We currently have one external director, Dr. Leora Meridor, who was elected at the Special General Meeting held on August 30, 2005. The initial term of our second external director, Mr. Haim Benjamini, expired in February 2008, and he is expected to be reelected in a forthcoming Special General Meeting.
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 Stock Market, we are required to maintain an audit committee, at least a majority of whose members are independent of management. Pursuant to the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission, or the SEC, has issued rules which required NASDAQ to impose independence requirements on each member of the audit committee. Such requirements came into effect July 31, 2005.
Presently, our audit committee consists of Mr. Benjamini, Dr. Meridor, Dr. Sarid and Mr. Tamir. We believe that these appointments comply with the requirements of the Companies Law and with the SEC and NASDAQ rules, and that Dr. Meridor qualifies to serve as the audit committee’s financial expert, as required by the SEC and NASDAQ.
Pursuant to the current listing requirements of the NASDAQ Global Market, we are required to have at least a majority of our directors on our board of directors qualify as independent. Effective March 3, 2005, NASDAQ revised the rules so that a foreign private issuer (such as our company) may follow home country practice in lieu of complying with this rule.
Based on representations from our current directors, we believe that all of our directors except Mr. Levinberg and Mr. Blank comply with the independence standards set forth above.
Employees
As of December 31, 2007, we had approximately 970 full-time employees, including 156 employees in engineering, research and development, 412 employees in manufacturing, operations and technical support, 147 employees in marketing and sales, 146 employees in administration and finance and 105 in other departments. Of these employees, 392 employees were based in our facilities in Israel, 228 were employed in the United States, 288 were employed in Latin America and 58 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.
As of December 31, 2006, we had approximately 950 full-time employees, including 160 employees in engineering, research and development, 400 employees in manufacturing, operations and technical support, 130 employees in marketing and sales, 140 employees in administration and finance and 120 in other departments. Of these employees, 400 employees were based in our facilities in Israel, 235 were employed in the United States, 250 were employed in Latin America and 65 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.
As of December 31, 2005, we had approximately 929 full-time employees, including 151 employees in engineering, research and development, 384 employees in manufacturing, operations and technical support, 129 employees in marketing and sales, 146 employees in administration and finance and 119 in other departments. Of these employees, 387 employees were based in our facilities in Israel, 251 were employed in the United States, 235 were employed in Latin America and 62 in Asia, the Far East and other parts of the world.
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) and the Coordination Bureau of Economic Organizations (including the Manufacturers’ Association of Israel) are applicable to all Israeli employees by 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 quarterly payments to approved severance funds or insurance policies, with the remainder accrued as a long-term liability in our consolidated 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 16.31% of wages (up to a specified amount), of which the employee contributes approximately 64% and the employer contributes approximately 36%. 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.
We have a number of savings plans in the United States that qualify under Section 401(k) of the U.S. Internal Revenue Code. We contribute one dollar for each dollar a participant contributes in this plan, in an amount of up to 3% of a participant’s earnings and in addition, we contribute fifty cents for each dollar a participant voluntarily contributes in this plan, up to an additional 3% of a participant’s earnings. Matching contributions in 2007, 2006 and 2005 for all the plans were $ 0.7 million, $ 0.7 million and $ 0.7 million, respectively. Matching contributions are invested in proportion to each participant’s voluntary contributions in the investment options provided under the plan.
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Share Ownership
See table under Item 7: “Major Shareholders and Related Party Transactions” below.
Stock Option Plans
In June 1995, we adopted the 1995 Stock Option Plan (Incentive and Restricted Stock Options), or the 1995 ISO/RSO Plan, the 1995 Section 102 Stock Option/Stock Purchase Plan, or the 1995 Section 102 Plan, and the 1995 Advisory Board Stock Option Plan, or the 1995 Advisory Board Plan. The 1995 Plans expired on June 29, 2005.
As of December 31, 2007, we had granted options to purchase a total of 111,913 ordinary shares under the 1995 Plans and options to purchase 69,949 ordinary shares remain outstanding. The exercise prices for such options vary from $7.8 to $2,730 and all such options expire at various times from January 2008 to February 2013. As of December 31, 2007, a total of 41,963 options have been exercised under the 1995 Plan.
In September 2003, we adopted the 2003 Stock Option Plan (Incentive and Restricted Stock Options), or the 2003 ISO/RSO Plan and the Section 102 Stock Option Plan 2003, or the 2003 Section 102 Plan and collectively, the “2003 Plans”. In February 2005, our shareholders increased the pool for the 2003 Plans by 1,135,000 shares and in December 2005, our shareholders further increased the pool by 3,500,000 shares, such that the 2003 Plans provide for the granting of options of up to an aggregate of 6,135,000 ordinary shares to our officers, directors, employees or service providers or any of the employees of service providers of our subsidiaries. As of December 31, 2007, options to purchase a total of 3,977,081 ordinary shares under the 2003 Plans were outstanding, and options to purchase 1,515,512 ordinary shares have been exercised.
The purpose of the 2003 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 our company. The 2003 Section 102 Plan is designed to afford qualified optionees certain tax benefits under the Israel Income Tax Ordinance.
The 2003 Plans are administered by the Compensation/Stock Option Committee appointed by our board of directors. The Stock Option Committee, comprised of Dr. Meridor, Mr. Benjamini, Mr. Tamir and Dr. Sarid, has broad discretion, subject to certain limitations, to determine the persons entitled to receive options, 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 2003 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 the 2003 ISO/RSO Plan will only be granted to the employees (including directors and officers) of our company or its subsidiaries. The exercise price of incentive stock options issued pursuant to the 2003 ISO/RSO Plan 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). Unless otherwise provided in an option agreement, the exercise price per share under options awarded pursuant to the 2003 Plans shall be the higher of (i) $5.00 per share; and (ii) the fair market value of the shares, as of the date of the option grant.
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.
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In December 2005, our shareholders adopted a new plan, the 2005 Stock Incentive Plan with a pool of 1.5 million shares. This plan is designed to enable the board of directors to determine various forms of incentives for all forms of service providers and, when necessary, adopt a Sub-plan in order to grant specific incentives. Among the incentives that may be adopted are share options, performance share awards, performance share unit awards, restructured shares, restricted share unit awards and other share based awards. To date, we have granted 50,000 options under this plan.
As of March 1, 2008, the 13 directors and executive officers listed above, as a group, held options to purchase 3,004,650 of our ordinary shares at a weighted average exercise price of $5.93 per share. Out of such options, 1,100 options expirein 2011, 850 expire in 2012, 154,200 options expire in 2013, 3,000 options expire in 2014 and 2,845,500 options expire in 2015.
| 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 15, 2008 (including options exercisable within 60 days of March 15, 2008) 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 our company, except to the extent that they hold more than 7% and as such, they will have a right to appoint a director, subject to certain conditions in our Articles of Association. 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 our outstanding share capital.
The information in this table is based on 39,747,279 ordinary shares outstanding as of March 15, 2008. 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.
| Name and Address
| Number of
Ordinary
Shares
Beneficially
Owned
| Percent of
Ordinary
Shares
Outstanding
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| York Capital Management(1) | | | | 8,070,563 | | | 20.3 | % |
| Mivtach Shamir Finance Ltd.(2) | | | | 2,216,945 | | | 5.4 | % |
| All officers and directors as a group (13 persons)(3) | | | | 2,717,616 | | | 6.8 | % |
| | (1) | Based on a Schedule 13D filed on December 20, 2006, the shares are directly owned by or allocated for the benefit of (i) York Capital Management, L.P., a Delaware limited partnership; (ii) York Investment Limited, a corporation established in the Commonwealth of the Bahamas; and (iii) York Credit Opportunities Fund, L.P., a Delaware limited partnership. These three entities are part of a family of pooled investment vehicles managed by JGD Management Corp., a Delaware corporation doing business as York Capital Management. The sole shareholder of JGD is James G. Dinan. Dinan Management is the general partner of York Capital Management L.P. and James G. Dinan and Daniel A. Schwartz are the controlling members of Dinan Management. York Offshore Limited is the investment manager of York Investment Limited. The controlling principal of York Offshore Limited is James G. Dinan. Daniel A. Schwartz is a director of York Offshore Limited. York Credit Opportunities Domestic Holdings is the general partner of York Credit Opportunities. James G. Dinan and Daniel A. Schwartz are the controlling members of York Credit Opportunities Domestic Holdings. The principal business address of each of these entities and individuals is c/o York Capital Management, 767 Fifth Avenue, 17th Floor, New York, New York, 10153. |
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| | (2) | Based on a Schedule 13D filed on July 28, 2005. Mr. Meir Shamir and Ashtrom Industries Ltd. share voting and dispositive power with respect to the shares held by Mivtach Shamir Holdings Ltd. The address of Mivtach Shamir Holdings Ltd. is Beit Sharvat, 4 Kaufman St., Tel Aviv 68012, Israel. |
| | (3) | Includes options that are currently exercisable or are exercisable within 60 days that are held by our directors and executive officers. |
Significant Changes in the Ownership of Major Shareholders
As of January 1, 2005, our major shareholders were Bank Hapoalim, holding 3,302,428 shares (approximately 15% ownership) and Eliezer Fishman, holding 2,996,259 shares (approximately 10% ownership. As of December 31, 2005, our major shareholders were Bank Hapoalim, holding 2,052,428 shares (approximately 9% ownership), Eliezer Fishman, holding 2,112,523 shares (approximately 9% ownership), Mivtach Shamir Finance Ltd., holding 2,216,945 shares (approximately 10% ownership), Joseph Harrosh, holding 1,146,274 shares (approximately 9% ownership) and York, holding 3,302,428 shares (approximately 15% ownership). As of December 31, 2006, our major shareholders were York, holding 8,070,563 shares (approximately 20% ownership), Bank Hapoalim, holding 2,052,428 shares (approximately 5% ownership) and Mivtach Shamir Finance Ltd., holding 2,216,945 shares (approximately 6 % ownership). As of December 31, 2007, our major shareholders were York, holding 8,070,563 shares (approximately 20% ownership), Citadel Investment Group, L.L.C., holding 2,140,424 shares approximately 5 % ownership) and Mivtach Shamir Finance Ltd., holding 2,216,945 shares (approximately 5 % ownership).
Major Shareholders Voting Rights
The voting rights of our major shareholders do not differ from the voting rights of other holders of our ordinary shares.
Record Holders
Based on a review of the information provided to us by our transfer agent, as of March 26, 2008, there were 88 holders of record of our ordinary shares, of which 68 record holders holding approximately 95.4% of our ordinary shares had registered addresses in the United States and 12 record holders holding approximately 4.52% of our ordinary shares had registered addresses in Israel. These numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside since many of these ordinary shares were held of record by brokers or other nominees, including CEDE & Co., the nominee for the Depositary Company (the central depositary for the U.S. brokerage community), which held approximately 75.6% of our outstanding ordinary shares as of said date.
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| B. | Related Party Transactions. |
York Capital Management
In July 2005, Bank Hapoalim assigned a $71.4 million loan owed by the Company to the bank, to York Capital Management. In December 2005, we revised the terms of this loan. On September 27, 2006, York exercised its right to have the Company issue it warrants in the amount of the loan and accrued interest and immediately exercised its option to convert the warrants into shares at $6.75 per share. This resulted in the issuance of approximately 10.6 million ordinary shares to York. In December 2006, York participated as a selling shareholder in our public offering and sold 3,033,333 ordinary shares. Please see "Item 5: Liquidity and Capital Resources - Financing Activities."
| C. | Interests of Experts and Counsel. |
Not applicable.
| ITEM 8: | FINANCIAL INFORMATION |
Consolidated Statements
See "Item 18: Financial Statements."
Export Sales
We outsource a majority of our manufacturing, some from Israel and some from outside of Israel. For information on our revenues breakdown 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.
In the first half of 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, and a request to file a class action lawsuit was filed in the Tel-Aviv, Israel District Court. The class action suits were consolidated into a single action in the United States District Court for the Eastern District of New York. The class action was settled and approved by the United States District Court for the Eastern District of Virginia in September 2007. The Israeli class action was dismissed by the court in October 2007.
In September 2003, Nova Mobilcom S.A., or Mobilcom, filed a lawsuit against Gilat do Brasil for specific performance of a Memorandum of Understanding which provided for the sale of Gilat do Brasil, and specifically the GESAC project, a government education project awarded to Gilat do Brazil, to Mobilcom for an unspecified amount. Gilat do Brasil does not believe that this claim has any merit and is vigorously defending itself against the claims presented therein.
The Brazilian tax authority has filed a claim against a subsidiary of Spacenet Inc. in Brazil, for alleged taxes due of approximately $4 million. In January 2004, the subsidiary received notice of an administrative ruling reducing the amount of the claim, and the subsidiary filed an appeal of such ruling. In December 2005, this appeal was denied and at present, the subsidiary faces a tax liability of approximately $8.2 million (the amount has increased due to interest and exchange rate differences). The subsidiary denies such claims and has filed a petition known as a "Acao Anulatoria" in the State Courts of the State of Sao Paulo, Brazil.
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From time to time, we are 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 our 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.
Dividend Policy
We have never paid cash dividends on our ordinary shares and cannot anticipate paying any cash dividends in the foreseeable future. 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 9 and 12 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
In March 2008 we announced the resignation of our Chief Financial Officer, Ms. Tal Payne who will be leaving our company in mid-2008.
On March 31, 2008 we announced the signing of an Agreement and Plan of Merger to be acquired for an aggregate value of $475 Million in an all cash transaction by a consortium of private equity investors that includes The Gores Group LLC, Mivtach Shamir Holdings Ltd., companies affiliated with Roy Ben-Yami, Ami Lustig and Eytan Stibbe and DGB Investments, Inc. Under the terms of the agreement, our shareholders will receive $11.40 per share in cash at closing, representing a premium of approximately 38% over our average closing share price during the 30 trading days ended April 25, 2007, the day in which Mivtach Shamir Holdings Ltd. issued a formal offer to the board of directors of Gilat to purchase 100% of the Company's shares. There is no financing condition to the obligations of the buyers to consummate the transaction. Our Board of Directors approved the agreement and recommended that our shareholders vote in favor of the transaction. The closing of the transaction is subject to shareholder approval, certain regulatory approvals and other customary closing conditions. It is currently anticipated that the transaction will be consummated by September 2008. Upon the closing of the transaction, our ordinary shares would no longer be traded on NASDAQ or the Tel Aviv Stock Exchange. This agreement is attached hereto as Exhibit 4.1.
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| ITEM 9: | THE OFFER AND LISTING |
| A. | Offer and Listing Details |
Annual Stock Information
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. All of the reported prices have been adjusted to reflect a twenty for one share reverse stock split which became effective April 16, 2003.
| Price
| Average Daily Trading Volume
|
|---|
| High
| Low
| |
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| Year Ended December 31, 2003: | | | $ | 8.80 | | $ | 3.43 | | | 80,345 | |
| | | |
| Year Ended December 31, 2004: | | | $ | 9.40 | | $ | 4.00 | | | 219,488 | |
| | | |
| Year Ended December 31, 2005: | | | $ | 7.48 | | $ | 5.19 | | | 88,311 | |
| | | |
| Year Ended December 31, 2006: | | |
| | | |
| First Quarter | | | $ | 6.44 | | $ | 5.59 | | | 61,384 | |
| Second Quarter | | | $ | 8.37 | | $ | 5.96 | | | 82,938 | |
| Third Quarter | | | $ | 9.54 | | $ | 7.15 | | | 77,997 | |
| Fourth Quarter | | | $ | 10.01 | | $ | 8.37 | | | 142,675 | |
| | | |
| Year Ended December 31, 2007: | | |
| | | |
| First Quarter | | | $ | 9.74 | | $ | 7.89 | | | 161,902 | |
| Second Quarter | | | $ | 9.87 | | $ | 8.07 | | | 172,138 | |
| Third Quarter | | | $ | 10.25 | | $ | 8.40 | | | 163,679 | |
| Fourth Quarter | | | $ | 11.18 | | $ | 10.01 | | | 118,200 | |
| | | |
| Most Recent Six Months: | | |
| | | |
| October 2007 | | | $ | 11.13 | | $ | 10.21 | | | 132,143 | |
| November 2007 | | | $ | 11.18 | | $ | 10.41 | | | 112,233 | |
| December 2007 | | | $ | 10.55 | | $ | 10.01 | | | 100,235 | |
| January 2008 | | | $ | 10.89 | | $ | 9.82 | | | 137,281 | |
| February 2008 | | | $ | 11.05 | | $ | 10.14 | | | 125,100 | |
| March 2008 | | | $ | 10.74 | | $ | 9.46 | | | 189,721 | |
| | | |
| April 2008 (through April 6) | | | $ | 10.75 | | $ | 10.68 | | | 565,575 | |
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Not applicable.
Our ordinary shares are quoted on the NASDAQ Global Market under the symbol “GILT.”
Not applicable.
Not applicable.
Not applicable.
| 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 our purpose is to engage in any business permitted by law and that we can also grant reasonable donations for any proper charitable cause.
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Amendment of the Articles of Association
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.
Amendment of the Memorandum
Companies that were incorporated prior to the effective date of the Companies Law, such as our company, may amend their memorandum of association to authorize future amendments to the memorandum of association by any required voting. On November 9, 2000, our shareholders approved an amendment to our Memorandum of Association, by adding a provision that authorizes our company to amend its Memorandum of Association by the affirmative vote of a majority of the ordinary shares present and voting at the meeting.
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 our company, can be set between four and twenty-one days before the date of the meeting (see section 182(b)). Article 20 of our Articles of Association 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 Israeli Companies Law 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.
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Quorum at General Meetings
Under Article 26(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 twenty five percent (25%) 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 original meeting was called as a special meeting, 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 such a meeting.
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 is 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 our company. Under the Companies Law, a person cannot serve as a director if convicted of certain offenses or been declared bankrupt.
Under our Articles of Association, 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, our board of directors is 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.
Our Articles further provide 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.
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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 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 Articles further stipulate that as a condition to the appointment of an Appointed Director, any appointing shareholder that delivers to our 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 us 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 us, upon our written request at any time and from time to time, with reasonable evidence of its beneficial ownership in the our company.
Under our Articles of Association, 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 us, whether as a director, officer, employee, contractor, consultant, partner or otherwise.
Under 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.
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.
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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.
Alternate Directors
See Item 6: “Directors and Senior Management – Alternate Directors”.
External Directors
See Item 6: “Directors and Senior Management – 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 our 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 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 us 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.
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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 our Chief Executive Officer flexibility in hiring officers (other than directors), Article 50(b) of our Articles of Association authorizes our Chief Executive Officer to appoint our officers and employees (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 our company shall be approved by either the board of directors, the Audit Committee or the Compensation Committee.
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 our 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 our 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 t our company, unless there is another person holding at that time more than fifty percent of the voting rights of our 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 we 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 us, in such manner and under such terms as our 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 us to purchase his shares or offer to purchase shares from any other shareholders.
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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 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:
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| | (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 our 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) private offering which includes one of the following: (a) a private placement of at least 20% of the Company’s securities prior to the private offering when the compensation for such placement is not in cash or in securities which are registered for public trade, or when the transaction is not in the ordinary course of business, and that as a result of such private offering the holdings of a shareholder that holds five percent or more of our outstanding share capital shall increase, 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; or (b) a private placement of securities that will cause any person to become a controlling shareholder. (clause 270(5))
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 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 our company in connection with interested parties transactions, as follows:
| | — | 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 our company; |
| | — | 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, or that will cause any person to become, as a result of the issuance, a controlling shareholder, such shareholder must promptly disclose to us any personal interest he may have in such private placement; and |
| | — | any of our shareholders voting on any transaction with a controlling shareholder as set forth above must inform us 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 us with respect to any such interest shall not be counted. |
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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 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:
| | — | 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; |
| | — | a breach by the office holder of his duty of care if such breach was done intentionally or recklessly; |
| | — | any act or omission done with the intent to derive an illegal personal gain; or |
| | — | 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.
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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 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. In addition, as of August 30, 2005, we have provided our directors and officers with letters providing them with indemnification to the fullest extent permitted under Israeli law.
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 insurance may also cover the Company for indemnifying such office holder.
ISRAELI TAXATION
The following is a summary of certain Israeli income tax and capital gains tax consequences for nonresidents and residents of Israel holding our ordinary shares. The summary is based on provisions of the Israeli Income Tax Ordinance (new version) and additional and complementary tax regulations promulgated thereunder, 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. There might be changes in the tax rates and in the circumstances in which they apply, and other modifications which might change the tax consequences to you. The summary is intended for general purposes only, and is not exhaustive of all possible tax considerations. 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. WE ARE NOT MAKING ANY REPRESENTATIONS REGARDING THE PARTICULAR TAX CONSEQUENCES AS TO ANY HOLDER, NOR ARE WE OR OUR ADVISORS RENDERING ANY FORM OF LEGAL OPINION OR PROFESSIONAL TAX ADVICE AS TO SUCH TAX CONSEQUENCES.
Generally, Israeli companies are subject to “Corporate Tax” on their worldwide income. On July 25, 2005, the Knesset, Israel’s Parliament, approved the Law of the Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among others, a gradual decrease in the corporate tax rate in Israel to the following tax rates: in 2005 – 34%, in 2006 – 31%, in 2007 – 29%, in 2008 – 27%, in 2009 – 26% and in 2010 and thereafter – 25%. However, the effective tax rate payable by a company which derives income from an approved enterprise (as further discussed below) may be considerably less.
Tax Consequences to Nonresidents of Israel
Nonresidents of Israel are subject to income tax on income accrued or derived from sources 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. We are required to withhold income tax on such payments to non-residents. Israel presently has no estate or gift tax.
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Capital Gains
Israeli law generally imposes a capital gains tax on capital gains derived from the sale of securities and other Israeli capital assets, including shares in Israeli resident companies, unless a specific exemption is available or unless a treaty between Israel and the country of the non-resident provides otherwise. 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. Gains from sales of our ordinary shares will be tax exempt for nonresidents of Israel if the shares are quoted on the NASDAQ Global Market or listed for trading on a stock exchange so long as the gains are not derived through a permanent establishment that the non-resident maintains in Israel.
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 exceptions stated in the treaty.
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. As of January 1, 2006, income tax on distributions of dividends other than bonus shares (stock dividends) is at the rate of 20% for dividends paid to an individual or a foreign corporation who is not a substantial shareholder, 25% for dividends paid to a substantial shareholder, and 15% for dividends generated by an approved enterprise, a different rate is provided in a treaty between Israel and shareholder’s country of residence.
Under the U.S.-Israel tax treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a U.S. resident will be 25%. However, the maximum tax rate on dividends not generated by an approved enterprise paid to a US corporation holding at least 10% of our voting power is 12.5%. For residents of other countries, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence, the maximum tax on dividends paid that we are required to withhold is 20%. As long as our shares are listed on a stock exchange, the maximum withholding tax rate will be 20%.
Interest
Nonresidents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income may include passive income, such as interest paid on our convertible notes. For residents of the United States, under the treaty between Israel and the U.S., the maximum tax on interest paid to a U.S. resident (as defined in the treaty) holding our convertible notes that we are required to withhold is 17.5%. For residents of other countries who are not substantial shareholders, unless a different rate is provided in a treaty between Israel and the country of residence of such holder of our convertible notes, the maximum tax that we are required to withhold is 25% on all distributions of interest. Substantial shareholders may be subject to an increased withholding tax rate, up to the marginal tax rate.
Filing of Tax Returns in Israel
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 by Israeli residents. 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, following Amendment 147 to the Israeli Income Tax Ordinance (“Amendment No. 147”), effective commencing January 1, 2006, gains from sales of ordinary shares incurred after December 31, 2002, are subject to 20% capital gains tax (25% for substantial shareholder) for individuals, Israeli companies that were subject to the Income Tax Law (Inflation Adjustments) – 1985 (the “Adjustment Law”) prior to the publication of Amendment No. 147 are subject to corporate tax rate on capital gain driven from the sale of our ordinary shares, Israeli companies that were not subject to the Adjustment law prior to the publication of Amendment No. 147 are subject to capital gain tax at a rate of 25% in connection with the sale of our ordinary shares. If our ordinary shares were purchased prior to January 1, 2003, different taxation will apply. Certain withholding obligations may apply on the sale of our shares.
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Dividends
Dividend income generated by an Approved Enterprise is subject to income tax at a rate of 15%. Starting January 1, 2006, the distribution of dividend income generated by other sources, other than bonus shares (stock dividends), to Israeli residents who purchased our Shares will generally be subject to income tax at a rate of 20% for individuals (25% for substantial shareholder) and will be exempt from income tax for corporations provided the dividend was paid out of income generated in Israel. We may be required to withhold income tax at the maximum rate of up to 25% (0% for Israeli corporations provided the dividend was paid out of income generated in Israel.) on all such distributions (15% for dividends generated by an Approved Enterprise).
Interest
Interest accrued and paid after January 1, 2006, is generally subject to 20% tax for individuals (the marginal tax rate for substantial shareholder) and the applicable corporate tax rate for companies. On all distributions of interest, we may be required to withhold income tax at a rate of up to the applicable corporate tax rate for companies, and up to the marginal tax rate for individuals.
Tax Benefits under the Law for the Encouragement of Capital Investments, 1959
The Law for the Encouragement of Capital Investments, 1959, as amended (effective as of April 1, 2005), (the “Investments Law”), provides that a capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry, Trade and Labor of the State of Israel, be designated as an approved enterprise. The Investment Center bases its decision as to whether or not to approve an application, among other things, on the criteria set forth in the Investments Law and regulations, the then prevailing policy of the Investment Center, and the specific objectives and financial criteria of the applicant. Each certificate of approval for an approved enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, e.g., the equipment to be purchased and utilized pursuant to the program.
The Investments Law provides that an approved enterprise is eligible for tax benefits on taxable income derived from its approved enterprise programs. The tax benefits under the Investments Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed by the approved enterprise, income generated from royalties, and income derived from a service which is related to such usage right or royalties, provided that such income is generated within the approved enterprise’s ordinary course of business. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is in general the result of a weighted average of the applicable rates. The tax benefits under the Investments Law might be restricted with respect to income derived from products manufactured outside of Israel. In addition, the tax benefits available to an approved enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and regulations and the criteria set forth in the specific certificate of approval, as described above. In the event that a company does not meet these conditions, it would be required to refund the amount of tax benefits, plus a consumer price index linkage adjustment and interest.
The Investments Law also provides that an approved enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved enterprise program in the first five years of using the equipment.
Taxable income of a company derived from an approved enterprise is subject to corporate tax at the maximum rate of 25%, rather than the regular corporate tax rate, for the benefit period. This period is ordinarily seven years commencing with the year in which the approved enterprise first generates taxable income after the commencement of production, and is limited to 12 years from commencement of production or 14 years from the date of approval, whichever is earlier (the “year’s limitation”).
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Should we derive income from sources other than the “approved enterprise” during the relevant period of benefits, such income will be taxable at the regular corporate tax rates.
Under certain circumstances (as further detailed below), the benefit period may extend to a maximum of ten years from the commencement of the benefit period.
A company may elect to receive an alternative package of benefits. Under the alternative package of benefits, a company’s undistributed income derived from the approved enterprise will be exempt from corporate tax for a period of between 2 and 10 years from the first year the company derives taxable income under the program, after the commencement of production, depending on the geographic location of the approved enterprise within Israel, and such company will be eligible for a reduced tax rate for the remainder of the benefits period (but not more than a maximum of 7 to 10 years in total). The limitation of years, as mentioned above, does not apply to the exemption period.
A company that has elected the alternative package of benefits, such as us, that subsequently pays a dividend out of income derived from the approved enterprise(s) during the tax exemption period will be subject to corporate tax in the year the dividend is distributed in respect of the gross amount distributed, at the rate which would have been applicable had the company not elected the alternative package of benefits, (generally 10%-25%, depending on the percentage of the company’s ordinary shares held by foreign shareholders). The dividend recipient is subject to withholding tax at the reduced rate of 15% applicable to dividends from approved enterprises, if the dividend is distributed during the tax exemption period or within 12 years thereafter. In the event, however, that the company is qualifies as a Foreign Investors’ Company, there is no such time limitation.
A company that has an approved enterprise program is eligible for further tax benefits if it qualifies as a foreign investors company. A foreign investors company is a company which, among others, more than 25% of its share capital, including shareholders’ loans, is owned by non-Israeli residents. A company that qualifies as a foreign investors company and has an approved enterprise program is eligible for tax benefits for a 10 year benefit period.
Tax benefits under the 2005 Amendment
On April 1, 2005, a comprehensive amendment to the investment law came into effect, (the “Amendment”). The Amendment includes revisions to the criteria for investments qualified to receive tax benefits as an Approved Enterprise. The Amendment applies to new investment programs and investment programs commencing after 2004, and does not apply to investment programs approved prior to December 31, 2004.
However, a company that was granted benefits according to section 51 of the Investment Law (prior the amendment) would not be allowed to choose a new tax year as a Year of Election (as described below) under the new amendment, for a period of 3 years from the company’s previous Year of Commencement under the old investment law.
As a result of the Amendment, it is no longer necessary for a company to acquire approved enterprise status in order to receive the tax benefits previously available under the alternative route, and therefore such companies do not need to apply to the Investment Center for this purpose. Rather, a company wishing to receive the tax benefits afforded to a Benefited Enterprise is required to select the tax year from which the period of benefits under the Investment Law are to commence by notifying the Israeli Tax Authority within 12 months of the end of that year, provided that its facilities meet the criteria for tax benefits set out by the Amendment, or a Benefited Enterprise. Companies are also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Amendment. The Amendment includes provisions attempting to ensure that a company will not enjoy both Government grants and tax benefits for the same investment program
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Our company is entitled to enjoy the tax benefits in accordance with the provisions of the Investment Law prior to its revision, but if our company is granted any new benefits in the future they will be subject to the provisions of the Amendment. The following discussion is a summary of the Investment Law prior to its Amendment as well as the relevant changes contained in the Amendment.
The Amendment simplifies the approval process: according the Amendment, only Approved Enterprises receiving cash grants require the approval of the Investment Center. The Investment Center will be entitled, to approve such programs only until December 31, 2007.
The Amendment does not apply to benefits included in any certificate of approval that was granted before the Amendment came into effect, which will remain subject to the provisions of the Investment Law as they were on the date of such approval.
Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business income from export (referred to as a “Benefited Enterprise”). In order to receive the tax benefits, the Amendment states that the company must make an investment in the Benefited Enterprise exceeding a certain percentage or a minimum amount specified in the Law. Such investment may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise, or the Year of Election. If the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Benefited Enterprise and in general the company’s effective tax rate will be the result of a weighted combination of the applicable tax rates. In this case, the minimum investment required in order to qualify as a Benefited Enterprise is required to exceed a minimum amount or a certain percentage of the company’s production assets at the end of the year before the expansion.
The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the Commencement Year, or 12 years from the first day of the Year of Election. The tax benefits granted to a Benefited Enterprise are determined, as applicable to its geographic location within Israel, according to one of the following new tax routes, which may be applicable to us:
| | — | Similar to the alternative route, exemption from corporate tax on undistributed income for a period of two to ten years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in each year. Benefits may be granted for a term of seven or ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the Benefited Enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%) in respect of the grossed up amount of the dividend that we may distribute. The company is required to withhold tax at a rate of 15% from any dividends distributed from income derived from the Benefited Enterprise; and |
| | — | A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited Enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents. |
If we are granted new benefits in the future, we will be subject to the first route.
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Generally, a company that is “Abundant in Foreign Investment” (as defined in the Investments Law) is entitled to an extension of the benefits period by an additional five years, depending on the rate of its income that is derived in foreign currency.
The Amendment changes the definition of “foreign investment” in the Investments Law so that the definition now requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder, provided that the company’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the aforementioned definition will take effect retroactively from 2003.
The Amendment will apply to approved enterprise programs in which the year of election under the Investments Law is 2004 or later, unless such programs received approval from the Investment Center on or prior to December 31, 2004, in which case the Amendment provides that the terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval.
As a result of the Amendment, tax-exempt income generated under the provisions of the Amendment will be subject to taxes upon distribution or liquidation and we may be required in the future to record deferred tax liability with respect to such tax-exempt income.
U.S. TAXATION
The following discussion is a general summary of certain U.S. federal income tax considerations applicable to U.S. Holders (as defined below) of ordinary shares, who hold such ordinary shares as capital assets (generally, property held for investment). This summary is based on provisions of the U.S. Internal Revenue Code, or the Code, existing and proposed U.S. Treasury regulations and administrative and judicial interpretations in effect as of the date of this annual report and the U.S. – Israel Tax Treaty. All of these authorities are subject to change (possibly with retroactive effect) and to differing interpretations. In addition, this summary does not discuss non-U.S. tax implications or U.S. state tax implications, no does it 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:
| | — | dealers in stocks or securities; |
| | — | tax-exempt organizations; |
| | — | regulated investment companies or real estate investment trusts; |
| | — | persons subject to the alternative minimum tax; |
| | — | persons who hold ordinary shares through partnerships or other pass-through entities; |
| | — | persons holding their shares as part of a straddle or appreciated financial position or as part of a hedging or conversion transaction; |
| | — | persons who acquired their ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation for services; |
| | — | non-residents aliens of the U.S. or persons having a functional currency other than the U.S. dollar; or |
| | — | direct, indirect or constructive owners of 10% or more of the outstanding voting shares of our company. |
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If a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns ordinary shares, the U.S. federal income tax treatment of a partner in such a partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership that owns ordinary shares and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of holding and disposing of ordinary shares.
THE FOLLOWING SUMMARY DOES NOT ADDRESS THE IMPACT OF A U.S. HOLDER’S INDIVIDUAL TAX CIRCUMSTANCES. ACCORDINGLY, EACH U.S. HOLDER IS URGED TO CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF AN INVESTMENT IN THE ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL OR NON-U.S. TAX LAWS AND POSSIBLE CHANGES IN THE 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:
| | — | a citizen or, for U.S. federal income tax purposes, a resident of the United States; |
| | — | a corporation created or organized in or under the laws of the United States or any political subdivision thereof; |
| | — | an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or |
| | — | 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) it has a valid election in effect under applicable U.S. Treasury regulations to e treated as a U.S. person. |
Dividends Paid on Ordinary Shares
Subject to the discussion of the passive foreign investment company or PFIC rules 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 our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Distributions in excess of our earnings and profits 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. Our dividends will not qualify for the dividends-received deduction otherwise available to U.S. corporations. In the event that we pay cash dividends, such dividends will be paid in Israeli currency. Dividends paid in NIS (including the amount of any Israeli taxes withheld therefrom) will be includible in the gross 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.
Subject to certain limitations, “qualified dividend income” received by a non-corporate taxpayer generally is subject to U.S. federal income tax at a reduced maximum tax rate of 15 percent through December 31, 2010. Dividends received with respect to ordinary shares should qualify for the 15 percent rate provided that either: (i) we are entitled to benefits under the income tax treaty between the United States and Israel (the “Treaty”); or (ii) the ordinary shares currently are readily tradable on an established securities market in the U.S.. We believe that we are entitled to benefits under the Treaty and that the ordinary shares currently are readily tradable on an established securities market in the U.S. No assurance can be given that the ordinary shares will remain readily tradable. The rate reduction does not apply to dividends received from PFICs, see discussion below, or in respect of certain short-term or hedged positions in common stock or in certain other situations. The legislation enacting the reduced tax rate contains special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to the reduced tax rate, see discussion below. U.S. Holders of ordinary shares should consult their own tax advisors regarding the effect of these rules in their particular circumstances.
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Subject to complex limitations, any Israeli withholding tax imposed on dividends paid by us will be a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability (or, alternatively, for deduction against income in determining such tax liability). The limitations set out in the Code include computational rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income. Dividends generally will be treated as foreign-source passive category income or, in the case of certain U.S. Holders, general category income for United States foreign tax credit purposes. Further, there are special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to a reduced tax, see discussion above. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the ordinary shares to the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the 16-day holding period required by the statute. The rules relating to the determination of the foreign tax credit are complex, and you should consult with your personal tax advisors to determine whether and to what extent you would be entitled to this credit.
Sale or Disposition of Ordinary Shares
Subject to the discussion of PFIC rules 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. 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. In general, any gain that you recognize on the sale or other disposition of ordinary shares will be U.S.-source for purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source income. Deduction of capital losses is subject to certain limitations under the Code.
In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of ordinary shares, the amount realized will be based on the U.S. dollar value of the NIS received with respect to the ordinary shares as determined on the settlement date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into United States dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss.
An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of ordinary shares, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the Internal Revenue Service, or the IRS. In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the U.S. dollar value of the currency received prevailing on the trade date and the settlement date. Any such currency gain or loss would be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such ordinary shares.
Passive Foreign Investment Company
For U.S. federal income tax purposes, we will be considered a PFIC for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules.
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Based on our current and projected income, assets and activities, we believe that we are not currently a PFIC. However, because the determination of whether we are a PFIC is based upon the composition of our income and assets from time to time, there can be no assurances that we will not become a PFIC for any future taxable year.
If we were treated as a PFIC for any taxable year, dividends would not qualify for the reduced maximum tax rate, discussed above, and, unless you elect either to treat your investment in ordinary shares as an investment in a “qualified electing fund”, or a QEF election, or to “mark-to-market” your ordinary shares, as described below:
| | — | you would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of ordinary shares ratably over the holding period for such ordinary shares, |
| | — | the amount allocated to each year during which we are considered a PFIC and subsequent years, other than the year of the dividend payment or disposition, would be subject to tax at the highest individual or corporate tax rate, as the case may be, in effect for that year and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year, |
| | — | the amount allocated to the current taxable year and any taxable year before we became a PFIC would be taxable as ordinary income in the current year, and |
| | — | you would be required to make an annual return on IRS Form 8621 regarding distributions received with respect to ordinary shares and any gain realized on your ordinary shares. |
If you make either a timely QEF election or a timely mark-to-market election in respect of your ordinary shares, you would not be subject to the rules described above. If you make a timely QEF election, you would be required to include in your income for each taxable year your pro rata share of our ordinary earnings as ordinary income and your pro rata share of our net capital gain as long-term capital gain, whether or not such amounts are actually distributed to you. You would not be eligible to make a QEF election unless we comply with certain applicable information reporting requirements.
Alternatively, if the ordinary shares are considered “marketable stock” and if you elect to “mark-to-market” your ordinary shares, you will generally include in income any excess of the fair market value of the ordinary shares at the close of each tax year over your adjusted basis in the ordinary shares. If the fair market value of the ordinary shares had depreciated below your adjusted basis at the close of the tax year, you may generally deduct the excess of the adjusted basis of the ordinary shares over its fair market value at that time. However, such deductions generally would be limited to the net mark-to-market gains, if any, that you included in income with respect to such ordinary shares in prior years. Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of ordinary shares with respect to which the mark-to-market election is made, is generally treated as ordinary income or loss.
Backup Withholding and Information Reporting
Payments in respect of ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and to U.S. backup withholding tax at a rate equal to the fourth lowest income tax rate applicable to individuals (which, under current law, is 28%). Backup withholding will not apply, however, if you (i) are a corporation or come within certain exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct taxpayer identification number and make any other required certification.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.
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Any U.S. holder who holds 10% or more in vote or value of our ordinary shares will be subject to certain additional United States information reporting requirements.
| F. | Dividend and Paying Agents |
Not applicable.
Not applicable.
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, as applicable to “foreign private issuers” as defined in Rule 3b-4 under the Exchange Act, and in accordance therewith, we are required to file annual and interim reports and other information with the Securities and Exchange Commission.
As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, transactions in our equity securities by our officers and directors are exempt from reporting as are the “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. We make our Securities and Exchange Commission filings electronically and they are available on the Securities and Exchange Commission’s website. We began filing through the EDGAR system beginning in November 2002. We are not required under the Exchange Act to file periodic reports and financial statements as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. However, we will distribute annually to our shareholders an annual report containing financial statements that have been examined and reported on, with an opinion expressed by an independent public accounting firm.
This annual report and the exhibits thereto and any other document that we have to file pursuant to the Exchange Act may be inspected without charge and copied at prescribed rates at the Securities and Exchange Commission public reference room at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549. You may obtain information on the operation of the Securities and Exchange Commission’s public reference room in Washington, D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330 and may obtain copies of our filings from the public reference room by calling (202) 942-8090.
Information about us is also available on our website athttp://www.gilat.com. Information on our website is not part of this annual report.
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| ITEM 11: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The table below details the balance sheet exposure by currency and interest rates:
| Expected Maturity Dates
|
|---|
| 2008
| 2009
| 2010
| 2011
| 2012 and
thereafter
|
|---|
| (In thousands)
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| Assets: | | | | | | | | | | | | | | | | | |
| Restricted cash - in U.S. dollars | | | | 7,065 | | | 707 | | | 1,114 | | | 500 | | | 4,000 | |
| Weighted interest rate | | | | 5.39 | % | | 4.81 | % | | 4.49 | % | | 5.00 | % | | 5.08 | % |
| In other currency: | | | | 26 | | | | | | | | | | | | | |
| Weighted interest rate | | | | 4.00 | % | | | | | | | | | | | | |
| Restricted cash held by Trustees | | |
| In U.S. dollars | | | | 5,532 | | | 16,544 | | | | | | | | | | |
| Weighted interest rate | �� | | | 3.94 | % | | 4.07 | % | | | | | | | | | |
| In other currency | | | | 1,918 | | | | | | | | | | | | | |
| Weighted interest rate | | | | 5.58 | % | | | | | | | | | | | | |
| Liabilities: | | |
| Long-term loans (including | | |
current maturities)
In U.S. dollars: | | | | 5,011 | | | 4,000 | | | 4,000 | | | 4,000 | | | | |
| Weighted interest rate | | | | 5.46 | % | | 5.20 | % | | 5.20 | % | | 5.20 | % | | | |
| In other currency: | | | | 343 | | | 365 | | | 389 | | | 414 | | | 5,536 | |
| Weighted interest rate | | | | 6.30 | % | | 6.30 | % | | 6.30 | % | | 6.30 | % | | 6.30 | % |
| Converted subordinated notes - in | | |
| U.S. dollars: | | | | | | | | | | 853 | | | 853 | | | 14,609 | |
| Weighted interest rate | | | | - | | | - | | | 4.00 | % | | 4.00 | % | | 4.00 | % |
| ITEM 12: | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
Not applicable.
PART II
| ITEM 13: | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None
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| ITEM 14: | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Not applicable.
| ITEM 15: | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Our principal executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of December 31, 2007, have concluded that, as of such date, our disclosure controls and procedures were effective and ensured that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our principal executive officer and chief financial officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the rules of the Securities and Exchange Commission.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| | — | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the company; |
| | — | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| | — | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting, as of December 31, 2007. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on that assessment, our management concluded that as of December 31, 2007, our internal control over financial reporting is effective.
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Our independent auditors, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, have issued an audit report on the effectiveness of our internal control over financial reporting. The report is included in page F-3 of this Annual Report on Form 20-F.
Changes in Internal Control over Financial Reporting
During the period covered by this Annual Report on Form 20-F, no changes in our internal control over financial reporting have occurred that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 16A: | AUDIT COMMITTEE FINANCIAL EXPERT |
Our board of directors has determined that Dr. Meridor and Dr. Sarid meet the definition of an audit committee financial expert, as defined in Item 401 of Regulation S-K.
We have adopted a Code of Ethics for executive and financial officers, that also applies to all of our employees. The Code of Ethics is publicly available on our website at www.gilat.com. Written copies are available upon request. If we make any substantive amendments to the Code of Ethics or grant any waivers, including any implicit waiver, from a provision of this code to our chief executive officer, principal financial officer or corporate controller, we will disclose the nature of such amendment or waiver on our website.
| ITEM 16C: | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Fees Billed by Independent Auditors
The following table sets forth, for each of the years indicated, the fees billed to us by our independent auditors and the percentage of each of the fees out of the total amount paid to the auditors.
| Year Ended December 31,
|
|---|
| 2007
| 2006
|
|---|
Services
Rendered
| Fees
| Percentages
| Fees
| Percentages
|
|---|
| | | | | |
|---|
| | | | |
|---|
| Audit (1) | | | $ | 631,273 | | | 78.2 | % | $ | 615,705 | | | 75.1 | % |
| Audit-related (2) | | | $ | 156,938 | | | 19.4 | % | | 156,245 | | | 19.0 | % |
| Tax (3) | | | | 19,500 | | | 2.4 | % | | 48,344 | | | 5.9 | % |
| | | |
| Total | | | $ | 807,711 | | | 100.0 | % | $ | 820,294 | | | 100.0 | % |
| (1) | Audit fees consist of services that would normally be provided in connection with statutory and regulatory filings or engagements, including services that generally only the independent accountant can reasonably provide. |
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| (2) | Audit-related fees relate to assurance and associated services that traditionally are performed by the independent auditor, including: accounting consultation and consultation concerning financial accounting and reporting standards. |
| (3) | Tax fees relate to tax compliance, planning, and advice. |
Policies and Procedures
Our Audit Committee has adopted a policy and procedures for the approval of audit and non-audit services rendered by our independent auditors, Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global. The policy generally requires the Audit Committee’s approval of the scope of the engagement of our independent auditor or on an individual engagement basis. The policy prohibits retention of the independent auditors to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also considers whether proposed services are compatible with the independence of the public auditors.
| ITEM 16D: | EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE |
Not applicable.
| ITEM 16E: | PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
Issuer Purchase of Equity Securities
In the year ended December 31, 2007, we did not engage in the purchase of any of our own shares.
PART III
| ITEM 17: | FINANCIAL STATEMENTS |
Not applicable.
| ITEM 18: | FINANCIAL STATEMENTS |
The Consolidated Financial Statements and related notes required by this item are contained on pages F-1 through F-54 hereof.
| Index to Consolidated Financial Statements | PAGE |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Reports of Independent Registered Public Accounting Firm | F-2 |
| Consolidated Balance Sheets | F-3 |
| Consolidated Statements of Operations | F-5 |
| Consolidated Statements of Changes in Shareholders' Equity | F-6 |
| Consolidated Statements of Cash Flows | F-8 |
| Notes to Consolidated Financial Statements | F-11 |
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| 1.1 | Memorandum of Association, as amended. Previously filed as Exhibit 1.1 to our 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 our Annual Report on Form 20-F for the fiscal year ending December 31, 2005, which Exhibit is incorporated herein by reference. |
| 2.1 | Form of 4.00% Convertible Subordinated Note due 2012. Previously filed as Exhibit T3C to our Registration Statement on Form F-3 (No.333-38667) which Exhibit is incorporated herein by reference 4.1. 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 our Annual Report on Form 20-F for the fiscal year ending December 31, 2000, which Exhibit is incorporated herein by reference. |
| 4.1 | Agreement and Plan of Merger dated March 31, 2008 by and among Galactic Holdings Ltd., Galactic Acquisition Company Ltd. and Gilat Satellite Networks Ltd. |
| 8.1 | List of subsidiaries. Previously filed as Exhibit 8.1 to our Annual Report on Form 20-F for the fiscal year ending December 31, 2006, which Exhibit is incorporated herein by reference. |
| 10.1 | Consent Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. |
| 10.2 | Consent of Mayer Hoffman McCann P.C. |
| 12.1 | Certification by Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
| 12.2 | Certification by Principal Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
| 13.1 | Certification by Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
| 13.2 | Certification by Principal Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
86
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/ Amiram Levinberg
——————————————
Amiram Levinberg
Chairman of the Board of Directors |
Date: April 9, 2008
87
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
IN U.S. DOLLARS
INDEX
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Gliat’s management is responsible for establishing and maintaining adequate internal control over financial reporting for Gilat. Gilat’s internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S generally accepted accounting principles. Gilat’s internal control over financial reporting includes those policies and procedures that:
| — | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Gilat's assets, |
| — | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Gilat are being made only in accordance with authorizations of management and directors of Gilat, and |
| — | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Gilat’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Gilat’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2007. In conducting its assessment of internal control over financial reporting, management based its evaluation on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Gilat’s management has concluded based on its assessment, that its internal control over financial reporting was effective as of December 31, 2007 based on these criteria.
The effectiveness of Gilat’s internal control over financial reporting as of December 31, 2007, has been audited by Kost, Forer, Gabbay & Kasierer (A Member of Ernst & Young Global), an independent registered public accounting firm.
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
GILAT SATELLITE NETWORKS LTD.
We have audited Gilat Satellite Networks Ltd.‘s (“Gilat”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Gilat’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Gilat maintained in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Gilat and its subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007 and our report dated April 9, 2008 expressed an unqualified opinion thereon.
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| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
| April 9, 2008 | A Member of Ernst & Young Global |
F - 3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. 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 StarBand Inc. a wholly owned subsidiary of the Company, which statements reflect total revenues of approximately 12.5% for the year ended December 31, 2005, of the related consolidated total. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for StarBand Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the 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. The audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report 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, 2007 and 2006, and the consolidated results of their operations and cash flows, for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2t and Note 9b to the consolidation financial statements, in 2006, the Company adopted Statement of Financial Accounting Standards Board No.123 (revised 2004), “Share-Based Payment”. Also, as discussed in Note 2u and Note 12 to the consolidated financial statements, in 2007, the Company adopted Interpretation No.48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109".
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission and our report dated April9, 2008, expressed an unqualified opinion thereon.
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| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
| April 9, 2008 | A Member of Ernst & Young Global |
F - 4
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| CONSOLIDATED BALANCE SHEETS |
|
| U.S. dollars in thousands |
| December 31,
|
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| 2007
| 2006
|
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| | | |
|---|
| | |
|---|
| | |
|---|
| ASSETS | | | | | | | | |
| | | |
| CURRENT ASSETS: | | |
| Cash and cash equivalents | | | $ | 122,807 | | $ | 149,545 | |
| Short- term bank deposits and held to maturity marketable securities | | | | 45,578 | | | - | |
| Short-term restricted cash | | | | 7,091 | | | 5,137 | |
| Restricted cash held by trustees | | | | 7,450 | | | 7,113 | |
| Trade receivables (net of allowance for doubtful accounts: 2007 - $ 4,528; 2006 | | |
| - $ 12,709) | | | | 43,746 | | | 29,612 | |
| Inventories | | | | 24,794 | | | 26,368 | |
| Other current assets | | | | 24,748 | | | 40,428 | |
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| | | |
| Total current assets | | | | 276,214 | | | 258,203 | |
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| LONG-TERM INVESTMENTS AND RECEIVABLES: | | |
| Severance pay fund | | | | 11,835 | | | 10,534 | |
| Long-term restricted cash | | | | 6,321 | | | 6,337 | |
| Long-term restricted cash held by trustees | | | | 16,544 | | | 15,646 | |
| Long-term trade receivables, receivables in respect of capital leases and other | | |
| receivables | | | | 9,170 | | | 19,241 | |
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| Total long-term investments and receivables | | | | 43,870 | | | 51,758 | |
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| PROPERTY AND EQUIPMENT, NET | | | | 105,247 | | | 121,366 | |
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| INTANGIBLE ASSETS AND DEFERRED CHARGES, NET | | | | 4,771 | | | 8,887 | |
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| | | |
| Total assets | | | $ | 430,102 | | $ | 440,214 | |
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The accompanying notes are an integral part of the consolidated financial statements.
F - 5
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| CONSOLIDATED BALANCE SHEETS |
|
| U.S. dollars in thousands (except share and per share data) |
| December 31,
|
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| 2007
| 2006
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| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
| | | |
| CURRENT LIABILITIES: | | |
| Short-term bank credit | | | $ | 5,823 | | $ | 1,200 | |
| Current maturities of long-term loans | | | | 5,354 | | | 6,537 | |
| Trade payables | | | | 25,954 | | | 21,258 | |
| Accrued expenses | | | | 20,275 | | | 21,400 | |
| Short-term advances from customer, held by trustees | | | | 15,005 | | | 15,045 | |
| Other current liabilities | | | | 58,686 | | | 72,129 | |
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| Total current liabilities | | | | 131,097 | | | 137,569 | |
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| LONG-TERM LIABILITIES: | | |
| Long-term loans, net | | | | 18,704 | | | 22,318 | |
| Long-term advances from customer, held by trustees | | | | 8,989 | | | 16,863 | |
| Accrued severance pay | | | | 11,723 | | | 10,640 | |
| Accrued interest related to restructured debt | | | | 2,493 | | | 3,147 | |
| Convertible subordinated notes | | | | 16,315 | | | 16,333 | |
| Other long-term liabilities | | | | 12,971 | | | 21,285 | |
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| Total long-term liabilities | | | | 71,195 | | | 90,586 | |
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| COMMITMENTS AND CONTINGENCIES | | |
| | | |
| SHAREHOLDERS' EQUITY: | | |
| Share capital - | | |
| Ordinary shares of NIS 0.2 par value: Authorized - 60,000,000 shares as of | | |
| December 31, 2007 and 2006; Issued and outstanding - 39,611,873 and | | |
| 38,820,352 shares as of December 31, 2007 and 2006, respectively | | | | 1,796 | | | 1,757 | |
| Additional paid-in capital | | | | 859,207 | | | 853,350 | |
| Accumulated other comprehensive income | | | | 1,776 | | | 702 | |
| Accumulated deficit | | | | (634,969 | ) | | (643,750 | ) |
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| Total shareholders' equity | | | | 227,810 | | | 212,059 | |
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| Total liabilities and shareholders' equity | | | $ | 430,102 | | $ | 440,214 | |
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The accompanying notes are an integral part of the consolidated financial statements.
F - 6
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
|
| U.S. dollars in thousands (except share and per share data) |
| Year ended December 31,
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| 2007
| 2006
| 2005
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| Revenues: | | | | | | | | | | | |
| Products *) | | | $ | 156,798 | | $ | 126,093 | | $ | 88,705 | |
| Services *) | | | | 125,821 | | | 122,617 | | | 120,690 | |
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| Total revenues | | | | 282,619 | | | 248,710 | | | 209,395 | |
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| Cost of revenues: | | |
| Products *) | | | | 82,822 | | | 66,363 | | | 42,896 | |
| Services *) | | | | 97,952 | | | 91,982 | | | 90,323 | |
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| Total cost of revenues | | | | 180,774 | | | 158,345 | | | 133,219 | |
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| Gross profit | | | | 101,845 | | | 90,365 | | | 76,176 | |
| Operating expenses: | | |
| Research and development costs, net *) | | | | 15,030 | | | 13,642 | | | 13,994 | |
| Selling and marketing expenses *) | | | | 38,374 | | | 36,475 | | | 31,329 | |
| General and administrative expenses *) | | | | 31,052 | | | 26,800 | | | 29,465 | |
| Impairment of long-lived and other assets | | | | 12,218 | | | - | | | - | |
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| Operating income | | | | 5,171 | | | 13,448 | | | 1,388 | |
| | | |
| Financial income (expenses), net *) | | | | 5,998 | | | (742 | ) | | (2,677 | ) |
| Other income (expenses) | | | | (116 | ) | | 138 | | | 299 | |
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| Income (loss) before taxes on income | | | | 11,053 | | | 12,844 | | | (990 | ) |
| Taxes on income | | | | 963 | | | 2,357 | | | 3,126 | |
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| Income (loss) after taxes on income | | | | 10,090 | | | 10,487 | | | (4,116 | ) |
| Equity in earnings of affiliated companies | | | | - | | | - | | | 400 | |
| | | |
| Net income (loss) | | | $ | 10,090 | | $ | 10,487 | | $ | (3,716 | ) |
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| Net earnings (loss) per share: | | |
| Basic | | | $ | 0.26 | | $ | 0.41 | | $ | (0.17 | ) |
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| Diluted | | | $ | 0.24 | | $ | 0.38 | | $ | (0.17 | ) |
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| Weighted average number of shares used in computing net earnings (loss) | | |
| per share: | | |
| Basic | | | | 39,140,718 | | | 25,799,077 | | | 22,439,551 | |
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| Diluted | | | | 41,576,454 | | | 27,519,726 | | | 22,439,551 | |
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| *) | Includes the following revenues (expenses) resulting from transactions with related parties for the years ended December 31, 2007, 2006 and 2005: revenues from products – $ 0, $ 0 and $ 1,205, respectively; revenues from services – $ 0 , $ 0 and $ 416, respectively; cost of services – $ 0, $ 0 and $ (8,349), respectively; research and development expenses, net – $ 0, $ 0 and $ (1,543) respectively; Selling and marketing expenses – $ 0, $ 0 and $ 468, respectively; General and administrative expenses – $ 0, $ 0 and $ (983), respectively; and financial expenses – $ 0, $ (3,772) and $ (3,759), respectively. |
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY |
|
| U.S. dollars in thousands (except share and per share data) |
| Number of
Ordinary
shares
(in
thousands)
| Share
capital
| Additional
paid-in
capital
| **)Accumulated
other
comprehensive
loss
| Accumulated
deficit
| Total
comprehensive
income (loss)
| Total
shareholders'
equity
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| Balance as of January 1, 2005 | | | | 22,312 | | $ | 984 | | $ | 733,582 | | $ | (2,624 | ) | $ | (650,521 | ) | | | | $ | 81,421 | |
| | | |
| Exercise of options, net | | | | 244 | | | 11 | | | 1,207 | | | - | | | - | | | | | | 1,218 | |
| Stock compensation related to options | | | | - | | | - | | | 137 | | | - | | | - | | | | | | 137 | |
| Fair value of change in conversion feature of a related party | | |
| long-term convertible loan | | | | - | | | - | | | 3,798 | | | - | | | - | | | | | | 3,798 | |
| Foreign currency translation adjustments from the disposal of | | |
| a subsidiary | | | | - | | | - | | | - | | | 1,714 | | | - | | $ | 1,714 | | | 1,714 | |
| Comprehensive income - foreign currency translation | | |
| adjustments | | | | - | | | - | | | - | | | 926 | | | - | | | 926 | | | 926 | |
| Net loss | | | | - | | | - | | | - | | | - | | | (3,716 | ) | | (3,716 | ) | | (3,716 | ) |
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| Total comprehensive loss | | | | | | | | | | | | | | | | | | $ | (1,076 | ) | | | |
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| Balance as of December 31, 2005 | | | | 22,556 | | | 995 | | | 738,724 | | | 16 | | | (654,237 | ) | | | | | 85,498 | |
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| Exercise of options, net | | | | 669 | | | 30 | | | 3,604 | | | - | | | - | | | | | | 3,634 | |
| Stock compensation related to employees stock options | | | | - | | | - | | | 3,757 | | | - | | | - | | | | | | 3,757 | |
| Conversion of long-term convertible loan from a related party | | | | 10,578 | | | 492 | | | 67,619 | | | - | | | - | | | | | | 68,111 | |
| Issuance of shares in a public offering, net of $ 2,733 | | |
| issuance expenses | | | | 5,017 | | | 240 | | | 39,646 | | | - | | | - | | | | | | 39,886 | |
| Comprehensive income - foreign currency translation | | |
| adjustments | | | | - | | | - | | | - | | | 686 | | | | | $ | 686 | | | 686 | |
| Net income | | | | - | | | - | | | - | | | - | | | 10,487 | | | 10,487 | | | 10,487 | |
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| Total comprehensive income | | | | | | | | | | | | | | | | | | $ | 11,173 | | | | |
| | | | | | | | | | |
| | | |
| Balance as of December 31, 2006 | | | | 38,820 | | | 1,757 | | | 853,350 | | | 702 | | | (643,750 | ) | | | | | 212,059 | |
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| Exercise of options, net | | | | 791 | | | 39 | | | 4,532 | | | - | | | - | | | | | | 4,571 | |
| Stock compensation related to employees stock options | | | | - | | | - | | | 1,303 | | | - | | | - | | | | | | 1,303 | |
| Conversion of convertible subordinated notes | | | | 1 | | *) | - | | | 22 | | | - | | | - | | | | | | 22 | |
| Accumulated affect of adjustment upon adoption of FASB | | |
| Interpretation No. 48 | | | | | | | - | | | - | | | - | | | (1,309 | ) | | | | | (1,309 | ) |
| Comprehensive income - foreign currency translation | | |
| adjustments | | | | - | | | - | | | - | | | 1,074 | | | - | | $ | 1,074 | | | 1,074 | |
| Net income | | | | - | | | - | | | - | | | - | | | 10,090 | | | 10,090 | | | 10,090 | |
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| Total comprehensive income | | | | | | | | | | | | | | | | | | $ | 11,164 | | | | |
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| Balance as of December 31, 2007 | | | | 39,612 | | $ | 1,796 | | $ | 859,207 | | $ | 1,776 | | $ | (634,969 | ) | | | | $ | 227,810 | |
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The accompanying notes are an integral part of the consolidated financial statements.
*) represents an amount of less the one thousands dollars
**) represent adjustments in respect of foreign currency translation.
F - 8
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
| U.S. dollars in thousands |
| Year ended December 31,
|
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| 2007
| 2006
| 2005
|
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| Cash flows from operating activities: | | | | | | | | | | | |
| Net income (loss) | | | $ | 10,090 | | $ | 10,487 | | $ | (3,716 | ) |
| Adjustments required to reconcile net income (loss) to net cash | | |
| provided by operating activities: | | |
| Depreciation and amortization | | | | 17,715 | | | 20,728 | | | 19,116 | |
| Impairment of long-lived and other assets | | | | 12,218 | | | - | | | - | |
| Gain from disposal of subsidiaries | | | | - | | | (137 | ) | | (397 | ) |
| Loss from deconsolidation of subsidiaries (a) | | | | - | | | - | | | 171 | |
| Stock compensation related to employees stock options | | | | 1,303 | | | 3,757 | | | 137 | |
| Accretion of discount related to the York loan | | | | - | | | 504 | | | - | |
| Equity in earnings of affiliated company | | | | - | | | - | | | (400 | ) |
| Accrued severance pay, net | | | | (218 | ) | | 177 | | | (309 | ) |
| Interest accrued on short and long-term restricted cash | | | | (1,326 | ) | | (896 | ) | | (490 | ) |
| Interest on held to maturity marketable securities | | | | (2,102 | ) | | - | | | - | |
| Exchange rate differences on long-term loans | | | | 766 | | | 705 | | | (973 | ) |
| Exchange rate differences on loans to employees | | | | (250 | ) | | (223 | ) | | 213 | |
| Capital loss from disposal of property and equipment | | | | 167 | | | 57 | | | 315 | |
| Deferred income taxes | | | | (891 | ) | | (1,131 | ) | | (473 | ) |
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| Decrease (increase) in trade receivables, net | | | | (14,037 | ) | | 4,120 | | | (2,440 | ) |
| Decrease (increase) in other assets (including short-term, long-term | | |
| and deferred charges) | | | | 28,529 | | | (6,258 | ) | | 6,711 | |
| Increase in inventories | | | | (207 | ) | | (11,846 | ) | | (5,188 | ) |
| Increase (decrease) in trade payables | | | | 4,619 | | | (3,000 | ) | | 2,941 | |
| Decrease in accrued expenses | | | | (1,455 | ) | | (1,049 | ) | | (4,652 | ) |
| Decrease in advances from customer, held by trustees, net | | | | (7,914 | ) | | (11,430 | ) | | (10,388 | ) |
| Increase (decrease) in other accounts payable and other long-term | | |
| liabilities, mainly deferred revenues | | | | (24,232 | ) | | 33,259 | | | 3,112 | |
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| Net cash provided by operating activities | | | | 22,775 | | | 37,824 | | | 3,290 | |
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| Cash flows from investing activities: | | |
| Purchase of property and equipment | | | | (9,269 | ) | | (6,519 | ) | | (3,605 | ) |
| Other investments | | | | (223 | ) | | - | | | - | |
| Purchase of held to maturity marketable securities | | | | (73,791 | ) | | - | | | - | |
| Proceeds from held to maturity marketable securities | | | | 30,315 | | | - | | | - | |
| Return on investment | | | | - | | | - | | | 388 | |
| Disposal of subsidiary consolidated in previous periods (a) | | | | - | | | - | | | (181 | ) |
| Disposal of subsidiary consolidated in previous periods | | | | - | | | 137 | | | 397 | |
| Investment in short-term bank deposits | | | | - | | | - | | | (3,301 | ) |
| Proceeds from short-term bank deposits | | | | - | | | 3,300 | | | - | |
| Proceeds from sale of property and equipment | | | | 33 | | | 1,577 | | | 34 | |
| Loans to employees - net | | | | 946 | | | 284 | | | (3,606 | ) |
| Investment in restricted cash (including long-term) | | | | (6,196 | ) | | (5,191 | ) | | (13,759 | ) |
| Proceeds from restricted cash (including long-term) | | | | 4,259 | | | 16,263 | | | 13,007 | |
| Investment in restricted cash held by trustees | | | | - | | | (3,520 | ) | | (3,305 | ) |
| Proceeds from restricted cash held by trustees | | | | 90 | | | 1,987 | | | 13,078 | |
| Investment in other assets | | | | - | | | (6 | ) | | (40 | ) |
|
| |
| |
| |
| | | |
| Net cash provided by (used in) investing activities | | | $ | (53,836 | ) | $ | 8,312 | | $ | (893 | ) |
|
| |
| |
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
| U.S. dollars in thousands |
| Year ended December 31,
|
|---|
| 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| Cash flows from financing activities: | | | | | | | | | | | |
| Exercise of options, net | | | $ | 4,571 | | $ | 3,634 | | $ | 1,218 | |
| Issuance of shares, net of issuance expenses | | | | (324 | ) | | 40,210 | | | - | |
| Short-term bank credit, net | | | | 4,623 | | | (6,972 | ) | | 4,013 | |
| Proceeds from long-term loans | | | | 1,000 | | | - | | | - | |
| Repayments of long-term loans | | | | (6,563 | ) | | (8,703 | ) | | (7,823 | ) |
| Repayments of long-term convertible loan | | | | - | | | - | | | (1,000 | ) |
|
| |
| |
| |
| | | |
| Net cash provided by (used in) financing activities | | | | 3,307 | | | 28,169 | | | (3,592 | ) |
|
| |
| |
| |
| | | |
| Effect of exchange rate changes on cash and cash equivalents | | | | 1,016 | | | 311 | | | 353 | |
|
| |
| |
| |
| | | |
| Increase (decrease) in cash and cash equivalents | | | | (26,738 | ) | | 74,616 | | | (842 | ) |
| Cash and cash equivalents at the beginning of the year | | | | 149,545 | | | 74,929 | | | 75,771 | |
|
| |
| |
| |
| | | |
| Cash and cash equivalents at the end of the year | | | $ | 122,807 | | $ | 149,545 | | $ | 74,929 | |
|
| |
| |
| |
| | | |
| Supplementary cash flow activities: | | |
| | | |
| (1) Cash paid during the year for: | | |
| Interest | | | $ | 2,817 | | $ | 7,769 | | $ | 6,196 | |
|
| |
| |
| |
| | | |
| Income taxes | | | $ | 1,898 | | $ | 787 | | $ | 6,491 | |
|
| |
| |
| |
| | | |
| (2) Non-cash transactions: | | |
| | | |
| Conversion of long-term convertible loan from a related | | |
| party | | | $ | - | | $ | 68,111 | | $ | - | |
|
| |
| |
| |
| | | |
| Classification between property and equipment and | | |
| inventories - net | | | $ | 2,197 | | $ | 8,823 | | $ | 5,263 | |
|
| |
| |
| |
| | | |
| Purchase of property and equipment by assumption of loan | | | $ | - | | $ | 1,753 | | $ | - | |
|
| |
| |
| |
| | | |
| Issuance expense payable | | | $ | - | | $ | 324 | | $ | - | |
|
| |
| |
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
| U.S. dollars in thousands |
| | Year ended
December 31,
2005
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| (a) | Disposal of subsidiary consolidated in previous periods : | | | | | |
| | | |
| Assets and liabilities of the subsidiary at date of deconsolidation: | | |
| | | |
| Working capital (excluding cash and cash equivalents) | | | $ | (52 | ) |
| Property and equipment, net | | | | 42 | |
| Loss on disposal | | | | (171 | ) |
| |
| |
| | | |
| | | | $ | (181 | ) |
| |
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 11
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands (except share and per share data) |
| | Gilat Satellite Networks Ltd. (the "Company" or "Gilat") and its subsidiaries (the "Group") is a global provider of Internet Protocol, or IP, based digital satellite communication and networking products and services. The Company designs, produces and markets VSATs, or very small aperture terminals, and related VSAT network equipment. VSATs are earth based terminals that transmit and receive broadband, Internet, voice, data and video via satellite. VSAT networks combine a large central earth station, called a hub, with multiple remote sites (ranging from tens to thousands of sites), which communicate via satellite. |
| | The Company currently operates three complementary, vertically integrated business units: |
| | — | Gilat Network Systems, ("GNS"), is a provider of VSAT-based networks and associated professional services, including turnkey and management services, to telecom operators worldwide. |
| | — | Spacenet Inc. provides satellite network services to enterprises, small office/home office ("SOHOs") and residential customers in the U.S. |
| | — | Spacenet Rural Communications, ("SRC"), provides telephony, Internet and data services primarily for rural communities in emerging markets in Latin America under projects that are subsidized by government entities. |
| | Gilat was incorporated in Israel in 1987 and launched its first generation VSAT in 1989. For a description of principal markets and customers, see note 15. |
| | b. | Impairment of long-lived assets and other charges: |
| | In 2007, the Group recorded a provision for the impairment of its long lived assets and other charges in Colombia in the amount of $ 12,218 see also note 11. |
| | c. | York Capital Management LP ("York"): |
| | In July 2005, Bank Hapoalim, an Israeli bank, assigned its loan to the Company to York. The loan included the right to convert the aggregate amount of the loan plus accrued interest into the Company's ordinary shares. At that time, Bank Hapoalim also provided York with an option to purchase 1,000,809 of the Company's shares held by the bank at $ 6.30 per share for a period of two years. In addition, York was given a proxy to vote all 2,052,428 shares owned by Bank Hapoalim and an additional 1,250,000 shares owned by Mivtach Shamir Finance Ltd. until July 18, 2007. Following the above, York became a related party of the Company. |
F - 12
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands (except share and per share data) |
| | In December 2005, the Company revised the terms of the loan that was assigned by Bank Hapoalim to York. Under the amendment, York agreed to defer $ 19,350 of principal payments due and established a new payment schedule. In consideration, the Company agreed to reduce the exercise price of the warrant issuable to York (assigned by Bank Hapoalim) to $ 6.75 per share for the period ending September 30, 2006. In addition, during that period, the Company was granted the right to require the conversion of the outstanding loan from York at $ 6.75 per share under certain circumstances. Beginning October 1, 2006, the exercise price of the warrant was to revert to the original terms (see Note 10). |
| | On September 27, 2006, York converted its entire loan and accrued interest into warrants and immediately exercised its option to convert the warrants into shares at $ 6.75 per share. This resulted in the issuance of approximately 10,600,000 of the Company's ordinary shares to York. |
| | Based on Interpretation 1 of Opinion 26 and EITF No. 85-17, "Accrued Interest upon Conversion of Convertible Debt", the net carrying amount of the convertible debt and accrued interest unpaid, including the unamortized discount, in the total amount of $ 68,100 was credited to shareholders' equity upon conversion. |
| | d. | Issuance of ordinary shares |
| | In December, 2006, the Company consummated a public offering of 8,050,000 of its ordinary shares at a price of $8.50 per share. Of such shares, 5,016,667 ordinary shares were sold by the Company and the remaining shares were sold by York. See also Note 9. |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES |
| | The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). |
| | 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. |
| | 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 are incurred in dollars. The Company's management believes that the dollar is the primary currency of the economic environment in which the Company and certain of its subsidiaries operate. Thus, the functional and reporting currency of the Company and certain of its subsidiaries is the dollar. |
F - 13
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with SFAS No. 52, “Foreign Currency Translation”. All transaction gains and losses of the remeasurement of monetary balance sheet items are reflected in the consolidated statements of operations as financial income or expenses, as appropriate.
The financial statements of foreign subsidiaries, whose functional currency has been determined to be their local currency, have been translated into dollars. Assets and liabilities have been translated using the exchange rates in effect at the balance sheet date. Statements of operations amounts have been translated using average rates, which approximates the prevailing exchange rate for each transaction. 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 subsidiaries. The accounts for Variable Interest Entities (“VIEs”), as prescribed by FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” and related interpretations, are included in the consolidated financial statements. Intercompany balances and transactions, including profits from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation. |
| | Cash equivalents are short-term highly liquid investments that are not restricted as to withdrawals or use with maturities of three months or less at the date acquired. |
| | The Company accounts for investments in marketable debt securities in accordance with Statement of Financial Accounting Standard No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. |
| | As of December 31, 2007, the Company classifies all of its debt securities as held-to-maturity. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity and are stated at amortized cost. The cost of held-to-maturity securities is adjusted for amortization of accretion of discounts to maturity using the effective interest method. Interest is included in financial income, net. As of December 31, 2007, no impairment has been identified |
F - 14
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | f. | Short-term and long-term restricted cash: |
| | Short-term restricted cash is primarily invested in certificates of deposit, which mature within one year. As of December 31, 2007, the vast majority of this amount is linked to the dollar. It is used as collateral for the lease of the Group’s offices, performance guarantees to customers and loans and bears weighted average interest of 5.43% and 5.02% in 2007 and 2006, respectively. |
| | Long-term restricted cash is primarily invested in certificates of deposit, which mature in more than one year. As of December 31, 2007, the vast majority of the amount is linked to the dollar. It bears an annual weighted average interest rate of 4.46% and 4.94% as of December 31, 2007 and 2006, respectively. This long-term restricted cash is used as collateral for the lease of the Group’s offices, a sale and lease back transaction performance guarantees to customers and loans. |
| | g. | Restricted cash held by trustees: |
| | Short-term and long-term restricted cash held by trustees is primarily invested in certificates of deposits. As of year end, 92% of the total amount is linked to the dollar and 8% of the total amount is linked to the Colombian Peso. The amounts held by trustees bear interest at rates of 4.1% and 7%, respectively, and are released based upon performance milestones as stipulated in the Group’s agreements with the government of Colombia., which are currently under renegotiation. See also note 11. |
| | 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, new products introduction and for market prices lower than cost. Any write-off is recognized in the consolidated statement of operations as cost of revenues. |
| | Cost is determined as follows: |
| | Raw materials, parts and supplies – with the addition of allocable indirect manufacturing costs using the average cost method. |
| | Work-in-progress – represents the cost of manufacturing with the addition of allocable indirect manufacturing costs, using the average cost method. |
| | Finished products – calculated on the basis of direct manufacturing costs with the addition of allocable indirect manufacturing costs, using the average cost method. |
F - 15
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | i. | Investment in affiliated companies: |
| | In these consolidated financial statements, affiliated companies are companies in which the Group holds 20% or greater equity interest (which are not subsidiaries) and where the Group 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 Group’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. |
| | j. | Investment in other companies: |
| | The investment in these companies is stated at cost, since the Group does not have the ability to exercise significant influence over operating and financial policies of the investments. |
| | The Group’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 APB 18. Any impairment loss is recognized in the consolidated statements of operations. |
| | k. | Long-term trade receivables: |
| | Long-term trade receivables from long-term payment agreements are recorded at estimated present values determined based on current rates of interest and reported at the net amounts in the accompanying consolidated financial statements. Imputed interest is recognized, using the effective interest method, as a component of financial income (expenses) in the statements of operations. |
| | 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 - 5 |
| Office furniture and equipment | 5 - 17 |
| Vehicles | 5 - 7 |
| Leasehold improvements | Over the term of the lease or the useful life |
| | of the improvements, 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. |
F - 16
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | m. | Intangible assets and deferred charges: |
| | Intangible assets subject to amortization are stated at amortized cost. |
| | The assets are amortized using the straight-line method over their estimated useful lives, which are five to fifteen years, in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. |
| | Deferred charges represent costs related to the deferred revenues. Such costs are recognized when the related revenues are recognized and are presented under other current assets for deferred charges that will be recognized within a year after the balance sheet date and under Intangible assets and deferred charges for deferred charges which will be recognized in more than one year after the balance sheet date. |
| | n. | Impairment of long-lived assets and long-lived assets to be disposed of: |
| | The Group’s long-lived assets are reviewed for impairment in accordance with SFAS 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. Such measurement includes significant estimates. 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. However, the carrying amount of a group of assets would not be reduced below its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. |
| | In 2007, the Group recorded a provision for the impairment of its long lived assets in Colombia in the amount of $ 10,287. See also Note 11. |
| | The Group generates revenues mainly from the sale of products and services for satellite-based communications networks. Sale of products includes mainly the sale of VSATs and hubs. Service revenues include access to and communication via satellites (“space segment”), installation of network equipment, telephone services, internet services, consulting, on-line network monitoring, network maintenance and repair services. The Group sells its products primarily through its direct sales force and indirectly through resellers. Sales consummated by the Group’s sales force and sales to resellers are considered sales to end-users. |
| | Revenues from product sales are recognized in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” (“SAB No. 104”), when delivery has occurred, persuasive evidence of an agreement exists, the vendor’s fee is fixed or determinable, no further obligation exists and collectability is probable. When significant acceptance provisions are included in the arrangement revenues are deferred until the acceptance occur. Generally the Group does not grant rights of return. Service revenues are recognized ratably over the period of the contract or as services are performed, as applicable. |
F - 17
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | In accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”) a multiple-element arrangement (an arrangement that involves the delivery or performance of multiple products, services and/or rights to use assets) is separated into more than one unit of accounting, if the functionality of the delivered element(s) is not dependent on the undelivered element(s), there is vendor-specific objective evidence (VSOE) of fair value of the undelivered element(s) and delivery of the delivered element(s) represents the culmination of the earnings process for those element(s). If these criteria are not met, the revenue is deferred until such criteria are met or until the period in which the last undelivered element is delivered. If there is VSOE for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative VSOE. |
| | 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 other’s installation services. The net investments in sales-type-leases are discounted at the interest rates implicit in the leases. 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. |
| | Revenues from products and services under operating leases of equipment are recognized ratably over the lease period, in accordance with SFAS No. 13. |
| | Deferred revenues represent amounts received by the Company when the criteria for revenue recognition as described above are not met. In general, when deferred revenues are recognized as revenues, the associated deferred costs are also recognized as cost of sales. |
| | p. | Shipping and advertising expenses: |
| | Selling and marketing expenses include shipping expenses in the amounts of $ 2,400, $ 3,800 and $ 1,600 for the years ended December 31, 2007, 2006 and 2005, respectively. |
| | Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2007, 2006 and 2005 amounted to $ 800, $ 600 and $ 600, respectively. |
| | Generally, the Company provides product warranties for periods between twelve to eighteen months at no extra charge. A provision is recorded for estimated warranty costs based on the Company’s experience. Warranty expenses for the years ended December 31, 2007, 2006 and 2005 were immaterial. |
F - 18
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | r. | Research and development expenses: |
| | Research and development expenses, net of grants received, are charged to expenses as incurred. |
| | The Company received royalty-bearing grants and non-royalty-bearing grants from the Government of Israel, the Advanced Satellite Network Technologies (“ASNT”), SES Global S.A Satellite Networks Next Generation Technologies and from other funding sources, for 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 or milestones achieved as provided by the relevant agreement and included as a deduction from research and development expenses. |
| | Research and development grants deducted from research and development expenses amounted to $ 2,200, $ 2,000 and $ 3,000 in 2007, 2006 and 2005, respectively. |
| | t. | Accounting for stock-based compensation: |
| | On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). |
| | SFAS 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated income statement. Prior to the adoption of SFAS 123(R), the Company accounted for equity-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”(“SFAS 123”). See Note 9 for a further discussion on stock-based compensation. |
F - 19
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | The Group accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. SFAS 109 prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between the financial reporting and the tax basis of 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, if it is more likely than not that a portion or all of the deferred tax assets will not be realized. |
| | In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 utilizes a two-step approach for evaluating tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) is only addressed if step one has been satisfied (i.e., the position is more-likely-than-not to be sustained) otherwise a full liability in respect of a tax position not meeting the more-than-likely-than-not criteria is recognized. Under step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, that is more-likely-than-not to be realized upon ultimate settlement. |
| | FIN 48 applies to all tax positions related to income taxes subject to FAS 109. This includes tax positions considered to be “routine” as well as those with a high degree of uncertainty. FIN 48 has expanded disclosure requirements, which include a tabular roll forward of the beginning and ending aggregate unrecognized tax benefits as well as specific detail related to tax uncertainties for which it is reasonably possible the amount of unrecognized tax benefit will significantly increase or decrease within twelve months (See also Note 12). |
| | FIN 48 is effective for fiscal years beginning after December 15, 2006. The cumulative effect of applying FIN 48 is reported as an adjustment to the opening balance of accumulated deficit. The adoption of FIN 48 resulted in an increase of the tax provision in the amount of $ 1,309 which was adjusted to the opening balance of the accumulated deficit. |
| | v. | 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 and held to maturity marketable securities, short-term and long-term restricted cash, short-term and long-term restricted cash held by trustees, trade receivables, short-term and long-term receivables relating to capital leases and long-term trade receivables. |
F - 20
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | The majority of the Group’s cash and cash equivalents, short-term bank deposits, and short-term and long-term restricted cash are invested in 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. |
| | The Company’s marketable securities include investments in U.S. and Israeli government debentures. Management believes that those governments are financially sound and that the portfolios are well-diversified, and accordingly, minimal credit risk exists with respect to these marketable securities. Moreover, the Company’s investment policy, limits the amount the Company may invest in any one type of investment, thereby reducing credit risk concentration. |
| | The Group also has restricted cash held by trustees, which is invested in U.S. dollar deposits and in Colombian Peso deposits with major banks in Colombia and in the U.S. As of December 31, 2007, restricted cash held by the trustees amounted to approximately $ 24,000. The Company is entitled to receive the restricted cash held by the trustee in stages based upon operational milestones. The cash held in trust is reflected in the Company’s balance sheet as “Restricted cash held by trustees”. If the Company does not meet certain milestones, or if the government of Colombia terminates the contracts unilaterally, the Company may be unable to receive this restricted cash. See also Note 11. |
| | Trade receivables, short-term and long-term receivables relating to capital leases and long-term trade receivables of the Group are mainly derived from sales to major customers located in the U.S., Europe, Asia South America (mainly one customer in Peru in the amount of approximately $9,300, as of December 31, 2007) and Africa. 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. |
| | A significant portion of the Group’s restricted cash held by trustees, trade receivables and long-term trade receivables is from two countries in Latin America –Colombia and Peru. Any instability in the political or economic situation or otherwise in those countries, could have a significant adverse impact on the Company. |
| | As of December 31, 2007, the Group has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. In 2007 the Company entered into a hedging agreement in order to cover the currency exposure of the New Israeli Shekel on identifiable cash flow items. See also note 2(z). |
F - 21
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | w. | Employee related benefits: |
| | 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 whose employment is terminated by the Company or who are otherwise entitled to severance pay in accordance with Israeli law or labor agreements 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 the remainder by an accrual. The value of these policies is recorded as an asset in the Company’s consolidated balance sheet. |
| | The deposited funds for 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 profits. |
| | Severance pay expenses for the years ended December 31, 2007, 2006 and 2005, amounted to approximately $ 2,500, $ 2,400 and $ 2,000, respectively. |
| | 401K profit sharing plans |
| | The Company has a number of savings plans in the United States that qualify under Section 401(k) of the Internal Revenue Code. U.S employees may contribute up to 100% of their pretax salary, but not more than statutory limits. The Company contributes one dollar for each dollar a participant contributes in this plan, in an amount of up to 3% and in addition, it contributes fifty cents for each dollar a participant contributes in this plan, for an additional 3%. Matching contributions in 2007, 2006 and 2005 for all the plans were approximately $ 700 per year. Matching contributions are invested in proportion to each participant’s voluntary contributions in the investment options provided under the plan. |
| | x. | 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, restricted cash held by trustees, trade receivables, short-term bank credit and trade payables approximate their fair value due to the short-term maturity of such instruments. |
| | The carrying amounts of the Group’s long-term borrowing arrangements, long-term trade receivables and long-term restricted cash approximate their fair value. The fair value was estimated using discounted cash flow analysis, based on the Group’s incremental borrowing rates for similar borrowing or investing arrangements. |
F - 22
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands, except share and per share data |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | The fair value of the convertible subordinated notes, which was determined according to market value (on the over the counter market) quoted as of the most recent quote available multiplied by the number of instruments outstanding and the carrying amount of the Company’s convertible subordinated notes was $ 13,200 and $ 16,300 as of December 31, 2007, respectively and $ 12,100 and $ 16,300 as of December 31, 2006, respectively. |
| | y. | Net earnings (loss) per share: |
| | Basic net earnings (loss) per share are computed based on the weighted average number of ordinary shares outstanding during each period. Diluted net earnings (loss) per share are computed based on the weighted average number of ordinary shares outstanding during each period, plus dilutive potential ordinary shares considered outstanding during the period, in accordance with SFAS No. 128, “Earnings per Share”. The total weighted average number of shares related to the outstanding options and warrants excluded from the calculations of diluted net earnings (loss) per share, as they would have been anti-dilutive, was 272,803, 9,276,286 and 13,390,669 for the years ended December 31, 2007, 2006 and 2005, respectively. |
| | The following table sets forth the computation of basic and diluted net earnings (loss) per share: |
| | Year ended December 31,
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Numerator for basic and diluted net earnings (loss) | | | | | | | | | | | |
| per share - | | |
| Net income (loss) available to holders of | | |
| Ordinary Shares | | | $ | 10,090 | | $ | 10,487 | | $ | (3,716 | ) |
| |
| |
| |
| |
| | 2. | Denominator (in thousands): |
| | Year ended December 31,
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Denominator for basic net earnings (loss) per share - | | | | | | | | | | | |
| Weighted average number of shares | | | | 39,141 | | | 25,799 | | | 22,440 | |
| Add-employee stock options and | | |
| convertible notes | | | | 2,435 | | | 1,721 | | | - | |
| |
| |
| |
| |
| Denominator for diluted net earnings (loss) per | | |
| share - adjusted weighted average shares | | |
| assuming exercise of options | | | | 41,576 | | | 27,520 | | | 22,440 | |
| |
| |
| |
| |
F - 23
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | z. | Derivatives and hedging activities: |
| | Financial Accounting Standard Board Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), as amended, requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. The Company uses derivatives to hedge certain cash flow foreign currency exposures in order to further reduce the Company’s exposure to foreign currency risks. |
| | aa. | Impact of recently issued accounting pronouncements: |
| | In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis, and should be applied prospectively. The adoption of the provisions of SFAS 157 related to financial assets and liabilities and other assets and liabilities that are carried at fair value on a recurring basis is not anticipated to materially impact the Company’s consolidated financial position and results of operations. Subsequently, the FASB provided for a one-year deferral of the provisions of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis. The Company is currently evaluating the impact of adopting the provisions of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed on a non-recurring basis. |
| | In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans–An Amendment of FASB No. 87, 88, 106 and 132(R)" (“SFAS 158”). SFAS 158 requires that the funded status of defined benefit postretirement plans be recognized on the company’s balance sheet and changes in the funded status be reflected in comprehensive income, effective for fiscal years ending after December 15, 2006. SFAS 158 also requires companies to measure the funded status of the plan as of the date of their fiscal year end, effective for fiscal years ending after December 15, 2008. . The Company is currently evaluating the impact of adopting SFAS 158. |
F - 24
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). Under this Standard, the Company may elect to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings. This election is irrevocable. SFAS 159 provides an opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were previously required to use a different accounting method than the related hedging contracts when the complex provisions of SFAS 133 hedge accounting are not met. SFAS 159 is effective for years beginning after November 15, 2007. The Company’s management has determined that the adoption of SFAS 159 will not have a significant impact on its consolidated financial statements since it has not elected the fair value option for any of its existing assets or liabilities as of FAS 159 effective date. |
| | In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007) (SFAS 141R), Business Combinations. SFAS 141R will change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. As such, the adoption of SFAS 141R is not expected to have any effect on the Company’s consolidated financial statements. |
| | In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This standard is effective for fiscal years beginning after December 15, 2008 and should be applied prospectively. However, the presentation and disclosure requirements of the statement shall be applied retrospectively for all periods presented. The Company is currently evaluating the impact of adopting SFAS 160. |
| | On December 21, 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (SAB 110), which, effective January 1, 2008, amends and replaces SAB 107, Share-Based Payment. SAB 110 expresses the views of the SEC staff regarding the use of a “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with FASB Statement No. 123(R), Share-Based Payment. Under the “simplified” method, the expected term is calculated as the midpoint between the vesting date and the end of the contractual term of the option. |
F - 25
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | The use of the “simplified” method, which was first described in Staff Accounting Bulletin No. 107, was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. The SEC staff does not expect the “simplified” method to be used when sufficient information regarding exercise behavior, such as historical exercise data or exercise information from external sources, becomes available. The Company is currently evaluating the impact of SAB 110. |
| | ab. | Reclassification: Certain 2006 and 2005 figures have been reclassified to conform to the 2007 presentation. The reclassification had no effect on previously reported net income, shareholders’ equity or cash flows. |
| NOTE 3: | – | MARKETABLE SECURITIES |
| | The Company invests in marketable debt securities, which are classified as held-to-maturity investments and included as part of short-term bank deposits and held-to-maturity marketable securities balance. The following is a summary of marketable debt securities: |
| | December 31,
|
|---|
| | 2007
| 2006
|
|---|
| | Amortized
cost
| Unrealized
gain
(losses)
| Market
value
| Amortized
cost
| Unrealized
gain
(losses)
| Market
value
|
|---|
| | | | | | | |
|---|
| | | | | | | |
|---|
| Held-to-maturity: | | | | | | | | | | | | | | | | | | | | |
| | | |
| Israeli Government debentures | | | $ | 4,260 | | *) | (3 | ) | $ | 4,257 | | $ | - | | *) | - | | $ | - | |
| U.S. Government debentures | | | | 41,134 | | *) | 195 | | | 41,329 | | | - | | *) | - | | | - | |
| |
| |
| |
| |
| |
| |
| |
| | | |
| | | | | 45,394 | | | 192 | | | 45,586 | | | - | | | - | | | - | |
| |
| |
| |
| |
| |
| |
| |
| | *) Israeli and U.S Government debentures include accrued interest to be received in the amount of approximately $ 64 and $ 1,302 respectively. No unrealized losses in respect of these debentures. |
| | a. | Inventories are comprised of the following: |
| | December 31,
|
|---|
| | 2007
| 2006
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Raw materials, parts and supplies | | | $ | 8,657 | | $ | 6,947 | |
| Work in progress | | | | 4,250 | | | 2,595 | |
| Finished products | | | | 11,887 | | | 16,826 | |
| |
| |
| |
| | | |
| | | | $ | 24,794 | | $ | 26,368 | |
| |
| |
| |
| | b. | Inventory write-offs totaled $ 500, $ 1,200 and $ 600 in 2007, 2006 and 2005, respectively. |
F - 26
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 5: | – | PROPERTY AND EQUIPMENT, NET |
| | a. | Composition of property and equipment, grouped by major classifications, is as follows: |
| | December 31,
|
|---|
| | 2007
| 2006
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Cost: | | | | | | | | |
| Buildings and land | | | $ | 92,114 | | $ | 91,666 | |
| Computers and electronic equipment | | | | 82,307 | | | 78,754 | |
| Equipment leased to others | | | | 98,837 | | | 96,799 | |
| Office furniture and equipment | | | | 8,968 | | | 8,734 | |
| Vehicles | | | | 375 | | | 270 | |
| Leasehold improvements | | | | 5,806 | | | 4,302 | |
| |
| |
| |
| | | |
| | | | | 288,407 | | | 280,525 | |
| Accumulated depreciation and provision for impairment *) | | | | 183,160 | | | 159,159 | |
| |
| |
| |
| | | |
| Depreciated cost | | | $ | 105,247 | | $ | 121,366 | |
| |
| |
| |
| | *) | The accumulated depreciation of equipment leased to others as of December 31, 2007 and 2006 is $ 85,500 and $ 66,800, respectively. |
| | b. | Depreciation expenses totaled $ 16,850, $ 19,800 and $ 17,700 in 2007, 2006 and 2005, respectively. |
| | c. | In 2007, the Group recorded a provision for the impairment of its long lived assets in Colombia, see also Note 11. |
| | d. | As for pledges and securities, see also Note 13f. |
| NOTE 6: | – | INTANGIBLE ASSETS AND DEFERRED CHARGES, NET |
| | a. | Composition of intangible assets and deferred charges, grouped by major classifications, is as follows: |
| | Weighted
average
amortization
| December 31,
|
|---|
| | 2007
| 2006
|
|---|
| | years
| | |
|---|
| | | | |
|---|
| | | | |
|---|
| Cost: | | | | | | | | | | | |
| Identifiable intangible assets resulting from | | |
| acquisitions of a subsidiary | | | | 12.7 | | $ | 22,599 | | $ | 22,599 | |
| Customer acquisition costs | | | | 5 | | | 1,416 | | | 1,416 | |
| Other | | | | 5 | | | 1,293 | | | 1,662 | |
| | |
| |
| |
| | | |
| | | | | | | | 25,308 | | | 25,677 | |
| Accumulated amortization and provision for | | |
| impairment | | | | | | | 21,448 | | | 20,587 | |
| | |
| |
| |
| Amortized cost | | | | | | | 3,860 | | | 5,090 | |
| | |
| |
| |
| | | |
| Deferred charges | | | | | | | 911 | | | 3,797 | |
| | |
| |
| |
| | | |
| | | | | | | $ | 4,771 | | $ | 8,887 | |
| | |
| |
| |
F - 27
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 6: | – | INTANGIBLE ASSETS AND DEFERRED CHARGES, NET (Cont.) |
| | b. | Amortization expenses amounted to $ 870, $ 960 and $ 1,400 for the years ended December 31, 2007, 2006 and 2005, respectively. |
| | c. | In 2007, the Group recorded a provision for the impairment of deferred charges in Colombia, see also Note 11. |
| | d. | Estimated amortization expenses for the following years is as follows: |
| Year ending December 31,
| |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| 2008 | | | $ | 662 | |
| 2009 | | | | 639 | |
| 2010 | | | | 639 | |
| 2011 | | | | 639 | |
| 2012 and thereafter | | | | 1,281 | |
| |
| |
| | | |
| | | | $ | 3,860 | |
| |
| |
| NOTE 7: | – | COMMITMENTS AND CONTINGENCIES |
| | a. | On March 29, 2001, Spacenet Inc. completed a transaction for the sale and leaseback of its corporate headquarters building. The sale price of the property was approximately $ 31,500 net of certain fees and commissions. Concurrently with the sale, Spacenet Inc. entered into an operating leaseback contract for a period of fifteen years at an initial annual rent of approximately $ 3,500 plus escalation. The capital gain resulting from the sale and leaseback amounting to $ 5,600 was deferred and is being amortized over the fifteen year term of the lease. In accordance with the lease terms, Spacenet Inc. made a security deposit consisting of a $ 5,500 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 Standards No. 13, “Accounting for Leases” (“SFAS No. 13”). |
| | Minimum lease commitments of certain subsidiaries under non-cancelable operating lease agreements with respect to premises occupied by them, at rates in effect subsequent to December 31, 2007, are as follows: |
| Year ending December 31,
| Gross
commitments
| Receivables
from subleases
| Net
commitments
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| 2008 | | | $ | 5,175 | | $ | 1,319 | | $ | 3,856 | |
| 2009 | | | | 4,567 | | | 1,347 | | | 3,220 | |
| 2010 | | | | 4,534 | | | 1,288 | | | 3,246 | |
| 2011 | | | | 4,670 | | | 1,069 | | | 3,601 | |
| 2012 | | | | 4,804 | | | 967 | | | 3,837 | |
| 2013 and thereafter | | | | 16,605 | | | 648 | | | 15,957 | |
| |
| |
| |
| |
| | | |
| | | | $ | 40,355 | | $ | 6,638 | | $ | 33,717 | |
| |
| |
| |
| |
| | Gross rent expenses and income from subleases were $ 6,493 and $ 1,169, respectively in 2007, $ 6,642 and $ 1,416, respectively in 2006, and $ 6,400 and $ 900, respectively in 2005. |
F - 28
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 7: | – | COMMITMENTS AND CONTINGENCIES (Cont.) |
| | Out of the above commitment, $ 570 is included as restructuring accrual in other accounts payable and other long-term liabilities as of December 31, 2007. Some of the Group’s lease agreements do not include renewal options. |
| | c. | Commitments with respect to space segment services: |
| | Future minimum payments due for space segment services mainly to SES Americom, (a related party until July 2005), subsequent to December 31, 2007, are as follows: |
| Year ending December 31,
| |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| 2008 | | | $ | 23,913 | |
| 2009 | | | | 18,764 | |
| 2010 | | | | 12,892 | |
| 2011 | | | | 7,176 | |
| 2012 | | | | 4,198 | |
| |
| |
| | | |
| | | | $ | 66,943 | |
| |
| |
| | Space segment services expenses, mainly to SES Americom, totaled $ 23,970, $ 23,698 and $ 24,200 in 2007, 2006 and 2005, respectively. |
| | d. | In 2007 and 2006, the Company’s primary material purchase commitments derived from inventory’s suppliers. The Company’s material inventory purchase commitments are based on purchase orders, or on outstanding agreements with some of our suppliers of inventory. As of December 31, 2007 and 2006, our major outstanding inventory purchase commitments amounted to $ 18.4 million and $ 9.5 million, respectively, all of which were orders placed or commitments made in the ordinary course of our business. As of December 31, 2007 and 2006, $ 13 and $4.4 million, respectively, of these orders and commitments, were from suppliers which can be considered sole or limited in number. |
| | e. | Legal and tax contingencies : |
| | 1. | In September 2003, Nova Mobilcom S.A. (“Mobilcom”) filed a lawsuit against Gilat do Brasil, a wholly-owned subsidiary of the Company, for specific performance of a memorandum of understandings which provided for the sale of Gilat do Brazil, and specifically the GESAC project, a government education project awarded to Gilat do Brazil, to Mobilcom for an unspecified amount. The Company does not believe that this claim has any merit and is vigorously defending itself against the claims presented therein. |
| | 2. | In 2003, the Brazilian Tax Authority filed a claim against a subsidiary of Spacenet Inc. in Brazil, for alleged taxes due in the amount of approximately $ 4,000. The subsidiary received notice of an administrative ruling against it in this regard and has filed a petition challenging this ruling in the state courts of the State of Sao Paulo, Brazil. At present, due to interest rates and the exchange rate of the Brazilian Reias, the Company’s management believes that the maximum subsidiary’s exposure is the payment of taxes in an amount of approximately $ 8,200 The Company intends to contest the claim vigorously. |
F - 29
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 7: | – | COMMITMENTS AND CONTINGENCIES (Cont.) |
| | 3. | The Company has certain tax exposures in some of the jurisdictions in which it conducts business. Specifically, in certain jurisdictions in the United States and in Latin America the Company is in the midst of different stages of audits and has received some tax assessments. The tax authorities in these and in other jurisdictions in which the Company operates as well as the Israeli Tax Authorities may raise additional claims, which might result in increased exposures and ultimately, payment of additional taxes. |
| | 4. | The Company has accrued approximately, $ 15,100 and $ 12,000 as of December 31, 2007 and 2006, respectively, for the expected implications of such legal and tax contingencies. These accruals are comprised of approximately $11,700 and $8,300 of tax related accruals as of December 31 2007 and 2006, respectively, and approximately $3,400 and $3,700 of legal and other accruals as of December 31, 2007 and 2006, respectively. The accruals related to tax contingencies have been assessed by the Company’s management based on the advice of outside legal and tax advisers. The total estimated exposure for the aforementioned tax related accruals is approximately $14,800 and $14,400 as of December 31, 2007 and 2006, respectively. |
| | These tax accruals include various tax matters such as taxes on income, property taxes, sales and use tax and value added tax, that are in different stages of audits, for which tax assessments have been received, or various tax exposures in which the Company has assessed the exposure and determined that an accrual is necessary. The estimated exposure for these legal and other related accruals is approximately $11,100 and $12,200 as of December 31, 2007 and 2006, respectively. The accruals related to legal contingencies have been assessed by the Company’s management based on the advice of outside legal advisers and are comprised of matters for which legal proceedings have been initiated against the Company. |
| | The exposures and provisions related to income taxes have been assessed and provided for in accordance with FIN 48. Liabilities related to legal proceedings, demands and claims and other taxes are recorded in accordance with SFAS 5, when it is probable that a liability has been incurred and the associated amount can be reasonably estimated. The Company’s management, based on its legal counsel opinion, believes that it had provided an adequate accrual to cover the costs to resolve the aforementioned legal proceedings, demands and claims. |
| | f. | Pledges and securities – see Note 10a and 13f. |
| | The Group guarantees its performance to certain customers (generally to government entities) through bank guarantees and corporate guarantees. Guarantees are often required for the Group’s performance during the installation and operational periods of long-term rural telephony projects such as 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 operational milestones are met. |
F - 30
| GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 7: | – | COMMITMENTS AND CONTINGENCIES (Cont.) |
| | At December 31, 2007, the aggregate amount of bank guarantees provided in order to secure the Group’s performance obligations is approximately $ 12,000, comprised mainly of performance guarantees provided on behalf of the Company’s subsidiary in Peru in an amount of approximately $ 7,700. The Group has restricted cash as collateral for these guarantees in an amount of approximately $ 1,200. |
| | In addition, the Group has provided bank guarantees for certain leases throughout the world for an aggregate amount of approximately $ 5,700.
The Group has restricted cash as collateral for these guarantees in an amount of approximately $ 5,700. The Group also provided a few other guarantees amounted to approximately $1,200 as of December 31, 2007. |
| | In accordance with FIN 45, paragraph 4, as the guarantees above are performance guarantees for the Company’s own performance, such guarantees are excluded from the scope of FIN 45. The Company has not recorded any liability for such amounts, since the Company expects that its performance will be acceptable. To date, no guarantees have ever been exercised against the Company. |
| NOTE 8: | – | HEDGING INSTRUMENTS |
| | To protect against changes in value of forecasted foreign currency cash flows resulting from salaries and other payments that are denominated in NIS, the Company has entered into foreign currency forward contracts. |
| | These contracts are designated as cash flows hedges, as defined by SFAS No. 133, as amended, and are all highly effective as hedges of these expenses. |
| | During the year ended December 31, 2007, the Company recognized a net income of $ 791 related to the effective portion of its hedging instruments. The effective portion of the hedged instruments has been included as an offset of payroll expenses and other operating expenses in the statement of operations. The ineffective portion of the hedged instrument amounted to $ 140 and has been included in financial expenses. |
| | As of December 31, 2007, the Company had no outstanding hedging instruments. |
F - 31
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands (except share and per share data) |
| NOTE 9: | – | SHAREHOLDERS’ EQUITY |
| | 1. | 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. |
| | 2. | In September 2006, the Company issued 10,578,474 ordinary shares to York upon conversion of its long-term convertible note. See also Note 1c and 10d. |
| | 3. | In December, 2006, the Company consummated a public offering of 8,050,000 ordinary shares at a price of $8.50 per share. Of such shares, 5,016,667 ordinary shares were sold by the Company and the remaining shares were sold by a selling shareholder (York). Through this offering the Company raised a gross amount of $ 42,401. Issuance expenses amounted to approximately $ 2,755. |
| | 4. | During the years ended December 31, 2007, 2006 and 2005 790,563, 668,913 and 243,695 options respectively were exercised into the Company’s ordinary shares and the same number of the Company’s ordinary shares were issued. |
| | The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard starting from January 1, 2006, the first day of the Company’s fiscal year 2006. Under that transition method, compensation cost recognized in the years ended December 31, 2007 and 2006, includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated. |
| | The Company has three stock option plans, the 1995 and the 2003 Stock Option and Incentive Plans and the 2005 Stock Incentive Plan (“the plans”). The 1995 Plan was amended in 1997, 1998 and 1999, and expired although there are still options outstanding under this plan. Under the 2003 Plan, options may be granted to employees, officers, directors and consultants of the Company. |
| | In 2005, the Company’s shareholders approved two increases in the number of options available for grant of the 2003 Plan for an aggregate of 4,635,000 shares to a total of 6,135,000 shares available for future grants. As of December 31, 2007, an aggregate of 642,407 ordinary shares of the Company are still available for future grants from the 2003 Stock Option Incentive Plan. |
| | Options granted under the 1995 and 2003 Plans generally vest quarterly over two to four years. The options expire seven or ten years from the date of grant. Any options, which are forfeited or canceled before expiration, become available for future grants. |
F - 32
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands (except share and per share data) |
| NOTE 9: | – | SHAREHOLDERS’ EQUITY (Cont.) |
| | The exercise price per share under the 1995 Plan was not less than the market price of an ordinary share at the date of grant. The exercise price for the 2003 Plan is the higher of (i) $ 5.00 per share; and (ii) the market value of the shares as of the date of the option grant, unless otherwise provided in the stock option agreement. |
| | In December 2005, the Company’s shareholders approved the adoption of a new plan, the 2005 Stock Incentive Plan with a number of options available for grant of 1,500,000 shares. This Plan is designed to enable the Company’s Board of Directors to determine various forms of incentives for all forms of service providers and, when necessary, adopt a sub-plan in order to grant specific incentives. Among the incentives that may be adopted are share options, performance share awards, performance share unit awards, restricted shares, restricted share unit awards and other share-based awards. As of December 31, 2007, the Company granted 50,000 performance based options under this Plan. |
| | The Company recognizes compensation expenses for the value of its awards, which have graded vesting, granted prior to January 1, 2006, based on the accelerated attribution method and for awards granted subsequent to January 1, 2006, based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures. |
| | The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing model. The option-pricing model requires a number of assumptions, of which the most significant are expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements. |
| | The expected option term represents the period that the Company’s stock options are expected to be outstanding and was determined based on the simplified method permitted by SAB 107 as the average of the vesting period and the contractual term. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. |
| | The fair value of the Company’s stock options granted to employees and directors for the years ended December 31, 2007, 2006 and 2005 was estimated using the following weighted average assumptions: |
| | Year ended
December 31,
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Risk free interest | | | | 4.5 | % | | 4.7 | % | | 4.2 | % |
| Dividend yields | | | | 0 | % | | 0 | % | | 0 | % |
| Volatility | | | | 45 | % | | 47 | % | | 48 | % |
| Expected term (in years) | | | | 6.1 | | | 5.4 | | | 5.5 | |
F - 33
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands (except share and per share data) |
| NOTE 9: | – | SHAREHOLDERS’ EQUITY (Cont.) |
| | A summary of employee option activity under the Company’s Stock Option Plans as of December 31, 2007 and changes during the year ended December 31, 2007 are as follows: |
| | Number of
options
| Weighted-
average
exercise
price
| Weighted-
average
remaining
contractual
term
(in years)
| Aggregate
intrinsic
value (in
thousands)
|
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Outstanding at January 1, 2007 | | | | 4,840,322 | | $ | 8.8 | | | | | | | |
| Granted | | | | 90,500 | | $ | 8.7 | | | | | | | |
| Exercised | | | | (781,075 | ) | $ | 5.8 | | | | | | | |
| Expired | | | | (3,373 | ) | $ | 465.0 | | | | | | | |
| Forfeited | | | | (49,344 | ) | $ | 39.7 | | | | | | | |
| | | |
| Outstanding at December 31, 2007 | | | | 4,097,030 | | $ | 8.6 | | | 7.6 | | $ | 17,298 | |
| | | |
| Exercisable at December 31, 2007 | | | | 3,346,423 | | $ | 9.0 | | | 7.6 | | $ | 14,420 | |
| | | |
| Vested and expected to vest at | | |
| December 31, 2007 | | | | 3,941,878 | | $ | 8.6 | | | 7.6 | | $ | 16,731 | |
| | A summary of the employee option activity under the Company's Stock Option Plans as of December 31, 2006 and 2005, and changes during the years ended on those dates, are as follow: |
| | Year ended December 31,
|
|---|
| | 2006
| 2005
|
|---|
| | Number
of
options
| Weighted
average
exercise
price
| Number
of
options
| Weighted
average
exercise
price
|
|---|
| | | | | |
|---|
| | | | | |
|---|
| Options outstanding at the
beginning of the year | | | | 5,159,835 | | $ | 8.6 | | | 1,438,644 | | $ | 17.1 | |
| Changes during the year: | | |
| Granted | | | | 312,000 | | $ | 7.2 | | | 4,069,000 | | $ | 6.0 | |
| Exercised | | | | (521,851 | ) | $ | 5.6 | | | (125,245 | ) | $ | 5.0 | |
| Expired | | | | (499 | ) | $ | 346.3 | | | (490 | ) | $ | 240.0 | |
| Forfeited and cancelled | | | | (109,163 | ) | $ | 10.9 | | | (222,074 | ) | $ | 17.3 | |
| Options outstanding at the end of | | |
| the year | | | | 4,840,322 | | $ | 8.8 | | | 5,159,835 | | $ | 8.6 | |
| |
| |
| |
| |
| |
| Options exercisable at the end of | | |
| the year | | | | 3,514,823 | | $ | 9.8 | | | 3,016,242 | | $ | 10.5 | |
| |
| |
| |
| |
| |
F - 34
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands (except share and per share data) |
| NOTE 9: | – | SHAREHOLDERS’ EQUITY (Cont.) |
| | The weighted-average grant-date fair value of options granted during the years ended December 31, 2007 and 2006 was $ 4.3 and $ 3.55, respectively. The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on the last trading day of the fourth quarter of fiscal 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2007. This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised for the year ended December 31, 2007 was approximately $ 3,200. As of December 31, 2007, there was approximately $ 1,200 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Company’s stock option plans. |
| | That cost is expected to be recognized over a weighted-average period of 1.2 years. Total grant-date fair value of vested options as of December 31, 2007 was approximately $ 15,600. |
| | The options outstanding under the Company’s Stock Option Plans as of December 31, 2007, have been separated into ranges of exercise price as follows: |
| Ranges of
exercise
price
| Options
outstanding
as of
December 31,
2007
| Weighted
average
remaining
contractual
life
| Weighted
average
exercise
price
| Options
exercisable
as of
December 31,
2007
| Weighted
average
exercise
price of
exercisable
options
|
|---|
| | | (Years) | | | |
|---|
| | | | | | |
|---|
| | | | | | |
|---|
| | | | | | |
|---|
| $ | 5 -7.5 | | | 3,742,175 | | | 7.7 | | $ | 5.8 | | | 3,202,799 | | $ | 5.8 | |
| $ | 7.7-10.8 | | | 285,731 | | | 7.4 | | $ | 8.2 | | | 74,541 | | $ | 8.1 | |
| $ | 42.4 -79 | | | 60,773 | | | 4.0 | | $ | 77.5 | | | 60,737 | | $ | 77.5 | |
| $ | 240.4 -2,730 | | | 8,351 | | | 1.9 | | $ | 749.2 | | | 8,346 | | $ | 749.1 | |
| |
| | | | | |
| | | |
| | | |
| | | | | 4,097,030 | | | 7.6 | | $ | 8.6 | | | 3,346,423 | | $ | 9.0 | |
| |
| | | | | |
| | | |
| | 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 123 on its stock-based employee compensation: |
| | Year ended
December 31,
2005
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Net loss as reported | | | $ | (3,716 | ) |
| | | |
| Add: stock-based employee compensation expenses included | | |
| in reported net loss - intrinsic value | | | | 120 | |
| Deduct: total stock-based employee compensation expense | | |
| determined under fair value based method | | | | (6,964 | ) |
| |
| |
| | | |
| Pro forma net loss | | | $ | (10,560 | ) |
| |
| |
| | | |
| Basic net loss per share as reported | | | $ | (0.17 | ) |
| |
| |
| | | |
| Diluted net loss per share as reported | | | $ | (0.17 | ) |
| |
| |
| | | |
| Pro forma basic loss per share | | | $ | (0.47 | ) |
| |
| |
| | | |
| Pro forma diluted loss per share | | | $ | (0.47 | ) |
| |
| |
F - 35
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands (except share and per share data) |
| NOTE 9: | – | SHAREHOLDERS’ EQUITY (Cont.) |
| | c. | In 2005, the Company recruited new management and as part of their recruitment package, an aggregate of 2,445,000 options were granted under the 2003 Stock Plan. At the same time, other executives were granted options for an aggregate of 490,000 shares under the 2003 Stock Plan. |
| | d. | In August 2005, the Company’s shareholders approved the accelerated vesting of all of the options granted to non-employee directors in an aggregate amount of 90,330 options. The compensation expense in connection with the accelerated vesting was approximately $ 26. |
| | e. | In 2003, the Company granted 150,000 stock options to its former Chairman of the Board of Directors, who was considered at that time a related party, in accordance with the terms of his consultancy agreement. The exercise price is $ 5.00 per share. The Company accounted for these options under the fair value method of SFAS No. 123 and EITF No. 96-18. The fair value of these options was estimated using a Black-Scholes option-pricing valuation model with the following weighted-average assumptions for 2005, 2004 and 2003: risk-free interest rates of 3%, dividend yields of 0%, volatility factor of the expected market price of the Company’s ordinary shares of 84%, and a weighted-average expected life of the options of three and a half years. Changes in the fair value of the options prior to completion of performance are reflected as an adjustment to the expense to be included in future periods over the vesting period. In 2005, 2004 and 2003, the Company recorded compensation expenses of $ 17, $ 207 and $ 233, respectively which are included in selling, marketing, general and administrative expenses. All options shall expire over a period ending in July 2008. |
| | 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 exchange rate prevailing at the time of repatriation. |
| | 2. | Pursuant to the terms of a credit line from a bank (see also Note 13), the Company is restricted from paying cash dividends to its shareholders without initial approval from the bank. |
F - 36
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands (except share and per share data) |
| NOTE 10: | – | RESTRUCTURING OF DEBTS |
| | a. | In 2003, the Company issued the 4.00% Convertible Subordinated Note due to 2012. The Company pays interest on its 4.00% Convertible Subordinated Note semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2005. The Company is committed to pay $ 400 of the principal amount of the notes on each of April 1 and October 1, in both 2010 and 2011, and the remaining principal amount at maturity. The notes are convertible at the option of the holder into the Company’s Ordinary shares at a conversion price of $ 17.4 per Ordinary share at any time before close of business on October 1, 2012, unless the notes have been converted pursuant to a mandatory conversion clause as defined in the 4.00% Convertible Subordinated Note. Commencing January 1, 2005, the Company may, at its option, require the conversion right to be exercised under certain circumstances set forth in the indenture. The collateral for the notes is a second priority security interest consisting of a floating charge on all of the Company’s assets and a pledge of all on the shares of Spacenet Inc., a wholly owned subsidiary of the Company. |
| | The interest of the holders of the notes in the collateral is subordinated to the security interest granted for the benefit of lending banks. As of December 31, 2007 and 2006, the outstanding amount of the notes is $ 16,300 and $ 16,300, respectively. |
| | The balance of the notes results from debt restructurings that occurred in 2003. The debt restructurings were accounted for as troubled debt restructuring on the basis of combination of types of restructuring and on the basis of modification of terms pursuant to Statement of the Financial Accounting Standard No. 15 “Accounting by Debtors and Creditors for Troubled Debt Restructurings” (“SFAS 15”), Emerging Issues Task Force No. 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 (“EITF 02-4”) and SFAS No. 145, “Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections”. Accordingly, the Company recognized a gain in 2003. As part of the accounting for the troubled debt restructurings, the Company accrued to the balance of the notes the remaining future interest payable until maturity, presented as a separate line item in the balance sheet. Therefore, at each reporting date the liabilities include both principal and all future remaining interest payments. Consequently, though the Company pays periodical interest payments, the statement of operations does not reflect the costs of such interest payments. |
| | b. | In April 2004, the Company further revised the terms of its loan from Bank Hapoalim, to which it owed a principal debt amount of $ 71,400. The new loan terms reduced the principal installments due on July 1, 2005 and January 1, 2006 from $ 4,463 to $ 1,000 and $ 1,500, respectively, with the remainder due for payment in 2012. Other principal payments of $ 4,463 due semi-annually thereafter remained unchanged and the last installment of $ 15,300 is due on July 2, 2012. In addition, the interest rate on the loan was also revised. |
| | In consideration for the Bank Hapoalim agreement to amend the interest rates, defer principal payments and modify certain covenants, the bank was entitled to convert the loan owed by the Company to Bank Hapoalim into Ordinary shares of the Company. |
F - 37
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands (except share and per share data) |
| NOTE 10: | – | RESTRUCTURING OF DEBTS (Cont.) |
| | The modification of the loan terms was accounted for as debt extinguishment due to the addition of a conversion option to the debt instrument which was considered substantial. The fair value of the amended loan was recorded, and the book value of the old loan was removed from the Company’s financial statements. Since Bank Hapoalim was a related party, the extinguishment gain of approximately $ 15,500 was recorded as an equity contribution in the year ended December 31, 2004. |
| | c. | In July 2005, Bank Hapoalim assigned its loan to the Company to York. Following the assignment, York is considered a related party. At that time of the assignment, certain board members of the Company resigned and were replaced by new board members. In addition, the Company’s CEO and Chairman of the Board of Directors resigned and a co-founder of the Company rejoined the Company as President and Chief Executive Officer. |
| | d. | In December 2005, the Company and York further revised the terms of the loan. The new loan terms deferred $ 19,350 in principal payments due in installments from January 5, 2006 through January 1, 2008. The new payment schedule provided that: (i) no principal payments be due in 2006, 2007 or January 2008 (with those payments being deferred until July 2012) (ii) approximately $ 4,500 was to be paid on July 1, 2008; (iii) approximately $ 9,000 was to be paid in semi-annual installments on January 1 and July 1 of 2009, 2010 and 2011; (iv) approximately $ 4,500 was to be paid on January 1, 2012; and (v) approximately $ 34,500 was to be paid on July 1, 2012. In addition, the amendment modified the terms of the conversion option until September 30, 2006. The amendment lowered and set the conversion price to $ 6.75 per share until September 30, 2006. In addition, during this period, the Company was granted the right to require the conversion of the outstanding loan from York at the same exercise price in the event that the closing share price of the Company’s Ordinary shares as published by NASDAQ over twenty consecutive trading days will exceed $ 9, provided that the aggregate trading volume during this period is a minimum of 1,700,000 Ordinary shares. Beginning October 1, 2006, the conversion price reverts to the original price. |
| | The modification of the loan was not considered substantial based on the measurement method prescribed by EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments”. In accordance with EITF 05-7, “Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues” which was early adopted by the Company, the change in the fair value of the conversation option immediately before and after the modification in the amount of $ 3,800 was recorded as a discount on the loan and increase to shareholders’ equity. |
| | e. | In September 2006, York converted the loan into the Company’s Ordinary shares.
Based on Interpretation 1 of Opinion 26 and EITF No. 85-17, “Accrued Interest upon Conversion of Convertible Debt”, the net carrying amount of the convertible debt and accrued interest unpaid, including the unamortized discount, in the total amount of $ 68,100 was credited to shareholders’ equity upon conversion. See also Note 1c. |
F - 38
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 11: | – | IMPAIRMENT OF LONG-LIVED AND OTHER ASSETS |
| | The Group’s long-lived assets are reviewed for impairment in accordance with Statements of Financial Accounting Standards No. 144, “Accounting for the impairment or disposal of long lived assets” (“SFAS 144”) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. |
| | Most of the activity of Spacenet Rural in Colombia consists of operating subsidized projects for the government (the “Compartel Projects”). In accordance with these projects, the Colombian government has transferred approximately $70,000 to trust accounts. The money is released from the trusts based on a schedule of payments and meeting certain operational milestones. As of December 31, 2007, approximately $51,000 has been released from the trusts to the Company. As of December 31, 2007, short-term and long-term restricted cash held by trustees’ accounts amounted to approximately $24,000 out of which 15,300 is due and not yet being released from the trusts as certain operational milestones imposed have not been fully met. The Colombian government and the Company have agreed to renegotiate certain terms of the contracts, including the operational milestones going forward, so that they better reflect the current telecom and business environment in Colombia. In order to guarantee the Company’s performance under the Compartel projects, the Company secured insurance from a local insurance company in Colombia. The Company has provided the insurance company with various corporate guarantees up to approximately $50,000 in order to secure the Company’s performance. |
| | In accordance with the guidelines of SFAS 144, “Accounting for the impairment or disposal of long lived assets”, in 2007, the Company compared the carrying amount of its long lived network assets group to the future undiscounted cash flows expected to be generated by those assets. Since the undiscounted cash flow expected to be generated by those assets were less than the long lived networks assets group carrying amount, the Company determined the fair value of its long lived networks assets group and concluded that the carrying amount of its long lived network assets group in Colombia exceeded their fair value and recorded an impairment in an amount of $12,218. |
| | The Company ensured that the accumulated revenues recognized from the Compartel Projects will not exceed the accumulated amounts already released from the trust. |
| | Assets impaired during 2007 as of the above analysis consist as follows: |
| | Year ended
December 31,
2007
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Property and equipment | | | $ | 10,287 | |
| Other assets | | | | 1,931 | |
| |
| |
| | | |
| | | | $ | 12,218 | |
| |
| |
F - 39
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| | a. | In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS 109. This interpretation prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition of tax positions, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect the operating results of the Company. |
| | The Company adopted the provisions of FIN 48 as of January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $ 1,309 increase in liability for unrecognized tax positions which was accounted with a corresponding increase to the January 1, 2007 balance of accumulated deficit. As of January 1, 2007, liabilities for unrecognized tax positions in accordance with FIN 48 amounted to $ 5,435. |
| | Interest associated with uncertain tax position is classified as financial expenses in the financial statements and penalties as general and administrative expenses. The Company’s policy for interest and penalties related to income tax exposures was not impacted as a result of the adoption of the recognition and measurement provisions of FIN 48. |
| | A reconciliation of the beginning and ending amount of unrecognized tax positions is as follows: |
| | Unrecognized
tax benefits
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Balance at January 1, 2007 | | | $ | 5,435 | |
| Additions based on tax positions related to the current year | | | | 370 | |
| Additions of exchange rate, penalties and interest related to unrecognized tax
liabilities from previous years | | | | 1,018 | |
| |
| |
| | | |
| Balance at December 31, 2007 | | | $ | 6,823 | |
| |
| |
| | The Company and its subsidiaries file income tax returns in Israel and in other jurisdictions of its subsidiaries. As of December 31, 2007, the tax returns of the Company and its main subsidiaries are open to examination by the Israeli and other tax authorities for the tax years 2002 through 2007. |
F - 40
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 12: | – | TAXES ON INCOME (Cont.) |
| | 1. | Tax benefits under the Law for the Encouragement of Capital Investments, 1959: |
| | The Company has been granted an “Approved Enterprise” status, under the Law, for nine investment programs in the alternative program, by the Israeli Government . In addition, the Company has elected 2005 as the Year of Election for a new Beneficiary Enterprise |
| | 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 the 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”and “Beneficiary Enterprise”, for the remainder of the benefit period. These tax benefits are subject to a limitation of the earlier of 12 years from commencement of operations, or 14 years from receipt of approval. The period of benefits for the first eight programs has expired and the management do not expect substantial benefits from the ninth program, which benefits will expire in 2009. |
| | The Company is entitled to claim accelerated depreciation with respect to equipment used by “Approved Enterprises” and Beneficiary Enterprise during the first five tax years of the operations of these assets. |
| | The entitlement to the above mentioned benefits are contingent upon the compliance with the conditions under the Law, regulations published there under and the conditions set out in certificates of approval (for an Approved Enterprises). Should the Company fail to meet such requirements, income attributable to its Approved Enterprise programs could be subject to the statutory Israeli corporate tax rate and the Company could be required to refund a portion of the tax benefits already received, with respect to such programs, in whole or in part, with the addition of linkage differences to the Israeli Consumer Price Index (“CPI”) and interest. |
| | On April 1, 2005, an amendment to the Law came into effect (the “Amendment”) and has significantly changed the provisions of the Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as an “Approved Enterprise”, such as provisions generally requiring that at least 25% of the “Approved Enterprise”, income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Law so that companies no longer require Investment Center approval in order to qualify for tax benefits Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set out by the Amendment. A company is also granted a right to approach the Israeli Tax Authorities for a pre-ruling regarding their eligibility for benefits under the Amendment. |
F - 41
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 12: | – | TAXES ON INCOME (Cont.) |
| | Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of the Company’s business income from export. In order to receive the tax benefits, the Amendment states that a company must make an investment in the Beneficiary Enterprise exceeding a minimum amount specified in the law. Such investment may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Beneficiary Enterprise (“the Year of Election”). Where a company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Beneficiary Enterprise, and the company’s effective tax rate will be the result of a weighted combination of the applicable rates. In this case, the minimum investment required in order to qualify as a Beneficiary Enterprise is required to exceed a certain percentage of the company’s production assets before the expansion. The duration of tax benefits is subject to a limitation of the earlier of 7-10 years from the Commencement Year, or 12 years from the first day of the Year of Election. The period of benefits of the Beneficiary Enterprise will expire in 2017. |
| | However, the Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the Law as they were on the date of such approval. Therefore, the Company’s existing “Approved Enterprises” programs will generally not be subject to the provisions of the Amendment. As a result of the Amendment, tax-exempt income generated under the provisions of the new law, will subject the Company to taxes upon distribution or liquidation and the Company may be required in the future to record deferred tax liability with respect to such tax-exempt income. As of December 31, 2007, the Company did not generate income under the provisions of the new law. |
| | The Company does not expect to pay any cash dividend. In the event of distribution of dividends from the above mentioned tax exempt income, the amount distributed would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected the alternative program of benefits (depending on the level of foreign investment in the Company), currently between 10% to 25% for an “Approved Enterprise” and Beneficiary Enterprise. |
| | Income from sources other than an “Approved Enterprise” during the benefit period is subject to tax at the regular corporate tax rate. In June 2004 and in July 2005, the “Knesset” (Israel’s parliament) adopted amendments to the Income Tax Ordinance (No.140 and Temporary Provision), 2004 and (No.147), 2005 respectively, which determine, among other things, that the corporate tax rate is to be gradually reduced as follows: 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. Until December 31, 2003, the corporate tax rate was 36%. |
F - 42
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 12: | – | TAXES ON INCOME (Cont.) |
| | The entitlement to the above mentioned benefits is dependent upon the Company fulfilling the conditions stipulated by the 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. |
| | 2. | Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments) Law, 1985: |
| | Under this law, results for tax purposes are measured and reflected in terms of earnings in NIS. As explained in Note 2b, the financial statements are measured in U.S. dollars. The annual changes in the NIS causes a further difference between taxable income and the income before taxes shown in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on the difference between the cost of assets and liabilities in the reporting currency and their tax base. |
| | c. | Non-Israeli subsidiaries: |
| | Non-Israeli subsidiaries are taxed according to the tax laws in their respective domiciles of residence. The Company has not made any provisions relating to undistributed earnings of the Company’s foreign subsidiaries since the Company has no current plans to distribute such earnings. If earnings are distributed to Israel in the form of dividends or otherwise, the Company may be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. It is not practicable to determine the amount of the unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries. |
| | d. | Carryforward tax losses and credits: |
| | As of December 31, 2007, the Company had operating loss carry forwards for Israeli income tax purposes of approximately $ 45,000, which may be offset indefinitely against future taxable income indefinitely. |
| | Carryforward tax losses in the U.S. subsidiaries amount to approximately $231,000. Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the “change in ownership” provisions of Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating loss before utilization. In the U.S, carryforward tax losses can be utilized within 20 years. See also Note 16. |
| | In addition the Group has carryforward tax losses relating to other subsidiaries of approximately $10,000. |
F - 43
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 12: | – | TAXES ON INCOME (Cont.) |
| | 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,
|
|---|
| | | 2007
| 2006
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| 1. | Provided in respect of the following: | | | | | | | | |
| | Carryforward tax losses | | | $ | 95,056 | | $ | 95,931 | |
| | Temporary differences relating to property and | | |
| | equipment | | | | 25,054 | | | 23,251 | |
| | Other | | | | 11,639 | | | 15,427 | |
| | |
| |
| |
| | | | |
| | Gross deferred tax assets | | | | 131,749 | | | 134,609 | |
| | Valuation allowance | | | | (124,223 | ) | | (126,954 | ) |
| | |
| |
| |
| | | | |
| | Net deferred tax assets | | | | 7,526 | | | 7,655 | |
| | |
| |
| |
| | | | |
| | Gross deferred tax liabilities | | |
| | Temporary differences relating to property and | | |
| | equipment | | | | (4,018 | ) | | (4,256 | ) |
| | Other | | | | (2,827 | ) | | (3,576 | ) |
| | |
| |
| |
| | | | | | (6,845 | ) | | (7,832 | ) |
| | |
| |
| |
| | | | |
| | Net deferred tax assets (liabilities) | | | $ | 681 | | $ | (177 | ) |
| | |
| |
| |
| | | | |
| | Domestic | | | $ | - | | $ | - | |
| | Foreign | | | | 681 | | | (177 | ) |
| | |
| |
| |
| | | | |
| | | | | $ | 681 | | $ | (177 | ) |
| | |
| |
| |
| 2. | Deferred taxes are included in the consolidated | | |
| | balance sheets, as follows: | | |
| | | | |
| | Current assets | | | $ | 703 | | $ | - | |
| | Current liabilities | | | | (22 | ) | | (113 | ) |
| | Non-current liabilities | | | | | | | (64 | ) |
| | |
| |
| |
| | | | |
| | | | | $ | 681 | | $ | (177 | ) |
| | |
| |
| |
| | 3. | As of December 31, 2007, the Group decreased the valuation allowance by approximately $ 2,731, resulting from changes in other temporary differences and in carry forward tax losses. Management currently believes that it is more likely than not that the deferred tax regarding the loss carry forwards and other temporary differences for which valuation allowance was provided will not be realized in the foreseeable future. |
F - 44
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 12: | – | TAXES ON INCOME (Cont.) |
| | f. | Reconciling items between the statutory tax rate of the Company and the effective tax rate: |
| | Year ended December 31,
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Income (loss) before taxes, as reported in the | | | | | | | | | | | |
| consolidated statements of operations | | | $ | 11,053 | | $ | 12,844 | | $ | (990 | ) |
| |
| |
| |
| |
| | | |
| Statutory tax rate | | | | 29 | % | | 31 | % | | 34 | % |
| |
| |
| |
| |
| | | |
| Theoretical tax expenses (benefit) on the above | | |
| amount at the Israeli statutory tax rate | | | $ | 3,205 | | $ | 3,982 | | $ | (337 | ) |
| Currency differences | | | | 2,070 | | | (1,392 | ) | | 1,834 | |
| Tax adjustment in respect of different tax rates | | |
| and "Approved Enterprise" status (1) | | | | (2,821 | ) | | (3,981 | ) | | 1,538 | |
| Changes in valuation allowance | | | | (2,731 | ) | | 1,849 | | | (8,387 | ) |
| Forfeiture of carry forward tax losses | | | | - | | | - | | | 4,762 | |
| Taxes paid in respect of prior years | | | | 62 | | | 898 | | | 2,546 | |
| Stock compensation relating to options per SFAS 123(R) | | | | 301 | | | 1,141 | | | - | |
| Nondeductible expenses and other permanent | | |
| differences | | | | 877 | | | (140 | ) | | 1,170 | |
| |
| |
| |
| |
| | | |
| | | | $ | 963 | | $ | 2,357 | | $ | 3,126 | |
| |
| |
| |
| |
| (1) Per share amounts (basic) of the tax | | |
| benefit results from the exemption | | | $ | (0.04 | ) | $ | (0.08 | ) | $ | 0.07 | |
| |
| |
| |
| |
| | | |
| Per share amounts (diluted) of the tax | | |
| benefit results from the exemption | | | $ | (0.03 | ) | $ | (0.07 | ) | $ | 0.07 | |
| |
| |
| |
| |
| | g. | Taxes on income included in the consolidated statements of operations: |
| | Year ended December 31,
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Current tax expense | | | $ | 1,854 | | $ | 3,488 | | $ | 3,599 | |
| | | |
| Deferred income taxes | | | | (891 | ) | | (1,131 | ) | | (473 | ) |
| |
| |
| |
| |
| | | |
| | | | $ | 963 | | $ | 2,357 | | $ | 3,126 | |
| |
| |
| |
| |
| | | |
| Domestic | | | $ | 414 | | $ | 684 | | $ | 1,549 | |
| Foreign | | | | 549 | | | 1,673 | | | 1,577 | |
| |
| |
| |
| |
| | | |
| | | | $ | 963 | | $ | 2,357 | | $ | 3,126 | |
| |
| |
| |
| |
F - 45
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 12: | – | TAXES ON INCOME (Cont.) |
| | h. | Income (loss) before taxes on income from continuing operations: |
| | Year ended December 31,
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Domestic | | | $ | 37,653 | | $ | 21,628 | | $ | 9,111 | |
| Foreign | | | | (26,600 | ) | | (8,784 | ) | | (10,101 | ) |
| |
| |
| |
| |
| | | |
| | | | $ | 11,053 | | $ | 12,844 | | $ | (990 | ) |
| |
| |
| |
| |
| NOTE 13: | – | SUPPLEMENTARY BALANCE SHEET INFORMATION |
| | December 31,
|
|---|
| | 2007
| 2006
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Receivables in respect of capital leases (see c below) | | | $ | 3,360 | | $ | 6,157 | |
| VAT receivables | | | | 2,099 | | | 5,854 | |
| Prepaid expenses | | | | 4,004 | | | 6,535 | |
| Deferred charges | | | | 5,882 | | | 16,921 | |
| Tax receivables | | | | 1,373 | | | 1,178 | |
| Employees | | | | 2,925 | | | 203 | |
| Income receivable | | | | 1,375 | | | 686 | |
| Other | | | | 3,730 | | | 2,894 | |
| |
| |
| |
| | | |
| | | | $ | 24,748 | | $ | 40,428 | |
| |
| |
| |
| | b. | Long-term trade receivables, receivables in respect of capital leases and other receivables: |
| | December 31,
|
|---|
| | 2007
| 2006
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Long-term receivables in respect of capital leases | | | | | | | | |
| (see c below) | | | $ | 3,000 | | $ | 5,558 | |
| Long-term trade receivables *) | | | | 5,036 | | | 8,291 | |
| Other receivables | | | | 1,134 | | | 5,392 | |
| |
| |
| |
| | | |
| | | | $ | 9,170 | | $ | 19,241 | |
| |
| |
| |
| | *) | Long term trade receivables are scheduled to be received by 2009. |
F - 46
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 13: | – | SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.) |
| | 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, 2007, are as follows (including unearned interest income in the amount of $ 500): |
| Year ending December 31,
| Capital
lease
| Operating
lease
| Total
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| 2008 | | | $ | 3,399 | | $ | 4,934 | | $ | 8,332 | |
| 2009 | | | | 1,510 | | | 4,289 | | | 5,799 | |
| 2010 | | | | 1,204 | | | 4,463 | | | 5,667 | |
| 2011 | | | | 671 | | | 1,257 | | | 1,928 | |
| 2012 | | | | 71 | | | 521 | | | 592 | |
| |
| |
| |
| |
| | | | | | |
| | | | $ | 6,855 | | $ | 15,464 | | $ | 22,318 | |
| |
| |
| |
| |
| | The net investments in capital lease receivables as of December 31, 2007, are $ 6,360. Total revenues from capital and operating leases amounted to $ 10,815, $ 7,966 and $ 5,700 in the years ended December 31, 2007, 2006 and 2005, respectively. |
| | d. | Short-term bank credit: |
| | The following is classified by currency and interest rates: |
| | Weighted average
interest rate
| | |
|---|
| | December 31,
| December 31,
|
|---|
| | 2007
| 2006
| 2007
| 2006
|
|---|
| | %
| U.S. dollars in thousands
|
|---|
| | | | | |
|---|
| In Dollars | | | | 6.50 | | | 6.50 | | $ | 5,500 | | $ | 1,200 | |
| In other currencies | | | | 13.50 | | | - | | | 323 | | | - | |
| |
| |
| |
| |
| |
| Total | | | | | | | | | $ | 5,823 | | $ | 1,200 | |
| | | | | |
| |
| |
F - 47
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 13: | – | SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.) |
| | e. | Other current liabilities: |
| | December 31,
|
|---|
| | 2007
| 2006
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Deferred revenue | | | $ | 17,963 | | $ | 39,382 | |
| Payroll and related employees accruals | | | | 12,994 | | | 10,807 | |
| Government authorities | | | | 14,821 | | | 10,777 | |
| Advances from customers | | | | 5,096 | | | 4,393 | |
| Provision for vacation pay | | | | 4,379 | | | 3,876 | |
| Other | | | | 3,433 | | | 2,893 | |
| |
| |
| |
| | | |
| | | | $ | 58,686 | | $ | 72,129 | |
| |
| |
| |
| | | Interest rate for
| | December 31,
| | |
|---|
| | | 2007
| 2006
| | 2007
| 2006
|
|---|
| | Linkage
| %
| %
| Maturity
| | |
|---|
| | | | | | | |
|---|
| | | | | | | |
|---|
| Restructured loans (a.i): | | | | | | | | | | | | | | | | | | | | |
| Loan from Bank Leumi | | | | | | | | | | | | | | | | | | | | |
| (a.ii)(a.iii) | | | | U.S.dollar | | | LIBOR +1.4 | % | | LIBOR +1.6 | % | | 2008-2011 | | $ | 16,000 | | $ | 20,000 | |
| Other long-term loans (b) | | | | U.S.dollar | | | 5 | % | | 5 | % | | 2008 | | | 11 | | | 1,829 | |
| | | | | | | | | |
| |
| |
| | | |
| | | | | | | | | | | | | | | | | 16,011 | | | 21,829 | |
| | | | | | | | | |
| |
| |
| Other loans: | | |
| Loans from a bank (c) | | | | Euro | | | 6.3 | % | | 6.3 | % | | 2008-2021 | | | 7,047 | | | 6,665 | |
| Other long-term loans | | | | U.S.dollar | | | | | | | | | 2007 | | | - | | | 309 | |
| | | | | U.S.dollar | | | | | | 5 | % | | 2007 | | | - | | | 52 | |
| | | | | U.S.dollar | | | 6.5 | % | | | | | 2008 | | | 1,000 | | | - | |
| | | | | | | | | |
| |
| |
| | | |
| | | | | | | | | | | | | | | | | 8,047 | | | 7,026 | |
| | | | | | | | | |
| |
| |
| | | |
| | | | | | | | | | | | | | | | | 24,058 | | | 28,855 | |
| Less - current maturities | | | | | | | | | | | | | | | | 5,354 | | | 6,537 | |
| | | | | | | | | |
| |
| |
| | | |
| | | | | | | | | | | | | | | | $ | 18,704 | | $ | 22,318 | |
| | | | | | | | | |
| |
| |
| | (a) | i. | In March 2003, the Company concluded a restructuring process reaching an agreement with the banks and other creditors, which revised the loan terms |
| | ii. | In addition to existing security interests in their favor, the Company granted the banks, a first priority security interest consisting of a floating charge on all of the Company’s assets and a pledge on Spacenet Inc. shares owned by the Company. The Company granted a second priority security interest in the same collateral to the holders of the new notes. |
| | iii. | The Company granted the lender a first priority security interest of approximately $ 16,000 in its facilities in Israel. |
F - 48
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 13: | – | SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.) |
| | (b) | 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, 2007, is collateralized by the subsidiary’s facilities in Germany. |
| | (c) | In order to secure credit lines provided by the Banks, the Company granted the Banks a floating charge on its facilities. As of December 31, 2007, the Company used approximately $ 11,400 of those credit lines. |
| | g. | Long-term debt maturities for loans after December 31, 2007, are as follows: |
| Year ending December 31,
| |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| 2008 | | | $ | 5,354 | |
| 2009 | | | | 4,365 | |
| 2010 | | | | 4,389 | |
| 2011 | | | | 4,414 | |
| 2012 and thereafter | | | | 5,536 | |
| |
| |
| | | |
| | | | $ | 24,058 | |
| |
| |
| | Interest expenses on the long-term loans amounted to $ 1,700, $ 5,400 and $ 6,600 for the years ended December 31, 2007, 2006 and 2005, respectively. |
| | h. | As for the convertible subordinated notes, see note 10. |
| | i. | Other long-term liabilities: |
| | December 31,
|
|---|
| | 2007
| 2006
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Deferred revenue | | | $ | 6,753 | | $ | 14,246 | |
| Space segment | | | | 1,704 | | | 2,795 | |
| Restructuring charges (mainly termination of lease | | |
| commitments) | | | | 1,323 | | | 1,889 | |
| Other | | | | 3,191 | | | 2,355 | |
| |
| |
| |
| | | |
| | | | $ | 12,971 | | $ | 21,285 | |
| |
| |
| |
F - 49
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 14: | – | SELECTED STATEMENTS OF OPERATIONS DATA |
| | a. | Research and development expenses, net: |
| | Year ended December 31,
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Total cost | | | $ | 17,270 | | $ | 15,687 | | $ | 16,944 | |
| Less: | | |
| Royalty bearing grants | | | | - | | | - | | | 1,633 | |
| Non-royalty bearing grants | | | | 2,240 | | | 2,045 | | | 1,317 | |
| |
| |
| |
| |
| | | |
| | | | $ | 15,030 | | $ | 13,642 | | $ | 13,994 | |
| |
| |
| |
| |
| | b. | Allowance for doubtful accounts: |
| | | Year ended December 31,
|
|---|
| | | 2007
| 2006
| 2005
|
|---|
| | | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Balance at beginning of year | | | $ | 12,709 | | $ | 12,311 | | $ | 14,506 | |
| Increase during the year | | | | 1,338 | | | 850 | | | 422 | |
| Write-off of bad debts | | | | (9,519 | ) | | (452 | ) | | (2,617 | ) |
| |
| |
| |
| |
| | | |
| Balance at the end of year | | | $ | 4,528 | | $ | 12,709 | | $ | 12,311 | |
| |
| |
| |
| |
| | c. | Financial expenses, net: |
| | Year ended December 31,
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Income: | | | | | | | | | | | |
| Interest on cash equivalents, bank deposits, | | |
| restricted cash and accretion on discounts | | |
| of held to maturity marketable securities | | | $ | 8,639 | | $ | 5,648 | | $ | 3,058 | |
| Interest with respect to capital lease | | | | 1,288 | | | 1,895 | | | 2,890 | |
| Other (mainly foreign exchange gains) | | | | 1,556 | | | 951 | | | 778 | |
| |
| |
| |
| |
| | | |
| | | | | 11,483 | | | 8,494 | | | 6,726 | |
| |
| |
| |
| |
| Expenses: | | |
| Interest with respect to short-term bank | | |
| credit and trade payables and other | | | | 1,574 | | | 1,433 | | | 1,303 | |
| Interest with respect to long-term loans | | | | 1,698 | | | 5,398 | | | 6,551 | |
| Interest with respect to capital lease | | | | - | | | - | | | 56 | |
| Accretion of discount related to the York | | |
| loan | | | | - | | | 504 | | | - | |
| Other | | | | 2,213 | | | 1,901 | | | 1,493 | |
| |
| |
| |
| |
| | | |
| | | | | 5,485 | | | 9,236 | | | 9,403 | |
| |
| |
| |
| |
| | | |
| | | | $ | 5,998 | | $ | (742 | ) | $ | (2,677 | ) |
| |
| |
| |
| |
F - 50
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 15: | – | CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION |
| | The Group applies SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS No. 131”). |
| | a. | Revenues by geographic areas: |
| | Following is a summary of revenues by geographic areas. Revenues are attributed to geographic areas, based on the location of the end customers, and in accordance with FAS 131: |
| | Year ended December 31,
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| United States | | | $ | 95,803 | | $ | 94,016 | | $ | 86,488 | |
| South America and Central America | | | | 76,073 | | | 79,557 | | | 61,974 | |
| Asia | | | | 39,614 | | | 38,160 | | | 36,915 | |
| Europe *) | | | | 36,342 | | | 18,346 | | | 10,822 | |
| Africa | | | | 34,787 | | | 18,631 | | | 13,196 | |
| |
| |
| |
| |
| | | |
| | | | $ | 282,619 | | $ | 248,710 | | $ | 209,395 | |
| |
| |
| |
| |
| *) Including revenues from related parties as | | |
| follows: | | |
| Satlynx | | | $ | - | | $ | - | | $ | 1,621 | |
| |
| |
| |
| |
| | b. | During 2007, 2006 and 2005, the Company did not have any single customer or country generating revenues exceeding 10% of the Company’s total revenues. |
| | c. | The Group’s long-lived assets are located as follows: |
| | December 31,
|
|---|
| | 2007
| 2006
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Israel | | | $ | 75,945 | | $ | 76,912 | |
| Latin America | | | | 9,242 | | | 26,843 | |
| United States | | | | 16,884 | | | 18,524 | |
| Europe | | | | 7,452 | | | 7,542 | |
| Other | | | | 495 | | | 432 | |
| |
| |
| |
| | | |
| | | | $ | 110,018 | | $ | 130,253 | |
| |
| |
| |
F - 51
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 15: | – | CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.) |
| | d. | Information on operating segments: |
| | In December 2004, the Company’s Board of Directors approved a re-organization of its business under two separate reportable business segments effective January 1, 2005. During the year ended December 31, 2004, the Company operated under a single reportable business segment. During the third quarter of 2005, the Company further refined its segment reporting by dividing the Spacenet segment into two segments, and the Company’s 2005 financial statements reflect operation under three business units: (i) Gilat Network Systems, a provider of VSAT-based networks and associated professional services, including turnkey and management services, to telecom operators worldwide.; (ii) Spacenet Inc., which provides satellite network services to enterprises, small office/home office, or SOHOs, and residential customers in the United States; and (iii) Spacenet Rural Communications, which provides telephony, Internet and data services primarily for rural communities in emerging markets in Latin America under projects that are subsidized by government entities. The following provides proforma information about the Company’s business during 2005, as if its business had operated under the new business segments. |
| | The Company’s reportable segments are differentiated by whether the nature of the transaction is dominated by an equipment sale (a Gilat Network Systems transaction) or by the operation of an enterprise or consumer network (a Spacenet Inc. transaction) or by the operation of a rural network in Latin America (a Spacenet Rural Communications transaction). Segments are managed separately and can be described as follows: |
| | Gilat Network Systems (“GNS”): GNS focuses on sales of solutions to operators by provision of its proprietary standard VSAT technology and hybrid solutions. The business of GNS reflects the generation of revenue from sales of the Company’s satellite-based networking equipment, professional services and applications. The charges to customers for satellite networking products, applications or professional services vary with the number of sites, the location of sites, installation services required and the types of technologies and protocols employed. |
| | Spacenet Inc.: Spacenet Inc.‘s business consists of business activity as an operator of communications networks for the provision of telephony, data and Internet services to its customers, primarily in the Americas. The charges to customers for networking services vary with the type of operations provided, the length of the contract, the amount of satellite capacity and the types of technologies and protocols employed. |
F - 52
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 15: | – | CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.) |
| | Spacenet Rural Communications: The business of Spacenet Rural Communications is comprised of several government-sponsored rural projects for telephony and/or internet and data connectivity. To date, this business segment has satellite-based rural telephony and internet access solutions in remote areas in Latin America. |
| | 2) | Information on the reportable segments: |
| | a) | The measurement of the reportable operating segments is based on the same accounting principles applied in these financial statements. |
| | b) | When reported by segment, the results of Spacenet Inc. and Spacenet Rural Communication are presented based upon intercompany transfer prices. The consolidation line reflects the intercompany profits that have been realized in order to adjust the transfer price to the Company’s cost. |
| | c) | Financial data relating to reportable operating segments: |
| | Year ended December 31, 2007
|
|---|
| | Spacenet Inc
| Spacenet
Rural
| GNS
| Consolidation
| Total
|
|---|
| | | | | | |
|---|
| | | | | | |
|---|
| | | | | | |
|---|
| Revenues: | | | | | | | | | | | | | | | | | |
| External revenues | | | $ | 95,370 | | $ | 34,190 | | $ | 153,059 | | $ | - | | $ | 282,619 | |
| Internal revenues | | | | | | | | | | 18,360 | | | (18,360 | ) | | - | |
| |
| |
| |
| |
| |
| |
| | | |
| | | | $ | 95,370 | | $ | 34,190 | | $ | 171,419 | | $ | (18,360 | ) | $ | 282,619 | |
| |
| |
| |
| |
| |
| |
| | | |
| Financial income | | |
| (expenses), net | | | $ | 47 | | $ | (186 | ) | $ | 6,137 | | $ | - | | $ | 5,998 | |
| |
| |
| |
| |
| |
| |
| | | |
| Income (loss) before | | |
| taxes on income | | | $ | (7,866 | ) | $ | (18,286 | ) | $ | 36,743 | | $ | 462 | | $ | 11,053 | |
| |
| |
| |
| |
| |
| |
| | | |
| Taxes on income | | | $ | - | | $ | 365 | | $ | 598 | | $ | - | | $ | 963 | |
| |
| |
| |
| |
| |
| |
| | Year ended December 31, 2006
|
|---|
| | Spacenet Inc
| Spacenet
Rural
| GNS
| Consolidation
| Total
|
|---|
| | | | | | |
|---|
| | | | | | |
|---|
| | | | | | |
|---|
| Revenues: | | | | | | | | | | | | | | | | | |
| �� External revenues | | | $ | 93,623 | | $ | 38,870 | | $ | 116,217 | | $ | - | | $ | 248,710 | |
| Internal revenues | | | | | | | | | | 19,791 | | | (19,791 | ) | | - | |
| |
| |
| |
| |
| |
| |
| | | |
| | | | $ | 93,623 | | $ | 38,870 | | $ | 136,008 | | $ | (19,791 | ) | $ | 248,710 | |
| |
| |
| |
| |
| |
| |
| | | |
| Financial income | | |
| (expenses), net | | | $ | 1,213 | | $ | 742 | | $ | (2,697 | ) | $ | - | | $ | (742 | ) |
| |
| |
| |
| |
| |
| |
| | | |
| Income (loss) before | | |
| taxes on income | | | $ | (3,237 | ) | $ | 1,472 | | $ | 11,424 | | $ | 3,185 | | $ | 12,844 | |
| |
| |
| |
| |
| |
| |
| | | |
| Taxes on income | | | $ | 3 | | $ | 183 | | $ | 2,171 | | $ | - | | $ | 2,357 | |
| |
| |
| |
| |
| |
| |
F - 53
GILAT SATELLITE NETWORKS LTD. AND ITS SUBSIDIARIES
|
|---|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands (except share and per share data) |
| NOTE 15: | – | CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.) |
| | Year ended December 31, 2005
|
|---|
| | Spacenet Inc
| Spacenet
Rural
| GNS
| Consolidation
| Total
|
|---|
| | | | | | |
|---|
| | | | | | |
|---|
| | | | | | |
|---|
| Revenues: | | | | | | | | | | | | | | | | | |
| External revenues | | | $ | 86,196 | | $ | 40,557 | | $ | 82,642 | | $ | - | | $ | 209,395 | |
| Internal revenues | | | | - | | | - | | | 15,611 | | | (15,611 | ) | | - | |
| |
| |
| |
| |
| |
| |
| | | |
| | | | $ | 86,196 | | $ | 40,557 | | $ | 98,253 | | $ | (15,611 | ) | $ | 209,395 | |
| |
| |
| |
| |
| |
| |
| | | |
| Financial income | | |
| (expenses), net | | | $ | 1,481 | | $ | (338 | ) | $ | (3,820 | ) | $ | - | | $ | (2,677 | ) |
| |
| |
| |
| |
| |
| |
| | | |
| Income (loss) before | | |
| taxes on income | | | $ | (8,726 | ) | $ | (482 | ) | $ | 1,680 | | $ | 6,538 | | $ | (990 | ) |
| |
| |
| |
| |
| |
| |
| | | |
| Taxes on income | | | $ | 4 | | $ | 1,856 | | $ | 1,266 | | $ | - | | $ | 3,126 | |
| |
| |
| |
| |
| |
| |
| NOTE 16: | – | SUBSEQUENT EVENTS – UNAUDITED |
| | On March 31, 2008 the Company announced the signing of an Agreement and Plan of Merger to be acquired for an aggregate value of $475,000 in an all cash transaction by a consortium of private equity. Under the terms of the agreement, the Company’s shareholders will receive $11.40 per share in cash at closing. There is no financing condition to the obligations of the buyers to consummate the transaction. The Company’s Board of Directors approved the agreement and recommended that its shareholders vote in favor of the transaction. The closing of the transaction is subject to shareholder approval, certain regulatory approvals and other customary closing conditions. It is currently anticipated that the transaction will be consummated by September 2008. Upon the closing of the transaction, the Company’s Ordinary shares would no longer be traded on NASDAQ or the Tel Aviv Stock Exchange. Carryforward tax losses in the U.S. subsidiaries may be subject to substantial limitations, see Note 12d. |
F - 54
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors
STARBAND COMMUNICATIONS INC.
We have audited the accompanying balance sheets of StarBand Communications Inc. as of December 31, 2005 and 2004, and the related statements of operations, shareholders’ equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of StarBand Communications Inc. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
MAYER HOFFMAN MCCANN P.C.
Bethesda, Maryland
January 19, 2006
88
