinberg, serve
as directors at present.
On April 15, 2003, the resignations of our Chief Executive Officer and
our President will become effective. Following this election at the Annual
General Meeting. our newly elected board of directors is expected to appoint a
new Chief Executive Officer and President.
Below is a description of (i) our directors and officers as of April
15, 2003, prior to the Annual General Meeting, and (ii) the nominees for the
board of directors at the Annual General Meeting.
I. DIRECTORS AND EXECUTIVE OFFICERS AND KEY EXECUTIVES OF OUR SUBSIDIARIES
PRIOR TO THE ANNUAL GENERAL MEETING:
NAME AGE POSITION
---- --- --------
Yoel Gat(1)(2)................ 51 Chief Executive Officer and Chairman of the board of directors, until April 15, 2003
Amiram Levinberg(1)(2)(3)..... 47 President until April 15, 2003, and Director
Shlomo Tirosh(4).............. 57 Director
Lori Kaufmann(1)(4)........... 43 Director
Erez Antebi(5)................ 43 Chief Operating Officer
Gideon Kaplan................. 47 Vice President, Technology
Yoav Leibovitch............... 44 Vice President, Finance and Administration and Chief Financial Officer
Joshua Levinberg.............. 48 Senior Vice President, Business Development
William I. Weisel............. 49 Vice President and General Counsel
Nick Supron................... 47 President and Chief Executive Officer, Spacenet
David R. Shiff................ 45 Vice President, Sales and Marketing, Spacenet
Samer Salameh................. 38 Chairman of the board of directors and Chief Executive OffICEr, rStar Corporation
(1) Member of the Stock Option Committee.
(2) Member of the Compensation Committee.
(3) Served as Chief Operating Officer until May 2002.
(4) Member of the Audit Committee.
(5) As of May 2002.
YOEL GAT is a co-founder of Gilat and has been Gilat's Chief Executive
Officer since Gilat's inception until his resignation on April 15, 2003. Mr. Gat
has been a director since Gilat's inception and, since July 1995, has served as
the Chairman of the board of directors. Mr. Gat is a member of the Stock Option
and Compensation Committees of the board of directors. Until July 1995, Mr. Gat
also served as the President of Gilat. From 1974 to 1987, Mr. Gat served in the
Israel Defense Forces. In his last position in service, Mr. Gat was a senior
electronics engineer in the Israel Ministry of Defense. Mr. Gat is a two-time
winner of the Israel Defense Award (1979 and 1988), Israel's most prestigious
research and development award. Mr. Gat also served as the Chairman of the MOST
Consortium and is a director of rStar Corporationand StarBand. Mr. Gat holds a
B.Sc. (Electrical Engineering and Electronics) from the Technion -- Israel
Institute of Technology and a master's degree in management science from the
Recanati Graduate School of Business Administration of Tel Aviv University,
where he concentrated on information systems.
AMIRAM LEVINBERG is a co-founder of Gilat and has been Gilat's
President from July 1995 until his resignation on April 15, 2003. Mr. Levinberg
has been a director since Gilat's inception. Until October 2002, Mr. Levinberg
also served as the Company's Chief Operations Officer. Mr. Levinberg is a member
of the Stock Option
65
and Compensation Committees of the board of directors. Until July 1995, he
served as Vice President of Engineering. In this capacity, he supervised the
development of Gilat's OneWay and Skystar Advantage VSATs. From 1977 to 1987,
Mr. Levinberg served in a research and development unit of the Israel Defense
Forces, where he managed a large research and development project. He was
awarded the Israel Defense Award in 1988. Mr. Levinberg holds a B.Sc.
(Electrical Engineering and Electronics) and a M.Sc. (Digital Communications)
from the Technion -- Israel Institute of Technology.
SHLOMO TIROSH is a co-founder of Gilat and has been a member of the
board of directors from its inception until April 15, 2003, serving as Chairman
of the board of directors until July 1995. Mr. Tirosh was a member of the Audit
Committee of the Board until April 15, 2003. Since July 1990, Mr. Tirosh has
been serving as Chairman of the Board and President of Mentergy, and from 1990
to 2001 as Chief Executive Officer of Mentergy. From 1964 to 1987, Mr. Tirosh
served in the Israel Defense Forces, where he held a variety of professional and
field command positions (retiring with the rank of colonel). From 1980 to 1985,
he headed a large research and development unit and, from 1985 to 1987, he
managed a large-scale technology project for the Israel Ministry of Defense. In
1988, he received the Israel Defense Award. Mr. Tirosh holds a B.A. (summa cum
laude) (Economics) from Bar-Ilan University.
LORI KAUFMANN has been a director of Gilat from November 2000 to April
15, 2003, and until that date was a member of the Audit, Compensation and Stock
Option Committees. Ms. Kaufmann has been an independent consultant in Israel and
the United States since 1993. From October 1998 to October 2000, Ms. Kaufmann
was vice president of MainXchange, an Internet-based financial services company.
In 1991, Ms. Kaufmann co-founded HK Associates, an Israeli marketing and
management-consulting firm that served many of Israel's leading high technology
companies, including, in 1991, Gilat. Ms. Kaufmann was employed by HK Associates
until 1993. From 1989 to 1990, Ms. Kaufmann was a senior economist at Israel
Chemicals Ltd., an Israeli chemicals firm. Ms. Kaufmann holds a B.A (magna cum
laude) (International Relations) from Princeton University and a MBA from
Harvard Business School.
EREZ ANTEBI has served as Gilat's Chief Operating Officer since October
2002. From the beginning of 1998 until being appointed Gilat's Chief Operating
Officer, Mr. Antebi served as Gilat's Vice President, General Manager for Asia,
Africa and Pacific Rim. From September 1994 until the beginning of 1998, he
served as Vice President and General Manager of Gilat Inc. Mr. Antebi joined
Gilat in May 1991 as product manager for the Skystar Advantage VSAT product.
From August 1993 until August 1994, he served as Vice President of Engineering
and Program Management of Gilat Inc. Prior to joining Gilat, Mr. Antebi worked
for a private importing business from 1989 to 1991, after having served as
marketing manager for high frequency radio communications for Tadiran Limited, a
defense electronics and telecommunications company, from 1987 to 1989, and as a
radar systems development engineer at Rafael, the research and development and
manufacturing arm of the Israel Defense Forces, from 1981 to 1987. Mr. Antebi
holds a B.Sc. and an M.Sc. Electrical Engineering from the Technion -- Israel
Institute of Technology.
GIDEON KAPLAN joined Gilat in 1989 as Vice President of Technology.
From late 1987 to mid-1989, Mr. Kaplan was employed as a research engineer with
Qualcomm, Inc., a mobile satellite communications and cellular radio company.
From 1978 to 1987, Mr. Kaplan served in a research and development unit of the
Israel Defense Forces and received the Israel Defense Award in 1984. Mr. Kaplan
holds a B.Sc., a M.Sc. and a Ph.D. (Electrical Engineering) from the Technion --
Israel Institute of Technology.
YOAV LEIBOVITCH joined Gilat in early 1991 as Vice President of Finance
and Administration and Chief Financial Officer. Since joining Gilat, Mr.
Leibovitch has also served as acting Chief Financial Officer of Gilat Inc. From
1989 to 1990, Mr. Leibovitch worked in the United States at Doubleday Books and
Music Clubs as special advisor for new business development. From 1985 to 1989,
he was the Financial Officer of a partnership among Bertelsmann, A.G., a large
German media and communications company; Clal Corporation, a major Israeli
industrial holding company; and Yediot Aharonot, an Israeli daily newspaper. Mr.
Leibovitch holds a B.A. (Economics and Accounting) and a M.B.A. (Finance and
Banking) from the Hebrew University of Jerusalem. Mr. Leibovitch is a Certified
Public Accountant in Israel.
JOSHUA LEVINBERG is a co-founder of Gilat and, since June 1999, serves
as Senior Vice President for Business Development of Gilat, having previously
served in that position from 1994 to April 1998. At that time, Mr. Levinberg
became Chief Executive Officer of GTH LA Antilles, the parent company of Global
Village Telecom
66
(GVT), until June 1999. From 1989 until September 1994, he served as Executive
Vice President and General Manager of Gilat Satellite Networks, Inc. From 1987
until the formation of Gilat Satellite Networks, Inc. in 1989, Mr. Levinberg was
Vice President of Business Development of Gilat. From 1985 to 1987, Mr.
Levinberg held various positions, including Manager of System Development and
Marketing Manager at the Israeli subsidiary of DSP Group Inc., a U.S. company
specializing in digital signal processing. From 1979 to 1985, he worked in the
Communications Engineering Department of Elrisa Ltd., a manufacturer of
sophisticated weapons and communications systems. Mr. Levinberg serves as
chairman of the board of directors of Satlynx S.A. Mr. Levinberg holds a B.Sc.
(Electrical Engineering and Electronics) from the Tel Aviv University. Amiram
Levinberg, and Joshua Levinberg are brothers.
WILLIAM I. WEISEL joined Gilat on December 18, 2001 as Vice President
and General Counsel. Prior to joining Gilat, Mr. Weisel was the Legal Affairs
Director, Israel for ADC Telecommunications Israel Ltd (April 1999-December
2001), Corporate Legal Counsel of Scitex Corporation Ltd (January 1995-March
1999), Legal Counsel for the logistics department of Scitex Corporation Ltd
(October 1992-December 1994), was in private business in Israel (November
1987-September 1992), and an associate with the Law Offices of Shraga Biran
(November 1986-November 1987). Prior to immigrating to Israel in April 1986, Mr.
Weisel was an associate with Jeffer, Mangels, Butler & Marmaro from March 1982,
and with Freeman, Freeman, Freeman & Hernand from January 1980 in Los Angeles,
California. Mr. Weisel holds a J.D. degree from Loyola Law School of Los Angeles
(1979) and a B.A., magnum cum laude from the University of California, Los
Angeles in political science (1976). He is licensed to practice law in, and is a
member of the Bars of the State of California and Israel.
NICK SUPRON joined Spacenet in January 2001 as President and Chief
Executive Officer. Prior to joining Spacenet and since 1999, Mr. Supron was a
private investor and management consultant. Between 1984 and 1999, he served in
various positions with Gtech Corporation, commencing as a senior corporate
consultant to the CEO and culminating as Senior Vice President of worldwide
operations. From 1982 to 1984, Mr. Supron was a Senior Corporate Consultant for
Tenneco Oil Company and he served as a senior project manager engineer between
1978 and 1980 for Brown & Root. Mr. Supron holds a MBA from Harvard Business
School and a BSME from the Rice University in Houston.
DAVID R. SHIFF joined Spacenet in December 1998 as Vice President of
Sales and Marketing. Prior to joining Spacenet, Mr. Shiff spent 15 years with
Hughes Network Systems, a division of Hughes Electronics. During his tenure at
Hughes, Mr. Shiff held a succession of business development, sales and sales
management positions. He served as Assistant Vice President, North American
Sales, for the Satellite Networks Division of Hughes Network Systems for the two
years immediately prior to joining Spacenet. Mr. Shiff holds a degree in
Mechanical Engineering from the University of Wisconsin.
SAMER SALAMEH joined rStar in November 2002, as Chief Executive Officer
and Chairman of the board of directors. Mr. Salameh most recently served as
President and Chief Executive Officer of Telmex North America Ventures, where he
managed a portfolio of companies. From 1997 to 2000, he served as Chairman and
Chief Executive Officer of Prodigy Communications Corp. where he led efforts to
take the company public in 1999, grew revenues from $20 million to over $300
million in two years, and transformed the company into one of the nation's
largest consumer DSL Internet service providers. Mr. Salameh has a Masters in
Administration in International Business from The Fletcher School, Tufts
University and a B.Sc. (Management and Economics) from Polytechnic University.
II NOMINEES TO THE BOARD AT THE ANNUAL GENERAL MEETING:
NAME AGE POSITION
---- --- --------
Shlomo Rodav (1).............. 54 Director
Yoel Gat(2) .................. 51 Director
Amiram Levinberg(3) .......... 47 Director
Gideon Chitayat(4)............ 64 Director
Meir Shamir................... 52 Director
Doron Steiger ................ 45 Director
Shalom Shally Tshuva(5)....... 36 Director
Linda E. Harnevo.............. 48 External Director
David Milgrom................. 45 External Director
67
(1) Mr. Rodav is expected to be appointed as the Chairman of the board of
directors. In addition to the traditional duties of the Chairman of the
board, which duties include convening and managing the annual
shareholders' meetings and meetings of the Company's board of
directors, Mr. Rodav, as Active Chairman, will have an overall
executory role in carrying out the decisions of the Company's board of
directors. Mr. Rodav will be responsible for supervising Company
management. He will also supervise and manage the implementation of the
Company's strategic development programs.
(2) Mr. Gat serves until April 15, 2003, as Gilat's Chief Executive Officer
and Chairman of the board of directors, and a member of the Stock
Option Committee and of the Compensation Committee of Gilat. Mr. Gat's
background information is set forth in Section I (A) above.
(3) Mr. Levinberg serves until April 15, 2003, as Gilat's President and
director, and a member of the Stock Option Committee and of the
Compensation Committee of Gilat. Mr. Levinberg's background information
is set forth in Section I (A) above.
(4) Mr. Chitayat currently serves on the board of directors of Bank
Hapoalim B.M. and of its subsidiary, Hapoalim U.S. Holding. Bank
Hapoalim B.M. is a principal shareholder and a creditor of Gilat.
Pursuant to the amendment of Articles 38 and 39 of our Articles of
Association which will be proposed at the Annual General Meeting, Bank
Hapoalim B.M. is expected to have the right to appoint a director to
our board of directors. Mr. Chitayat was nominated to be elected at the
Annual General Meeting at the request of Bank Hapoalim B.M.
(5) Mr. Tshuva currently serves as the Managing Director of Foresight
Technology Investments and Consulting Ltd. Foresight's major
shareholder, which holds 70% of its shares, is Discount Capital
Markets, a wholly owned subsidiary of Israel Discount Bank Ltd. which
is a principal shareholder and a creditor of Gilat. Pursuant to the
amendment of Articles 38 and 39 of our Articles of Association which
will be proposed at the Annual General Meeting, Israel Discount Bank
Ltd. is expected to have the right to appoint a director to our board
of directors. Mr. Tshuva was nominated to be elected at the Annual
General Meeting at the request of Israel Discount Bank Ltd.
SHLOMO RODAV is the indirect owner, director, chairman and/or Chief
Executive Officer of numerous companies in the investment, environment,
infrastructure, food, hi-tech and other areas. Mr. Rodav has served as a
director since 1996 of Israel Coldstorage & Supply Co. Ltd., a public company,
and in an array of private companies including Torrel Investments Ltd. and
Torrel-Crown (Israel) Ltd., Metzad Ateret Ltd., Waste Management (W.M.) Israel
Ltd., Nymphaea A.A. Ltd., Tapoogan Industries Ltd., Jaf-Ora Ltd., Jafora-Tabori
Ltd. and others. Mr. Rodav served in the past as a director in numerous other
companies, including, among others, Extent and Cellonet for which a receiver has
been appointed. Mr. Rodav holds an MBA from Columbia University and a B.A. from
the Tel Aviv University.
GIDEON CHITAYAT has served as the President and Chief Executive Officer
of General Management and Business Strategy Consultant (GMBS) Ltd. since 1985.
Mr. Chitayat serves and served in the past as a consultant to Chief Executive
Officers and to Chairmen of boards of directors of several leading Israeli
companies and entities in diversified fields in Israel, and his main area of
consultancy is competitive strategy. Among those companies and entities are Teva
Pharmaceutical Industries Ltd., Amdocs Israel, Bank Mizrahi Ltd., Pele-Phone
Cellular Communication Ltd., Ackerstein Ltd., Israel Railways, El-Op Electro
Optics Industries Ltd., Israel Electric Corporation Ltd., Bank Leumi Le-Israel
B.M., Osem Food Corporation Ltd. and Israel Chemicals Ltd. Mr. Chitayat
currently serves on the board of directors of Bank Hapoalim B.M. and Mishkan
Mortgages Bank, both of which are public companies, as well as of Israel
Aircraft Industries and Hapoalim U.S. Holding. Mr. Chitayat served in the past
on the boards of directors of many leading public and private companies and
entities, including Cellcom Israel Ltd., Africa-Israel Investment Company and
its subsidiaries, Oil Refineries Ltd., Ihud Insurance Ltd., Tadiran Consumer and
Electric Products Ltd., Migdal Insurance Company, Bezeq - Israel Telephone
Corporation and others. Mr. Chitayat holds a Ph.D. and an M.A. in Business and
Applied Economics from the Wharton School of the University of Pennsylvania, and
a MBA (with honors) and B.A. (Economics) from the Hebrew University in
Jerusalem. Mr. Chitayat was Senior Adjunct Professor at the Recanati Graduate
School of Business Administration in the Tel Aviv University and held numerous
academic positions in the past, including at the Wharton School of the
University of Pennsylvania, at the Jerusalem School of Business Administration
of the Hebrew University in Jerusalem and at Harvard Business School. Mr.
Chitayat has published numerous articles and a book on corporate, boards of
directors and business issues.
MEIR SHAMIR founded Mivtach Shamir Holdings Ltd., which invests
extensively in Israeli and foreign companies, and has served as its Chairman and
Chief Executive Officer since 1992. Mr. Shamir serves as a director in several
public companies, including Lipman Electronics Engineering Ltd. and Wizcom
Technologies Ltd. in the field of electronics, the venture capital firm
Technoplus Ventures Ltd., Mivtach Shamir Finance Ltd. in the area of
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finance and pension funds, and Digal Investment and Holdings Ltd. in real
estate. In addition, Mr. Shamir is the owner of and serves as a director in
numerous private companies. Mr. Shamir holds a B.A. (Management and Economics)
from Bar-Ilan University.
DORON STEIGER has been the Chief Executive Officer and has served as a
director since 1998 of Dirad Holdings Ltd., a company owned by Mr. Steiger, and
has been the Managing Director of Dirad Investments Ltd. since 1999 and of Dirad
Technologies Management (2000) Ltd. since 2000. These companies are engaged in
consultancy and investments. Mr. Steiger has served since 2001 as a director of
Taagid Hamichzur Ltd., engaged in collection and recycling, and as the Chairman
of the board of directors of Newlog Ltd., which is the result of a merger of
several subsidiaries of Zim Israel Maritime Company Ltd., Israel's major
maritime freight company. Mr. Steiger has recently been appointed as a director
of Leadertech Ltd., pursuant to an agreement with Leadertech Ltd., which
appointment is pending and contingent upon a shareholders' approval. Leadertech
Ltd. is a public venture capital firm. Mr. Steiger is also serving as a director
of several start-up, R&D and financing companies in the hi-tech field. Mr.
Steiger was the Chief Executive Officer of Israel Corporation Ltd. from April
1997 to March 1998. Mr. Steiger holds an MBA and a B.A. (Economics) from the Tel
Aviv University.
SHALOM SHALLY TSHUVA has been the Managing Director of Foresight
Technology Investments and Consulting Ltd. since 1994. Mr. Tshuva also has
served as a director, since 1999, of the investment firms Forstech Holdings
(1999) Ltd. and Hadar Tshuva Holdings (1999) Ltd. Mr. Tshuva served as a
director in Taya-Net Ltd., for which company a liquidator was appointed by the
court in 2001. Mr. Tshuva holds a MBA (Finance) and a B.Sc. (Mathematics and
Computer Science) from the Tel Aviv University.
LINDA E. HARNEVO is the founder and General Manager of the technology
solutions company RedZebra Ltd., and has served on its board of directors. Ms.
Harnevo has also recently founded Global Medical Networks, which is engaged in
the field of mobile medical information, and serves on its board of directors.
Ms. Harnevo has recently been appointed as a director of Lipman Electronics
Engineering Ltd., a public company in the field of electronics. Ms. Harnevo
holds a Ph.D and an M.Sc. from the Weizmann Institute and a B.Sc. from Bar-Ilan
University.
DAVID MILGROM currently serves as the Chief Executive Officer of Gmul
Investment Ltd., dealing mainly with investments in high-tech, real-estate and
infrastructure, and will serve as the Chief Executive Officer of The Israel
Credit Insurance Company Ltd. as of May 1, 2003. From 1997 to 2000 Mr. Milgrom
served as the Budget Director in the Israeli Ministry of Finance and was
responsible for Israel's budget preparation and structural reforms in the
Israeli economy. Mr. Milgrom was the Chief Financial Officer of Pele-Phone
Cellular Communication Ltd. Mr. Milgrom serves as an external director in the
investment committee of Menora, a public company which is one of the largest
insurance companies in Israel. His term of office in Menora will expire on 2005.
Mr. Milgrom holds a MBA and a B.A. (Economics and Political Science) from the
Hebrew University in Jerusalem.
COMPENSATION OF DIRECTORS AND OFFICERS
The following table sets forth the aggregate compensation paid to or
accrued on behalf of all of our directors and officers as a group for the year
ended December 31, 2002:
SALARIES, FEES, DIRECTORS' FEES, PENSION, RETIREMENT AND SIMILAR
COMMISSIONS AND BONUSES BENEFITS
All directors and officers as a group (29 $6,105,600 $1,744,634
persons)
MANAGEMENT EMPLOYMENT AGREEMENTS
Yoel Gat and Amiram Levinberg, two of our co-founders, are currently
employed under employment agreements renewable annually on December 31 of each
year. The employment agreements are subject to earlier termination by each
officer upon 60 days' notice to us. The agreements provide, amongst other
things, for an adjustment to the annual bonuses payable to Messrs. Gat and
Levinberg under their employment agreements and Mr. Gat's agreement provides for
a personal annual allowance benefit of $150,000 to cover personal expenses
related to
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extended stays in the United States expected to result from the integration of
Spacenet. Among other provisions, such agreements contain non-competition and
confidentiality provisions. Both Mr. Gat and Mr. Levinberg have resigned,
effective on April 15, 2003. The terms of their resignation are still under
negotiation.
BOARD COMPENSATION
By a resolution adopted in 1996 by our board of directors and
shareholders, the directors of Gilat who are not executive officers receive
annual compensation of $10,000 for their services on the board of directors or
any committee of the board of directors. In addition, by resolution of our board
of directors and shareholders which was adopted in November 2001, each current
and future non-employee director shall receive options to purchase 20,000 of our
ordinary shares. All of the non-management directors are reimbursed for their
expenses for each board of directors meeting attended.
We expect the Compensation Committee, following its institution by our
new board of directors, to recommend a change in the compensation of our
directors. Such a recommendation will be brought to the approval of the
shareholders at the next general meeting of our shareholders.
BOARD COMPOSITION AND PRACTICES
Our Articles of Association provide that our directors, except for the
external directors, shall be elected at the annual general meeting of our
shareholders by the vote of the holders of a majority of the voting power
represented at such meeting in person or by proxy. The elected directors are to
serve until the next annual meeting of the shareholders, unless any office is
vacated earlier under any relevant provisions of our Articles of Association.
Our Articles of Association further provide that our board of directors shall
consist of such number of directors that is not less than two nor more than
fourteen, as shall be determined from time to time by our shareholders at the
general meeting.
Pursuant to an amendment to our Articles of Association which we expect
will be adopted at the Annual General Meeting scheduled for April 15, 2003, our
board of directors shall consist of not less than five and not more than nine
directors as shall be determined from time to time by a majority vote at the
general meeting of our shareholders. Unless resolved otherwise by our
shareholders, our board of directors will be comprised of (i) nine directors, if
four directors are appointed by beneficial owners of 7% or more of our issued
and outstanding ordinary shares (as set forth below), or (ii) seven directors,
if fewer than four directors are so appointed by beneficial owners of 7% or more
of our ordinary shares.
Pursuant to the proposed amendment to our Articles of Association, each
beneficial owner of 7% or more of our issued and outstanding ordinary shares
will be entitled to appoint, at each annual general meeting of our shareholders,
one member to our board of directors, provided that a total of not more than
four directors are so appointed. In the event that more than four qualifying
beneficial owners notify us that they desire to appoint a member to our board of
directors, only the four shareholders beneficially owning the greatest number of
shares shall each be entitled to appoint a member to our board of directors. So
long as our ordinary shares are listed for trading on Nasdaq, we may require
that any such appointed director qualify as an "independent director" as
provided for in the Nasdaq rules then in effect. Our board of directors will
have the right to remove any such appointed director when the beneficial
ownership of the shareholder who appointed such director falls below 7% of our
ordinary shares.
Under the proposed amendment, a majority of the voting power at the
annual general meeting of our shareholders will elect the remaining members of
the board of directors, including external directors as required under the
Companies Law. At any annual general meeting at which directors are appointed
pursuant to the preceding paragraph, the calculation of the vote of any
beneficial owner who appointed a director pursuant to the preceding paragraph
shall not take into consideration, for the purpose of electing the remaining
directors, ordinary shares constituting 7% of our issued and outstanding
ordinary shares held by such appointing beneficial owner.
Under the proposed amendment, each of our directors (except external
directors) shall serve, subject to early resignation or vacation of office in
certain circumstances as set forth in our Articles of Association, until the
adjournment of the next annual general meeting of our shareholders next
following the general meeting in which such director was elected. The holders of
a majority of the voting power represented at a general meeting of our
shareholders in person or by proxy will be entitled to (i) remove any
director(s), other than external directors and
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directors appointed by beneficial holders of 7% or more of our issued and
outstanding ordinary shares as set forth above, (ii) elect directors instead of
directors so removed, or (iii) fill any vacancy, however created, in the board
of directors. Our board of directors may also appoint additional directors,
whether to fill a vacancy or to expand the board of directors, who will serve
until the next general meeting of our shareholders following such appointment.
Our Articles of Association further provide that the board of directors
may delegate all of its powers to committees of the board of directors as it
deems appropriate, subject to the provisions of applicable law.
We expect our board of directors to agree to appoint Mr. Robert
Bednarek as an observer to the board of directors. In such capacity, Mr.
Bednarek will be invited to participate in every meeting of the board of
directors and given the opportunity to express his views on the matters
discussed, but will not have any voting rights at the meetings. Mr. Bednarek
will have the same access to the Company's books and records as the directors of
the Company and will be subject to customary confidentiality and non-disclosure
undertakings. Mr. Bednarek served as a director of Gilat from April 2002 to
September 2002. Mr. Bednarek is the Executive Vice President Corporate
Development and a member of the Executive Committee of SES GLOBAL S.A., the
parent company of SES Americom Inc. which is a principal shareholder of Gilat
and a major supplier of satellite transponder capacity to Gilat. Mr. Bednarek
previously was the Executive Vice-President and Chief Technology Officer of
PanAmSat Corporation and holds a B.Sc. (Engineering) from the University of
Florida.
ALTERNATE DIRECTORS
Our Articles of Association provide that a director may appoint, by
written notice to us and subject to the consent of the board of directors, any
person qualified to serve as a director to serve as an alternate director
(provided such person does not already serve as a director or an alternate
director). An alternate director shall have all of the rights and obligations of
the director appointing him or her, except the power to appoint an alternate
(unless otherwise specifically provided for in the appointment of such
alternate). An alternate director may not act at any meeting at which the
director appointing him or her is present. Unless the time period or scope of
any such appointment is limited by the appointing director, such appointment is
effective for all purposes and for an indefinite time, but will expire upon the
expiration of term or vacation of office of the appointing director. Currently,
no alternate directors have been appointed.
EXTERNAL DIRECTORS
Under the Companies Law, public companies are required to elect two
external directors who must meet specified standards of independence. Companies
that are registered under the laws of Israel and whose shares are listed for
trading on a stock exchange outside of Israel, such as Gilat, are treated as
public companies with respect to the external directors requirement. External
directors may not have during the 2 years preceding their appointment, directly
or indirectly through a relative, partner, employer or controlled entity, any
affiliation with (i) the public company, (ii) those of its shareholders who are
controlling shareholders at the time of appointment, or (iii) any entity
controlled by the company or by its controlling shareholders. The term
"affiliation" includes an employment relationship, a business or professional
relational maintained on a regular basis, control and services as an office
holder. No person can serve as an external director if the person's other
positions or business creates or may create conflicts of interest with the
person's responsibilities as an external director. Until the lapse of two years
from termination of office, a company may not engage an external director as an
employee or otherwise.
External directors serve for a three-year term, which may be renewed
for only one additional three-year term. External directors can be removed from
office only by the court or by the same special percentage of shareholders that
can elect them, and then only if the external directors cease to meet the
statutory qualifications with respect to their appointment or if they violate
their fiduciary duty to the company. The court may additionally remove external
directors from office if they were convicted of certain offenses by a
non-Israeli court or are permanently unable to fulfill their position. If, when
an external director is elected, all members of the board of directors of a
company are of one gender, the external director to be elected must be of the
other gender.
If delegated any authority of the board of directors, any committee of
the board of directors must include at least one external director. An external
director is entitled to compensation as provided in regulations adopted under
the Companies Law and is otherwise prohibited from receiving any other
compensation, directly or indirectly, in connection with such service.
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The Companies Law requires external directors to submit to the company,
prior to the date of the notice of the general meeting convened to elect the
external directors, a declaration stating their compliance with the requirements
imposed by Companies Law for the office of external director.
The election of external directors requires the affirmative vote of a
majority of our ordinary shares voted on in person or by proxy at a meeting of
the shareholders, provided that such majority includes at least one-third of the
votes of the non-controlling shareholders of the company who are voting on this
matter at the meeting. This approval requirement need not be met if the
aggregate shareholdings of those non-controlling shareholders who vote against
the election of the external directors represent one percent or less of all the
voting power of the company. "Controlling" for the purpose of this provision
means the ability to direct the acts of the company. Any person holding one half
or more of the voting power of the company or of the right to appoint directors
or the Chief Executive Officer is presumed to have control of the company.
The nominees for external directors at the Annual General Meeting
scheduled for April 15, 2003, are Ms. Linda E. Harnevo and Mr. David Milgrom.
AUDIT COMMITTEE
The Companies Law provides that publicly traded companies must appoint
an audit committee. The responsibilities of the audit committee include
identifying irregularities in the management of the company's business and
approving related party transactions as required by law. An audit committee must
consist of at least three members, and include all of the company's external
directors. However, the chairman of the board of directors, any director
employed by the company or providing services to the company on a regular basis,
any controlling shareholder and any relative of a controlling shareholder may
not be a member of the audit committee. An audit committee may not approve an
action or a transaction with an officer or director, a transaction in which an
officer or director has a personal interest, a transaction with a controlling
shareholder and certain other transactions specified in the Companies Law,
unless at the time of approval two external directors are serving as members of
the audit committee and at least one of the external directors was present at
the meeting in which an approval was granted.
Pursuant to the current listing requirements of the Nasdaq National
Market, we are required to establish an audit committee, at least a majority of
whose members are independent of management. Pursuant to the Sarbanes-Oaxley Act
of 2002, the Securities and Exchange Commission (the "SEC") has issued new rules
which would, among other things, require Nasdaq to impose independence
requirements on each member of the audit committee. Nasdaq has proposed rules
that would comply with the SEC's requirements and which are expected to be
applicable to us in 2004.
The proposed requirements would implement two basic criteria for
determining independence: (i) audit committee members would be barred from
accepting any consulting, advisory or other compensatory fee from the issuer or
an affiliate of the issuer, other than in the member's capacity as a member of
the board of directors and any board committee, and (ii) audit committee members
of an issuer that is not an investment company may not be an "affiliated person"
of the issuer or any subsidiary of the issuer apart from his or her capacity as
a member of the board and any board committee.
The SEC has proposed to define "affiliate" for non-investment companies
as "a person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person
specified." The term "control" is proposed to be consistent with the other
definitions of this term under the Securities Exchange Act of 1934, as "the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a person, whether through the ownership of voting
securities, by contract, or otherwise." A safe harbor has been proposed by the
SEC, under which a person who is not an executive officer, director or 10%
shareholder of the issuer would be deemed not to have control of the issuer.
Under the final rules adopted by the SEC, an issuer is required to
disclose in its annual report, beginning with the annual report for 2003,
whether or not such issuer has at least one audit committee financial expert. If
it does, the issuer must disclose the name of the expert. If not, the issuer
must disclose why it does not have an audit committee financial expert.
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Presently, our audit committee consists of Ms. Kaufman and Mr. Tirosh.
As of April 15, 2003, we expect our new board of directors to appoint the
expected external directors, Mr. Milgrom and Ms. Harnevo, to serve on our audit
committee, together with one of the remaining independent directors. We believe
that this appointment will comply with the requirements of the Companies Law and
with the proposed SEC rules, and that Mr. Milgrom is qualified to serve as the
audit committee's financial expert, as required by the SEC.
INDEPENDENT DIRECTORS
Pursuant to the current listing requirements of the Nasdaq National
Market, we are required to have at least two independent directors on our board
of directors. Under rules proposed by Nasdaq, the majority of the members of the
board directors will need to be independent. These proposals have not yet been
approved by the SEC.
An "independent director" for these purposes has been proposed to mean
a person other than an officer or employee of a company or its subsidiaries or
any other individual having a relationship, which, in the opinion of the
company's board of directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
The following persons are not considered independent under the proposed
rules:
(a) a director who is or was employed by the company or by
any parent or subsidiary of the company within the last three
years;
(b) a director who accepts or has family member (by blood,
marriage or adoption or has the same residence) who accepts
any payments from the company or any of its affiliates in
excess of $60,000 during the current fiscal year or any of the
past three fiscal years, other than compensation for board
service, compensation paid to family members who are employees
(other than executive officers of the company, its parent
company or its subsidiaries) or benefits under a qualified
plan or non-discretionary compensation;
(c) a director who is a family member of an individual who
is, or within the past three years was, employed by the
company or by any parent or subsidiary of the company as an
executive officer;
(d) a director who is a partner in, or a controlling
shareholder or an executive officer of, any organization to
which the company made, or from which the company received,
payments (other than those arising solely from investments in
the company's securities) that exceed 5% of the recipient's
consolidated gross revenues for that year, or $200,000,
whichever is more, in the current fiscal year or any of the
past three fiscal years;
(e) a director of the listed company who is employed as an
executive officer of another entity where any of the executive
officers of the listed company serve on the compensation
committee of such other entity, or if such relationship
existed within the last three years; or
(f) a director who was a partner or employee of the
company's outside auditor, and worked on the company's audit,
within the last three years.
This independence requirement does not apply to a company of which more
than 50% of the voting power is held by an individual, a group or another
company.
Of the nominees for directors at the Annual General Meeting, we believe
that Mr. Milgrom, Ms. Harnevo Mr. Shamir, Mr. Steiger and Mr. Radav will comply
with the independence standards set forth above.
ADVISORY BOARD
We have authorized an Advisory Board to be composed of senior members
of the business and technology community with expertise in areas of our
business, who will be expected to advise and assist us in determining and
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implementing our strategic course of action, as well as in fostering contacts
with potential customers for our products. There are currently no appointees to
the Advisory Board.
EMPLOYEES
As of December 31, 2002, we had approximately 909 full-time employees,
including 111 employees in administration and finance, 100 employees in
marketing and sales, 180 employees in engineering, research and development and
322 employees in manufacturing, operations and technical support. Of these
employees, 395 employees were based in our facilities in Israel, 300 were
employed in the United States, and 213 in Asia, the Far East and other parts of
the world.
We also utilize temporary employees, as necessary, to supplement our
manufacturing and other capabilities. We believe that our relations with our
employees are satisfactory.
We and our employees are not parties to any collective bargaining
agreements. However, certain provisions of the collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel) ("Histadrut") and
the Coordination Bureau of Economic Organizations (including the Manufacturers'
Association of Israel) are applicable to all Israeli employees by order (the
"Extension Order") of the Israeli Ministry of Labor and Welfare. These
provisions principally concern the length of the work day and the work week,
minimum wages for workers, contributions to a pension fund, insurance for
work-related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment. Furthermore, pursuant to such
provisions, the wages of most of our employees are automatically adjusted based
on changes in the Israeli CPI. The amount and frequency of these adjustments are
modified from time to time.
Israeli law generally requires severance pay upon the retirement or
death of an employee or termination of employment without due cause. Our ongoing
severance obligations are partially funded by making monthly payments to
approved severance funds or insurance policies, with the remainder accrued as a
long-term liability in our financial statements. In addition, Israeli employees
and employers are required to pay specified sums to the National Insurance
Institute, which is similar to the U.S. Social Security Administration. Since
January 1, 1995, such amounts also include payments for national health
insurance. The payments to the National Insurance Institute are approximately
14.6% of wages (up to a specified amount), of which the employee contributes
approximately 66% and the employer contributes approximately 34%. The majority
of our permanent employees are covered by life and pension insurance policies
providing customary benefits to employees, including retirement and severance
benefits. For Israeli employees, we contribute 13.33% to 15.83% (depending on
the employee) of base wages to such plans and the permanent employees contribute
5% of base wages.
SHARE OWNERSHIP
See table under Item 7: "Major Shareholders and Related Party
Transactions" below.
STOCK OPTION PLANS
In January 1993, we adopted the Stock Option Plan (Incentive and
Restricted Stock Options) (the "1993 ISO/RSO Plan") and Section 102
Option/Restricted Stock Purchase Plan (the "1993 Section 102 Plan")
(collectively, the "1993 Plans"). The 1993 Plans provide for the granting of
options and/or rights to purchase (in the case of the 1993 Section 102 Plan) up
to an aggregate of 318,500 ordinary shares to our officers, directors, key
employees or consultants or any of our subsidiaries.
In June 1995, we adopted the following plans, referred to together as
the "1995 Plans":
(i) the 1995 Stock Option Plan (Incentive and Restricted Stock Options)
(the "1995 ISO/RSO Plan"), which currently provides for the granting of
incentive and restricted stock options for the purchase of up to 3,940,000
ordinary shares (increased by 3,820,000 as a result of several resolutions of
the board of directors, which were approved by the shareholders);
(ii) the 1995 Section 102 Stock Option/Stock Purchase Plan (the "1995
Section 102 Plan"), which provides for the granting of options to purchase up to
5,920,000 ordinary shares (increased by 4,300,000 as a result of resolutions of
the Board in November 1999, May 2000 and March 2001); and
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(iii) the 1995 Advisory Board Stock Option Plan (the "1995 Advisory
Board Plan"), which provides for the granting of options to purchase up to
150,000 ordinary shares.
The purpose of the 1993 Plans and 1995 Plans is to enable us to attract
and retain qualified persons as employees, officers, directors, consultants and
advisors and to motivate such persons by providing them with an equity
participation in Gilat. In addition, the 1993 and 1995 ISO/RSO Plans are
designed to afford qualified optionees certain tax benefits available under the
United States Internal Revenue Code of 1986, as amended (the "Code"). The 1993
and 1995 Section 102 Plans are designed to afford qualified optionees certain
tax benefits under the Israel Income Tax Ordinance. The 1995 Advisory Board Plan
is designed to allow for the granting of options to members of the Advisory
Board. The 1993 Plans will expire on January 27, 2003 and the 1995 Plans will
expire on June 29, 2005 (ten years after their adoption), unless terminated
earlier by the board of directors.
Each of the 1993 Plans and the 1995 Plans is administered by a Stock
Option Committee appointed by the Board. The Stock Option Committee (comprised
of Messrs. Gat, Levinberg and Ms. Kaufmann) has broad discretion, subject to
certain limitations, to determine the persons entitled to receive options or
rights to purchase under the 1993 Plans and 1995 Plans, the terms and conditions
on which options or rights to purchase are granted and the number of shares
subject thereto. The Stock Option Committee also has discretion to determine the
nature of the consideration to be paid upon the exercise of an option and/or
right to purchase granted under the 1993 Plans and the 1995 Plans. Such
consideration generally may consist of cash or, at the discretion of the Board,
cash and a recourse promissory note.
Stock options issued as incentive stock options pursuant to both the
1993 and 1995 ISO/RSO Plans will only be granted to the employees of Gilat or
its subsidiaries. The exercise price of incentive stock options issued pursuant
to both the 1993 and 1995 ISO/RSO Plans must be at least equal to the fair
market value of the ordinary shares as of the date of the grant (and, in the
case of optionees who own more than 10% of the voting stock, the exercise price
must equal at least 110% of the fair market value of the ordinary shares as of
the date of the grant). The exercise price of restricted stock options issued
pursuant to the 1993 and 1995 ISO/RSO Plans and the 1995 Advisory Board Plan
must not be less than the lower of (i) 50% of the book value of the ordinary
shares as of the end of the fiscal year immediately preceding the date of such
grant or (ii) 50% of the fair market value per share of ordinary shares as of
the date of the grant. The price per share under options awarded pursuant to the
1993 and 1995 Section 102 Plans may be any price determined by the Stock Option
Committee.
Options are exercisable and restrictions on disposition of shares lapse
according to the terms of the individual agreements under which such options
were granted or shares issued. Ordinary shares as to which the rights associated
with such shares have not vested will be held by a trustee designated by us.
In April 2001, Gilat initiated a voluntary stock option exchange
program for its employees (the "Option Exchange Program"). Under the program,
employees of Gilat and its subsidiaries who were granted options under Gilat's
stock option plans were given the opportunity to cancel outstanding stock
options previously granted to them in exchange for an equal number of new
options to be granted at a future date pursuant to the terms of Gilat's Plans.
The exercise price of these new options is equal to the fair market value of
Gilat's ordinary shares as reported by Nasdaq on the date the options were
granted. In November 2001, the Company granted the new options under the Option
Exchange Program. Options for a total of 6,443,668 ordinary shares were tendered
for cancellation and were cancelled as of May 24, 2001.
In November 2001, the Board and Shareholders of Gilat approved the
allocation of an option for 20,000 shares for each current and future
non-employee director.
As of December 31, 2002, we granted options to purchase a total of
299,198 ordinary shares under the 1993 Plans and 8,490,955 ordinary shares under
the 1995 Plans The exercise prices for such options vary from $0.39 to $159.875
and all such options expire at various times from November 2003 to February
2013. As of December 31, 2002, options under the plans for a total of 870,381
shares have been exercised.
In May 1999, the Board approved the establishment of a new stock option
plan under Section 102 of the Israel Income Tax Ordinance with 500,000 ordinary
shares to be reserved for issuance. Management was directed to prepare the plan
and obtain the necessary regulatory approvals. The plan was approved by the
shareholders at the
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1999 annual meeting, but the request for regulatory approval was withdrawn and
there are no current plans to activate the plan in the near future.
ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of March 31, 2003 (including
options exercisable within 60 days of March 31, 2003) with respect to: (i) each
person who is believed by us to be the beneficial owner of more than 5% of the
ordinary shares; (ii) each director or officer who holds more than 1% of the
ordinary shares, and (iii) all directors and officers as a group. Except where
otherwise indicated, we believe, based on information furnished by the owners,
that the beneficial owners of the ordinary shares listed below have sole
investment and voting power with respect to such shares, subject to any
applicable community property laws. The shareholders listed below do not have
any different voting rights from any other shareholders of Gilat, except to the
extent that they hold more than 7% and as such, if the proposed amendment to the
Articles of Association is adopted at the April 15, 2003 Annual General Meeting,
they will have a right to appoint a director, subject to certain conditions.
Except as disclosed below, none of the directors, officers or key executives
listed in the Directors and Senior Management table appearing in Item 6 above,
owns 1% or more of Gilat's outstanding share capital.
NUMBER OF PERCENT OF
ORDINARY ORDINARY
SHARES SHARES
BENEFICIALLY OUTSTANDING
OWNED
Bank Hapoalim B.M (1)(2) 35,636,853 13.72
Israel Discount Bank Ltd. (1)(3) 23,095,304 8.89
SES Global S.A. (4) 18,596,048 7.16
Eliezer Fishman (1)(5) 43,303,642 16.67
MW Post Advisory Group, LLC (6) 14,126,240 5.44
All officers and directors as a group 3,232,156 1.24
(6 persons)
(1) Based on a Schedule 13D filing made with the United States
Securities and Exchange Commission.
(2) Bank Hapoalim B.M. also holds Notes in the principal amount of
$12,164,739. The Company has an outstanding loan to Bank Hapoalim B.M. in the
approximate amount of $71.4 million. Bank Hapoalim became a principal
shareholder as a result of the Arrangement.
(3) Israel Discount Bank Ltd. also holds Notes in the principal
amount of $9,514,743. Israel Discount Bank Ltd. has issued performance
guarantees to the Company in the approximate aggregate amount of $13.3 million.
Israel Discount Bank became a principal shareholder as a result of the
Arrangement.
(4) SES Global S.A. holds 14,261,048 ordinary shares through SES
Americom Inc., a wholly owned subsidiary, and 4,308,000 ordinary shares through
SES Capital Belgium S.A., an indirectly wholly owned subsidiary. Prior to the
Arrangement, SES Global S.A. held, indirectly through SES Capital Belgium S.A.,
4,308,000 ordinary shares which constituted immediately prior to the Arrangement
18.44% of the ordinary shares then outstanding. The information is based on data
available to us as of the date of our filing.
(5) Mr. Fishman, directly and through members of the Fishman family,
beneficially owns Gilat ordinary shares through the following entities (which
hold Gilat ordinary shares directly or indirectly through other companies):
Fishman Family Properties Management (1988) Ltd. ("FFPM"), Fishman Chains Ltd.
("FC"), Fishman Mifalei Kerur Ltd. ("FMK"), E.T. Fishman Properties (1998) Ltd.
("ETFP"), Hashkaot Kedaiot Ltd. ("HK"), and Fish Et Ltd. ("FE"), all of whom are
incorporated in Israel. Mr. Fishman, directly and through members of the Fishman
family, is the sole shareholder of FFPM, ETFP, HK, and FE and owns 97.5% of FC
and 98% of FMK. Mr. Fishman, directly and through members of the Fishman family,
also holds Notes in the aggregate principal amount of $17,697,422. Mr. Fishman,
directly and indirectly, became a principal shareholder as a result of the
Arrangement.
(6) Lawrence A. Post holds 14,126,240 ordinary shares through M.S.
Post Advisory Group, LLC, an entity indirectly owned by Mr. Post and in which he
serves as President. The information is based on Schedule 13G filing made with
the Securities and Exchange Commission. Mr. Post became a principal shareholder
as a result of the Arrangement.
RELATED PARTY TRANSACTIONS
SPACENET NOTES
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In April 2000, Spacenet issued notes to four trusts that were established
for the benefit of family members of Yoel Gat, Amiram Levinberg, Joshua
Levinberg and Yoav Leibovitch, respectively (the "Officers"). These notes were
issued in consideration for the payment of principal amounts ranging between
$159,091 and $318,182; they carry a 5% annual interest and are due in April
2005. Each note is convertible at a predetermined conversion price. Conversion
is at the option of the holders at any time prior to maturity, into a number of
up to between 1.81% and 3.63% of the issued and outstanding share capital and
vested options of StarBand (including the amount of such share capital and
vested options already held by the note holder). The Officers expressly disclaim
beneficial ownership of the shares issuable upon conversion of the notes. The
Notes were repaid in 2002 at a discounted value.
As part of the Arrangement, we entered into the following agreements with our
shareholders:
AMENDMENT TO LOAN AGREEMENT WITH BANK HAPOALIM.
According to the terms of the amendment signed in March, 2003, of the
$102 million in principal amount due from us to Bank Hapoalim, (i) $25.5 million
was converted into 18,488,590 ordinary shares, (ii) $5.1 million was converted
into Notes of the same principal amount and (iii) the remaining debt amount of
$71.4 million remains as a loan on revised terms. The revised terms include
equal semiannual installments of principal of $4.463 million beginning on July
2, 2005, with a last installment of $8.925 million on July 2, 2012. The loan
bears interest at the six-month LIBOR rate plus 2.5% and is payable semiannually
together with the installments of principal.
AGREEMENT WITH SES AMERICOM
Under the agreement, SES Americom agreed to terminate its transponder
agreements with Spacenet that relate to StarBand (which is partially held by
Spacenet) and to enter into a new transponder capacity agreement directly with
StarBand. SES Americom also agreed to allow Spacenet to defer an outstanding
debt of $3.5 to 2003, and to defer payment of certain transponder capacity
charges due in 2003 and 2004, with payment of those deferred charges to commence
in 2005. The agreement reduced the aggregate amount payable to SES Americom in
2003, from $26.9 million to $16.5 million (including the $3.5 million which was
deferred from 2002 to 2003). As part of this agreement, we issued SES Americom a
number of ordinary shares equal to approximately 5.5% of our ordinary shares,
that, together with our ordinary shares already held by an affiliate of SES
Americom, constitute approximately 7.2% of our outstanding ordinary shares. In
addition, as part of this agreement, Gilat provided SES Americom with a parental
guarantee, guaranteeing (i) Spacenet's obligations incurred or arising in 2003
under the agreement, and (ii) repayment of $3.4 million by Spacenet. After
giving effect to the agreement, our overall liability as of December 31, 2002
decreased to $110 million.
ITEM 8: FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS
See Item 18: "Financial Statements."
EXPORT SALES
Gilat's manufacturing facilities are based in Israel. Most of our
products are exported out of Israel. For information on Gilat's revenues
breakdown by geographic market for the past three years, see Item 5:
"Operating and Financial Review and Prospects."
LEGAL PROCEEDINGS
We are a party to various legal proceedings incident to our business.
Except as noted below, there are no material legal proceedings pending or, to
our knowledge, threatened against us or our subsidiaries, and we are not
involved in any legal proceedings that our management believes, individually or
in the aggregate, would have a material adverse effect on our business,
financial condition or operating results.
77
On March 7, 2001, rStar (then known as ZapMe! Corporation) filed an
action against a software vendor, ON Technology Corporation ("OTC"), by which
rStar alleged that OTC breached a software license agreement and defrauded rStar
concerning the capabilities of the software. By its complaint, rStar seeks
recovery of $390,160 rStar paid to OTC in connection with the software, as well
as other damages. On or about March 29, 2001, OTC filed a counterclaim against
rStar, alleging that the principal sum of $307,528 is due from rStar for
additional license fees, maintenance fees, and professional fees in connection
with OTC's software. rStar denies the allegations contained in the counterclaim,
and is pursuing its claims against OTC in this matter.
On June 11, 2001, an action was filed against Gilat in the District
Court of Tel Aviv, Israel by Terayon Ltd. (formerly Combox Ltd.) ("Terayon")
alleging Gilat's breach of contract in connection with purchase orders issued by
Gilat. Terayon is claiming it is owed approximately $2.4 million. The parties
have agreed to arbitrate the case and the matter is proceeding accordingly. We
do not believe that we are in breach of these purchase orders and are vigorously
defending against these claims.
On June 12, 2001, we received a letter from a supplier, Celeritek,
Inc., demanding payment of approximately $6.1 million, in response to our
termination of certain purchase orders. We do not believe that this claim has
merit and intend to vigorously defend against it.
Gilat claims that KSAT Satellite Networks Inc. is obligated to pay to
Gilat approximately $2,787,832 in principal and interest on an outstanding
shareholder loan that became due on October 17, 2002; and KSAT
Telecommunications Ltd, a subsidiary of KSAT Satellite Networks Inc. claims that
Gilat owes it approximately $562,000 for services rendered, which claim Gilat
denies, and in any case, Gilat has claimed a setoff against the amount owed to
Gilat above. We do not believe that KSAT Telecommunications' claim has merit and
intend to vigorously defend against it.
The Israeli customs authority is examining certain imports to determine
whether Gilat has paid the appropriate duty for certain components. The
investigation may result in administrative proceedings to recover approximately
$1 million from the Company, which we will have the right to challenge. We
maintain that we have made all required payments.
On November 13, 2001 Gilat was named as a defendant in an amended
complaint for patent infringement that was filed by the Lemelson Foundation in
the U.S. The lawsuit alleges that Gilat's integration and sale of certain
components in its products violates one or more of the Lemelson patents. The
complaint does not state the amount claimed from Gilat. The amended complaint
has not been formally served on Gilat. Settlement discussions with plaintiff's
counsel have taken place without resolution of the matter, but no further action
has been taken by plaintiff. Gilat intends to vigorously defend itself in this
action.
On February 1, 2002, an action was filed by Recovar Group ("Recovar")
against Gilat Florida, Inc. to collect monies allegedly owed to Test Equipment
Solutions Today, Inc. for goods supplied to Gilat Florida between January 31,
2001 and December 28, 2001. The alleged receivable was assigned to Recovar.
Gilat Florida is vigorously defending against such claims.
In 2002, a number of securities class action lawsuits were filed
against us and certain of our officers and directors in the United States
District Court for the Eastern District of New York and in the United States
District Court for the Eastern District of Virginia ("class action suits") and a
request to file a class action lawsuit was filed in the Tel-Aviv, Israel
District Court. The class action suits were brought on behalf of parties who
purchased our securities between May 16, 2000 and October 2, 2001, inclusive,
and allege violations of the federal securities laws and claim that we issued
material misrepresentations to the market. The class action suits in the US have
been consolidated into a single action in the United States District Court for
the Eastern District of New York. The Israeli court granted a motion to stay the
proceedings of the Israeli action pending the outcome of the US class action
proceeding. We believe the allegations against us and our officers and directors
in the class action suits are without merit and we intend to contest them
vigorously.
In the early part of 2002, a third party issued a letter to the Company
claiming that it has rights to a portion of one of our subsidiaries based upon a
document and certain partial payments made. The Company rejects the legal bases
for such claims and intends to vigorously defend any action if brought by the
third party but does intend to seek a mutually acceptable resolution to this
dispute.
78
On January 7, 2002, Gilat received a letter from the Syndia Corporation
("Syndia") alleging Gilat's possible infringement of a Lemelson patent that is
owned by Syndia. The claimed infringement involves the alleged integration by
Gilat of certain semiconductor components procured from unlicensed third party
manufacturers. Gilat intends to vigorously dispute such claim.
In July 2002 an arbitration proceeding was commenced in England by
Global Manufacturers' Services Valencia S.A. ("GMS") pursuant to an arbitration
clause in a supply agreement between Gilat and GMS. GMS claimed that
approximately $13.2 million was owed by Gilat for certain inventory allegedly
purchased on Gilat's behalf under the agreement. In March 2003, an agreement to
settle the matter was reached between the parties. The final settlement is in
the process of completion.
On November 15, 2002 an action was filed against Spacenet Inc. in the
United States District Court for the District of Connecticut by Linda Thompson,
a former employee of Spacenet, seeking sales commissions allegedly owed in the
amount of $500,000 plus compensatory damages for an alleged wrongful termination
of employment. The court ordered Spacenet to post a pre-judgment bond of
$275,000 pending the outcome of the trial. Spacenet is vigorously disputing such
claims and has filed a motion to dismiss the wrongful termination claim.
In addition, from time to time, we may be notified of claims that we
may be infringing patents, copyrights or other intellectual property rights
owned by third parties. While we do not believe we are currently infringing any
intellectual property rights of third parties, we cannot assure that other
companies will not, in the future, pursue claims against us with respect to the
alleged infringement of patents, copyrights or other intellectual property
rights owned by third parties. In addition, litigation may be necessary to
protect our intellectual property rights and trade secrets, to determine the
validity of and scope of the propriety rights of others or to defend against
third-party claims of invalidity. Any litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
Gilat's business, financial condition and operating results.
If any claims or actions are asserted against us, we may seek to obtain
a license under a third party's intellectual property rights. We cannot assure,
however, that a license will be available under terms that are acceptable to us,
if at all. The failure to obtain a license under a patent or intellectual
property right from a third party for technology used by us could cause us to
incur substantial liabilities and to suspend the manufacture of the product
covered by the patent or intellectual property right. In addition, we may be
required to redesign our products to eliminate infringement if a license is not
available. Such redesign, if possible, could result in substantial delays in
marketing of products and in significant costs. In addition, should we decide to
litigate such claims, such litigation could be extremely expensive and time
consuming and could materially adversely affect our business, financial
condition and operating results, regardless of the outcome of the litigation.
We are also a party to various regulatory proceedings incident to our
business. To the knowledge of our management, none of such proceedings is
material to us or to our subsidiaries.
DIVIDENDS POLICY
We have never paid cash dividends on our ordinary shares and do not
anticipate paying any cash dividends in the foreseeable future. We intend to
retain any earnings for use in our business. We have decided to reinvest
permanently the amount of tax-exempt income derived from our "Approved
Enterprises" and not to distribute such income as dividends. See notes 11 and 13
of the notes to consolidated financial statements included in this annual report
on Form 20-F. We may only pay cash dividends in any fiscal year out of
"profits," as determined under Israeli law. In addition, the terms of some of
our financing arrangements restrict us from paying dividends to our
shareholders.
In the event we declare dividends in the future, we will pay those
dividends in NIS. Because exchange rates between NIS and the dollar fluctuate
continuously, a U.S. shareholder will be subject to currency fluctuation between
the date when the dividends are declared and the date the dividends are paid.
SIGNIFICANT CHANGES
On January 24, 2003 an action was filed by Spacenet Inc. against
Creative Resources Solutions L.L.C.
79
(CRS) in the Circuit Court for Fairfax County, Virginia in the amount of $1.5M
seeking payment of unpaid service charges and contract damages. After Spacenet
rejected CRS' offer to settle the lawsuit for a cash payment by CRS, CRS filed a
counterclaim for $4.7million alleging contract non-performance by Spacenet.
Spacenet is vigorously pursuing its claim against CRS and disputing CRS'
counterclaim, which it believes has no merit.
In February 2003, a letter was received from a former employee alleging
that Gilat owes him approximately $400,000 in compensation as a result of his
employment with and services rendered to Gilat. Gilat denies that it owes any
amounts to him and intends to vigorously dispute such claims.
In March 2003, we concluded the Arrangement with our bank lenders,
holders of our old notes and certain other creditors. See: "Item 5: Operating
and Financial Review and Prospects - Commitments and Contingencies".
Concurrent with the closing of the Arrangement, Messrs. Gat and
Levinberg, Chief Executive Officer and President of the Company, resigned from
their respective positions as officers, effective April 15, 2003. See "Item 6:
Directors, Senior Management and Employees".
ITEM 9: THE OFFER AND LISTING
Our ordinary shares are quoted on the Nasdaq National Market under the
symbol "GILTF." The following table sets forth, for the periods indicated, the
range of high and low closing sale price for the ordinary shares, as reported by
Nasdaq:
AVERAGE DAILY TRADING
PRICE VOLUME
----- ------
HIGH LOW
---- ---
YEAR ENDING DECEMBER 31, 1998: $56.38 $22.50 165,016
YEAR ENDING DECEMBER 31, 1999: $125.25 $41.75 226,233
YEAR ENDING DECEMBER 31, 2000:
First Quarter................... $181.50 $103.00 433,984
Second Quarter.................. $128.75 $64.00 378,984
Third Quarter................... $93.38 $67.50 233,381
Fourth Quarter.................. $77.50 $25.38 506,111
YEAR ENDING DECEMBER 31, 2001:
First Quarter................... $43.75 $11.25 691,983
Second Quarter................. $16.03 $9.36 423,825
Third Quarter .................. $14.01 $5.02 268,101
Fourth Quarter.................. $4.43 $2.00 673,734
YEAR ENDING DECEMBER 31, 2002:
First Quarter................... $6.26 $3.30 244,432
Second Quarter.................. 3.49 1.00 155,600
Third Quarter................... 1.15 0.45 194,124
Fourth Quarter.................. 0.69 0.33 210,176
80
AVERAGE DAILY TRADING
PRICE VOLUME
----- ------
HIGH LOW
---- ---
YEAR ENDING DECEMBER 31, 2003:
First Quarter 0.47 0.19 697,020
MOST RECENT SIX MONTHS:
October 2002 0.69 0.43 93,730
November 2002 0.62 0.39 331,065
December 2002 0.55 0.33 205,733
January 2003 0.47 0.33 140,480
February 2003 0.44 0.34 133,947
March 2003 0.39 0.19 1,816,633
As of March 31, 2003, there were 259,757,196 ordinary shares
outstanding, and 176 record holders of ordinary shares, of which 142 represented
U.S. record holders owning an aggregate of approximately 86.9% of our
outstanding ordinary shares.
ITEM 10: ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
REGISTRATION AND PURPOSES
Gilat Satellite Networks Ltd. is an Israeli company registered with the
Israel companies register, registration no. 52-003893-6.
Under the Companies Law, a company may define its purposes as to engage
in any lawful business and may broaden the scope of its purposes to the grant of
reasonable donations for any proper charitable cause, even if the basis for any
such donation is not dependent upon business considerations. Article 3A of our
Articles of Association provides that Gilat's purpose is to engage in any
business permitted by law and that Gilat can also grant reasonable donations for
any proper charitable cause.
AMENDMENT OF THE ARTICLES
Under the Companies Law, a company may amend its articles of
association by the affirmative vote of a majority of the shares voting and
present at the general meeting of shareholders or by a different voting if so
provided by the company's articles of association. Article 3 of our Articles of
Association provides that the Articles of Association may be amended by a
resolution approved by holders of a majority of the shares represented at a
general meeting and voting on such resolution, if such amendment is recommended
by the board of directors; in any other case, by a resolution approved by
holders of at least 75% of the shares represented at a general meeting and
voting on such resolution.
Israeli law further provides that any amendment to the articles of
association of a company that obligates a shareholder to acquire additional
shares or to increase the extent of his liability shall not obligate the
shareholder without his prior consent.
81
AMENDMENT OF THE MEMORANDUM
Companies that were incorporated prior to the effective date of the
Companies Law, such as Gilat, may amend their memorandum of association to
authorize future amendments to the memorandum of association by any required
voting. On November 9, 2000, Gilat's shareholders approved an amendment to
Gilat's Memorandum of Association, by adding a provision that will authorize
Gilat to amend its Memorandum of Association by the affirmative vote of a
majority of the ordinary shares present and voting at the meeting. This
amendment to the Memorandum of Association is included as an exhibit to this
annual report on Form 20-F.
RECORD DATE FOR NOTICES OF GENERAL MEETING AND OTHER ACTION
Under the Companies Law, for the purpose of a shareholder vote, the
record date for companies traded outside of Israel, such as Gilat, can be set
between four and forty days before the date of the meeting. Article 20 of our
Articles of Association therefore provides that the board of directors may set
in advance a record date, which shall not be more than forty nor less than four
days before the date of such meeting (or any longer or shorter period permitted
by law).
NOTICE OF GENERAL MEETINGS; OMISSION TO GIVE NOTICE
The Companies Law provides that a company whose shares are traded on an
exchange must give notice of a general meeting to its shareholders of record at
least twenty-one days prior to the meeting, unless the company's articles
provide that a notice need not be sent. Accordingly, Article 25(a) of our
Articles of Association provides that not less than 21 days' prior notice shall
be given to shareholders of record of every General Meeting (i.e. Annual General
Meetings and Special General Meetings). It further provides that notice of a
General Meeting shall be given in accordance with any law and otherwise as the
board of directors may determine. In addition, Article 25(c) of our Articles of
Association provides that no shareholder present, in person or by proxy, at the
commencement of a General Meeting shall be entitled to seek the revocation of
any proceedings or resolutions adopted at such General Meeting on grounds of any
defect in the notice of such meeting relating to the time or the place thereof.
ANNUAL GENERAL MEETINGS AND SPECIAL GENERAL MEETINGS
Under the Companies Law, an annual meeting of the shareholders should
be held once in every calendar year and not more than fifteen months from the
last annual meeting. The Companies Law Israeli provides that a special meeting
of shareholders must be called by the board of directors upon the written
request of (i) two directors, (ii) one-fourth of the serving directors, (iii)
one or more shareholders who hold(s) at least five percent of the issued share
capital and at least one percent of the voting power of the company, or (iv) one
or more shareholders who have at least five percent of the voting power of the
company. Within twenty one days of receipt of such demand, the board of
directors is required to convene the special meeting for a time not later than
thirty five days after notice has been given to the shareholders. Article 24 of
our Articles of Association provide that our board of directors may call a
special meeting of the shareholders at any time and shall be obligated to call a
special meeting as specified above.
QUORUM AT GENERAL MEETINGS
Under Article 6(b) of our Articles of Association, the required quorum
for any general meeting of shareholders and for any class meeting is two or more
shareholders present in person or by proxy and holding at least thirty-three and
one-third percent (331/3%) of the issued shares (or of the issued shares of such
class in the event of a class meeting). The required quorum in a meeting that
was adjourned because a quorum was not present, shall be two shareholders
present in person or by proxy. Under Article 26(c) of our Articles of
Association, if the adjourned meeting was called by a shareholder(s), the quorum
in the adjourned meeting shall be one or more shareholders, present in person or
by proxy and holding the number of shares required to call a meeting.
82
ADOPTION OF RESOLUTIONS AT GENERAL MEETINGS
Article 28(b) of our Articles of Association provides for voting by a
written ballot only. In addition, Article 28(c), in accordance with the
Companies Law, provides that the declaration of the Chairman of the Meeting as
to the results of a vote are not considered to be conclusive, but rather prima
facie evidence of the fact.
Under our Articles of Association, any resolution of the shareholders,
except a resolution for a voluntary liquidation of the company and, in certain
circumstances, a resolution to amend our Articles of Association, shall be
deemed adopted if approved by the vote of the holders of a majority of the
voting power represented at such meeting in person or by proxy.
VOTING POWER
Article 31 of our Articles of Association provides that every
shareholder shall have one vote for each share held by him of record or, in
accordance with the definition of "shareholder" in the Companies Law, in his
name with an "exchange member" and held of record by a "nominee company", as
such terms are defined in the Companies Law.
We do not have cumulative voting provisions for the election of
directors or for any other matter.
ELECTION AND REMOVAL OF DIRECTORS
Under our Articles of Association, the ordinary shares do not have
cumulative voting rights in the election of directors. A director is not
required to retire at a certain age and need not be a shareholder of Gilat.
Under the Companies Law, a person cannot serve as a director if convicted of
certain offenses or been declared bankrupt. Article 39 of our Amended Articles
provides that the affirmative vote of a majority of the shares then represented
at a general meeting of shareholders shall be entitled to remove a director from
office (for any reason), to elect directors instead of the directors so removed
or to fill any vacancy, however created, in the board of directors. The
directors may, at any time and from time to time, appoint a director to
temporarily fill a vacancy on the board of directors, except that if the number
of directors then in office at the time of such vacancy constitutes less than a
majority of the entire Board, they may only act in an emergency, or to fill the
vacancy up to the minimum number required to effect corporate action.
Our board of directors has recommended to our shareholders to amend
Articles 38 and 39 of our Articles of Association, and our shareholders are
expected to vote on such proposal on April 15, 2003. Under the proposed
amendment, our board of directors shall consist of not less than five and not
more than nine directors as shall be determined from time to time by a majority
vote at the general meeting of our shareholders. Unless resolved otherwise, the
proposed amendment states that our board of directors will be comprised of nine
directors, if four directors are appointed by beneficial owners of seven percent
or more of our issued and outstanding ordinary shares as set forth below, or
seven directors, if fewer than four directors are appointed by beneficial owners
of seven percent or more of our issued and outstanding ordinary shares as set
forth below.
The proposed amendment further provides that each beneficial owner of
seven percent or more of our issued and outstanding ordinary shares shall be
entitled to appoint, at each annual general meeting of our shareholders, one
member to our board of directors (an "Appointed Director"), provided that a
total of not more than four Appointed Directors are so appointed. In the event
more than four such qualifying beneficial owners notify us that they desire to
appoint an Appointed Director, only the four shareholders beneficially owning
the greatest number of shares shall each be entitled to appoint an Appointed
Director.
For the purposes of the preceding paragraph, a "beneficial owner" of
ordinary shares means any person or entity who, directly or indirectly, has the
power to vote, or to direct the voting of, such ordinary shares. All ordinary
shares beneficially owned by a person or entity, regardless of the form which
such beneficial ownership takes, shall be aggregated in calculating the number
of ordinary shares beneficially owned by such person or entity. All persons and
entities that are affiliates (as defined below) of each other shall be deemed to
be one person or entity for the purposes of this definition. For the purposes of
the preceding paragraph, an "affiliate" means, with respect to any person or
entity, any other person or entity controlling, controlled by, or under common
control with such person or
83
entity. "Control" shall have the meaning ascribed to it in the Israeli
Securities Law - 1968, i.e. the ability to direct the acts of a company. Any
person holding one half or more of the voting power of a company of the right to
appoint directors or to appoint the Chief Executive Officer is presumed to have
control of the company.
The proposed amendment further stipulates that as a condition to the
appointment of an Appointed Director, any appointing shareholder that delivers
to the Company a letter of appointment shall, prior to such delivery, be
required to file with the SEC a Schedule 13D, or an amendment to its Schedule
13D if there is any change in the facts set forth in its Schedule 13D already on
file with the SEC which discloses any such change in its holdings of ordinary
shares, regardless of whether any filing or amendment is required to be filed
under the rules of the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder. In addition, any Appointing
Shareholder shall be obligated to notify the Company in writing of any sale,
transfer, assignment or other disposition of any kind of ordinary shares by such
appointing shareholder that results in the reduction of its beneficial ownership
to below the percentage indicated above, immediately after the occurrence of
such disposition of shares but in any event not later than the earliest of (i)
ten (10) days thereafter, or (ii) the next Annual General Meeting. Without
derogating from the foregoing, so long as an Appointed Director serves on the
board of directors, the appointing shareholder which appointed such Appointed
Director shall provide the Company, upon its written request at any time and
from time to time, with reasonable evidence of its beneficial ownership in the
Company.
Under the proposed amendment, so long as our ordinary shares are listed
for trading on Nasdaq, we may require that any Appointed Director qualify as an
"independent director" as provided for in the Nasdaq rules then in effect. In
addition, in no event may a person become an Appointed Director unless such
person does not, at the time of appointment, and did not, within two years prior
thereto, engage, directly or indirectly, in any activity which competes with the
Company, whether as a director, officer, employee, contractor, consultant,
partner or otherwise.
Under the proposed amendment of Articles 38 and 39 of our Articles of
Association, the annual general meeting of our shareholders, by the vote of the
holders of a majority of the voting power represented at such meeting in person
or by proxy, will elect the remaining members of the board of directors. At any
annual general meeting at which Appointed Directors are appointed as set forth
above, the calculation of the vote of any beneficial owner who appointed a
director pursuant to the preceding paragraph shall not take into consideration,
for the purpose of electing the remaining directors, ordinary shares
constituting seven percent of our issued and outstanding ordinary shares held by
such appointing beneficial owner.
Appointed Directors, as set forth above, may be removed by our board of
directors when the beneficial ownership of the shareholder who appointed such
Appointed Director falls below seven percent of our ordinary shares. In
addition, the office of an Appointed Director will expire upon the removal of
the Appointed Director by the shareholder who appointed such Appointed Director
or when the Appointed Director ceases to qualify as an "independent director" as
set forth above.
The proposed amendment to Article 39 of our Articles of Association
further provides that the affirmative vote of a majority of the shares then
represented at a general meeting of shareholders shall be entitled to remove
director(s) other than Appointed Directors from office (unless pursuant to
circumstances or events prescribed under the Companies Law), to elect directors
instead of directors so removed or to fill any vacancy, however created, in the
board of directors. Subject to the foregoing and to early resignation or ipso
facto termination of office as provided in Article 42 of our Articles of
Association, each director shall serve until the adjournment of the of the
Annual General Meeting next following the Annual General Meeting or General
Meeting at which such director was elected.
Our directors may, at any time and from time to time, appoint a
director to temporarily fill a vacancy on the board of directors or in addition
to their body (subject to the number of directors in the board of directors as
set forth above), except that if the number of directors then in office
constitutes less than a majority of the number provided for entire board of
directors, as set forth above, they may only act in an emergency, or to fill the
vacancy up to the minimum number required to effect corporate action or in order
to call a general meeting for the purpose of electing directors.
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ALTERNATE DIRECTORS
See "Item 6: Directors, Senior Management and Employees - Alternate
Directors".
EXTERNAL DIRECTORS
See "Item 6: Directors, Senior Management and Employees - External
Directors".
QUALIFICATION OF DIRECTORS
Article 40 of our Articles of Association provides that no person shall
be disqualified to serve as a director by reason of him not holding shares in
the Company or by reason of him having served as director in the past. Our
directors are not subject under the Companies Law or our Articles of Association
to an age limit requirement. Under the Companies Law, a person cannot serve as a
director if he been convicted of certain offenses, unless specifically
authorized by the court, or has been declared bankrupt.
PROCEEDINGS OF THE BOARD OF DIRECTORS
Article 46 of our Articles of Association provides that the board of
directors may meet and adjourn its meetings and otherwise regulate such meetings
and proceedings as the directors think fit. Any director may convene a meeting
of the board of directors, upon notice of not less than 7 days.
Consistent with the Companies Law, Article 46 of our Articles of
Association provides that no director present at the commencement of a meeting
of the board of directors shall be entitled to seek the revocation of any
proceedings or resolutions adopted at such meeting on account of any defect in
the notice of such meeting relating to the time or the place thereof.
Article 47 of our Articles of Association provides that unless
unanimously decided otherwise by the board of directors, a majority of the
directors then in office shall constitute a quorum for meetings of the board of
directors. No business shall be transacted at a meeting of the board of
directors unless the requisite quorum is present.
Our board of directors may elect directors as a Chairman and a
Co-Chairman. The Companies Law provides that the Chairman of the Board of a
company shall have a casting vote in the event of a tied vote, unless the
company's articles of association provides otherwise. Article 48 of 46 of our
Articles of Association provides that neither the Chairman nor the Co-Chairman
of the Board shall have a casting or additional vote.
BORROWING POWERS
The Companies Law authorizes the board of directors of a company, among
other things, to determine the credit limit of the company and to issue bonds.
Article 35(b) of our Articles of Association states that our board of directors
may, from time to time, at its discretion, cause Gilat to borrow or secure the
payment of any sum or sums of money, and may secure or provide for the repayment
of such sum or sums in such manner, at such times and upon such terms and
conditions as it deems fit.
POWERS OF CHIEF EXECUTIVE OFFICER
The Companies Law provides that transactions between a company and its
"office holders", which are not "extraordinary transactions" (as both terms are
defined below), require the approval of the board of directors, unless another
manner of approval is provided by the articles of association. See "Item 10:
Additional Information--Interested Parties Transactions." Accordingly, to
provide Gilat's Chief Executive Officer flexibility in hiring officers (other
than directors), Article 50(b) of our Articles of Association authorizes Gilat's
Chief Executive Officer to appoint the officers and employees of Gilat (other
than directors) and to determine their remuneration as long as the board of
directors did not do so, and provides further that the remuneration of the four
highest salaried personnel of the Company shall be approved by either the board
of directors, the Audit Committee or the Compensation Committee.
85
An "extraordinary transaction" is defined in the Companies Law as a
transaction which is not in the company's ordinary course of business, or is not
on market terms, or that may materially affect the company's profitability,
assets or liabilities.
An "office holder" is defined in the Companies Law as a director,
general manager, chief business manager, deputy general manager, or any other
person assuming the responsibilities of any of the foregoing positions without
regard to such person's title, and any other manager directly subordinate to the
general manager.
TRANSFER OF SHARES
Fully paid ordinary shares are issued in registered form and may be
freely transferred pursuant to the Articles of Association, unless such transfer
is restricted or prohibited by another instrument.
ACQUISITION OF SHARES OVER CERTAIN THRESHOLDS
The Companies Law provides that an acquisition of shares in the Company
must be made by means of a tender offer, if, as a result of the acquisition, the
purchaser would become a holder of twenty five percent or more of the voting
rights in the Company. This rule does not apply if there is already another
holder of twenty five percent of the voting rights. Similarly, the Companies Law
provides that an acquisition of our shares must be made by means of a tender
offer, if, as a result of the acquisition, the purchaser would become a holder
of forty five percent of the voting rights in the Company, unless there is
another person holding at that time more than fifty percent of the voting rights
of the Company.
Regulations under the Companies Law provide that the Companies Law's
tender offer rules do not apply to a company whose shares are publicly traded
either outside of Israel or both in and outside of Israel if, pursuant to the
applicable foreign securities laws and stock exchange rules, there is a
restriction on the acquisition of any level of control of the company or if the
acquisition of any level of control of the company requires the purchaser to
make a tender offer to the public shareholders.
REPURCHASE OF SHARES
The Companies Law, subject to certain limitations, allows companies
under certain circumstances to repurchase their own shares. Article 10(b) of our
Articles of Association provides that Gilat may at any time, and from time to
time, subject to the Companies Law, purchase back or finance the purchase of any
shares or other securities issued by Gilat, in such manner and under such terms
as the board of directors shall determine, whether from one or more
shareholders. Such purchase shall not be deemed a payment of dividends and no
shareholder will have the right to require Gilat to purchase his shares or offer
to purchase shares from any other shareholders.
FOREIGN OWNERSHIP
Neither our Articles of Association nor Israeli law restrict in any way
the ownership of our ordinary shares by nonresidents of Israel, or restrict the
voting or other rights of nonresidents of Israel. Notwithstanding, nationals of
certain countries that are, or have been, in a state of war with Israel may not
be recognized as owners of ordinary shares, without a special government permit.
MERGERS
The Companies Law provides for mergers between Israeli companies, if
each party to the transaction obtains the appropriate approval of its board of
directors and shareholders. A "merger" is defined in the Companies Law as a
transfer of all assets and liabilities (including conditional, future, known and
unknown liabilities) of a target company to another company, the consequence of
which is the dissolution of the target company in accordance with the provisions
of the Companies Law. For purposes of the shareholder vote of each merging
entity, unless a court rules otherwise, the merger requires the approval of a
majority of the shares of that entity that are not held by the other entity or
are not held by any person who holds 25% or more of the shares or the right to
appoint 25% or more
86
of the directors of the other entity. Article 69A of our Articles of Association
provides that a merger requires the approval of the holders of a majority of the
shares voting thereon.
DISTRIBUTION OF DIVIDENDS AND LIQUIDATION RIGHTS
Our ordinary shares are entitled to the full amount of any cash or
share dividend declared, in proportion to the paid up nominal value of their
respective holdings. In the event of liquidation, after satisfaction of
liabilities to creditors, our assets will be distributed to the holders of our
ordinary shares in proportion to the paid up nominal value of their respective
holdings. Such rights may be affected by the grant of preferential dividend or
distribution rights to the holders of a class of shares with preferential rights
that may be authorized in the future by the shareholders.
Generally, pursuant to the Companies Law, the decision to distribute
dividends and the amount to be distributed, whether interim or final, is made by
the board of directors. Accordingly, under Article 52 of our Articles of
Association, our board of directors has the authority to determine the amount
and time for payment of interim dividends and final dividends.
Under the Companies Law, dividends may be paid only out of its net
profits for the two years preceding the distribution of the dividends,
calculated in the manner prescribed in the Companies Law. Pursuant to the
Companies Law, in any distribution of dividends, our board of directors is
required to determine that there is no reasonable concern that the distribution
of dividends will prevent us from meeting our existing and foreseeable
obligations as they become due. Our Articles of Association provide that no
dividends shall be paid otherwise than out of our profits and that any such
dividend shall carry no interest. In addition, upon the recommendation of our
board of directors, approved by the shareholders, we may cause dividends to be
paid in kind.
MODIFICATION OF CLASS RIGHTS
The rights attached to any class of shares (unless otherwise provided
by the terms of issue of such class), such as voting, dividends and the like,
may be modified by the affirmative vote of a majority of the issued shares of
the class at a general meeting of the holders of the shares of such class.
INTERESTED PARTIES TRANSACTIONS
The Companies Law requires that certain transactions, actions and
arrangements be approved by the Audit Committee as well as by our board of
directors. In certain circumstances, in addition to Audit Committee and board of
directors approval, approval by our shareholders at a general meeting is also
required. Specifically, the approval of our Audit Committee, board of directors
and shareholders is required with respect to the following:
(1) a director's terms of service and employment, including, among
other things, grant of exemptions, insurance and indemnification;
(2) extraordinary transactions (as defined above) with (i) controlling
shareholders, or (ii) another person or entity in which transaction
a controlling shareholder has a personal interest, including a
private placement which is an extraordinary transaction; and
(3) the terms of engagement or employment with a controlling
shareholder who is also an office holder or an employee of the
Company.
The approval of our shareholders would be required in addition to the
approval of our board of directors, in (i) any transaction in which the majority
of our directors have a personal interest, and (ii) a private placement of
securities that will increase the holdings of a shareholder that holds five
percent or more of our outstanding share capital, or that will cause any person
to become, as a result of the issuance, a holder of more than five percent of
our outstanding share capital.
For the purpose of approvals of interested parties transactions, a
"controlling shareholder" is defined under the Companies Law as: (i) a
shareholder having the ability to direct the acts of the company (for this
purpose, any person
87
holding one half or more of the voting power of the company or of the right to
appoint directors or the Chief Executive Officer is presumed to have control of
the company); or (ii) the holder of twenty five percent or more of the voting
rights at the general meeting of the company, if there is no other person
holding more than fifty percent of such rights (for this purpose, two or more
holders having a personal interest in the transaction shall be deemed to be
joint holders).
The Companies Law requires a special majority of shareholder votes in
approving the transactions with a controlling shareholder referenced in
paragraphs (2) and (3) above. The special majority approval must comply with one
of the following: (a) it must include at least one-third of all of the votes of
the shareholders voting at the meeting who do not have a personal interest in
the transaction, or (b) the total number of opposing votes from amongst the
shareholders who do not have a personal interest in the transaction does not
exceed one percent of all of the voting power of the Company.
The disclosure provisions of the Companies Law require certain
disclosure to be made to the Company in connection with interested parties
transactions, as follows:
o an office holder or a controlling shareholder promptly disclose
any direct or indirect personal interest (excluding personal
interest caused by the holding of Company shares) that he may
have, and all related information known to him, in connection
with any existing or proposed transaction by the Company;
o in the event of a private placement that will increase the
holdings of any shareholder holding more than five percent of our
outstanding share capital, or that will cause any person to
become, as a result of the issuance, a holder of more than five
percent of our outstanding share capital, such shareholder must
promptly disclose to the Company any personal interest he may
have in such private placement; and
o any of our shareholders voting on any transaction with a
controlling shareholder as set forth above must inform the
Company prior to the voting, or on the proxy card if applicable,
of any personal interest he has in the transaction. The vote of a
shareholder who does not inform the Company with respect to any
such interest shall not be counted.
In addition, a director who has a personal interest in a transaction,
except a transaction with an office holder or in which an office holder has a
personal interest but which is not an extraordinary transaction, may not be
present or vote at a meeting of the Audit Committee or the board of directors,
unless a majority of directors in the Audit Committee or the board of directors,
as applicable, have a personal interest in the transaction.
EXEMPTION, INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS
The Companies Law describes the fiduciary duty of an office holder as a
duty to act in good faith and for the benefit of the company, including by
refraining from actions in which he has a conflict of interest or that compete
with the company's business, refraining from exploiting a business opportunity
of the company in order to gain a benefit for himself or for another person, and
disclosing to the company any information and documents which are relevant to
the company and that were obtained by him in his or her capacity as an office
holder. The duty of care is defined as an obligation of caution of an office
holder that requires the office holder to act at a level of competence at which
a reasonable office holder would have acted in the same position and under the
same circumstances, including by adopting reasonable means for obtaining
information concerning the profitability of the act brought for his approval.
Under the Companies Law, a company may not exempt an office holder from
liability with respect to a breach of his fiduciary duty, but may exempt in
advance an office holder from his liability to the company, in whole or in part,
with respect to a breach of his duty of care.
Pursuant to the Companies Law, a company may indemnify an office holder
against a monetary liability imposed on him by a court, including in settlement
or arbitration proceedings, and against reasonable legal expenses in a civil
proceeding or in a criminal proceeding in which the office holder was found to
be innocent or in which he was convicted of an offense which does not require
proof of a criminal intent. The indemnification of an office
88
holder must be expressly allowed in the articles of association, under which the
company may (i) undertake in advance to indemnify its office holders with
respect to categories of events that can be foreseen at the time of giving such
undertaking and up to an amount determined by the board of directors to be
reasonable under the circumstances, or (ii) provide indemnification
retroactively at amounts deemed to be reasonable by the board of directors.
A company may also procure insurance of an office holder's liability in
consequence of an act performed in the scope of his office, in the following
cases: (a) a breach of the duty of care of such office holder, (b) a breach of
the fiduciary duty, only if the office holder acted in good faith and had
reasonable grounds to believe that such act would not be detrimental to the
company, or (c) a monetary obligation imposed on the office holder for the
benefit of another person.
A company may not indemnify an office holder against, nor enter into an
insurance contract which would provide coverage for, any monetary liability
incurred as a result of any of the following:
o a breach by the office holder of his fiduciary duty unless the
office holder acted in good faith and had a reasonable basis to
believe that the act would not prejudice the company;
o a breach by the office holder of his duty of care if such breach
was done intentionally or recklessly;
o any act or omission done with the intent to derive an illegal
personal gain; or
o any fine or penalty levied against the office holder as a result
of a criminal offense.
In addition, under the Companies Law, indemnification of, and
procurement of insurance coverage for, a company's office holders must be
approved by the company's audit committee and board of directors and, in
specified circumstances, by the company's shareholders.
Our Articles of Association allow us to exempt any office holder to the
maximum extent permitted by law, before or after the occurrence giving rise to
such exemption. Our Articles of Association also provide that we may indemnify
any past or present office holder, to the maximum extent permitted by law,
against any liabilities he or she may incur in such capacity, limited with
respect (i) to the categories of events that can be foreseen in advance by our
board of directors when authorizing such undertaking and (ii) to the amount of
such indemnification as determined retroactively by our board of directors to be
reasonable in the particular circumstances. Similarly, we may also agree to
indemnify an office holder for past occurrences, whether or not we are obligated
under any agreement to provide such indemnification. We have obtained directors'
and officers' liability insurance covering our officers and directors and those
of our subsidiaries for certain claims.
Our Articles of Association also allow us to procure insurance covering
any past or present officer holder against any liability which he or she may
incur in such capacity, to the maximum extent permitted by law. Such an
insurance may also cover the Company for indemnifying such office holder.
ISRAELI TAXATION
The following is a short summary of certain Israeli tax consequences to
persons holding our ordinary shares, including the legislation of a tax reform
approved by the Knesset in July 2002, which is effective from January 1, 2003,
and on administrative and judicial interpretations, all as currently in effect,
and all of which are subject to change (possibly with retroactive effect) and to
differing interpretations. Regulations relating to the tax reform have not yet
been promulgated and might be different than what is currently expected and
assumed in the following discussion. Therefore, there might be changes in the
tax rates and in the circumstances in which they apply, and other modifications
which might change the tax consequenses to you. The discussion is not intended
and should not be construed as legal or professional tax advice and is not
exhaustive of all possible tax considerations.
THIS SUMMARY DOES NOT DISCUSS ALL ASPECTS OF ISRAELI INCOME AND CAPITAL
GAIN TAXATION THAT MAY BE APPLICABLE TO INVESTORS IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES OR TO INVESTORS WHO ARE SUBJECT TO SPECIAL STATUS OR TREATMENT
UNDER ISRAELI TAX LAW. FOR THE FOREGOING AND OTHER REASONS, YOU ARE URGED TO
CONSULT YOUR OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF YOUR HOLDINGS.
89
GILAT IS NOT MAKING ANY REPRESENTATIONS REGARDING THE PARTICULAR TAX
CONSEQUENCES AS TO ANY HOLDER, NOR IS GILAT OR ITS ADVISORS RENDERING ANY FORM
OF LEGAL OPINION OR PROFESSIONAL TAX ADVICE AS TO SUCH TAX CONSEQUENCES.
TAX CONSEQUENCES TO NONRESIDENTS OF ISRAEL
Nonresidents of Israel are subject to income tax on income accrued or
derived from sources in Israel or received in Israel. These sources of income
include passive income such as dividends, royalties and interest, as well as
non-passive income from services rendered in Israel. Gilat is required to
withhold income tax at the rate of 25% (15% for dividends generated by an
Approved Enterprise) on all distributions of dividends other than bonus shares
(stock dividends), unless a different rate is provided in a treaty between
Israel and the shareholder's country of residence. Under the income tax treaty
between the United States and Israel (the "Treaty"), the maximum tax on
dividends paid to a holder of ordinary shares who is a U.S. resident (as defined
in the Treaty) is 25%. Israel presently has no estate or gift tax.
CAPITAL GAINS
Israeli law imposes a capital gains tax on capital gains derived from
the sale of securities and other Israeli capital assets, including shares. The
capital gain or loss amount is equal to the consideration received by the holder
for the shares less the holder's tax basis in the shares. It is expected that
gains from sales of our ordinary shares will be tax exempted for nonresidents of
Israel if the shares are listed for trading on a stock exchange recognized by
the Israeli Ministry of Finance. If the gains from sales of our ordinary shares
are not tax exempt for nonresidents of Israel according to regulations to be
promulgated, they are expected to be (A) tax exempt for the portion accrued
until December 31, 2002, for so long as (1) the ordinary shares are listed for
trading on a stock exchange recognized by the Israeli Ministry of Finance and
(2) Gilat qualifies as an Industrial Company or Industrial Holding Company under
the law for Encouragement of Industry (Taxes) 1969, and (B) subject to 15% tax
for the part commencing January 1, 2003, if the ordinary shares are listed on a
stock exchange recognized by the Israeli Ministry of Finance. Under current
legislation the exemption applies for stock exchanges in Israel. It is expected
that it will apply also to stock exchanges outside of Israel (if recognized by
the Israeli Ministry of Finance) but it is not assured and subject to secondary
legislation. The purchase price for purposes of capital gains commencing January
1, 2003, will be the higher of the tax basis or the average market value in the
three days before January 1, 2003. We believe that we qualify as an Industrial
Company under the law for Encouragement of Industry (Taxes)- 1969. There is
uncertainty as to whether the Nasdaq will be regarded as a recognized stock
exchange for this purpose. If the Nasdaq will not be regarded as a recognized
stock exchange for this purpose or our shares are delisted, gains from sales of
ordinary shares will be subject to 25% capital gain tax on the capital gain
derived since December 31, 2002, and 36% capital gain tax for companies and up
to 50% capital gain tax for individuals on the capital gain derived until
December 31, 2002, while the allocation of the gain between the two periods is
proportional to the holding periods until December 31, 2002, and after December
31, 2002.
For residents of the United States holding less than 10% of our shares
at any time in the twelve months before the sale, under the treaty between
Israel and the U.S., capital gains from the sale of capital assets are generally
exempt from Israeli capital gains tax with respect to the exeptions stated in
the treaty. For residents of other countries, the purchaser of the shares may be
required to withhold capital gains tax at a rate of 30% on all amounts received
for the sale of our ordinary shares, for so long as the capital gain from such a
sale is not exempt from Israeli capital gains tax, and unless a different rate
is provided in a treaty between Israel and the stockholder's country of
residence.
DIVIDENDS
Nonresidents of Israel are subject to income tax on income accrued or
derived from sources in Israel. These sources of income may include dividends on
our ordinary shares. For residents of the United States, under the treaty
between Israel and the U.S., the maximum tax on dividends paid to a U.S.
resident (as defined in the treaty) holding Gilat ordinary shares that Gilat is
required to withhold is 25%. For residents of other countries, unless a
different rate is provided in a treaty between Israel and the stockholder's
country of residence, Gilat may be required to withhold income tax at the
maximum rate of 25% on all distributions of dividends other than stock
dividends.
FILING OF TAX RETURNS IN ISRAEL
90
A nonresident of Israel who receives interest, dividend or royalty
income derived from or accrued in Israel, from which tax was withheld at the
source, is generally exempt from the duty to file tax returns in Israel with
respect to such income, provided such income was not derived from a business
conducted in Israel by the taxpayer.
TAX CONSEQUENCES TO RESIDENTS OF ISRAEL
CAPITAL GAINS
Israeli law imposes a capital gains tax on capital gains derived from
the sale of securities and other Israeli capital assets, including shares. The
capital gain or loss amount is equal to the consideration received by the holder
for the shares less the holder's tax basis in the shares. Under current law,
effective commencing January 1, 2003, gains from sales of ordinary shares
incurred after December 31, 2002, are subject to 15% capital gains tax for
individuals and Israeli companies not subject to the Income Tax Law (Inflation
Adjustments) - 1985 (the "Adjustment Law") and 36% capital gain tax for Israeli
companies subject to the Adjustment Law if the ordinary shares are listed on a
stock exchange recognized by the Israeli Ministry of Finance. Under current
legislation the 15% tax rate applies for securities, which are listed for
trading on a stock exchange in Israel. It is expected that it will apply also to
stock exchanges outside of Israel (if recognized by the Israeli Ministry of
Finance) but it is not assured and subject to secondary legislation. For
individuals and Israeli companies not subject to the Adjustment Law the purchase
price for purposes of capital gains commencing January 1, 2003, will be the
higher of the tax basis or the average market value in the three days before
January 1, 2003 . Gains incurred until December 31, 2002, are exempt from
capital gains tax for so long as (i) the ordinary shares are listed on a stock
exchange recognized by the Israeli Ministry of Finance and (ii) Gilat Qualifies
as an Industrial Company or Industrial Holding Company under the law for
Encouragement of Industry (Taxes)- 1969. We believe that we qualify as an
Industrial Company under the law for Encouragement of Industry (Taxes)- 1969. If
we do not qualify as an Industrial Company under that law, the tax rate on
capital gains derived until December 31, 2002, might be 35% for individuals or
36% for companies. There is uncertainty as to whether the Nasdaq will be
regarded as a recognized stock exchange for this purpose. If the Nasdaq will not
be regarded as a recognized stock exchange for this purpose or our shares are
delisted, gains from sales of ordinary shares will be subject to 25% capital
gain tax on the capital gain derived since December 31, 2002, and 36% capital
gain tax for companies and up to 50% capital gain tax for individuals on the
capital gain derived until December 31, 2002, while the allocation of the gain
between the two periods is proportional to the holding periods until December
31, 2002, and after December 31, 2002.
DIVIDENDS
The distribution of dividend income, other than bonus shares (stock
dividends), to Israeli residents who purchased our Shares will generally be
subject to income tax at a rate of 25% for individuals and will be exempt from
income tax for corporations. Gilat may be required to withhold income tax at the
maximum rate of 25% (0% for corporations) on all such distributions.
U.S. TAXATION
The following discussion is a general summary of the material U.S.
federal income tax considerations applicable to U.S. Holders (as defined below)
of ordinary shares, who hold such instruments as capital assets (generally,
property held for investment). This summary is based on provisions of the Code,
existing and proposed U.S. Treasury regulations and administrative and judicial
interpretations in effect as of the date of this annual report. All of these
authorities are subject to change (possibly with retroactive effect) and to
differing interpretations. In addition, this summary does not discuss all
aspects of U.S. federal income taxation that may be applicable to investors in
light of their particular circumstances or to investors who are subject to
special treatment under U.S. federal income tax law, including:
o life insurance companies;
o dealers in stocks or securities;
o financial institutions;
o tax-exempt organizations;
91
o persons subject to the alternative minimum tax;
o persons holding their shares as part of a straddle, hedging,
conversion or integrated transactions;
o persons having a functional currency other than the U.S. dollar;
or
o direct, indirect or constructive owners of 10% or more of the
outstanding voting shares of Gilat.
EACH U.S. HOLDER IS URGED TO CONSULT WITH ITS TAX ADVISOR REGARDING THE
TAX CONSEQUENCES OF ITS HOLDINGS, INCLUDING THE EFFECTS OF FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
As used herein, the term "U.S. Holder" means a beneficial owner of an
ordinary share who is, for U.S. federal income tax purposes:
o a citizen or resident of the United States;
o a corporation created or organized in or under the laws of the
United States or any political subdivision thereof;
o an estate, the income of which is subject to U.S. federal income
taxation regardless of its source; or
o a trust if (i) (A) a U.S. court is able to exercise primary
supervision over the trust's administration and (B) one or more
U.S. persons have the authority to control all of the trust's
substantial decisions, or (ii) (A) it was in existence on August
20, 1996, (B) it was properly treated as a U.S. person on and
before that date, and (C) it validly elected to continue to be so
treated.
DIVIDENDS PAID ON ORDINARY SHARES
Subject to the discussion of the passive foreign investment company
notes below, a U.S. Holder generally will be required to include in gross income
as ordinary dividend income the amount of any distributions paid on the ordinary
shares (including the amount of any Israeli taxes withheld) to the extent that
such distributions are paid out of Gilat's current or accumulated earnings and
profits as determined for U.S. federal income tax purposes. Distributions in
excess of Gilat's earnings and profits as so determined will be applied against
and will reduce the U.S. Holder's tax basis in its ordinary shares and, to the
extent they are in excess of such tax basis, will be treated as gain from a sale
or exchange of such ordinary shares. Gilat's dividends will not qualify for the
dividends-received deduction otherwise available to U.S. corporations. In the
event that Gilat pays cash dividends, such dividends will be paid in Israeli
currency. Dividends paid in Israeli currency (including the amount of any
Israeli taxes withheld therefrom) will be includible in the income of a U.S.
Holder in a U.S. dollar amount calculated by reference to the exchange rate in
effect on the day they are received by the U.S. Holder. Any gain or loss
resulting from currency exchange fluctuations during the period from the date
the dividend is includible in the income of the U.S. Holder to the date such
payment is converted into U.S. dollars generally will be treated as U.S. source
ordinary income or loss.
Any dividends paid by Gilat to a U.S. Holder on the ordinary shares
generally will be treated as foreign source passive income for U.S. foreign tax
credit purposes. Subject to the limitations set forth in the Code, U.S. Holders
may elect to claim a foreign tax credit against their U.S. federal tax liability
for Israeli income tax withheld from dividends received on ordinary shares. A
U.S. Holder will be denied a foreign tax credit with respect to Israeli income
tax withheld from dividends received on ordinary shares if the U.S. Holder has
not held the ordinary shares for a certain minimum period or to the extent such
U.S. Holder is under an obligation to make certain related payments with respect
to substantially similar or related property. The rules relating to the
determination of the foreign tax credit are complex, and each U.S. Holder should
consult with its tax advisor to determine whether and to what extent it is
entitled to such credit. U.S. Holders who do not elect to claim a foreign tax
credit may instead claim a deduction from the gross income for Israeli income
tax withheld, but only for a year in which the U.S. Holder elects itemize
deductions.
92
DISPOSITION OF ORDINARY SHARES
Subject to the discussion of passive foreign investment company notes
below, upon the sale or other disposition of ordinary shares, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
the amount realized on the disposition and such holder's adjusted tax basis in
the ordinary shares disposed of which is generally the U.S. dollar cost of such
shares. Gain or loss upon the disposition of ordinary shares will be long-term
capital gain or loss if, at the time of the disposition, the U.S. Holder's
holding period for the ordinary shares disposed of exceeds one year. Long-term
capital gains realized by individual U.S. Holders generally are subject to a
lower marginal U.S. federal income tax rate than ordinary income. The
deductibility of capital losses by a U.S. Holder is subject to limitations.
In general, any gain recognized by a U.S. Holder on the sale or other
disposition of ordinary shares will be U.S. source income for U.S. foreign tax
credit purposes. However, pursuant to the Treaty, gain from the sale or other
disposition of ordinary shares by a U.S. holder who is a U.S. resident (for
Treaty purposes) and who sells or otherwise disposes of the ordinary shares in
Israel may be treated as foreign source income for U.S. foreign tax credit
purposes. Any loss on such sale or other disposition of ordinary shares may be
required to be allocated against foreign source income for U.S. foreign tax
credit limitation purposes.
PASSIVE FOREIGN INVESTMENT COMPANY
Special U.S. federal income tax rules apply to U.S. Holders owning
shares of a so-called "passive foreign investment company" ("PFIC"). A foreign
corporation generally will be considered a PFIC for any taxable year in which
75% or more of its gross income consists of passive income, or 50% or more of
the average value of its assets consists of "passive assets" (generally, assets
that generate passive income). Based upon an analysis of Gilat's financial
position, Gilat has not ever been a PFIC and does not expect to become a PFIC
for its current taxable year. While Gilat intends to manage its business so as
to avoid PFIC status, to the extent consistent with its other business goals, no
assurances can be made that the business plans of Gilat will not change in a
manner which affects its PFIC status determination in the current or any future
taxable year. If Gilat were classified as a PFIC, a U.S. Holder generally would
be subject to additional federal income tax liability (including an interest
charge) upon the sale or other disposition of ordinary shares or upon the
receipt of amounts treated as "excess distributions." U.S. holders are urged to
consult their tax advisors concerning the U.S. federal income tax consequences
of holding ordinary shares if Gilat were considered a PFIC in any year.
BACKUP WITHHOLDING
A U.S. Holder may be subject to backup withholding with respect to
dividends on, and the proceeds of dispositions of, ordinary shares. In general,
backup withholding will apply to a U.S. Holder only if the U.S. Holder fails to
comply with certain identification procedures or fails to report properly
payments of dividends. Backup withholding will not apply with respect to
payments made to certain exempt recipients, such as corporations and tax-exempt
organizations. Backup withholding is not an additional tax and may be claimed as
a credit against the U.S. federal income tax liability of a U.S. Holder,
provided that the required information is timely furnished to the Internal
Revenue Service.
DOCUMENTS ON DISPLAY
We file reports and other information with the SEC. These reports
include certain financial and statistical information about us, and may be
accompanied by exhibits. You may read and copy any document we file with the SEC
at the SEC's Public Reference Room at 450 Fifth Street, Washington D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. The SEC maintains an Internet website at HTTP://WWW.SEC.GOV
that contains reports, proxy statements, information statements and other
material that are filed through the SEC's Electronic Data Gathering, Analysis
and Retrieval ("EDGAR") system. We began filing through the EDGAR system
beginning in November 2002.
Information about us is also available on our website at
HTTP://WWW.GILAT.COM. Such information on our website is not part of this annual
report. You may also visit us on the World Wide Web at www.gilat.com.
93
ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
The currency of our primary economic environment is the dollar.
However, we have balances and activities in other currencies. We are therefore
exposed to market risks arising from changes in currency exchange rates. We are
also exposed to market risks arising from changes in interest rates.
EXCHANGE RATE RISK MANAGEMENT
Our functional currency and that of most of our subsidiaries is the
dollar. Accordingly, we attempt to protect ourselves against exposure arising
from the difference between assets and liabilities in each currency other than
the dollar ("Balance Sheet Exposure"). We strive to limit our exposure through
"natural" hedging, i.e., attempting to maintain similar levels of assets and
liabilities in any given currency, to the extent possible. However, this method
of "natural" hedging is not always achievable.
The table below details the balance of the Balance Sheet Exposure by
currency:
--------------------------------- --------------------------------
DECEMBER 31, 2002
--------------------------------- --------------------------------
(IN THOUSANDS)
LIABILITIES - SHORT TERM
--------------------------------- --------------------------------
Variable rate debt:
In NIS $21
Weighted average interest rate 17.1%
In other currencies $5
Weighted average interest rate 10.0%
--------------------------------- --------------------------------
In addition, we pay for the purchase of certain components of our
products in Japanese yen. As a result, an increase in the value of the Japanese
yen in comparison to the dollar could increase the cost of revenues. We have
entered into an agreement with our principal Japanese supplier in an effort to
reduce the effects of fluctuations in the exchange rate, although there can be
no assurance that such agreement will effectively eliminate our Japanese yen
exposure.
94
INTEREST RATE RISK MANAGEMENT
Due to the existence of assets and liabilities with different interest
rates and maturity dates, we are exposed to changes in interest rates.
The table below details the Balance Sheet Exposure by currency and
interest rates:
------------------------------ -------------------------------------------------------
EXPECTED MATURITY DATES
------------------------------ ----------------- ----------------- -------------------
2003 2004 2005 AND
THEREAFTER
------------------------------ ----------------- ----------------- -------------------
(IN THOUSANDS)
ASSETS:
------------------------------ -------------------------------------------------------
Short-term - in U.S.
dollars: $1,663
Fixed rate
Weighted interest rate 1.15%
Long-term loans - in
U.S. dollars: $1,000,000
Weighted interest rate 5%
------------------------------ ----------------- ----------------- -------------------
LIABILITIES:
------------------------------ ----------------- ----------------- -------------------
1) Long-term - in U.S.
dollars: $358,648
Fixed rate debt
Weighted interest rate 4.25%
------------------------------ ----------------- ----------------- -------------------
2) Long-term loans - in
U.S. dollars $8,197 $121,426 $23,713
Weighted average
interest rate 3.09% 3.00 3.00%
------------------------------ ----------------- ----------------- -------------------
3) Short-term
Variable rate debt - in
U.S. dollars $1,801
Weighted average
interest rate 1.47%
In NIS $21
Weighted average
interest rate 17.1%
------------------------------ ----------------- ----------------- -------------------
4) Other $5
Weighted average
interest rate
------------------------------ ----------------- ----------------- -------------------
In February 2000, we completed a private offering of $350 million of
convertible subordinated notes due 2005. The notes are convertible into ordinary
shares at a conversion price of $186.18 per share. Each note bears annual
interest of 4.25% payable semiannually, on March 15 and September 15, commencing
September 15, 2000.
95
In March 2003, we exchanged the old notes and we issued (i) 202,083,908
ordinary shares and (ii) $83.254 million in principal amount of 4.00%
convertible notes due 2012, also called Notes.
In December 2000, we entered into a facility agreement with an Israeli
bank, under which we borrowed $108 million to finance our general corporate
activities. The loan bears interest at LIBOR plus 0.8% per annum and the
principal is repayable in six semi-annual payments commencing June 2002. As of
March 2003, of the $102 million in principal amount still due from us to Bank
Hapoalim, (i) $25.5 million was converted into 18,488,590 ordinary shares, (ii)
$5.1 million was converted into Notes of the same principal amount and (iii) the
remaining debt amount of $71.4 million remains as a loan on revised terms. The
revised terms include equal semiannual installments of principal of $4.463
million beginning on July 2, 2005, with a last installment of $8.925 million on
July 2, 2012. The loan bears interest at the six-month LIBOR rate plus 2.5% and
is payable semiannually together with the installments of principal.
ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II
ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable.
ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
Not Applicable.
ITEM 15: CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer have evaluated
our disclosure controls and procedures (as defined in Rule 13a-14(c) to the
Securities and Exchange Act of 1934) within 90 days prior to the filing of this
Annual Report on Form 20-F and have determined that such disclosure controls and
procedures are effective to ensure that information required to be disclosed in
our filings under the Securities Exchange Act of 1934 with respect to the
Company and its consolidated subsidiaries is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
We evaluate our internal controls for financial reporting purposes on a
regular basis. If we identify a problem in our internal controls during the
course of our evaluations, we consider what revision, improvement and/or
correction to make in order to ensure that our internal controls are effective.
We are currently in the process of enhancing our internal controls. We
anticipate that implementation of these enhancements may continue through the
end of the year. Pending full implementation of these enhancements, we have
instituted additional procedures and policies to preserve our ability to
accurately record, process and summarize financial data and prepare financial
statements for external purposes that fairly present our financial condition,
results of operations and cash flows.
Internal controls, no matter how designed, have limitations. It is the
Company's intent that the internal controls be conceived to provide adequate,
but not absolute, assurance that the objectives of the controls are met on a
consistent basis. Management plans to continue its review of internal controls
and disclosure procedures on an ongoing basis.
We have made no other significant changes in internal controls, or
other factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies or material
weaknesses. We intend to continue to refine our internal controls on an ongoing
basis as we deem appropriate with a view towards making improvements.
96
PART III
ITEM 16: [RESERVED]
Not Applicable.
ITEM 17: NOT APPLICABLE
ITEM 18: FINANCIAL STATEMENTS
The Consolidated Financial Statements and related notes, as well as the
Interim Condensed Consolidated Financial Statements and related notes, required
by this item are contained on pages F-1 through F-___ hereof.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
------------------------------------------ ----
Reports of Independent Auditors................................................................. F-2
Consolidated Balance Sheets at December 31, 2001 and 2002....................................... F-3 to F-4
Consolidated Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002...... F-5
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31,
2000, 2001 and 2002.......................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002...... F-7 to F-9
Notes to Consolidated Financial Statements...................................................... F-10 to F-62
Reports of Independent Auditors with respect to consolidated subsidiaries....................... F-63 to F-65
ITEM 19: EXHIBITS
1.1 Memorandum of Association, as amended. Previously filed as Exhibit 1.1 to
Gilat's Annual Report on Form 20-F for the fiscal year ending December
31, 2000, which Exhibit is incorporated herein by reference.
1.2 Articles of Association, as amended and restated. Previously filed as
Exhibit 1.2 to Gilat's Annual Report on Form 20-F for the fiscal year
ending December 31, 2000, which Exhibit is incorporated herein by
reference.
2.1 Indenture, dated as of March 7, 2000, between Gilat Satellite Networks
Ltd. and The Bank of New York. Previously filed as Exhibit 4.2 to the
Registration Statement on Form F-3 (No. 333-12242), which Exhibit is
incorporated herein by reference.
2.2 Form of 4.25% Convertible Subordinated Note due 2005. Previously filed as
Exhibit 4.3 to the Registration Statement on Form F-3 (No. 333-12242),
which Exhibit is incorporated herein by reference.
2.3 Form of 4.00% convertible subordinated note due 2012. Previously filed as
Exhibit T3C to the Registration Statement on Form F-3 (No. 022-38667)
which Exhibit is incorporated herein by reference.
4.1 Agreement between the Company and Bank Hapoalim B.M. dated March 6, 2003.
4.2 Share Issuance Agreement between the Company and SES Americom, Inc. dated
December 30, 2002.
4.3 Parental Guarantee executed by the Company dated December 30, 2002.
4.4 Master Agreement dated as of September 29, 2000, by and among StarBand,
Gilat Satellite Networks Ltd. and Spacenet Inc. Previously filed as
Exhibit 4.1 to Gilat's Annual Report on Form 20-F/A (Amendment No. 2) for
the fiscal year ending December 31, 2000, which Exhibit is incorporated
herein by reference. *
4.5 Tender Offer Agreement dated as of October 3, 2000, by and among Gilat
Satellite Networks Ltd., rStar Corporation (formerly named ZapMe!
Corporation) and the Stockholders Listed on Schedules A and B thereto.
Previously filed as Exhibit (d) to Schedule TO filed with the Securities
and Exchange Commission on October 17, 2000, which Exhibit is
incorporated herein by reference.
4.6 Agreement dated April 23, 2001, by and between rStar Corporation and
Spacenet Inc. regarding a capital lease obligation. Previously filed as
Exhibit 4.4 to Gilat's Annual Report on Form 20-F for the fiscal year
ending December 31, 2000, which Exhibit is incorporated herein by
reference.
97
4.7 Second Amended and Restated Acquisition Agreement dated as of December
31, 2001, by and among Gilat-to-Home Latin America (Holland) N.V., rStar
Corporation and Gilat Satellite Networks Ltd. relating to the acquisition
of StarBand Latin America (Holland) B.V. Previously filed as Exhibit 2.1
to Amendment No. 1 to the Registration Statement on Form F-4 (No.
333-71422), which Exhibit is incorporated herein by reference.
4.8 Form of master agreement, by and among StarBand Latin America (Holland)
B.V., Gilat-to-Home Latin American (Holland) N.V., Gilat-to-Home Latin
America, Inc., and Gilat Satellite Networks Ltd. Previously filed as
Exhibit 10.1 to Amendment No. 1 to the Registration Statement on Form F-4
(No. 333-71422), which Exhibit is incorporated herein by reference. *
4.9 Sublease and Master Deed of Lease dated as of March 28, 2001 by and among
BP III Leasco, LLC as Sublessor, BP Tysons, LLC as Landlord and Spacenet
Real Estate Holdings, LLC as Sublessee and Master Tenant. Previously
filed as Exhibit 4.7 to Gilat's Annual Report on Form 20-F for the fiscal
year ending December 31, 2000, which Exhibit is incorporated herein by
reference.
4.10 Acquisition Agreement, among Gilat Satellite Networks (Holland) BV, Gilat
Satellite Networks Ltd., Spacenet International Holdings Inc., Spacenet
International Ventures Inc., Gilat Satellite Networks (Luxembourg) S.A.
dated April 2002. Previously filed as Exhibit 4.8 to the Annual Report on
Form 20-F for the fiscal year ending December 31, 2001, which Exhibit is
incorporated herein by reference.
8.1 List of subsidiaries. Previously filed as Exhibit 8.1 to the Annual
Report on Form 20-F for the fiscal year ending December 31, 2001, which
Exhibit is incorporated herein by reference.
10.1 Consent Kost Forer & Gabbay, a member of Ernst & Young Global.
10.2 Consent of KPMG Accountants N.V.
10.3 Consent of Berman Hopkins Wright & LaHam, CPAs LLP.
10.4 Consent of Grant Thorton LLP.
12.(a).1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
* Portions of this exhibit were omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
98
SIGNATURE
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
GILAT SATELLITE NETWORKS LTD.
By: /s/ Yoel Gat
----------------------------------------
Yoel Gat
Chairman and Chief Executive Officer
Date: April 15, 2003
99
CERTIFICATIONS
I, Yoel Gat, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 20-F of Gilat Satellite Networks
Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: ___________ _______________________
Yoel Gat
Chief Executive Officer
100
CERTIFICATIONS
I, Yoav Leibovitch, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 20-F of Gilat Satellite Networks
Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: d.
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
e. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
f. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function): c. all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
d. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
IN U.S. DOLLARS
INDEX
PAGE
------------------
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEETS F-3 - F4
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7 - F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 - F-62
F-1
[LOGO] ERNST & YOUNG
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
GILAT SATELLITE NETWORKS LTD.
We have audited the accompanying consolidated balance sheets of Gilat
Satellite Networks Ltd. ("the Company") and its subsidiaries as of December 31,
2001 and 2002, and the related consolidated statements of operations, changes in
shareholders' equity (deficiency) and cash flows for each of the three years in
the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements, based on our audits. We did not audit the
financial statements of certain consolidated subsidiaries, which statements
reflect total assets of approximately 25% as of December 31, 2001, and total
revenues of approximately 8% and 25% for the years ended December 31, 2000 and
2001, respectively, of the related consolidated totals. Those financial
statements were audited by other auditors, whose reports have been furnished to
us, and our opinion, insofar as it relates to amounts included for these
subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2001 and 2002, and the consolidated results of
their operations and cash flows, for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
Tel-Aviv, Israel KOST FORER & GABBAY
April 14, 2003 A Member of Ernst & Young Global
F - 2
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
------------------------------------
2001 2002
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 97,325 $ 48,072
Short-term bank deposits 12,900 1,663
Short-term restricted cash 3,520 12,151
Trade receivables, (net of allowance for doubtful accounts 2001 -
$ 114,703; 2002 - $ 17,041) *) 125,059 55,459
Inventories 123,372 74,978
Other accounts receivable and prepaid expenses 46,090 47,113
---------------- ----------------
TOTAL current assets 408,266 239,436
---------------- ----------------
LONG-TERM INVESTMENTS AND RECEIVABLES:
Long-term restricted cash 9,521 10,733
Investment in other companies 12,182 -
Severance pay fund 5,784 7,664
Long-term note 43,430 1,000
Long-term trade receivables and other receivables, net 40,279 31,427
---------------- ----------------
111,196 50,824
---------------- ----------------
PROPERTY AND EQUIPMENT, NET 247,200 162,905
---------------- ----------------
INTANGIBLE ASSETS AND DEFERRED CHARGES, NET 35,280 21,049
---------------- ----------------
GOODWILL 56,681 -
---------------- ----------------
TOTAL assets $ 858,623 $ 474,214
================ ================
*) Includes the following balances resulting from transactions with related parties as of December 31, 2001
and 2002: trade receivables - $ 1,102 and $ 1,402, respectively;
The accompanying notes are an integral part of the consolidated financial statements.
F - 3
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)
DECEMBER 31,
-------------------------------------
2001 2002
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Short-term bank credit $ 4,664 $ 1,826
Current maturities of long-term loans 25,224 8,197
Trade payables *) 46,927 26,507
Accrued expenses *) 51,737 37,592
Other accounts payable 30,142 37,787
---------------- ----------------
TOTAL current liabilities 158,694 111,909
---------------- ----------------
LONG-TERM LIABILITIES:
Accrued severance pay 8,831 8,412
Long-term loans, net of current maturities *) 136,073 145,140
Other long-term liabilities 17,066 19,193
Convertible subordinated notes 350,000 358,648
---------------- ----------------
TOTAL long-term liabilities 511,970 531,393
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 10,639 3,827
---------------- ----------------
SHAREHOLDERS' EQUITY (DEFICIENCY):
Share capital - Ordinary shares of NIS 0.01 par value -Authorized:
300,000,000 as of December 31, 2001 and 2002; Issued and
outstanding: 23,388,613 and 23,855,922 shares as of December 31,
2001 and 2002, respectively 69 70
Additional paid in capital 617,374 617,797
Accumulated other comprehensive loss (5,710) (8,165)
Accumulated deficit (434,413) (782,617)
---------------- ----------------
TOTAL shareholders' equity (deficiency) 177,320 (172,915)
---------------- ----------------
TOTAL liabilities and shareholders' equity (deficiency) $ 858,623 $ 474,214
================ ================
*) Includes the following balances resulting from transactions with related parties as of December 31,
2001 and 2002: Trade payables - $ 842 and $ 3,211, respectively, Accrued expenses - $0 and $5,706,
respectively, Other accounts payable - $0 and $3,281, respectively, Long-term loans, net of current
maturities - $ 962 and $ 0, respectively.
The accompanying notes are an integral part of the consolidated financial statements.
F - 4
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 2001 2002
-------------- ------------- ------------
Revenues:
Products *) $ 398,299 $ 279,297 $ 130,011
Services *) 106,263 106,732 78,744
-------------- ------------- ------------
504,562 386,029 208,755
-------------- ------------- ------------
Cost of revenues:
Products 265,259 194,374 107,527
Services *) 79,182 94,665 61,501
Write-off of inventories - 59,790 20,107
-------------- ------------- ------------
344,441 348,829 189,135
-------------- ------------- ------------
Gross profit 160,121 37,200 19,620
-------------- ------------- ------------
Research and development costs, net *) 31,272 35,634 25,066
Selling, marketing, general and administrative expenses *) 82,444 121,486 86,227
Provision and write-off of doubtful accounts and capital lease
receivables **) 3,654 134,614 34,714
Impairment of goodwill - 50,580 13,049
Impairment of tangible and intangible assets - 42,982 50,666
Restructuring charges - 30,284 -
-------------- ------------- ------------
Operating income (loss) 42,751 (378,380) (190,102)
Financial expenses, net (1,289) (21,334) (21,324)
Write-off of investments in affiliated and other companies (9,350) (28,007) (51,379)
-------------- ------------- ------------
Income (loss) before taxes on income 32,112 (427,721) (262,805)
Taxes on income 2,003 974 929
-------------- ------------- ------------
Income (loss) after taxes on income 30,109 (428,695) (263,734)
Equity in losses of affiliated companies (950) (252) (29,334)
Acquired in-process research and development of an affiliated company (10,000) - -
Minority interest in losses of subsidiaries 276 5,889 3,517
-------------- ------------- ------------
Income (loss) from continuing operations, before cumulative effect of a
change in an accounting principle 19,435 (423,058) (289,551)
Loss from cumulative effect of a change in an accounting principle - - (56,716)
Loss from discontinued operations - (6,054) (1,937)
-------------- ------------- ------------
Net income (loss) $ 19,435 $ (429,112) $ (348,204)
============== ============= ============
Earnings (loss) per share from continued operation:
Basic $ 0.86 $ (18.11) $ (12.28)
============== ============= ============
Diluted $ 0.81 $ (18.11) $ (12.28)
============== ============= ============
Basic and diluted Loss per share from discontinued operation: - $ (0.26) $ (0.08)
============== ============= ============
Basic and diluted Loss per share from cumulative effect of a change in
an accounting principle $ - $ - $ (2.41)
============== ============= ============
Net earnings (loss) per share:
Basic $ 0.86 $ (18.37) $ (14.77)
============== ============= ============
Diluted $ 0.81 $ (18.37) $ (14.77)
============== ============= ============
Weighted average number of shares used in computing net earnings (loss)
per share (in thousands):
Basic 22,516 23,361 23,581
============== ============= ============
Diluted 24,099 23,361 23,581
============== ============= ============
*) Includes the following income (expenses) resulting from transactions with related parties for the years ended
December 31, 2000, 2001 and 2002: product revenues - $ 105,708, $ 24,947 and $ 5,300, respectively; service
revenues - $ 44,526, $ 25,070 and $ 1,450, respectively; cost of services - $ (16,126), $ (36,078) and $ (19,695),
respectively; research and development costs, net - $ (2,000), $ (4,000) and $ 0, respectively selling, marketing,
general and administrative - $0, $0, and $253, respectively.
**) In 2001, Primarily Starband (see note 1d)
The accompanying notes are an integral part of the consolidated financial statements
F - 5
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NUMBER OF
ORDINARY ACCUMULATED
SHARES ADDITIONAL OTHER
(IN SHARE PAID-IN COMPREHENSIVE
THOUSANDS) CAPITAL CAPITAL LOSS
--------------- ------------ ------------- ----------------
Balance as of January 1, 2000 21,147 $ 64 $ 527,052 $ (2,557)
Conversion of convertible subordinated notes,
net 1,786 4 75,095 -
Issuance of shares in consideration for the
acquisition of DNI 218 1 7,682 -
Exercise of options 204 (* - 7,498 -
Comprehensive loss - Foreign currency
translation adjustments - - - (883)
Net income - - - -
--------------- ------------ ------------- ----------------
Total comprehensive income
Balance as of December 31, 2000 23,355 69 617,327 (3,440)
Exercise of options, net 34 (* - 47 -
Comprehensive loss - Foreign currency
translation adjustments - - - (2,270)
Net loss - - - -
--------------- ------------ ------------- ----------------
Total comprehensive loss
Balance as of December 31, 2001 23,389 69 617,374 (5,710)
Exercise of options, net 1 (* 5 -
Stock compensation related to options issued
to non employees - - 107 -
Issuance of shares in consideration for the
acquisition of rStar 466 1 311 -
Foreign currency translation adjustments from
the disposal of European subsidiaries - - - 2,117
Comprehensive loss - Foreign currency
translation adjustments - - - (4,572)
Net loss - - - -
--------------- ------------ ------------- ----------------
Total comprehensive loss
Balance as of December 31, 2002 23,856 $ 70 $ 617,797 $ (8,165)
=============== ============ ============= ================
(CONTINUED)
TOTAL
TOTAL SHAREHOLDERS'
ACCUMULATED COMPREHENSIVE EQUITY
DEFICIT INCOME (LOSS) (DEFICIENCY)
--------------- ----------------- ---------------
Balance as of January 1, 2000 $ (24,736) $ - $ 499,823
Conversion of convertible subordinated notes,
net - - 75,099
Issuance of shares in consideration for the
acquisition of DNI - - 7,683
Exercise of options - - 7,498
Comprehensive loss - Foreign currency
translation adjustments - (883) (883)
Net income 19,435 19,435 19,435
--------------- ----------------- ---------------
Total comprehensive income $ 18,552
=================
Balance as of December 31, 2000 (5,301) - 608,655
Exercise of options, net - - 47
Comprehensive loss - Foreign currency
translation adjustments - (2,270) (2,270)
Net loss (429,112) (429,112) (429,112)
--------------- ----------------- ---------------
Total comprehensive loss $ (431,382)
=================
Balance as of December 31, 2001 (434,413) - 177,320
Exercise of options, net - - 5
Stock compensation related to options issued
to non employees - - 107
Issuance of shares in consideration for the
acquisition of rStar - - 312
Foreign currency translation adjustments from
the disposal of European subsidiaries - - 2,117
Comprehensive loss - Foreign currency
translation adjustments (4,572) (4,572)
Net loss (348,204) (348,204) (348,204)
--------------- ----------------- ---------------
Total comprehensive loss $ (352,776)
=================
Balance as of December 31, 2002 $ (782,617) $ (172,915)
=============== ===============
*) Represents an amount lower than $ 1.
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 2001 2002
---------------- ---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 19,435 $ (429,112) $ (348,204)
Less loss for the year from discontinued operations - 6,054 1,937
Adjustments required to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 42,431 61,273 46,230
Stock compensation relating to options issued to non-employees - - 107
Impairment of goodwill - 50,580 69,765
Impairment of intangible assets - 28,229 8,255
Write off of investments 9,350 28,007 11,989
Write off of long-term note - - 39,390
Impairment of property and equipment and other tangible and intangible
assets - 14,753 42,411
Acquired in-process research and development of an affiliated
company 10,000 - -
Equity in losses of affiliated companies 950 252 29,334
Accrued severance pay, net 1,206 7 (1,568)
Interest accrued on short and long-term bank deposits 2,204 1,344 (163)
Exchange differences on long-term loans 983
Interest received (accrued) on long term loan to an affiliated
company - (242) -
Minority interest in losses of subsidiaries - (5,424) (3,517)
Capital gain from disposal of property and equipment - - (177)
Deferred income taxes, net (3,575) (1,058) (40)
Decrease (increase) in trade receivables (104,068) 25,053 62,484
Decrease (increase) in other accounts receivable and prepaid
expenses (including long-term receivables) (65,300) 43,513 13,737
Decrease (increase) in inventories (75,318) (9,119) 24,742
Write-off of inventories - 59,790 20,107
Increase (decrease) in trade payables 42,112 (36,727) (19,797)
Increase (decrease) in accrued expenses (355) 13,265 (16,825)
Increase (decrease) in other accounts payable and other long-term
liabilities (3,003) (8,526) 13,196
Other 16 40 -
Cash used for discontinued operation - (5,574) (1,185)
---------------- ---------------- ---------------
Net cash used in operating activities (123,915) (163,622) (6,809)
---------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (147,907) (59,235) (9,739)
Return of investment in a company - 2,500 -
Investment in affiliated companies (49,680) - (13,461)
Investment in other companies (17,012) (2,578) -
Investment in short-term bank deposits (198,300) (12,900) -
Proceeds from short-term bank deposits 218,000 303 11,400
Proceeds from long-term bank deposits 56,678 34,000 -
Long-term note (40,000) - -
Long-term loans to affiliated company (5,150) - -
Deconsolidation of subsidiaries (a) - - 7,671
Acquisition of rStar (b) - 51,379 -
Acquisition of DNI (c) 278 - -
Acquisition of GTHLA (d) 3,558 - -
Proceeds from sale of property and equipment 34 32,549 -
Proceeds from disposal of property and equipment - - 832
Investment in short-term restricted cash - (3,520) (11,035)
Investment in long-term restricted cash - (8,944) (1,460)
Investment in other assets (2,556) (5,364) (2,098)
Proceeds from short-term restricted cash - - 2,652
---------------- ---------------- ---------------
Net cash provided by (used in) investing activities $ (182,057) $ 28,190 $ (15,238)
================ ================ ===============
The accompanying notes are an integral part of the financial statements.
F - 7
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
---------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of options, net $ 7,498 $ 47 $ 5
Issuance of convertible subordinated notes, net of issuance
expenses of $ 10,609 339,391 - -
Prepaid expenses related to restructuring of debts - - (2,240)
Short-term bank credit, net 6,984 (9,320) (2,838)
Proceeds from long-term loans 111,413 54,158 1,220
Cash paid to minority shareholders of a subsidiary - - (9,997)
Repayment of long-term loans - (4,535) (13,443)
---------------- ---------------- ---------------
Net cash provided (used in) by financing activities 465,286 40,350 (27,293)
---------------- ---------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (224) (64) 87
---------------- ---------------- ---------------
Increase (decrease) in cash and cash equivalents 159,090 (95,146) (49,253)
Cash and cash equivalents at the beginning of the year 33,381 192,471 97,325
---------------- ---------------- ---------------
Cash and cash equivalents at the end of the year $ 192,471 $ 97,325 $ 48,072
================ ================ ===============
Supplementary cash flows activities:
(a) Cash paid during the year for:
Interest $ 8,979 $ 21,436 $ 15,101
================ ================ ===============
Income taxes $ 8,845 $ 1,218 $ 329
================ ================ ===============
(b) Non-cash transactions:
Conversion of convertible subordinated notes, net $ 75,099 $ - $ -
================ ================ ===============
Acquisition of rStar shares in exchange for satisfaction of
capital lease obligation (see Note 2a) $ - $ 45,000 $ -
================ ================ ===============
Investment in other companies (see Note 6a) $ - $ 3,100 $ -
================ ================ ===============
Arrangement with SES Americom (see Note 18a) $ - $ - $ 5,706
================ ================ ===============
Issuance of shares in consideration for the acquisition of
RStar $ - $ - $ 312
================ ================ ===============
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED
DECEMBER 31,
2002
-----------------
(a) Deconsolidation of European subsidiaries consolidated in previous
periods (see also Note 1e)
Assets and liabilities of the subsidiaries at date of deconsolidation:
Working capital (excluding cash and cash equivalents) $ 1,385
Equity investment (3,114)
Long-term trade receivables and other receivables 1,439
Property, plant and equipment and deferred charges 7,404
Other long-term liabilities (1,560)
Foreign currency translation 2,117
-----------------
$ 7,671
=================
YEAR ENDED
DECEMBER 31,
2001
-----------------
(b) Acquisition of rStar (see also Note 2a)
Estimated net fair value of assets acquired and liabilities assumed at
the date of acquisition was as follows:
Working capital deficiency (excluding cash and cash equivalents) $ 39,956
Equity investment 42,187
Long-term trade receivables and other receivables (2,288)
Property and equipment (4,507)
Other long-term liabilities 20,545
Net assets of discontinued operations (12,458)
Minority interest 6,267
Goodwill (38,323)
-----------------
$ 51,379
=================
F - 9
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED
DECEMBER 31,
2000
-----------------
(c) Acquisition of DNI (see also Note 2c)
Estimated net fair value of assets acquired and liabilities assumed at the date of
acquisition was as follows:
Working capital (excluding cash and cash equivalents) (160)
Property and equipment (72)
Goodwill (7,173)
Less - amounts acquired by issuance of shares 7,683
-----------------
$ 278
=================
(d) Acquisition of GTHLA (see also Note 2b)
Estimated net fair value of assets acquired and liabilities assumed at the date of
acquisition was as follows:
Working capital deficiency (excluding cash and cash equivalents) 28,054
Less equity investment and long-term loan to an affiliated company 10,958
Long-term trade receivables and other receivables (544)
Property and equipment (17,682)
Other long-term liabilities 16,808
Goodwill (34,036)
-----------------
$ 3,558
=================
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:- GENERAL
a. Organization:
Gilat Satellite Networks Ltd. ("the Company") and its
wholly-owned subsidiaries ("the Group"), are providers of
products and services for satellite-based communications
networks. The Group designs, develops, manufactures, markets
and sells products and provides services for products that
enable complete end-to-end telecommunications and data
networking solutions, based on very small aperture terminal
("VSAT") satellite earth stations and related central
station (hub) equipment.
In March 2003, the Company completed a plan of arrangement
with the Company's bank lenders, holders of the Company's
4.25% Convertible Subordinated Notes due 2005 (the "old
notes"), and certain other creditors. According to the
arrangement, the Company's obligation under the old notes in
the amount of $362.0 million (including accrued interest in
the amount of $12.0 million) was cancelled and the holders
of the old notes were issued a combination of $83.3 million
of 4.00% Convertible Notes due 2012 (the "new notes") and
202,083,908 Ordinary shares. Additional shares and notes
were issued to Bank Hapoalim and to certain creditors as
follows: (i) $25.5 million of the long-term to the Company's
debt to Bank Hapoalim was converted into 18,488,590 Ordinary
shares; (ii) $5.1 million of the Company's debt to Bank
Hapoalim was converted into new notes of the same principal
amount: (iii) 14,261,048 shares were issued to SES Americom
as part of an agreement for reduction of the Company's
overall liability and deferral of certain payments; (iv)
1,067,728 shares were issued to IBM as part of an amended
agreement with them; and (v) $0.2 million new notes were
issued to each of the two advisors for services rendered in
the arrangement. As part of the agreement, debt to another
financing creditor and loan agreements with bank creditors
were amended (See Note 18). Under the new arrangement
principal payments, except for $1 million to other financing
creditor, would commence only in 2004.
For a description of principal markets and customers, see
Note 17.
b. StarBand Communications Inc.:
On March 30, 2000, the Company and Spacenet, Microsoft
Network LLC ("MSN"), EchoStar Communications Corporation
("EchoStar") and ING Furman Selz Investment ("ING"), entered
into an agreement, pursuant to which MSN, EchoStar and ING
invested a total of $ 125 million in, and the Company and
Spacenet contributed certain intangible assets, including
exclusive marketing rights, trademarks, technology, know-how
and other to a newly formed joint venture, StarBand
Communications Inc. ("StarBand" or the "JV"), a North
American broadband satellite internet service provider. As a
result of the above investment, the Company through
Spacenet, MSN, EchoStar and ING owned 42.1%, 17.7%, 17.7%
and 7.2%, respectively, of the outstanding capital stock of
StarBand. In addition, certain related parties of StarBand
held 8% of its outstanding share capital.
F - 11
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:- GENERAL (CONT.)
There are additional agreements covering, inter-alia, the supply
of equipment and services to MSN by StarBand. The Company and
Spacenet have entered into a master supply and services agreement
under which the Company and Spacenet provide StarBand with, among
other things, network operations, equipment, use of facilities
and certain research and development support.
The Company accounted for the transaction as a contribution of
assets to the newly formed entity at the transferors' basis which
was zero, in accordance with FASB's Emerging Issues Task Force
89-7 "Exchange of assets or Interest in a Subsidiary for a
Non-Controlling Equity Interest in a New Entity" ("EITF 89-7")
(as subsequently codified in EITF 01-2: "Interpretation of APB
29" ("EITF 01-2")) and Accounting Principle Board Opinion No. 18
"The Equity Method of Accounting for Investments in Common Stock"
("APB No. 18").
In September 2001, EchoStar invested an additional $ 50 million
in StarBand, increasing its equity ownership to 29.2% (decreasing
the Company and Spacenet ownership to 34.9%). The agreement
allowed for an additional increase in ownership by EchoStar of up
to 56.8 % (decreasing the Company ownership to 20.9%) upon
EchoStar's fulfillment of its undertaking to launch a next
generation satellite. The Company, Spacenet and StarBand agreed
in conjunction with the investment agreement that StarBand would
pay its outstanding receivable to the Company in the amount of
$75 million as of December 31, 2001, by way of quarterly $5
million installments commencing in January 2002. However, at the
beginning of 2002: (a) Echostar announced that it would not
provide additional funds to Starband; (b) Starband had not
fulfilled its obligation to pay $5 million in the first quarter
of 2002; and (c) Starband's cash position had deteriorated. In
accordance with Statement of Financial Accounting Standard No. 5
"Accounting for Contingencies" ("SFAS No. 5"), the Company
identified the above conditions as a type I event and
accordingly, recorded in 2001, a bad debt provision of $75
million, which is included in provision and write off of doubtful
accounts and capital lease receivables and reversed $3 million in
revenues. In 2002, revenues from sales to Starband in the amount
of $3.2 million were recognized on a cash basis.
On May 31, 2002, StarBand filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Court.
During 2002, the Company provided StarBand approximately $7
million of debtor in possession financing, the majority of which
has been in the form of transponder capacity and additional
financing of approximately $18.2 million. All amounts provided
including "debtor in possession" were recorded as equity in
losses of affiliated companies in the amount of approximately
$25.2 million.
All of the above ownership percentages are presented on a fully
diluted basis.
c. Restructuring charges, write offs and other significant charges:
1. In the year 2001, the Group did not meet its projected
sales. The recession had a negative impact on the
communications industry. The Group began to experience a
slowdown in orders and sales in virtually all of its
markets- vertical, consumer and enterprise.
F - 12
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:- GENERAL (CONT.)
The Group realized that its corporate sales would indeed be
heavily impacted. In addition to the corporate enterprise market,
the consumer market also experienced its first slowdown in sales.
Furthermore, certain circumstances such as the global decrease in
telecommunication companies and depressed market conditions
indicated that the carrying amount of the investments in other
companies and in affiliated company would not be recoverable.
As a result of the above, the Company's management recorded in
2001 the following charges:
a) Restructuring charges of approximately $ 30.3 million. (See
Note 13).
b) Write off and mark down of excess inventory, inventory
expected to be sold at prices lower than their carrying
value and discontinued products in an amount of
approximately $ 59.8 million, which is included in cost of
revenues. (See Note 4b).
c) Reserve for capital lease receivables, increase in bad debt
provision and write-offs in an amount of approximately $
134.6 million of which $ 75 million related to StarBand. The
provisions are included in provision and write off for
doubtful account and capital lease receivables. (See Note
16c).
d) Impairment of tangible, intangible assets and goodwill as
follows:
1) Property and equipment and current assets in an amount
of approximately $14.8 million. (See Note 7c).
2) Goodwill in an amount of approximately $50.6 million.
(See Note 9c).
3) Intangible assets in an amount of approximately $28.2
million. (See Note 8c)
e) Impairment of investments in other companies in an amount of
approximately $ 19.6 million. The impairment was recorded as
a write off of investments in the statement of operations.
(See Note 6).
f) Impairment of investment in affiliated company in an amount
of approximately $ 8.4 million. The impairment was recorded
as a write off of investments in the statement of
operations. (See Note 5b).
F - 13
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:- GENERAL (CONT.)
2. In the year 2002, the recession in the communications
industry and the slowdown in orders continued. Furthermore,
certain circumstances such as the global decrease in
telecommunication companies and depressed market conditions
indicated that the carrying amount of the certain assets
would not be recoverable. In October 2002, the Company
commenced the Arrangement to restructure its debt, which was
successfully completed on March 6, 2003. Prior to and while
the Arrangement was under negotiation, the Company's ability
to sell products and retain customers declined. As a result
of the above, the Company's management recorded in 2002 the
following charges:
a) Write off and mark down of excess inventory, inventory
expected to be sold at prices lower than their carrying
value and discontinued products in an amount of
approximately $ 20.1 million, which is included in cost
of revenues. (See Note 4b).
b) Increase in bad debt provision and write offs in an
amount of approximately $ 34.7 million. The provisions
are included in provision and write off for doubtful
account and capital lease receivables. (See Note 16c).
c) Impairment of tangible, intangible assets and goodwill
as follows:
1) Property and equipment and current assets in an
amount of approximately $ 42.4 million.
(See Note 7d).
2) Intangible assets in an amount of approximately
$8.3 million. (See Note 8d).
3) Goodwill in an amount of approximately $69.7
million that is presented under "Cumulative effect
of a change in an accounting principle" and
impairment of goodwill in the operating expense.
(See Note 9d).
Impairment of investments in other companies in an
amount of approximately $ 12.0 million. The
impairment was recorded as a write off of
investments in the statement of operations.
(See Note 6).
Impairment of long-term note in an amount of
approximately $ 39.4 million. The impairment was
recorded as a write-off of investments in the
statement of operations. (See Note 2b).
d) Discontinued operations of rStar:
During the third quarter of 2002, the Company's
management decided to suspend activities relating to
all operational components of rStar, which was mainly
AutoNetworks, Inc., a 85% subsidiary of the Company.
F - 14
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:- GENERAL (CONT.)
The loss from discontinued operations consists of the following
(in thousands):
YEAR ENDED DECEMBER 31,
2001 2002
----------------- ----------------
Cost and expenses:
Cost of revenues $ - $ 152
Sales and marketing 2,960 866
General and administrative 480 404
Research and development 2,614 515
----------------- ----------------
Loss from discontinued operations $ 6,054 $ 1,937
================= ================
e. Satlynx S.A.:
In May 2002, the Company completed an agreement with SES
Global to form Satlynx S.A. (Satlynx"), a company that
provides two-way satellite broadband communications services
to enterprises, consumers and Soho users in Europe. The
Company and SES Global contributed cash and in kind
contributions, which included existing facilities,
transponders, hubs, terminals, technology and technical and
marketing assistance (some of these assets were immediately
purchased by Satlynx from SES Global and from Gilat with the
cash investment). As part of the agreement, the Company sold
to Satlynx its existing European operations and enterprise
customers in France, Italy, Germany, Holland, England and
Czechoslovakia for $ 12 million in cash and approximately $
2.5 million in a note (the "Satlynx Note"). The future of
Satlynx is contingent upon its ability to raise additional
funding.
The Company accounted for the transaction as a contribution
of assets to the newly formed entity at the transferors'
basis which was equal to the amount of the Satlynx Note, in
accordance with FASB's Emerging Issues Task Force 89-7
"Exchange of Assets or Interest in a Subsidiary for a
Non-Controlling Equity Interest in a New Entity" ("EITF
89-7") (as was codified into EITF 01-2: "Interpretation of
APB 29" ("EITF 01-2")) and Accounting Principle Board
Opinion No. 18 "The Equity Method of Accounting for
Investments in Common Stock" ("APB 18"). The Company does
not control Satlynx and therefore ceased to consolidate its
European operations as of May 1, 2002, and recognized equity
losses in the amount of $4.1 million , representing the
investment in Satlynx certain receivables and guaranties
provided to Satlynx. As of December 31, 2002 investment in
Satlinx amounted to $ 0.
The Company has determined that it does not control Satlynx
for the following reasons: (i) the Company owns 50% of the
outstanding shares which comprises just under a majority of
the shares; (ii) the CEO of Satlynx has been appointed by
SES Global (the other 50% shareholder); and (iii) the
shareholders agreement entered into between the Company and
SES provided SES with certain veto and management rights
which enable SES to participate in significant financial and
operating decisions that would normally be made in the
ordinary course of business. As such, SES has the ability to
block significant business decisions that the Company might
otherwise choose to undertake.
F - 15
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- ACQUISITIONS
a. Until October 2000, the Company held 1.2% of the Common
stock of rStar Corporation Inc. ("rStar" (formerly: ZapMe!
Corporation)), a public company traded on the Nasdaq
National Market, which had been acquired for total
consideration of approximately $ 2.5 million. This primary
investment was recorded under the cost method.
In November and December 2000, the Company's subsidiary,
Gilat Satellite Networks (Holland) BV ("Gilat BV") acquired
47.8% of rStar's Common stock for $ 49.7 million in cash,
under a tender offer dated October 3, 2000.
In 2000, after the additional investment, the investment in
rStar was accounted for using the equity method. The Company
identified the cost of each investment, the fair value of
the underlying assets acquired, and the goodwill related to
each step of the investment. An amount of $ 10 million out
of the total investment was attributed to in-process
research and development. The technological feasibility of
rStar's in-process research and development had not yet been
established, and there was no alternative future use for it.
During 2000, Gilat BV did not record equity losses with
respect to rStar results of operations due to immateriality.
During January 2001, Gilat BV acquired an additional 2%
interest in rStar for approximately $ 2 million, reaching
51%, of the outstanding share capital of rStar pursuant to
the tender offer mentioned above. As a result, Gilat
consolidated rStar's financial statements from January 1,
2001. The additional acquisition was treated on the basis of
the purchase method of accounting, and accordingly, the
purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair value at
the dates of acquisition. The Company included both the
goodwill previously included with its investment in an
affiliated company and the goodwill from the additional
purchase in the balance sheet caption "Goodwill".
During May 2001, rStar issued and delivered to Gilat BV
19,396,552 shares of rStar Common stock, in full
satisfaction of rStar's outstanding capital lease
obligations to Spacenet in the amount of approximately $ 45
million, which resulted in the Group increasing its share
equity in rStar from 51% to approximately 66%. The Company
determined the cost of this acquisition based on the fair
value of rStar's capital lease obligation, and accounted for
the acquisition based on the purchase method of accounting
in accordance with Accounting Principles Board Opinion No.
16 "Business Combination" ("APB 16"). This transaction
resulted in recording additional goodwill.
In April 2001, the Group signed an agreement with rStar,
which was amended in September 2001 and again in December
2001. According to the amended agreement, rStar acquired
StarBand Latin America (Holland) BV ("StarBand Latin
America"), a wholly owned subsidiary, from the Group in
exchange for 43,103,448 shares of rStar Common stock. rStar
also reacquired approximately 29% of its Common stock from
its shareholders (other than the Group) in exchange for
466,105 Ordinary shares of Gilat and cash consideration in
the amount of $10 million.
F - 16
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- ACQUISITIONS (CONT.)
Pursuant to the first and the second amendments of the
agreement, in the event of StarBand Latin America reaching
certain net income levels in the next few years, Gilat would
be entitled to receive additional shares of rStar Common
stock. In the event StarBand Latin America does not reach
certain net income levels in the next few years, rStar
shareholders will be entitled to receive in each of the two
years in the period ending June 2004 cash consideration in
the amount of $2.5 million or $5 million per year, subject
to those results. The terms of the special cash
consideration and the additional share issuance will be
canceled in the event of a rStar public offering or in the
event rStar closes a sale of its Common Stock, in a single
transaction, with a party other than the Group that raises
gross proceeds to rStar of at least $100 million, at a price
of rStar Common Stock equal to $1 per share. Under the
revised terms, only 60% of these proceeds need to be in the
form of cash.
The Company guarantees the payment of the Special
Distribution. The Company estimates that no provision is
needed for the first distribution as of December 31, 2002.
During 2002, the Company provided a provision for the second
distribution as of December 31, 2002 as management's current
assessment is that with the current level of sales in 2003
and with the uncertainties in the markets in which rStar
operates, it is probable that the special distribution will
be paid in 2004. However, if rStar is successful in growing
its business and increasing its net income during 2003, the
special distribution may not need to be paid in part or at
all. The acquisition and the tender offer described above
consummated on August 2, 2002. As such, the Group holds
approximately 85% of rStar's outstanding stock
In September 2001, the Company wrote off goodwill and other
intangible assets related to rStar in an amount of $ 50.6
million (See Notes 1c, 8c and 9c). The Company recorded an
impairment of the remaining goodwill of $3.1 million as of
January 1, 2002 upon the adoption of SFAS 142 and included
in the cumulative effect of a change in an accounting
principle. A subsequent additional impairment of rStar
goodwill in the amount of $13 million is recorded in
operating expenses.
The following represents the unaudited pro-forma results of
operations for the year ended December 31, 2000, assuming
that the rStar acquisition had been consummated as of
January 1, 2000 (in thousands except per share data):
YEAR ENDED
DECEMBER 31,
2000
-----------------
(UNAUDITED)
-----------------
Total revenues $ 477,820
=================
Net loss from continuing operations $ (3,093)
=================
Basic and diluted net loss per share
from continuing operations: $ (0.14)
=================
F - 17
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- ACQUISITIONS (CONT.)
b. In April 2000, Gilat BV and the other shareholders of Gilat
To Home Latin America (Antilles) N.V. (formerly - "Global
Village Telecom (Antilles) N.V.") ("GTHLA") entered into an
agreement, pursuant to which the latter were to exchange all
of their rights in GTHLA for the rights that GTHLA held in
two Brazilian entities formed to provide telephone and other
communications services in south central Brazil, and a cash
payment of $ 5.3 million. As part of the transaction, the
Company granted a $ 40 million long-term loan ("Original
Note"), to a new entity formed by those investors, in
exchange for a note convertible into Common shares of the
new entity equal to approximately 9.1% of the then
outstanding shares of the new entity. The note bore interest
at 5% per annum and was to mature in May 2002. Following the
transaction, Gilat BV, together with certain other
shareholders, holds 100% of GTHLA. The operations of GTHLA
are included in the Company's consolidated results of
operations from April 14, 2000. The acquisition was
accounted for by the purchase method, and accordingly, the
purchase price has been allocated to the fair value of the
assets acquired and liabilities assumed of GTHLA and
resulted in recording of goodwill in the amount of
approximately $ 34 million, which was being amortized over
10 years until December 2001.
The note was presented in long-term investments and
receivables in 2000 and 2001. On May 14, 2002, Gilat
accepted an Amendment and Restatement of the Convertible
Subordinated Note. Under the terms of the Restated Note, the
note was to mature on December 27, 2002 and a portion of the
interest ($3 million) was due in installments, the last of
which was paid on September 30, 2002. In addition, the
Amended Note improved the conversion terms for Gilat and
also provides for a cash pre-payment of certain amounts to
Gilat in certain events. Due to financial difficulties of
the debtors, the note was not repaid.
The Company recognized an impairment of the above long-term
loan in the amount of $39.4 million in accordance with
Accounting Standard No. 114 "Accounting by Creditors for
Impairment of a Loan" ("SFAS 144").
In 2002, the balance of the goodwill was written-off in
accordance with SFAS No. 142 as cumulative effect of a
change in an accounting principle (see Note 9), resulting
in a charge of $28 million.
F - 18
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- ACQUISITIONS (CONT.)
The following unaudited pro forma information presents the
results of operations for the Group and GTHLA for the year
ended December 31, 2000, as if the acquisition had been
consummated as of January 1, 2000 (in thousands, except per
share data):
YEAR ENDED
DECEMBER 31,
2000
------------------
(UNAUDITED)
------------------
Total revenues $ 496,351
==================
Net loss $ (5,568)
==================
Basic and diluted net loss per share $ (0.25)
==================
c. On July 12, 2000, the Company acquired all of the shares of
Deterministic Networks, Inc. ("DNI"), a privately held
company based in California, which is a supplier of
Policy-Based Networking products and, providing quality of
service (QoS), network management, and Internet security
capabilities that enhance the products and services of its
customers. The total consideration was approximately $ 7.8
million, which was paid, in 218,422 Ordinary shares of the
Company. The operations of DNI are included in the
consolidated statements from July 1, 2000. The acquisition
was treated on the basis of the purchase method of
accounting. Accordingly, the purchase price has been
allocated to the fair value of the assets acquired and
liabilities assumed of DNI and resulted in recording
goodwill in the amount of approximately $ 7.2 million, which
was being amortized over 5 years until December 2001. The
purchase price was based on the market price of the
Company's Ordinary shares on the announcement date of the
transaction. In 2002, the goodwill has been written-off in
accordance with FAS No. 142 as cumulative effect of a change
in an accounting principle, see Note 9.
Pro-forma information in accordance with APB No. 16 has not
been provided as the net income and earnings per share of
DNI for 2000 were not material in relation to total
consolidated net income and net earnings per share.
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the
United States ("US GAAP").
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F - 19
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
b. Financial statements in U.S. dollars:
The majority of the revenues of the Company and certain of
its subsidiaries are generated in U.S. dollars ("Dollar") or
linked to the Dollar. In addition, a substantial portion of
the Company's and certain of its subsidiaries' costs is
incurred in dollars. Company's management believes that the
Dollar is the primary currency of the economic environment
in which the Company, its affiliated companies, reported
under the equity method, and certain of its subsidiaries,
operate. Thus, the functional and reporting currency of the
Company, certain of its subsidiaries, and its affiliates is
the Dollar.
Accordingly, monetary accounts maintained in currencies
other than the Dollar are remeasured into U.S. Dollars in
accordance with Statement of Financial Accounting Standard
No. 52 "Foreign Currency Translation"("SFAS No.52"). All
transaction gains and losses of the remeasurement of
monetary balance sheet items are reflected in the statements
of operations as financial income or expenses, as
appropriate.
The financial statements of foreign subsidiaries, whose
functional currency has been determined on their local
currency, have been translated into U.S. dollars. Assets and
liabilities have been translated using the exchange rates in
effect at the balance sheet date. Statement of operations
amounts have been translated using the average exchange rate
for the period. The resulting translation adjustments are
reported as a component of shareholders' equity in
accumulated other comprehensive income (loss).
c. Principles of consolidation:
The consolidated financial statements include the accounts
of the Company and its wholly owned and majority-owned
subsidiaries. Intercompany balances and transactions,
including profits from inter-company sales not yet realized
outside the Group, have been eliminated upon consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments
that are not restricted as to withdraws or use with original
maturities of three months or less at the date acquired.
e. Short-term bank deposits:
Bank deposits with maturities of more than three months but
less than one year are included in short-term bank deposits.
Such bank deposits are stated at cost.
f. Short-term restricted cash:
Restricted cash is primarily invested in certificates of
deposit, which mature within one year, linked to the U.S
dollar, bear interest at rates of 0.9% - 4.5% and is used as
collateral for the lease of the Group's offices, a sale and
lease back transaction and performance guarantees to
customers.
F - 20
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
g. Inventories:
Inventories are stated at the lower of cost or market value.
Inventory write-offs are provided to cover risks arising
from slow-moving items, excess inventories, discontinued
products, and for market prices lower than cost. In 2001 and
2002, the Company wrote off approximately $ 59.8 million and
$20.1 million, respectively, of excess inventory,
discontinued products, and for market prices lower than
cost, which has been included in cost of revenues (See Notes
1d and 4b).
Cost is determined as follows:
Raw materials, parts and supplies - using the average cost
method with the addition of allocable indirect manufacturing
costs.
Work-in-progress - represents the cost of manufacturing with
the addition of allocable indirect manufacturing costs.
Finished products - on the basis of direct manufacturing
costs with the addition of allocable indirect manufacturing
costs.
Inventories include amounts related to long-term contracts
as determined by the percentage of completion method of
accounting. Such amounts are recorded as "cost and estimated
earnings in excess of billings".
h. Long-term restricted cash:
Restricted cash is primarily invested in certificates of
deposit, which mature in more than one year, linked to the
U.S dollar, bear interest at a rate of 0.9%-4.5% and used as
collateral for the lease of the Group's offices, a sale and
lease back transaction and performance guarantees to
customers.
i. Investment in affiliated companies:
In these financial statements, affiliated companies are
companies held to the extent of 20% or more (which are not
subsidiaries) , where the Company can exercise significant
influence over operating and financial policies of the
affiliate. The investment in affiliated companies is
accounted for by the equity method. Profits on intercompany
sales, not realized outside the Group, were eliminated.
The excess of the purchase price over the fair value of net
tangible assets acquired has been attributed to goodwill,
acquired in-process research and development and other
identifiable assets.
Acquired in-process research and development related to
investments in affiliated companies is expensed when the
technological feasibility has not yet been established, and
for which there is no alternative future use.
F - 21
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company's investments in affiliates are reviewed for
impairment, in accordance with APB 18 whenever events or
changes in circumstances indicate that the carrying amount
of an investment may not be recoverable. In 2001, impairment
losses were identified in the amount of $ 8.4 million (See
Notes 1d and 5b).
j. Investment in other companies:
The investment in these companies is stated at cost, since
the Company does not have the ability to exercise
significant influence over operating and financial policies
of the investees.
The Company's investments in other companies are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an investment may not
be recoverable in accordance with Accounting Principle Board
Opinion No. 18 "The equity Method of Accounting for
Investments in Common Stock" ("APB 18"). During the years
ended December 31, 2001 and 2002, impairment losses have
been identified in the amounts of $ 19.6 million and $ 12
million, respectively. (See Notes 1d and 6).
k. Long term trade receivables:
Long-term receivables from extended payment agreements are
recorded at estimated present values determined based on
current rates of interest and reported at the net amounts in
the accompanying financial statements. Imputed interest is
recognized, using the effective interest method as a
component of interest income in the accompanying statements.
l. Property and equipment, net:
Property and equipment are stated at cost, net of
accumulated depreciation. Depreciation is calculated by the
straight-line method over the estimated useful lives of the
assets as follows:
YEARS
--------------------------------------------------
Buildings 50
Computers and electronic equipment 3 - 12.5
Office furniture and equipment 5 - 17
Vehicles 7
Leasehold improvements Over the term of the lease or the useful life of
the improvements, by whichever is shorter
Equipment leased to others under operating leases is carried
at cost less accumulated depreciation and depreciated using
the straight-line method over the useful life of the assets.
The Group accounts for costs of computer software developed
or obtained for internal use in accordance with Statement of
Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP
98-1"). SOP 98-1 requires the capitalization of certain
costs incurred in connection with developing or obtaining
internal use software.
F - 22
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
m. Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of:
The Company's long-lived assets are reviewed for impairment
in accordance with Statement of Financial Accounting
Standard No. 144 "Accounting for the Impairment or Disposal
of Long- Lived Assets" ("SFAS No. 144") whenever events or
changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the assets. If such assets
are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
The impairment loss shall be reduced the carrying amount of
the long-lived assets of a Group covered by the Statement on
a pro-rata basis using the relative carrying amounts of
those assets. However, the carrying amount of a long-lived
asset of the Group would not be reduced below its fair
value, if determinable. Assets to be disposed of are
reported at the lower of the carrying amount or fair value
less costs to sell.
The Company recorded losses from write-off of property and
equipment, which it ceased to use in operations, adjustment
to the carrying amount of property and equipment and
impairment losses in the amount of $ 0, $ 10.2 million and $
42.4 million in 2000, 2001 and 2002, respectively. (See
Notes 1d and 7c and 7d).
n. Intangible assets and deferred charges:
Issuance costs, customer acquisition costs and other
intangible assets are stated at amortized cost.
Intangible assets subject to amortization that arose from
acquisitions prior July 1, 2001, are being amortized on a
straight-line basis over their useful life in accordance
with APB Opinion No. 17 "Intangible Assets". Issuance costs,
customer acquisition costs and other intangible assets are
amortized using the straight-line method over their
estimated useful life, which are five to fifteen years (See
Notes 1dc, 2a and 8c).
Before the adoption of SFAS No. 144 the Group evaluated the
recoverability of intangible assets and deferred charges
annually and the appropriateness of the amortization period
based on the estimated future undiscounted cash flows
derived from the asset in 2002, the Company evaluated the
recoverability of intangible assets and deferred charges in
accordance with SFAS No. 144 (see Note 3l above). Any
impairment loss is recognized in the statement of
operations.
In 2001 and 2002, such impairments were indicated and the
Group recognized impairment loss in the amounts of $ 28.2
million and $8.3 million, respectively, which was included
in the impairment of tangible and intangible assets in the
statements of operations. (See Notes 1d, 2a and 8c and 8d).
F - 23
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
o. Goodwill:
Goodwill represents the excess of the costs over the net
assets of businesses acquired. Goodwill that arose from
acquisitions prior to July 1, 2001, was amortized until
December 31, 2001, on a straight-line basis over five to
fifteen years. Under SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") goodwill acquired in a
business combination for which date is on or after July 1,
2001, shall not be amortized.
SFAS No. 142 requires goodwill to be tested for impairment
on adoption and at least annually thereafter or between
annual tests in certain circumstances, and written down when
impaired, rather than being amortized as previous accounting
standards required. Goodwill is tested for impairment by
comparing the fair value of each of the Company's reporting
unit with its carrying value. Fair values are determined
using discounted cash flows, market multiples and market
capitalization. Significant estimates used in the
methodologies include estimates of future cash flows, future
short-term and long-term growth rates, weighted average cost
of capital and estimates of market multiples.
Before the adoption of SFAS No. 142 the Group evaluated the
recoverability of goodwill annually and the appropriateness
of the amortization period based on the estimated future
undiscounted cash flows derived from the asset. In those
cases in which quoted market price in an active market
exist, the Company used the market price as the measure for
the fair value Any impairment loss was recognized in the
statement of operations. In 2001, such impairments were
indicated and the Group recognized impairment loss in the
amount of $ 50.6 million, which was included in the
impairment of goodwill in the statements of operations. (See
Notes 1c, 2a and 9).
During 2002, the Company performed the transitional and
annual impairment tests and accordingly recognized an
impairment of $ 69.7 million, out of which $ 56.7 million is
presented under "Net loss from cumulative effect of a change
in an accounting principle" and $ 13.0 million is presented
in impairment of goodwill in the operating expenses. (see
Note 9d)
Before the adoption of SFAS No. 142 the Group evaluated the
recoverability of goodwill annually and the appropriateness
of the amortization period based on the estimated future
undiscounted cash flows derived from the asset. In those
cases in which quoted market price in an active market
exist, the Company used the market price as the measure for
the fair value Any impairment loss was recognized in the
statement of operations. In 2001, such impairments were
indicated and the Group recognized impairment loss in the
amount of $ 50.6 million, which was included in the
impairment of goodwill in the statements of operations. (See
Notes 1d, 2a and 9c).
F - 24
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
p. Revenue recognition:
The Group generates revenues mainly from sale of products
and services for satellite-based communications networks.
Sale of products includes mainly the sale of VSAT's and
services include access to and communication with satellites
("space segment"), installation of network equipment,
consulting, on-line network monitoring and network
maintenance and repair services.
Revenues from product sales are recognized in accordance
with SEC Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB No. 101"), when
shipment has occurred, persuasive evidence of an arrangement
exists, the vendor's fee is fixed or determinable, no
further obligation remains and collectibility is probable.
The Group does not grant rights of return. The Group sells
its products primarily through its direct sales force and
indirectly through resellers, both of whom are considered
end users.
Revenues from products under sales-type-lease contracts are
recognized in accordance with SFAS No. 13, "Accounting for
Leases" ("SFAS No. 13") upon installation or upon shipment,
in cases where the customer obtains its own or others
installation services. The present values of payments due
under sales-type-lease contracts are recorded as revenues at
the time of shipment or installation, as appropriate. Future
interest income is deferred and recognized over the related
lease term as financial income. The net investments in
sales-type-lease are discounted at the interest rates
implicit in the leases.
Revenue from products and services under operating leases of
equipment is recognized ratably over the lease period.
Arrangements that include installation services are
evaluated to determine whether those services are an
integral component of the equipment used. When installation
services are considered integral, revenues from products and
installation services are recognized only upon installation.
When services are not considered integral, revenues from
products sales are recognized upon shipment and the service
revenues are recognized when the services are performed.
Revenues from services under long-term contracts are
recognized based on Statement Of Position No. 81-1
"Accounting for Performance of Construction - Type and
Certain Production - Type Contracts" ("SOP 81-1"), using
contract accounting on a percentage of completion method
based on the ratio of actual costs incurred to total costs
estimated to be incurred over the duration of the contract.
Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are first
determined, in the amount of the estimated loss on the
entire contract.
Service revenues are recognized ratably over the contractual
period or as services are performed. Where arrangements
involve multiple elements, revenue is allocated to each
element based on the relative fair value of the element when
sold separately.
Deferred revenue includes unearned amounts received under
services contracts, and amounts received from customers but
not yet recognized as revenues.
F - 25
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
q. Research and development:
Research and development expenses, net of grants received,
are charged to expenses as incurred.
r. Grants:
The Company received royalty-bearing grants and
non-royalty-bearing grants from the Government of Israel,
U.S.-Israel Science and Technology Foundation ("USISTF") and
from other funding sources for funding approved research and
development projects. These grants are recognized at the
time the Company is entitled to such grants on the basis of
the costs incurred and included as a deduction from research
and development costs.
Research and development grants amounted to $ 4,304,000, $
8,849,000, and $ 3,946,000 in 2000, 2001 and 2002,
respectively.
As for one-time expense related to the settlement with the
Office of the Chief Scientist in the Israeli Ministry of
Industry and Trade ("OCS") program, see Note 15g.
s. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB No. 25") and FASB Interpretation No. 44
"Accounting for Certain Transactions Involving Stock
Compensation" in accounting for its employee stock option
plans. Under APB No. 25, when the exercise price of the
Company's share options is less than the market price of the
underlying shares on the date of grant, compensation expense
is recognized.
The Company applies SFAS No. 123, and Emerging Issues Task
Force Consensus 96-18, "Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring in
Conjunction with Selling Goods or Services" ("EITF 96-18")
with respect to warrants issued to non-employees. SFAS No.
123 requires the use of option valuation models to measure
the fair value of the warrants at the date of grant.
Under Statement of Financial Accounting Standard No. 148
"Accounting for Stock-Based Compensation- Transition and
Disclosure" ("SFAS 148") that amended SFAS 123 "Accounting
for Stock-Based Compensation", pro forma information
regarding net income (loss) and net earnings (loss) per
share is required and has been determined as if the Company
had accounted for its employee share options under the fair
value method of SFAS No. 123. The fair value of these
options is amortized over their vesting period and estimated
at the date of grant using a Black-Scholes multiple option
pricing model with the following weighted average
assumptions; risk-free interest rates of 5%, 3% and 3% for
2000, 2001 and 2002, respectively; a dividend yield of 0%
for each of those years; a volatility factor of the expected
market price of the Company's Ordinary shares of 0.94 for
2000, 2.27 for 2001 and 0.73 for 2002; and a weighted
average expected life of the option of 3 years for each of
those years.
F - 26
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Weighted average fair value of options granted at their
grant date were $ 64, $ 4.2 and $ 1.9 during 2000, 2001 and
2002, respectively. All options were granted at fair market
value.
The following table illustrates the effect on the net income
(loss) and net earnings (loss) per share, assuming that the
Company had applied the fair value recognition provision of
SFAS No. 123 on its stock-based employee compensation.
YEAR ENDED DECEMBER 31,
------------------------------------------------
2000 2001 2002
--------------- --------------- ----------------
U.S. DOLLARS IN THOUSANDS
(EXCEPT PER SHARE DATA)
------------------------------------------------
Net income (loss) as reported $ 19,435 $ (429,112) $ (348,204)
Deduct: total stock-based employee compensation
expense determined under fair value based method (99,846) (32,014) (9,715)
--------------- --------------- ----------------
Pro forma net loss $ (80,411) $ (461,126) $ (357,919)
=============== =============== ================
Pro forma basic and diluted net loss per share $ (3.57) $ (19.74) $ (15.18)
=============== =============== ================
t. Income taxes:
The Group accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 prescribes the use of the liability method
whereby deferred tax assets and liability account balances
are determined based on differences between financial
reporting and tax based assets and liabilities and are
measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The
Group provides a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable
value.
u. Concentrations of credit risks:
Financial instruments that potentially subject the Group to
concentrations of credit risk consist principally of cash
and cash equivalents, short-term bank deposits, short-term
and long-term restricted cash, trade receivables and
long-term trade receivables.
The majority of the Group's cash and cash equivalents,
short-term and long-term restricted cash and short-term bank
deposits are invested in U.S dollars with major banks in
Israel and in the United States. Such deposits in the United
States may be in excess of insured limits and are not
insured in other jurisdictions. Management believes that the
financial institutions that hold the Group's investments are
financially sound and, accordingly, minimal credit risk
exists with respect to these investments.
F - 27
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The trade receivables and long-term trade receivables of the
Group derive from sales to major customers located in the
U.S., Europe, South America (Mainly Peru) and the Far East.
The Group performs ongoing credit evaluations of its
customers and obtains letters of credit and bank guarantees
for certain receivables. An allowance for doubtful accounts
is determined with respect to those amounts that the Group
has determined to be doubtful of collection and a general
allowance is provided to cover additional potential
exposures.
A significant portion of our trade receivable are from a
single government entity in Latin America. Any instability
in the political or economic situation or otherwise in that
country, could have a significant adverse impact on the
Company's business.
The Group has no significant off-balance-sheet concentration
of credit risk such as foreign exchange contracts, option
contracts or other foreign hedging arrangements.
v. Severance pay:
The Company's liability for severance pay for its Israeli
employees is calculated pursuant to Israeli severance pay
law based on the most recent salary of the employees
multiplied by the number of years of employment, as of the
balance sheet date. Employees are entitled to one month's
salary for each year of employment or a portion thereof. The
Company's liability for all of its Israeli employees, is
partly provided by monthly deposits for insurance policies
and by an accrual. The value of these policies is recorded
as an asset in the Company's balance sheet.
The deposited funds made to the Company's employees include
profits accumulated up to the balance sheet date. The
deposited funds may be withdrawn only upon the fulfillment
of the obligation pursuant to Israeli severance pay law or
labor agreements. The value of the deposited funds is based
on the cash surrendered value of these policies, and
includes immaterial profits.
Severance pay expenses for the years ended December 31,
2000, 2001 and 2002, amounted to approximately $ 2,494,000 $
2,933,000 and $1,896,000 respectively.
w. Fair value of financial instruments:
The following methods and assumptions were used by the Group
in estimating their fair value disclosures for financial
instruments:
The carrying amounts of cash and cash equivalents,
short-term restricted cash, short-term bank deposits, trade
receivables, short term bank credit and trade payables
approximate their fair value due to the short-term maturity
of such instruments.
F - 28
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The carrying amounts of the Group's long-term borrowing
arrangements (other than the arrangement included in the
debt restructuring, mainly the subordinated notes, see Note
18a), long-term note, long-term trade receivables and
long-term restricted cash approximate their fair value. The
fair value was estimated using discounted cash flow
analyses, based on the Group's incremental borrowing rates
for similar type of borrowing arrangements.
The fair value of the subordinated notes, which was
determined according to market value, and the carrying
amount of the Group's convertible subordinated notes was
$91.0 million and $350 million as of December 31, 2001,
respectively and $87.5 million and $350 million as of
December 31, 2002, respectively.
x. Basic and diluted net earnings (loss) per share:
Basic net earnings (loss) per share is computed based on the
weighted average number of Ordinary Shares outstanding
during each year. Diluted net earnings per share is computed
based on the weighted average number of Ordinary Shares
outstanding during each year, plus dilutive potential
Ordinary Shares considered outstanding during the year, in
accordance with SFAS No. 128 "Earnings per Share"
The difference between the weighted average number of shares
used in computing basic net earnings per share and the
weighted average number of shares used in computing diluted
net earnings per share for the year ended December 31, 2000
derives from potential Ordinary Shares considered
outstanding as a result of options outstanding during the
year. In 2000, 2001 and 2002, the shares attributable to the
convertible subordinated notes have been excluded from the
calculation of the diluted net loss per Ordinary Share
because such securities were anti-dilutive. In addition, for
the three years ended December 31, 2002, there were no
adjustments to net income (loss) in computing diluted
earnings (loss) per share.
Convertible subordinate notes, outstanding stock options and
warrants have been excluded from the calculation of the
diluted net earnings (loss) per Ordinary share when such
securities are anti-dilutive for the periods presented. The
total weighted average number of shares related to the
convertible subordinated notes, outstanding options and
warrants excluded from the calculations of diluted net
earnings (loss) per share was 2,132,405, 1,960,283 and
2,024,792 for the years ended December 31, 2000, 2001 and
2002, respectively.
F - 29
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
y. Impact of recently issued accounting standards:
In April 2002, the FASB issued SFAS No. 145, "Rescission of
SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and
Technical Corrections," ("SFAS No. 145") which rescinds SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," and an amendment of that Statement, and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS No. 145 amends SFAS No. 44, "Accounting
for Intangible Assets for Motor Carriers." SFAS No. 145
amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. SFAS No. 145
also amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. SFAS
No. 145 is effective for fiscal years beginning May 15,
2002. As a result of adopting SFAS 145, the gain from the
restructuring of the company's liabilities will not be
recorded as an extraordinary item but as a financing income.
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit of Disposal Activities," ("SFAS
No. 146") which addresses significant issues regarding the
recognition, measurement and reporting of costs associated
with exit and disposal activities, including restructuring
activities. SFAS No. 146 requires that costs associated with
exit or disposal activities be recognized when they are
incurred rather than at the date of a commitment to an exit
or disposal plan. SFAS No. 146 is effective for all exit or
disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of SFAS No. 146 to have
a material impact on the Company's results of operations or
financial position.
In November 2002, the FASB issued Interpretation No. 45
("FIN No. 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others, an interpretation of SFAS No. 5,
57 and 107 and Rescission of FASB Interpretation No. 34
("FIN No. 34")." FIN No. 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN No. 45 does not prescribe a
specific approach for subsequently measuring the guarantor's
recognized liability over the term of the related guarantee.
It also incorporates, without change, the guidance in FIN
No. 34, "Disclosure of Indirect Guarantees of Indebtedness
to Others," which is being superseded. The disclosure
provisions of FIN No. 45 are effective for financial
statements of interim or annual periods that end after
December 31, 2002 and the provisions for initial recognition
and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31,
2002, irrespective of a guarantor's year-end. The Company
does not expect the adoption of FIN No. 45 to have a
material impact on its results of operations or financial
position.
F - 30
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
In January 2003, the FASB issued Interpretation No. 46 (or
FIN 46), "Consolidation of Variable Interest Entities." FIN
46 requires a variable interest entity to be consolidated by
a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual
returns or both. A variable interest entity is a
corporation, partnership, trust, or any other legal
structures used for business purposes that either (a) does
not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial
resources for the entity to support its activities. A
variable interest entity often holds financial assets,
including loans or receivables, real estate or other
property. A variable interest entity may be essentially
passive or it may engage in research and development or
other activities on behalf of another company. The
consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in
the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply to
all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was
established. The Company is evaluating the possible impact
of the new interpretation and does not expect it to have a
material effect on its financial position or result of
operations.
z. Reclassification:
Certain 2001 figures have been reclassified to conform with
the 2002 presentation.
NOTE 4:- INVENTORIES
a. The inventory is comprised of the following:
DECEMBER 31,
---------------------------------------
2001 2002
------------------ -----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------
Raw materials, parts and supplies $ 35,040 $ 29,255
Work in progress 5,103 6,757
Finished products 79,583 38,966
Cost and estimated earnings in excess of billings on
uncompleted contracts *) 3,646 -
------------------ -----------------
$ 123,372 $ 74,978
================== =================
*)Composed as follows:
Cost incurred on uncompleted contracts 7,410 $ -
Estimated earnings 627 -
------------------ -----------------
8,037 -
Less - billings (4,391) -
------------------ -----------------
$ 3,646 $ -
================== =================
F - 31
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4:- INVENTORIES (CONT.)
b. The Group periodically assesses its inventory valuation in
accordance with its revenues forecasts, technological
obsolescence, and the market conditions.
c. In September 2001, as a result of adjusted forecast of
revenues for the years 2001 and 2002, and the decision to
discontinue selling certain products, the Group (i) wrote
off excess inventories in order to adjust the inventory
level to the new revenue expectations, in the amount of
approximately $14 million (ii) wrote off the products that
were discontinued in accordance with the restructuring plan,
in the amount of approximately $37 million and (iii) marked
down inventory that is expected to be sold at a price lower
than the carrying value, in an amount of approximately $9
million. These amounts include provision for canceled
purchase orders and legal claims in the amount of $5.8
million, of which approximately $1.8 million are still
provided for as of December 31, 2002. (See Note 11.e.14).
In 2002, as a result of adjusted forecast of revenues for
the years 2002 and 2003, and the decision to discontinue
selling certain products, the Group (i) wrote off excess
inventories in order to adjust the inventory level to the
new revenue expectations, in the amount of approximately $
7.0 million (ii) wrote off the products that were
discontinued in the amount of approximately $ 8.8 million
and (iii) marked down inventory that is expected to be sold
at a price lower than the carrying value, in an amount of
approximately $ 4.3 million.
NOTE 5:- INVESTMENTS IN AFFILIATED COMPANIES
a. The investments in affiliated companies comprise as follows:
DECEMBER 31,
--------------------------------------
2001 2002
----------------- ------------------
U.S. DOLLARS IN THOUSANDS
--------------------------------------
Cost $ - $ 29,334
Share in accumulated losses - (29,334)
----------------- ------------------
TOTAL investments $ - $ -
================= ==================
b. The Company equity ownership in KSAT, a Canadian company, as
of December 31, 2002 is 23.4% on a fully diluted basis. As a
result of assessing the recoverability of the carrying
amount of investments, the Company's management decided in
the year 2001, to write-off its investment in KSAT including
the long term loan in the total amount of $ 8.4 million
since circumstances such as the global decrease in
telecommunication companies, depressed market conditions and
difficulties in raising additional capital, indicated that
the carrying amount of the investment may not be
recoverable. The impairment charge is included in write off
of investments.
c. For investment in Starband, see Note 1d.
d. For investment in Satlynx, see Note 1f.
F - 32
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6:- INVESTMENTS IN OTHER COMPANIES
a. On June 30, 2001, the Company's subsidiary, GTHLA completed
a transaction with Communication y Telefonia Rural S.A.
("CTR") via Rural Telecommunications Chile S.A. ("RT"), an
entity formed by CTR to facilitate this transaction, whereby
GTHLA transferred to RT its Chilean rural telephony network,
comprised of property and equipment totaling approximately
$4.7 million, capitalized software totaling approximately
$3.4 million, and inventory totaling approximately $3.1
million, in exchange for 13% of the outstanding shares of
CTR. The transaction was accounted for under APB No. 29
"Accounting for Non-monetary Transactions" and as a result
no gain or loss was recognized for the exchange of property
and equipment and capitalized software for shares of CTR as
the fair market value of the property and equipment and
capitalized software approximated the book value on the date
of the transaction. In 2001, the Company recorded revenues
of $3.1 million relating to the sale of inventory to CTR. In
2002, the Company wrote-off the investment in CTR, in the
amount of $11.2 million, which is included in write-off of
investments in the statements of operation of 2001. Since
certain circumstances, such as the global decrease in the
telecommunication companies, low capital valuation, and
cumulative losses, indicated that the carrying amount of the
investment may not be recoverable.
b. On March 6, 2000, the Company entered into an agreement to
invest $ 10 million in Knowledge Broadcasting. Com LLC
("KBC"), a multi-media company formed to distribute content
to businesses and homes, using satellite and other
technologies, in return for approximately 10 million shares
of KBC, equal to approximately 5.6% of the total number of
KBC units, and a one-year warrant to purchase an additional
20 million shares at the same purchase price. The Company
also granted KBC (i) a five-year warrant to purchase
approximately 191,000 of the Company's Ordinary Shares, at a
purchase price of $ 157.05 per share conditioned on KBC
providing specific content as stipulated in the agreement.
(ii) a five-year option to acquire equipment and services
payable by KBC during the first two years for up to 20
million shares of KBC (if the Company does not exercise its
warrant), and thereafter, in cash or such other form as may
be agreed between the parties.
In June 2001, the Company received $2.5 million as a result
of KBC reduction of capital by distribution of cash to its
shareholders. In September 2001, the Company's management
decided to write-off the investments in an amount of $7.5
million since certain circumstances, such as the global
decrease in the internet and telecommunication companies,
low capital valuation, and depressed market conditions,
indicated that the carrying amount of the investment may not
be recoverable. The impairment is included in write off of
investments in the statement of operations of 2001.
c. During 2000, 2001 and 2002, the Company's management
identified the following factors pertaining to other
companies in which the Company had invested: (i) some of the
negotiations for additional funding were not successful or
ended with very low valuations; (ii) a planned merger for
one of the companies did not occur; (iii) weakness in the
capital markets continued and intensified after the
September 11, 2001 terrorist events; (iv) decreased levels
of cash curtailed future financing which is needed in order
to finance their business and achieve a scale; and (v) a
growing other than temporary weakness in the target markets
of these companies was confirmed.
F - 33
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6:- INVESTMENTS IN OTHER COMPANIES (CONT.)
The indicators specified above led the Company to conclude
that these depressed market conditions were not temporary
and needed to be considered in the Company's financial
statements. As a result, the Company's management decided to
record a write off of the investments and related
receivables in an amount of $ 9.4 million, $12.1 million and
$ 0.8 million in the year ended December 31, 2000, 2001 and
2002, respectively. The impairment has been recorded as
write-off of investments in the statements of operations.
NOTE 7:- PROPERTY AND EQUIPMENT, NET
a. Composition of property and equipment, grouped by major
classifications, is as follows:
DECEMBER 31,
--------------------------------------
2001 2002
------------------ ------------------
U.S. DOLLARS IN THOUSANDS
--------------------------------------
Cost:
Buildings and land $ 93,623 $ 92,614
Computers and electronic equipment 164,517 138,634
Equipment leased to others 59,543 40,734
Office furniture and equipment 15,856 12,122
Leasehold improvements 13,073 4,823
Vehicles 305 244
------------------ ------------------
346,917 289,171
------------------ ------------------
Accumulated depreciation 99,717 126,266
------------------ ------------------
Depreciated cost $ 247,200 $ 162,905
================== ==================
b. Depreciation expenses totaled $ 33,532,000 $ 41,182,000 and
$ 41,731,000 in 2000, 2001 and 2002, respectively.
c. In 2001, as a result of the Group's restructuring plan and
the Group's strategy to reduce costs and improve
profitability, the Group discontinued certain of its
operations and products, which resulted in impairment of
property and equipment in an amount of approximately $ 10.2
million.
d. In 2002, the Company recorded an impairment of property and
equipment in an amount of $ 42.4 million to reduce the
carrying value of property and equipment. The impairment was
a result of the continued deterioration in market conditions
in general, in the communication market in particular and
the decrease in the projected income and the losses of the
Company. The impairments are included as impairment of
tangible and intangible assets, in the statement of
operations.
e. As for pledges and securities, see Note 11e.
F - 34
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: - INTANGIBLE ASSETS AND DEFERRED CHARGES, NET
a. Composition of intangible assets and deferred charges,
grouped by major classifications, is as follows:
DECEMBER
31,
---------------------------------------
2001 2002
------------------ -------------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------
Cost:
Identifiable intangible assets resulting from
acquisitions of subsidiaries $ 21,800 $ 21,800
Issuance costs of convertible subordinated notes (see
Note 10) 10,621 10,621
Deferred income taxes (see Note 14d) 2,324 374
Customer acquisition costs 2,910 2,000
Other 5,533 4,637
------------------ -------------------
43,188 39,432
Accumulated amortization and provision for impairment 7,908 18,383
------------------ -------------------
Amortized cost $ 35,280 $ 21,049
================== ===================
b. Amortization expenses amounted to $ 4,036,000, $ 5,037,000
and $4,499,000 for the years ended December 31, 2000, 2001
and 2002, respectively.
c. In 2001, as a result of the circumstances which indicated
that the carrying amount of certain intangible assets would
not be recoverable, the Company reassessed the fair value of
its intangible assets, which resulted in impairment in an
amount of approximately $ 28.2 million.
d. In 2002, the Company recorded an impairment of intangible
assets in an amount of $8.3 million to reduce the carrying
value of intangibles assets of the reporting units to its
implied fair value. The impairment was a result of the
circumstances prompted by the continued deterioration in
market conditions in general, in the communication market in
particular and the decrease in the projected income of the
Company. The impairments are included as impairment of
tangible and intangible assets, in the statement of
operations.
e. Estimated amortization expenses for the years ended:
YEAR ENDED DECEMBER 31, IN THOUSANDS
------------------
2003 $ 6,736
2004 2,089
2005 2,787
2006 1,257
2007 and thereafter 8,180
------------------
$ 21,049
==================
F - 35
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9:- GOODWILL
a. The changes in the carrying amount of goodwill for the year
ended December 31, 2002, are as follows:
GOODWILL
--------------------
U.S. DOLLARS
IN THOUSANDS
--------------------
Balance as of January 1, 2002 $ 56,716
Goodwill acquisitions and additions during the year 13,049
Cumulative effect of a change in an accounting principle (56,716)
Impairment of goodwill (13,049)
--------------------
Balance as of December 31, 2002 $ -
====================
b. Amortization expenses amounted to $ 4,863,000 $ 15,054,000
and $ 0 for the years ended December 31, 2000, 2001 and
2002, respectively.
c. As of September 30, 2001, the Company's management assessed
the carrying value of its goodwill resulting from the
acquisition of rStar. The Company identified the following
factors (i) the continued deterioration in market conditions
in general and in the communication markets in particular;
(ii) the permanent decrease in the expected income from
rStar's target markets (primarily North America); (iii) the
significant decrease of rStar's share price and (iv) rStar's
continued low share price for two fiscal quarters since the
$ 45 million investment in May 2001, which indicated other
than temporary impairment.
As a result, the Company's management decided to record an
impairment of goodwill in an amount of $ 50.6 million in the
year 2001. The impairment is included as impairment of
goodwill in the statement of operations.
d. In 2002, the Company recorded an impairment of the goodwill
in an amount of $69.7 million to reduce the carrying value
of goodwill to its implied fair value. The impairment was
prompted by the continued deterioration in market conditions
in general, in the communication market in particular and
the decrease in the projected income of the Company. The
impairment adjustment recognized at adoption of the new
rules in the amount of $56.7 million was recorded as a
cumulative effect of change in accounting principle in the
first quarter of 2002 statement of operations. The
impairment adjustments recognized after adoption, in the
amount of $13.0 million, was recorded as impairment of
goodwill in the operating expenses.
F - 36
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9:- GOODWILL (CONT.)
e. The unaudited results of operations presented below for the
three years ended December 31, 2000, 2001 and 2002,
respectively, reflect the impact on results of operations
had the Company adopted the non-amortization provisions of
SFAS No. 142 effective January 1, 2000:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 2001 2002
-------------- -------------- ---------------
U.S. DOLLARS IN THOUSANDS
(EXCEPT PER SHARE DATA)
----------------------------------------------------
Reported net income (loss) $ 19,435 $ (429,112) $ (348,204)
Cumulative effect of a change in an
accounting principle - - 56,716
Goodwill amortization 4,863 15,054 -
-------------- --------------- ---------------
Adjusted net income (loss) $ 24,298 $ (414,058) $ (291,488)
============== =============== ===============
Basic net income (loss) per share:
Reported net income (loss) $ 0.86 $ (18.37) $ (14.77)
Cumulative effect of a change in an
accounting principle - - 2.41
Goodwill amortization 0.22 0.64 -
-------------- --------------- ---------------
Adjusted net income (loss) per share $ 1.08 $ (17.73) $ (12.36)
============== =============== ===============
Diluted net income (loss) per share:
Reported net income (loss) $ 0.81 $ (18.37) $ (14.77)
Cumulative effect of a change in an
accounting principle - - 2.41
Goodwill amortization 0.20 0.64 -
-------------- --------------- ---------------
Adjusted net income (loss) per share $ 1.01 $ (17.73) $ (12.36)
============== =============== ===============
F - 37
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10:- CONVERTIBLE SUBORDINATED NOTES
a. Issuance of convertible subordinated notes:
Under an Offering Memorandum issued at the end of February
2000, the Company issued on March 7, 2000, $ 350 million
convertible subordinated notes ("the Notes"), traded in the
United States on the Private Offerings, Resales and Trading
through Automated Linkages ("PORTAL") market and due March
15, 2005. The Notes bear interest at an annual rate of
4.25%, payable March 15 and September 15 of each year,
commencing September 15, 2000. Unless previously redeemed,
the Notes are convertible by the holders, at any time
through maturity, beginning 90 days following issuance of
the Notes, into Ordinary shares of the Company, at a
conversion price of $ 186.18 per share, subject to
adjustment under certain circumstances. The Notes are
redeemable at the option of the Company, in whole or in
part, at any time on or after March 18, 2003, at the
redemption price, plus interest accrued to the redemption
date. The redemption price will range from 100.85% to
101.70%, depending on the date of redemption. In accordance
with EITF 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Continently Adjustable
Conversion Ratios" no recognition of a beneficial conversion
feature was required.
In March 2003, the Company completed a plan of arrangement
for the reorganization with its bank lenders, holders of the
company's 4.25% Convertible Subordinated Notes due 2005 (the
"old notes"), and certain other creditors. In 2002, in
accordance with Statement of Financial Accounting Standard
No. 6 "Classification of Short-Term Obligations Expected to
Be Refinanced" ("SFAS No. 6"), the Company presented the
principal amount along with accrued interest. See also Note
18.
b. On May 1, 2000, the Company published a notice of optional
conversion of the $ 75 million convertible subordinated
notes, which had been issued on May 14, 1997, on June 5,
2000, at 102% of the principal amount thereof, plus interest
accrued and unpaid as of the conversion date. At June 5,
2000, all notes were converted into 1,785,690 Ordinary
shares.
NOTE 11:- COMMITMENTS AND CONTINGENCIES
a. On March 29, 2001, Spacenet completed a transaction for the
sale and leaseback of its corporate headquarters building.
The sale price of the property was approximately $ 31.5
million net of certain fees and commissions. Concurrent with
the sale, Spacenet entered into an operating leaseback
contract for a period of fifteen years at an initial annual
rental of approximately $3.5 million plus escalation. The
capital gain resulting from the sale and leaseback amounting
to $5.6 million was deferred and will be amortized over the
15 year term of the lease. In accordance with the lease
terms, Spacenet made a security deposit consisting of a $
5.5 million fully cash collateralized letter of credit for
the benefit of the lessor. The lease is accounted for as an
operating lease in accordance with Statement of Financial
Accounting Standard No. 13 "Accounting for Leases".
F - 38
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11:- COMMITMENTS AND CONTINGENCIES (CONT.)
b. Lease commitments:
Minimum lease commitments of certain subsidiaries under
non-cancelable operating lease agreements in respect of
premises occupied by them, at rates in effect subsequent to
December 31, 2002, are as follows:
U.S. DOLLARS
YEAR ENDED DECEMBER 31, IN THOUSANDS
--------------------
2003 $ 4,922
2004 4,699
2005 4,210
2006 4,020
2007 and thereafter 30,642
--------------------
$ 48,493
====================
Rent expenses totaled $ 8,165,000, $ 8,050,000 and
$5,059,000 in 2000, 2001 and 2002, respectively.
c. Commitments with respect to space segment services:
All the required space segment services necessary to meet
the terms of customer contracts are obtained from either SES
Americom or from unrelated third parties under long-term
contracts ranging from one to twelve years. (See Note 18 ).
Future minimum payments due for space segment services
mainly to SES Americom, a related party, subsequent to
December 31, 2002, are as follows:
U.S. DOLLARS
YEAR ENDED DECEMBER 31, IN THOUSANDS
--------------------
2003 $ 16,939
2004 14,663
2005 13,195
2006 11,859
2007 and thereafter 54,393
--------------------
$ 111,049
====================
The minimum payment schedule above was prepared based on the
agreement signed with SES in December 31, 2002, which was
subject to the completion of the debt restructuring. See
also Note 18.
Space segment services expense, mainly to SES Americom,
totaled $ 24,387,000, $ 46,855,000 and $ 25,480,000 in 2000,
2001 and 2002, respectively.
F - 39
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11:- COMMITMENTS AND CONTINGENCIES (CONT.)
d. In August 2002, the Company concluded the acquisition of
rStar, increasing the ownership in this entity to
approximately 85%. Under the terms of the acquisition, the
Company may be required to reimburse rStar shareholders a
special consideration of up to $10 million, $5 million of
which may become due in June 2003 and $5 million of which
may become due in June 2004. (See Note 2a).
e. Legal claims:
1. On June 11, 2001, an action was filed against Gilat in
the District Court of Tel Aviv, Israel by Terayon Ltd.
(formerly Combox Ltd.) ("Terayon") alleging Gilat's
breach of contract in connection with purchase orders
issued by Gilat. Terayon is claiming it is owed
approximately $2.4 million. The parties have agreed to
arbitrate the case and the matter is proceeding
accordingly. We do not believe that we are in breach of
these purchase orders and are vigorously defending
against these claims.
2. A supplier has demanded a payment of approximately $6.1
million, alleging a breach of contract in relation to
purchase orders. The Company has asserted defenses and
intends to defend against the claim.
3. An arbitration proceeding was commenced in July 2002 in
England by a former supplier of the Company pursuant to
an arbitration clause in a supply agreement between
Gilat and the supplier. The supplier claimed that
approximately $13.2 million was owed by Gilat for
certain inventory allegedly purchased on Gilat's behalf
under the agreement. In March 2003, an agreement to
settle the matter was reached between the parties. The
final settlement is in the process of completion.
4. During September 2001, the Israeli customs authority
began examining certain imports to determine whether
the Company paid the appropriate duty for certain
equipment. The investigation may result in
administrative proceedings to recover approximately $1
million from the Company. The Company maintains that it
has made all required payments.
5. On November 13, 2001, Gilat was named as a defendant in
a complaint for patent infringement that was filed by
the Lemelson Foundation in the U.S.. The lawsuit
alleges that Gilat's integration and sale of certain
components in its products violates one or more of the
Lemelson patents. The complaint does not state the
amount claimed from Gilat. An amended complaint has not
been formally served on Gilat. Settlement discussions
with plaintiff's counsel have taken place without
resolution of the matter, but no further action has
been taken by plaintiff. Gilat intends to vigorously
defend itself in this action.
6. On January 7, 2002, Gilat received a letter from the
Syndia Corporation ("Syndia") alleging Gilat's possible
infringement of a Lemelson patent that is owned by
Syndia due to the alleged integration by Gilat of
certain semiconductor components procured from
unlicensed third party manufacturers. Gilat intends to
vigorously dispute such claim.
F - 40
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11:- COMMITMENTS AND CONTINGENCIES (CONT.)
7. A number of securities class action lawsuits have been
filed against Gilat and certain of its officers and
directors. The litigation includes actions filed in the
United States District Court for the Eastern District
of New York and in the United States District Court for
the Eastern District of Virginia ("class actions
suits") and a request to file a class action lawsuit in
the Tel-Aviv, Israel District Court. The class action
suits, alleging violations of the federal securities
laws and claim that Gilat issued material
misrepresentations to the market, were brought on
behalf of parties who purchased Gilat securities
between May 16, 2000, and October 2, 2001, inclusive.
The class action suits in the U.S. have been
consolidated into a single action in the United States
District Court for the Eastern District of New York.
The Israeli court granted a motion to stay the
proceedings in the Israeli action pending the outcome
of the U.S. class action proceeding. Gilat believes the
allegations against it and its officers and directors
in the class action suits are without merit and intend
to contest them vigorously.
8. On March 7, 2001, rStar (then known as ZapMe!
Corporation) filed action against a software vendor, ON
Technology Corporation ("OTC"), by which rStar alleged
that OTC breached a software license agreement and
defrauded rStar concerning the capabilities of the
software. By its complaint, rStar seeks recovery of
approximately $390,000 rStar paid to OTC in connection
with the software, as well as other damages. On or
about March 29, 2001, OTC filed a counterclaim against
rStar, alleging that the principal sum of approximately
$308,000 is due from rStar for additional license fees,
maintenance fees, and professional fees in connection
with OTC's software. The Company has asserted defenses
and intends to defend against the claim.
9. In the early part of 2002, a third party issued a
letter to the Company claiming that it has rights to a
portion of one of our subsidiaries based upon a
document and certain partial payments made. The Company
rejects the legal bases for such claims and intends to
vigorously defend any action if brought by the third
party but does intend to seek a mutually acceptable
resolution to this dispute.
10. An action was filed on February 1, 2002, by Recovar
Group ("Recovar") against Gilat Florida, Inc. to
collect monies allegedly owed to Test Equipment
Solutions Today, Inc. for goods supplied to Gilat
Florida between January 31, 2001, and December 28,
2001. The alleged receivable was assigned to Recovar.
Gilat Florida is vigorously defending against such
claims.
11. Gilat claims that KSAT Satellite Networks Inc. is
obligated to pay to Gilat approximately $2,788,000 in
principal and interest on an outstanding shareholder
loan that became due on October 17, 2002; and KSAT
Telecommunications Ltd, a subsidiary of KSAT Satellite
Networks Inc. claims that Gilat owes it approximately
$562,000 for services rendered, which claim Gilat
denies, and in any case, Gilat has claimed a setoff
against the amount owed to Gilat above. We do not
believe that KSAT Telecommunications' claim has merit
and intend to vigorously defend against it.
F - 41
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11:- COMMITMENTS AND CONTINGENCIES (CONT.)
12. On November 15, 2002, an action was filed against
Spacenet Inc. in the United States District Court for
the District of Connecticut by Linda Thompson, a former
employee of Spacenet, seeking sales commissions
allegedly owed in the amount of $500,000 plus
compensatory damages for an alleged wrongful
termination of employment. The court ordered Spacenet
to post a pre-judgment bond of $275,000 pending the
outcome of the trial. Spacenet is vigorously disputing
such claims and has filed a motion to dismiss the
wrongful termination claim.
13. In accordance with SFAS No. 5 "Accounting for
Contingencies", the Company with the advise of its
legal counsel has accrued approximately $ 4 million for
the expected implication of the such legal proceedings.
f. Charges:
1. Spacenet granted a lender, a security interest of
approximately $12.7 million in certain of its computer,
machinery, and hub equipment.
2. The Company granted a lender a security interest of
approximately $30.0 million in certain of its
facilities in Israel.
3. A Dutch subsidiary of the Company entered into a
mortgage and loan agreement with a German bank. The
amount of the mortgage as of December 31, 2002, is Euro
5.9 million, collateralized by the facilities in
Germany.
4. Short-term bank credit and long-term loans are secured
by a negative pledge agreement
F - 42
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11:- COMMITMENTS AND CONTINGENCIES (CONT.)
g. Guarantees:
The Company guaranteed the performance to customers (usually
government entities). Such guarantees are required by
contract for our performance during the installation and
operational period of long-term rural telephony projects in
Latin America and for the performance of other projects
(government and corporate) throughout the rest of the world.
The guarantees typically expire when certain milestones are
met. The maximum potential amount of future payments that
the Company could be required to make under its guarantees
at December 31, 2002, is $ 47.4 million. This amount
includes guarantees of performance for our subsidiary in
Peru in the amount of $30 million and guaranties for two
projects in Colombia in the amount of $10 million. The
Company has restricted cash as a collateral for the
performance guarantees in an amount of $11.4 million. The
Company has not recorded any liability for such amounts, as
the Company does expect that its performance will be
acceptable. To date, no guarantees were exercised against
the Company.
The Company has provided guarantees in relation to certain
satellite transponder agreements in the amount of up to $
3.4 million.
The Company guaranteed certain property leases in McLean,
Virginia, Melbourne, Florida and London in amounts of up to
$24.3 million. The Company has restricted cash as a
collateral for the guarantees in an amount of $6.3 million.
NOTE 12:- SHAREHOLDERS' EQUITY (DEFICIENCY)
a. Share capital:
Ordinary shares confer upon their holders voting rights, the
right to receive cash dividends and the right to share in
excess assets upon liquidation of the Company.
b. Stock Option Plans:
The Company has two stock option plans, the 1993 and the
1995 Stock Option and Incentive Plans ("the Plans"). The
1995 plan was amended in 1997, 1998 and 1999. Under the
Plans, options may be granted to employees, officers,
directors and consultants of the Group. Pursuant to the
plans, as of December 31, 2002, the Company reserved for
issuance a total of 10,328,500 Ordinary shares. As of
December 31, 2002, an aggregate of 1,837,545 Ordinary shares
of the Company are still available for future grant.
F - 43
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
Options granted under the Plans generally vest quarterly
over 4 years, 50% pf the options granted under the tender
offer on November 27, 2001, vested immediately and the
reminder vest quarterly over two years. Those options will
expire ten years from the date of grant. Any options which
are forfeited or canceled before expiration become available
for future grants. The exercise price per share under the
Plans shall not be less than the market price of an Ordinary
share at the date of grant. No compensation cost in
connection with options that were granted to employees has
been charged against income in the years ended December 31,
2000, 2001 and 2002. On April 24, 2001, the Company filed a
tender offer with the Securities and Exchange Commission
allowing employees of the Group, if they so choose, to
cancel outstanding options previously granted to them. In
exchange, the employees were to receive an equal number of
new options to be granted at a date, more than six months
following the cancellation of the old options, with a per
share exercise price equal to the fair market value of the
Company's shares on the date of grant of the new options.
Such transaction did not affect the Company's results of
operations.
On November 27, 2001, the Company granted 6.2 million new
options to the 737 employees that chose to cancel their
options under the tender. The option exercise price was the
market price as of the date of the grant. 50% of the options
granted under the tender offer vested immediately and the
remainder vest quarterly over 2 years.
In January 2002, the Company's Board of Directors resolved
to accelerate the vesting period for all Gilat employees
whose employment was to be terminated as part of the change
of control of six European subsidiaries sold to Satlynx S.A.
(See Note 1f). In addition to immediate vesting of all
options, effective upon the change of control. The exercise
period of the options was modified such that such Satlynx
employees have a 60-day period to exercise their options in
the event their employment is terminated by Satlynx. The
Company did not record any compensation expenses in
accordance with FIN No. 44.
A summary of the status of the plans as of December 31,
2000, 2001 and 2002, and changes during the years ended on
those dates, is presented below:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2000 2001 2002
-------------------------- -------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------ ------------- ------------- ------------ ------------ -------------
$ $ $
------------- ------------ -------------
Options outstanding at the 3,615,817 44.16 8,089,003 72.85 7,354,131 7.63
beginning of the year
Changes during the year:
Granted 4,991,088 92.88 6,953,423 5.11 923,325 3,89
Exercised (203,103) 37.47 (34,077) 2.77 (1,300) 3.86
Forfeited and cancelled (314,799) 80.15 (7,654,218) 74.3 (655,582) 11.90
------------ ------------- ------------- ------------ ------------ -------------
Options outstanding at the
end of the year 8,089,003 72.85 7,354,131 7.63 7,620,574 6.81
============ ============= ============= ============ ============ =============
Options exercisable at the
end of the year 1,689,570 43.84 2,321,762 12.16 4,744,059 8.05
============ ============= ============= ============ ============ =============
F - 44
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
1. In the event that cash dividends are declared by the
Company, such dividends will be declared and paid in
Israeli currency. Under current Israeli regulations,
any cash dividend in Israeli currency paid in respect
of Ordinary shares purchased by non-residents of
Israel with non-Israeli currency, may be freely
repatriated in such non-Israeli currency, at the rate
of exchange prevailing at the time of repatriation.
2. Pursuant to the terms of a credit line from a bank
(see Note 15d), the Company is restricted from paying
cash dividends to its shareholders without initial
approval from the bank.
NOTE 13:- RESTRUCTURING CHARGES
a. In March and September 2001, the Group recorded
restructuring charges of approximately $10 million and $
20.3 million, respectively, pursuant to restructuring plans
committed to by management, of which in 2001, $13.0 million
was paid in cash, $6.3 million was a non-cash expense and
$11 million was accrued as a short-term liability. In 2002,
$7.4 million was paid in cash. The restructuring costs
consist of employee termination benefits associated with
involuntary termination of approximately 650 employees
including potential claims (see Note 11e), compensation to
certain suppliers and customers, costs associated with
termination of lease commitments in respect of premises
occupied by the Group and other costs. The terminations
resulted from the Group's strategy to reduce costs and
improve profitability.
F - 45
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13:- RESTRUCTURING CHARGES (CONT.)
Restructuring charges were accounted for in accordance with
FASB's Emerging Issues Task Force 94-3, "Liability
Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)" ("EITF 94-3") and Staff
Accounting Bulletin No. 100, "Restructuring and Impairment
Charges" ("SAB No. 100").
RESTRUCTURING
CHARGES IN THE ACCRUED
YEAR ENDED LIABILITY AS OF
DECEMBER 31, DECEMBER 31,
-------------------- ------------------
2001 2002
-------------------- ------------------
U.S. DOLLARS IN THOUSANDS
------------------------------------------
Employee terminations, including potential claims $ 11,785 $ 895
Termination of lease commitments 7,826 755
Compensation to customers and suppliers 9,167 583
Other 1,506 1,405
-------------------- ------------------
$ 30,284 $ 3,638
==================== ==================
For additional description of restructuring charges, write
off and other significant charges, see Note 1c.
NOTE 14:- TAXES ON INCOME
a. The Company:
1. Tax benefits under the Law for the Encouragement of
Capital Investments, 1959:
The Company has been granted an "Approved Enterprise"
status for nine investment programs in the alternative
program, by the Israeli Government under the Law for
Encouragement of Capital Investments, 1959 ("the Law").
In 2002, the Company applied for approval of an
additional investment program, part of which is
expected to be considered an increase of the investment
in the ninth Approved Enterprise and another part is
expected to be considered a replacement of previously
approved equipment.
Since the Company is a "foreign investors' company", as
defined by the above-mentioned law, it is entitled to a
ten-year period of benefits, for enterprises approved
after April 1993. The main tax benefits from said
status, are a tax exemption for two to four years, and
a reduced tax rate (based on the percentage of foreign
shareholding in each tax year) on income from all of
its approved enterprises, for the remainder of the
benefit period. These tax benefits are subject to a
limitation of the earlier of twelve years from
commencement of operations, or fourteen years from
receipt of approval. The periods of benefits of the
approved enterprises will expire between 2003 and 2009.
F - 46
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14:- TAXES ON INCOME (CONT.)
The tax-exempt profits that will be earned by the Company's
"Approved Enterprises" can be distributed to shareholders,
without imposing tax liability on the Company only upon its
complete liquidation. If these retained tax-exempt profits
are distributed in a manner other than in the complete
liquidation of the Company it would be taxed at the
corporate tax rate applicable to such profits as if the
Company had not elected the alternative system of benefits
(depending on the level of foreign investment in the
Company) currently between 10% to 25% for an "Approved
Enterprise".
The Company is entitled to claim accelerated depreciation in
respect of equipment used by "Approved Enterprises" during
the first five years of the operations of these assets.
The entitlement to the above mentioned benefits is
conditional upon the Company's fulfilling the conditions
stipulated by the above mentioned law, regulations published
there under and the certificates of approval for the
specific investments in approved enterprises. In the event
of failure to comply with these conditions, the benefits may
be canceled and the Company may be required to refund the
amount of the benefits, in whole or in part, with the
addition of linkage differences to the Israeli Consumer
Price Index ("CPI") and interest.
Income from sources other than the "Approved Enterprise"
during the benefit period will be subject to tax at the
regular corporate tax rate of 36%.
2. Measurement of results for tax purposes under the Income Tax
(Inflationary Adjustments) Law, 1985:
Under this law, results for tax purposes are measured in
real terms, in accordance with the changes in the Israeli
CPI, or in the exchange rate of the dollar for a "foreign
investors' company". The Company has elected to measure its
results for tax purposes on the basis of the changes in the
exchange rate of the dollar, which as stated in Note 3b, is
the Company's reporting currency, and therefore results in
no differences.
3. The Law for the Encouragement of Industry (Taxes), 1969:
The Company is an "industrial company", as defined by this
law and, as such, is entitled to certain tax benefits,
mainly accelerated depreciation, as prescribed by
regulations published under the Inflationary Adjustments
Law, and amortization of patents, certain other intangible
property rights and deduction of share issuance expenses.
F - 47
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14:- TAXES ON INCOME (CONT.)
4. Israeli tax reform:
On January 1, 2003, a comprehensive tax reform took
effect in Israel. Pursuant to the reform, resident
companies are subject to Israeli tax income accrued or
derived in Israel or abroad. In addition, the concept
of "controlled foreign corporation" was introduced,
according to which an Israeli company may become
subject to Israeli taxes on certain income of a
non-Israeli subsidiary if the subsidiary's primary
source of income is passive income (such as interest,
dividends, royalties, rental income or capital gains).
The tax reform also substantially changed the system of
taxation of capital gains.
b. Non-Israeli subsidiaries:
Non-Israeli subsidiaries are taxed based on tax laws in
their countries of residence.
c. Carryforward tax losses and credits:
At December 31, 2002, the Company had net operating loss
carryforwards for Israeli income tax purposes of
approximately $64.3 million, which are available to offset
against future taxable income.
In addition, the Group had carryforward tax losses and
research and development tax credits relating to non-Israeli
subsidiaries, mainly in the U.S, of approximately $ 399
million as of December 31, 2002. The carryforward amounts
expire between 2013 and 2021.
Utilization of U.S. net operating losses may be subject to
substantial annual limitation due to the "change in
ownership" provisions of the Internal Revenue Code of 1986
and similar state provisions. The annual limitations may
result in the expiration of net operating losses before
utilization. In connection with the debt restructuring
described in Note 18a, the Company expects the expiration of
a significant portion of the carryforward tax losses.
F - 48
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14:- TAXES ON INCOME (CONT.)
d. Deferred income taxes:
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components
of the Groups' deferred tax liabilities and assets are as
follows:
DECEMBER 31,
-------------------------------------
2001 2002
----------------- -----------------
U.S. DOLLARS IN THOUSANDS
-------------------------------------
1. Provided with respect of the following:
Carryforward tax losses and research and
development credits $ 155,619 $ 192,106
Intercompany profits 2,152 -
Other 23,539 42,010
----------------- -----------------
Deferred tax assets before valuation allowance 181,310 234,116
Valuation allowance (176,256) (229,021)
----------------- -----------------
Net deferred tax assets $ 5,054 $ 5,095
================= =================
Domestic $ 4,587 $ 4,560
Foreign 467 535
----------------- -----------------
$ 5,054 $ 5,095
================= =================
2. Deferred taxes are included in the balance sheets,
as follows:
Current assets $ 2,763 $ 4,721
Non-current assets 2,324 374
Other long-term liabilities (33) -
----------------- -----------------
$ 5,054 $ 5,095
================= =================
3. As of December 31, 2002, the Group has increased the
valuation allowance by approximately $ 39.9 million
with respect to deferred tax assets resulting from tax
loss carryforwards and other temporary differences.
Management currently believes that it is more likely
than not that the deferred tax regarding the loss
carryforwards and other temporary differences will not
be realized in the foreseeable future.
e. The main reconciling items between the statutory tax rate of
the Company and the effective tax rate are the
non-recognition of tax benefits from accumulated net
operating losses carryforward and other temporary
differences among the various subsidiaries worldwide due to
the uncertainty of the realization of such tax benefits and
the effect of approved enterprise.
F - 49
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14:- TAXES ON INCOME (CONT.)
f. Taxes on income included in the statements of operations:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- --------------- ---------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Provision for income tax:
Current $ 7,912 $ 2,467 $ 970
Previous years (2,334) (361) -
--------------- --------------- ---------------
5,578 2,106 970
Deferred income taxes (3,575) (1,132) (41)
--------------- --------------- ---------------
$ 2,003 $ 974 $ 929
=============== =============== ===============
Domestic $ 2,879 $ (2,001) $ 604
Foreign (876) 2,975 325
--------------- --------------- ---------------
$ 2,003 $ 974 $ 929
=============== =============== ===============
g. Income (loss) before taxes on income from continuing
operations:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- --------------- ---------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Domestic $ 61,880 $ (168,956) $ (103,351)
Foreign (29,768) (258,765) (159,454)
--------------- --------------- ---------------
$ 32,112 $ (427,721) $ (262,805)
=============== =============== ===============
NOTE 15:- SUPPLEMENTARY BALANCE SHEET INFORMATION
a. Other accounts receivable and prepaid expenses:
DECEMBER 31,
------------------------------------
2001 2002
---------------- ----------------
U.S. DOLLARS IN THOUSANDS
------------------------------------
Government authorities $ 11,147 $ 15,704
Employees 1,881 1,843
Receivables in respect of capital leases (see c below) 15,450 14,075
Prepaid expenses 5,609 7,085
Deferred income taxes (see Note 14d) 2,763 4,721
Other 9,240 3,685
---------------- ----------------
$ 46,090 $ 47,113
================ ================
F - 50
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15:- SUPPLEMENTARY BALANCE SHEET INFORMATION (CONT.)
b. Long-term trade receivables and other receivables:
DECEMBER 31,
------------------------------------
2001 2002
---------------- ----------------
U.S. DOLLARS IN THOUSANDS
------------------------------------
Long term trade receivables in respect of capital lease $ 25,264 $ 22,229
Other long term trade receivables 13,556 9,029
Other receivables 1,459 169
---------------- ----------------
$ 40,279 $ 31,427
================ ================
c. Receivables in respect of capital and operating leases:
The Group's contracts with customers contain long-term
commitments, for remaining periods ranging from one to five
years, to provide network services, equipment, installation
and maintenance.
The aggregate minimum future payments to be received by the
Group under these contracts as of December 31, 2002, are as
follows (including unearned interest income in the amount of
$ 4.6 million):
YEAR ENDED DECEMBER 31, U.S DOLLARS
IN THOUSANDS
------------------
2003 $ 14,075
2004 11,374
2005 8,934
2006 5,466
2007 and thereafter 1,070
------------------
$ 40,919
==================
The net investments in capital lease receivables, as of
December 31, 2002, are $ 36.3 million. Total revenues from
capital and operating leases amounted to $ 45.7 million and
$19.9 million in the year ended December 31, 2001 and 2002,
respectively.
F - 51
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15:- SUPPLEMENTARY BALANCE SHEET INFORMATION (CONT.)
d. Short-term bank credit:
1. The following is classified by currency and interest
rates:
WEIGHTED AVERAGE
INTEREST RATE
-----------------------------
DECEMBER 31, DECEMBER 31,
----------------------------- --------------------------------
2001 2002 2001 2002
----------------------------- --------------- ----------------
% U.S. DOLLARS IN THOUSANDS
----------------------------- --------------------------------
In dollars 3.06 7.16 $ 3,376 $ 1,801
In Israeli NIS and other
currencies 4.7-23.15 10.0-17.1 1,288 25
============= ============= ---------------- ---------------
10.3 7.28 $ 4,664 $ 1,826
============= ============= ================ ===============
Short-term bank credit is secured by a negative pledge
agreement.
2. As of December 31, 2002, the Company has utilized all
its available credit line, which includes guarantees
for future performance obligations.
e. Other accounts payable:
DECEMBER 31,
-------------------------------------
2001 2002
----------------- -----------------
U.S. DOLLARS IN THOUSANDS
-------------------------------------
Payroll and related employees accruals $ 2,981 $ 3,464
Provision for vacation pay 4,838 4,836
Advances from customers 643 7,862
Deferred revenue 7,277 6,904
Current maturities of long-term liabilities with respect
to capital lease agreements 8,069 1,810
Sale taxes payable 5,676 7,536
Related parties - 3,281
Other 658 2,094
----------------- -----------------
$ 30,142 $ 37,787
================= =================
F - 52
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15:- SUPPLEMENTARY BALANCE SHEET INFORMATION (CONT.)
f. Long-term loans:
DECEMBER 31,
RATE OF -----------------------------
INTEREST FOR
2001 AND 2002 MATURITY 2001 2002
---------------- ------------- ------------- --------------
LINKAGE % U.S. DOLLARS IN THOUSANDS
----------- ---------------- -----------------------------
Restructured loans (a):
Loan from bank Hapoalim Dollar Libor+0.8% $ 108,000 $ 105,147
Loan from bank Leumi Dollar Libor + 2.0% 30,000 30,000
Other long-term loans (b) Dollar Libor+1.0% 9,266 6,579
------------- --------------
147,266 141,726
------------- --------------
Other loans:
Loans from a bank DM 5.86%-6.3% 2003-2021 5,380 6,140
Loans from a bank Dollar 6.75% 2003 - 539
Other long-term loans (b) Dollar Libor+1.0% 2003-2004 7,689 4,677
Other long-term loans Dollar 5.0% 2005 - 255
Loans from related parties Dollar 5% 2005 962 -
------------- --------------
14,031 11,611
------------- --------------
161,297 153,337
Less - current maturities 25,224 8,197
------------- --------------
$ 136,073 $ 145,140
============= ==============
(a) Subsequent to the balance sheet date, the Company
entered into a restructuring process reaching an
agreement with the banks and other creditors which
revised the loan terms. (See Note 18).
(b) The Company granted the lender a security interest on
certain of its computer, machinery, and hub equipment
assets.
Long-term debt maturities for loans that were not
restructured after December 31, 2002, are as follows:
U.S DOLLARS
YEAR ENDED DECEMBER 31, IN THOUSANDS
----------------------- ------------------
2003 $ 3,946
2004 1,697
2005 329
2006 302
2007 and thereafter 5,337
------------------
$ 11,611
==================
Interest expenses on the long-term loans amounted to $ 0,
$7,717,000 and $6,784,000 for the years ended December 31,
2000, 2001 and 2002, respectively.
As for amendment of terms of certain loans see Note 18 .
F - 53
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15:- SUPPLEMENTARY BALANCE SHEET INFORMATION (CONT.)
g. Other long-term liabilities:
DECEMBER 31,
------------------------------------
2001 2002
---------------- ----------------
U.S. DOLLARS IN THOUSANDS
------------------------------------
Deferred revenue $ 7,859 $ 6,099
Long term liability in respect of OCS agreement *) 2,758 2,775
Provision for cash distribution to rStar minority, see
Note 2a - 5,000
Long-term liabilities with respect to capital lease
agreements **) 3,140 3,415
Other 3,309 1,904
---------------- ----------------
$ 17,066 $ 19,193
================ ================
*) The Company was committed to pay royalties to the
Government of Israel at rate of 3%-5% on sales proceeds
from products for which the Government participates in
the research and development by way of grants. The
obligation to pay these royalties is contingent on
actual sales of the products and, in the absence of
such sales, no payment is required. The royalty amount
was determined up to the amount of the grants received
(the grants are linked to the U.S. dollar and part of
the grants bear interest at LIBOR rate).
Royalties paid or accrued for the years ended December
31, 2000, 2001 and 2002 to Office of the Chief
Scientist in the Israeli Ministry of Industry and Trade
("the OCS") amounted to $ 138,000, $ 1,269,000 and $0,
respectively.
In October 2001, the Company filed a request with the
OCS for the commitment to pay all royalties arising
from future sales with respect of previous OCS grants.
The Company recorded expenses in the amount of $ 3.4
million payable over a period of up to five years,
which bears interest at a rate to be agreed between the
Company and the OCS. The amount was recorded in
selling, marketing, general and administrative. This
agreement will enable the Company to participate in a
new OCS program under which it will be eligible to
receive future research and development grants for
generic research and development projects without any
royalty repayment obligations.
F - 54
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15:- SUPPLEMENTARY BALANCE SHEET INFORMATION (CONT.)
**) Future minimum lease payments in respect of capital
lease agreements:
YEAR ENDED DECEMBER 31, U.S DOLLARS
IN THOUSANDS
------------------
2003 $ 1,810
2004 1,534
2005 2,038
------------------
5,382
Less amount representing interest 158
------------------
Present value of minimum lease payments $ 5,224
==================
NOTE 16:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development costs, net:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- ---------------- ----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Total cost $ 35,576 $ 44,483 $ 29,012
Less:
Royalty bearing grants 926 2,058 -
Non - royalty bearing grants 3,378 6,791 3,946
--------------- ---------------- ----------------
$ 31,272 $ 35,634 $ 25,066
=============== ================ ================
b. Selling, marketing, general and administrative expenses:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- ---------------- ----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Selling and marketing (1) $ 41,575 $ 54,313 $ 35,990
General and administrative (2) 40,869 67,173 50,237
--------------- ---------------- ----------------
$ 82,444 $ 121,486 $ 86,227
=============== ================ ================
(1) Including shipping expenses in the amounts of $1.9
million, $ 5.4 million and $ 3.8 million for the years
ended December 31, 2000, 2001 and 2002, respectively.
(2) Including amortization of goodwill and other
identifiable intangible assets.
F - 55
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16:- SELECTED STATEMENTS OF OPERATIONS DATA (CONT.)
c. Allowance for doubtful accounts:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- ---------------- ----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Balance at beginning of year $ 4,423 $ 8,077 $ 114,703
Increase during the year 3,654 134,614 34,714
Write-off of bad debts - (27,988) (132,376)
--------------- ---------------- ----------------
Balance at the end of year $ 8,077 $ 114,703 $ 17,041
=============== ================ ================
In 2001, the Company provided allowance for its capital
leases receivables relating to vertical market customers
that were specifically identified by the management of the
Company as having difficulties paying their respective
receivables. Those customers were significantly adversely
affected by the recession which was indicated in the third
quarter and was accompanied in the United States by an
abrupt drop in consumer spending, intensifying business
lay-offs of workers and by an acceleration of the downsizing
of businesses. Furthermore, the Company increased its
allowance for bad debt provision since certain circumstances
such as the global decrease in the Telecommunication
companies, depressed market conditions and difficulties in
collections from certain customers indicated that the
carrying amount of the receivables may not be recoverable.
Management estimated potential recovery of the identified
capital lease receivables and other trade receivables and
allocated reserves for the difference between the receivable
balance and the estimated recovery amount to be $134.6
million (including $75 million relating to StarBand, see
Note 1b) for 2001.
During 2002, we increased our allowance for bad debt
provision since certain circumstances such as the depressed
market conditions and difficulties in collections from
certain customers indicated that the carrying amount of the
receivables may not be recoverable. As a result, we
increased our bad debt provision and wrote off an amount of
approximately $34.7 million.
F - 56
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16:- SELECTED STATEMENTS OF OPERATIONS DATA (CONT.)
d. Financial income (expenses), net:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- ---------------- ----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Income:
Interest on cash equivalents and bank
deposits and restricted cash $ 14,264 $ 8,165 $ 1,798
Interest with respect to capital lease 4,923 2,615 4,625
Other (mainly translation adjustments) 741 1,734 1,276
--------------- ---------------- ----------------
19,928 12,514 7,699
--------------- ---------------- ----------------
Expenses:
Interest on Convertible Subordinated Notes
(see Note 10) 13,972 14,875 14,936
Amortization of issuance costs of
convertible subordinated notes (see Notes
8 and 10) 1,978 2,124 2,127
Interest with respect to short-term bank
credit and trade payables and other 704 2,113 1,484
Interest with respect to long-term loans - 7,717 6,784
Interest with respect to capital lease - 1,135 1,912
Other (mainly translation adjustments) 4,563 5,884 1,780
--------------- ---------------- ----------------
21,217 33,848 29,023
--------------- ---------------- ----------------
$ (1,289) $ (21,334) $ (21,324)
=============== ================ ================
F - 57
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17:- CUSTOMERS AND GEOGRAPHIC INFORMATION
The Group operates in one business segment - the design,
development, manufacturing, marketing and providing of services
for very small aperture terminal ("VSAT") satellite earth
stations. The Group has adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information".
a. Revenues by geographic area:
Following is a summary of revenues by geographic area.
Revenues are attributed to geographic area, based on the
location of the end customers, as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- ---------------- ----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
United States $ (* 289,744 $ (* 151,100 $ (* 110,256
South America and Central America (* 108,463 117,551 40,486
Asia (* 63,665 (* 50,562 24,629
Europe 31,309 48,554 (* 14,577
Africa 8,194 16,855 17,325
Israel 719 1,019 1,205
Other 2,468 388 277
--------------- ---------------- ----------------
$ 504,562 $ 386,029 $ 208,755
=============== ================ ================
*)Including revenues from related parties as follows:
StarBand revenues $ 128,544 $ 44,288 $ 3,220
Others 21,690 5,729 3,530
--------------- ---------------- ----------------
$ 150,234 $ 50,017 $ 6,750
=============== ================ ================
b. Revenues from single customers, which exceed 10% of total
revenues in the reported years, as a percentage of total
revenue:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 2001 2002
--------------- ---------------- ----------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------------------
Customer A - related party (see Note 1b) 25.48% 11.47% 1.54%
Customer B - - 10.52%
=============== ================ ================
F - 58
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17:- CUSTOMERS AND GEOGRAPHIC INFORMATION (CONT.)
c. The Group's long-lived assets are located in the following
countries:
DECEMBER 31,
2001 2002
U.S. DOLLARS IN THOUSANDS
United States $ 140,551 $ 50,938
Israel 117,458 94,014
Latin America 98,033 15,441
Europe 26,928 17,237
Other 404 789
----------------- -----------------
$ 383,374 $ 178,419
================= =================
NOTE 18:- SUBSEQUENT EVENTS (UNAUDITED)
a. In March 2003, the Company completed a plan of arrangement
with its bank lenders, holders of the Company's 4.25%
Convertible Subordinated Notes due 2005 (the "old notes"),
and certain other creditors.
A part of the arrangement, the Company amended the following
agreements, as detailed herein:
4.25% Convertible Subordinated Notes due 2005:
In exchange for the old notes which had a principal amount
of $350 million, the Company issued (i) 202,083,908 ordinary
shares and (ii) $83.3 million in principal amount of 4.00%
Convertible Notes due 2012, also called new notes. The
Company will pay interest on the new notes semiannually in
arrears on April 1 and October 1 of each year, beginning on
April 1, 2005. The first interest payment shall be payable
with respect to the period from January 1, 2005 to April 1,
2005. Prior to January 1, 2005, interest will be accrued and
compounded semi-annually. The Company will pay $2.5 million
of the principal amount of the new notes on each of April 1
and October 1, in both 2010 and 2011, and the remaining
principal amount at maturity. The new notes are convertible
at the option of the holder into the Company's Ordinary
shares at a conversion price of $0.87 per Ordinary share at
any time after one year from the date of issuance of the new
notes and before close of business on October 1, 2012,
unless the new notes have been mandatory converted
previously. Commencing January 1, 2005, the Company may, at
its option, require the conversion right to be exercised if
the average closing bid price of its Ordinary shares exceeds
$1.00 per Ordinary share for 60 consecutive calendar days
and the average daily trading volume in its Ordinary shares
during that period is not less than $100,000 or such smaller
amount, if any, as may be set forth in the indenture
governing the new notes. The collateral for the new notes is
a second priority security interest consisting of a floating
charge on all of the Company's assets and a pledge of all of
the shares of Spacenet that the Company owns. The interest
of the holders of the new notes in the collateral will be
subordinated to the security interest granted for the
benefit of the bank lenders.
F - 59
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18:- SUBSEQUENT EVENTS (UNAUDITED) (CONT.)
Bank Hapoalim:
Of the $102 million in principal amount due from the
Company to Bank Hapoalim, (i) $25.5 million was converted
into 18,488,590 Ordinary shares, (ii) $5.1 million was
converted into new notes of the same principal amount and
(iii) the remaining debt amount of $71.4 million remains as
a loan on revised terms. The revised terms include equal
semiannual installments of principal of $ 4.5 million
beginning on July 2, 2005, with a last installment of $8.9
million on July 2, 2012. The loan bears interest at the
six-month LIBOR rate plus 2.5% and is payable semiannually
together with the installments of principal.
Bank Leumi:
The revised terms of the restructured loan include
principal payments in the amount of $1 million annually
during each of 2003 and 2004, and principal payments of $4
million annually during each of the years 2005 through
2011. The loan bears interest at the six-month LIBOR rate
plus 2.5%. In addition, Bank Leumi agreed to maintain its
line of credit utilized for performance guarantees for the
Company's benefit and for its direct and indirect
subsidiaries in the existing aggregate amount of $15
million for at least one year, subject to the limitation
that continued availability of the line of credit may be
affected by the overall collateral made available by the
Company in support of credit used by the Company in the
future for the issuance of guarantees.
Bank Discount:
Israel Discount Bank agreed to maintain its performance
guarantees for the Company's benefit and its subsidiaries
in the existing amount of $13.3 million for at least one
year.
SES:
The Company entered into a new agreement with SES Americom,
its major supplier of satellite transponder capacity.
According to the agreement, SES Americom agreed to allow
Spacenet to defer payment of certain transponder capacity
charges due in 2003 and 2004, with payment of those
deferred charges to commence in 2005. As part of this
agreement, the Company will issue SES Americom 14,261,048
Ordinary shares equal to approximately 5.5% of the
Company's Ordinary shares. The agreement reduced the
Company's liability to SES Americom from an aggregate
amount of $26.9 million to have been paid in 2003 to an
aggregate amount of $13.5 million. In addition, a $3.5
million payment was deferred from 2002 to 2003. In 2002,
the Company recorded a provision for the settlement in the
amount of $5.7 million, representing the fair value of the
shares issued at the closing date of the arrangement.
As of March 31, 2003, 259,757,196 of the Company's Ordinary
shares are outstanding. The arrangement reduced the
Company's principal debt by approximately $ 293 million and
the interest accrued on the convertible note by
approximately $12 million and significantly reduced overall
financing costs.
F - 60
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18:- SUBSEQUENT EVENTS (UNAUDITED) (CONT.)
On March 19, 2003, the Company distributed a proxy statement
relating to a shareholders meeting to be held on April 15 of
this year, to approve, among other things (i) the
implementation of a 1-for-20 reverse stock split, (ii) an
increase of the Company's share capital, and (iii) the
election of a slate of directors. The expected reverse stock
split will reduce the number of the Company's Outstanding
shares of the Company to approximately 12,987,860 shares,
based on the amount of outstanding shares as of March 31,
2003.
The Company will account for the troubled debt restructuring
included in the arrangement on the basis of Combination of
Types of Restructuring and on the basis of Modification of
Terms in lieu of troubled debt restructuring pursuant to FAS
15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings" and EITF 02-4 "Debtor's Accounting for a
Modification or an Exchange of Debt Instruments in
Accordance with FASB Statement No. 15, Accounting by Debtors
and Creditors for Troubled Debt Restructurings." and SFAS
No. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of
SFAS No. 13, and Technical Corrections," ("SFAS No. 145").
Tax Consequences of the Arrangement to the Company:
The Company obtained a ruling from the Israeli Tax
Authorities regarding the tax treatment of the arrangement
described above. According to the ruling (i) a payment of
approximately $ 1.1 million will be due after the completion
of the arrangement; (ii) the capital gain for tax purposes
in according with the ruling will be decreased from the tax
basis of the Company's assets as of January 1, 2001; (iii)
an amount equal to the difference between the part of our
debt to Bank Hapoalim that will be converted into the
Company's Ordinary shares under the arrangement and the
value of the Company's Ordinary shares that will be issued
in consideration for that part will be considered as taxable
income in tax year 2003; (iv) the value of the Company's
Ordinary shares for the purposes of the ruling is expected
to be approximately $0.5 per share; (v) the Company's tax
returns beginning with the 2001 tax year will be submitted
according to the ruling; (vi) the ruling can not be used by
the holders of the existing notes as approval of their
losses by the Israel Tax Authorities and the ruling shall
not otherwise apply to the holders of the existing notes;
and (vii) the Company will commit not to transfer its
activities abroad or, for tax purposes, cease to be
considered an Israeli resident.
In addition, the Company may be subject to payment of
Israeli stamp tax if and to the extent required by law.
b. On January 24, 2003 an action was filed by Spacenet Inc.
against Creative Resources Solutions L.L.C. (CRS) in the
Circuit Court for Fairfax County, Virginia in the amount of
$1.5 million seeking payment of unpaid service charges and
contract damages. After Spacenet rejected CRS' offer to
settle the lawsuit for a cash payment by CRS, CRS filed a
counterclaim for $4.7 million alleging contract
non-performance by Spacenet. Spacenet is vigorously pursuing
its claim against CRS and disputing CRS; counterclaim, which
it believes has no merit.
F - 61
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18:- SUBSEQUENT EVENTS (UNAUDITED) (CONT.)
c. In February 2003, a letter was received from a former
employee alleging that the Company owes him approximately
$400,000 in compensation as a result of his employment with
and services rendered to the Company. The Company denies
that it owes any amounts to him and intends to vigorously
dispute such claims.
F - 62
EXHIBIT 4.1
THIS AMENDING AGREEMENT ("Agreement") is made on the 6th day of March, 2003
BETWEEN:
(1) GILAT SATELLITE NETWORKS LTD. (under a stay of proceedings), a limited
liability company organised and existing under the laws of the State of
Israel (the "BORROWER");
(2) BANK HAPOALIM B.M., a banking corporation incorporated in the State of
Israel (the "LENDER");
RECITALS
WHEREAS, On December 29, 2000 the Borrower borrowed $108,000,000 from the
Lender pursuant to the Facility Agreement as defined below;
WHEREAS, the Facility Agreement was subsequently revised as follows:
(1) On August 12, 2002 to amend the Interest Period as stated therein
(see EXHIBIT A).
(2) On February 24, 2002 to provide limitations on the creation of
security interests and certain commitments for financial
covenants (see EXHIBIT B).
(3) On July 8, 2002, to provide for the payment of periodical
interest of $1,524,312, the partial payment of $ 6,000,000 on
account of the principal and the additional partial repayment of
principal by a new short term loan in the sum of $12,000,000,
with a due date of September 15, 2002, that was later extended to
January 2, 2003 (see EXHIBIT C).
WHEREAS, on October 15 2002, the Borrower, having failed to meet an
interest payment of $7,437,500 to the Noteholders, commenced the
Section 350 Proceedings with the consent of the Creditors in the
District Court in Tel Aviv, which were followed by a Section 304
Proceeding in the U.S. Bankruptcy Court in the State of Delaware,
all culminating in a stay of proceedings against the Borrower in
the State of Israel and the United States of America;
WHEREAS, pursuant to and conditioned upon a court sanctioned arrangement
among certain creditors of the Borrower, as fully described in
the Proxy Solicitation, AS DEFINED BELOW, the Borrower and the
Lender have agreed to amend the Facility Agreement to state as
provided in this Agreement, starting the Effective Date as
defined below;
WHEREAS, the Borrower is expected to emerge from the Israeli Section 350
Proceedings with a reduction of and /or modifications to the
terms of its indebtedness to the Creditors, as set forth in the
Proxy Solicitation;
2
WHEREAS, the Borrower is expected to receive the final order from the U.S.
Bankruptcy Court implementing and giving effect in the United
States, under section 304 of the U.S Bankruptcy Code, to the
Arrangement;
WHEREAS, on May 31, 2001 StarBand filed a voluntary petition under Chapter
11 with the US Bankruptcy Court in Delaware, and at the time of
execution of this Agreement, StarBand is still under the
protection of the court in the Chapter 11 proceedings with
unclear prospects of emerging from these proceedings;
WHEREAS, The Proxy Solicitation document fairly described the
capitalization, consolidated financial information, analysis of
results of operation and financial condition, recent business
development, risk factors, management and certain tax
considerations, - of the Borrower and its subsidiaries as of
January 6, 2003, excluding the financial information which is as
of September 30, 2002, and other than the description of other
events specifically stated in this Agreement, no material event
has come to the attention of the management of the Borrower as of
such date, which event has not been disclosed in writing to the
Lender; and
WHEREAS, the parties wish to amend the Facility Agreement as provided
herein;
IT IS AGREED as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
In this Agreement, the following terms shall have the following meanings:
ADVANCE The principal amount borrowed by the
Borrower under the Facility Agreement. The
parties acknowledge that the Advance in the
total amount of $108,000,000 was drawn on
the Drawdown Date.
ADDITIONAL COLLATERAL The PARI PASSU first priority (a) charge on
all issued and outstanding shares of
Spacenet and (b) floating charge on all the
assets of the Borrower.
ADDITIONAL PLEDGE The pledge agreement concerning the PARI
AGREEMENT PASSU first priority charge of all issued
and outstanding shares of Spacenet.
AGREEMENT This Agreement.
APPLICABLE LAW (a) any constitution, treaty, statute,
code, law, regulation, ordinance,
rule, judgement, rule of law,
official order, judicial order,
writ, decree, request, approval,
concession, grant, franchise,
licence, directive, guideline,
policy, standard, plan,
requirement, or other governmental
restriction; and
3
(b) any similar form of decision of, or
determination by, or any
interpretation or administration of
any of the foregoing (whether or
not having the force of law) of any
Governmental Authority,
whether in effect as of the date hereof or
thereafter and in each case as amended,
re-enacted or replaced.
ARRANGEMENT The Means the arrangement among the
Creditors and the Borrower, as described in
the Proxy Solicitation and as approved by
the Creditors at the Creditors meetings
dated February 5, 2003.
BUSINESS DAY Means (i) any day that is not a Saturday, a
Sunday or a day on which commercial banks in
New York or Tel Aviv are required or
authorised to be closed and (ii) when used
in any respect relating to LIBOR, any day
described in clause (i) of this definition
that is also a day on which dealings may be
carried out in the London inter-bank market.
CAPITAL GUIDELINE any law, rule, regulation, policy, guideline
or directive (whether or not having the
force of law and whether or not the failure
to comply therewith would be unlawful) (i)
regarding capital adequacy, capital ratios,
capital requirements, the calculation of a
bank's capital or similar matters, or (ii)
affecting the amount of capital required to
be obtained or maintained by the Lender or
any Person controlling the Lender or the
manner in which the Lender or any Person
controlling the Lender allocate capital to
any of their contingent liabilities
(including letters of credit), advances,
acceptances, commitments, assets or
liabilities,
CAPITAL STOCK Means any and all shares, interests,
warrants, options or other equivalents
(however designated) of capital stock of a
corporation or any and all equivalent
ownership interests in a Person (other than
a corporation).
CHAPTER 11 Chapter 11 of Title 11 of the U.S Bankruptcy
Code.
COLLATERAL The Pledged Collateral, as defined in the
Pledge Agreement and the Additional
Collateral.
CONDITIONS PRECEDENT The conditions set forth in Section 3.1
below.
COURT The Tel Aviv District Court.
CREDITOR each of the following: the Noteholders, the
Lender, the Israeli Discount Bank Ltd., and
Bank Leumi Le-Israel B.M., collectively
called "Creditors".
DEBENTURE the document creating the first priority
PARI PASSU floating charge on all the assets
of the Borrower in favour of the Lender,
dated the date hereof.
4
DRAWDOWN DATE December 29, 2000, the date on which the
Borrower drewdown the Advance.
DOLLAR, US DOLLAR OR $ Freely transferable lawful currency for the
time being of the United States or any
successor currency.
EFFECTIVE DATE three (3) business days following the day on
which all Conditions Precedent are fulfilled
but no later than March 31 2003, or any
later date mutually agreed upon in advance
and in writing by the Lender and the
Borrower.
ENVIRONMENTAL ACTION Any complaint, summons, citation, notice,
directive, order, claim, litigation,
investigation, judicial or administrative
proceeding, judgment, letter or other
written communication from any Governmental
Authority or any third party involving
violations of Environmental Laws or Releases
of Hazardous Materials:
(a) from any assets, properties or
businesses of the Borrower,
Spacenet or any predecessor in
interest;
(b) from or onto any adjoining
properties or businesses; or
(c) from or onto any facilities which
received Hazardous Materials
generated by the Borrower, Spacenet
or any predecessor in interest.
ENVIRONMENTAL LAWS All Applicable Laws concerning health,
safety, biodiversity, Hazardous Materials or
matters related to pollution or protection
of the environment.
EVENT OF DEFAULT Any of the events set out in Section 16
(Events of Default) of this Agreement.
FACILITY The Dollar term loan facility granted by the
Lender to the Borrower under the Facility
Agreement.
FACILITY AGREEMENT The agreement between the Lender and
Borrower dated December 28, 2000 creating a
US Dollar denominated loan facility of a
principal amount of up to $108,000,000
including all amendments thereto as set
forth in the Recitals above.
FINAL MATURITY DATE July 2, 2012, or such earlier date on which
all obligations of the Borrower shall become
due and payable (whether by acceleration or
otherwise) in accordance with the terms of
this Agreement.
GAAP Generally accepted accounting principles of
a designated country, consistently applied.
GOVERNMENTAL AUTHORITY Any government, governmental department,
ministry, cabinet, commission, board,
bureau, agency, tribunal, regulatory
authority, instrumentality, judicial,
legislative or administrative body or
entity, domestic or foreign, federal,
national, state, regional, provincial or
local, having or exercising jurisdiction
over the matter or matters in question.
5
HAZARDOUS MATERIALS Any natural or artificial substance or
emission (whether in solid or liquid form or
in the form of a gas or vapour and whether
alone or in combination with any other
substance) which is:
(a) capable of causing harm to man or
any other living organism or
damaging the environment or public
health or welfare including but not
limited to any controlled, special,
hazardous, toxic, radioactive or
dangerous waste;
(b) defined as or included in the
definition of "hazardous
substances", "hazardous waste",
"restricted hazardous waste",
"toxic substance", "toxic
pollutant", "contaminant" or
"pollutant" or words of similar
import under any Applicable Law; or
(c) with respect to which any handling,
transportation, disposal or release
into the environment or any human
exposure is prohibited, limited or
otherwise regulated by any
Governmental Authority by reason of
its hazardous nature.
6
INDEBTEDNESS Any indebtedness in respect of:
(a) moneys borrowed or debit balances
at banks and other financial
institutions;
(b) any charge, bond, note, loan stock
or other security;
(c) any acceptance or documentary
credit;
(d) receivables sold or discounted
(otherwise than on a non-recourse
basis);
(e) the acquisition cost of any asset
to the extent payable before or
after the time of acquisition or
possession by the party liable
where the advance or deferred
payment is arranged primarily as a
method of raising finance or
financing the acquisition of that
asset;
(f) any lease entered into primarily as
a method of raising finance or
converting fixed assets into liquid
assets;
(g) any currency swap or interest rate
swap, cap or collar arrangement or
any other derivative or hedging
instrument;
(h) any amount raised under any other
transaction having the commercial
effect of a borrowing or raising of
money;
(i) any guarantee, indemnity or similar
assurance against financial loss of
any Person; or
(j) the available amount of all letters
of credit issued for the account of
any Person, other than letters of
credit issued in connection with
trade transactions issued in the
ordinary course of business.
INDENTURE The indenture to be executed, prior to the
Effective Date, between the Trustee and the
Borrower governing the New Notes.
INTEREST PAYMENT The last day of each Interest Period.
DATES
INTEREST PERIOD As determined in accordance with
Section 6.3 (Interest Periods) or, with
respect to interest at the Post-Default
Rate, Section 6.4 (Default Interest).
LIBOR For any Interest Period the rate of interest
per six months loans equal to:
(a) the rate (rounded upwards, if
necessary, to the nearest 1/16th of
one percent) which is the offered
rate at or about 11:00am London
time two (2) Business Days prior to
the commencement of such Interest
Period for Dollar deposits
7
for a period equal to such Interest
Period which appears on the page
"LIBOR 01" on the Reuters Monitor
Money Rates Service (or such other
page or service as may replace it)
and, in the absence of any such
replacement page or service, such
other page of such other service as
the Lender and the Borrower may
agree; or
(b) if no such rate appears on such
Reuters page or the Lender
determines that no rate for a
period of comparable duration to
the relevant Interest Period
appears on such Reuters page or the
Lender determines that no such
Reuters page or service is
available at the relevant time, the
arithmetic mean (rounded upwards,
if necessary, to the nearest 1/16th
of one percent) of the rates per
annum as supplied to the Lender at
its request, quoted by three
reference banks selected by the
Lender to leading banks in the
London interbank market in the
ordinary course of business, at or
about 11:00am London time two (2)
Business Days prior to the
commencement of such Interest
Period for the offering of Dollar
deposits to the Lender in an amount
comparable to the amount upon which
interest is accruing, and for a
period comparable to such Interest
Period for delivery on the first
day of that Interest Period.
LIBOR OVERNIGHT RATE as of any date, for any Interest Period in
respect of interest at the Post-Default Rate
pursuant to Section 6.4 (Default Interest),
the rate per annum, equal to:
(a) the rate (rounded upwards if
necessary, to 1/16th of one
percent) which is the offered rate
at or about 11.00 am London time
two (2) Business Days prior to the
commencement of such Interest
Period for Dollar deposits for a
period equal to one day which
appears on the page "RMEY" on the
Reuters Monitor Money Rates Service
(or such other page or service as
may replace it) and, in the absence
of any such replacement page or
service, such other page of such
other service as the Lender and the
Borrower may agree; or
(b) if no such rate appears on such
Reuters page or the Lender
determines that no rate for a
period of one day appears on such
Reuters page or the Lender
determines that no such Reuters
page or service is available at the
relevant time, the arithmetic mean
(rounded upwards, if necessary, to
the nearest 1/16th of one percent)
of the rates per annum as supplied
to the Lender at its request,
quoted by three reference banks
selected by the Lender to leading
banks in the London interbank
market in the ordinary course of
business, at or about 11:00am
London time two (2) Business Days
prior to the commencement of such
day for the offering of Dollar
deposits to the Lender in an amount
comparable to the amount upon which
interest is accruing, and for a
period equal to one day.
8
MATERIAL ADVERSE Any effect or event, other than the events
EFFECT indicated in the Chapter 11 proceedings with
regard to Starband, the Section 350
Proceedings, the Section 304 Proceedings and
in the information set forth in EXHIBIT D,
which is materially adverse or materially
prejudicial to:
(a) the business, properties,
operations, prospects or condition
(financial or otherwise) of the
Borrower, Spacenet, or Starband;
(b) the ability of the Borrower,
Spacenet or Starband to perform its
obligations hereunder or under any
other Revised Transaction Document
to which it is a party;
(c) the validity, perfection or
priority of a Security Interest
arising under the Revised
Transaction Documents; or
(d) the rights, powers and remedies of
the Lender under this Agreement or
any other Revised Transaction
Document or the legality, validity
or enforceability of this Agreement
or any other Revised Transaction
Document.
NEW NOTES 4% Convertible Notes of the Borrower due
2012 to be issued to the Noteholders and the
Lender following the approval of the
Arrangement by the Court.
NEW NOTEHOLDERS The holders of New Notes.
NOTEHOLDERS The holders of the 4.25% Convertible
Subordinated Notes due 2005 that were
issued by the Borrower.
OBLIGATIONS Each of:
(a) the obligations of the Borrower to
pay, as and when due and payable
(by scheduled maturity or
otherwise), all amounts from time
to time owing by it in respect of
any Revised Transaction Document to
which it is a party, whether for
principal, interest (including,
without limitation, all interest
that accrues after the commencement
of any case, proceeding or other
action relating to bankruptcy,
insolvency or reorganization of the
Borrower, whether or not a claim
for post-filing interest is allowed
in such proceeding), fees,
commissions, expense
reimbursements, indemnifications or
otherwise, and
(b) the obligations of the Borrower to
perform or observe all of its other
obligations from time to time
existing under any Revised
Transaction Document to which it is
a party.
9
OPTION The Stock Purchase Option granted by
Spacenet in favour of the Lender or any of
its wholly owned subsidiaries on December
28, 2000.
ORDINARY SHARES The ordinary shares, par value NIS 0.01 each
of the Borrower.
ORIGINAL LOAN AMOUNT The original $108,000,000 lent to the
Borrower on the Drawdown Date.
OTHER BANKS Bank Leumi Le-Israel B.M. and the Israel
Discount Bank Ltd.
OUTSTANDING BALANCE Means at any given time, the
Principal decreased by any Principal
Instalment Amounts paid to the Lender and
increased by any accrued and unpaid
interest.
PARTIAL PAYMENT (FIRST) The First Partial Repayment shall mean the
repayment of $6,000,000 on account of the
principal of the Original Loan Amount along
with $1,524,312 of interest as per the
amendment to the Facility Agreement dated
July 8, 2002.
PARTIAL PAYMENT (SECOND) The Second Partial Payment shall mean the
conversion of $30,600,000 of the Original
Loan Amount by the issuance to the Lender of
18,488,590 Ordinary Shares and $5,100,000
principal amount of New Notes, effected on
the date hereof.
PERMITTED SECURITY INTERESTS Any of the following:
(a) with respect to Spacenet, any
Security Interest created by
Spacenet over the Collateral
pursuant to the Pledge Agreement;
(b) with respect to the Borrower, any
Security Interests created by the
Borrower with regard to the
Additional Collateral pursuant to
the Additional Pledge Agreement;
(c) with respect to the Borrower, the
Debenture and the first priority
floating charge to be created in
favour of the Lender and the Other
Banks, pursuant to the Arrangement
and the second priority floating
charge to be created in favour of
the Noteholders pursuant to the
Arrangement;
(d) with respect to any other Person,
any Security Interest set forth in
EXHIBIT E.
(e) the Security Interests created by
the Borrower with respect to land
and building forming part of Parcel
No. 108 of Block 6640 and any
proceeds received from the sale
thereof, regardless to the date on
which such Security Interests will
be officially registered;
10
(f) any Security Interests created by
the Borrower over future
uncollected book debts and
receivables up to an aggregate
amount of US$15,000,000 with
respect to goods and services to be
provided by the Borrower in the
ordinary course of business to bona
fide customers (i.e. - upon the
condition that such debts and
receivables are incurred after the
Effective Date); provided that (i)
provided that such Security
Interests are granted only to banks
or similar financial institutions
as security for credit facilities
(including then provision of
guarantees for the account of the
Borrower) the purpose of such
credit facilities being to
facilitate the same transaction on
account of which such uncollected
book debts and receivable are
payable, and (ii) such uncollected
book debts and receivables over
which Security Interests are
granted as aforesaid constitute no
more than 50% of the purchase price
which the Borrower, acting
reasonably and prudently, assesses
as being payable in respect of the
goods and services provided or to
be provided by the Borrower within
the framework of the aforesaid
transaction;
(g) any Security Interests created by
the Borrower over an asset which
secures Indebtedness incurred for
the purpose of financing the
acquisition of that asset, provided
that the amount of Indebtedness so
secured does not exceed the cost of
that acquisition and that any such
Security Interest shall attach to
the relevant asset
contemporaneously with the
acquisition of such asset;
(h) any Security Interests created by
the Borrower arising solely by
operating of law, in order to
secure the payment of Taxes,
provided that the liability for the
payment of such Taxes is incurred
in the normal course of business
and such Taxes are either not due
and payable or are being contested
in good faith and with respect to
which, in either case, adequate
reserves are being maintained;
(i) any Security Interests created by
the Borrower in favor of the
Lender; or
(j) any Security Interest to be created
by the Borrower with the prior
written consent of the Lender.
PERMITTED INDEBTEDNESS Any Indebtedness consented to
or to be consented to by the Lender pursuant
to this Agreement which ranks either PARI
PASSU with or after (such that it is
subordinated to) the Indebtedness created
hereunder.
PERSON an individual, corporation, limited
liability company, partnership, association,
joint-stock company, trust, unincorporated
organization, joint venture or Governmental
Authority.
11
PLEDGE AGREEMENT The pledge agreement between Spacenet and
the Lender dated on December 28, 2000.
PLEDGED STOCK -- STARBAND The Pledged Stock as defined in the Pledge
Agreement.
PLEDGED SHARES - SPACENET The Pledged Shares as defined in the
Additional Pledge Agreement.
POST DEFAULT RATE LIBOR Overnight Rate plus 5% per annum.
POTENTIAL EVENT OF DEFAULT Any event which may become an Event of
Default, whether as a result of the passage
of time, the giving of notice or the
fulfilment of any other condition.
POWERS As defined in the Pledge Agreement and /or
in the Additional Pledge Agreement.
PRINCIPAL $71,400,000.
PRINCIPAL INSTALLMENT AMOUNT Each Principal Installment Amount, as set
forth in the Amortization Table attached as
EXHIBIT F to be paid in each Principal
payment date.
PRINCIPAL PAYMENT Each of the dates on which Principal shall
be repaid as set forth in the DATE
Amortization Table attached as EXHIBIT F.
PROXY SOLICITATION The proxy solicitation document dated
January 6, 2003 distributed by the Borrower
to its Creditors describing the proposed
Arrangement and setting up dates for
Noteholders meetings for the purpose of
approving the Arrangement.
REGISTRATION RIGHTS Means the Registration Rights Agreement
dated 15 February 2000 between AGREEMENT
Microsoft G-Holdings Inc., Microsoft
Corporation, StarBand and Spacenet.
RELEASE Any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting,
escaping, leaching, seeping, migrating,
dumping, or disposing of any Hazardous
Material (including the abandonment or
discarding of barrels, containers, and other
closed receptacles containing any Hazardous
Material) into the indoor or outdoor
environment, including ambient air, soil,
surface or ground water.
REMEDIAL ACTION All actions taken to:
(a) monitor, assess, evaluate,
investigate, clean up, remove,
treat, remediate or contain or in
any way address Hazardous Materials
in the indoor or outdoor
environment,
12
(b) prevent, mitigate or minimize any
Release or threatened Release so
that the Release or threatened
Release does not mitigate or
endanger or threaten to endanger
public health or welfare or the
environment; or
(c) perform pre-remedial investigations
and studies, and post remedial
operation and maintenance
activities.
REPAYMENT INSTALMENT An amount of Principal, to be
repaid to the Lender on each Principal
Payment Date, in accordance with EXHIBIT F.
REVISED TRANSACTION DOCUMENTS Each of the following:
(a) This Agreement;
(b) The Pledge Agreement;
(c) The Additional Pledge Agreement;
(d) The Debenture;
(e) the Option; and
(f) The Registration Rights Agreement.
SECTION 350 PROCEEDINGS All legal proceedings under Section 350 of
the Israeli Companies Law, 1999 in
Bankruptcy Case No. 1994/02 at the Court.
SECTION 304 PROCEEDINGS All legal proceedings in the Bankruptcy
Court in Delaware that are ancillary to the
Section 350 Proceedings.
SECURITY INTEREST Any mortgage, deed, deposit arrangement,
pledge, claim, lien (statutory or other),
charge, encumbrance, conditional sale, title
retention, preferential right, priority,
trust arrangement, assignment, hypothecation
or security interest or any other agreement
or arrangement having the effect of
conferring security.
SECURITY INTEREST SHARING The agreement among the Lender and the Other
Banks with regard to the AGREEMENT
Additional Collateral.
SPACENET Spacenet Inc., a corporation duly organised
and existing under the laws of the State of
Delaware and a wholly-owned subsidiary of
the Borrower.
STARBAND Starband Communications Inc., a corporation
duly organised and existing under the laws
of the State of Delaware.
STOCKHOLDERS' AGREEMENT as defined in the Pledge Agreement.
13
SUBSIDIARY as to any Person, any corporation of which
more than 50% of the outstanding Capital
Stock having (in the absence of
contingencies) ordinary voting power to
elect directors (or Persons performing
similar functions) of such corporation is,
at the time of determination, owned
directly, or indirectly through one or more
intermediaries, by such Person.
TAX Taxes, documentary taxes, stamp taxes, value
added taxes, transaction taxes, cash reserve
obligations, withholding taxes, registration
and other similar taxes), withholdings,
levies, imposts, duties, charges, compulsory
loans, fees, assessments, surcharges,
deductions, other compulsory payments and
similar charges of whatever nature and
howsoever arising that are now or at any
time hereinafter imposed, assessed, charged,
levied, collected, demanded, withheld or
claimed, by the State of Israel, the United
States of America, any other applicable
jurisdiction or any Governmental Authority
thereof or therein (including any penalty or
interest or other liabilities payable in
connection with any of the foregoing).
TRUSTEE The Bank of New York.
1.2 In this Agreement, words and defined terms denoting the singular
number include the plural and vice versa and the use of any gender
shall be applicable to all genders.
1.3 The recitals, schedules, appendices, annexes and exhibits to this
Agreement form an integral part hereof.
1.4 Section headings used in this Agreement are for the sake of
convenience only and shall not affect the interpretation hereof.
1.5 Unless otherwise indicated herein, all references to time of day
refer to Tel Aviv time on such day. For purposes of the
computation of a period of time from a specified date to a later
specified date, the word "from" means "from and including" and the
words "to" and "until" each means "to but excluding", provided,
however, that with respect to a computation of fees or interest
payable to the Lender, such period shall in any event consist of
at least one full day.
1.6 All accounting terms not specifically defined herein shall, in
relation to any Person, be construed in accordance with generally
accepted accounting principles and practices, consistently
applied, in conformity with those used in the preparation of such
Person's financial statements except as otherwise provided herein.
All financial calculations to be made hereunder shall be made in
accordance with generally accepted financial practices.
14
1.7 All references in any Revised Transaction Document to clauses,
sections, articles, schedules, annexes and exhibits are to
clauses, sections, articles, schedules and exhibits in or to such
Revised Transaction Document unless otherwise specified therein.
The words "hereof," "herein" and "hereunder" and words of similar
import when used in a Revised Transaction Document shall refer to
such Revised Transaction Document as a whole and not to any
particular provision of such Revised Transaction Document.
1.8 References in any Revised Transaction Document to any statute,
decree or regulation shall be construed as a reference to such
statute, law, decree or regulation as re-enacted, redesignated,
amended or extended from time to time and references in any
Transaction Document to any document or agreement shall be deemed
to include references to such document or agreement as amended,
varied, supplemented or replaced from time to time.
1.9 References to any representation by any Person or by any officer
thereof being to the best of such Person's knowledge shall be
deemed to be the best of such Person's knowledge after due
inquiry.
1.10 If any amount to be determined or measured pursuant to any of the
Revised Transaction Documents relates to a transaction in a
currency other than Dollars, such determination shall be made by
converting such currency by reference to the buying spot market
rate of exchange on the date of such transaction.
1.11 Any reference in this Agreement to a "month" or a period of one or
more "months" means a period beginning in one calendar month and
ending in the following calendar month on the day numerically
corresponding to the day of the calendar month in which such
period started, provided that if such period started on the last
day in a calendar month, or if there is no such numerically
corresponding day, such period shall end on the last day in the
following calendar month (and "month" shall be construed
accordingly).
1.A. With effect from the Effective Date, the Facility Agreement shall
be amended and restated so it shall be replaced by this Agreement
(including its annexes, exhibits and schedules), and for avoidance
of doubt, this Agreement shall supersede the Facility Agreement
and shall constitute the definitive and binding version of the
Facility Agreement, as amended and revised by this Agreement.
2. FACILITY
2.1 FACILITY
Subject to the terms of the Facility Agreement, the Lender
advanced the Original Loan Amount to the Borrower on December 29,
2000. There is no further commitment to lend money to the
Borrower. As of the Effective Date, the parties agree and
acknowledge that the Principal is $71,400,000 (seventy one million
and four hundred thousands U.S. dollars), subject to Section 6.3
(a) below.
2.2 AVAILABILITY PERIOD
Not Applicable.
15
2.3 DRAWDOWN
Not Applicable.
2.4 DRAWDOWN REQUEST
Not Applicable
2.5 PURPOSE
The Principal shall be used for general corporate purposes.
3. CONDITIONS PRECEDENT
3.1 CONDITIONS PRECEDENT
The entrance of this Agreement into effect, including the
agreement of the Lender to accept the Second Partial Payment is
subject to (A) the procurement of the approval by the Court of the
Arrangement as voted for by the Lender in the Creditors meeting
and subject to the terms thereof by no later than March 31, 2003,
and (B) the fulfilment, on or before the Effective Date, of each
of the following conditions precedent, to the satisfaction of the
Lender, unless waived in accordance with the provisions of Section
3.2 (Waiver):
(a) The Borrower shall have paid all fees, costs, expenses,
taxes and duties then payable by the Borrower pursuant to
this Agreement.
(b) The presentation for its approval PRIOR TO EXECUTION of the
Indenture and other pertinent agreements concerning the New
Notes.
(c) The representations and warranties of the Borrower
contained in Section 14 (Representations and Warranties) of
this Agreement and in any other Revised Transaction
Document, certificate or instrument delivered to the Lender
pursuant hereto shall be correct.
(d) The execution of this Agreement shall not contravene any
Applicable Law.
(e) The Lender shall have received the following, each in form
and substance reasonably satisfactory to the Lender and,
unless indicated otherwise:
(i) a copy of the Indenture, duly executed by Borrower;
(ii) the Additional Pledge Agreement and the Debenture,
duly executed by Borrower;
(iii) all certificates representing the Spacenet Pledged
Shares together with the Powers and, appropriate
pledge notice, duly executed by Borrower, for filing
with the Companies Registrar, or in such office or
offices as may be necessary or, in the reasonable
opinion of the Lender, desirable to perfect the
Security Interests purported to be created by the
additional Pledge Agreement;
16
(iv) a copy of the resolutions adopted by the Board of
Directors of the Borrower, certified by authorised
officers thereof authorising (x) the transactions
contemplated hereby, and (y) the execution, delivery
and performance by the Borrower of each Revised
Transaction Document to which it is a party and the
execution and delivery of the other documents to be
delivered by the Borrower in connection herewith and
therewith, unless authorised previously;
(v) a certificate or resolution of an authorised officer
of the Borrower, certifying the names and true
signatures of the officers of the Borrower,
authorised to sign each Revised Transaction Document
to which the Borrower will be a party and the other
documents to be executed and delivered by the
Borrower in connection herewith, together with
evidence of the incumbency of such authorised
officers, unless certified previously;
(vi) a copy of the certificate of incorporation,
memorandum and articles of association or other
constitutional documents of the Borrower and
Spacenet certified by an authorised officer of the
Borrower and Spacenet, as appropriate;
(vii) an opinion of Gross, Kleinhendler, Hodak, Halevy,
Greenberg & Co., special counsel to the Borrower, in
form and substance reasonably satisfactory to the
Lender;
(viii) an opinion of Sherman & Sterling, special counsel to
the Borrower on matters affecting U.S. law which are
relevant to the effectiveness of this Agreement;
(ix) a certificate of the chief executive officer or the
chief financial officer of the Borrower, certifying
that Borrower owns all the issued and outstanding
shares of Common Stock of Spacenet, together with
written confirmation from Ernst & Young or the
Borrower's legal counsel that such shares of
Spacenet constitute 100% of the issued and
outstanding Capital Stock of Spacenet.
(x) a certificate from the appropriate official of the
State of Delaware certifying as to the existence in
good standing of and the payment of taxes by,
Spacenet in such state; and
(xi) such other agreements, instruments, approvals,
opinions and other documents as the Lender may
reasonably request.
(f) All proceedings in connection with the transactions
contemplated by this Agreement, and all documents
incidental thereto, shall be satisfactory to the Lender and
its special counsel, and the Lender and such special
counsel shall have received all such information and such
counterpart originals or certified or other copies of such
documents as the Lender or such special counsel may
reasonably request.
17
(g) All necessary permits, consents, approvals or licences
required from any Governmental Authority for the execution
of this Agreement or the consummation of the transactions
contemplated hereby shall have been received and shall be
in full force and effect.
(h) The Lender shall have determined, in its sole judgment,
that no event having a Material Adverse Effect shall have
occurred from the date of the Proxy Solicitation up to the
Effective Date.
(j) All necessary permits, consents, approvals or licences if
and to the extent required from the U.S. Securities and
Exchange Commission ("SEC") and NASDAQ would have been
received allowing for free tradability of the Ordinary
Shares and New Notes issued to the Lender under the
Arrangement, subject only to the limitations on sales of
securities imposed on "affiliates" of an issuer.
3.2 WAIVER
The Lender may, in its sole discretion, waive any of the
conditions precedent set out in Clause 3.1 (Conditions Precedent),
either with or without imposing any conditions thereto.
3.3 CLOSING
The closing of this Agreement shall take place at the offices of
Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co. Law Offices, 1
Azrieli Center, Tel Aviv, Israel at 10:00 a.m. Israel time, on the
Effective Date, or, if at such time any condition set forth in
Section 3.1 above has not been fulfilled or waived in accordance
with the provisions of Section 3.2 (Waiver), as soon as
practicable after all the conditions precedent set forth in
Section 3.1 above have been fulfilled or waived in accordance with
the provisions of Section 3.2 (Waiver), but not later than March
31, 2003 or on such later time as may be mutually agreed to in
advance and in writing by Lender and the Borrower.
At the closing, the following transactions shall take place
simultaneously:
(i) this Agreement will enter into effect;
(ii) the issuance by the Borrower, pursuant to the Arrangement,
of 202,083,908 Ordinary Shares to the Noteholders
(including the Lender) and additional 18,488,590 Ordinary
Shares to the Lender;
(iii) the entrance into effect of the Indenture and other
pertinent agreements concerning the New Notes;
(iv) the issuance by the Borrower of the New Notes to the
Trustee pursuant to the Arrangement; and
(v) the entrance into effect of the Debenture and the
Additional Pledge Agreement, in accordance with the terms
thereof.
18
(vi) The cancellation of the 4.25% Convertible Subordinated
Notes due year 2005 of the Borrower, pursuant to the
Arrangement.
(vii) The Borrower shall deliver to the Lender: (a) appropriate
pledge notices concerning the Debenture and the Additional
Pledge Agreement, duly executed by Borrower, for filing, by
the Lender, with the Israeli Companies Registrar, within
the period provided for by Applicable Law; and (b) notice
of issuance to the Israeli Companies Registrar, with
regards to the issuance of the Ordinary Shares referred to
in sub-section 3.3 (ii) above, to be filed by the Borrower,
within the period provided for by Applicable Law, which
shall bear all applicable duties and expenses in relation
to said filing.
Provided that, none of the foregoing transactions in this Section
3.3, whether initiated by the Borrower or by any other party,
shall be deemed to have taken place, and no document or
certificate shall be deemed to have been delivered, until all such
transactions have been completed and all such documents have been
delivered.
4. REPAYMENT
The Borrower shall repay the Principal in full by equal consecutive
Repayment Instalments on Principal Payment Dates which shall coincide
starting July 2, 2005 with the Interest Payment Dates, all as set forth
in the Amortisation Table attached hereto as EXHIBIT F. Any amount of the
Principal which is repaid may not be re-borrowed.
5. PREPAYMENT
5.1 PREPAYMENT UPON EXECUTION OF THIS AGREEMENT
(a) The parties agree that the Second Partial Payment of the
Original Loan Amount shall be effective as of January 2,
2003, subject to the fulfilment of the conditions specified
above.
5.2 VOLUNTARY PREPAYMENT
(a) The Borrower may, at any time, by giving not less than 30
days' prior written notice to the Lender, prepay the
Principal, in whole or in part, without penalty or premium,
provided only that any such prepayment shall made upon an
Interest Payment Date, that it shall be made in multiples
of $500,000 each and provided further that all other sums
due and payable under this Agreement shall be paid
simultaneously with such prepayment.
(b) Any notice provided by the Borrower pursuant to this
Section 5.2 shall be irrevocable and shall specify the date
fixed for prepayment, and the aggregate of the portion of
the Principal and the interest thereon to be paid on the
prepayment date.
19
5.3 MISCELLANEOUS PROVISIONS
(a) Any prepayments under this Agreement shall be made together
with accrued interest and all other amounts accrued and
payable under this Agreement and shall be applied to
instalments of Principal in the inverse order of maturity.
(b) No prepayment is permitted except in accordance with the
express terms of this Agreement.
(c) No amount prepaid under this Agreement may subsequently be
re-borrowed.
5.4 MANDATORY PREPAYMENT
All mandatory repayment shall be made upon Interest Payment Dates.
6. INTEREST
6.1 RATE OF INTEREST
The rate of interest applicable to the Outstanding Balance for
each Interest Period shall be LIBOR plus 2.5% per annum. Interest
shall accrue from and include the first day of an Interest Period,
but exclude the last day of such Interest Period.
6.2 PAYMENT OF INTEREST
(a) The Borrower shall pay interest on the Outstanding Balance
in arrears on each Interest Payment Date, and at maturity
(whether upon demand, by acceleration or otherwise).
(b) All interest shall be computed on the basis of a year of
360 days for the actual number of days, including the first
day but excluding the last day, elapsed.
6.3 INTEREST PERIODS
(a) The initial Interest Period in respect of the Outstanding
Balance shall commence on January 2, 2003 and shall end on
the numerically corresponding day (or, if there is no
numerically corresponding day, on the last day) in the
calendar month that is six (6) months thereafter.
(b) Each subsequent Interest Period shall commence on the last
day of the preceding Interest Period and ending on the
numerically corresponding day (or, if there is no
numerically corresponding day, on the last day) in the
calendar month that is six (6) months thereafter.
(c) If any Interest Period would end on a day other than a
Business Day, such Interest Period shall be extended to the
next succeeding Business Day unless such next succeeding
Business Day would fall in the next calendar month, in
which case such Interest Period shall end on the preceding
Business Day.
(d) No Interest Period shall end on a date which is later than
the Final Maturity Date.
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(e) Any Interest Period that begins on the last Business Day of
a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the
end of such Interest Period) shall end on the last Business
Day of a calendar month.
(f) The Lender, with the agreement of the Borrower, may make
such adjustments to the duration of Interest Periods.
6.4 DEFAULT INTEREST
(a) If the Borrower fails to pay any amount payable by it
hereunder, it shall forthwith on demand by the Lender pay
interest on the overdue amount from the due date up to the
date of actual payment (before and after judgement), at the
Post-Default Rate.
(b) For the purposes hereof, any amount payable by the Borrower
on demand shall be deemed overdue when a demand has been
made for the payment thereof and the amount has not been
paid.
(c) Upon the occurrence and during the continuance of an Event
of Default, the Outstanding Balance and (to the extent
permitted by law) interest and other amounts which are not
paid when due, shall bear interest until such amount is
paid in full at a fluctuating interest rate per annum equal
at all times to the Post-Default Rate.
(d) Interest at the Post-Default Rate shall be payable on
demand.
(e) Interest Periods in respect of interest at the Post-Default
Rate shall be of one (1) day's duration.
(f) Interest at the Post-Default Rate will be compounded on a
quarterly basis.
6.5 DETERMINATION BY LENDER
Each determination by the Lender of an interest rate or fees
hereunder shall be conclusive and binding for all purposes in the
absence of manifest error.
7. PAYMENTS
7.1 PLACE
All payments by the Borrower under this Agreement shall be made to
the Lender, by means of the Lender debiting the Borrower's account
with the Lender (bank account no. 156677, at branch no. 616), or
in such other manner as the Lender may notify the Borrower. The
Borrower hereby agrees and authorises the Lender to debit the said
account of all sums due and payable under this Agreement without
prior notice, provided only that the Lender shall notify the
Borrower of any such debit within 3 Business Days thereof.
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7.2 TIME OF SETTLEMENT
Payments under this Agreement to the Lender shall be made for
value by no later than 11.00 am on the due date or at such times
as the Lender may otherwise specify to the Borrower as being
customary at the time for the settlement of transactions in US
dollars.
7.3 CURRENCY OF ACCOUNT AND PAYMENT
(a) All amounts payable under this Agreement shall be paid in
Dollars and in immediately available funds.
(b) If in respect of any liability for any Obligation of the
Borrower under any of the Revised Transaction Documents the
Lender receives payment or that liability is converted into
a claim, proof, judgment or order, in either case in a
currency other than in the currency (the "CONTRACTUAL
CURRENCY") in which the amount is expressed in the relevant
document to be payable, then:
(i) the Borrower shall indemnify the Lender on demand by
the Lender against any loss or liability resulting
from the conversion;
(ii) if the amount received by the Lender, when converted
into the Contractual Currency by the Lender, is less
than the amount of the liability in the Contractual
Currency, then the Borrower shall on demand by the
Lender pay to the Lender an amount in the
Contractual Currency equal to the difference; and
(iii) the Borrower shall on demand by the Lender pay to
the Lender any exchange costs and taxes payable or
paid in connection with any conversion referred to
in this Section 7.3.
7.4 NO SET-OFF OR COUNTERCLAIM
All payments made by the Borrower under this Agreement shall be
made without defence, retention, set-off or counterclaim and free
and clear of any deductions or charges.
7.5 NON-BUSINESS DAYS
(a) If a payment under this Agreement is due on a day which is
not a Business Day, the due date for that payment shall
instead be the next Business Day in the same calendar month
(if there is one) or the preceding Business Day (if there
is not).
(b) During any extension of the due date for payment of any
Principal Instalment Amount under this Section 7.5
(Non-Business Days) interest is payable on that Principal
Instalment Amount at the rate payable on the original due
date.
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7.6 PARTIAL PAYMENTS
(a) If the Lender receives a payment insufficient to discharge
all the amounts then due and payable by the Borrower under
this Agreement, the Lender shall apply that payment towards
the Obligations of the Borrower under this Agreement in the
following order:
(i) FIRST, in or towards payment pro rata of any unpaid
fees and expenses, costs, and indemnities of the
Lender;
(ii) SECONDLY, except as set out in (iii), in payment of
all amounts of interest and, to the extent it has
not already been paid, default interest due and
payable;
(iii) THIRDLY, in payment of all amounts of Principal,
then outstanding due and payable;
(v) FOURTHLY, in or towards payment pro rata of any
other sums due but unpaid hereunder.
(b) Section 7.6 (a) above shall override any appropriation made
by the Borrower.
7.7 ACCOUNTS
The Lender shall maintain in accordance with its usual practice
accounts recording the amounts from time to time owing by the
Borrower to the Lender under this Agreement. In any legal
proceeding and otherwise for the purposes of this Agreement, the
entries made in such accounts shall, in the absence of manifest
error, constitute prima facie evidence as to the existence and
amount of the obligations of the Borrower recorded in such
accounts.
8. TAXES
8.1 GROSS-UP
All payments by the Borrower hereunder shall be made without any
deduction and free and clear of and without any deduction for or
on account of any Taxes, except to the extent that the Borrower is
required by law to make payment subject to any deduction or
withholding of any Taxes. If any Tax or amounts in respect of Tax
must be deducted, or any other deductions must be made, from any
amounts payable or paid by the Borrower, the Borrower shall pay
such additional amounts as may be necessary to ensure that the
Lender receives a net amount equal to the full amount which it
would have received had payment not been made subject to Tax
(other than Tax on the overall net income of the Lender or the
overall net income of a division or branch of the Lender) or other
deduction.
8.2 TAX RECEIPTS
All Taxes required by law to be deducted by the Borrower from any
amounts paid or payable hereunder shall be paid by the Borrower
when due and the Borrower shall, within fifteen (15) days of the
payment being made, deliver to the Lender evidence
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satisfactory to the Lender (including all relevant tax receipts)
that the payment has been duly remitted to the appropriate
authority.
8.3 TAX INDEMNITY
The Borrower will indemnify the Lender for the amount of Taxes
with respect to payments under this Agreement paid by the Lender
and any liability (including penalties, interest and expenses for
non-payment, late payment or otherwise) arising therefrom or with
respect thereto, whether or not such Taxes were correctly or
legally asserted. This indemnification shall be paid within thirty
(30) days from the date on which the Lender makes written demand,
which demand shall identify the nature and amount of Taxes for
which indemnification is being sought and the basis of the claim.
9. MARKET DISRUPTION
9.1 MARKET DISRUPTION
If by reason of changes affecting the Dollar market, the Lender is
unable, due to circumstances beyond its control, to determine the
interest rate applicable to the Outstanding Balance, or the Lender
otherwise determines that adequate and fair means do not exist for
ascertaining the applicable interest rate, then the Lender shall
promptly notify the Borrower of the fact that this Section 9
(Market Disruption) is in operation.
9.2 ALTERNATIVE BASIS FOR INTEREST
(a) If a notification under Section 9.1 (Market Disruption) is
made at any time under this Agreement, then,
notwithstanding any other provision of this Agreement,
within five (5) Business Days of receipt of the
notification, the Borrower and the Lender shall enter into
negotiations for a period of not more than thirty (30) days
with a view to agreeing on an alternative basis for
determining the rate of interest.
(b) If no alternative basis is agreed, the Lender shall certify
on or before the last day of the Interest Period to which
the notification relates, an alternative basis for
determining the rate of interest applicable to the
Principal, which shall reflect the cost to the Lender of
funding the Outstanding Balance from whatever sources the
Lender, acting in its good faith judgement, may select plus
2.5% per annum.
9.3 REVIEW
So long as any alternative basis for the ascertaining of the
interest rate or funding is in force, the Lender, in consultation
with the Borrower shall from time to time, but not less than
monthly, review whether or not the circumstances referred to in
Section 9.1 (Market Disruption) still prevail with a view to
returning to the original provisions of this Agreement. Upon any
return to the normal provisions of this Agreement, the Outstanding
Balance shall be continued for an Interest Period expiring on the
next Interest Payment Date which would have applied pursuant to
Section 6.3 (Interest Periods) if the provisions of this Section 9
(Market Disruption) had not been operating.
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10. INCREASED COSTS
10.1 INCREASED COSTS
If the Lender shall have determined that, after the date of this
Agreement, the adoption or implementation of or any change in, any
law, rule, treaty or regulation, or any policy, guideline or
directive of, or any change in the interpretation or
administration thereof by, any court, central bank or other
administrative or Governmental Authority (including relating to
taxation, or reserve asset, special deposit, cash ratio, liquidity
or capital adequacy requirements or any other form of banking or
monetary control), or compliance by the Lender or any Person
controlling the Lender with any directive of or guideline from any
central bank or other Governmental Authority or the introduction
of or change in any accounting principles applicable to the Lender
or any Person controlling the Lender (in each case, whether or not
having the force of law), shall:
(a) change the basis of taxation of payments to the Lender or
any Person controlling the Lender of any amounts payable
hereunder (except for taxes on the overall net income of
the Lender or any Person controlling the Lender);
(b) impose, modify or deem applicable any reserve, special
deposit or similar requirement against the Outstanding
Balance or against assets of or held by, or deposits with
or for the account of, or credit extended by the Lender or
any Person controlling the Lender; or
(c) impose on the Lender or any Person controlling the Lender
any other condition regarding this Agreement or the
Outstanding Balance,
and the result of any event referred to in clauses (a), (b) or (c)
above shall be: (i) to cause the Lender to incur an additional
cost as a result of its having entered into, or performing,
maintaining or funding its obligations hereunder or (ii) to reduce
any amount received or receivable by the Lender hereunder, then,
upon demand by the Lender, the Borrower shall pay to the Lender
such additional amounts as will compensate the Lender for such
increased costs or reductions in amount.
10.2 CHANGES IN CAPITAL GUIDELINES
If the Lender shall have determined that, after the date of this
Agreement, any Capital Guideline or adoption or implementation of,
or any change in, any Capital Guideline by the Governmental
Authority charged with the interpretation or administration
thereof, or compliance by the Lender or any Person controlling the
Lender with any Capital Guideline or with any request or directive
of any such Governmental Authority with respect to any Capital
Guideline, or the implementation of, or any change in, any
applicable accounting principles (in each case, whether or not
having the force of law), either:
(a) affects or would affect the amount of capital required or
expected to be maintained by the Lender or any Person
controlling the Lender, and the Lender determines that the
amount of such capital is increased as a direct or indirect
consequence of the Advance being made or maintained or
other obligations hereunder; or
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(b) has or would have the effect of reducing the rate of return
on the Lender or any such other controlling Person's
capital to a level below that which the Lender or such
controlling Person could have achieved but for such
circumstances as a consequence of the Advance made or
maintained, or the Lender's or such other controlling
Person's other obligations hereunder
(in each case, taking into consideration the Lender's or such
other controlling Person's policies with respect to capital
adequacy), then, upon demand by the Lender, the Borrower shall pay
to the Lender from time to time such additional amounts as will
compensate the Lender for such cost of maintaining such increased
capital or such reduction in the rate of return on the Lender's or
such other controlling Person's capital.
10.3 CERTIFICATE
A certificate of the Lender claiming compensation under this
Section 10 (Increased Costs) specifying the event herein above
described and the nature of such event shall be submitted by the
Lender to the Borrower, setting forth the additional amount due
and an explanation of the calculation thereof, the Lender's
reasons for invoking the provisions of this Section 10 (Increased
Costs), and shall be final and conclusive absent manifest error.
10.4 OPTIONAL PREPAYMENT
If increased costs have been and continue to be payable to the
Lender in accordance with Clause 10.1 (Increased Costs) for a
period in excess of thirty (30) days, the Borrower shall have the
right, and on last day of the current Interest Period, upon not
less than thirty (30) days' prior written notice to the Lender
(which notice shall be irrevocable and shall bind the Borrower to
make the prepayment specified below) and upon payment of all
accrued interest and amounts due under Section 5 (Prepayment) and
Section 10 (Increased Costs) on the amount to be prepaid, to
prepay all or, as the case may be, that portion of the Outstanding
Balance with respect to which the Lender informs the Borrower that
amounts are being charged under Section 10 (Increased Costs).
10.5 MITIGATION
If the Lender requests compensation under Section 10 (Increased
Costs), then the Lender shall use reasonable efforts to designate
a different lending office for booking the Outstanding Balance
hereunder or to assign its rights and obligations hereunder to
another of its offices, branches or affiliates, if in the
reasonable judgment of the Lender, such designation or assignment
(a) would eliminate or reduce amounts payable pursuant to Section
10 (Increased Costs), in the future and (b) would not subject the
Lender to an unreimbursed cost or expense and would not otherwise
be disadvantageous to the Lender. The Borrower hereby agrees to
pay all reasonable costs and expenses incurred by the Lender in
connection with any such designation or assignment.
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11. ILLEGALITY
11.1 ILLEGALITY
Notwithstanding any other provision of this Agreement, if,
subsequent to the date of this Agreement, a continuance of the
Outstanding Balance has been made:
(a) unlawful by any change made in any Applicable Law;
(b) impossible, by compliance by the Lender with any request of
a Governmental Authority (whether or not having force of
law); or
(c) impracticable as a result of a contingency occurring after
the date of this Agreement which materially and adversely
affects the London interbank dollar market,
the Borrower shall, upon notice by the Lender (but subject to the
approval of the appropriate Governmental Authorities, which the
Borrower agrees to take all reasonable steps to obtain as quickly
as possible, if such approval is then required), prepay in full
and on last day of the current Interest Period or the passage of
sixty (60) Business Days, whichever is later, unless the effect of
the Applicable Law, request or contingency requires earlier or
immediate repayment, in which case, on such earlier date or
immediately, as relevant, that portion of the Outstanding Balance
affected thereby together with all accrued interest and amounts
due under Section 10 (Increased Costs) (if any) thereon and all
amounts, if any, determined by the Lender to be payable to it
pursuant to Section 12 (Breakage) hereof.
11.2 NOTICE OF ILLEGALITY
If Section 11.1 (Illegality) is applicable, the Lender shall
forthwith so notify the Borrower, by means of a certificate which
specifies in reasonable detail the nature of such illegality or
impossibility. The Lender will use its best efforts, and will
discuss the same with the Borrower, in order to designate a
different lending office and transfer the Outstanding Balance (or
any portion thereof) thereto if such designation and transfer will
avoid the need for giving such notice and will not, in the
Lender's good faith judgment, be otherwise disadvantageous to the
Lender. If such best efforts do not result in the transfer of the
Outstanding Balance to a new lending office, then the Outstanding
Balance shall be repaid in full in accordance with Section 11.1
(Illegality).
12. BREAKAGE
12.1 INDEMNITY FOR BREAKAGE COSTS
The Borrower hereby agrees to indemnify the Lender against any
loss or expense that the Lender actually sustains or incurs as a
consequence of:
(a) any failure to make a voluntary prepayment after notice of
prepayment has been given by the Borrower;
(b) any prepayment of the Outstanding Balance required by any
provision of this Agreement;
27
(c) any payment made on a date other than the last day of the
Interest Period applicable thereto,
(d) any voluntary prepayment,
(e) any default in payment or prepayment of the Outstanding
Balance or any part thereof (including accrued interest),
as and when due and payable (at the due date thereof, by
notice of prepayment or otherwise), or
(f) the occurrence of any Event of Default.
including, in each such case, any loss or reasonable expense
sustained or incurred in liquidating or employing deposits from
third parties acquired to effect or maintain the Outstanding
Balance. Notwithstanding the above, the Borrower's liability to
indemnify the Lender pursuant to clause (d) above shall be limited
to interest differentials incurred by the Lender in liquidating or
employing deposits of or borrowings from third parties in
connection with such voluntary prepayment.
12.2 NOTIFICATION OF BREAKAGE COSTS
A certificate of the Lender setting forth in reasonable detail any
amount or amounts that the Lender is entitled to receive pursuant
to this Section 12 (Breakage) and the basis for the determination
of such amount or amounts shall be delivered to the Borrower and
shall be conclusive and binding absent manifest error.
13. FEES
The Borrower shall pay to the Lender all fees and other expenses incurred
by the Lender in connection with this Agreement. In the event the
Outstanding Balance is syndicated, pursuant to Section 25 (Assignment),
an agency fee of $10,000 per annum shall be paid from the date of
syndication and on each anniversary thereafter. All fees paid under this
Agreement are non-refundable under all circumstances.
14. REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants to the Lender as follows, as
of the date of this Agreement, subject, where applicable, to the
Arrangement, the Section 350 Proceedings, the Section 304 Proceedings,
the stay of proceeding imposed thereunder and proceedings under Chapter
11 regarding StarBand:
14.1 ORGANISATION, ETC.
(a) The Borrower is a public company, duly organised, in and
validly existing under the Applicable Laws of the State of
Israel, possessing the capacity to sue and be sued in its
own name.
(b) Spacenet is a limited liability corporation, duly
organised, in and validly existing under the Applicable
Laws of the State of Delaware possessing the capacity to
sue and be sued in its own name.
28
(c) Each of the Borrower and Spacenet has all requisite
corporate power and authority to conduct its business as
now conducted and as presently contemplated and to
consummate the transactions contemplated by the Revised
Transaction Documents.
(d) Each of the Borrower and Spacenet is duly qualified to do
business and is in good standing in each jurisdiction in
which the character of the properties owned or leased by it
or in which the transaction of its business makes such
qualification necessary.
14.2 AUTHORISATION, ETC.
The execution, delivery and performance by the Borrower (and
Spacenet, to the extent that Spacenet is a party to such Revised
Transaction Documents) of each Revised Transaction Document (i)
has been duly authorised by all necessary corporate action, (ii)
does not contravene the memorandum or articles of association of
the Borrower or any Applicable Law or any contractual restriction
binding on or otherwise affecting it or any of its properties,
(iii) will not result in or require the creation of any Security
Interest (other than pursuant to any Revised Transaction Document)
upon or with respect to any of its properties, and (iv) will not
result in any suspension, revocation, impairment, forfeit or
nonrenewal of any material permit, license, authorisation or
approval applicable to its operations or any of its properties.
14.3 ENFORCEABILITY OF DOCUMENTS
(a) Each Revised Transaction Document constitutes the legal,
valid and binding obligation of the Borrower (and Spacenet,
to the extent that Spacenet is a party to such Revised
Transaction Documents) enforceable in accordance with its
respective terms except as the enforceability thereof may
be limited by (i) applicable bankruptcy, insolvency,
reorganisation, moratorium or other similar laws affecting
the enforcement of creditors' rights generally; and (ii)
general equitable principles (regardless of whether the
issue of enforceability is considered in a proceeding in
equity or at law).
(b) Each Revised Transaction Document is in proper legal form
under the Applicable Laws of the State of Israel, and under
the respective governing law selected in each respective
Revised Transaction Document (and the jurisdiction of
organisation of each party thereto) for the enforcement
thereof.
(c) The Revised Transaction Documents have been duly and
validly executed and delivered by the Borrower (and
Spacenet, to the extent that Spacenet is a party to such
Revised Transaction Documents) and have not been amended,
modified, supplemented, repudiated or terminated and are in
full force and effect.
14.4 GOVERNMENTAL APPROVALS; COMPLIANCE
(a) No authorisation or approval or other action by, and no
notice to any Governmental Authority or other regulatory
body is required in connection with the due execution,
delivery and performance by the Borrower or
29
Spacenet of any Revised Transaction Document, other than
the approval of the Arrangement by the Court.
(b) Each of the Borrower and Spacenet has all necessary
agreements, licenses, certificates and authorisations of
Governmental Authorities in order to own and operate its
business as currently conducted or contemplated to be
conducted. Other than specifically stated in the Proxy
Solicitation, neither the Borrower nor Spacenet are in
breach of or default under any such agreements, licenses,
certificates and authorisations.
(c) Neither the Borrower nor Spacenet is in violation of its
memorandum or articles of association, charter or by-laws,
any material Applicable Law or any term of any agreement or
instrument binding on or otherwise affecting it or any of
its properties, except as set forth in EXHIBIT D.
14.5 LITIGATION
Other than the matters disclosed on pages 46 and 47 of the Proxy
Solicitation, [2 pages attached at EXHIBIT G], the matters
affecting the Section 350 Proceedings and the Section 304
Proceedings and Proceedings under Chapter 11, with regard to the
Borrower, Spacenet and StarBand,
(a) no litigation, arbitration or administrative proceedings
are current, pending or, to the best of the Borrower's
knowledge, threatened against or affecting the Borrower,
Spacenet or StarBand, to the best of the Borrower's
knowledge, current, pending or threatened against any other
party to any Revised Transaction Document, or any of the
Borrower's, StarBand's or Spacenet's or their respective
properties, revenues or assets which have had or if
adversely determined, are reasonably likely to have a
Material Adverse Effect;
(b) there is no injunction, writ, preliminary restraining order
or any order of any nature issued by an arbitrator, court
or other Governmental Authority directing that any of the
material transactions provided for in any of the Revised
Transaction Documents not be consummated as herein or
therein provided; and
(c) the Borrower, Spacenet and StarBand, are not in default
with respect to any writ, order, decree, injunction or
other decision of any Governmental Authority except where
such default has not had and is not reasonably likely to
have a Material Adverse Effect.
14.6 ADVERSE AGREEMENTS
The Borrower and Spacenet are not parties to any agreement or
instrument, or subject to any charter or other corporate
restriction or any judgment, order, regulation, ruling or other
requirement of a court or other Governmental Authority or
regulatory body, which has caused, or in the future is reasonably
likely to result in, a Material Adverse Effect.
30
14.7 WINDING -UP
(a) Except for the Arrangement and the Chapter 11 filing by
StarBand, no proceedings for the bankruptcy, winding up,
insolvency, or reorganisation of or for any moratorium or
scheme of arrangement or any other similar proceedings
relating to the Borrower, Spacenet or StarBand, are
threatened, contemplated or outstanding.
(b) Except for the Arrangement and the Chapter 11 filing by
StarBand, no proceedings for the bankruptcy, winding up,
insolvency, or reorganisation of or for any moratorium or
scheme of arrangement or any other similar proceedings
relating to any other party to a Revised Transaction
Document (other than the Lender) are, to the Borrower's
knowledge, threatened, contemplated or outstanding which
have had or are reasonably likely to have a Material
Adverse Effect.
14.8 TAXES
(a) The Borrower, Spacenet and StarBand have filed or caused to
be filed all Tax returns which are required to be filed by
each, and, all Taxes, assessments and other governmental
charges imposed upon them or on any of their properties and
which have become due and payable on or prior to the date
hereof have been paid, except to the extent contested in
good faith by proper proceedings which stay the imposition
of any penalty, fine or Security Interest resulting from
the non-payment thereof and with respect to which adequate
reserves have been set aside for the payment thereof.
(b) The Borrower, Spacenet and StarBand have no knowledge of
any Tax in connection with the execution and delivery of
and performance of its Obligations under the Revised
Transaction Documents or the consummation of the
transactions contemplated thereby other than that which is
set forth in the Proxy Solicitation which is reasonably
likely to have a Material Adverse Effect.
14.9 ENVIRONMENT
(a) The operations of the Borrower and Spacenet are in
compliance with all Environmental Laws except where the
failure to be in compliance would not have a Material
Adverse Effect.
(b) There has been no Release at any of the properties owned or
operated by the Borrower or a predecessor in interest, or
at any disposal or treatment facility which received
Hazardous Materials generated by the Borrower or any
predecessor in interest except, in each case, where the
Release would not have a Material Adverse Effect.
(c) No Environmental Actions have been asserted against the
Borrower, Spacenet, StarBand or any predecessor in interest
nor does the Borrower have knowledge or notice of any
threatened or pending Environmental Action against the
Borrower or any predecessor in interest which will have a
Material Adverse Effect.
31
(d) No Environmental Actions have been asserted against any
facilities that may have received Hazardous Materials
generated by the Borrower, Spacenet, StarBand or any
predecessor in interest which will result in a Material
Adverse Effect.
14.10 INSURANCE
(a) The Borrower keeps its properties adequately insured and
maintains: (i) insurance to such extent and against such
risks, including fire, as is customary with companies in
the same or similar businesses, (ii) workmen's compensation
insurance in the amount required by Applicable Law, (iii)
public liability insurance, including product liability
insurance, in the amount customary with companies in the
same or similar business against claims for personal injury
or death on properties owned, occupied or controlled by
them, and (iv) such other insurance as may be required by
Applicable Law.
(b) All insurances referred to in paragraph (a) above are or,
at the time they are required to be maintained or effected,
will be, in full force and effect and to the best of the
Borrower's knowledge no event or circumstance has occurred,
nor has there been any omission to disclose a fact, which
would in either case entitle any insurer to avoid or
otherwise reduce its liability under any policy relating to
such insurances.
14.11 SECURITY
(a) The Pledge Agreement ,the Additional Pledge Agreement and
the Debenture confer the Security Interests they purport to
confer upon the Lender over all of the Collateral and such
Security Interests are first ranking, and except for the
shared Security Interests with the Other Banks with regard
to the Additional Collateral, are not subject to any PARI
PASSU Security Interests, and such agreements are not
liable to avoidance due to any act or circumstance of the
Borrower, Spacenet or StarBand, on the date of execution of
the Additional Pledge Agreement. Spacenet is not in the
process of any bankruptcy, winding-up, composition or any
other similar insolvency proceedings for the reorganisation
of its affairs.
(b) Other than the Security Interests created or purported to
be created by Spacenet under the Pledge Agreement, and
other than the Security Interests created or purported to
be created by the Borrower under the Additional Pledge
Agreement, the Debenture and the other Permitted Security
Interests, there are no other Security Interests covering
the Collateral and there are no obligations to create any
such Security Interests.
(d) The Pledge Agreement (including all relevant financing
statements and other filings under the UCC and any other
Applicable Law) and the Additional Pledge Agreement, were
duly filed, recorded and/or registered in each office and
in each jurisdiction where required to create, perfect and
maintain in full force and effect all Security Interests
under the Pledge Agreement and the Additional Pledge
Agreement.
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(e) Spacenet is the sole legal and beneficial owner of the
StarBand Pledged Stock and there are no covenants,
agreements, stipulations, reservations, conditions,
interests, rights or other matters whatsoever which
adversely affect the StarBand Pledged Stock. Spacenet has
received no notice of any adverse claim by any Person in
respect of the ownership of the StarBand Pledged Stock or
any interest in it.
(f) The Borrower is the sole legal and beneficial owner of the
Additional Spacenet Pledged Shares and other than the PARI
PASSU Security Interest Sharing Agreement with the Other
Banks and the other Permitted Security Interests, there are
no covenants, agreements, stipulations, reservations,
conditions, interests, rights or other matters whatsoever
which adversely affect the Spacenet Pledged Shares. The
Borrower has received no notice of any adverse claim by any
Person in respect of the ownership of the Spacenet Pledged
Shares or any interest in it.
14.12 SPACENET
The Borrower is the sole legal and beneficial owner of all of the
issued and outstanding Capital Stock of Spacenet, free and clear
of all Security Interests. There are no pre-emptive or other
outstanding rights, options, warrants, conversion rights or
agreements or commitment to issue or sell any shares of capital
stock of Spacenet or any securities or obligations convertible
into, or exchangeable for, or giving any person the right to
subscribe for or acquire, any shares of Capital Stock of Spacenet
and no securities or obligations evidencing such rights are
outstanding.
14.13 FINANCIAL CONDITION
The Borrower has furnished to the Lender copies of the Selected
Consolidated Financial Information included in the Proxy
Solicitation (pages 36 through 46, attached hereto as EXHIBIT H)
including, but not limited to, the financial information of the
Borrower dated September 30, 2002, as well as financial
information of Spacenet as of September 30, 2002, attached hereto
as EXHIBIT I. Such financial information:
(a) has been prepared in accordance with U.S. GAAP.;
(b) has been (in the case of audited financial statements)
audited by the Borrower's and Spacenet's auditors;
(c) is true, correct, complete and accurate in all material
respects as of the dates specified therein; and
(d) fully and fairly represents the financial condition and
state of affairs of the Borrower and Spacenet as at the
date to which it was drawn up and for the periods specified
therein and the results of their respective financial
operations during such period,
and there has been no change in the financial condition of the
Borrower Spacenet , to the best knowledge of the Borrower and
Spacenet, that has had or could reasonably be expected to have a
Material Adverse Effect since the date to which those financial
statements mentioned above were drawn up.
33
The Borrower has furnished to the Lender a draft business plan,
which has as yet not been approved by the authorized organ of the
Borrower. Borrower is entitled to materially modify or amend said
draft business plan until June 30, 2003, and shall subsequently
update, amend or modify it on annual bases.
After giving effect to the transactions contemplated or required
to occur by the terms of this Agreement as of the Effective Date,
the Borrower is, individually and together with Spacenet and its
other Subsidiaries, solvent, i.e. is able to meet its financial
obligations when due.
14.14 OBLIGATIONS
The Obligations of the Borrower hereunder constitute direct,
unconditional, and general obligations of the Borrower and carry a
first ranking as to priority of payment to all other Indebtedness
of the Borrower except for the indebtedness to the Other Banks
covered by the Security Interest Sharing AGREEMENT, and
obligations mandatorily preferred by law applying to companies
generally. Except with respect to Permitted Security Interests,
the Borrower has not secured or agreed to secure any such other
Indebtedness by any Security Interest upon any of its present or
future revenues or assets or capital stock.
14.15 EVENT OF DEFAULT
No Event of Default or Potential Event of Default has occurred.
14.16 ACCURACY AND FULL DISCLOSURE
(a) No Revised Transaction Document or schedule or exhibit
thereto and no certificate, report, statement or other
document or information furnished in writing by or on
behalf of the Borrower to the Lender in connection herewith
or with the consummation of the transactions contemplated
hereby, contains any material misstatement of fact or omits
to state a material fact or any fact necessary to make the
statements contained herein or therein not misleading in
any material respect.
(b) The rights and remedies of the Lender in relation to any
misrepresentations or breach of warranty on the part of the
Borrower shall not be prejudiced by any investigation by or
on behalf of the Lender into the affairs of the Borrower,
by the execution, delivery or performance of any other
Revised Transaction Document or by any other act or thing
which may be done by or on behalf of the Lender or any of
them in connection with any Revised Transaction Document
and which might, apart from this paragraph, prejudice such
rights and remedies.
(c) All of the information which is required to be scheduled to
this Agreement on the date hereof is set forth in the
Schedules attached hereto, is correct and accurate in all
material respects and does not omit to state any
information material thereto.
34
15. COVENANTS OF THE BORROWER
The Borrower hereby undertakes, so long as any Outstanding Balance (or a
portion thereof) (whether or not due) shall remain unpaid, unless the
Lender shall otherwise consent in writing:
15.1 REPORTING REQUIREMENTS
The Borrower shall furnish to the Lender:
(a) as soon as available and in any event within sixty (60)
days after the end of each of the first three fiscal
quarters of each fiscal year of each of the Borrower,
Spacenet and StarBand, if available, internally prepared
consolidated balance sheets, quarterly profit and loss
statements of the Borrower, Spacenet and StarBand, as at
the end of such fiscal quarter; and for the period
commencing at the end of the immediately preceding fiscal
year and ending with the end of such fiscal quarter,
setting forth in each case in comparative form the figures
for the corresponding date or period of the immediately
preceding fiscal year, all in reasonable detail and
certified by the chief financial officer of the Borrower,
Spacenet or StarBand (or, with regard to StarBand, in the
absence of a chief finance officer, another officer), as
appropriate, as fairly presenting, in all material
respects, the financial position of the Borrower, Spacenet
or StarBand, as appropriate (and any consolidated
Subsidiaries) as of the end of such fiscal quarter and the
results of operations and changes in financial position of
the Borrower, Spacenet or StarBand, as appropriate, for
such fiscal quarter, in accordance with applicable GAAP
applied in a manner consistent with that of the most recent
audited financial statements furnished to the Lender,
subject to year end adjustments and the absence of
footnotes;
(b) as soon as available, and in any event within ninety (90)
days after the end of each fiscal year of each of the
Borrower, Spacenet and StarBand, consolidated balance
sheets, consolidated profit and loss statements and cash
flow of the Borrower, Spacenet and StarBand, as
appropriate, (and any consolidated Subsidiaries), as at the
end of such fiscal year, setting forth in comparative form
the corresponding figures for the immediately preceding
fiscal year, all in reasonable detail and prepared in
accordance with applicable GAAP, and with respect to the
consolidated financial statements accompanied by a report
and an unqualified opinion prepared in accordance with
generally accepted auditing standards, of independent
certified public accountants of recognised standing
selected by the Borrower, Spacenet or StarBand, as
appropriate, and reasonably satisfactory to the Lender.
(c) simultaneously with the delivery of the financial
statements required by clauses (a) and (b) of this Section
15.1, a certificate of the chief financial officer of the
Borrower, stating that such officer has reviewed the
provisions of this Agreement and the other Transaction
Documents and has made or caused to be made under such
officer's supervision a review of the condition and
operations of the Borrower and its Subsidiaries during the
period covered by such financial statements with a view to
determining whether the Borrower and its Subsidiaries were
in compliance with all of the provisions of such Revised
Transaction Documents at the times such compliance is
35
required by the Revised Transaction Documents, and that
such review has not disclosed, and such officer has no
knowledge of the existence during such period of an Event
of Default or Potential Event of Default or, if an Event of
Default or such Potential Event of Default existed,
describing the nature and period of existence thereof and
the action which the Borrower and its Subsidiaries propose
to take or took with respect thereto;
(d) promptly upon their becoming available and subject to any
legal prohibition, a copy of (i) all consultants' reports,
investment bankers' reports, accountants' management
letters, business plans and similar documents concerning
the Borrower and Spacenet (and to the extent available to
the Borrower or Spacenet, StarBand), (ii) all reports,
financial statements or other information delivered by the
Borrower and Spacenet and StarBand to their respective
shareholders generally, (iii) all reports, proxy
statements, financial statements and other information
generally distributed by the Borrower, and Spacenet (and to
the extent available to the Borrower or Spacenet, StarBand)
to their respective creditors or the financial community in
general, and (iv) any audit or other reports submitted to
the Borrower and Spacenet (and to the extent available to
the Borrower or Spacenet, StarBand) by their respective
independent accountants in connection with any annual,
interim or special audit, and (v) all reports submitted to
the SEC;
(e) promptly after submission to any Governmental Authority,
all documents and information furnished to such
Governmental Authority in connection with any investigation
of the Borrower, Spacenet or StarBand other than routine
inquiries by such Governmental Authority;
(g) as soon as possible, and in any event within three (3)
Business Days after the occurrence of an Event of Default,
Potential Event of Default or event having a Material
Adverse Effect, the written statement of the chief
executive officer or the chief financial officer of the
Borrower, setting forth the details of such Event of
Default, Potential Event of Default or event and the action
which the Borrower proposes to take with respect thereto;
(h) promptly after the commencement of thereof, but in any
event not later than three (3) Business Days after service
of process with respect thereto on, or the obtaining of
knowledge thereof by, the Borrower, written notice of each
action, suit or proceeding before any court or other
Governmental Authority or other regulatory body or any
arbitrator involving the Borrower, Spacenet or StarBand
which could have a Material Adverse Effect; and
(i) promptly after the execution of this Agreement, (1)
quarterly statements concerning the conditions of
operations and the Borrower's compliance with the financial
covenants of this Agreement as set forth in Section 15.20
(b) below and with the business plan referred to in Section
14.13. above, compliance with said financial covenants, to
be certified by the chief financial officer of the
Borrower, (2) quarterly statements of backlog (projected
and actually submitted to the Borrower and its
Subsidiaries), (3) quarterly statements listing the
outstanding balances of major creditors and debtors of the
Borrower, (4) monthly cash flow data, (5) quarterly reports
on capital expenditures exceeding $500,000, and (6) such
other financial information, of
36
the Borrower, Spacenet and StarBand that the Lender may
reasonably request once each calendar quarter.
15.2 KEEPING OF RECORDS AND BOOKS OF ACCOUNT
The Borrower shall keep, and cause Spacenet to keep, adequate
records and books of account, with complete entries made in
accordance with applicable GAAP.
15.3 INSPECTION RIGHTS
The Borrower shall permit, and cause Spacenet to permit, the
Lender, or any agents or representatives thereof at any time and
from time to time upon reasonable notice to the Borrower, during
normal business hours, to examine and make copies of and abstracts
from their records and books of account, to visit and inspect
their properties, to conduct audits, physical counts, valuations
or examinations and to discuss their affairs, finances and
accounts with any of the directors, officers, managerial
employees, independent accountants or other representatives
thereof provided that (i) the foregoing shall be in a manner so as
to not unduly disrupt the business of the Borrower and Spacenet
and (ii) such notice shall not be required if an Event of Default
has occurred and is continuing.
15.4 PRESERVATION OF EXISTENCE
The Borrower shall maintain and preserve, and cause each
Subsidiary to maintain and preserve, its existence, rights and
privileges, and become or remain duly qualified and in good
standing in each jurisdiction in which the character of the
properties owned or leased by them or in which the transaction of
their business makes such qualification necessary, except where
the failure to preserve its rights and privileges and to qualify
and be in good standing would not have a Material Adverse Effect.
15.5 COMPLIANCE WITH LAWS
(a) The Borrower shall comply, and cause Spacenet and each
other Subsidiary to comply, with all applicable material
laws, rules, regulations and orders, such compliance to
include, without limitation, (i) paying before the same
become delinquent all Taxes, assessments and governmental
charges or levies imposed upon it or upon its income or
profits or upon any of its properties, and (ii) paying all
lawful claims arising under such laws which if unpaid might
become a Security Interest upon any of its properties,
except to the extent contested in good faith by proper
proceedings which stay the imposition of any penalty, fine
or Security Interest resulting from the non-payment thereof
and with respect to which adequate reserves have been set
aside for the payment thereof and except, solely with
respect to Subsidiaries of the Borrower other than
Spacenet, to the extent that any such non-compliance
(singly or in the aggregate with other non-compliance)
would not have a Material Adverse Effect.
(b) The Borrower shall obtain, maintain and preserve, and cause
each of its Subsidiaries to obtain, maintain and preserve,
all permits licenses, authorisations, approvals,
entitlements and accreditations which are necessary in the
proper conduct of their business and if the failure to
obtain same could cause a Material Adverse Effect.
37
15.6 MAINTENANCE OF PROPERTIES
The Borrower shall maintain and preserve all of its properties
which are necessary or useful in the proper conduct of their
business in good working order and condition, ordinary wear and
tear and damage due to casualty excepted.
15.7 NO DISTRIBUTIONS
The Borrower shall not make any distributions, as the term is
defined in the Companies Law 1999, to its shareholders out of
earnings or reserves, without the prior consent of the Lender.
15.8 The Borrower undertakes to see to it that the Security Interest
granted to the Lender in the Additional Pledge Agreement over the
Additional Collateral shall be duly perfected, filed, recorded
and/or registered with the Companies Registrar and in each office
and in each jurisdiction where required to create, perfect and
maintain in full force and effect all Security Interest under the
Additional Pledge Agreement.
15.9 CREATION OF SECURITY INTERESTS
The Borrower shall not create or suffer to exist, or permit any of
its Subsidiaries to create or suffer to exist any Security
Interest upon or with respect to the Collateral other then the
Permitted Security Interests.
15.10 SECURITY
(a) The Borrower shall, and shall cause Spacenet to, defend the
Collateral or cause the Collateral to be defended against,
and shall take, at its expense, any action necessary to
remove any Security Interest (other than Permitted Security
Interests) over the Collateral, and shall defend the right,
title and interest of the Lender in and to the Collateral
against the claims and demands of all other Persons.
(b) The Borrower shall, and shall cause Spacenet to, maintain
all Security Interests created under the Pledge Agreement
in favour of the Lender and will effect all registrations
relating thereto.
15.11 MERGER
The Borrower shall not merge or consolidate with any Person, or
permit Spacenet to merge or consolidate with, any Person;
provided, however, that the Borrower or Spacenet may be merged
with or into another Person, or may consolidate with another
Person, so long as:
(a) to the extent permitted by Applicable Law, the Borrower or
Spacenet gives the Lender at least 30 days' prior written
notice of such merger or consolidation;
(b) the Borrower or Spacenet shall be the surviving entity in
such merger or consolidation;
38
(c) no Potential Event of Default or Event of Default shall
have occurred and be continuing either immediately before
or immediately after giving effect to such merger or
consolidation; or
(d) such merger or consolidation will not have a Material
Adverse Effect.
15.12 LIQUIDATION
Except with regard to Chapter 11 Proceedings concerning StarBand,
the Arrangement, the Section 350 Proceedings and the Section 304
Proceedings, the Borrower shall not and shall not permit Spacenet
or any of its other Subsidiaries to enter into any voluntary
liquidation, bankruptcy, winding up or dissolution except, solely
with respect to Subsidiaries of the Borrower other than Spacenet,
to the extent that any such voluntary liquidation, bankruptcy,
winding up or dissolution would not (singly or in the aggregate
with other such actions) have a Material Adverse Effect.
15.13 ASSETS
The Borrower shall not and shall not permit Spacenet and any of
the Borrower's Subsidiaries to sell, assign, lease or otherwise
transfer or dispose of, any of its properties, rights or other
assets whether now owned or hereafter acquired to any Person,
other than the sale or other disposition of assets either for fair
market value or where such sale or other disposition would not
(singly or in the aggregate with other sales or dispositions) have
a Material Adverse Effect.
15.14 SPACENET
(a) The Borrower shall not sell or grant any pre-emptive
rights, options, conversion rights or agreements or
commitment to sell any Capital Stock of Spacenet or any
other right in any Capital Stock of Spacenet.
(b) The Borrower shall procure that Spacenet shall not issue or
undertake to issue any Capital Stock of Spacenet or grant
any pre-emptive rights, options, conversion rights or
agreements or commitment to issue Capital Stock of Spacenet
or any securities or obligations convertible into, or
exchangeable for, or giving any person the right to
subscribe for or acquire, any shares of Capital Stock of
Spacenet.
(c) The Borrower shall grant the Lender an irrevocable Power of
Attorney to act to preserve the Lender's rights over the
Collateral, in the event that in the reasonable and sole
judgement of the Lender, the Borrower has not met its
obligations under Section 15.10 above .
15.15 MAINTENANCE OF INSURANCE
The Borrower shall maintain and shall cause Spacenet to maintain,
with responsible and reputable insurance companies or
associations, insurance (including, without limitation,
comprehensive general liability and property and casualty
insurance) with respect to its property and business, in such
amounts and covering such risks, as is required by any
Governmental Authority or other regulatory body having
jurisdiction
39
with respect thereto and as is carried generally in accordance
with sound business practice by companies in similar businesses
similarly situated.
15.16 ENVIRONMENTAL
The Borrower shall and shall procure that Spacenet shall:
(a) keep any property either owned or operated by it free of
any Security Interests arising under any Environmental
Laws;
(b) comply with Environmental Laws except where the failure to
comply would not have a Material Adverse Effect and provide
to the Lender documentation of such compliance which the
Lender reasonably requests;
(c) promptly notify the Lender of any Release of a Hazardous
Material in excess of any reportable quantity and take any
Remedial Actions required by Governmental Authorities to
abate said Release; and
(d) promptly provide the Lender with written notice within ten
(10) days of the receipt of any Environmental Action or
notice that an Environmental Action will be filed against
the Borrower.
15.17 DEFAULT, MATERIAL ADVERSE EFFECT
The Borrower shall provide the Lender with prompt written notice
of any Event of Default, Potential Event of Default or Material
Adverse Effect.
15.18 CHANGE IN BUSINESS
Except with the prior written consent of the Lender, the Borrower
will not, and will procure that no Subsidiary of the Borrower
will, make, or agree or threaten to make any change in the nature
of its business activities as presently conducted, or carry on any
other business other than its business as presently conducted
except, solely with respect to Subsidiaries of the Borrower other
than Spacenet, to the extent that any such change would not
(singly or in the aggregate with any other such changes) have a
Material Adverse Effect.
15.19 FURTHER ASSURANCES
The Borrower shall, and shall procure that its Subsidiaries shall,
execute, acknowledge, and deliver, at the sole cost and expense of
the Borrower, all such further acts, deeds, conveyances,
mortgages, assignments, estoppel certificates, financing
statements, notices of assignment and assurances as the Lender may
reasonably require from time to time in order to:
(a) carry out more effectively the purposes of this Agreement
and the other Revised Transaction Documents,
(b) subject the Collateral to valid and perfected first
priority Security Interests or other Permitted Security
Interests;
40
(c) better assure, convey, grant, assign, transfer and conform
unto the Lender the rights now or hereafter intended to be
granted to the Lender under this Agreement, any Revised
Transaction Document or any other instrument under which
the Borrower may be or may hereafter become bound for
carrying out the intention or facilitating the performance
of the terms of the Agreement.
15.20 OTHER ASSURANCES AND FINANCIAL COVENANTS
(a) The Borrower undertakes that it and any of its Subsidiaries
shall not create or permit to subsist any Security
Interests over all or any of the present or future
Indebtedness or any present or future liabilities for
taxes, of the Borrower or any other person, other than
Permitted Security Interests.
(b) Unless otherwise agreed to in advance and in writing by the
Lender, the Borrower undertakes that it shall maintain at
all times:
(i) a Shareholders' Equity to Total Assets ratio of no
less than 15%; and
(ii) a minimum level of cash and cash equivalents with a
value of US$30,000,000 (Thirty million United States
Dollars) as part of its Current Assets.
For the purposes of this sub-section (b):
"Shareholders' Equity" shall mean the Total Shareholders' Equity
according to its meaning consistent with the most recent
consolidated financial statements of the Borrower required to be
delivered to the Lender pursuant to Section 15.1 above.
"Total Assets", and "Current Assets" and "cash and cash
equivalents" shall be given their respective meanings consistent
with the most recent consolidated financial statements of the
Borrower required to be delivered to the Lender pursuant to
Section 15.1 above.
All of the above undertakings (and any undertakings or restrictions in
any other clause hereof) are cumulative, and accordingly none of them
shall (except to the extent expressly stated) be limited by any exception
to any other undertaking or by implication from the terms of any other
undertaking.
15.21 COVENANTS GRANTED TO OTHER PARTIES
The Borrower undertakes to amend this Agreement so as to grant the
Lender covenants of any type equal or identical to any covenants
agreed to with any lender to or creditor of the Borrower in any
agreement, to the extent the covenants at issue are superior to
the covenants contained in this Section 15. The Borrower shall
notify the Lender of such change no later than 7 working days
after the execution of the other agreement.
41
15.22 REPURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a "change of control", as defined in the
Proxy Solicitation, no advance repayment of any funds owed at such
time to the New Noteholders (other than the payment of the
regularly scheduled payments), and no repurchase in cash of the
New Notes shall be permitted unless the Outstanding Balance, as
well as any other loan owed to the Lender and any of the Other
Banks, is paid in full, contemporaneously with any such repurchase
or repayment in cash.
16. EVENTS OF DEFAULT
Each of the following events occuring after the Effective Date shall
constitute an Event of Default:
16.1 NON-PAYMENT
The Borrower shall fail to pay:
(a) any Principal Instalment Amount or accrued interest when
due; or
(b) any Outstanding Balance when due (whether by scheduled
maturity, required prepayment, acceleration, demand or
otherwise); or
(c) any fee or other amount payable under the Revised
Transaction Documents within three (3) Business Days after
the due date thereof.
16.2 REPRESENTATIONS AND WARRANTIES
Any representation or warranty made by the Borrower, Spacenet or
any officer of the Borrower or Spacenet under or in connection
with any Revised Transaction Document shall have been incorrect in
any material respect when made.
16.3 NON-PERFORMANCE
The Borrower or Spacenet shall default in the performance or
observance of:
(a) the covenants contained in Section 15 of this Agreement;
(b) any other covenant contained in this Agreement and such
default shall continue unremedied for a period of ten (10)
days.
16.4 OTHER DEFAULT
The Borrower or Spacenet shall fail to perform or observe any
other term, covenant or agreement contained in any Revised
Transaction Document to be performed or observed by the Borrower
or Spacenet (other than under Section 16.3), as appropriate, and
such failure, if capable of being remedied, shall remain
unremedied for twenty (20) days.
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16.5 CROSS DEFAULT
The Borrower or Spacenet shall fail to pay any principal or
interest on any of its Indebtedness (excluding Indebtedness
created hereby) in excess of $2,000,000, or any interest or
premium thereon, when due (whether by scheduled maturity, required
payment, acceleration, demand or otherwise) and such failure shall
continue after the applicable grace period, if any, specified in
the agreement or instrument relating to such Indebtedness, or any
other default under any agreement or instrument relating to any
such Indebtedness, or any other event, shall occur and shall
continue after the applicable grace period, if any, specified in
such agreement or instrument, if the effect of such default or
event is to accelerate, or to permit the acceleration of the
maturity of such Indebtedness; or any such Indebtedness in excess
of such amount shall be declared to be due and payable, or
required to be prepaid (other than by a regularly scheduled
required prepayment), prior to the stated maturity thereof.
16.6 LIQUIDATION
(a) The Borrower or any other party to the Revised Transaction
Documents (other than the Lender and StarBand):
(i) commits an act of bankruptcy (provided that it shall
not be an Event of Default for the Borrower or
Spacenet to notify a creditor of its intention not
to pay a debt when due where such non-payment is not
due to the Borrower's or Spacenet's inability to pay
such debt);
(ii) is, or is deemed for the purposes of any law to be,
generally unable to pay its debts as they fall due
or to be insolvent; or
(iii) admits a general inability to pay its debts as they
fall due or notifies its creditors of a general
intention not to pay its debts when due.
(b) The Borrower or any other party to the Revised Transaction
Documents (other than the Lender or StarBand) suspends
making payments on all or any class of its debts or
announces an intention to do so, or a moratorium is
declared in respect of any of its indebtedness.
(c) Any step (including petition, proposal or convening a
meeting), other than the Arrangement, is taken with a view
to a composition, assignment or arrangement with any
creditors of the Borrower or any other party to the Revised
Transaction Documents (other than the Lender and StarBand).
(d) With the exception of the Arrangement, any order
(provisional or otherwise) is made or resolution passed
for, or any step (including petition, proposal or convening
a meeting) is taken by the Borrower or any other party to
the Revised Transaction Documents (other than the Lender
and StarBand) with a view to the liquidation,
administration, winding up, entry into receivership,
re-organisation, dissolution or any other insolvency
proceedings of the Borrower or any other party to the
Revised Transaction Documents (other than the Lender and
StarBand).
43
(e) Any Person presents a petition which is not withdrawn or
set aside within forty-five (45) days for the winding-up,
liquidation, bankruptcy, receivership, reorganisation or
for the administration of the Borrower or any other party
to the Revised Transaction Documents (other than the Lender
and other than StarBand).
16.7 APPOINTMENT OF RECEIVERS AND MANAGERS
(a) Any permanent or interim liquidator, trustee in bankruptcy,
judicial custodian, compulsory manager, receiver,
administrator or the like is appointed in respect of the
Borrower or any other party to the Revised Transaction
Documents (other than the Lender and StarBand) over all or
any part of their respective assets.
(b) Any Person requests the appointment of a permanent or
interim liquidator, trustee in bankruptcy, judicial
custodian, compulsory manager, receiver, administrator or
the like for the Borrower or any other party to the
Transaction Documents (other than the Lender and StarBand).
16.8 CREDITORS' PROCESS
Any distress, execution, attachment, sequestration, or other
proceeding affecting any material asset (irrespective of the
actual value of such asset) of the Borrower or any other party to
the Revised Transaction Documents (other than the Lender and
StarBand) is initiated and, if such proceeding is being contested
in good faith by appropriate proceedings and is not removed,
discharged or paid out within thirty (30) days after the
initiation thereof or such shorter period as may render such asset
liable to forfeiture, seizure or sale.
16.9 ANALOGOUS PROCEEDINGS
There occurs, in relation to the Borrower or any other party to
the Revised Transaction Documents (other than the Lender and
StarBand), any event anywhere which, in the opinion of the Lender,
is similar or substantially equivalent to any of those mentioned
in Sections 16.6 through 16.8 of this Agreement (inclusive).
16.10 REVISED TRANSACTION DOCUMENTS
Any Revised Transaction Document, other than the Pledge Agreement
as a result of the proceedings under Chapter 11 and their outcome,
or any material provision thereof (as determined by the Lender):
(a) is terminated (other than by expiration of its stated
term), repudiated or cancelled other than in accordance
with the Revised transaction Documents;
(b) is or becomes invalid, illegal or unenforceable or any
party thereto (other than the Lender) or any Governmental
Authority shall so assert in writing; or
(c) ceases to be in full force and effect or is assigned or
otherwise transferred, amended or prematurely terminated
other than as permitted under the Revised Transaction
Documents, or shall cease to give the Lender the Security
44
Interests, rights, powers and privileges purported to be
created thereby or any party thereto (other than the
Lender) shall so assert in writing.
16.11 MATERIAL ADVERSE EFFECT AND FAILURE TO COMPLY WITH BUSINESS PLAN
Any event, condition or circumstance or series of events,
conditions or circumstances occurs which, in the reasonable
opinion of the Lender, has had or could reasonably be expected to
have a Material Adverse Effect, or if the Borrower were to fail to
meet the targets of its business plan referred to in Section 14.13
above in any material fashion.
16.12 EFFECTIVENESS OF SECURITY
The Debenture or the Additional Pledge Agreement do not create, or
at any time, any Security Interest created by the Debenture or the
Additional Pledge Agreement ceases to be, a valid and perfected
first priority Security Interest in the Collateral covered
thereby, or granting the PARI PASSU priority rights of the
Additional Collateral, other than in the Security Interest Sharing
Agreement or is otherwise ineffective or any party thereto (other
than the Lender) shall so assert in writing.
17. REMEDIES ON EVENT OF DEFAULT
17.1 REMEDIES
At any time when an Event of Default has occurred and is
continuing, the Lender may:
(a) declare (without presentment, demand, protest or notice of
any kind all of which are hereby expressly waived by the
Borrower) the Agreement terminated in whole or in part,
whereby the Agreement or any part thereof so terminated
shall be considered null and void;
(b) declare that all or part of the Outstanding Balance, and
all other amounts payable under this Agreement be payable
on demand, whereupon they shall immediately and without
presentment, demand, protest or notice of any kind all of
which are hereby expressly waived by the Borrower, become
payable on demand by the Lender;
(c) declare the Outstanding Balance, and all other amounts
payable under this Agreement to be forthwith due and
payable, whereupon the Outstanding Balance, and all such
amounts shall become and be forthwith due and payable,
without presentment, demand, protest or further notice of
any kind, all of which are hereby expressly waived by the
Borrower;
(d) proceed to enforce or exercise any Security Interest
created by the Borrower or Spacenet in favour of the
Lender; and
(f) exercise any and all of its other rights under Applicable
Law, hereunder and under the other Revised Transaction
Documents.
45
17.2 AUTOMATIC ACCELERATION
Notwithstanding Section 17.1 above, upon the occurrence of any
Event of Default described in Sections 16.6, 16.7, 16.8, 16.9 or
16.11, the Outstanding Balance, and all other amounts payable
under this Agreement shall become and be forthwith due and
payable, without presentment, demand, protest or further notice of
any kind, all of which are expressly waived by the Borrower.
18. COSTS AND EXPENSES
18.1 INITIAL COSTS
The Borrower shall, whether or not the transactions contemplated
in the Revised Transaction Documents are consummated, forthwith on
demand pay the Lender, on a full indemnity basis, the legal fees,
including VAT, and expenses incurred by the Lender in connection
with:
(a) the preparation, review, registration, execution and
delivery of the revised Transaction Documents and any other
related documentation;
(b) any amendment, modification, waiver, consent or suspension
of rights (or any proposal for any of the foregoing) in
connection with or ongoing administration of any Revised
Transaction Document or any document referred to in any
Revised Transaction Document or related thereto;
(c) the filing and registration (where appropriate) and
delivery of evidence of the Indebtedness relating to the
Outstanding Balance, and
(d) All legal fees incurred by the Lender in connection with
the Arrangement.
18.2 ENFORCEMENT COSTS
The Borrower shall, whether or not the transactions contemplated
in the Revised Transaction Documents are consummated, forthwith on
demand pay to the Lender, on a full indemnity basis, the amount of
all costs and expenses (including any VAT thereon and including,
but not limited to, costs and expenses of the Lender's legal,
technical and other professional advisers and any other out of
pocket expenses) incurred by the Lender:
(a) in connection with the enforcement of, or the preservation
of any rights and remedies under, any of the Revised
Transaction Documents; and
(b) in investigating any possible Event of Default or Potential
Default; and
(c) in any attempt to collect from the Borrower amounts owed
hereunder or under any other Revised Transaction Document.
46
19. STAMP DUTIES
The Borrower shall pay, and forthwith on demand indemnify the Lender
against any liability that the Lender incurs in respect of, any stamp,
registration, filing and similar tax or fee which is or becomes payable
in connection with the entry into, registration, recording, performance
or enforcement of any Revised Transaction Document.
20. SET-OFF
The Lender may, and is hereby authorised to, at any time and from time to
time, without notice to the Borrower (any such notice being expressly
waived by the borrower) and to the fullest permitted by law, set off and
apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time
owing by the Lender to or for the credit or the account of the Borrower
against any and all Obligations of the Borrower now or hereafter existing
under any Revised Transaction Document, irrespective of whether or not
the Lender shall have made any demand hereunder or thereunder and
although such Obligations may be contingent or unmatured. Such set-off
shall be subject to the provisions of Section 7.6. The Lender agrees to
notify the Borrower promptly after any such set-off and application made
by the Lender provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of the
Lender under this Section 20 (Set-Off) are in addition to the other
rights and remedies (including, without limitation, other rights of
set-off) which the Lender may have.
21. SEVERABILITY
If a provision of a Revised Transaction Document is or becomes illegal,
invalid or unenforceable in any jurisdiction, that shall not affect:
(a) the validity or enforceability in that jurisdiction of any other
provision of the Revised Transaction Documents; or
(b) the validity or enforceability in other jurisdictions of that or
any other provision of the Revised Transaction Documents.
Where provisions of any Applicable Law resulting in such illegality,
invalidity or unenforceability may be waived, they are hereby waived by
Borrower and the Lender to the full extent permitted by Applicable Law so
that the Revised Transaction Documents shall be deemed valid and binding
agreements, in each case enforceable in accordance with their respective
terms.
22. WAIVERS AND REMEDIES CUMULATIVE
22.1 The rights, powers and remedies of the Lender under the Revised
Transaction Documents may be exercised as often as necessary, are
cumulative and not exclusive of its rights, powers and remedies
under the general law or which such Lender would otherwise have
and may be waived only in writing and specifically.
22.2 No course of dealing between the Borrower and the Lender, nor any
delay in exercising or non-exercise of any right, power or
privilege of the Lender shall operate as a waiver of any right,
power or privilege of the Lender, nor shall any single or partial
exercise of any right, power or privilege under any Revised
Transaction Document preclude any other
47
or further exercise thereof or the exercise of any other right,
power or privilege thereunder. No notice to or demand on the
Borrower in any case shall entitle the Borrower to any other or
further notice or demand in similar or other circumstances or
constitute a waiver of the rights of the Lender to any other or
further action in any circumstances without notice or demand.
22.3 The rights and remedies of the Lender under the Revised
Transaction Documents or at law or in equity, may be pursued
separately, successively or concurrently against Borrower or any
collateral, at the discretion of the Lender.
23. NOTICES
23.1 All notices, demands, requests, consents, approvals, designations
and other communications under or in connection with this
Agreement ("NOTICES") shall be given in writing and, unless
otherwise stated may be made by letter or facsimile. Any Notice
will be deemed to be given as follows:
(a) if mailed (by certified mail, postage prepaid and return
receipt requested) upon receipt or three Business Days
after mailing whichever occurred first;
(b) if sent by overnight courier, upon receipt or two Business
Days after delivered to such overnight courier, whichever
occurs first;
(c) if by facsimile, when transmitted and a confirmation is
received.
except that notices to the Lender pursuant to Section 2 (Facility)
hereof shall not be effective until received by the Lender.
However, a Notice given in accordance with the above but received
on a day which is not a Business Day or after business hours in
the place of receipt will only be deemed to be given on the next
Business Day in that place.
23.2 ADDRESSES FOR NOTICES
The address and facsimile number of the parties for all Notices,
and all other documents or instruments to be furnished, delivered
or provided under or in connection with this Agreement shall be as
follows:
If to the Borrower: Gilat Satellite Networks Ltd.
21 Yegia Kapayim St.
Kiryat Arye, Petah Tikva,
Israel 49130
Attention: Mr. Eitan Winter
Telephone: 972-3-9252176
Telecopy: 972-3- 9213321
With a copy to: Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co.
1 Azrieli Center
Tel Aviv 67021, Israel
Attention: Gene Kleinhendler, Esq.
If to the Lender: Bank Hapoalim B.M.
Head Office
Corporate Banking Division
41-45 Rothschild Boulevard
Tel Aviv 65784
Israel
Facsimile: 972-3-567-3849
Attention: Mr. Tzahi Cohen
With a copy to: Lipa Meir & Co.
4 Itamar Ben Avi Street
Tel Aviv 66761 Israel
Attention: Zuriel Lavie, Advocate
Abraham Sofer, Esquire
Telephone: 972-3-6070600
Telecopier: 972-3-6070666
or, as to each party, at such other address as shall be designated
by such party in a written notice to the other party complying as
to delivery with the terms of this Section 23 (Notices).
23.3 RELIANCE
The Lender may act without liability upon the basis of a Notice
reasonably believed by the Lender in good faith to be from the
Borrower (or from any officer thereof designated in writing to the
Lender).
24. AMENDMENTS
No amendment or waiver of any provision of this Agreement or the other
Revised Transaction Documents, and no consent to any departure by the
Borrower therefrom, will in any event be effective unless the same shall
be in writing and signed by the Borrower, the Lender and any other
relevant party, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
25. ASSIGNMENT
25.1 ASSIGNMENT BY THE BORROWER
The Borrower may not assign, transfer, novate or dispose of any
of, or any interest in, its rights and/or Obligations under the
Revised Transaction Documents except with the prior written
consent of the Lender.
49
25.2 ASSIGNMENT BY THE LENDER
The Lender may assign to one or more other lenders or other
entities all or a portion of its rights and obligations under this
Agreement (including, without limitation, all or a portion of the
Principal); provided, however, that:
(a) such assignment is in an amount which is at least
$5,000,000 or a multiple of $1,000,000 in excess thereof;
(b) each such assignment shall be of a constant, and not a
varying percentage of all of the assigning Lender's rights
and obligations under this Agreement; and
(c) the parties to each such assignment shall execute and
deliver to the Lender, for its acceptance, an assignment
and acceptance agreement.
From and after the effective date of such assignment and
acceptance agreement (i) the assignee thereafter shall become a
"Lender" hereunder and, in addition to the rights and obligations
hereunder held by it immediately prior to such effective date,
have the rights and obligations hereunder that have been assigned
to it and (ii) the assigning Lender thereunder shall to the extent
that rights and obligations hereunder have been assigned by it,
relinquish its rights and be released from its obligations under
this Agreement. Any such assignment shall not adversely affect the
Borrower's rights under this Agreement except that the assigning
Lender shall not be responsible for the obligations assigned.
The Lender shall maintain at its address referred to in Section 23
(Notices) hereof a copy of each assignment and acceptance
delivered to and accepted by it. Such copies shall be available
for inspection by the Borrower at any reasonable time and from
time to time upon reasonable prior notice. Upon its receipt of an
assignment and acceptance notice executed by the Lender and an
assignee Lender, the Lender shall give prompt notice thereof to
the Borrower.
Notwithstanding anything to the contrary contained in this Section
25 (Assignment), the Lender may grant participations, in whole or
in part, in its rights and obligations under this Agreement and
the Outstanding Balance without notice to the Borrower and without
restriction; provided that (i) the Lender's obligations under this
Agreement shall remain unchanged, (ii) the Lender shall remain
solely responsible to the other parties hereto for the performance
of such obligations and (iii) the Borrower shall continue to deal
solely and directly with the Lender in connection with the
Lender's rights and obligations under this Agreement, and the
Lender shall retain the sole right to enforce the obligations of
the Borrower relating to the Principal.
26. COUNTERPARTS
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which shall be
deemed to be an original but all of which taken together shall constitute
one and the same agreement.
50
27. GOVERNING LAW, JURISDICTION
This Agreement is governed by and shall be construed in accordance with
the laws of the State of Israel and each Party hereby irrevocably submits
to the exclusive jurisdiction of the courts of Tel-Aviv-Jaffa in
connection with any dispute arising out of or in connection with this
Agreement.
28. REINSTATEMENT
If claim is ever made upon the Lender for repayment or recovery of any
amount or amounts received by the Lender in payment or on account of any
of the Obligations under this Agreement or the Revised Transaction
Documents, the Lender shall give prompt notice of such claim to the
Borrower, and if the Lender repays all or part of said amount by reason
of:
(a) any judgment, decree or order of any court or administrative body
having jurisdiction over the Lender or any of their property, or
(b) any good faith settlement or compromise of any such claim effected
by the Lender with any such claimant,
then and in such event the Borrower agrees that:
(A) any such judgment, decree, order, settlement or compromise shall
be binding upon the Borrower notwithstanding the cancellation of
any instrument evidencing the Obligations under this Agreement or
the other Revised Transaction Documents or the termination of this
Agreement or the other Revised Transaction Documents, and
(B) it shall be and remain liable to the Lender hereunder for the
amount so repaid or recovered to the same extent as if such amount
had never originally been received by the Lender.
29. INDEMNIFICATION
In addition to all of the Borrower's other Obligations under this
Agreement, the Borrower agrees to defend, protect, indemnify and hold
harmless the Lender and all of the respective officers, directors,
employees, attorneys, consultants and agents of the Lender (collectively
called the "INDEMNITEES") from and against any and all losses, damages,
liabilities, obligations, penalties, fees, costs and expenses (including,
without limitation, attorneys' fees, costs and expenses) imposed on or
incurred by such Indemnitees, whether prior to or from and after the date
of this Agreement, whether direct, indirect or consequential as a result
of or arising from or relating to or in connection with any of the
following:
(a) the negotiation, preparation, execution, performance or
enforcement of this Agreement, any Revised Transaction Document or
any other document in connection with the transactions
contemplated by this Agreement,
(b) any matter relating to the financing transactions contemplated by
this Agreement or by any document executed in connection with the
transactions contemplated by this Agreement; or
51
(c) any claim, litigation, investigation or proceeding relating to any
of the foregoing whether or not any indemnitee is a party thereto
(collectively, the "INDEMNIFIED MATTERS"); provided, however, that the
Borrower shall have no obligation to any Indemnitee hereunder for any
Indemnified Matter caused by or resulting from the gross negligence or
wilful misconduct of such Indemnitee, as determined by a final judgment
of a court of competent jurisdiction.
To the extent that the undertaking to indemnify, pay and hold harmless
set forth in this Section 29 (Indemnification) may be unenforceable
because it is in violation of any law or public policy, the Borrower
shall contribute the maximum portion which they are permitted to pay and
satisfy under Applicable Law, to the payment and satisfaction of all
Indemnified Matters incurred by the Indemnitees. The Indemnity shall
survive the repayment of the Obligations and the discharge of the
Security Interests granted under the Revised Transaction Documents.
30. CONFIDENTIALITY
Upon delivering to the Lender or permitting the Lender to inspect, any
written information pursuant to this Agreement or the other Revised
Transaction Documents, the Lender shall treat such information as
confidential to the extent such information is conspicuously marked
confidential. The Lender agrees to hold such information in confidence
from the date of disclosure thereof. Subject to the other provisions of
this Section 30 (Confidentiality), the Lender may disclose confidential
information to its officers, directors, employees, attorneys, accountants
or other professionals engaged by the Lender to the extent necessary for
the purposes of this Agreement and only after determining that such third
party has been instructed to hold such information in confidence to the
same extent as if it were the Lender. Notwithstanding the foregoing, the
provisions of this Section 30 (Confidentiality) shall not apply to
information within any one of the following categories or any combination
thereof:
(a) information the substance of which, at the time of disclosure by
the Lender, has been disclosed to or is known to any creditor
(other than information as to which neither creditor is then under
an obligation of nondisclosure), or any other Person other than
(A) a director, officer, employee or agent of the Borrower or a
professional engaged by the Borrower or (B) a Person who is then
under an obligation of nondisclosure (otherwise than as a
consequence of a wrongful act of the Lender),
(b) information that has been disclosed in the Proxy Solicitation.
(c) information which the Lender had in its possession prior to
receipt thereof from the disclosing party, or
(d) information received by the Lender from a third party having no
obligations of nondisclosure with respect thereto.
Nothing contained in this Section 30 (Confidentiality) shall
prevent any disclosure: (i) believed in good faith by the Lender
to be required by any law or guideline or interpretation or
application thereof by the Court, the U.S Bankruptcy Court in the
State of Delaware, any Governmental Authority, arbitrator or grand
jury charged with the interpretation or administration thereof or
compliance with any request or directive of any Governmental
Authority, arbitrator or grand jury (whether or not having the
force of law), (ii) determined by counsel for the Lender to be
necessary or advisable in
52
connection with enforcement or preservation of rights under or in
connection with this Agreement or any other Revised Transaction
Document or (iii) of any information which has been made public by
a Person other than the Lender. The Lender shall have the right to
disclose any confidential information described in this Section 30
(Confidentiality) to an assignee or prospective assignee or to a
participant or prospective participant in the Obligations
hereunder, provided that the assigning or selling Lender shall
have obtained from such assignee or prospective assignee or
participant or prospective participant an agreement to hold such
information in confidence to the same extent as if it were the
Lender. Furthermore, the Lender shall have the right to disclose
any confidential information described in this Section 30
(Confidentiality) to the Bank, any of its wholly owned
subsidiaries or registered assigns as holder of the Option,
provided that the Lender shall have obtained from the holder its
agreement to hold such information in confidence to the same
extent as if it were the Lender.
53
[Signature Page of the Amending Agreement]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
GILAT SATELLITE NETWORKS LTD. (under a stay of proceedings), BANK HAPOALIM B.M.,
as Lender as Borrower
SHARE ISSUANCE AGREEMENT ("AGREEMENT"), entered into this 30th day of
December, 2002, by and between GILAT SATELLITE NETWORKS LTD., a company formed
under the laws of the State of Israel (the "COMPANY"), and SES AMERICOM, INC., a
corporation formed under the laws of the State of Delaware ("SES").
WITNESSETH
WHEREAS, the Company's wholly owned subsidiary, Spacenet Inc.
("SPACENET"), desires to enter into an agreement (the "SPACENET-SES AGREEMENT")
with SES substantially in the form attached hereto as EXHIBIT A, which provides
for, among other things, (i) the termination of certain transponder service
agreements between Spacenet and SES and (ii) the right of Spacenet to defer
certain payments due to SES under certain transponder service agreements between
Spacenet and SES;
WHEREAS, StarBand Communications Inc., a Delaware corporation in which
the Company curently indirectly holds an approximately 35% interest on a fully
diluted basis ("STARBAND"), desires to enter into an agreement (the
"STARBAND-SES AGREEMENT") with SES substantially in the form attached hereto as
EXHIBIT B;
WHEREAS, in consideration of SES entering into the Spacenet-SES
Agreement and the StarBand-SES Agreement, the Company has agreed to enter into
this Agreement pursuant to which the Company will issue SES ordinary shares and
other securities in the Company on the terms and conditions set forth herein;
and
WHEREAS, the Company intends to propose an arrangement ("ARRANGEMENT")
to certain of its creditors under Section 350 of the Israeli Companies Law -
1999, which Arrangement will include the transactions contemplated by this
Agreement, the Spacenet-SES Agreement and the StarBand-SES Agreement, and will
be voted on at meetings of creditors to be convened under the supervision of the
District Court of Tel Aviv-Yafo (the "ISRAELI COURT").
NOW THEREFORE, in consideration of the covenants and promises set forth
herein, the parties agree as follows:
1. PURCHASE AND SALE OF SHARES.
(a) Subject to the terms and conditions set forth herein, the
Company agrees to issue to SES an aggregate of fourteen million two hundred
sixty one thousand and forty eight (14,261,048) ordinary shares of the Company,
par value NIS 0.01 per share (the "SECURITIES"). The Securities will constitute
5.5% of the issued and outstanding share capital of Company immediately
following the issuance of the securities contemplated by the Arrangement, and
taking into account the issuance of the Securities, as shown by the
capitalization table attached hereto as EXHIBIT C.
(b) The closing of the issuance of the Securities shall take
place at the offices of the Company, at 11:00 a.m. within two business days of
the satisfaction of the
conditions set forth in Section 3, or at such other time and place as the
parties mutually agree upon orally or in writing (the "CLOSING"). At such
Closing, (i) SES shall deliver to the Company an executed original of each of
the Spacenet-SES Agreement and the StarBand-SES Agreement and all other
documents to be executed or delivered in connection therewith, and (ii) the
Company shall deliver to SES a share certificate registered in the name of SES,
representing the Securities.
2. INVESTMENT REPRESENTATIONS. SES makes the following investor
representations to the Company:
(a) INVESTMENT INTENT. SES is acquiring the Securities for its
own account for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof or interest
therein.
(b) PURCHASER STATUS. At the time SES was offered the
Securities, it was, and at the date hereof, it is, and at the Closing Date, it
will be, an "accredited investor" as defined in Rule 501(a) under the Securities
Act of 1933, as amended (the "Securities Act").
(c) EXPERIENCE. SES either alone or together with its
representatives, has such knowledge, sophistication and experience in business
and financial matters so as to be capable of evaluating the merits and risks of
the prospective investment in the Securities, and has so evaluated the merits
and risks of such investment.
(d) ABILITY OF SES TO BEAR RISK OF INVESTMENT. SES is able to
bear the economic risk of an investment in the Securities and, at the present
time, is able to afford a complete loss of such investment.
(e) ACCESS TO INFORMATION. SES acknowledges that it has been
afforded (i) the opportunity to ask such questions as it has deemed necessary
of, and to receive answers from, representatives of the Company concerning the
Securities, the proposed Arrangement and the proceedings with respect thereto in
the Israeli Court and; (ii) access to information about the Company and the
Company's financial condition, results of operations, business, properties,
management and prospects sufficient to enable it to evaluate its investment.
(f) RELIANCE. SES understands and acknowledges that (i) the
Securities are being issued to it without registration under the Securities Act
in a private placement that is exempt from the registration provisions of the
Securities Act and (ii) the availability of such exemption, depends in part on,
and the Company will rely upon the accuracy and truthfulness of, the foregoing
representations and SES hereby consents to such reliance.
3. CONDITIONS TO CLOSING. The obligation of SES to acquire the Securities,
and the obligation of the Company to issue the Securities, are each subject to
(i) the approval of the Arrangment by the Israeli Court within 90 days of the
date of this Agreement (such approval not to be inconsistent with the terms of
this Agreement), (ii) the entry of an order of enforcement of the Arrangement by
the United States Bankruptcy Court for the District of Delaware under Section
304 of the United States Bankruptcy Code within 45 days of such approval by the
Israeli Court (such order not to be inconsistent with the terms of this
Agreement)and (iii) the approval of the transactions contemplated by this
Agreement by the shareholders of the Company within 90 days of the entry of the
order referenced in clause (ii) of this Section 3 (such approval not to be
inconsistent with the terms of this Agreement). The parties agree that in the
event that these conditions are not
2
satisfied, this Agreement shall be null and void, and the parties shall be
returned to their original positions as if this Agreement had never been
executed.
4. TRANSFER RESTRICTIONS.
(a) Securities may only be disposed pursuant to an effective
registration statement under the Securities Act, to the Company or pursuant to
an available exemption from or in a transaction not subject to the registration
requirements of the Securities Act.
(b) SES agrees to the imprinting, so long as is required by
this Section 4.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES
ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE , AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR
IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
Securities shall not contain the legend set forth above nor
any other if in the opinion of counsel to the Company such legend is not
required under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission).
5. VOTE FOR ARRANGEMENT. SES agrees that, if the Israeli Court requires or
requests that shareholders of the Company have the opportunity to vote on the
Arrangement at a meeting of shareholders convened under the supervision of the
Israeli Court, SES will vote all of the ordinary shares of the Company that it
holds in favor of the Arrangement presented to the creditors and shareholders of
the Company.
6. COMPANY REPRESENTATIONS. The Company warrants and represents to SES
that:
(a) upon the issuance of ordinary shares of the Company to
holders of the Company's 4.25% Convertible Subordinated Notes due 2005 (the
"Existing Notes") pursuant to the Arrangement ("Completion of the Arrangement"),
and after giving effect to the transactions contemplated by this Agreement, the
authorized capital stock of the Company shall consist of 300,000,000 ordinary
shares;
(b) assuming the Arrangement as described in the proxy
solicitation sent to holders of the Existing Notes is approved by creditors of
the Company in accordance with Israeli law, Exhibit C sets forth the
capitalization structure of the Company upon Completion of the Arrangement,
after giving effect to the transactions contemplated by this Agreement;
(c) except as indicated on Exhibit C, and except for options
to purchase 8,676,213 ordinary shares of the Company issued to employees of the
Company at exercise prices ranging from $120 per share to approximately $2 per
share, and a warrant granted to Knowledge Broadcasting.com LLC that upon
satisfaction of certain conditions is exercisable
3
into approximately 191,000 ordinary shares of the Company at an exercise price
of $157.05 per share, there are no options, warrants, conversion privileges,
subscription or purchase rights or other rights presently outstanding to
purchase or otherwise acquire (i) any authorized but unissued, unauthorized or
treasury shares of the Company's capital stock, (ii) any "Stock Equivalents" (as
defined below), or (iii) other securities of the Company, and there are no
commitments, contracts, agreements, arrangements or understandings by the
Company to issue any shares of the Company's capital stock or any Stock
Equivalents or other securities of the Company; and
(d) the Securities are duly authorized, and when issued to SES
will be validly issued, fully paid and non-assessable and will be free and clear
of all liens.
"Stock Equivalents" means any security or obligation which is by its
terms convertible into or exchangeable for ordinary shares of the Company or
other securities of the Company, and any option, warrant or other subscription
or purchase right with respect to ordinary shares or such other securities.
7. ASSIGNMENT This Agreement may not be assigned, in whole or in part, by
SES without the prior written consent of the Company, except that SES may assign
this Agreement to an affiliate of SES without the consent of the Company.
8. RIGHTS OF SECURITIES The Securities shall have those rights attached to
them as are set forth in the Company's Articles of Association, as same may be
amended from time to time.
9. GOVERNING LAW This Agreement shall be governed by and construed under
the laws of the State of Israel, without giving effect to principles of conflict
of laws.
10. NOTICES Any notice under this Agreement shall be in writing and shall
be deemed effective (i) upon personal delivery to the party to be notified, (ii)
the business day following the date of mailing by a internationally recognized
overnight courier service or (iii) five (5) business days after deposit with a
national post office, for dispatch by registered or certified mail, postage
prepaid and addressed to the party to be notified (A) if to the Company, to 21
Yegia Kapayim Street, Kiryat Aryeh, Petah Tikva, 49130, Israel, Attention: Yoav
Leibovitch and (B) if to SES, to Four Research Way, Princeton, New Jersey 08540,
USA, Attention: General Counsel, or in each case at such other address as such
party may designate by ten (10) days' advance written notice to the other party.
11. AMENDMENTS AND WAIVERS No provision of this Agreement may be amended or
waived, except by the written instrument signed by all the parties hereto or, in
the case of a waiver, by the party against whom enforcement os such waiver is
sought.
12. SEVERABILITY If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
13. ENTIRE AGREEMENT This Agreement, together with the Spacenet-SES
Agreement and the StarBand-SES Agreement, contains the entire understanding of
the parties with respect to the subject matter hereof and supersedes all prior
agreements and understandings with respect to such matters.
4
14. EXECUTION This Agreement may be executed in two counterparts, all of
which when taken together shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
GILAT SATELLITE NETWORKS LTD.
By:____________________________
Name:
Title
SES AMERICOM, INC.
By:____________________________
Name:
Title
5
EXHIBIT C
CAPITALIZATION TABLE
6
EXHIBIT 4.3
PARENT GUARANTEE
GUARANTEE, dated as of December 30, 2002 by Gilat Satellite
Networks Ltd. ("Guarantor") in favor of SES Americom Colorado, Inc. (hereinafter
called the "Beneficiary").
1. GUARANTEE. In consideration of and to induce Beneficiary to enter
into the Umbrella Agreement # 2 (the "Agreement") with Spacenet Inc. (the
"Company"), dated the same date as this Guarantee, modifying certain satellite
transponder service agreements, the Guarantor unconditionally and irrevocably
guarantees to the Beneficiary, its successors, endorsees and assigns, the prompt
payment when due of (i) all Company obligations incurred or arising in 2003
under the AMC-6 Satellite Transponder Service Agreement effective 25 March 2002,
as amended to date and by the Agreement, and (ii) repayment of the $3.4 million
described in Section 3 of the Agreement (collectively, the "Obligations").
2. NATURE OF GUARANTEE. The Guarantor's obligations hereunder with
respect to any Obligation shall not be affected by the existence, validity,
enforceability, perfection, or extent of any collateral for such Obligations.
The Beneficiary shall not be obligated to file any claim relating to the
Obligations owing to it in the event that the Company becomes subject to a
bankruptcy, reorganization or similar proceeding and the failure of the
Beneficiary to so file shall not affect the Guarantor's obligations hereunder.
In the event that any payment to the Beneficiary in respect to any Obligations
is rescinded or must otherwise be returned for any reason whatsoever, the
Guarantor shall remain liable hereunder in respect to such Obligations as if
such payment had not been made. Guarantor's obligations hereunder are contingent
upon Beneficiary providing simultaneous notice to Guarantor at 21 Yegia Kapayim
Street, Kiryat Aryeh, Petah Tikva, 49130 Israel, Attn: Yoav Leibovitch, in each
instance in which Beneficiary provides notice to Spacenet in connection with the
Obligations referenced above. The Guarantor reserves the right to assert
defenses which the Company may have to payment of any Obligation other than
defenses arising from the bankruptcy or insolvency of the Company and other
defenses expressly waived hereby.
3. CONSENTS, WAIVERS AND RENEWALS. The Guarantor agrees that the
Beneficiary and the Company may, without prior written consent of the Guarantor,
mutually agree to modify the Obligations or any agreement between the
Beneficiary and the Company, without in any way impairing or affecting this
Guarantee. The Guarantor agrees that Beneficiary may resort to the Guarantor for
payment of any of the Obligations, whether or not the Beneficiary shall have
resorted to any collateral security, or shall have proceeded against any other
obligor principally or secondarily obligated with respect to any of the
Obligations. The Guarantor hereby waives (i) notice of acceptance of this
Guarantee; (ii) presentment, protest and notice of protest or dishonor of any of
the indebtedness hereby guaranteed; and (iii) any and all legal requirements
that Beneficiary shall institute legal action against the Company with respect
to the Agreement as a condition precedent to bringing any action against the
Guarantor. No invalidity, irregularity or unenforceability of all or any part of
the Agreement and no waiver, modification, extension, forbearance or delay on
the part of Beneficiary with respect to the enforcement of the Agreement shall
operate to release or be deemed a legal or equitable defense to the obligations
of the Guarantor under this Guarantee.
4. TERMINATION, GOVERNING LAW. This Guarantee, which is binding on
the Guarantor's successors and assigns, is a guarantee of payment and not of
collection and shall be construed in accordance with the laws of the State of
New York, excluding its conflict of laws rules. It is a continuing guarantee,
which shall remain in force until full and final payment of all of the
Obligations of the Company to the Beneficiary guaranteed hereby.
GILAT SATELLITE NETWORKS LTD.
Signature:
Name:
Title:
EXHIBIT 10.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
Forms S-8 (Registration Nos. 333-96630, 333-08826, 333-10092, 333-12466 and
333-12988) Form F-3 (Registration No. 333-12698) and Form F-4 (Registration No.
333-71422) of our report dated April 14, 2003, with respect to the consolidated
financial statements of Gilat Satellite Networks Ltd. included in this Annual
Report on Form 20-F for the year ended December 31, 2002.
Yours Truly,
April 14, 2003 KOST, FORER and GABBAY
Tel-Aviv, Israel A Member of Ernst & Young Global
EXHIBIT 10.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Gilat-To-Home Latin America (Netherlands Antilles) B.V.
We consent to the incorporation by reference in the Registration Statements on
Forms S-8 (Nos. 333-96630, 333-08826, 333-10092, 33312466 and 333-12988), Form
F-3 (No.333-12698), and Form F-4 (No. 333-71422 of our report dated February 8,
2002 with respect to the consolidated financial statements of Gilat-To-Home
Latin America (Netherlands Antilles) N.V. which report appears in the Form 20-F
of Gilat Satellite Networks Ltd. (none of which aforementioned financial
statements are separately presented therein)
Amstelveen, the Netherlands
April 14, 2003
KPMG Accountants N.V. KPMG Accountants N.V., registered
under number 33263683 with the Chamber of Commerce in
Amsterdam, is a member of KPMG International, a Swiss
association.
EXHIBIT 10.3
CONSENT OF INDEPENDENT AUDITORS
Gilat Satellite Networks Ltd.
21 Yegia Kapayim Street
Daniv Park, Kiryat Arye
Petah Tikva 49130
Israel
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-96630, 333-08826, 333-10092, 333-12466 and
333-12988), Form F-3 (Nos. 333-12242 and 333-12698), and Form F-4 (No.
333-71422) of our report dated January 17, 2002, with respect to the
consolidated financial statements of Gilat Satellite Networks Ltd. included in
this Annual Report on Form 20-F for the year ended December 31, 2002.
Berman Hopkins Wright & LaHam CPAs LLP
April 14, 2003
Melbourne, Florida
EXHIBIT 10.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 31, 2002 on the consolidated financial
statements of rStar Corporation included in the Annual Report of Gilat Satellite
Networks, Ltd. on Form 20-F for the year ended December 31, 2002. We hereby
consent to the incorporation by reference of said report in the Registration
Statements of Gilat Satellite Networks, Ltd. on Form S-8 (Nos. 333-08826,
333-10092, 333-12466, and 333-12988), Form F-3 (No. 333-12698), and Form F-4
(No. 333-71422)
/s/ Grant Thornton LLP
San Francisco, California
April 15, 2003
Exhibit 12.(a).1
GILAT SATELLITE NETWORKS LTD.
CERTIFICATION PURSUANT TO
18 U.S.C. SS. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing by Gilat Satellite Networks Ltd. (the "Company")
with the Securities and Exchange Commission of an Annual Report on Form 20-F for
the period ending December 31, 2002, (the "Report"), the undersigned Chief
Executive Officer and Chief Financial Officer, respectively, of the Company each
hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ YOEL GAT
--------------------------
Yoel Gat
Chief Executive Officer
/s/ YOAV LEIBOVITCH
--------------------------
Yoav Leibovitch
Chief Financial Officer
Date: April 15, 2003
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