GILAT SATELLITE NETWORKS LTD.

Transcription

As filed with the Securities and Exchange Commission on April 9, 2008
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
or
⌧
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
or
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report .................
Commission file number: 0-21218
(Exact name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
Gilat House, 21 Yegia Kapayim Street, Kiryat Arye, Petah Tikva, 49130 Israel
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares, NIS 0.20 Par Value
Name of each exchange on which registered
NASDAQ Global Market
Securities registered or to be registered pursuant of Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
1
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock at the close of the period covered by the annual report:
39,747,279 Ordinary Shares, NIS 0.20 par value per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
No ⌧
Yes
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
No ⌧
Yes
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ⌧
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer
and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer ⌧
Non-accelerated filer
Indicate by check mark which financial statement item the Registrant elected to follow:
Item 18 ⌧
Item 17
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
No ⌧
Yes
This report on Form 20-F is being incorporated by reference into our Registration Statements on Form S-8 (Registration Nos. 333-132649, 333-123410,
333-113932, 333-08826, 333-10092, 333-12466 and 333-12988).
2
INTRODUCTION
We are a leading global provider of Internet Protocol, or IP, based digital satellite communication and networking products and services. We design,
produce and market 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 have significant advantages to wireline and wireless networks, as VSATs
can provide highly reliable, cost-effective, end-to-end communications regardless of the number of sites or their geographic locations.
We have a large installed customer base and have shipped more than 670,000 VSAT units to customers in over 85 countries on six continents since
1989. We have 16 sales and service offices worldwide and two call centers to support our customers. Our products are primarily sold to communication
service providers and operators that use VSATs to serve enterprise, government and residential users. Also, in the U.S. and certain countries in Latin
America, we provide services directly to end-users in various market segments.
We currently operate three complementary, vertically-integrated business units: Gilat Network Systems, or GNS, a provider of VSAT-based
networks and associated professional services, including turnkey and management services, to telecom operators worldwide; Spacenet Inc. a provider of
satellite network services to enterprises, small office/home office, or SOHOs, and residential customers in the U.S.; and Spacenet Rural Communications,
or SRC, a provider of telephony, Internet and data services primarily for rural communities in emerging markets in Latin America under projects that are
subsidized by government entities.
We were incorporated in Israel in 1987 and are subject to the laws of the State of Israel. Our corporate headquarters, executive offices and research
and development, engineering and manufacturing facilities are located at Gilat House, 21 Yegia Kapayim Street, Kiryat Arye, Petah Tikva 49130, Israel.
Our telephone number is (972) 3-925-2000.
The name “Gilat®” and the names “Connexstar™,” “SkyAbis™,” “SkyEdge™,” “Spacenet™,” and “StarBand™” appearing in this annual report on
Form 20-F are trademarks of our company and its subsidiaries. See Item 4: “Information on the Company.” Other trademarks appearing in this annual
report on Form 20-F are owned by their respective holders.
Except for the historical information contained in this annual report, the statements contained in this annual report are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our business, financial condition and results of operations.
Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks
discussed in Item 3: “Key Information–Risk Factors” and elsewhere in this annual report.
We urge you to consider that statements which use the terms “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate” and
similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are
based on assumptions and are subject to risks and uncertainties. Except as required by applicable law, including the securities laws of the U.S., we do not
intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with U.S. generally accepted
accounting principles, or U.S. GAAP. All references in this annual report to “dollars” or “$” are to U.S. dollars and all references in this annual report to
“NIS” are to New Israeli Shekels. The representative exchange rate between the NIS and the dollar as published by the Bank of Israel on April 7, 2008
was NIS 3.64 per $1.00.
As used in this annual report, the terms “we”, “us”, “Gilat” and “our” mean Gilat Satellite Networks Ltd. and its subsidiaries, unless otherwise
indicated.
Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts,
agreements or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report or to
any registration statement or annual report that we previously filed, you may read the document itself for a complete description.
TABLE OF CONTENTS
Page
Part I
Item 1
Identity of Directors, Senior Management and Advisers
1
Item 2
Offer Statistics and Expected Timetable
1
Item 3
Key Information
1
Selected Consolidated Financial Data
Risk Factors
1
3
Item 4
Information on the Company
16
Item 4A
Unresolved Staff Comments
31
Item 5
Operating and Financial Review and Prospects
31
Item 6
Directors and Senior Management
49
Item 7
Major Shareholders and Related Party Transactions
58
Item 8
Financial Information
60
Item 9
The Offer and Listing
62
Item 10
Additional Information
63
Item 11
Quantitative and Qualitative Disclosures about Market Risk
82
Item 12
Description of Securities Other than Equity Securities
82
Item 13
Defaults, Dividends, Arrearages and Delinquencies
82
Item 14
Material Modifications to the Rights of Security Holders and Use of Proceeds
83
Item 15
Controls and Procedures
83
Item 15T
Controls and Procedures
84
Item 16
[Reserved]
84
Item 16A
Audit Committee Financial Expert
84
Item 16B
Code of Ethics
84
Item 16C
Principal Accounting Fees and Services
84
Item 16D
Exemptions from the Listing Standards for Audit Committees
85
Item 16E
Purchase of Equity Securities by the Issuer and AffiliatedPurchasers
85
Item 17
Financial Statements
85
Item 18
Financial Statements
85
Item 19
Exhibits
86
Part II
Part III
PART I
ITEM 1:
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not Applicable.
ITEM 2:
OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3:
KEY INFORMATION
Selected Consolidated Financial Data
The selected consolidated statement of operations data set forth below for the years ended December 31, 2007, 2006 and 2005, and the selected
consolidated balance sheet data as of December 31, 2007 and 2006 are derived from our audited consolidated financial statements that are included
elsewhere in this Report. These financial statements have been prepared in accordance with U.S. generally accepted accounting principles or U.S. GAAP.
The selected consolidated statement of operations data set forth below for the years ended December 31, 2004 and 2003 and the selected consolidated
balance sheet data as of December 31, 2005, 2004 and 2003 are derived from our audited consolidated financial statements that are not included in this
Annual Report filed on Form 20F.
The selected consolidated financial data set forth below should be read in conjunction with Item 5: “Operating and Financial Review and Prospects”
and the Consolidated Financial Statements and Notes thereto included in Item 18 in this annual report on Form 20-F for the year ended December 31,
2007.
1
Year ended December 31.
2007
2006
2005
2004
2003
U.S. Dollars in thousands except per share data
Statement of Operations Data:
Revenues:
Products
Services
$
Cost of revenues:
Products
Services
Write-off of inventories
Gross profit
Operating expenses:
Research and development expenses,
net
Selling and marketing expenses
General and administrative expenses
Provision and write-off for
doubtful accounts and capital
lease receivables
Impairment of goodwill
Impairment of tangible and
intangible assets
Restructuring charges
Operating income (loss)
Financial income (expenses), net.
Gain from restructuring of
debts
Other income (expense)
Gain (loss) from write-off of
investments in affiliated and
other companies
156,798
125,821
$
$
88,705
120,690
$
100,122
141,376
$
120,776
69,401
282,619
248,710
209,395
241,498
190,177
82,322
97,952
500
65,206
91,982
1,157
42,312
90,323
584
48,703
113,692
2,000
75,560
75,553
6,434
180,774
158,345
133,219
164,395
157,547
101,845
90,365
76,176
77,103
32,630
15,030
38,374
29,714
13,642
36,475
25,950
13,994
31,329
29,043
13,879
33,282
35,647
16,949
31,264
40,456
1,338
-
850
-
422
-
717
-
1,383
5,000
12,218
-
-
-
2,161
-
26,912
3,905
(8,583)
(266)
(93,239)
(3,256)
5,171
5,998
13,448
(742)
(116)
Income (loss) before taxes on
income
Taxes on income
126,093
122,617
1,388
(2,677)
138
299
-
-
(274)
244,203
954
-
3,300
11,053
963
12,844
2,357
(990)
3,126
(9,123)
4,429
151,962
9,690
10,090
10,487
(4,116)
(13,552)
142,272
-
-
400
1,242
488
-
-
-
164
871
10,090
10,487
Gain (loss) from cumulative effect
of a change in an accounting
principle
-
-
-
611
-
Loss from discontinued operations
-
-
-
-
-
Income (loss) after taxes on income
Equity in earnings (losses) of
affiliated companies
Minority interest in losses of a
subsidiary
Income (loss) before cumulative
effect of a change in an
accounting principle
(3,716)
(12,146)
143,631
Net income (loss)
$
10,090
$
10,487
$
(3,716)
$
(11,535)
$
143,631
Earnings (loss) per share before
cumulative effect of a change in
an accounting principle
Basic
$
0.26
$
0.41
$
(0.17)
$
(0.55)
$
12.09
$
0.24
$
0.38
$
(0.17)
$
(0.55)
$
11.31
$
0.03
-
-
-
Diluted
Basic and diluted net earnings
(loss) per share from cumulative
effect of a change in an
accounting principle
-
-
-
Basic and diluted loss per share
from discontinued operation
-
-
-
Net earnings (loss) per share:
Basic
Diluted
Weighted average number of shares
used in computing net earnings
(loss) per share:
Basic
Diluted
$
0.26
$
0.41
$
(0.17)
$
(0.52)
$
12.09
$
0.24
$
0.38
$
(0.17)
$
(0.52)
$
11.31
39,141
25,799
22,440
22,242
11,881
41,576
27,520
22,440
22,242
12,819
2
As of December 31,
2007
2006
2005
2004
2003
U.S. dollars in thousands
Balance Sheet Data:
Working capital
Total assets
Short-term bank credit and current
maturities of long-term debt
Convertible subordinated notes
Other long-term liabilities
Shareholders' equity (deficiency)
$
$
145,117
430,102
11,177
16,315
54,880
227,810
$
$
120,634
440,214
7,737
16,333
74,253
212,059
$
$
70,207
372,977
15,884
16,333
156,490
85,498
$
$
67,750
391,094
13,028
16,171
179,453
81,421
$
$
74,490
401,956
4,770
15,543
190,917
76,401
RISK FACTORS
Risks Relating to Our Business
We have incurred major losses in past years and may not sustain profitable operations in the future.
While we achieved net income of approximately $10.1 million in 2007 and of approximately $ 10.5 million in 2006 we incurred losses of 3.7 million
in 2005 and we have an accumulated deficit of $635.0 million. We can not assure you that we can continue to operate profitably in the future. If we do not
sustain profitability, the viability of our company will be in question and our share price could decline.
If commercial satellite communications markets fail to grow as anticipated, our business could be materially harmed.
A number of the commercial markets for our products and services in the satellite communications area, including our broadband products, have been
developed only in recent years. Because these markets are relatively new, it is difficult to predict the rate at which these markets will grow, if at all. If the
markets for commercial satellite communications products fail to grow, or grow more slowly than anticipated, our business could be materially harmed.
Conversely, to the extent that growth in these markets results in capacity limitations in the satellite communications area, it could materially harm our
business and impair the value of our shares. Specifically, we derive virtually all of our revenues from sales of VSAT communications networks and
provision of services related to these networks. A significant decline in this market or the replacement of VSAT technology by an alternative technology
could materially harm our business and impair the value of our shares.
Trends and factors affecting the telecommunications industry are beyond our control and may result in reduced demand and pricing pressure on
our products.
We operate in the telecommunication industry and are affected by trends and factors affecting the telecommunications industry, which are beyond our
control and may affect our operations. These trends and factors include:
y
adverse changes in the public and private equity and debt markets and our ability, as well as the ability of our customers and suppliers, to obtain
financing or to fund working capital and capital expenditures;
y
adverse changes in the credit ratings of our customers and suppliers;
y
adverse changes in the market conditions in our industry and the specific markets for our products;
y
access to, and the actual size and timing of, capital expenditures by our customers;
3
y
inventory practices, including the timing of product and service deployment, of our customers;
y
the amount of network capacity and the network capacity utilization rates of our customers, and the amount of sharing and/or acquisition of new
and/or existing network capacity by our customers;
y
the overall trend toward industry consolidation and rationalization among our customers, competitors, and suppliers;
y
increased price reductions by our direct competitors and by competing technologies including, for example, the introduction of Ka-band satellite
systems by our direct competitors which could significantly drive down market prices;
y
conditions in the broader market for communications products, including data networking products and computerized information access
equipment and services;
y
governmental regulation or intervention affecting communications or data networking;
y
monetary stability in the countries where we operate; and
y
the effects of war and acts of terrorism, such as disruptions in general global economic activity, changes in logistics and security arrangements, and
reduced customer demand for our products and services.
These trends and factors may reduce the demand for our products and services or require us to increase our research and development expenses and
may harm our financial results.
Because we compete for large-scale contracts in competitive bidding processes, losing a small number of bids could have a significant adverse
impact on our operating results.
A significant portion of our revenues is derived from being selected as the supplier of networks based on VSATs, under large-scale contracts that we
are awarded from time to time in a competitive bidding process. These large-scale contracts sometimes involve the installation of thousands of VSATs.
The number of major bids for these large-scale contracts for VSAT-based networks in any given year is limited and the competition is intense. Losing or
defaulting on a relatively small number of bids each year could have a significant adverse impact on our operating results.
Many of our large-scale contracts are with governments or large enterprises in Latin America and other parts of the world, so that any instability
in the exchange rates or in the political or economic situation or any unexpected unilateral termination or suspension of payments could have a
significant adverse impact on our business.
In recent years, a significant portion of our revenues has been derived from large-scale contracts with foreign governments and agencies, including
those in Peru, Russia, Colombia and Mexico. Agreements with the governments in these countries typically include unilateral early termination clauses
and other risks such as the imposition of new government regulations and taxation that could pose additional financial burdens on us. In addition, the
foreign exchange risks in these countries are often significant due to possible fluctuations in local currencies relative to the U.S. dollar. We do not have a
policy of hedging specific contracts. In some cases we hedge the risks involved in our general operations in Israel and in our subsidiaries abroad. Any
termination of business in any of the aforementioned countries or any instability in the exchange rates could have a significant adverse impact on our
business.
In November 2002, we were awarded two large projects by the Colombian government, including the installation and operation of approximately 550
telecenters to provide Internet connectivity and telephony services in cities and towns throughout Colombia and a second site of approximately 3,300
public rural satellite telephony network. The original total value of the contracts was approximately $72 million and the remaining value of the contracts,
which are being held in restricted cash, is approximately $24.0 million as of December 31, 2007. Thus far, $15 million of such amount has become due. If
we do not meet certain minimum equity requirements or indicators, the Colombian government may assert that we are in breach of our contract with them
and withhold release of all such restricted cash. At present, $15 million has not been released by the Colombian Government due to claims by the
government that we have not met certain operating indicators. We are currently negotiating with the Colombian government certain amendments to these
contracts. Any early unilateral termination by the Colombian government could have a significant adverse impact on our operating results.
4
If we are unable to develop, introduce and market new products, applications and services on a cost-effective and timely basis, our business could
be adversely affected.
The network communications market, to which our products and services are targeted, is characterized by rapid technological changes, new product
introductions and evolving industry standards. If we fail to stay abreast of significant technological changes, our existing products and technology could be
rendered obsolete. Historically, we have enhanced the applications of our existing products to meet the technological changes and industry standards. For
example, in 2007 we announced the forthcoming release of our SkyEdge II product, which supports higher performance and more efficient use of the
space capacity, based on advanced technologies such as DVB-S2 ACM. Our success is dependent upon the acceptance of this new product into the
market, our ability to continue to develop new products, applications and services and meet developing market needs.
To remain competitive in the network communications market, we must continue to be able to anticipate changes in technology, market demands and
industry standards and to develop and introduce new products, applications and services, as well as enhancements to our existing products, applications
and services. If we are unable to respond to technological advances on a cost-effective and timely basis, or if our new products or applications are not
accepted by the market, our business, financial condition and operating results could be adversely affected.
A decrease in the selling prices of our products and services could materially harm our business.
The average selling prices of wireless communications products historically decline over product life cycles. In particular, we expect the average
selling prices of our products to decline as a result of competitive pricing pressures and customers who negotiate discounts based on large unit volumes. In
some markets, such as in the US, our competitors have launched Ka-band satellites and another has announced plans to launch a Ka-band satellite. These
actions may affect our competitiveness due to the relative lower cost of Ka-band space segment per subscriber. We also expect that competition in this
industry will continue to increase. To offset these price decreases, we intend to rely primarily on obtaining yield improvements and corresponding cost
reductions in the manufacturing process of existing products, on the introduction of new products with advanced features and on offering turnkey and
other solutions to communications operators that are higher up in the value chain. However, we cannot assure you that we will be able to obtain any yield
improvements or cost reductions, introduce any new products in the future or reach the higher value chain to which we strive to sell. To the extent that we
do not meet any or all of these goals, it could materially harm our business and impair the value of our shares.
If we lose existing contracts and orders for our products are not renewed, our ability to generate revenues will be harmed.
The majority of our business in 2007 was generated from recurring customers, and, as a result, the termination or non-renewal of our contracts could
have a material adverse effect on our business, financial condition and operating results. Some of our existing contracts could be terminated due to any of
the following reasons, among others:
y
dissatisfaction of our customers with our products and/or the services we provide or our inability to provide or install additional products or
requested new applications on a timely basis;
5
y
customers' default on payments due;
y
our failure to comply with financial covenants in our contracts;
y
the cancellation of the underlying project by the government-sponsoring body; or
y
the loss of existing contracts or a decrease in the number of renewals of orders or the number of new large orders.
If we are not able to gain new customers and retain our present customer base, our revenues will decline significantly. In addition, if Spacenet has a
higher than anticipated subscriber churn, or if Spacenet Rural does not win new government related contracts, this could materially adversely affect our
financial position.
We are dependent upon a limited number of suppliers for key components to build our hubs and VSATs, and may be significantly harmed if we
are unable to obtain the hardware necessary for our hubs and VSATs on favorable terms or on a timely basis.
Several of the components required to build our VSATs and hubs are manufactured by a limited number of suppliers. We have not experienced any
difficulties with our suppliers with respect to availability of components. However, we cannot assure you of the continuous availability of key components
or our ability to forecast our component requirements sufficiently in advance. Our research and development and operations groups are continuously
working with our vendors and subcontractors to obtain components for our products on favorable terms in order to reduce the overall price of our
products. If we are unable to obtain the necessary volume of components at desired favorable terms or prices, we may be unable to produce our products at
desired favorable terms or prices. As a result, sales of our products may be lower than expected, which could have a material adverse effect on our
business, financial condition and operating results. . Our suppliers are not always able to meet our requested lead times. If we are unable to satisfy
customers’ needs, we could lose their business.
In 2007 we entered into an outsourcing manufacturing agreement with a single source manufacturer for almost all of our indoor units. . This agreement
exposes us to certain risks related to our dependence on a single manufacturer which could include failure in meeting time tables and quantities, or
material price increases which may affect our ability to provide competitive prices. We estimate that the replacement of the outsourcing manufacturer
would, if necessary, take a period of between six to nine months.
We operate in a highly competitive network communications industry. We may be unsuccessful in competing effectively against many of our
competitors who have substantially greater financial resources.
We operate in a highly competitive industry of network communications, both in the sales of our products and our services. As a result of the rapid
technological changes that characterize our industry, we face intense worldwide competition to capitalize on new opportunities, to introduce new products
and to obtain proprietary and standard technologies that are perceived by the market as being superior to those of our competitors. Some of our
competitors have substantially greater financial resources, providing them with greater research and development and marketing capabilities. These
competitors may also be more experienced in obtaining regulatory approvals for their products and services and in marketing them. Our relative position
in the network communications industry may place us at a disadvantage in responding to our competitors’ pricing strategies, technological advances and
other initiatives. Our principal competitors in the supply of VSAT networks are Hughes Network Systems, LLC, or HNS, ViaSat Inc., and iDirect
Technologies. Most of our competitors have developed or adopted different technology standards for their VSAT products. To the extent that one of these
competing standards becomes an industry standard, demand for our products will decrease and our business will be harmed.
6
In the U.S. market, where we operate as a service provider via Spacenet, the enterprise wide area network, or WAN, market is extremely competitive,
with a number of established VSAT and terrestrial providers competing for nearly all contracts. The U.S. enterprise VSAT market is primarily served by
HNS and Spacenet. In addition, more recently, Spacenet’s primary competitors in the enterprise WAN market are large terrestrial carriers such as AT&T,
Verizon and Qwest.
In Peru and Colombia, where we primarily operate public rural telecom services we typically encounter competition on government subsidized bids
from various service providers, system integrators and consortiums. Some of these competitors offer solutions based on VSAT technology and some on
alternate technologies (typically cellular, wireless local loop or WiMAX). As operators that offer terrestrial or cellular networks expand their reach to
certain SRC regions, they compete with our VSAT solutions.
Our actions to protect our proprietary VSAT technology may be insufficient to prevent others from developing products similar to our products.
Our business is based mainly on our proprietary VSAT technology and related products and services. We establish and protect proprietary rights and
technology used in our products by the use of patents, trade secrets, copyrights and trademarks. We also utilize non-disclosure and intellectual property
assignment agreements. Because of the rapid technological changes and innovation that characterize the network communications industry, our success
will depend in large part on our ability to protect and defend our intellectual property rights. Our actions to protect our proprietary rights in our VSAT
technology and related products may be insufficient to prevent others from developing products similar to our products. In addition, the laws of many
foreign countries do not protect our intellectual property rights to the same extent as the laws of the U.S. If we are unable to protect our intellectual
property, our ability to operate our business and generate expected revenues may be harmed.
We depend on a single facility in Israel and are susceptible to any event that could adversely affect its condition.
Most of our laboratory capacity, our principal offices and principal research and development facilities are concentrated in a single location in Israel.
Fire, natural disaster or any other cause of material disruption in our operation in this location could have a material adverse effect on our business,
financial condition and operating results. As discussed above, to remain competitive in the network communications industry, we must respond quickly to
technological developments. Damage to our facility in Israel could cause serious delays in the development of new products and services and, therefore,
could adversely affect our business. In addition, the particular risks relating to our location in Israel are described below.
Our international sales expose us to changes in foreign regulations and tariffs, tax exposures, political instability and other risks inherent to
international business, any of which could adversely affect our operations.
We sell and distribute our products and provide our services internationally, particularly in the U.S., Latin America, Asia, Africa and Europe. A
component of our strategy is to continue to expand into new international markets. Our operations can be limited or disrupted by various factors known to
affect international trade. These factors include the following:
y
imposition of governmental controls, regulations and taxation which might include a government’s decision to raise import tariffs or license fees in
countries in which we do business;
y
government regulations that may prevent us from choosing our business partners or restrict our activities. For example, a particular Latin American
country may decide that high-speed data networks used to provide access to the Internet should be made available generally to Internet service
providers and may require us to provide our wholesale service to any Internet service provider that request it, including entities that compete with
us. If we become subject to any additional obligations such as these, we would be forced to comply with potentially costly requirements and
limitations on our business activities, which could result in a substantial reduction in our revenue;
7
y
tax exposures in various jurisdictions relating to our activities throughout the world;
y
political instability in countries in which we do or desire to do business. For example, economic instability in Brazil has led to an increase in the
value of the Brazilian Reals. Such unexpected increases have had an adverse affect on the gross margin of our projects in Brazil. We also face
similar risks from potential or current political and economic instability in countries such as Russia, Kazakhstan, Angola, and India.
y
trade restrictions and changes in tariffs which could lead to an increase in costs associated with doing business in foreign countries;
y
difficulties in staffing and managing foreign operations that might mandate employing staff in the U.S. and Israel to manage foreign operations.
This change could have an adverse effect on the profitability of certain projects;
y
longer payment cycles and difficulties in collecting accounts receivable;
y
seasonal reductions in business activities;
y
foreign exchange risks due to fluctuations in local currencies relative to the dollar; and
y
relevant zoning ordinances that may restrict the installation of satellite antennas and might also reduce market demand for our service.
Additionally, authorities may increase regulation regarding the potential radiation hazard posed by transmitting earth station satellite antennas’
emissions of radio frequency energy that may negatively impact our business plan and revenues.
Any decline in commercial business in any country can have an adverse effect on our business as these trends often lead to a decline in technology
purchases or upgrades by private companies. We expect that in difficult economic periods, countries in which we do business will find it more difficult to
raise financing from investors for the further development of the telecommunications industry. Any such changes could adversely affect our business in
these and other countries.
We may face difficulties in obtaining regulatory approvals for our telecommunication services, which could adversely affect our operations.
Our telecommunication services require licenses and approvals by the Federal Communications Commission, or FCC, in the U.S., and by regulatory
bodies in other countries. In the U.S., the operation of satellite earth station facilities and VSAT systems such as ours are prohibited except under licenses
issued by the FCC. We must also obtain approval of the regulatory authority in each country in which we propose to provide network services or operate
VSATs. The approval process in Latin America and elsewhere can often take a substantial amount of time and require substantial resources.
In addition, any approvals that are granted may be subject to conditions that may restrict our activities or otherwise adversely affect our operations.
Also, after obtaining the required approvals, the regulating agencies may, at any time, impose additional requirements on our operations. We cannot assure
you that we will be able to comply with any new requirements or conditions imposed by such regulating agencies on a timely or economically efficient
basis.
Our lengthy sales cycles could harm our results of operations if forecasted sales are delayed or do not occur.
The length of time between the date of initial contact with a potential customer or sponsor and the execution of a contract with the potential customer
or sponsor may be lengthy and vary significantly depending on the nature of the arrangement. During any given sales cycle, we may expend substantial
funds and management resources and not obtain significant revenue, resulting in a negative impact on our operating results.
8
Our operating results may vary significantly from quarter to quarter and these quarterly variations in operating results, as well as other factors,
may contribute to the volatility of the market price of our shares.
Our operating results may vary significantly from quarter to quarter. The causes of fluctuations include, among other things:
y
the timing, size and composition of orders from customers;
y
the timing of introducing new products and product enhancements by us and the level of their market acceptance;
y
the mix of products and services we offer; and
y
the changes in the competitive environment in which we operate.
The quarterly variation of our operating results, may, in turn, create volatility in the market price for our shares. Other factors that may contribute to
wide fluctuations in our market price, many of which are beyond our control, include, but are not limited to:
y
announcements of technological innovations;
y
customer orders or new products or contracts;
y
competitors' positions in the market;
y
changes in financial estimates by securities analysts;
y
conditions and trends in the VSAT and other technology industries;
y
our earnings releases and the earnings releases of our competitors; and
y
the general state of the securities markets (with particular emphasis on the technology and Israeli sectors thereof).
In addition to the volatility of the market price of our shares, the stock market in general and the market for technology companies in particular have
been highly volatile and at times thinly traded. Investors may not be able to resell their shares following periods of volatility.
We may at times be subject to claims by third parties alleging that we are infringing on their intellectual property rights. We may be required to
commence litigation to protect our intellectual property rights. Any intellectual property litigation may continue for an extended period and may
materially adversely affect our business, financial condition and operating results.
There are numerous patents, both pending and issued, in the network communications industry. We may unknowingly infringe on a patent. We may
from time to time be notified of claims that we are infringing on the patents, copyrights or other intellectual property rights owned by third parties. While
we do not believe that we have in the past or are at present infringed on any intellectual property rights of third parties, we cannot assure you that we will
not be subject to such claims.
9
In addition, we may be required to commence litigation to protect our intellectual property rights and trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against third-party claims of invalidity. An adverse result in any litigation could force us to pay
substantial damages, stop designing or manufacturing, using and selling the infringing products, spend significant resources to develop non-infringing
technology, discontinue using certain processes or obtain licenses to use the infringing technology. In addition, we may not be able to develop noninfringing technology, and we may not be able to find appropriate licenses on reasonably satisfactory terms. Any such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on our business, financial condition and operating results.
Potential product liability claims relating to our products could have a material adverse effect on our business.
We may be subject to product liability claims relating to the products we sell. Potential product liability claims could include those for exposure to
electromagnetic radiation from the antennas we provide. Our agreements with our business customers generally contain provisions designed to limit our
exposure to potential product liability claims. We also maintain a product liability insurance policy. However, our insurance may not cover all relevant
claims or may not provide sufficient coverage. To date, we have not experienced any material product liability claim. Our business, financial condition and
operating results could be materially adversely affected if costs resulting from future claims are not covered by our insurance or exceed our coverage.
Our insurance coverage may not be sufficient for every aspect or risk related to our business.
Our business includes risks, only some of which are covered by our insurance. For example, in many of our satellite capacity agreements, we do not
have a back up for satellite capacity, and we do not have indemnification or insurance in the event that our supplier’s satellite malfunctions or is lost. In
addition, we are not covered by our insurance for acts of fraud or theft. Our business, financial condition and operating results could be materially
adversely affected if we incur significant costs resulting from these exposures.
We may engage in acquisitions that could harm our business, results of operations and financial condition, and dilute our shareholders' equity.
We have a corporate business development team whose goal is to pursue new business opportunities. This team pursues growth opportunities through
internal development and through the acquisition of complementary businesses, products and technologies. We are unable to predict whether or when any
prospective acquisition will be completed. The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may
require a disproportionate amount of our resources and management’s attention. We cannot assure you that we will be able to successfully identify suitable
acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, or expand into new markets. Further, once integrated,
acquisitions may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected. The
occurrence of any of these events could harm our business, financial condition or results of operations. Future acquisitions may require substantial capital
resources, which may not be available to us or may require us to seek additional debt or equity financing. Future acquisitions by us could result in the
following, any of which could seriously harm our results of operations or the price of our shares:
y
issuance of equity securities that would dilute our current shareholders' percentages of ownership;
y
large one-time write-offs;
y
the incurrence of debt and contingent liabilities;
y
difficulties in the assimilation and integration of operations, personnel, technologies, products and information systems of the acquired companies;
y
diversion of management's attention from other business concerns;
10
y
contractual disputes;
y
risks of entering geographic and business markets in which we have no or only limited prior experience; and
y
potential loss of key employees of acquired organizations.
Our failure to manage growth effectively could impair our business, financial condition and results of operations.
Risks Related to Ownership of Our Ordinary Shares
Our share price has been highly volatile and may continue to be volatile and decline.
The trading price of our shares has fluctuated widely in the past and may continue to do so in the future as a result of a number of factors, many of
which are outside our control. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market prices of
many technology companies, particularly telecommunication and Internet-related companies, and that have often been unrelated or disproportionate to the
operating performance of these companies. These broad market fluctuations could adversely affect the market price of our shares. In the past, following
periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company.
Securities class action litigation could result in substantial costs and a diversion of our management’s attention and resources.
The concentration of our ordinary share ownership may limit our shareholders' ability to influence corporate matters.
As of March 31, 2008, York Capital Management, or York, and entities affiliated with them beneficially own or vote approximately 20% of our
outstanding ordinary shares. As a result, York may have a substantial influence over all matters that require approval by our shareholders, including the
election of directors and approval of significant corporate transactions. As a result, corporate actions might be taken even if other shareholders oppose
them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other shareholders
may view as beneficial.
Future sales of our ordinary shares and the future exercise of options may cause the market price of our ordinary shares to decline and may
result in substantial dilution.
We cannot predict what effect, if any, future sales of our ordinary shares by York and our other 5% shareholders, or the availability of our ordinary
shares for future sale, including shares issuable upon the exercise of our options, will have on the market price of our ordinary shares. Sales of substantial
amounts of our ordinary shares in the public market by our 5% shareholders, or the perception that such sales could occur, could adversely affect the
market price of our ordinary shares and may make it more difficult for you to sell your ordinary shares at a time and price you deem appropriate.
We have never paid cash dividends and have no intention to pay dividends in the foreseeable future.
We have never paid cash dividends on our shares and do not anticipate paying any cash dividends in the foreseeable future. We intend to continue
retaining earnings for use in our business, in particular to fund our research and development, which are important to capitalize on technological changes
and develop new products and applications. In addition, the terms of some of our financing arrangements restrict us from paying dividends to our
shareholders.
11
Our ordinary shares are traded on more than one market and this may result in price variations.
Our ordinary shares are traded on the NASDAQ Global Market and on the Tel Aviv Stock Exchange. Trading in our ordinary shares on these markets
is made in different currencies (U.S. dollars on the NASDAQ Global Market, and new Israeli Shekels, or NIS, on the Tel Aviv Stock Exchange), and at
different times (resulting from different time zones, different trading days and different public holidays in the U.S. and Israel). Consequently, the trading
prices of our ordinary shares on these two markets often differ. Any decrease in the trading price of our ordinary shares on one of these markets could
cause a decrease in the trading price of our ordinary shares on the other market.
We May Be Adversely Affected if the Proposed Merger is Not Completed
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. There is no assurance that the conditions to the completion of the merger will be satisfied. In
the event that the merger is not completed, we may be subject to several risks including the following: the current market price of our ordinary shares may
reflect a market assumption that the merger will occur and a failure to complete the merger could result in a decline in the market price of our ordinary
shares; management’s attention from our day to day business may be diverted; uncertainties with regard to the merger may adversely affect our
relationships with our employees, suppliers and customers; and we may be required to pay significant transaction costs related to the merger.
Risks Related To Regulatory Matters
We have historically relied, and in the future intend to rely, upon tax benefits from the State of Israel to reduce our taxable income. The
termination or reduction of these tax benefits would significantly increase our costs and could have a material adverse effect on our financial
condition and results of operations.
Under the Israeli Law for Encouragement of Capital Investments, 1959 (Investment Law), portions of our Israeli facility qualify as “Approved
Enterprises.” As a result, we have been eligible for tax benefits for the first several years in which we generated taxable income from such “Approved
Enterprise.” Our historical operating results reflect substantial tax benefits, including tax exemptions and decreased tax rates up to December 31, 2000. In
2001, 2002 and 2003, we had substantial losses for tax purposes and a decrease in revenues and therefore could not realize any tax benefits since then due
to current and/or carryforward losses. On April 1, 2005, an amendment to the Investment Law, or the Amendment, came into effect, and has significantly
changed the provisions of the Investment Law and the criteria for new investments qualified to receive tax benefits. The Amendment enacted major
changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require approval of the Investment Center
of the Ministry of Industry, Commerce and Labor of the State of Israel, or the Investment Center, in order to qualify for tax benefits. The Amendment will
be applied to new approved enterprises, and there is no assurance that we will, in the future, be eligible to receive additional tax benefits under this law.
Our financial condition and results of operations could suffer if the Israeli government terminated or reduced the current tax benefits available to us.
In order to be eligible for these tax benefits under the Amendment, we must comply with two material conditions. We must invest a specified amount
in property and equipment in Israel, and at least 25% of each new “Approved Enterprise” income should be derived from export. We believe we have
complied with these conditions, but we have not received confirmation of our compliance from the Israeli government. If we fail in the future to comply in
whole or in part with these conditions, we may be required to pay additional taxes and would likely be denied these tax benefits in the future, which could
harm our financial condition and results of operations. For additional information concerning Israeli taxation, please see “Israeli Taxation.”
The transfer and use of some of our technology and its production is limited because of the research and development grants we received from
the Israeli government to develop such technology.
Our research and development efforts associated with the development of certain of our legacy products have been partially financed through grants
from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor. We may be subject to certain restrictions under the terms of the
Chief Scientist grants. Specifically, any product incorporating technology developed with the funding provided by these grants may not be manufactured,
nor may the technology which is embodied in our products be transferred outside of Israel without appropriate governmental approvals. These restrictions
do not apply to the sale or export from Israel of our products developed with this technology.
12
As a foreign private issuer whose shares are listed on the NASDAQ Global Market, we may follow certain home country corporate governance
practices instead of NASDAQ requirements.
As a foreign private issuer whose shares are listed on the NASDAQ Global Market, we are permitted to follow certain home country corporate
governance practices instead of certain requirements of the NASDAQ Marketplace Rules, including the composition of our Board of Directors, director
nomination procedure, compensation of officers, distribution of annual reports to shareholders, and quorum at shareholders meetings. In addition, we may
follow Israeli law instead of the NASDAQ Marketplace Rules that require that we obtain shareholder approval for certain dilutive events, such as for the
establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of our company, certain
transactions other than a public offering involving issuances of a 20% or more interest in our company and certain acquisitions of the stock or assets of
another company.
We may fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002,which could have an
adverse effect on our financial results and the market price of our ordinary shares.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of
Section 404, which started in connection with our 2006 Annual Report on Form 20-F, have resulted in increased general and administrative expense and a
diversion of management time and attention, and we expect these efforts to require the continued commitment of resources. Section 404 of the SarbanesOxley Act requires us to provide (i) management’s annual review and evaluation of our internal control over financial reporting and (ii) starting 2007, a
statement by management that its independent registered public accounting firm has issued an attestation report on our internal control over financial
reporting, in connection with the filing of the Annual Report on Form 20-F for each fiscal year. We have documented and tested our internal control
systems and procedures and have made improvements in order for us to comply with the requirements of Section 404. While our assessment of our
internal control over financial reporting resulted in our conclusion that as of December 31, 2007, our internal control over financial reporting was
effective, we cannot predict the outcome of our testing in future periods. If we fail to maintain the adequacy of our internal controls, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Failure to maintain effective internal
controls over financial reporting could result in investigation or sanctions by regulatory authorities, and could have a material adverse effect on our
operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.
Risks Related to Our Location in Israel
Political and economic conditions in Israel may limit our ability to produce and sell our products. This could have a material adverse effect on
our operations and business.
We are incorporated under the laws of the State of Israel, where we also maintain our headquarters and most of our research and development and
manufacturing facilities. Political, economic and security conditions in Israel directly influence us. Since the establishment of the State of Israel in 1948,
Israel and its Arab neighbors have engaged in a number of armed conflicts. A state of hostility, varying in degree and intensity, has led to security and
economic problems for Israel. Major hostilities between Israel and its neighbors may hinder Israel’s international trade and lead to economic downturn.
This, in turn, could have a material adverse effect on our operations and business.
13
There has been an increase in unrest and terrorist activity in Israel, which began in September 2000 and which has continued with varying levels of
severity through 2007. The future effect of this deterioration and violence on the Israeli economy and our operations is unclear. The election of
representatives of the Hamas movement to a majority of seats in the Palestinian Legislative Council in January 2006 resulted in an escalation in violence
among Israel, the Palestinian Authority and other groups. In July 2006, extensive hostilities began along Israel’s northern border with Lebanon and to a
lesser extent in the Gaza Strip. In June 2007, there was an escalation in violence in the Gaza Strip resulting in Hamas effectively controlling the Gaza Strip
and a further escalation in violence has occurred during the first few months of 2008. Ongoing violence between Israel and the Palestinians as well as
tension between Israel and the neighboring Syria and Lebanon may have a material adverse effect on our business, financial conditions and results of
operations.
Furthermore, there are a number of countries, primarily in the Middle East, as well as Malaysia and Indonesia, that restrict business with Israel or
Israeli companies, and we are precluded from marketing our products to these countries. Restrictive laws or policies directed towards Israel or Israeli
businesses may have an adverse impact on our operations, our financial results or the expansion of our business
Our results of operations may be negatively affected by the obligation of our personnel to perform military service.
Many of our employees in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and may be called for active duty under
emergency circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods
of time. Our operations could be disrupted by the absence for a significant period of one or more of our key employees or a significant number of other
employees due to military service. Any disruption in our operations could adversely affect our business.
Because most of our revenues are generated in dollars or are linked to the dollar while a portion of our expenses are incurred in NIS, our results
of operations would be adversely affected if inflation in Israel is not offset on a timely basis by a devaluation of the NIS against the dollar.
Most of our revenues are in dollars or are linked to the dollar, while a portion of our expenses, principally salaries and related personnel expenses, are
in NIS. Therefore, our NIS related costs, as expressed in U.S. dollars, are influenced by the exchange rate between the U.S. dollar and the NIS. During
2007, the NIS appreciated against the U.S. dollar, which resulted in a significant increase in the U.S. dollar cost of our NIS expenses. We are also exposed
to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar or that the timing of this devaluation lags
behind inflation in Israel. This would have the effect of increasing the dollar cost of our operations. In the past, the NIS has devalued against foreign
currencies, generally reflecting inflation rate differentials. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation or
appreciation of the NIS against the dollar. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely
affected.
You may not be able to enforce civil liabilities in the U.S. against our officers and directors.
Most of our executive officers are non-residents of the U.S. A significant portion of our assets and the personal assets of most of our directors and
executive officers are located outside the U.S. Therefore, it may be difficult to effect service of process upon any of these persons within the U.S. In
addition, a judgment obtained in the U.S. against us, and most of our directors and executive officers, including but not limited to judgments based on the
civil liability provisions of the U.S. federal securities laws, may not be collectible in the U.S.
14
Generally, it may also be difficult to bring an original action in an Israeli court to enforce judgments based upon the U.S. federal securities laws
against us and most of our directors and executive officers. Subject to particular time limitations, executory judgments of a U.S. court for liquidated
damages in civil matters may be enforced by an Israeli court, provided that:
y
the judgment was obtained after due process before a court of competent jurisdiction, that recognizes and enforces similar judgments of Israeli
courts, and according to the rules of private international law currently prevailing in Israel;
y
adequate service of process was effected and the defendant had a reasonable opportunity to be heard;
y
the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;
y
the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties;
y
the judgment is no longer appealable; and
y
an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreign court.
If a foreign judgment is enforced by an Israeli court, it will be payable in Israeli currency.
Additionally, it may be difficult for an investor or any other person or entity, to assert U.S. securities law claims in original actions instituted in Israel.
Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws on the ground that Israel is not the most appropriate forum in which to
bring such a claim. Even if an Israeli court agrees to hear a claim, it may determine that Israeli law is applicable to the claim. Certain matters of procedures
will also be governed by Israeli law.
Terrorist attacks in Israel and globally may have a material adverse effect on our operating results.
Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, terrorist attacks in Israel and other
acts of violence or war may affect the securities markets on which our shares trade, the markets in which we operate, and our operations and profitability.
We cannot assure you that there will not be further terrorist attacks against the U.S. or Israel, or against American or Israeli businesses. These attacks or
subsequent armed conflicts resulting from or connected to them may directly impact our physical facilities or those of our suppliers or customers.
Furthermore, these terrorist attacks may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately
affect the sales of our products in the U.S. and overseas. Also, the ongoing armed conflicts around the world such as in Iraq could have a further impact on
our sales, our profitability, our supply chain, our production capability and our ability to deliver product and services to our customers.
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of
shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our articles of association and
by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In
particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his
power in the company, including, among other things, in voting at the general meeting of shareholders on, among other things, amendments to a
company’s articles of association, increases in a company’s authorized share capital, mergers and interested party transactions requiring shareholder
approval. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the
appointment of a director or executive officer in the company has a duty of fairness toward the company. However, Israeli law does not define the
substance of this duty of fairness. Because Israeli corporate law has undergone extensive revision in recent years, there is little case law available to assist
in understanding the implications of these provisions that govern shareholder behavior.
15
Israeli law may delay, prevent or make difficult a merger with, or an acquisition of us, which could prevent a change of control and therefore
depress the price of our shares.
Provisions of Israeli law may delay, prevent or make undesirable a merger or an acquisition of all or a significant portion of our shares or assets.
Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions involving significant
shareholders and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law could have the effect of
delaying or preventing a change in control and may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our
shareholders. These provisions may limit the price that investors may be willing to pay in the future for our ordinary shares. Furthermore, Israeli tax
considerations may make potential transactions undesirable to us or to some of our shareholders.
Under current Israeli law, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from
benefiting from the expertise of some of our former employees.
We currently have non-competition clauses in the employment agreements of nearly all of our employees. The provisions of such clauses prohibit our
employees, if they cease working for us, from directly competing with us or working for our competitors. Recently, Israeli courts have required employers,
seeking to enforce non-compete undertakings against former employees, to demonstrate that the competitive activities of the former employee will cause
harm to one of a limited number of material interests of the employer recognized by the courts (for example, the confidentiality of certain commercial
information or a company’s intellectual property). In the event that any of our employees chooses to leave and work for one of our competitors, we may be
unable to prevent our competitors from benefiting from the expertise our former employee obtained from us, if we cannot demonstrate to the court that we
would be harmed.
ITEM 4:
INFORMATION ON THE COMPANY
OUR BUSINESS
We are a leading global provider of Internet Protocol, or IP, based digital satellite communication and networking products and services. We design,
produce and market 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. VSAT networks have significant advantages to wireline and wireless
networks, as VSATs can provide highly reliable, cost-effective, end-to-end communications regardless of the number of sites or their geographic
locations.
America, we provide services directly to end users in various market segments.
16
We currently operate three complementary, vertically-integrated business units:
Gilat Network Systems, or GNS, is a provider of VSAT-based networks and associated professional services, including turnkey and management
services, to telecom operators worldwide. According to the 2007 COMSYS VSAT Report, prepared by Communications Systems Limited, or COMSYS, a
leading satellite industry research firm, we are the second-largest manufacturer of VSATs, with a 23.5% market share of shipped VSATs and the leading
provider to the international market (comprised of all countries other then the U.S. and Canada). We also provide industry specific solutions for cellular
backhaul, governments, business continuity and disaster recovery. In the year ended December 31, 2007, we derived approximately 54% of our revenues
from GNS. GNS’s representative customers include StarOne in Brazil, Optus in Australia, China Unicom, Bharti in India, Global Teleport in Russia,
Telkom in South Africa and AT&T in Europe.
Spacenet Inc. provides satellite and hybrid terrestrial network services to enterprise, government, small office/home office, or SOHO, and residential
customers in the U.S. Spacenet provides three primary lines of service: custom networks, commercial grade service known as Connexstar, and StarBand
service. According to the COMSYS report, we have a 19.5% market share of U.S. VSAT enterprise sites. In the year ended December 31, 2007, we
derived approximately 34% of our revenues from Spacenet. Spacenet’s representative customers include Dollar General, Goodyear, Intercontinental
Hotels Group, Valero, Sunoco and Kroger.
Spacenet Rural Communications, or 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. We believe that we are the largest rural satellite telecom provider in Latin America,
and currently have approximately 16,000 operational sites. In the year ended December 31, 2007, we derived approximately 12% of our revenues from
SRC.
Since July 2005, we have operated under a new management team as well as a new board of directors. Our Chairman and CEO, Amiram Levinberg,
who is a co-founder of our company, leads a highly experienced team of satellite industry executives. Our new management has refocused our business
strategy and continued our financial turnaround, which has resulted in four consecutive quarters of increasing revenues and net income.
We have diversified revenue streams that result from both sales of products and services. In the year ended December 31, 2007, approximately 55%
of our revenues were derived from product sales and approximately 45% of our revenues were derived from services. Our service revenues are derived
from long-term contracts of three to six years, which provide stability and visibility into future revenues. As of December 31, 2007, we had a backlog of
$202 million for equipment and multi-year service contracts. During the same period, we derived 33.9% of our revenues from the U.S., 26.9% from South
and Central America, 14.0% from Asia, 12.3% from Africa and 12.9% from Europe.
We were incorporated in Israel in 1987 and shipped our first generation VSAT in 1989. Since then, we have been among the technological leaders in
the VSAT industry. Our continuous investment in research and development has resulted in the development of new and industry-leading VSAT products
and our intellectual property portfolio includes 60 issued patents (27 U.S. and 33 foreign). As of December 31, 2007, we had approximately 970
employees, including approximately 160 persons engaged in research, development and engineering activities.
Industry Overview
Satellite networks are comprised of multiple ground stations that communicate through a satellite in orbit, providing continent-wide wireless
connectivity. VSAT networks are used in a variety of applications such as broadband, Internet, voice, data and video. VSAT networks are usually
deployed in a hub-and-spoke configuration, with customer locations connecting directly via satellite to a central “hub” facility. The value chain of VSAT
satellite networks consists of the following four main elements:
17
Satellite operators provide satellite transponder capacity on satellites positioned in geostationary orbit above the equator. Once in orbit, a satellite
beam can typically service a geographic area the size of the continental U.S. or larger. The satellite receives information from a VSAT or the network hub,
amplifies it and transmits it back to earth on a different frequency. Satellite operators sell the capacity in a variety of leasing agreements to their customers.
The current generation of high-power satellites uses Ku-band frequencies. Other frequencies are C-band and the more recently introduced Ka-band. Our
technology is compatible with C-band, Ku-band and Ka-band satellites including special extended C-band and extended Ku-band satellites. Some of the
leading satellite operators are Intelsat, SES and Eutelsat.
Ground station equipment providers manufacture VSAT networks that combine a large central earth station, called a hub, with multiple remote
sites (ranging from tens to thousands of sites) which communicate via satellite. GNS is a leading ground station equipment provider.
Communication service providers buy equipment from ground station equipment providers, install and maintain such equipment, lease capacity
from satellite operators and sell a full package of communication services to the end user. Spacenet and SRC are leading communication service providers
in the U.S. and in Latin America, respectively.
End users are customers utilizing equipment and satellite communication services. Examples of end users range from enterprises, to SOHOs, to
residential consumers.
VSAT networks have a diverse range of uses and applications, and provide communication services as a stand-alone, alternate or complement to
wireline and wireless networks. We believe that the advantages of VSAT networks include:
Universal availability - VSATs provide service to any location within a satellite footprint.
Timely implementation - Deployment times (ranging from a few weeks to a few months) can ensure rapid connectivity.
Broadcast and multicast capabilities - The satellite medium is an ideal solution for broadcast and multicast applications as the satellite signal is
simultaneously received by any group of users in the satellite footprint.
Reliability and service availability - VSAT network availability is high due to VSAT reliability, small number of components in the network as
well as terrestrial infrastructure independence.
Scalability - VSAT networks scale easily from a single site to thousands of locations.
Cost-effectiveness - The cost of VSAT networks is distance independent and therefore a cost-effective solution for multiple sites in remote
locations.
18
Applications delivery - Wide spectrum of capabilities and customer applications such as e-mail, virtual private networks, or VPN, video, voice,
Internet access, distance learning, content distribution and financial transactions.
Portability - VSAT solutions can be mounted on vehicles or deployed rapidly in fixed locations, then relocated or moved as required.
Given the technological and implementation benefits afforded by VSAT networks, we believe that the market for VSAT products and services will
continue to grow.
According to the COMSYS report, the VSAT equipment market generated approximately $950 million of revenues in 2006, which represents a
compound annual growth rate of approximately 18% from 2003 to 2006 According to a Northern Sky Research report from 2007, the number of VSAT
sites is expected to grow at a compounded annual growth rate, or CAGR, of approximately 19.4% through 2011.
According to the COMSYS report, the VSAT service market generated approximately $4.6 billion worth of revenues in 2006, which represents an
annual growth rate of approximately 9% from 2003 to 2006. According to the Northern Sky Research report, the global broadband satellite services
market is expected to have a CAGR of approximately 10.7% through 2011.
We believe that there are three primary categories of end-users that require VSAT products and services:
Enterprise and Business. This market includes large companies and organizations, government entities, small medium enterprises, or SMEs, and
SOHO end users. For enterprises, VSAT networks offer network connectivity and deliver applications such as networks within corporations (known as
corporate intranets), Internet connections for voice, data and video (known as broadband), transaction-based connectivity to enable on-line data delivery
such as point-of-sale (credit and debit card authorization), inventory control and real time stock exchange trading. According to the Northern Sky Research
report, global enterprise and SME IP VSAT sites will grow from approximately 780,000 in 2006 to 1.45 million sites in 2011. This represents a CAGR of
13.2%.
Rural Telecommunications. The rural telecommunications market is comprised of communities throughout the world that require telephone,
facsimile and Internet access in areas that are underserved by existing telecommunications services. These communication services are usually provided to
the rural population via government-subsidized initiatives. This market segment is comprised of “Build-Operate” projects, in which governments subsidize
the establishment and the operation of a rural network to be served by a satellite, wireless or cellular service provider that is usually selected in a bid
process. According to the 2006 GSM Association Universal Access Report, 57 out of the 92 emerging market and developing countries sampled for their
study have plans to establish universal service funds, or USFs, within their jurisdictions to meet local telephony and Internet service requirements.
According to this report, the USFs jointly collected approximately $6.0 billion worldwide through 2006, out of which $1.6 billion has been redistributed to
the communications industry. In other instances, local communications operators have USOs which require them to serve rural areas lacking terrestrial
infrastructure. Some local communications operators elect to fulfill this obligation by hiring third parties in a model known as “Build-Operate-Transfer.”
In these instances, the network is established and made operational by a third party service provider and then transferred to the operator.
Consumer. The consumer market consists of residential users. These users require a high-speed internet connection that enables the transmission of
data, audio and video, similar to a digital subscriber line, or DSL, or cable modem service. According to the Northern Sky Research report, in 2006 83%
of these sites were located in North America.
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Our Competitive Strengths
We are a leading provider of satellite communication and networking products and services. Our competitive strengths include:
Market leadership in large and growing markets. Since our inception, we have sold more than 670,000 VSATs to customers in over 85 countries.
Our customer base includes a large number of satellite-based communications service providers and operators worldwide. In addition, we provide satellitebased communication services primarily to enterprises in the U.S. and we are the largest satellite communications service provider to rural communities in
Latin America. The large installed base of our VSAT equipment also provides opportunities for new and incremental sales to existing customers.
According to the 2007 COMSYS report, our global market share to the enterprise market was approximately 23.5%, based on the number of terminals
shipped, making us the second largest VSAT manufacturer in the world for this segment.
Technology leadership. We have been at the forefront of VSAT technology and services for almost 20 years and continue to be an innovator and
developer of new satellite technologies. Our highly customizable single platform VSAT technology enables us to provide our customers with a wide range
of broadband, Internet, voice, data and video solutions and our product and operations infrastructure is capable of running hubs with greater than 99.99%
availability while rolling out thousands of new VSAT site locations each month. We have unified all our legacy product lines under SkyEdge which
enables us to focus our research, development and engineering efforts that are supported by approximately 160 persons. This enables us to rapidly develop
new features and applications. In addition, by directly serving end-users through our service organizations, we are able to quickly respond to changing
market conditions to ensure we maintain our leadership position.
As an example of our technology innovation, we have adapted our SkyEdge platform to meet the interoperability criteria of Cisco Systems’ VSAT
Network Module, or NM. We are a Cisco Systems Technology Developer Partner and, with our SkyEdge hubs, we offer interoperability with the Cisco
VSAT NM that may be integrated into several of Cisco’s routers, enabling near-instantaneous failover from a primary circuit to the satellite backup.
Global presence and local support worldwide. We have sold our products in over 85 countries on six continents. Our products and services are used
by a large and diverse group of customers including some of the largest enterprises in the world, several government agencies and many rural
communities. We have 16 sales and service offices worldwide. Through our network of offices we are able to maintain a two-tier customer support
program offering local support offices and a centralized supply facility.
Complementary business lines. Our three business units, GNS, Spacenet and SRC, enable us to provide a full turnkey solution to our customers by
integrating a diverse range of value-added products and services. Our offerings range from VSAT network equipment, installation, operation and
maintenance to provide services ranging from broadband, Internet, voice, data and video to managed solutions that are highly flexible and customizable.
Our business model enables us to be closely attuned to all of our customers’ needs and to rapidly adapt to changing market trends. Our VSAT-based
networks often serve as a platform for the delivery of a complete system, providing versatile solutions for corporate enterprises, government agencies,
SMEs, rural communities, SOHOs and consumers.
Diversified revenue streams and customer base. For the year ended December 31, 2007, 55% of our revenues were generated from products and
45% of our revenues were generated from services. Our product sales are generally independent equipment orders which often generate maintenance
contracts and additional opportunities for future product sales. Our service sales are characterized by long-term contracts that provide a recurring revenue
base. In the year ended December 31, 2007, our three business units, GNS, Spacenet and SRC, accounted for 54%, 34% and 12% of our revenues,
respectively. We are not overly dependant on any single customer, project or geographic region and no single customer accounted for more than 10% of
our revenues.
20
Strong financial position. Our strong financial position allows us to compete effectively with other companies in our industry. We had nine
consecutive quarters of revenue growth and improved profitability, excluding the impairment of tangible assets recorded in the fourth quarter of 2007
related to our operations in Colombia. As of December 31, 2007, our total cash increased to $200.0 million from $182.6 million as of December 31, 2006
(total cash includes cash and cash equivalents, held to maturity marketable securities, restricted cash and restricted cash held by trustees less short terms
bank credits) and we reduced our debt to $40.4 million as of December 31, 2007, from $45.2 million at December 31, 2006.
Experienced management team. Since July 2005, we have operated under a new management team as well as a new board of directors. Our
Chairman and CEO, Amiram Levinberg, is a co-founder of our company and leads a highly experienced executive team of satellite industry veterans. Our
new management has refocused our business strategy and continued our financial turnaround, which has resulted in increasing revenues and net income.
Our Growth Strategy
Our objective is to leverage our advanced technology and capabilities to:
Enhance our leadership position in our core markets. We are expanding our position in the VSAT market through the development of new
products, solutions and services within our target markets. Through the development of our SkyEdge single platform product and our end-to-end solution
offerings, we are focused on providing innovative products and services required by our customers and end-users. In 2008, we will increase of investment
in research and development by approximately $3 million. This expense will focus on reducing our hub costs and expanding our product portfolio with
new product offerings.
Expand our presence across the communications value chain. We are a leading global provider of VSAT network equipment and services. GNS is
focused on providing more than VSAT equipment to our customers by offering full solutions and turnkey implementation based on capabilities developed
to meet customer requirements. Spacenet is focused on more than connectivity by expanding its offering to include managed network services and other
value-added services.
Focus on emerging markets. We are expanding our focus on rural and emerging markets. Traditionally, it has been considered too costly for service
providers to provide full-terrestrial networks to these regions. As a result, many governments either require telecommunications operators to provide
communications access through USOs to these communities or provide funding via USFs to subsidize the provision of these services. At this time,
available worldwide USF funding is estimated to be $4.4 billion in approximately 15 countries. As this communications rollout is adopted, VSAT-based
communication networks provide a high quality, cost-effective alternative to terrestrial, wireless and cellular systems. GNS is currently focusing its
growth efforts to service providers that are either being required by USOs to facilitate the rural expansion, or to service providers that are utilizing the
subsidies created through USFs.
Focus on business continuity. We are addressing the growing area of business continuity and disaster recovery applications by providing secondary
networks for continuous operations during network failures or natural disasters. Examples of solutions include integration of a mobile communications kit
for a complete on-the-go communication network and Cisco’s iComm offered by Spacenet and business continuity solutions such as Cisco’s VSAT
Network Module and standalone VSATs that provide near-instantaneous failover from a primary circuit to the satellite backup.
Enter new strategic markets. We have identified a number of markets which we believe will be strategic to our future growth, including Broadband
Wireless Access, or BWA, solutions and additional government markets. BWA is a developing technology designed to solve the last mile connectivity
problem facing many rural and remote locations. Service providers are using BWA systems to provide a link between end users and communications
networks. We already have significant operations in emerging markets and have established sales and distribution channels in many of these remote
locations. The current focus of most established BWA providers is geared toward urban and mobile solutions. We will leverage our distribution channels,
expertise and presence in rural areas to provide BWA solutions, which will complement our present product offerings.
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We are also leveraging our technology expertise to further develop customized VSAT products, applications and services for the government and
government-supported sectors in additional territories. Many governments, including the U.S., require applications with specific communication
parameters that are particularly well-suited for satellite networks based on cost and performance. These applications range from border control and
sensitive military applications to distance learning and open classroom education programs.
Proactively evaluate acquisitions that will support and enable our growth strategy. As we continue to focus on expanding the target markets for our
products, services and solutions, we may have opportunities to acquire companies or technologies that would be complementary or additive to our existing
platform and global distribution channels. We will proactively, but selectively, evaluate opportunities to expand our business.
Our Business Units
Gilat Network Systems
Overview
GNS is a leading global provider of network systems and associated professional services for operators of satellite communications systems. Our
operational experience in large VSAT networks together with our local offices worldwide enables us to work closely and directly with those operators. We
provide VSAT communication equipment and solutions to the enterprise, rural communications and consumer markets.
Our SkyEdge product portfolio delivers efficient, reliable and affordable broadband, Internet, voice data and video. SkyEdge offers a cost-effective
way to deliver the communications services that enterprises, carriers, service providers and governments require, from interactive data and broadband IP to
public telephony and corporate voice over Internet Protocol, or VoIP, services.
We also provide solutions tailored to the requirements of individual industries. Based on our open SkyEdge platform, our solutions provide added
value to operators through better performance and integration as well as simpler deployment. One such solution is SkyAbis, which provides cost-effective
cellular backhaul for rural communications.
We also support satellite networking through professional services, training and a full range of turnkey solutions and outsourced network operations
including “Build-Operate-Transfer” for networking facilities.
GNS is headquartered in Petah Tikva, Israel and has 13 offices worldwide, with approximately 485 employees. In the year ended December 31, 2007,
GNS had revenues of $171.4 million, including sales of $18.4 million to Spacenet and SRC.
Products and Solutions
SkyEdge Family of Products
Our SkyEdge platform is based on a single hub with multiple VSATs to support a variety of services and applications. Our advanced access scheme
and quality of service implementation enables delivering high quality services in an efficient manner.
In 2007, we announced the launch of the SkyEdge II system which provides higher performance and is more efficient in terms of space capacity than
our SkyEdge. The SkyEdge family of products can support triple play services, such as wireline quality voice, video, and data on the same platform. In
addition, multiple network topologies can be deployed with the same platform. This enables an improved user-experience and reduced operating expenses.
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We currently offer the following VSAT products. All of these products are connected to an outdoor RF unit which is mounted on a dish antenna:
Product
SkyEdge IP +
SkyEdge II IP
SkyEdge PRO
SkyEdge Call
SkyEdge Gateway
SkyEdge
Armadillo
Description
IP Router
VSAT
Multi-Service
VSAT
Telephony
VSAT
Trunking
Solution
VSAT
VSAT for
outdoor
applications
Interfaces
Single IP
Multiple IP,
Multiple
Telephony, Mesh
Single IP, Dual
Telephony
Multiple IP,
Multiple
Telephony, E1,
Mesh
Single IP
Typical
Application
Internet,
Intranet,
E-mail, VoIP,
IP devices,
Transactions
Internet, Native
voice, VoIP,
Video
conferencing
Internet,
Native voice
E1 Trunking,
Voice, Video,
Data
Outdoor install,
Transactions, IP
devices
Type of
Customers
Residential,
SOHO, SME,
Enterprise
SME, Enterprise,
Carriers
Carriers for
USOs
Enterprise,
Carriers
Utility, SCADA,
Video
surveillance
Solutions
Our VSAT-based networks serve as a platform for the delivery of custom tailored solutions for identified markets. We pre-package, commercialize
and sell these end-to-end solutions which offer higher value to our customers. For example, our SkyAbis supports a cellular backhaul application for
Global System for Mobile Communications, or GSM, and Code Division Multiple Access, or CDMA, cellular-based stations. Our end-to-end solutions
include government communication infrastructure solutions for post offices, elections, military and security and rapid VSAT deployment. We also provide
turnkey solutions that include installation, operation and third-party peripheral equipment.
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We currently offer the following solutions:
Solution
SkyAbis
e-Post
e-Voting
Disaster
Recovery/Rapid
Deployment
Transportable
and man-pack
units
communication
solutions
Cisco VSAT NM
Description
Cellular
traffic
backhaul
enabling
operators to
expand their
market reach
Turnkey
communication
and applications
for electronic
postal services
Turnkey
communication,
authentication
and electronic
voting for
national
elections
Typical
Application
Cellular
backhaul for
GSM and
CDMA
networks
Communication
network,
Internet access,
Fax, Prepaid
telephony,
Counter
automation
software,
Money transfer
Communication
network,
Polling
terminals,
Fingerprint
identification
system
On-demand
access to voice,
data, video
Business
continuity,
Disaster recovery,
Content
distribution
Type of
Customers/
Vertical
GSM and
CDMA
cellular
operators
Governments,
Postal agencies
Governments,
National
election
committees
Mobile medical
units, Mobile
ATM, Military
and security
forces, Fire and
police units
Enterprise,
Financial sector,
Government
Selected
customers
Enitel
(Nicaragua)
Posta (Kenya)
CNE
(Venezuela)
Petrobras
(Brazil),
Metpresa
(Mexico)
Cisco sales
channel
customers,
Valero (U.S.)
Vivo (Brazil)
Satellite-based
networking for
Cisco router with
Cisco VSAT NM
Turnkey Implementation Capabilities
We provide end-to-end turnkey solutions and integration to existing infrastructures. This includes network rollout projects, where we provide
operators with a fully operational network. We also provide consultancy and other professional services for customers.
Among the components that go into our turnkey projects are planning (including network analysis, system design, teleport design and network, space
segment and backhaul planning), integration of our existing operators’ infrastructure and equipment with the VSAT network and implementation of the
project plan.
Manufacturing, Customer Support and Warranty
Our products are designed and tested primarily at our facilities in Israel. We outsource a significant portion of the manufacturing of our products to
third parties. We also work with third-party vendors for the development and manufacture of components integrated into our products, as well as for
assembly of components for our products.
We offer a customer care program, which we refer to as SatCare, and professional services programs that improve customer network availability
through ongoing support and maintenance cycles. As part of our professional services, we provide:
y
Outsourced operations such as VSAT installation, service commissioning and hub operations.
y
Proactive troubleshooting, such as periodic network analysis, to identify symptoms in advance.
24
y
Training and certification to ensure customers and local installers are proficient in VSAT operation.
We typically provide a one-year warranty to our customers as part of our standard contract. We also provide extended warranty services through our
SatCare program, for an additional annual fee.
GNS Customers and Markets
We sell VSAT communications networks and solutions primarily to service providers. The service providers to whom we sell our products and
solutions are primarily serving the enterprise and rural communication market segments. We have more than 200 customers worldwide.
Enterprise and service providers use our networks for broadband, Internet, voice, data and video connectivity for applications such as credit card
authorizations, online banking, corporate intranet, interactive distance learning, lottery transactions, retail point-of-sale, inventory control and Supervisory
Control and Data Acquisition, or SCADA, services. Examples are Grupo Elektra one of Latin America’s leading specialty retailers and financial service
companies, and HCL in India, a service provider whose end users include stock brokerage firms.
Service providers serving the rural communications market are typically public telephony and Internet operators providing telephony and Internet
services through public call offices, telecenters, Internet cafes or pay phones. Some of the rural communication projects are for government customers.
Examples of our rural telecom customers include Global teleport in Russia and Telecom Fiji.
Our VSAT networks also provide underserved areas with a high-speed Internet connection similar to DSL service provided to residential users.
Among our customers in this area are StarOne in Brazil and Optus in Australia.
GNS Sales and Marketing
We use both direct and indirect sales channels to market our products, solutions and services. Most of our revenues are derived from direct sales. Our
GNS equipment sales division has organized its marketing activities by geographic areas, with groups, subsidiaries or affiliates covering most regions of
the world. Our sales teams are comprised of account managers and sales engineers (approximately 150 employees), who establish account relationships
and determine technical and business requirements for the network. These teams also support the other distribution channels with advanced technical
capabilities and application experience. Sales cycles in the VSAT network market vary significantly, with some sales requiring 18 months from an initial
lead through signing of the contract and others stemming from an immediate need for product delivery within two to three months. The sales process
includes understanding customer needs, several network design iterations, network demonstrations, and on occasion, software development and
integrations with third-party equipment for complete solution offerings.
Spacenet Inc.
Overview
Spacenet provides satellite network services to enterprise, government, small office/home office, or SOHO customers in North America. In addition,
we offer our enterprise customers value-added services, including hybrid satellite/terrestrial networks and outsourced network management.
Spacenet’s equipment and services are currently deployed at more than 100,000 business, government and residential locations in the U.S. Our
customers include Dollar General, Goodyear, Intercontinental Hotels Group, Kroger , Sunoco and Valero. The 2007 COMSYS report ranked Spacenet as
the second largest satellite network service provider in North America for the enterprise/government market, with a19.5% market share, which is more
than five (5) times larger than the third-ranked provider. Our market includes WAN services for retail, energy, financial services, hospitality and
government customers, as well as Internet access services for SOHO and residential customers.
25
Spacenet is based in McLean, Virginia, and has approximately 245 employees. In the year ended December 31, 2007, Spacenet had revenues of $95.4
million.
Services
Spacenet offers prepackaged and custom network services that are sold under the Spacenet, Connexstar and StarBand brand names. These service
lines target a variety of markets and applications, as is illustrated in the diagram below:
Service
StarBand
Connexstar
Transaction
Connexstar
Broadband
Connexstar
Performance
Spacenet
Custom
Networks
Description
VSAT
Internet
access
services
Low-bandwidth
VSAT network
Commercial
grade
broadband
VSAT
networks
High-bandwidth
VSAT network
Customized
VSAT and
hybrid
terrestrial
WANs
Typical
applications
Web,
E-mail
Credit cards,
Point-of-sale,
SCADA
Intranet,
Credit cards,
Back-office
applications
VoIP, Video
monitoring,
Backup
networks
Credit cards,
Point-of-sale,
Multicast,
Intranet
Target
Markets
SOHOs
Utilities pipeline
networks, Lottery
operators
Retail,
Hospitality,
Small business
Disaster recovery,
Business continuity,
Government,
Energy exploration
Large
enterprise
customers
Sample
Customers
Residential
users
Chevron Pipeline,
TXU
Do It Best,
Boston Market
Government,
Cisco-based
networks
Goodyear,
Sunoco
Spacenet’s custom network services for large enterprise and government customers provide secure private networks specifically sized and tuned to a
customer’s application, protocol support and bandwidth needs. These networks may be delivered as a “private hub” (each set of hub equipment is used for
only one customer) or “virtual private hub” (hub equipment is shared among multiple customers but is logically partitioned to provide private hub benefits
at a lower cost). Custom network configurations also include hybrid terrestrial/satellite networks in which Spacenet provides management of both network
components, integrating them as a single WAN.
Spacenet’s standard Connexstar services are optimized for popular customer applications, and are engineered to provide superior performance compared
to other providers’ “one size fits all” solutions. Connexstar services are offered in full-time plans for primary network use or as on-demand services for
emergency response and backup use.
These services are also available in fixed site or transportable configurations for on-the-go communications. All of Spacenet’s custom network and
standard Connexstar services offer Service Level Agreements, or SLAs, for network reliability; network management and reporting tools; professional
program management and implementation assistance; and professional-grade installation and maintenance options.
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Network Operations and Customer Support
We operate teleport facilities with Network Operation Centers, or NOCs, in McLean, Virginia, Chicago, Illinois, and Marietta, Georgia. Our
operations staff of more than 100 persons supervises network implementation and installation quality assurance, manages shared-hub and private-hub
networks, provides first-level and escalated help desk/problem resolution, manages inventory and shipping, and dispatches field service/maintenance
technicians. The Chicago NOC facility specializes in operation of high-availability networks on legacy VSAT platforms. The Marietta NOC facility
operates the Connexstar and StarBand services as well as first and second-level call centers. The McLean headquarters facility provides pilot and disaster
recovery hub operations, third-tier network escalation and advanced network management services.
For enterprise and government satellite networks, we offer SLAs providing guarantees on network uptime and availability as well as guaranteed
network performance and issue resolution time. Spacenet’s network management and operations features include diverse and scalable hub and satellite
options, centralized network management center, extensive web-based tools for customers, dedicated program management and service automation.
Spacenet Sales and Marketing
We sell our enterprise and government services directly through a team of ten major-account executives as well as through a network of
approximately 30 authorized enterprise service resellers, primarily telecom carriers, IT integrators and value-added resellers focused on specific industries.
Our StarBand SOHO services are sold both directly and through approximately 150 sales agents, that are typically direct-to-home satellite TV
resellers and/or satellite Internet service resellers. Our distribution channel strategy is shown below:
Spacenet Rural Communications
Overview
SRC is a service provider for public telephony and Internet services to rural areas in Latin America, mainly in Peru and Colombia. In these countries,
we have built the infrastructure and act as an operator (Build-and-Operate model) in subsidized government projects. Our services include operating public
phones and telecenters and distributing pre-paid cards for telephone usage at remote villages. In addition, SRC uses its infrastructure to provide services to
enterprise, SME, SOHO and residential customers. SRC also provides outsourcing of VSAT network implementation and operation to other operators in
the region.
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SRC has offices in Peru and Colombia and employs approximately 243 persons. In the year ended December 31, 2007 SRC had revenues of
$34.2 million.
SRC Services and Solutions
We began to operate in Peru in 1998, with the award of our first rural telephony project called “Frontera Norte” for FITEL, with approximately 200
sites. Since then, we have participated in almost every rural communications project launched by the Peruvian government and have won, either wholly or
partially, all five projects. Overall, we operate almost 6,000 telephony sites in Peru, of which approximately 600 have Internet connectivity, and have been
awarded over $45 million in government subsidies to build and operate these networks. In addition, we have developed services for private customers,
such as Banco de la Nacion, utilizing our current infrastructure and providing those customers with Internet, data and telephony services. Our rural
network manages millions of incoming and outgoing minutes every month, serving more than six million people in rural areas. On average, the network in
Peru has reduced the distance between rural phone locations from 50km to 5km.
SRC Colombia started operations in 1999 by winning the government’s Compartel I project focused on rural telephony. Since then we have been
awarded two additional projects with over $100 million in government subsidies in the aggregate.
Currently, SRC Colombia operates a network of almost 10,000 rural sites spread throughout the country, serving over seven million persons. The
services for those rural sites include telephony, Internet, data, fax and other services. In order to comply with government bid requirements, SRC has
integrated a variety of technologies into its VSAT based network such as wireless local loop and cellular.
In addition to its well established operations in Peru and Colombia, SRC provides services to customers in other countries in the region. In Panama,
SRC is working with Cable & Wireless to allow it to fulfill its USO with cost efficient technology and high quality service.
Customer Support Operations
SRC complements its services with back office support for subsidized telephony and Internet networks as well as for private Internet, data and
telephony clients including a call center, network operations center, field service maintenance and a pre-paid calling card platform and distribution
channels.
SRC Customers and Markets
Public Rural Telecom Services:
In a large number of remote and rural areas, primarily in developing countries, there is limited or no telephone or Internet service, due to inadequate
terrestrial telecommunications infrastructure. In these areas, VSAT networks utilize existing satellites to rapidly provide high-quality, cost-effective
telecommunications solutions. In contrast to terrestrial networks, VSAT networks are simple to reconfigure or expand, relatively immune to difficulties of
topography and can be situated almost anywhere. Additionally, VSATs can be installed and connected to a network quickly without the need to rely on
local infrastructure. For example, some of our VSATs are powered by solar energy where there is no existing power infrastructure. Our VSATs provide
reliable service, seldom require maintenance and, when necessary, repair is relatively simple.
As a result of the above advantages, there is a demand for government-sponsored, VSAT-based bundled services of fixed telephony and Internet
access. Many of these government-funded projects have been expanded to provide not only telephony services and Internet access, but to also provide
telecenters that can serve the local population. These telecenters typically include PCs, printers, fax machines, photocopiers, VCRs and TVs for
educational programs. Additional revenue may be received, both in the form of subsidies and direct revenues from the users, when these additional
services are provided. Our rural telecom government customers are Compartel in Colombia and FITEL in Peru.
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VSAT Services to Telecom Operators:
In some markets, existing telecom operators are mandated by the government to provide universal services. Providing these services in remote areas
is a challenge to these operators, and they sometimes outsource these services to rural telecom service providers. The exact nature of these outsourcing
projects varies, but they are typically a “Build-Transfer” model or a “Build-Operate-Transfer” model. Cable & Wireless in Panama is SRC’s first “BuildOperate-Transfer” customer.
Enterprise and Government Agencies:
We also provide private network services to enterprises and government agencies. These customers contract directly with SRC for VSAT equipment
and associated network services to be deployed at customer locations, typically for a contract term of three to five years. We also resell managed terrestrial
connectivity equipment and services from facilities-based Local Exchange Carrier partners. One such customer is Banco de la Nacion in Peru.
SRC Sales and Marketing
We use direct sales channels to market our services. Our sales team of account managers and sales engineers are the primary account interfaces and
work to establish account relationships and determine technical and business demands.
Competition
The network communications industry is highly competitive and the level of competition is increasing. In the equipment market, GNS faces
competition from other VSAT providers, such as Hughes Network Systems LLC, Viasat, iDirect and other smaller vendors.
The U.S. enterprise VSAT market is primarily served by Spacenet and Hughes Network Systems LLC. In addition, more recently, Spacenet’s
primary competitors in the enterprise WAN market are large terrestrial carriers such as AT&T, Verizon and Qwest.
In Peru and Colombia, where we primarily operate public rural telecom services, we typically encounter competition on government subsidized bids
from various service providers, system integrators and consortiums. Some of these competitors offer solutions based on VSAT technology and some on
alternate technologies (typically cellular, wireless local loop or WiMAX). As operators that offer terrestrial or cellular networks expand their reach to
certain SRC regions, they compete with our VSAT solutions.
29
Geographic Distribution of our Business
The following table sets forth our revenues by geographic area for the periods indicated below as a percent of our total sales:
Years Ended December 31,
2007
United States
South America and Central America
Asia
Africa
Europe
Total
(1)
2006
33.9%
26.9%
14.0%
12.3%
12.9%
37.8%
32.0%
15.3%
7.5%
7.4%
100.0%
100.0%
2005
41.3%
29.6%
17.6%
6.3%
5.2%(1)
100.0%
Including revenues from a related party of 0.8% for the year ended December 31, 2005.
Capital Expenditures and Divestitures. In 2005, 2006 and 2007, our property and equipment purchases amounted to approximately $3.6 million ,
$6.5 million and $9.3 million, respectively. These amounts do not include the reclassification of inventory to property and equipment made during 2005,
2006 and 2007 in the amount of approximately $7.3 million, $9.2 million and $2.2 million, respectively. In 2005, we completed the sale of Deterministic
Networks Inc. to some of its employees, we purchased the remaining shares of StarBand and our shareholdings in Satlynx were diluted from
approximately 40.6% to 0.17%. On March 1, 2006 we and SES executed an agreement whereby we transferred our remaining 0.17% interest in Satlynx to
SES. As part of this agreement, we received a waiver from SES on any royalty payments which may be payable by us to SES in accordance with
development agreements signed between the parties in 2002 and SES provided a corporate guarantee to cover Satlynx’s obligations to us.
Backlog
Our 2007 year-end backlog for equipment sales and revenues from multi-year service contracts for our VSAT products was approximately $202
million, down from approximately $209 million at year-end 2006. Backlog does not include revenues from future traffic on our rural networks, future
revenues from subscribers from our consumer and enterprise operation and other cancelable agreements. Backlog is not necessarily indicative of future
sales. Many of our contracts can be terminated at the convenience of the customer. In addition, some of our contracts may include product specifications
that require us to complete additional product development. Any inability to meet the specifications or complete the product development could lead to a
termination of the related contract.
Facilities
Our headquarters are located in a modern office park which we own in Petah Tikva, Israel. This facility is comprised of approximately 380,000
square feet of office space.
We have network operations centers in Marietta, Georgia and shared hub facilities in Chicago, Illinois, Peru and Colombia, from which we perform
network services and customer support functions 24 hours a day, 7 days a week, 365 days a year.
We lease approximately 160,000 square feet of office space in McLean, Virginia. These offices house our personnel and also contain one of our U.S.
shared hub centers. In 2000 and 2002, we purchased and developed facilities on approximately 140,400 square feet of land in Backnang, Germany. Since
May, 2002, these facilities are leased to a third party.
We also maintain facilities in Plano, Texas, Chicago, Illinois, Marietta, Georgia and in Brazil, Colombia, Mexico, and Peru, along with representative
offices in Beijing, Melbourne, Pretoria, Bangkok, New Delhi, Almaty, Jakarta and Moscow and small facilities in other locations throughout the world.
We believe our facilities to be adequate for our needs.
30
ITEM 4A:
UNRESOLVED STAFF COMMENTS
Not Applicable
ITEM 5:
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
We were incorporated in 1987 and began trading on the NASDAQ Stock Market in 1993. We are a leading global provider of Internet Protocol, or
IP, based digital satellite communication and networking products and services. We design, produce and market 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 have significant advantages to wireline and wireless networks, as VSATs can provide highly reliable, cost effective, end-to-end
communications regardless of the number of sites or their geographic locations.
America, we provide services directly to end users in various market segments.
We currently operate three complementary, vertically-integrated business units:
GNS is a provider of VSAT-based networks and associated professional services, including turnkey and management services, to telecom operators
worldwide.
Spacenet provides satellite network services to enterprises, government, small office/home office, or SOHOs, and residential customers in the U.S.
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.
Financial Background
In July 2005, Bank Hapoalim assigned an outstanding Company loan in the amount of $71.4 million held by it to York Capital Management LP. The
terms of the loan included a right to receive warrants for the purchase of our ordinary shares. The aggregate maximum exercise amount to be paid under
the warrants was equal to the outstanding balance on the loan payable by us, including accrued interest.
In December 2005, we revised the terms of the loan that was assigned by Bank Hapoalim to York. Under the amendment, York agreed to defer
certain principal payments due and established a new payment schedule. In consideration, we 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. On September 27, 2006, York exercised its right to have
us 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. As a result of the conversion, our liabilities were reduced by
approximately $68.1 million, including approximately $1.0 million of accrued interest and net of the approximately $3.3 million of the unamortized
balance representing the fair value of change in conversion feature. Our shareholders’ equity increased by the same amount. No profit or loss was recorded
as a result of the conversion.
31
In December, 2006, we completed a public offering of 8,050,000 of our ordinary shares at a price to the public of $8.50 per share. Of such shares,
5,016,667 ordinary shares were sold by us and the remaining shares were sold by York. We received net proceeds of approximately $39.9 million from the
offering.
General
The selected financial information as of December 31, 2007, December 31, 2006 and December 31, 2005 have been derived from our consolidated
audited financial statements, which include all adjustments consisting of normal recurring accruals that we consider necessary for a fair presentation of the
financial position and the results of operations for these periods. Our financial statements have been prepared in accordance with accounting principles
generally accepted in the U.S.
Financial Statements in U.S. dollars
The currency of the primary economic environment in which most of our operations are conducted is the U.S. dollar and, therefore, we use the U.S.
dollar as our functional and reporting currency. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts.
Gains and losses arising from non-U.S. dollar transactions and balances are included in the consolidated statements of operations. The financial statements
of foreign subsidiaries, whose functional currency has been determined to be their local currency, have been translated into U.S. dollars. Assets and
liabilities have been translated using the exchange rates in effect at the balance sheet date. Statements of operations amounts have been translated using the
average rates, which approximate 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).
Critical Accounting Policies and Estimates
The preparation of the financial information in conformity with generally accepted accounting principles requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on going
basis, we evaluate our estimates, mainly related to account receivables, inventories, deferred charges, long-lived assets, restructuring charges, revenues,
stock based compensation relating to options and contingencies. We base our estimates on historical experience and on various other assumptions,
including assumptions of third parties that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our unaudited
consolidated financial information included in this prospectus:
Revenues. We generate 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, or space segment, installation of
network equipment, telephone services, internet services, consulting, on-line network monitoring, network maintenance and repair services. We sell our
products primarily through our direct sales force and indirectly through resellers. Sales consummated by our 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, or SAB, No. 104, “Revenue Recognition”, or 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 accepted provision is included in the arrangement. Revenues are deferred until the acceptance occurs.
Generally, we do not grant rights of return. Service revenues are recognized ratably over the period of the contract or as services are performed, as
applicable.
32
In accordance with Emerging Issues Task Force, or EITF, Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables, or 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”, or 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 product revenue generally relates to acceptance provisions that have not been met, partial shipment or when the Company does not have
VSOE of fair value on the undelivered items. In general, when deferred revenues are recognized as revenues, the associated deferred costs are also
recognized as cost of sales.
Cost of Revenues. Cost of revenues, for both products and services, includes the cost of system design, equipment, satellite capacity, customer
service, interconnection charges and third party maintenance and installation. Generally, for equipment contracts, cost of revenues is expensed as revenues
are recognized. For network service contracts, cost of revenues is expensed as revenues are recognized over the term of the contract. For maintenance
contracts, cost of revenues is expensed as the maintenance cost is incurred over the term of the contract. At each balance sheet date, we evaluate our
inventory balance for excess quantities and obsolescence. This evaluation includes an analysis of sales levels by product and projections of future demand.
In addition, we write off inventories that are considered obsolete. Remaining inventory balances are adjusted to the lower of cost or market value. If future
demand for our old or new products or market conditions is less favorable than our projections, inventory write-offs may be required and would be
reflected in cost of revenues for such period.
Income Taxes. 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 $
1,309,000 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 $ 5,435,000.
33
Accounts Receivable and Allowance for Doubtful Accounts. We are required to estimate our ability to collect our trade receivables. A
considerable amount of judgment is required in assessing their ultimate realization. We provided allowance for our receivables relating to customers that
were specifically identified by our management as having difficulties paying their respective receivables. This provision is in addition to a small portion of
general allowance which we have provided to cover additional potential exposures. If the financial condition of our customers deteriorates, resulting in
their inability to make payments, additional allowances may be required. These estimates are based on historical bad debt experience and other known
factors. If the historical data we used to determine these estimates does not properly reflect future realization, additional allowances may be required.
Inventory Valuation. We are required to state our inventories at the lower of cost or market value. In assessing the ultimate realization of
inventories, we are required to make judgments as to future demand requirements and compare that with the current or committed inventory levels.
Impairment of Intangible Assets, Long-Lived Assets and Investment in Affiliated Companies. We periodically evaluate our intangible assets,
long-lived assets and investments in affiliates for potential impairment indicators. Our judgments regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our acquired businesses and investments.
Our long-lived assets are reviewed for impairment annually and 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 the assets to the future
undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the assets. In measuring the recoverability of assets, we are required to
make estimates and judgments in assessing our five year forecast and cash flows, which is the estimated useful life of our current primary assets, and
compare that with the carrying amount of the assets. Additional significant estimates used by management in the methodologies used to assess the
recoverability of our long-lived assets include estimates of future short-term and long-term growth rates, market acceptance of products and services, our
success in winning bids and other judgmental assumptions, which are also affected by factors detailed in our risk factors section in this prospectus. If these
estimates or the related assumptions change in the future, we may be required to record impairment charges for our long-lived assets.
Our 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.
Future events could cause us to conclude that impairment indicators exist and that additional intangible assets and long-lived assets associated with
our acquired businesses and our long-lived assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial
condition and results of operations.
In accordance with the guidelines of FASB 144, “Accounting for the impairment or disposal of long lived assets”, in 2007, the Company concluded
that the carrying amount of its long lived network assets group in Colombia exceeded their fair value and recorded an impairment of $12.2 million.
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 transferred approximately $70 Million 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 million has been released from
the trusts to the Company. As of December 31, 2007, and approximately $24 million is being held in trust with respect to these projects, of which
approximately $15.3 million has become due and is not being released from the trusts as certain operational milestones imposed by the Colombian
government 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 our
performance under the Compartel projects, we secured insurance from a local insurance company in Colombia. We have provided the insurance company
with various corporate guarantees guaranteeing our performance for in excess of $50 million.
34
During 2007, the Company deferred revenues related to the Compartel Projects in the amount of approximately $6.4 million in order to ensure that
accumulated revenues recognized from the Compartel Projects will not exceed the accumulated amounts already released from the trust. In general, we
recognize revenues for these projects on a straight line basis, relative to the beginning of operation and for the period that service is required to be
provided. The deferred revenues relate to periods for which we have already provided service but, due to the current restriction on release of the payments
from the trusts in which the payments are held, these amounts have not been released from restricted cash.
Legal and Other Contingencies. We are currently involved in certain legal and other proceedings and are also aware of certain tax and other legal
exposures relating to our business. We are required to assess the likelihood of any adverse judgments or outcomes of these proceedings or contingencies as
well as potential ranges of probable losses. A determination of the amount of accruals required, if any, for these contingencies is made after careful
analysis. The accounting treatment related to income taxes exposure/ contingencies have been assessed and provided in accordance with SFAS No. 109,
“Accounting for Income Taxes” (“SFAS 109”) and FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).
Liabilities related to legal proceedings, demands and claims are recorded in accordance with the Statement of Financial Accounting Standards No. 5,
“Accounting for Contingencies,” or SFAS No. 5. SFAS No. 5 defines a contingency as “an existing condition, situation, or set of circumstances involving
uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.” In
accordance with SFAS No. 5, accruals for exposures or contingencies are being provided when the expected outcome is probable and when the amount of
loss can be reasonably estimated. It is possible, however, that future results of operations for any particular quarter or annual period could be materially
affected by changes in our assumptions, the actual outcome of such proceedings or as a result of the effectiveness of our strategies related to these
proceedings.
In July 2006, the FASB issued 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.
We adopted the provisions of FIN 48 as of January 1, 2007. As a result of the implementation of FIN 48, we 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 positions is classified as financial expenses in the financial statements and penalties as general and
administrative expenses. Our 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.
35
Accounting for Stock-Based Compensation. On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standard
(“SFAS”) No. 123(R), “Share-Based Payment,” which requires us to measure all employee stock-based compensation awards using a fair value method
and recognize such expense in our consolidated financial statements. We adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard starting from January 1, 2006. We estimate the fair value of stock options granted using the BlackScholes option pricing model. Prior to the adoption of SFAS 123(R), we accounted for equity-based awards to employees and directors using the intrinsic
value method in accordance with APB No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) as allowed under SFAS 123. Non-cash sharebased compensation of $1.3 million was recorded in 2007. As of December 31, 2007, there was $1.2 million of total unrecognized compensation cost
related to non-vested share-based awards granted under our stock option plans. That cost is expected to be recognized over a weighted average period of
1.2 years.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues. Revenues for the years ended December 31, 2007 and 2006 for our three business segments were as follows:
Year Ended
Year Ended
December 31,
December 31,
2007
2006
Percentage
2007
2006
Percentage of
GNS
Equipment
Services
$
25.0%
33.0%
52.2%
8.4%
47.5%
7.2%
171,419
136,008
26.0%
60.6%
54.7%
26,513
68,857
24,312
69,311
9.1%
(0.7)%
9.4%
24.4%
9.8%
27.9%
95,370
93,623
1.9%
33.8%
37.7%
268
33,922
1,700
37,170
(84.2)%
(8.7)%
0.1%
12.0%
0.7%
14.9%
34,190
38,870
(12.0)%
12.1%
15.6%
17,649
711
18,066
1,725
(2.3)%
(58.8)%
6.2%
0.3%
7.3%
0.7%
18,360
19,791
(7.2)%
6.5%
8.0%
Total
Equipment
Services
156,798
125,821
126,093
122,617
24.4%
2.6%
55.5%
44.5%
50.7%
49.3%
Total
282,619
248,710
13.6%
100.0%
100.0%
SRC
Equipment
Services
Intercompany Adjustments
Equipment
Services
$
revenues
118,147
17,861
Spacenet
Equipment
Services
147,666
23,753
change
$
Revenues in 2007 increased by 13.6% compared to 2006. The increase in revenues is primarily attributable to increased revenues in GNS reaching
$171.4 million in 2007, up approximately 26% from $136.0 million in 2006. This growth derives mainly from projects in Eastern Europe, Africa and India
which include turnkey projects to governments and operators fulfilling universal service obligations. Revenues in 2007 were derived 55.5% from
equipment and 44.5% from services. In 2006, our revenues were derived 50.7% from equipment and 49.3% from services. The decrease in the service
portion of our business can be attributed to the reduction of revenues recognized in SRC, in the amount of $6.4 million, relating to the delay in the release
of restricted cash from the Compartel projects in Colombia, in order to ensure that accumulated revenues recognized from the projects will not exceed the
accumulated amounts already released from the trust. This decrease was offset by an increase in service revenues generated by GNS in connection with
value added services sold to our customers.
36
Gross profit. The gross profit of our three business segments for the years ended December 31, 2007 and 2006 was as follows:
Year Ended
Year Ended
December 31,
December 31,
2007
2006
2007
2006
Percentage of revenues per
GNS
Equipment
Services
$
$
Spacenet
Equipment
Services
$
$
SRC
Equipment
Services
$
$
Intercompany
Adjustments
Total Gross Profit
$
72,064
13,028
55,752
8,172
48.8%
54.8%
47.2%
45.8%
85,092
63,924
49.6%
47.0%
3,449
11,097
3,218
13,132
13.0%
16.1%
13.2%
18.9%
14,546
16,350
15.3%
17.5%
231
2,089
1,555
7,222
86.2%
6.2%
91.5%
19.4%
2,320
8,777
6.8%
22.6%
113
1,314
0.6%
6.6%
90,365
36.0%
36.3%
101,845
$
segment
$
Our gross profit margin remained at approximately 36% for the years ended December 31, 2007 and 2006. Gross profit increased by approximately
$11.5 million as a result of the increase in our revenues. GNS’ gross margin increased from 47.0% in 2006 to 49.6% in 2007, mainly as a result of high
margin equipment transactions, immaterial amounts of inventory write offs during 2007 compared to approximately $1.2 million in 2006 and increased
service revenues which carry higher margins in GNS. The increase in GNS’ gross margin was offset by a decrease in SRC’s gross margins caused by a
deferral of revenues in the Compartel Projects in Colombia for which expenses continue to be recorded.
When reported by segment, the results of Spacenet and SRC are presented based upon intercompany transfer prices. The intercompany adjustments
line reflects the intercompany profits that were realized in order to adjust the transfer price to our cost.
37
Research and Development Expenses:
Year Ended
Year Ended
December 31,
December 31,
2007
2006
Percentage
change
2007
2006
Percentage of revenues per segment
GNS
Expenses incurred
Less - grants
$
17,270
2,240
$
15,687
2,045
10.1%
9.5%
10.1%
1.3%
11.5%
1.5%
Total GNS
$
15,030
$
13,642
10.2%
8.8%
10.0%
Net research and development costs increased by approximately $1.4 million in the year ended December 31, 2007 compared to 2006. The increase was
mainly due to increased salary and related expenses caused mainly by the devaluation of the US Dollar against the NIS during 2007 and increased
headcount.
Selling and marketing expenses. The selling and marketing expenses of our three business segments for the years ended December 31, 2007 and
2006 were as follows:
Year Ended
Year Ended
December 31,
December 31,
2007
2006
Percentage
change
2007
2006
GNS
Spacenet
SRC
$
27,205
8,905
2,264
$
24,984
9,403
2,088
8.9%
(5.3)%
8.4%
15.9%
9.3%
6.6%
18.4%
10.0%
5.4%
Total
$
38,374
$
36,475
5.2%
13.6%
14.7%
Selling and marketing expenses increased by approximately $1.9 million in the year ended December 31, 2007, compared to 2006. This increase is
attributable mainly to increased expenses in GNS associated with our increased revenues in 2007.
General and administrative expenses. The general and administrative expenses of our three business segments for the year ended December 31,
2007 and 2006 were as follows:
Year Ended
Year Ended
December 31,
December 31,
2007
2006
Percentage
change
2007
2006
GNS
Spacenet
SRC
$
12,135
12,979
5,938
$
11,314
9,528
5,958
7.3%
36.2%
(0.3)%
7.1%
13.6%
17.4%
8.3%
10.2%
15.3%
Total
$
31,052
$
26,800
15.9%
11.0%
10.8%
General and administrative expenses increased by approximately $4.3 million in 2007, compared to 2006. This increase is attributable primarily to an
increase in general and administrative expenses in Spacenet relating to sales and use tax penalties of $1.2 million, an increase in rent expenses of
approximately $0.7 million resulting from vacant sublet space for a short period during 2007, an increase in professional consulting fees of approximately
$0.6 million relating to Sarbanes Oxley related work and tax consultants, $0.5 million relating to franchise and communication tax penalties and an
increase of approximately $0.2 million relating to legal fees. The increased general and administrative expenses in GNS are attributed mainly to the
increase in the level of our operations.
38
Financial income (expenses), net. In the year ended December 31, 2007, we had financial income of approximately $6.0 million, compared to
financial expenses of approximately $0.7 million in 2006. The increase in our financial income is mainly attributed to a $3.7 million decrease in interest
expenses on long-term loans due to the conversion of the convertible loan from York at the end of September 2006 and an increase of $2.9 million in
interest income from bank deposits and held to maturities marketable securities, increased cash balances and an increase in interest rates.
Taxes on income. Taxes on income in 2007 were approximately $1.0 million compared to approximately $2.4 million in 2006. Taxes on income are
dependent upon where our revenues are generated and the reduction in taxes in 2007 is not driven by any particular change in policy or event.
Year ended December 31, 2006 Compared to Year ended December 31, 2005
Revenues. Revenues for the years ended December 31, 2006 and 2005 for our three business segments are as follows:
Year Ended
Year Ended
December 31,
December 31,
2006
2005
GNS
Equipment
Services
$
Spacenet
Equipment
Services
SRC
Equipment
Services
Intercompany Adjustments
Equipment
Services
Total
Equipment
Services
Total
$
39
118,147
17,861
change
2006
2005
Percentage of revenues
83,033
15,220
42.3%
17.4%
47.5%
7.2%
39.7%
7.3%
136,008
98,253
38.4%
54.7%
47.0%
24,312
69,311
15,424
70,772
57.6%
(2.1)%
9.8%
27.9%
7.4%
33.8%
93,623
86,196
8.6%
37.7%
41.2%
1,700
37,170
4,666
35,891
(63.6)%
3.6%
0.7%
14.9%
2.2%
17.1%
38,870
40,557
(4.2)%
15.6%
19.3%
18,066
1,725
14,418
1,193
25.3%
44.6%
7.3%
0.7%
6.9%
0.6%
19,791
15,611
26.8%
8.0%
7.5%
126,093
122,617
88,705
120,690
42.1%
1.6%
50.7%
49.3%
42.4%
57.6%
209,395
18.8%
100.0%
100.0%
248,710
$
Percentage
$
The increase in our revenues in the year ended December 31, 2006 is principally attributable to increased equipment sales. GNS accounted for
approximately $37.8 million of the increase, mainly due to government and universal service obligations, or USOs, projects in Latin America, Russia and
Africa. The increase was in line with our business strategy to focus on expanding our solutions and services across the value chain by offering project
implementation, turnkey solutions and value-added products and services. In addition, Spacenet accounted for approximately $7.4 million of the increase
in revenues, mainly due to sales to lottery operators.
Intercompany adjustments reflect the elimination of sales by GNS to the other business segments.
Gross profit. The gross profit of our three business segments for the years ended December 31, 2006 and 2005 was as follows:
Year Ended
Year Ended
December 31,
December 31,
2006
2005
GNS
Equipment
Services
$
Spacenet
Equipment
Services
SRC
Equipment
Services
Intercompany
adjustments
Total Gross Profit
$
55,752
8,172
2005
42,148
8,366
47.2%
45.8%
50.8%
55.0%
63,924
50,514
47.0%
51.4%
3,218
13,132
1,404
11,457
13.2%
18.9%
9.1%
16.2%
16,350
12,861
17.5%
14.9%
1,555
7,222
3,913
4,257
91.5%
19.4%
83.9%
11.9%
8,777
8,170
22.6%
20.1%
1,314
4,631
6.6%
29.7%
76,176
36.3%
36.4%
90,365
$
2006
$
Our gross profit margin remained at approximately 36% for the years ended December 31, 2006 and 2005. Gross profit increased by approximately
$14.2 million as a result of the increase in our revenues. Spacenet’s gross margin increased from 14.9% in 2005 to 17.5% in 2006, mainly as a result of the
increase in equipment sales to lottery operators and improved efficiency in our service costs as a result of integrating the operations of StarBand into those
of Spacenet. GNS’s gross profit increased by approximately $13.4 million, while the gross margin decreased, mainly due to an increase in the size of
transactions and volume of VSATs which carry lower margins, and to a general downward pressure on prices in the industry. In addition, during 2006, we
wrote-off approximately $1.2 million of excess inventory compared to approximately $0.6 million in 2005.
When reported by segment, the results of Spacenet and SRC are presented based upon intercompany transfer prices. The intercompany adjustments
line reflects the intercompany profits that were realized in order to adjust the transfer price to our cost.
40
Research and development expenses, net. All of our research and development expenses are incurred by our GNS business segment. Our research
and development expenses for the years ended December 31, 2006 and 2005 are as follows:
Year Ended
Year Ended
December 31,
December 31,
2006
2005
Percentage
change
2006
2005
Expenses incurred
Less - grants
$
15,687
2,045
$
16,944
2,950
(7.4)%
(30.7)%
11.5%
1.5%
17.2%
3.0%
Total
$
13,642
$
13,994
(2.5)%
10.0%
14.2%
Net research and development costs decreased by approximately $0.4 million in the year ended December 31, 2006 compared to 2005. The decrease
was mainly due to our sale of a wholly owned subsidiary, Deterministic Networks Inc., in September 2005 and a decrease in the level of depreciation and
amortization, offset by the reduced amount of grants received from SES Global due to our completion of the research and development project performed
on behalf of SES Global in 2005.
Selling and marketing expenses. The selling and marketing expenses of our three business segments for the years ended December 31, 2006 and
2005 are as follows:
Year Ended
Year Ended
December 31,
December 31,
2006
2005
Percentage
change
2006
2005
GNS
Spacenet
SRC
$
24,984
9,403
2,088
$
20,000
9,668
1,661
24.9%
(2.7)%
25.7%
18.4%
10.0%
5.4%
20.4%
11.2%
4.1%
Total
$
36,475
$
31,329
16.4%
14.7%
15.0%
Selling and marketing expenses increased by approximately $5.1 million in the year ended December 31, 2006, compared to 2005. This increase is
attributable mainly to approximately $4.5 million of increased expenses associated with our increased revenues in 2006 and the adoption of SFAS 123(R)
on January 1, 2006, resulting in non-cash compensation expenses of approximately $1.4 million. These increases were offset mainly by a reduction in
other expenses in Spacenet’s operations due to the operational merger of StarBand and Spacenet Inc in 2005.
41
General and administrative expenses. The general and administrative expenses of our three business segments for the years ended December 31,
2006 and 2005 are as follows:
Year Ended
Year Ended
December 31,
December 31,
2006
2005
Percentage
change
2006
2005
GNS
Spacenet
SRC
$
11,314
9,528
5,958
$
11,290
11,493
6,682
0.2%
(17.1)%
(10.8)%
8.3%
10.2%
15.3%
11.5%
13.3%
16.5%
Total
$
26,800
$
29,465
(9.1)%
10.8%
14.1%
General and administrative expenses decreased by approximately $2.7 million in 2006, compared to 2005. This decrease is attributable mainly to
reduced administrative expenses of approximately $2.9 million in our Spacenet operations as a result of the operational merger of StarBand and Spacenet
in 2005, reduced legal and professional fees of approximately $0.9 million and a reduction in depreciation and amortization expenses of approximately
$0.8 million. These decreases were offset in part by the adoption of SFAS 123(R) on January 1, 2006, resulting in non-cash compensation expenses of
approximately $2.0 million.
Financial expenses, net. In the year ended December 31, 2006, we had financial expenses of approximately $0.7 million, compared to approximately
$2.7 million in 2005. The decrease in our financial expenses is mainly attributable to a $2.4 million increase in net interest income from bank deposits, due
to an increase in Libor rates and increased cash balances, and a decrease in interest expenses on long-term loans in the amount of approximately $1.2
million, mainly due to the conversion of the convertible loan held by York at the end of September 2006. This decrease in our financial expenses was
offset in part by reduced interest income relating to a capital lease of approximately $0.8 million and approximately $0.5 million of amortization expenses
related to the fair value of the modification of the conversion feature relating to the loan convertible loan owed to York.
Taxes on income. Taxes on income in 2006 were approximately $2.4 million compared to approximately $3.1 million in 2005. The decrease is
principally attributable to tax expenses recorded in 2005 in connection with a settlement with the Israeli Tax Authorities of approximately $1.2 million.
Although our income before taxes increased, our tax expenses did not change materially because the increase in income was primarily attributable to
reduced losses by some of our subsidiaries.
Variability of Quarterly Operating Results
Our revenues and profitability may vary from quarter to quarter and in any given year, depending primarily on the sales mix of our family of products
and the mix of the various components of the products (i.e. the volume of sales of remote terminals versus hub equipment and software and add-on
enhancements), sale prices, and production costs, as well as entering into new service contracts, the termination of existing service contracts, or different
profitability levels between different service contracts. Sales of our products to a customer typically consist of numerous remote terminals and related hub
equipment and software, which carry varying sales prices and margins.
Annual and quarterly fluctuations in our results of operations may be caused by the timing and composition of orders by our customers and the timing
of our ability to recognize revenues. Our future results may also be affected by a number of factors, including our ability to continue to develop, introduce
and deliver new and enhanced products on a timely basis and expand into new product offerings at competitive prices, to anticipate effectively customer
demands and to manage future inventory levels in line with anticipated demand. Our results may also be affected by currency exchange rate fluctuations
and economic conditions in the geographical areas in which we operate. In addition, our revenues may vary significantly from quarter to quarter as a result
of, among other factors, the timing of new product announcements and releases by our competitors and us. We can not be certain that revenues, gross
profit and net income (or loss) in any particular quarter will not vary from the preceding or comparable quarters. Our expense levels are based, in part, on
expectations as to future revenues. If revenues are below expectations, operating results are likely to be adversely affected. In addition, a substantial
portion of our expenses are fixed (i.e. space segment, lease payments), and adjusting the expenses in cases where revenues drop unexpectedly often takes
considerable time. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to all of the foregoing factors, it is possible that in some future quarters our revenues or operating
results will be below the expectations of public market analysts or investors. In such event, the market price of our shares would likely be materially
adversely affected.
42
Our business historically has not been affected by seasonal variations.
Liquidity and Capital Resources
Since inception, our financing requirements have been met through cash from funds generated by private equity investments, public offerings,
issuances of convertible notes, bank loans, operations, as well as funding from research and development grants. In addition, we also finance our
operations through available credit facilities as discussed below. We have used available funds primarily for working capital, capital expenditures and
strategic investments.
As of December 31, 2007, we had cash and cash equivalents of $122.8 million, short-term bank deposits and held to maturity marketable securities of
$45.6 million, short-term and long-term restricted cash of $13.4 million, short-term and long-term restricted cash held in trustees’ accounts of
$24.0 million and short-term bank credits of $5.8 million. As of December 31, 2006, we had cash and cash equivalents of $149.5 million, short-term and
long-term restricted cash of $11.5 million, short-term and long-term restricted cash held in trustees’ accounts of $22.8 million and short-term bank credits
of $1.2 million.
The $24.0 million of restricted cash held in a trustee’s account relates to funds collected from two of our large projects in Colombia, which are
divided into seven different regions and contracts. The release of these funds from the trust is dependent both on a schedule of payments and on the
achievement of operational milestones. However, in the event that we do not meet certain milestones, or if the contracts are terminated unilaterally by the
government of Colombia, we may be unable to receive this restricted cash. At present these agreements and the operational milestones are being renegotiated.
As of December 31, 2007, our accumulated debt was approximately $40.4 million, comprised of long-term loans of $24.1 million and convertible
subordinates notes of approximately $16.3 million.
Our credit agreements contain various restrictions and limitations that may impact us, including pledges on our assets and property. These restrictions
and limitations relate to incurrence of indebtedness, contingent obligations, liens, mergers and acquisitions, asset sales, dividends and distributions,
redemption or repurchase of equity interests, certain debt payments and modifications of loans and investments.
The following table summarizes our cash flows for the periods presented:
December 31,
2007
2006
2005
US Dollars
in thousands
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
$
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the period
22,775
(53,836)
3,307
1,016
$
(26,738)
149,545
Cash and cash equivalents at end of the period
$
43
122,807
37,824
8,312
28,169
311
$
74,616
74,929
$
149,545
3,290
(893)
(3,592)
353
(842)
75,771
$
74,929
Our cash and cash equivalents decreased by $26.7 million during the year ended December 31, 2007 as a result of the following:
Operating activities. Cash provided by operating activities was approximately $22.7 million mainly due to a decrease in other assets (including
short-term, long-term and deferred charges) in the amount of $28.5 million and growth in our positive net cash flow provided by other operating activities
in the amount of $32.4 million. The above was offset in part by an increase in trade receivables of approximately $14.0 million and a decrease in other
accounts payables and other long term liabilities of approximately 24.2 million .
Investing activities. Cash used in investing activities was approximately $53.8 million, mainly from net investment in held to maturity marketable
securities in the amount of approximately $43.5 million, purchase of property and equipment in the amount of approximately $9.3 million, net investment
in restricted cash (including long term) in the amount of approximately $1.9 million net of proceeds from loans to employees of approximately
$0.9 million.
Financing activities. Cash provided by financing activities was approximately $3.3 million, primarily from proceeds of approximately $4.6 million
from the exercise of options, net proceeds of approximately $4.6 million of short term bank credit, net of net repayment of long term loans of
approximately $5.6 million and net of approximately $0.3 million of issuance expenses in respect of offering completed in December 2006.
Our cash and cash equivalents increased by $74.6 million during the year ended December 31, 2006 as a result of the following:
Operating activities. Cash provided by operating activities was approximately $37.8 million mainly due to an increase in other accounts payable and
other long-term liabilities in the amount of $33.2 million mainly due to strong collections of advances from customers and growth in our deferred revenues
and positive net cash flow provided by other operating activities in the amount of $16.4 million. The above was offset in part by an increase in inventories
of approximately $11.8 million to support the higher demand for our products.
Investing activities. Cash provided by investing activities was approximately $8.3 million, mainly from net proceeds of restricted cash (including
long-term) of approximately $11.1 million, proceeds from short-term bank deposits of approximately $3.3 million, proceeds from sale of property and
equipment of approximately $1.6 million and net proceeds from loans to employees of approximately $0.3 million, net of purchase of property and
equipment in the amount of approximately $6.5 million and a net investment in restricted cash held by trustees in the amount of approximately
$1.6 million.
Financing activities. Cash provided by financing activities was approximately $28.2 million, primarily from proceeds of approximately $40.2
million from the offering completed in December 2006 and proceeds of approximately $3.6 million from the exercise of options, net of repayment of
approximately $8.7 million of long-term loans and $7.0 million of short-term bank credits.
Contractual Obligations
As of December 31, 2007, our short and long term obligations were as follows:
Contractual Obligations
Payments due by period (in thousands)
2013 and
Total
Long-term loans *
Accrued interest related to restructured
debt (including $653 as short term
accrued expenses)
Capital lease obligations
Operating lease
Other long-term debt
Total contractual cash obligations
(*) Future interest payments are not included due to variability in interest rates
44
2008
2009-2010
2011-2012
24,058
16,315
5,354
8,754
854
4,854
15,461
3,146
14
100,660
4,240
148,433
653
14
27,769
399
34,188
1,298
1,195
38,122
599
49,626
18,812
500
40,821
after
5,096
15,957
2,742
23,798
Off Balance Sheet Arrangements
At times, we guarantee the performance of our work to some of our customers, primarily government entities. Guarantees are often required for our
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.
In addition, from time to time, we provide corporate guarantees to guarantee the performance of our subsidiaries. No guarantees have ever been exercised
against us.
As of December 31, 2007, the aggregate amount of bank guarantees outstanding in order to secure our various performance obligations was
approximately $12.1 million, comprised mainly of performance guarantees provided on behalf of our subsidiary in Peru in an amount of approximately
$7.7 million. We have restricted cash as collateral for these guarantees in an amount of approximately $1.2 million.
We have also provided bank guarantees mainly for certain leases for our offices worldwide, which are secured by restricted cash in the amount of
approximately $5.7 million.
Impact of Inflation and Currency Fluctuations
While most of our sales and service contracts are in U.S. dollars and most of our expenses are in U.S. dollars and NIS, portions of our projects in
Latin America are linked to their respective local currencies. The foreign exchange risks are often significant due to fluctuations in local currencies
relative to the U.S. dollar.
The influence on the U.S. dollar cost of our operations in Israel relates primarily to the cost of salaries in Israel, which are paid in NIS and constitute
a substantial portion of our expenses in NIS. In 2007, there was inflation in Israel of 3.4% and the U.S Dollar depreciated in relation to the NIS at a rate of
9.1%, from NIS 4.225 per $1 on December 31, 2006 to NIS 3.846 per $1 on December 31, 2007. In the period ending in December 31, 2006 deflation in
Israel was 0.1% while the U.S. dollar depreciated in relation to the NIS at a rate of 8.2%. If future inflation in Israel exceeds the devaluation of the NIS
against the U.S. dollar or if the timing of such devaluation lags behind increases in inflation in Israel or if evaluation of the NIS against the U.S.dollar
continues, our results of operations may be materially adversely affected. In 2007 and 2008, in order to limit these risks, we entered into hedging
agreements to cover certain of our NIS to US Dollar exchange rate exposures.
Regarding the changes in the value of other foreign currencies in relation to the U.S. dollar, our monetary balances that are not linked to the U.S.
dollar impacted our financial expenses during 2007 and 2006. This is due to heavy fluctuations in currencies in certain regions of Latin America in which
we do business. There can be no assurance that in the future our results of operations may not be materially adversely affected by other currency
fluctuations.
45
Effective Corporate Tax Rate
On January 1, 2003, a comprehensive tax reform took effect in Israel. Pursuant to the tax reform, resident companies are subject to Israeli tax on
income accrued or derived in Israel or abroad. In addition, the concept of a “controlled foreign corporation” was introduced, according to which an Israeli
company may become subject to Israeli taxes on certain income of a non-Israeli subsidiary if the subsidiary’s primary source of income is passive income
(such as interest, dividends, royalties, rental income or capital gains). The tax reform also substantially changed the system of taxation of capital gains.
Following the reform, the capital gains tax rate applicable to us was decreased from 36% to 25%, while the allocation of the gain between the two periods
is proportional to the holding periods until December 31, 2002, and after December 31, 2002. In 2006 and in 2007, the tax reform did not have any
material effect on our liquidity, financial condition or results of operations.
Israeli companies are subject to income tax on their worldwide income. Pursuant to tax reform legislation that came into effect in 2003, the corporate
tax rate is to undergo staged reductions to 25% by the year 2010. In order to implement these reductions, the corporate tax rate is scheduled to decline
from 29% in 2007 to 27% in 2008, 26% in 2009 and 25% in 2010. However, the effective tax rate payable by a company that derives income from an
Approved Enterprise, discussed further below, may be considerably less.
On April 1, 2005, an amendment to the Investment Law came into effect which significantly changed the provisions of the Investment 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, such as
provisions generally requiring that at least 25% of the approved enterprise’s income will be derived from export. A facility that is approved under the
Amendment is called a “Benefited Enterprise.” Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded
under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits. However, the Investment
Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as in effect on
the date of such approval. Therefore, our existing Approved Enterprises will not be subject to the provisions of the Amendment.
According to 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 liabilities with respect to such tax-exempt income. As of December 31, 2007, we
did not generate income under the provisions of the Amendment.
Currently, we have nine Approved Enterprise programs under the alternative route of the Investment Law. The period of benefits for the first eight
programs has expired and we do not expect substantial benefits from the other program. See “ITEM 10: Additional Information – Israeli Taxation.” In
addition, the Company chose 2005 as the year of election for a new Benefited Enterprise under the amendment.
We expect to derive a substantial portion of our operating income, when we become profitable for Israeli tax purposes from future Benefited
Enterprise facilities. We may therefore be eligible for a tax exemption for a limited period on undistributed Benefited Enterprise income, and an additional
subsequent period of reduced corporate tax rates ranging between 10% and 25%, depending on the level of foreign ownership of our shares, on
undistributed such Benefited Enterprise income. Income from sources other than the “Approved Enterprises” or “Benefited Enterprises” “during the
relevant period of benefits will be taxable at the regular corporate tax rates.
We anticipate that we will not have to pay taxes relating to the 2008 tax year for most of our major entities due to current or carry forward tax losses.
Cash outlays for income taxes in the future might be different from tax expenses, mainly due to cash tax payments for previous years that might be
triggered by tax audits in the various tax jurisdictions, deferred tax expenses (income) and payments usually made in arrears for annual taxes in profitable
years.
Research and Development
We devote significant resources to research and development projects designed to enhance our VSAT products, to expand the applications for which
they can be used and to develop new products. We intend to continue to devote research and development resources to complete development of certain
features, to improve functionality, including supporting higher throughput, to improve space segment utilization, and to reduce the cost of our products.
46
We devoted significant research and development resources in 2007, 2006 and 2005 to the development of our SkyEdge family of products. We
develop our own network software and software for our VSATs. We generally license our software to customers as part of the sale of our network
products and services. We also license certain third party software for use in our products.
Our software and our internally developed hardware are proprietary and we have implemented protective measures both of a legal and practical
nature. We have obtained and registered patents in the United States and in various other countries in which we offer our products and services. We rely
upon the copyright laws to protect against unauthorized copying of the object code of our software and upon copyright and trade secret laws for the
protection of the source code of our software. We derive additional protection for our software by licensing only the object code to customers and keeping
the source code confidential. In addition, we enter into confidentiality agreements with our customers and other business partners to protect our software
technology and trade secrets. We have also made copyright, trademark and service mark registrations in the United States and abroad for additional
protection of our intellectual property. Despite all of these measures, it is possible that competitors could copy certain aspects of our technology or obtain
information that we regard as a trade secret in violation of our legal rights.
Third-Party Funding
In accordance with an agreement entered in 2001 with the Chief Scientist we are eligible to participate in a program under which we are eligible to
receive future research and development grants for generic research and development projects without any royalty repayment obligations.
The following table sets forth, for the years indicated, our gross research and development expenditures, the portion of such expenditures which was
funded by royalty-bearing and non-royalty bearing grants and the net cost of our research and development activities:
Years
2007
2006
2005
(U.S. dollars in thousands)
Gross research and development costs
Less:
Royalty-bearing grants
Non-royalty-bearing grants
$
Research and development costs - net
$
17,270
$
2,240
15,030
15,687
$
2,045
$
13,642
16,944
1,633
1,317
$
13,994
Trend Information
In the past few years the satellite communications market has experienced increasing competition both from within its sector and from competing
satellite communication technologies. Specifically, the expansion of cellular coverage in rural areas worldwide, increased terrestrial infrastructures as well
as the advancement of wireless technologies, increases the options for our potential and existing customers. In addition, the number of satellite
communications providers in the market has increased and prices of technologies continue to decline. Another development in our industry is the
increasing demand for complete solutions which encompass far more than a single platform of a communications solution.
We estimate that the political environment in Israel could continue to prevent certain countries from doing business with us and this, in addition to the
increased competition and reduced prices in the telecommunications industry overall, may have adverse effects on our business. Given all of the above, we
cannot guarantee or predict what our sales will be, what trends will develop and if any changes in our business and marketing strategy will be
implemented.
47
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 nonfinancial 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 nonrecurring 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.
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-bycontract 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 adoption of the provisions of Statement No. 160.
48
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.
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.
ITEM 6:
DIRECTORS AND SENIOR MANAGEMENT
Directors
The following table sets forth the name, age, position(s) and a brief account of the business experience of each of the directors:
Name
Age
Amiram Levinberg
Haim Benjamini(1)(2)
Jeremy Blank
Ehud Ganani
Leora Meridor(1)(2)
Karen Sarid(1)(2)
Izhak Tamir(1)(2)
52
68
29
55
60
57
55
Position(s)
Chairman of the Board of Directors and Chief Executive Officer
External Director
Director
Director
External Director
Director
Director
(1) Member of our Compensation and Stock Option Committee.
(2) Member of our Audit Committee.
Amiram Levinberg co-founded our company and served as a director on our board since its inception and until April 2004. In July 2005,
Mr. Levinberg rejoined our company as our Chairman of the Board and Chief Executive Officer. From July 1995 and until April 15, 2003, he served as
our President. Until 2002, Mr. Levinberg also served as our Chief Operations Officer. Until July 1995, he served as our Vice President of Engineering.
From 1977 to 1987, Mr. Levinberg served in a research and development unit of the Israel Defense Forces, where he managed a large research and
development project. He was awarded the Israel Defense Award in 1988. Mr. Levinberg holds a B.Sc. in Electrical Engineering and Electronics and a
M.Sc. degree in Digital Communications from Israel Institute of Technology, in Haifa, Israel, or the Technion. Mr. Levinberg serves on the board of
directors of Cardboard Industries and Kargal, a cardboard manufacturer in Israel.
49
Haim Benjamini has served on our board as an external director since February 2005. Mr. Benjamini currently serves as an advisor to Teva
Pharmaceutical Industries Ltd.‘s CEO, board and management. He served as the Corporate Vice President of Human Resources of Teva from 1988 until
December 31, 2004. From 1982 to 1988, Mr. Benjamini served as the Corporate Vice President of Human Resources at Scitex Corporation. Mr. Benjamini
served as a guest lecturer at Tel Aviv University from 1997 to 2003 as part of the Masters of Arts program in Labor Studies. Mr. Benjamini holds a M.A.
(Organizational Behavior) from the University of Chicago and a B.A (Social Sciences, Sociology and Political Science) from the Hebrew University.
Mr. Benjamini is a Brigadier General (Ret) in the Israel Defense Forces and served in various command staff and training roles from 1957 until 1982.
Jeremy Blank has served on our board since July 2005. Mr. Blank is a managing director of York Capital Management. York is a private investment
fund based in New York with approximately $13 billion in assets under management. From 1999 to 2004, Mr. Blank worked at Morgan Stanley as a vice
president within Morgan Stanley’s fixed income department and earlier, in Morgan Stanley’s mergers and acquisitions department. Mr. Blank graduated
from Yeshiva University in New York City with a Bachelor’s degree in Finance.
Dr. Ehud Ganani has served on our board since July 2005. Dr. Ganani currently serves as Chairman of the boards of directors of the following
companies, both in the security and defense markets: Trace Guard Technologies Inc., and DefenSoft Ltd. He served as the Chief Executive Officer of
Israel Military Industries from 2002 to 2005. Prior to that he served in various senior positions in Rafael Armament Development Authority, the last of
which was as Vice President of Marketing and Business Development from 1997 to 2002. Dr. Ganani holds a Doctorate of Science in chemical
engineering from Washington University and a Bachelor of Science in Chemical Engineering from the Technion.
Dr. Leora (Rubin) Meridor has served on our board since August 2005. Dr. Meridor is a business and financial consultant and serves on the boards
of Teva Pharmaceutical Industries Ltd. and Nice Systems. Between 2001 and 2004, Dr. Meridor served as chair of the board of Poalim Capital
Markets Ltd. and between 2001 and 2005, as chair of the boards of directors of Bezeq International Ltd. and Walla! Communications Ltd. Between 1996
and 2000 she served as Senior Vice President, Head of Credit & Risk Management Division of the First International Bank. From 1992 to 1996 she served
as Head of Research at the Bank of Israel. Dr. Meridor has a Ph.D in Economics, an M.Sc in Mathematics and B.Sc. in Mathematics and Physics, all from
the Hebrew University in Jerusalem. Her studies include a post doctoral year at Massachusetts Institute of Technology.
Karen Sarid has served on our board since July 2005. Ms. Sarid currently serves as the chief operating officer and chief financial officer of Galil
Medical Ltd. and as the general manager of Galil Israel. Galil Medical is a medical device company that develops a cryotherapy platform. Ms. Sarid has
served as a General Manager of Orex Computed Radiography Ltd., a Kodak company focusing on advanced radiography systems for the digital x-ray
market since September 2000 until March 2007. From September 1999 until September 2000, Ms. Sarid served as Chief Financial Officer and a member
of the board of directors of Forsoft Ltd., a software solutions provider and a subsidiary of the Formula Group. From 1996 until August 1999, Ms. Sarid
was Chief Financial Officer and a member of the board of directors of ESC Medical Systems Ltd., a medical laser manufacturer that is traded on the
NASDAQ Stock Market. Ms. Sarid currently serves on the board of directors of LanOptics Ltd. and as chair of its audit committee. Ms Sarid also serves
on the board of directors of Oridion Ltd. and Audiocodes Ltd. Ms. Sarid received a B.A. in Economics and Accounting from Haifa University, and was
awarded the CFO of the Year award in 1998 by the Association of Chief Financial Officers in Israel.
Izhak Tamir has served on our board since July 2005. Mr. Tamir has been President and a Director of Orckit since its founding in 1990. Orckit
Communications Ltd. is a leading provider of advanced telecom equipment targeting high capacity packetized broadband services. Mr. Tamir has served
on the board of directors of Scopus Video Networks since 2005. From 1987 until 1989, Mr. Tamir was employed by Comstream Inc., in San Diego,
California. From 1985 until 1987, he was Vice President of A.T. Communication Channels Ltd., a subsidiary of Bezeq. From 1978 to 1985, he was a
senior engineer in the Israeli government. Mr. Tamir holds an engineering degree from the Technion, and an M.B.A. from Tel Aviv University. Mr. Tamir
has been Chairman of the board of directors of Tikcro Technologies Ltd. since January 2000 and its Chief Executive Officer since August 2003.
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Senior Management
The executive officers and key executives of our company and its subsidiaries are as follows:
Name
Age
Amiram Levinberg(1)
Erez Antebi
Andreas Georghiou
Yoav Leibovitch
Joshua Levinberg
Tal Payne
52
48
58
50
54
36
(1)
Position(s)
Chief Executive Officer and Chairman of the Board of Directors
Chief Executive Officer, Gilat Networks Systems, and, President, Spacenet Rural Communications
Chief Executive Officer, Spacenet Inc.
Executive Vice President, Corporate Development
Executive Vice President, Corporate Business Development & Strategy
Chief Financial Officer
Please see biography under “Directors” above.
Erez Antebi was appointed as Chief Executive Officer of Gilat Networks Systems on June 1, 2005, and as CEO of Spacenet Rural Communications
on February 1, 2008. Prior to that time, Mr. Antebi served as our Chief Operating Officer from October 2002 until September 2003, when he left to serve
as Chief Executive Officer of Clariton Networks Ltd. From the beginning of 1998 until being appointed our Chief Operating Officer, Mr. Antebi served as
our Vice President, General Manager for Asia, Africa and Pacific Rim. From September 1994 until the beginning of 1998, he served as Vice President and
General Manager of Gilat Inc. Mr. Antebi joined our company in May 1991 as product manager for the Skystar Advantage VSAT product. From
August 1993 until August 1994, he served as Vice President of Engineering and Program Management of Gilat Inc. Prior to joining us, Mr. Antebi worked
for a private importing business from 1989 to 1991, after having served from 1987 to 1989 as marketing manager for high frequency radio
communications for Tadiran Limited, a defense electronics and telecommunications company, and as a radar systems development engineer at Rafael, the
research and development and manufacturing arm of the Israel Defense Forces, from 1981 to 1987. Mr. Antebi holds a B.Sc. and an M.Sc. Electrical
Engineering from the Technion.
Andreas Georghiou joined Spacenet Inc. as its Chief Executive Officer in August 2006. Prior to joining Spacenet, Mr. Georghiou had been with SES
Americom and its predecessor, GE Americom, a unit of GE Capital, for over 20 years in various leadership roles. Immediately preceding his assumption
of CEO duties at Spacenet, Mr. Georghiou served as Chief Commercial Officer at SES Americom and, prior to that and through July 2005 he served as the
Senior Vice President of Business Operations. From 2003 through July 2006, Mr. Georghiou also served as President of Americom Asia Pacific, a
regional satellite venture of SES. From 1994 to 2003 he served as the Senior Vice President of Sales & Marketing for Global Satellite Services at GE
Americom. From 1992 to 1994 he served as Americom’s Director of Business Development. While at GE Americom, he also served as an officer of GE
Capital. In addition, Mr. Georghiou held various positions at RCA Corporation including IT Manager, Director of Treasury Planning and Manager of
Operations Research, at the David Sarnoff Research Center. He is a member of the Board of Directors of Society of Satellite Professionals International
(SSPI) and a member of the Corporate Leadership Advisory Council of the U.S. Chamber of Commerce. Mr. Georghiou holds an undergraduate degree
from the University of Pennsylvania, and a master’s degree from the Wharton School of Business, where he studied as a Fulbright Scholar.
Yoav Leibovitch rejoined our company in his current position as Executive Vice President of Corporate Development in September 2005. Prior to
rejoining us and during 2004, Mr. Leibovitch served as a consultant for business development in Kasamba Ltd. and assisted in the initial public offering of
Scopus Ltd. Mr. Leibovitch first joined our company in early 1991 as Vice President of Finance and Administration and Chief Financial Officer, a
position he held until December 2003. From 1989 to 1990, Mr. Leibovitch worked in the U.S. at Doubleday Books and Music Clubs, a subsidiary of
Bertelsmann, A.G., as special advisor for new business development. From 1985 to 1989, he was the Chief Financial Officer of a partnership among
Bertelsmann, A.G., a large German media and communications company; Clal Corporation, a major Israeli industrial holding company; and Yediot
Aharonot, an Israeli daily newspaper. Mr. Leibovitch holds a B.A. (Economics and Accounting) and a M.B.A. (Finance and Banking) from the Hebrew
University of Jerusalem. Mr. Leibovitch is a Certified Public Accountant in Israel.
51
Joshua Levinberg, a co-founder of Gilat, rejoined our company as Executive Vice President of Corporate Business Development & Strategy in
August 2005. From June 1999 until 2003, he served as Senior Vice President for Business Development of our company, having previously served in that
position from 1994 to April 1998. At that time, Mr. Levinberg became Chief Executive Officer of GTH LA Antilles, then the parent company of Global
Village Telecom, or GVT, until June 1999. From 1989 until September 1994, he served as Executive Vice President and General Manager of Gilat
Satellite Networks, Inc. in the U.S. From 1987 until the formation of Gilat Satellite Networks, Inc. in 1989, Mr. Levinberg was Vice President of
Marketing & Business Development of our company. Mr. Levinberg holds a B.Sc. (Electrical Engineering and Electronics) from Tel Aviv University.
Amiram Levinberg and Joshua Levinberg are brothers.
Tal Payne was appointed our Chief Financial Officer in May 2005. Before that, Ms. Payne served as our Vice President of Finance starting
January 2004. Prior to that, Ms. Payne served as our Financial Director since July 1999. Prior to joining us, Ms. Payne, a CPA, was employed as a
Manager for Kesselman & Kesselman, PriceWaterhouseCooper’s Israel office from 1994 to 1999. She holds a B.A. in Economics and Accounting, as well
as an Executive MBA, both from Tel Aviv University. In March 2008, Ms. Payne announced her resignation which will become effective in mid-2008.
Compensation of Directors and Officers
The following table sets forth the aggregate compensation paid to or accrued on behalf of all of our directors and officers as a group for the year
ended December 31, 2007:
Salaries, Fees, Directors'
Fees,
Pension, Retirement and
Commissions and
Bonuses(1)
All directors and officers as a group (17 persons)
(1)
4,886,519
Similar Benefits
1,242,707
Also includes bonuses and stock option compensation accrued in 2007.
Management Agreements
Prior to the closing of the transaction pursuant to which Bank Hapoalim assigned its loan to our company to York Capital Management, York, , paid
$100,000 to a company controlled by Mr. Amiram Levinberg and his brother, Mr. Joshua Levinberg, to perform due diligence on our company. In
addition, Mr. Amiram Levinberg had a right to certain benefits from options held by York in shares of our company owned by Bank Hapoalim. For further
information on Mr. Levinberg’s relationship with York, please see the Principal Shareholder table and the footnote on York.
Mr. Amiram Levinberg, our Chairman and Chief Executive Officer has a three year employment agreement with us which will terminate July
2008.Under this agreement, Mr. Levinberg is entitled to (i) a salary of 100,000 NIS per month; (ii) options to purchase 915,000 ordinary shares of our
company; (iii) a “transaction bonus” equal to 0.82% of the market value of our company in a transaction or series of related transactions following which a
company, person or a group of persons or companies acting together will purchase from our company’s shareholders, in a bona fide, arms length
transaction, 50% or more of our then outstanding share capital subject to Mr. Levinberg complying with certain prior conditions; and (iv) entitlement to
participate in our company’s annual bonus plan, subject to the specific approval of the shareholders.
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Board Compensation
By resolutions adopted by our shareholders, directors who are not employees are entitled to receive annual compensation of $20,000 and an
additional $300 for each board or committee meeting attended for up to four hours, and an additional $300 for each board or committee meeting which
extends beyond four hours. In addition, board members are compensated for telephone participation in board and committee meetings in an amount of
50% of what would be received for physical attendance. Each current and future non-employee director is entitled to receive options to purchase 20,000 of
our ordinary shares, which options vest over a three-year period, and are exercisable for so long as such optionee remains a director of our company.
Board Composition and Practices
Our Articles of Association as adopted at a shareholders meeting on April 15, 2003, provide that our board of directors shall consist of not less than
five and not more than nine directors as shall be determined from time to time by a majority vote at the general meeting of our shareholders. Unless
resolved otherwise by our shareholders, our board of directors will be comprised of (i) nine directors, if four directors are appointed by beneficial owners
of 7% or more of our issued and outstanding ordinary shares (as set forth below), or (ii) seven directors, if fewer than four directors are so appointed by
beneficial owners of 7% or more of our ordinary shares.
Pursuant to our Articles of Association, each beneficial owner of 7% or more of our issued and outstanding ordinary shares is entitled to appoint, at
each annual general meeting of our shareholders, one member to our board of directors, provided that a total of not more than four directors are so
appointed. In the event that more than four qualifying beneficial owners notify us that they desire to appoint a member to our board of directors, only the
four shareholders beneficially owning the greatest number of shares shall each be entitled to appoint a member to our board of directors. So long as our
ordinary shares are listed for trading on NASDAQ, we may require that any such appointed director qualify as an “independent director” as provided for in
the NASDAQ rules then in effect. Our board of directors has the right to remove any such appointed director when the beneficial ownership of the
shareholder who appointed such director falls below 7% of our ordinary shares.
Our Articles of Association provide that a majority of the voting power at the annual general meeting of our shareholders will elect the remaining
members of the board of directors, including external directors as required under the Companies Law. At any annual general meeting at which directors
are appointed pursuant to the preceding paragraph, the calculation of the vote of any beneficial owner who appointed a director pursuant to the preceding
paragraph shall not take into consideration, for the purpose of electing the remaining directors, ordinary shares constituting 7% of our issued and
outstanding ordinary shares held by such appointing beneficial owner.
Each of our directors (except external directors) serve, subject to early resignation or vacation of office in certain circumstances as set forth in our
Articles of Association, until the adjournment of the next annual general meeting of our shareholders next following the general meeting in which such
director was elected. The holders of a majority of the voting power represented at a general meeting of our shareholders in person or by proxy will be
entitled to (i) remove any director(s), other than external directors and directors appointed by beneficial holders of 7% or more of our issued and
outstanding ordinary shares as set forth above, (ii) elect directors instead of directors so removed, or (iii) fill any vacancy, however created, in the board of
directors. Our board of directors may also appoint additional directors, whether to fill a vacancy or to expand the board of directors, who will serve until
the next general meeting of our shareholders following such appointment.
Our Articles of Association further provide that the board of directors may delegate all of its powers to committees of the board of directors as it
deems appropriate, subject to the provisions of applicable law.
53
Alternate Directors
Our Articles of Association provide that a director may appoint, by written notice to us and subject to the consent of the board of directors, any
person qualified to serve as a director to serve as an alternate director (provided such person does not already serve as a director or an alternate director).
An external director may not be appointed as an alternate director, unless otherwise permitted in the Companies Law. An alternate director shall have all
of the rights and obligations of the director appointing him or her, except the power to appoint an alternate (unless otherwise specifically provided for in
the appointment of such alternate). An alternate director may not act at any meeting at which the director appointing him or her is present and he is not
entitled to remuneration. Unless the time period or scope of any such appointment is limited by the appointing director, such appointment is effective for
all purposes and for an indefinite time, but will expire upon the expiration of term or vacation of office of the appointing director. Currently, no alternate
directors have been appointed.
External Directors
Under the Companies Law, public companies are required to elect two external directors who must meet specified standards of independence.
Companies that are registered under the laws of Israel and whose shares are listed for trading on a stock exchange outside of Israel, such as Our company,
are treated as public companies with respect to the external directors’ requirement. External directors may not have during the two years preceding their
appointment, directly or indirectly through a relative, partner, employer or controlled entity, any affiliation with (i) the public company, (ii) those of its
shareholders who are controlling shareholders at the time of appointment, or (iii) any entity controlled by the company or by its controlling shareholders.
The term “affiliation” includes an employment relationship, a business or professional relationship maintained on a regular basis, control and services as
an office holder. No person can serve as an external director if the person’s other positions or business creates or may create conflicts of interest with the
person’s responsibilities as an external director. Until the lapse of two years from termination of office, a company may not engage an external director as
an employee or otherwise.
External directors serve for a three-year term, which may be renewed for only one additional three-year term. External directors can be removed from
office only by the court or by the same special percentage of shareholders that can elect them, and then only if the external directors cease to meet the
statutory qualifications with respect to their appointment or if they violate their fiduciary duty to the company. The court may additionally remove external
directors from office if they were convicted of certain offenses by a non-Israeli court or are permanently unable to fulfill their position. If, when an
external director is elected, all members of the board of directors of a company are of one gender, the external director to be elected must be of the other
gender.
If delegated any authority of the board of directors, any committee of the board of directors must include at least one external director. An external
director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other
compensation, directly or indirectly, in connection with such service.
The Companies Law requires external directors to submit to the company, prior to the date of the notice of the general meeting convened to elect the
external directors, a declaration stating their compliance with the requirements imposed by Companies Law for the office of external director. External
Directors are required to have professional ability or financial and accounting expertise, as long as at least one of the External Directors is a financial and
accounting expert.
The election of external directors requires the affirmative vote of a majority of our ordinary shares voted on in person or by proxy at a meeting of the
shareholders, provided that such majority includes at least one-third of the votes of the non-controlling shareholders of the company who are voting on this
matter at the meeting. This approval requirement need not be met if the aggregate shareholdings of those non-controlling shareholders who vote against
the election of the external directors represent one percent or less of all the voting power of the company. “Controlling” for the purpose of this provision
means the ability to direct the acts of the company. Any person holding one half or more of the voting power of the company or of the right to appoint
directors or the chief executive officer is presumed to have control of the company.
54
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.
Audit Committee
The Companies Law provides that publicly traded companies must appoint an audit committee. The responsibilities of the audit committee include
identifying irregularities in the management of the company’s business and approving related party transactions as required by law. An audit committee
must consist of at least three members, and include all of the company’s external directors. However, the chairman of the board of directors, any director
employed by the company or providing services to the company on a regular basis, any controlling shareholder and any relative of a controlling
shareholder may not be a member of the audit committee. An audit committee may not approve an action or a transaction with an officer or director, a
transaction in which an officer or director has a personal interest, a transaction with a controlling shareholder and certain other transactions specified in the
Companies Law, unless at the time of approval two external directors are serving as members of the audit committee and at least one of the external
directors was present at the meeting in which an approval was granted.
Pursuant to the current listing requirements of the NASDAQ 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.
Independent Directors
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.
55
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.
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.
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.
56
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.
57
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 expire in 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:
A.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
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
York Capital Management(1)
Mivtach Shamir Finance Ltd. (2)
All officers and directors as a group (13 persons)(3)
(1)
Number of
Ordinary
Shares
Beneficially
Percent of
Ordinary
Shares
Owned
Outstanding
8,070,563
2,216,945
2,717,616
20.3%
5.4%
6.8%
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.
58
(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.
59
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.
60
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.
61
ITEM 9:
A.
THE OFFER AND LISTING
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.
Average Daily Trading
Volume
Price
High
Low
Year Ended December 31, 2003:
$
8.80
$
3.43
80,345
$
9.40
$
4.00
219,488
$
7.48
$
5.19
88,311
$
$
$
$
6.44
8.37
9.54
10.01
$
$
$
$
5.59
5.96
7.15
8.37
61,384
82,938
77,997
142,675
$
$
$
$
9.74
9.87
10.25
11.18
$
$
$
$
7.89
8.07
8.40
10.01
161,902
172,138
163,679
118,200
October 2007
November 2007
December 2007
January 2008
February 2008
March 2008
$
$
$
$
$
$
11.13
11.18
10.55
10.89
11.05
10.74
$
$
$
$
$
$
10.21
10.41
10.01
9.82
10.14
9.46
132,143
112,233
100,235
137,281
125,100
189,721
April 2008 (through April 6)
$
10.75
$
10.68
565,575
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Most Recent Six Months:
62
B.
Plan of Distribution
Not applicable.
C.
Markets
Our ordinary shares are quoted on the NASDAQ Global Market under the symbol “GILT.”
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expense of the Issue
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.
63
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.
64
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.
65
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.
66
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.
67
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:
y
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;
y
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
y
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:
y
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;
y
a breach by the office holder of his duty of care if such breach was done intentionally or recklessly;
y
any act or omission done with the intent to derive an illegal personal gain; or
y
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 knowhow 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:
y
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
y
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:
y
insurance companies;
y
dealers in stocks or securities;
y
financial institutions;
y
tax-exempt organizations;
y
regulated investment companies or real estate investment trusts;
y
persons subject to the alternative minimum tax;
y
persons who hold ordinary shares through partnerships or other pass-through entities;
y
persons holding their shares as part of a straddle or appreciated financial position or as part of a hedging or conversion transaction;
y
persons who acquired their ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation
for services;
y
non-residents aliens of the U.S. or persons having a functional currency other than the U.S. dollar; or
y
direct, indirect or constructive owners of 10% or more of the outstanding voting shares of our company.
77
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:
y
a citizen or, for U.S. federal income tax purposes, a resident of the United States;
y
a corporation created or organized in or under the laws of the United States or any political subdivision thereof;
y
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
y
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.
78
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.
79
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:
y
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,
y
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,
y
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
y
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-tomarket 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.
80
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.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
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 at http://www.gilat.com. Information on our website is not part of this annual report.
81
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
2012 and
2008
2009
2010
2011
thereafter
(In thousands)
Assets:
Restricted cash - in U.S. dollars
Weighted interest rate
In other currency:
Restricted cash held by Trustees
In U.S. dollars
In other currency
Liabilities:
Long-term loans (including
current maturities)
In U.S. dollars:
In other currency:
Converted subordinated notes - in
U.S. dollars:
ITEM 12:
7,065
5.39%
26
4.00%
707
4.81%
5,532
3.94%
1,918
5.58%
16,544
4.07%
5,011
5.46%
343
6.30%
4,000
5.20%
365
6.30%
-
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13:
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None
82
-
1,114
4.49%
500
5.00%
4,000
5.08%
4,000
5.20%
389
6.30%
4,000
5.20%
414
6.30%
5,536
6.30%
853
4.00%
853
4.00%
14,609
4.00%
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:
y
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of
the company;
y
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
y
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 ControlIntegrated Framework.
Based on that assessment, our management concluded that as of December 31, 2007, our internal control over financial reporting is effective.
83
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 16:
RESERVED
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.
ITEM 16B:
CODE OF ETHICS
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
(1)
Fees
Percentages
Fees
Percentages
Audit (1)
Audit-related (2)
Tax (3)
$631,273
$156,938
19,500
78.2% $615,705
19.4% 156,245
2.4% 48,344
75.1%
19.0%
5.9%
Total
$807,711
100.0% $820,294
100.0%
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.
84
(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
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
85
PAGE
F-2
F-3
F-5
F-6
F-8
F-11
ITEM 19:
EXHIBITS
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.
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
Page
Management's Report on Internal Control Over Financial Reporting
F-2
Reports of Independent Registered Public Accounting Firm
F-3 - F-4
Consolidated Balance Sheets
F-5- F-6
Consolidated Statements of Operations
F-7
Consolidated Statements of Changes in Shareholders' Equity
F-8
Consolidated Statements of Cash Flows
F-9 - F-11
Notes to Consolidated Financial Statements
F-12- F-54
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:
y
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Gilat's assets,
y
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
y
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
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.
Tel-Aviv, Israel
April 9, 2008
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 9, 2008, expressed an unqualified opinion
thereon.
Tel-Aviv, Israel
April 9, 2008
F-4
CONSOLIDATED BALANCE SHEETS
December 31,
2007
2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Short- term bank deposits and held to maturity marketable securities
Short-term restricted cash
Restricted cash held by trustees
Trade receivables (net of allowance for doubtful accounts: 2007 - $ 4,528; 2006
- $ 12,709)
Inventories
Other current assets
$
Total current assets
LONG-TERM INVESTMENTS AND RECEIVABLES:
Severance pay fund
Long-term restricted cash
Long-term restricted cash held by trustees
Long-term trade receivables, receivables in respect of capital leases and other
receivables
Total long-term investments and receivables
PROPERTY AND EQUIPMENT, NET
INTANGIBLE ASSETS AND DEFERRED CHARGES, NET
Total assets
$
The accompanying notes are an integral part of the consolidated financial statements.
F-5
122,807
45,578
7,091
7,450
$
149,545
5,137
7,113
43,746
24,794
24,748
29,612
26,368
40,428
276,214
258,203
11,835
6,321
16,544
10,534
6,337
15,646
9,170
19,241
43,870
51,758
105,247
121,366
4,771
8,887
430,102
$
440,214
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)
December 31,
2007
2006
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit
Current maturities of long-term loans
Trade payables
Accrued expenses
Short-term advances from customer, held by trustees
Other current liabilities
$
Total current liabilities
5,823
5,354
25,954
20,275
15,005
58,686
$
1,200
6,537
21,258
21,400
15,045
72,129
131,097
137,569
LONG-TERM LIABILITIES:
Long-term loans, net
Long-term advances from customer, held by trustees
Accrued severance pay
Accrued interest related to restructured debt
Other long-term liabilities
18,704
8,989
11,723
2,493
16,315
12,971
22,318
16,863
10,640
3,147
16,333
21,285
Total long-term liabilities
71,195
90,586
1,796
859,207
1,776
(634,969)
1,757
853,350
702
(643,750)
227,810
212,059
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
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total shareholders' equity
Total liabilities and shareholders' equity
$
F-6
430,102
$
440,214
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2007
Revenues:
Products *)
Services *)
$
Total revenues
156,798
125,821
2006
$
126,093
122,617
2005
$
88,705
120,690
282,619
248,710
209,395
82,822
97,952
66,363
91,982
42,896
90,323
Total cost of revenues
180,774
158,345
133,219
Gross profit
Operating expenses:
Research and development costs, net *)
Selling and marketing expenses *)
General and administrative expenses *)
Impairment of long-lived and other assets
101,845
90,365
76,176
15,030
38,374
31,052
12,218
13,642
36,475
26,800
-
13,994
31,329
29,465
-
Operating income
5,171
13,448
1,388
Financial income (expenses), net *)
Other income (expenses)
5,998
(116)
Cost of revenues:
Products *)
Services *)
(742)
138
(2,677)
299
Income (loss) before taxes on income
Taxes on income
11,053
963
12,844
2,357
(990)
3,126
Income (loss) after taxes on income
Equity in earnings of affiliated companies
10,090
-
10,487
-
(4,116)
400
Net income (loss)
$
10,090
$
10,487
$
(3,716)
Basic
$
0.26
$
0.41
$
(0.17)
$
0.24
$
0.38
$
(0.17)
Diluted
Weighted average number of shares used in computing net earnings (loss)
per share:
Basic
Diluted
*)
39,140,718
25,799,077
22,439,551
41,576,454
27,519,726
22,439,551
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.
F-7
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Balance as of January 1, 2005
Exercise of options, net
Stock compensation related to options
Fair value of change in conversion feature of a related party
long-term convertible loan
Foreign currency translation adjustments from the disposal of
a subsidiary
Comprehensive income - foreign currency translation
adjustments
Net loss
Number of
Ordinary
shares
(in
Share
Additional
paid-in
thousands)
capital
capital
22,312
$
**)
Accumulated
Total
Total
other
comprehensive Accumulated comprehensive shareholders'
deficit
loss
income (loss)
$ (2,624) $(650,521)
984
$733,582
244
-
11
-
1,207
137
-
-
1,218
137
-
-
3,798
-
-
3,798
-
-
-
1,714
-
-
-
-
926
-
Stock compensation related to employees stock options
Conversion of long-term convertible loan from a related party
Issuance of shares in a public offering, net of $ 2,733
issuance expenses
adjustments
Net income
Conversion of convertible subordinated notes
Accumulated affect of adjustment upon adoption of FASB
Interpretation No. 48
adjustments
Net income
926
(3,716)
1,714
926
(3,716)
22,556
995
738,724
16
(654,237)
669
10,578
30
492
3,604
3,757
67,619
-
-
3,634
3,757
68,111
5,017
240
39,646
-
-
39,886
-
-
-
686
-
10,487
85,498
$
686
10,487
686
10,487
$ 11,173
38,820
1,757
853,350
702
791
1
39
-
4,532
1,303
22
-
-
-
-
-
-
1,074
-
*)
-
(643,750)
212,059
-
4,571
1,303
22
(1,309)
10,090
Total comprehensive income
Balance as of December 31, 2007
$ 1,714
$ (1,076)
Total comprehensive income
$ 81,421
(3,716)
Total comprehensive loss
equity
(1,309)
$ 1,074
10,090
1,074
10,090
$ 11,164
39,612
$ 1,796
*) represents an amount of less the one thousands dollars
**) represent adjustments in respect of foreign currency translation.
F-8
$859,207
$ 1,776
$(634,969)
$227,810
CONSOLIDATED STATEMENTS OF CASH FLOWS
2007
Cash flows from operating activities:
Net income (loss)
Adjustments required to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization
Impairment of long-lived and other assets
Gain from disposal of subsidiaries
Loss from deconsolidation of subsidiaries (a)
Accretion of discount related to the York loan
Equity in earnings of affiliated company
Accrued severance pay, net
Interest accrued on short and long-term restricted cash
Interest on held to maturity marketable securities
Exchange rate differences on long-term loans
Exchange rate differences on loans to employees
Capital loss from disposal of property and equipment
Deferred income taxes
$
Decrease (increase) in trade receivables, net
Decrease (increase) in other assets (including short-term, long-term
and deferred charges)
Increase in inventories
Increase (decrease) in trade payables
Decrease in accrued expenses
Decrease in advances from customer, held by trustees, net
Increase (decrease) in other accounts payable and other long-term
liabilities, mainly deferred revenues
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Other investments
Purchase of held to maturity marketable securities
Proceeds from held to maturity marketable securities
Return on investment
Disposal of subsidiary consolidated in previous periods (a)
Disposal of subsidiary consolidated in previous periods
Investment in short-term bank deposits
Proceeds from short-term bank deposits
Proceeds from sale of property and equipment
Loans to employees - net
Investment in restricted cash (including long-term)
Proceeds from restricted cash (including long-term)
Investment in restricted cash held by trustees
Proceeds from restricted cash held by trustees
Investment in other assets
Net cash provided by (used in) investing activities
$
F-9
10,090
2006
$
10,487
2005
$
(3,716)
17,715
12,218
1,303
(218)
(1,326)
(2,102)
766
(250)
167
(891)
20,728
(137)
3,757
504
177
(896)
705
(223)
57
(1,131)
19,116
(397)
171
137
(400)
(309)
(490)
(973)
213
315
(473)
(14,037)
4,120
(2,440)
28,529
(207)
4,619
(1,455)
(7,914)
(6,258)
(11,846)
(3,000)
(1,049)
(11,430)
6,711
(5,188)
2,941
(4,652)
(10,388)
(24,232)
33,259
3,112
22,775
37,824
3,290
(9,269)
(223)
(73,791)
30,315
33
946
(6,196)
4,259
90
-
(6,519)
137
3,300
1,577
284
(5,191)
16,263
(3,520)
1,987
(6)
(3,605)
388
(181)
397
(3,301)
34
(3,606)
(13,759)
13,007
(3,305)
13,078
(40)
(53,836)
$
8,312
$
(893)
2007
Cash flows from financing activities:
Issuance of shares, net of issuance expenses
Short-term bank credit, net
Proceeds from long-term loans
Repayments of long-term loans
Repayments of long-term convertible loan
$
2006
4,571
(324)
4,623
1,000
(6,563)
-
$
3,634
40,210
(6,972)
(8,703)
-
Net cash provided by (used in) financing activities
3,307
28,169
Effect of exchange rate changes on cash and cash equivalents
1,016
311
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
(26,738)
149,545
Cash and cash equivalents at the end of the year
2005
$
1,218
4,013
(7,823)
(1,000)
(3,592)
353
74,616
74,929
(842)
75,771
$
122,807
$
149,545
$
74,929
$
2,817
$
7,769
$
6,196
$
1,898
$
787
$
6,491
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
$
-
Supplementary cash flow activities:
(1) Cash paid during the year for:
Interest
Income taxes
(2) Non-cash transactions:
F - 10
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)
Property and equipment, net
Loss on disposal
F - 11
$
(52)
42
(171)
$
(181)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:
a.
–
GENERAL
Organization:
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:
y
Gilat Network Systems, ("GNS"), is a provider of VSAT-based networks and associated professional services, including turnkey
and management services, to telecom operators worldwide.
y
Spacenet Inc. provides satellite network services to enterprises, small office/home office ("SOHOs") and residential customers in
the U.S.
y
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
NOTE 1:
–
GENERAL (Cont.)
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").
a.
Use of estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
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
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.
d.
Cash equivalents:
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.
e.
Marketable securities:
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-tomaturity 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
NOTE 2:
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.
h.
Inventories:
Inventories are stated at the lower of cost or market value. Inventory write-offs are provided to cover risks arising from slow-moving items,
excess inventories, discontinued products, 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
NOTE 2:
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
Computers and electronic equipment
Office furniture and equipment
Vehicles
Leasehold improvements
50
3-5
5 - 17
5-7
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
NOTE 2:
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.
o.
Revenue recognition:
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
NOTE 2:
–
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.
q.
Warranty costs:
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
NOTE 2:
r.
–
Research and development expenses:
Research and development expenses, net of grants received, are charged to expenses as incurred.
s.
Grants:
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 stockbased compensation.
F - 19
NOTE 2:
u.
–
Income taxes:
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 morelikely-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
NOTE 2:
–
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
NOTE 2:
w.
–
Employee related benefits:
Severance Pay
The Company’s liability for severance pay for its Israeli employees is calculated pursuant to Israeli severance pay law based on the most
recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees 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
U.S. dollars in thousands, except share and per share data
NOTE 2:
–
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.
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:
1.
Numerator:
2007
Numerator for basic and diluted net earnings (loss)
per share Net income (loss) available to holders of
Ordinary Shares
2.
$
10,090
2006
$
10,487
2005
$
(3,716)
Denominator (in thousands):
Denominator for basic net earnings (loss) per share Weighted average number of shares
Add-employee stock options and
convertible notes
Denominator for diluted net earnings (loss) per
share - adjusted weighted average shares
assuming exercise of options
F - 23
2007
2006
2005
39,141
25,799
22,440
2,435
1,721
-
41,576
27,520
22,440
NOTE 2:
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 nonrecurring 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
NOTE 2:
–
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
NOTE 2:
–
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.
NOTE 3:
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.
–
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
Unrealized
gain
Market
Amortized
Unrealized
gain
Market
cost
(losses)
value
cost
(losses)
value
Held-to-maturity:
Israeli Government debentures
U.S. Government debentures
$
4,260
41,134
45,394
*)
*)
(3) $ 4,257
195
41,329
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.
NOTE 4:
a.
–
INVENTORIES
Inventories are comprised of the following:
December 31,
2007
Raw materials, parts and supplies
Work in progress
Finished products
b.
Inventory write-offs totaled $ 500, $ 1,200 and $ 600 in 2007, 2006 and 2005, respectively.
F - 26
2006
$
8,657
4,250
11,887
$
6,947
2,595
16,826
$
24,794
$
26,368
NOTE 5:
–
PROPERTY AND EQUIPMENT, NET
Composition of property and equipment, grouped by major classifications, is as follows:
a.
December 31,
2007
Cost:
Buildings and land
Computers and electronic equipment
Equipment leased to others
Office furniture and equipment
Vehicles
Leasehold improvements
$
92,114
82,307
98,837
8,968
375
5,806
$
Depreciated cost
105,247
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.
a.
–
91,666
78,754
96,799
8,734
270
4,302
280,525
159,159
$
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.
NOTE 6:
$
288,407
183,160
Accumulated depreciation and provision for impairment *)
*)
2006
INTANGIBLE ASSETS AND DEFERRED CHARGES, NET
Composition of intangible assets and deferred charges, grouped by major classifications, is as follows:
December 31,
Weighted
average
amortization
2007
2006
years
Cost:
Identifiable intangible assets resulting from
acquisitions of a subsidiary
Customer acquisition costs
Other
12.7
5
5
$
Accumulated amortization and provision for
impairment
Amortized cost
Deferred charges
$
F - 27
22,599
1,416
1,293
$
22,599
1,416
1,662
25,308
25,677
21,448
20,587
3,860
5,090
911
3,797
4,771
$
8,887
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
2009
2010
2011
2012 and thereafter
NOTE 7:
–
$
662
639
639
639
1,281
$
3,860
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”).
b.
Lease commitments:
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:
2008
2009
2010
2011
2012
2013 and thereafter
Gross
Receivables
Net
commitments
from subleases
commitments
$
5,175
4,567
4,534
4,670
4,804
16,605
$
1,319
1,347
1,288
1,069
967
648
$
3,856
3,220
3,246
3,601
3,837
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
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:
2008
2009
2010
2011
2012
$
23,913
18,764
12,892
7,176
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
NOTE 7:
–
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.
g.
Guarantees:
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
NOTE 7:
–
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
NOTE 9:
a.
b.
–
SHAREHOLDERS’ EQUITY
Share capital:
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.
Stock Option Plans:
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
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 prevesting 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
Risk free interest
Dividend yields
Volatility
Expected term (in years)
2006
4.5%
0%
45%
6.1
F - 33
2005
4.7%
0%
47%
5.4
4.2%
0%
48%
5.5
NOTE 9:
–
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
Weightedaverage
exercise
Weightedaverage
remaining
contractual
term
Aggregate
intrinsic
value (in
options
price
(in years)
thousands)
Outstanding at January 1, 2007
Granted
Exercised
Expired
Forfeited
4,840,322
90,500
(781,075)
(3,373)
(49,344)
$
$
$
$
$
8.8
8.7
5.8
465.0
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:
2006
Options outstanding at the
beginning of the year
Changes during the year:
Granted
Exercised
Expired
Forfeited and cancelled
Options outstanding at the end of
the year
Number
of
Weighted
average
exercise
Number
of
Weighted
average
exercise
options
price
options
price
5,159,835
$
8.6
$
$
$
$
7.2
5.6
346.3
10.9
4,840,322
$
3,514,823
$
312,000
(521,851)
(499)
(109,163)
Options exercisable at the end of
the year
F - 34
2005
1,438,644
$
17.1
4,069,000
(125,245)
(490)
(222,074)
$
$
$
$
6.0
5.0
240.0
17.3
8.8
5,159,835
$
8.6
9.8
3,016,242
$
10.5
NOTE 9:
–
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-themoney 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
Options
outstanding
as of
December 31,
Weighted
average
remaining
contractual
Weighted
average
exercise
Options
exercisable
as of
December 31,
Weighted
average
exercise
price of
exercisable
price
2007
life
price
2007
options
(Years)
$
$
$
$
5 -7.5
7.7-10.8
42.4 -79
240.4 -2,730
3,742,175
285,731
60,773
8,351
7.7
7.4
4.0
1.9
$
$
$
$
5.8
8.2
77.5
749.2
3,202,799
74,541
60,737
8,346
$
$
$
$
5.8
8.1
77.5
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
$
Add: stock-based employee compensation expenses included
in reported net loss - intrinsic value
Deduct: total stock-based employee compensation expense
determined under fair value based method
(3,716)
120
(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
NOTE 9:
–
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.
g.
Dividends:
1.
In the event that cash dividends are declared by the Company, such dividends will be declared and paid in Israeli currency. Under
current Israeli regulations, any cash dividend in Israeli currency paid in respect of ordinary shares purchased by non-residents of
Israel with non-Israeli currency, may be freely repatriated in such non-Israeli currency, at the 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
NOTE 10:
a.
–
RESTRUCTURING OF DEBTS
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
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
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
Other assets
F - 39
$
10,287
1,931
$
12,218
NOTE 12:
a.
–
TAXES ON INCOME
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
Additions based on tax positions related to the current year
Additions of exchange rate, penalties and interest related to unrecognized tax
liabilities from previous years
$
Balance at December 31, 2007
$
5,435
370
1,018
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
NOTE 12:
b.
–
TAXES ON INCOME (Cont.)
The Company:
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
NOTE 12:
–
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
NOTE 12:
–
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
NOTE 12:
e.
–
Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of the Groups’ deferred tax liabilities
and assets are as follows:
December 31,
2007
1.
Provided in respect of the following:
Carryforward tax losses
Temporary differences relating to property and
equipment
Other
$
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Gross deferred tax liabilities
Temporary differences relating to property and
equipment
Other
2.
95,056
$
95,931
25,054
11,639
23,251
15,427
131,749
(124,223)
134,609
(126,954)
7,526
7,655
(4,018)
(2,827)
(4,256)
(3,576)
(6,845)
(7,832)
Net deferred tax assets (liabilities)
$
681
$
(177)
Domestic
Foreign
$
681
$
(177)
$
681
$
(177)
$
703
(22)
$
(113)
(64)
$
681
$
(177)
Deferred taxes are included in the consolidated
balance sheets, as follows:
Current assets
Current liabilities
Non-current liabilities
3.
2006
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
NOTE 12:
f.
–
Reconciling items between the statutory tax rate of the Company and the effective tax rate:
2007
Income (loss) before taxes, as reported in the
consolidated statements of operations
$
11,053
Statutory tax rate
g.
$
$
3,205
2,070
2005
12,844
29%
Theoretical tax expenses (benefit) on the above
amount at the Israeli statutory tax rate
Currency differences
Tax adjustment in respect of different tax rates
and "Approved Enterprise" status (1)
Changes in valuation allowance
Forfeiture of carry forward tax losses
Taxes paid in respect of prior years
Stock compensation relating to options per SFAS 123(R)
Nondeductible expenses and other permanent
differences
(1)
2006
$
(990)
31%
$
(2,821)
(2,731)
62
301
3,982
(1,392)
34%
$
(3,981)
1,849
898
1,141
877
(337)
1,834
1,538
(8,387)
4,762
2,546
-
(140)
1,170
$
963
$
2,357
$
3,126
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
Taxes on income included in the consolidated statements of operations:
2007
Current tax expense
$
Deferred income taxes
2006
1,854
$
(891)
Domestic
Foreign
F - 45
3,488
2005
$
(1,131)
3,599
(473)
$
963
$
2,357
$
3,126
$
414
549
$
684
1,673
$
1,549
1,577
$
963
$
2,357
$
3,126
NOTE 12:
–
Income (loss) before taxes on income from continuing operations:
h.
2007
Domestic
Foreign
NOTE 13:
a.
–
2006
2005
$
37,653
(26,600)
$
21,628
(8,784)
$
9,111
(10,101)
$
11,053
$
12,844
$
(990)
SUPPLEMENTARY BALANCE SHEET INFORMATION
Other current assets:
December 31,
2007
Receivables in respect of capital leases (see c below)
VAT receivables
Prepaid expenses
Deferred charges
Tax receivables
Employees
Income receivable
Other
b.
2006
$
3,360
2,099
4,004
5,882
1,373
2,925
1,375
3,730
$
6,157
5,854
6,535
16,921
1,178
203
686
2,894
$
24,748
$
40,428
Long-term trade receivables, receivables in respect of capital leases and other receivables:
December 31,
2007
Long-term receivables in respect of capital leases
(see c below)
Long-term trade receivables *)
Other receivables
*)
Long term trade receivables are scheduled to be received by 2009.
F - 46
2006
$
3,000
5,036
1,134
$
5,558
8,291
5,392
$
9,170
$
19,241
NOTE 13:
c.
–
SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.)
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):
Capital
Operating
lease
lease
2008
2009
2010
2011
2012
Total
$
3,399
1,510
1,204
671
71
$
4,934
4,289
4,463
1,257
521
$
8,332
5,799
5,667
1,928
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,
2007
December 31,
2006
2007
%
In Dollars
In other currencies
6.50
13.50
Total
F - 47
2006
6.50
-
$
5,500
323
$
1,200
-
$
5,823
$
1,200
NOTE 13:
e.
–
Other current liabilities:
December 31,
2007
Deferred revenue
Payroll and related employees accruals
Government authorities
Advances from customers
Provision for vacation pay
Other
f.
2006
$
17,963
12,994
14,821
5,096
4,379
3,433
$
39,382
10,807
10,777
4,393
3,876
2,893
$
58,686
$
72,129
Long-term loans:
Interest rate for
Linkage
Restructured loans (a.i):
Loan from Bank Leumi
(a.ii)(a.iii)
Other long-term loans (b)
Other loans:
Loans from a bank (c)
Other long-term loans
U.S.dollar
U.S.dollar
2007
2006
%
%
LIBOR +1.4%
5%
Euro
U.S.dollar
U.S.dollar
U.S.dollar
6.3%
2007
2006
Maturity
LIBOR +1.6%
5%
6.3%
5%
6.5%
Less - current maturities
(a)
December 31,
2008-2011
2008
2008-2021
2007
2007
2008
$ 16,000
11
$ 20,000
1,829
16,011
21,829
7,047
1,000
6,665
309
52
-
8,047
7,026
24,058
5,354
28,855
6,537
$ 18,704
$ 22,318
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
NOTE 13:
g.
–
(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.
Long-term debt maturities for loans after December 31, 2007, are as follows:
2008
2009
2010
2011
2012 and thereafter
$
5,354
4,365
4,389
4,414
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
Deferred revenue
Space segment
Restructuring charges (mainly termination of lease
commitments)
Other
$
6,753
1,704
2006
$
1,323
3,191
$
F - 49
12,971
14,246
2,795
1,889
2,355
$
21,285
NOTE 14:
a.
–
SELECTED STATEMENTS OF OPERATIONS DATA
Research and development expenses, net:
2007
Total cost
Less:
Royalty bearing grants
Non-royalty bearing grants
$
$
2,240
$
b.
17,270
2006
15,030
2005
15,687
$
2,045
$
13,642
16,944
1,633
1,317
$
13,994
Allowance for doubtful accounts:
2007
c.
2006
2005
Balance at beginning of year
Increase during the year
Write-off of bad debts
$
12,709
1,338
(9,519)
$
12,311
850
(452)
$
14,506
422
(2,617)
Balance at the end of year
$
4,528
$
12,709
$
12,311
Financial expenses, net:
2007
Income:
Interest on cash equivalents, bank deposits,
restricted cash and accretion on discounts
of held to maturity marketable securities
Interest with respect to capital lease
Other (mainly foreign exchange gains)
$
Expenses:
Interest with respect to short-term bank
credit and trade payables and other
Interest with respect to long-term loans
Interest with respect to capital lease
Accretion of discount related to the York
loan
Other
$
F - 50
8,639
1,288
1,556
2006
$
2005
5,648
1,895
951
$
3,058
2,890
778
11,483
8,494
6,726
1,574
1,698
-
1,433
5,398
-
1,303
6,551
56
2,213
504
1,901
1,493
5,485
9,236
9,403
5,998
$
(742)
$
(2,677)
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:
2007
United States
South America and Central America
Asia
Europe *)
Africa
*) Including revenues from related parties as
follows:
Satlynx
2006
2005
$
95,803
76,073
39,614
36,342
34,787
$
94,016
79,557
38,160
18,346
18,631
$
86,488
61,974
36,915
10,822
13,196
$
282,619
$
248,710
$
209,395
$
-
$
-
$
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
Israel
Latin America
United States
Europe
Other
F - 51
2006
$
75,945
9,242
16,884
7,452
495
$
76,912
26,843
18,524
7,542
432
$
110,018
$
130,253
NOTE 15:
d.
–
CUSTOMERS, GEOGRAPHIC AND SEGMENTS INFORMATION (Cont.)
Information on operating segments:
Operating Segments:
1)
General:
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 satellitebased 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
NOTE 15:
–
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
Spacenet Inc
Revenues:
External revenues
Internal revenues
GNS
Rural
Consolidation
Total
$
95,370
$
34,190
$
153,059
18,360
$
(18,360)
$
282,619
-
$
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
$
$
(18,286)
$
36,743
$
462
$
11,053
Taxes on income
$
$
598
$
-
$
963
(7,866)
-
$
365
Spacenet
Rural
Spacenet Inc
Revenues:
External revenues
Internal revenues
GNS
Consolidation
Total
$
93,623
$
38,870
$
116,217
19,791
$
(19,791)
$
248,710
-
$
93,623
$
38,870
$
136,008
$
(19,791)
$
248,710
Financial income
(expenses), net
$
1,213
$
742
$
(2,697)
$
-
$
taxes on income
$
(3,237)
$
1,472
$
11,424
$
3,185
$
12,844
Taxes on income
$
$
183
$
2,171
$
-
$
2,357
3
F - 53
(742)
NOTE 15:
–
Spacenet
Rural
Spacenet Inc
Revenues:
External revenues
Internal revenues
NOTE 16:
–
GNS
Consolidation
Total
$
86,196
-
$
40,557
-
$
82,642
15,611
$
(15,611)
$
209,395
-
$
86,196
$
40,557
$
98,253
$
(15,611)
$
209,395
Financial income
(expenses), net
$
1,481
$
(338)
$
(3,820)
$
-
$
(2,677)
taxes on income
$
(8,726)
$
(482)
$
1,680
$
6,538
$
(990)
Taxes on income
$
$
1,266
$
-
$
4
$
1,856
3,126
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
Exhibit 4.1
AGREEMENT AND PLAN OF MERGER
by and among
GALACTIC HOLDINGS LTD.,
GALACTIC ACQUISITION COMPANY LTD.
and
Dated as of March 31, 2008
TABLE OF CONTENTS
Page
ARTICLE I
Section 1.1
Section 1.2
DEFINITIONS
Definitions
Other Terms
2
2
7
ARTICLE II
Section 2.1
Section 2.2
Section 2.3
Section 2.4
Section 2.5
THE MERGER
The Merger
Closing
Effective Time
Articles of Association
Directors and Officers
10
10
10
10
11
11
ARTICLE III
Section 3.1
Section 3.2
Section 3.3
Section 3.4
Section 3.5
Section 3.6
EFFECT OF THE MERGER ON SHARE CAPITAL; PAYMENT
Effect on Share Capital
Exchange of Certificates
Stock Options
Lost Certificates
Transfers; No Further Ownership Rights
Withholding Tax
11
11
12
14
15
15
15
ARTICLE IV
Section 4.1
Section 4.2
Section 4.3
Section 4.4
Section 4.5
Section 4.6
Section 4.7
Section 4.8
Section 4.9
Section 4.10
Section 4.11
Section 4.12
Section 4.13
Section 4.14
Section 4.15
Section 4.16
Section 4.17
Section 4.18
Section 4.19
Section 4.20
Section 4.21
Section 4.22
Section 4.23
Section 4.24
Section 4.25
Section 4.26
Section 4.27
Section 4.28
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Organization; Qualification
Capitalization
Authority
Consents and Approvals; No Violations; Voting
SEC Reports and Financial Statements
Absence of Certain Changes or Events
Information Supplied
Employee Matters and Benefit Plans
Contracts
Litigation
Compliance with Applicable Law
Taxes
Property
Environmental
Insurance
Intellectual Property
Affiliate Transactions
Brokers
Opinion of Financial Advisor
Board of Directors and Audit Committee Approval
Inapplicability of Certain Statutes
Grants, Incentives and Subsidies
Encryption and Other Restricted Technology
Effect of Transaction
Customers and Suppliers
Warranties
Foreign Corrupt Practices Act; Certain Business Practices
No Other Representations or Warranties
16
16
17
18
18
20
21
21
21
25
27
28
28
30
30
31
32
35
35
35
35
36
36
36
36
37
37
37
38
i
ARTICLE V
Section 5.1
Section 5.2
Section 5.3
Section 5.4
Section 5.5
Section 5.6
Section 5.7
Section 5.8
Section 5.9
Section 5.10
Section 5.11
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND THE MERGER SUB
Organization, Good Standing and Qualification
The Purchaser and the Merger Sub.
Corporate Authority
The Merger Sub Board Approval
Share Ownership
Governmental Filings; No Violations; Etc
Brokers and Finders
Available Funds
Interest in Competitors
Information Supplied
Acknowledgement of Disclaimer of Other Representations and Warranties
38
38
38
38
39
39
39
40
40
41
41
41
ARTICLE VI
Section 6.1
Section 6.2
Section 6.3
Section 6.4
Section 6.5
Section 6.6
Section 6.7
Section 6.8
Section 6.9
Section 6.10
Section 6.11
Section 6.12
Section 6.13
Section 6.14
Section 6.15
CONDUCT PRIOR TO THE EFFECTIVE TIME AND ADDITIONAL AGREEMENTS
Conduct of Business by the Company
Specific Activities
No Control of Other Party's Business
Access to Information; Confidentiality; Financing
No Solicitation
Merger Proposal
Shareholders Approval
Filings; Other Actions; Notification
Publicity
Israeli Tax Ruling
Notification of Certain Matters
Directors' and Officers' Insurance; Indemnification Agreements
The Merger Sub Obligations
Employee Matters
Property
41
41
42
45
45
47
50
51
52
53
53
54
55
56
56
58
ARTICLE VII
Section 7.1
Section 7.2
Section 7.3
Section 7.4
CONDITIONS PRECEDENT
Conditions to Each Party's Obligation to Effect the Merger
Conditions to Obligations of the Purchaser and the Merger Sub to Effect the Merger
Conditions to Obligations of the Company to effect the Merger
Frustration of Closing Conditions
58
58
58
59
59
ARTICLE VIII
Section 8.1
Section 8.2
TERMINATION
Termination or Abandonment
Termination Fees and Expenses
60
60
61
ii
ARTICLE IX
Section 9.1
Section 9.2
Section 9.3
Section 9.4
Section 9.5
Section 9.6
Section 9.7
Section 9.8
Section 9.9
Section 9.10
Section 9.11
MISCELLANEOUS
Amendment
Governing Law; Jurisdiction; Service of Process
Extension; Waiver
Notices
Interpretation
Counterparts
Entire Agreement: Third-Party Beneficiaries
Severability
Other Remedies; Specific Performance
Assignment
Non-Survival of Representations, Warranties and Agreements
EXHIBIT INDEX
Exhibit A
Exhibit B
Exhibit C
Form of Limited Guaranty
Irrevocable Proxy and Unilateral Undertaking
Merger Proposal
iii
64
64
64
65
65
67
67
67
67
67
68
68
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of March 31, 2008, by and among GALACTIC HOLDINGS LTD., an Israeli company (the
“Purchaser”), GALACTIC ACQUISITION COMPANY LTD., an Israeli company and a subsidiary of the Purchaser (the “Merger Sub”), and GILAT
SATELLITE NETWORKS LTD., an Israeli company (the “Company”). The Purchaser, the Merger Sub and the Company are each referred to herein as a
“Party,” and collectively as the “Parties.”
RECITALS
A.
The Parties hereto intend to enter into a transaction whereby the Merger Sub will merge with and into the Company (the “Merger”) by way and
upon the terms and conditions set forth in this Agreement and in accordance with the provisions of Sections 314-327 of the Companies Law 57591999 of the State of Israel (the “Companies Law”), following which, the Merger Sub will cease to exist, the Company will become a Subsidiary of
the Purchaser, and the Company Shares (as defined below) will be exchanged for the right to receive the Aggregate Merger Consideration (as
defined below).
B.
The Board of Directors has: (i) determined that this Agreement, the Merger and the other transactions contemplated by this Agreement
(collectively, the “Transactions”) are fair to, and in the best interests of, the Company and its shareholders, and that, considering the financial
position of the merging companies, no reasonable concern exists that the Surviving Company will be unable to fulfill the obligations of the
Company to its creditors, (ii) approved this Agreement, the Merger and the Transactions, and (iii) determined to recommend to the shareholders of
the Company the approval of this Agreement, the Merger and the Transactions.
C.
The boards of directors of each of the Purchaser and the Merger Sub have approved this Agreement, the Merger and the Transactions, and the
board of directors of the Merger Sub has (i) determined that, considering the financial position of the merging companies, no reasonable concern
exists that the Surviving Company will be unable to fulfill the obligations of the Merger Sub to its creditors, and (ii) recommended that the sole
shareholder of the Merger Sub vote to approve this Agreement, the Merger and the Transactions.
D.
Concurrently with the execution and delivery of this Agreement, the sole shareholder of the Merger Sub has approved this Agreement, the Merger
and the Transactions.
E.
Concurrently with the execution and delivery of this Agreement and as a condition to and inducement of the Company’s willingness to enter into
this Agreement, the Sponsors (as defined below) have each entered into a Limited Guaranty in the form attached hereto as Exhibit A, dated as of
the date hereof, in favor of the Company with respect to certain obligations of the Purchaser and the Merger Sub under this Agreement (the
“Limited Guaranty”).
F.
Concurrently with the execution and delivery of this Agreement and as a condition to and inducement of the Purchaser’s willingness to enter into
this Agreement, certain shareholders of the Company have executed an irrevocable proxy and unilateral undertaking in favor of the Purchaser in
the form attached hereto as Exhibit B, according to which each such shareholder undertook to support the approval and adoption of this
Agreement, the Merger and the Transactions at the Company Shareholders’ Meeting (as defined below).
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NOW, THEREFORE, in consideration of the forgoing premises, and of the representations, warranties, covenants and agreements contained herein,
the Parties hereto, intending to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions.
As used in this Agreement, the following terms shall have the following meanings:
“102 Trustee” means the trustee appointed by the Company in accordance with the provisions of the Ordinance, and approved by the Israeli Taxing
Authority, with respect to Company 102 Securities.
“Affiliate” of any Person means another Person that, directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under
common Control with such first Person.
“Aggregate Merger Consideration” shall mean the product of (i) the number of Company Shares issued and outstanding (other than those shares
cancelled pursuant to Section 3.1(a) and Company Shares held by certain Sponsors or their Affiliates) immediately prior to the Effective Time multiplied
by (ii) the Merger Consideration (as defined below).
“Agreement” means this Agreement, together with all Exhibits and Schedules attached hereto, as the same may be amended from time to time in
accordance with the terms hereof.
“Articles of Association” means the articles of association of the Company as of the date hereof.
“Board of Directors” means the board of directors of the Company.
“Business Day” means, except as otherwise set forth herein, any day other than Friday, Saturday or any other day on which banks are legally
permitted to be closed in Israel or Los Angeles, California.
“Code” means the U.S. Internal Revenue Code of 1986, as amended.
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“Company 102 Securities” means (i) Company Stock Options granted under Section 102(b)(2) of the Ordinance, or granted under Section 102 of the
Ordinance prior to January 1, 2003, and (ii) Company Shares issued upon the exercise of any such Company Stock Options and held by the 102 Trustee
pursuant to the Ordinance.
“Company Employee Plan” means each Plan, including (i) each “employee benefit plan,” within the meaning of, and subject to, Section 3(3) of
ERISA, and (ii) each International Employee Plan, other than plans, programs and arrangements sponsored or maintained by Governmental Authorities to
which the Company or its Subsidiaries are legally-mandated to contribute, which is or has been maintained, contributed to, or required to be contributed
to, by the Company or its Subsidiaries, or with respect to which the Company or its Subsidiaries has or may have, as of the Closing Date, any liability or
obligation, contingent or otherwise.
“Company Intellectual Property Rights” means any Intellectual Property Rights, including Registered Intellectual Property Rights, that are owned,
used or held for use by the Company or any of its Subsidiaries or necessary for the conduct of the business of the Company or any of its Subsidiaries.
“Company Product” means any product or service of the Company or any of its Subsidiaries currently being marketed, sold or licensed by the
Company or any of its Subsidiaries.
“Company Shares” means ordinary shares, NIS 0.20 par value per share, of the Company.
“Company Stock Option Plans” means the Company’s 1995 Stock Option Plan, 1995 Section 102 Stock Option Plan, 2003 Stock Option Plan, 2003
Section 102 Stock Option Plan, and 2005 Share Incentive Plan.
“Confidentiality Agreement” means that certain confidentiality agreement, dated as of July 6, 2007, by and between the representative of the
Company and The Gores Group, LLC, entered into in connection with the Transactions, to which agreement the other Sponsors have been subsequently
joined.
“Contract” means any binding written, oral, electronic or other contract, lease, license, sublicense, instrument, note, bond, indenture, option, warrant,
purchase order, undertaking, agreement or obligation of any nature.
“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a Person, whether
through the ownership of voting securities, by Contract, as trustee or executor, or otherwise.
“Employee” means any current employee or director of the Company or its Subsidiaries.
“Employment Agreement” means each management, employment, severance, change in control, retention, relocation, repatriation, expatriation or
arrangement or other Contract with respect to which the Company or any of its Subsidiaries has or may have, as of the Closing Date, any liability or
obligation, contingent or otherwise.
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“Encumbrances” means any liens, charges, security interests, mortgages, pledges, options, preemptive rights, rights of first refusal or first offer,
proxies, levies, voting trusts or agreements, or other adverse claims or restrictions on title or transfer of any nature whatsoever.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
“ERISA Affiliate” means any Subsidiary of the Company or other Person or entity under common Control with the Company, its Subsidiaries or their
respective Affiliates within the meaning of Section 414 (c), (m) or (o) of the Code.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“GAAP” means generally accepted accounting principles as in effect in the United States of America at the time of the preparation of the subject
financial statements.
“Government Contract” means any Contract to which the Company is a party with any Governmental Authority or any Contract to which the
Company is a party that is a subcontract (at any tier) with another Person that holds either a Contract directly with any Governmental Authority or a
subcontract (at any tier) under any such Contract.
“Intellectual Property Licenses” means any Contract including any grant (i) by the Company or any of its Subsidiaries to any Person of any license,
sublicense, right, permission, consent or non-assertion relating to or under any Intellectual Property Rights of the Company or any of its Subsidiaries, or
(ii) by any Person to the Company or any of its Subsidiaries of any license, sublicense, right, permission, consent or non-assertion relating to or under any
Intellectual Property Rights.
“Intellectual Property Rights” means any and all intellectual property rights and related priority rights, arising from or in respect of the following,
whether protected, created or arising under the Laws of the United States or any other jurisdiction (including common law and statutory rights) or under
any international convention, including: (i) all United States and foreign patents and utility models and applications therefor and all reissues, divisions, reexaminations, renewals, extensions, provisional applications, continuations and continuations-in-part thereof, and equivalent rights anywhere in the world
in inventions and discoveries, including invention disclosures (“Patents”), (ii) all trade secrets and other proprietary rights in know-how and confidential
or proprietary information (including inventions and discoveries, whether patentable or not, technology research and development, technical information,
techniques, methods, processes, algorithms, schematics, business methods, formulae, specifications, drawings, prototypes, models, designs, customer lists
and supplier lists), in each case excluding any rights in respect of any of the foregoing that are protected by Patents (“Trade Secrets”), (iii) all copyrights,
published and unpublished works of authorship (including databases and other compilations of information), copyright registrations and applications
therefor, and mask works and mask work registrations and applications therefor and all renewals, extensions, restorations and reversions of any of the
foregoing (“Copyrights”), (iv) all uniform resource locators, e-mail and other internet addresses and domain names and applications and registrations
therefor (“URLs”), (v) all trademarks, service marks, trade names, logos, brand names, symbols, trade dress, certification marks, collective marks, d/b/a’s,
assumed names, fictitious names and other indicia of origin, common law trademarks and service marks, trademark and service mark registrations and
applications therefor, and all renewals and extensions of any of the foregoing, and all goodwill associated therewith (“Trademarks”), and (vi) all “moral”
rights of authors and inventors, however denominated throughout the world.
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“International Employee Plan” means each Plan and each government-mandated plan or program that has been adopted or maintained by the
Company or its Subsidiaries, whether informally or formally, or with respect to which the Company or any of its Subsidiaries has, will or may have, as of
the Closing Date, any obligation or liability, contingent or otherwise, substantially for the benefit of individuals who perform or have performed services
to the Company or its Subsidiaries outside the United States. This shall include, in Israel, manager’s insurance or other provident or pension funds which
are not government-mandated but were set up to provide for the Company’s legal obligation to pay statutory severance pay (Pitzuay Piturim) under the
Severance Pay Law 5723-1963 (“Severance Pay Law”).
“Knowledge” means the actual knowledge of (i) as to the Company, those officers set forth in Section 1.1 of the Company Disclosure Schedule, and
(ii) as to the Purchaser, the directors of the Purchaser set forth in Section 1.1 of the Purchaser Disclosure Schedule.
“Laws” shall mean any order, any federal, state, provincial, local or other statute, law, rule of common law, or code of any kind, domestic or foreign,
and the rules, regulations, ordinances and standards promulgated thereunder and, where applicable, any interpretation thereof by any Governmental
Authority having jurisdiction with respect thereto or charged with the administration thereof.
“Material Adverse Effect” means any change, event, occurrence or effect which, individually or in the aggregate, did or would reasonably be
expected to (a) have a material adverse effect on the business, results of operations, or financial condition of the Company and its Subsidiaries taken as a
whole or (b) materially impede the ability of the Company and its Subsidiaries to consummate the Transactions or perform their obligations under this
Agreement, in each case, other than changes, events, occurrences or effects relating to or arising from: (i) changes in general economic or political
conditions or financial credit or securities markets in general (including changes in interest or exchange rates) in any country or region in which any of the
Company or its Subsidiaries conducts a material portion of its business, except to the extent such changes affect the Company and its Subsidiaries in a
disproportionate manner as compared to other companies operating in any such country or region in industries in which the Company or its Subsidiaries
operate or do business, (ii) any event, circumstance, change or effect that affects the industries in which the Company or its Subsidiaries operate, except to
the extent such event, circumstance, change or effects affect the Company and its subsidiaries in a disproportionate manner as compared to other
participants in the industry, (iii) any changes in GAAP occurring after the date of this Agreement, (iv) acts of war, armed hostilities or terrorism, or
escalation or worsening thereof, that cause any damage or destruction to, or render physically unusable, any facility or property of the Company or any of
its Subsidiaries or otherwise disrupt the business or operations of the Company or any of its material Subsidiaries, (v) the negotiation, announcement or
performance of this Agreement and the Transactions (including the impact thereof on relationships, contractual or otherwise, with customers, suppliers,
vendors or employees) or any action taken by the Company at the written request of, or with the written consent of, the Purchaser, (vi) any decline in the
market price or decrease or increase in the trading volume of Company Shares after the date of this Agreement, (vii) any failure to meet internal or
published projections, forecasts, or revenue or earning predictions for any period after the date of this Agreement, (viii) any litigation arising from
allegations of a breach of fiduciary duty or other violation of applicable Law relating to this Agreement, the Merger or the other Transactions, or the
approval thereof, and (ix) the outcome of any threatened or actual litigation or contingent liability disclosed in Section 4.5(d) of the Company Disclosure
Schedule unless the Company or any of its Subsidiaries has engaged in fraud or intentional misrepresentation in connection with the items disclosed in
such schedule; provided, that the exceptions in clauses (vi) and (vii) shall not prevent or otherwise affect a determination that the underlying cause of any
such decline or failure is a Material Adverse Effect.
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“Memorandum of Association” means the memorandum of association of the Company as of the date hereof.
“NASDAQ” means The NASDAQ Global Market.
“Permitted Encumbrance” shall mean (i) any statutory Encumbrance for Taxes not yet due or payable or the amount or validity of which is being
contested in good faith by appropriate proceedings and for which adequate accruals or reserves have been established on the financial statements in
accordance with GAAP, (ii) Encumbrances securing indebtedness or liabilities that are reflected in the most recent Company SEC Documents (as defined
below) filed prior to the date hereof, (iii) such non-monetary Encumbrances or other imperfections of title, if any, that do not individually or in the
aggregate, adversely affect the use of the relevant property or assets, including (A) easements or claims of easements whether shown or not shown by the
public records, boundary line disputes, overlaps, encroachments and any matters not of record which would be disclosed by an accurate survey or a
personal inspection of the property, (B) rights of parties in possession, (C) any supplemental Taxes or assessments not shown by the public records, and
(D) title to any portion of the premises lying within the right of way or boundary of any public road or private road, (iv) Encumbrances disclosed on
existing title reports or existing surveys, (v) Encumbrances imposed or promulgated by Laws with respect to real property and improvements, including
zoning regulations, (vi) Encumbrances under applicable securities Laws, and (vii) mechanics’, carriers’, workmen’s, repairmen’s and similar
Encumbrances, incurred in the ordinary course of business.
“Person” means any individual, corporation (including not-for-profit), general or limited partnership, limited liability company, joint venture, estate,
trust, association, organization, Governmental Authority or other entity of any kind or nature.
“Plan” means each material plan, program, policy, contract, agreement or other arrangement, other than an Employment Agreement, providing for
compensation, bonus, incentive, severance, termination pay, deferred compensation, stock or stock-related awards, including Company Stock Options
welfare benefits, insurance, salary continuation, vacation, leave of absence, educational assistance, fringe benefits or other employee benefits or
remuneration of any kind, funded or unfunded.
6
“Registered Intellectual Property Rights” means all United States, international and foreign (i) issued Patents, including pending applications
therefor, (ii) registered Trademarks and pending applications to register Trademarks, including intent-to-use applications, (iii) Copyright registrations and
pending applications to register Copyrights, and (iv) URL registrations and pending applications to register URLs.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Software” means any and all (i) computer programs, including any and all software implementations of algorithms, models and methodologies,
whether in source code or object code, (ii) databases and compilations, including any and all data and collections of data, whether machine-readable or
otherwise, (iii) descriptions, flow-charts and other work product used to design, plan, organize and develop any of the foregoing, screens, user interfaces,
report formats, firmware, development tools, templates, menus, buttons and icons and (iv) documentation, including user manuals and other training
documentation, related to any of the foregoing.
“Sponsors” means Gores Capital Partners II, L.P., Mivtach Shamir Holdings Ltd., G SAT B Ltd., G SAT L Ltd., G SAT S Ltd. and DGB
Investments, Inc.
“Subsidiary” means, with respect to any Person, any other Person of which at least a majority of the securities or ownership interests having by their
terms ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions is directly or indirectly owned or
Controlled by such Person or by one or more of its Subsidiaries.
“Tax” or, collectively, “Taxes,” means (i) any and all United States, federal, provincial, state and local taxes, Israeli and other foreign taxes,
assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits,
sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes,
together with all interest, linkage for inflation, penalties and additions imposed with respect to such amounts, and (ii) any liability for the payment of any
amounts of the type described in clause (i) as a result of being or ceasing to be a member of an affiliated, consolidated, combined or unitary group for any
period (including any liability under United States Treas. Reg. Section 1.1502-6 or any comparable provision of Israeli or other foreign, state or local
Laws).
Section 1.2 Other Terms.
Accounting terms not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective
meanings ascribed to them under GAAP. In addition to the terms defined in Section 1.1, the following terms are defined in the Sections of this Agreement
noted below:
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Defined Term
Section
102 Trust Period
Acquisition Proposal
Aggregate Consideration
Aggregate Option Consideration
Antitrust Requirements
Approved Enterprise
Book-Entry Shares
Certificates
Change of Recommendation
Closing
Closing Date
Companies Law
Companies Registrar
Company
Company Charter Documents
Company Contract
Company Disclosure Schedule
Company Employees
Company Expenses
Company Permits
Company SEC Documents
Company Shareholder Approval
Company Shareholders' Meeting
Company Stock Options
Company Termination Fee
Copyrights
Debt Commitment Letter
Debt Financing
Effective Time
End Date
Environmental Law
Equity Commitment Letter
Equity Financing
Exchange Fund
Financing
Financing Agreements
Financing Commitments
Governmental Authority
Governmental Consents
Grants
Hazardous Substance
Indemnitee
Investment Center
IRS
Israeli Employees
Israeli Options Tax Ruling
Israeli Withholding Tax Extension
6.10 (b)
6.5 (f)
3.2 (a)
3.3 (a)
4.4 (a)
4.12 (d)
3.1 (b)
3.1 (b)
6.5 (d)
2.2
2.2
Recitals
2.3
Preamble
4.1 (a)
4.9 (b)
Article IV
6.14 (a)
8.2 (b)
4.11
4.5 (a)
4.4 (c)
6.7 (a)
3.3 (a)
8.2 (a)(i)
1.1
5.8 (a)
5.8 (a)
2.3
8.1 (b)
4.14 (b)
5.8 (a)
5.8 (a)
3.2 (a)
5.8 (a)
6.4 (d)
5.8 (a)
4.4 (a)
4.4 (a)
4.22
4.14 (c)
6.12 (a)
4.4 (a)
4.8 (b)
4.8 (i)
6.10 (b)
6.10 (a)(ii)
8
Defined Term
Section
Israeli Withholding Tax Ruling
Jointly Owned Intellectual Property
Limited Guaranty
Maximum Amount
Merger
Merger Certificate
Merger Consideration
Merger Proposal
Merger Sub
New Plans
Notice of Superior Proposal
OCS
Open Source
Option Consideration
Option Schedule
Ordinance
Party
Patents
Paying Agent
Property
Purchaser
Purchaser Affiliate
Purchaser Disclosure Schedule
Purchaser Expenses
Purchaser Termination Fee
Recommendation
Representatives
Restraints
Returns
SEC
Severance Pay Law
Subsidiary Shares
Substantial Creditors
Superior Proposal
Surviving Company
Surviving Company Articles
Tail Policy
Trademarks
Trade Secrets
Transactions
URLs
6.10 (a)(ii)
4.16 (c)
Recitals
6.12 (d)
Recitals
2.3
3.1 (b)
6.6 (a)
Preamble
6.14 (b)
6.5 (d)
4.4 (a)
4.16 (g)
3.3 (a)
3.3 (b)
3.6
Preamble
1.1
3.2 (a)
4.13 (b)
Preamble
4.4 (c)
Article V
8.2 (c)
8.2 (b)(ii)
4.20 (a)
6.4 (a)
7.1 (e)
4.12 (a)
4.4 (a)
1.1
4.2 (c)
6.6 (b)(ii)
6.5 (g)
2.1
2.4
6.12 (b)
1.1
1.1
Recitals
1.1
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ARTICLE II
THE MERGER
Section 2.1 The Merger.
Subject to the satisfaction or waiver (to the extent permitted hereunder and by Law) of the conditions set forth in Article VII, at the Effective Time
and subject to and upon the terms and conditions set forth in this Agreement and the applicable provisions of Sections 314 through 327 of the Companies
Law, (i) the Merger Sub (as the target company (Chevrat Ha’Ya’ad)) shall be merged with and into the Company (as the absorbing company (HaChevra
Ha’Koletet)), (ii) the separate corporate existence of the Merger Sub shall thereupon cease, (iii) the Company shall continue as the surviving company
(sometimes hereinafter referred to as the “Surviving Company”), (iv) the Surviving Company shall continue to be governed by Israeli Law and shall
become a wholly owned Subsidiary of the Purchaser, and (v) all the properties, rights, privileges and powers of the Company and the Merger Sub shall
vest in the Surviving Company, and all debts, liabilities and duties of the Company and the Merger Sub shall become the debts, liabilities and duties of the
Surviving Company.
Section 2.2 Closing.
The closing of the Merger and the Transactions (the “Closing”) shall take place, subject to the terms and conditions of this Agreement, at the offices
of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153, on the second Business Day after the satisfaction or waiver (to the
extent permitted hereunder and by Law) of the conditions set forth in Article VII hereof (other than those conditions that by their nature may only be
satisfied at the Closing, but subject to the fulfillment or waiver of those conditions), or at such other time, date and location as the Parties hereto shall
mutually agree. The date upon which the Closing actually occurs shall be referred to herein as the “Closing Date.”
Section 2.3 Effective Time.
As soon as practicable following the satisfaction or waiver (to the extent permitted hereunder and by Law) of the conditions set forth in Article VII
(other than those conditions that by their nature may only be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions), the
Merger Sub shall, in coordination with the Company, deliver (and the Purchaser shall cause the Merger Sub to deliver) to the Registrar of Companies of
the State of Israel (the “Companies Registrar”) a notice of the contemplated Merger and the proposed date of the Closing on which the Companies
Registrar is requested to issue a certificate evidencing the Merger in accordance with Section 323(5) of the Companies Law (the “Merger Certificate”)
after notice that the Closing has occurred is served to the Companies Registrar. The Merger shall become effective upon issuance of the Merger Certificate
by the Companies Registrar (the “Effective Time”).
Section 2.4 Articles of Association.
The parties hereto shall take all actions necessary so that the articles of association of the Company as in effect immediately prior to the Effective
Time shall be the articles of association of the Surviving Company (the “Surviving Company Articles”), until duly amended as provided therein or by
applicable Law.
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Section 2.5 Directors and Officers.
(a)
The Parties shall take all actions necessary so that the directors of the Merger Sub at the Effective Time shall, from and after the Effective Time,
be appointed and serve as the directors of the Surviving Company until their successors shall have been duly elected or appointed and qualified or until
their removal or resignation in accordance with the Surviving Company Articles.
(b)
The Parties shall take all actions necessary so that the current officers of the Company shall remain the officers of the Surviving Company until
their successors shall have been duly elected or appointed or qualified or until their removal or resignation in accordance with the Surviving Company
Articles.
ARTICLE III
EFFECT OF THE MERGER ON SHARE CAPITAL; PAYMENT
Section 3.1 Effect on Share Capital.
At the Effective Time, by virtue of, and simultaneously with, the Merger and without any action on the part of the Company, the Merger Sub or the
holders of any securities of the Company or the Merger Sub:
(a)
Cancellation of Company Shares. Each of the Company Shares held by the Company as dormant shares or held by the Purchaser or the Merger
Sub immediately prior to the Effective Time shall automatically be cancelled, retired and shall cease to exist, and no consideration or payment shall be
delivered in exchange therefor or in respect thereof.
(b)
Conversion of Company Shares. Except as otherwise provided in this Agreement, each Company Share issued and outstanding immediately
prior to the Effective Time (other than shares cancelled pursuant to Section 3.1(a) hereof, and Company Shares held by certain Sponsors or one of their
Affiliates), shall be automatically converted into the right to receive $11.40 in cash (such per share amount, the “Merger Consideration”), without interest.
All Company Stock Options shall be treated in accordance with Section 3.3 hereof. Each Company Share to be converted into the right to receive the
Merger Consideration as provided in this Section 3.1(b) shall be automatically cancelled and shall cease to exist, and the holders of certificates (the
“Certificates”), which immediately prior to the Effective Time represented outstanding Company Shares, or non-certificated Company Shares represented
by book-entry (“Book-Entry Shares”) shall cease to have any rights with respect to such Company Shares other than the right to receive, upon surrender of
such Certificates or Book-Entry Shares, in accordance with Section 3.2 of this Agreement, the Merger Consideration, without interest.
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(c)
Conversion of the Merger Sub Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the holder
thereof, each ordinary share, par value of NIS 1.00 per share, of the Merger Sub issued and outstanding immediately prior to the Effective Time shall be
converted into and become fully paid ordinary shares, par value NIS 0.20 per share, of the Surviving Company as shall be issued and outstanding as of the
Effective Time and such ordinary shares shall constitute the only outstanding shares of the Surviving Company.
(d)
Adjustments. Without limiting the other provisions of this Agreement, if at any time during the period between the date of this Agreement and
the Effective Time, any change in the number of outstanding Company Shares shall occur as a result of a reclassification, recapitalization, stock split
(including a reverse stock split), or combination, exchange or readjustment of shares, or any share dividend or distribution with a record date during such
period, the Merger Consideration as provided in Section 3.1(b) shall be equitably adjusted to reflect such change; provided that, in no event shall the
Aggregate Consideration increase as a result of such change.
Section 3.2 Exchange of Certificates.
(a)
Designation of Paying Agent; Deposit of Exchange Fund. Prior to the Effective Time, the Purchaser shall designate a paying agent based in the
United States (the “Paying Agent”) reasonably acceptable to the Company for the payment of the Aggregate Merger Consideration as provided in Section
3.1(b). Concurrently with the scheduled date of issuance of the Merger Certificate by the Companies Registrar, the Purchaser shall deposit, or cause to be
deposited with the Paying Agent for the benefit of holders of Company Shares and Company Stock Options cash constituting an amount equal to (i) the
sum of the Aggregate Merger Consideration plus (ii) the Aggregate Option Consideration (the “Aggregate Consideration,” and such Aggregate
Consideration as deposited with the Paying Agent, the “Exchange Fund”). In the event the Exchange Fund shall be insufficient to make the payments
contemplated by Section 3.1(b) and Section 3.3, the Purchaser shall promptly deposit, or cause to be deposited, additional funds with the Paying Agent in
an amount which is equal to the deficiency in the amount required to make such payment. The Paying Agent shall cause the Exchange Fund to be (i) held
in trust for the benefit of the holders of Company Shares and Company Stock Options, and (ii) applied promptly to making the payments in accordance
with this Agreement. In the event that a portion of the Aggregate Consideration will not be disbursed immediately to Israeli residents while a request for a
tax exemption is pending, such funds shall be placed in an interest bearing account and the interest earned thereon shall be paid to the recipients. The
Exchange Fund shall not be used for any purpose other than to fund payments in accordance with this Agreement.
(b)
As promptly as practicable following the Effective Time, and, in the case of holders of record of Book-Entry Shares and only with respect to
such holders’ Book-Entry Shares, not later than the first Business Day thereafter, the Surviving Company shall cause the Paying Agent to mail or
otherwise transmit (or to make available for collection by hand) to each holder of record of a Certificate or Book-Entry Share, which immediately prior to
the Effective Time represented outstanding Company Shares (i) a letter of transmittal, which shall specify that delivery shall be effected, and risk of loss
and title to the Certificates or Book-Entry Shares, as applicable, shall pass, only upon proper delivery of the Certificates (or affidavits of loss in lieu
thereof) or Book-Entry Shares to the Paying Agent and which shall be in the form and have such other provisions as the Purchaser and the Company may
reasonably specify, (ii) instructions for use in effecting the surrender of the Certificates or Book-Entry Shares in exchange for the Merger Consideration
into which the number of Company Shares previously represented by such Certificate or Book-Entry Shares shall have been converted pursuant to this
Agreement (which instructions shall provide that at the election of the surrendering holder, Certificates or Book-Entry Shares may be surrendered, and the
Merger Consideration in exchange therefor collected, by hand delivery to the extent permitted by the Paying Agent) and (iii) a declaration form in which
the holder of record of a Certificate or Book-Entry Share states whether such holder is a resident of Israel as defined in the Ordinance (as defined below) at
the time of mailing to such holder any information statement in connection with approval of the Merger, including any other declarations that may be
required for Israeli Tax purposes.
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(c)
Upon surrender of a Certificate (or affidavit of loss in lieu thereof) or Book-Entry Share for cancellation to the Paying Agent, together with a
letter of transmittal duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be required
pursuant to such instructions, the holder of such Certificate or Book-Entry Share shall be entitled to receive in exchange therefor the Merger
Consideration, without interest, for each Company Share formerly represented by such Certificate or Book-Entry Share, to be mailed (or made available
for collection by hand if so elected by the surrendering holder and permitted by the Paying Agent) as soon as practicable, and, in the case of holders of
record of Book-Entry Shares and only with respect to such holders’ Book-Entry Shares, not later than the one (1) Business Day, following the Paying
Agent’s receipt of such Certificate (or affidavit of loss in lieu thereof) or Book-Entry Share. The Certificate (or affidavit of loss in lieu thereof) or BookEntry Share so surrendered shall be forthwith cancelled. The Paying Agent shall accept such Certificates (or affidavits of loss in lieu thereof) or BookEntry Shares upon compliance with such reasonable terms and conditions as the Paying Agent may impose to effect an orderly exchange thereof in
accordance with normal exchange practices. No interest shall be paid or accrued for the benefit of holders of the Certificates or Book-Entry Shares on the
Merger Consideration.
(d)
Termination of Exchange Fund. Any portion of the Exchange Fund that remains undistributed to the holders of the Certificates, Book-Entry
Shares or Company Stock Options for eighteen (18) months after the Effective Time shall be delivered to the Purchaser, upon demand, and any such
holders prior to the Merger who have not theretofore complied with this Article III shall thereafter look only to the Purchaser, as general creditors thereof,
for payment of their claim for cash, without interest, to which such holders may be entitled.
(e)
No Liability. None of the Purchaser, the Merger Sub, the Company, the Surviving Company or the Paying Agent shall be liable to any Person in
respect of any cash held in the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law. If any
Certificates or Book-Entry Shares are not surrendered prior to two (2) years after the Effective Time (or immediately prior to such earlier date on which
any cash in respect of such Certificate or Book-Entry Share would otherwise escheat to, or become the property of, any Governmental Authority), any
such cash in respect of such Certificate or Book-Entry Share shall, to the extent permitted by applicable Law, become the property of the Purchaser, free
and clear of all claims, rights or interest of any Person previously entitled thereto.
(f)
Investment of Exchange Fund. The Paying Agent shall invest the Exchange Fund as directed by the Purchaser or, after the Effective Time, the
Surviving Company; provided that, (i) no such investment shall relieve the Purchaser or the Paying Agent from making the payments required by this
Article III, (ii) no such investment shall have maturities that could prevent or delay payments to be made pursuant to this Agreement, and (iii) such
investments shall be in short-term obligations of the United States of America with maturities of no more than thirty (30) days or guaranteed by the United
States of America and backed by the full faith and credit of the United States of America or in commercial paper obligations rated A-I or P-1 or better by
Moody’s Investors Service, Inc. or Standard & Poor’s Corporation, respectively. Any interest or income produced by such investments will be payable to
the Surviving Company or the Purchaser, as the Purchaser directs.
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Section 3.3 Stock Options.
(a)
As of the Effective Time, each option to purchase Company Shares (each a “Company Stock Option”) that is outstanding and unexercised
immediately prior to the Effective Time shall be accelerated and cancelled by virtue of the Merger and without any action on the part of any holder of any
Company Stock Options, in consideration for the right to receive in accordance with, and subject to, the Israeli Options Tax Ruling, if applicable, as
promptly as practicable following the Effective Time, an amount in cash equal to the product of (i) the number of Company Shares previously subject to
such Company Stock Options and (ii) the excess, if any, of the Merger Consideration over the exercise price per Company Share previously subject to
such Company Stock Options, less any required withholding Taxes and applicable commissions and fees (the “Option Consideration” and the sum of all
such payments, the “Aggregate Option Consideration”). As of the Effective Time, all Company Stock Options shall no longer be outstanding and shall
automatically cease to exist, and each holder of a Company Stock Option shall cease to have any rights with respect thereto, except the right to receive the
Option Consideration, without interest. Prior to the Effective Time, the Company shall take all actions necessary to effectuate this Section 3.3, including
providing holders of Company Stock Options with notice of their rights with respect to any such Company Stock Options as provided herein.
(b)
As promptly as practicable following the Effective Time, the Paying Agent shall transfer to the account designated by the plan administrator,
under the applicable Company Stock Option Plan, the portion of the Aggregate Option Consideration that holders of Company Stock Options (other than
Company 102 Securities) are entitled to receive pursuant to Section 3.3(a). As soon as reasonably practicable thereafter, the applicable plan administrator,
in coordination with the Surviving Company, shall pay to each holder of Company Stock Options (other than holders of Company 102 Securities) the
amounts contemplated by Section 3.3(a), less applicable deductions and withholding at the time of payment. All payments with respect to Company 102
Securities, as set forth on a schedule to be mutually agreed upon by the Purchaser and the Company on or prior to the Closing Date (the “Option
Schedule”), shall be delivered by the Paying Agent to the 102 Trustee, as soon as practicable after the Effective Time, to be held and distributed pursuant
to the agreement with the 102 Trustee and applicable Laws (including the provisions of Section 102 of the Ordinance and the regulations and rules
promulgated thereunder). The 102 Trustee shall comply with any applicable Israeli Tax withholding requirements with respect to the payment in respect to
Company 102 Securities and with such procedures as may be required by the Israeli Options Tax Ruling, if obtained.
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Section 3.4 Lost Certificates.
If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be
lost, stolen or destroyed and, if required by the Surviving Company, the posting by such Person of a bond, in such reasonable and customary amount as the
Surviving Company may direct, as indemnity against any claim that may be made against the Surviving Company with respect to such Certificate, the
Paying Agent will issue in exchange for such lost, stolen or destroyed Certificate the applicable Merger Consideration to which the holder thereof is
entitled pursuant to this Article III.
Section 3.5 Transfers; No Further Ownership Rights.
(a)
The Merger Consideration paid in respect of Company Shares upon the surrender for exchange of Certificates or Book-Entry Shares in
accordance with the terms of this Article III shall be deemed to have been paid in full satisfaction of all rights pertaining to the Company Shares
represented by such Certificates or Book-Entry Shares, and at the Effective Time, the share transfer books shall be closed and thereafter there shall be no
further registration of transfers on the share transfer books of the Surviving Company of Company Shares that were outstanding immediately prior to the
Effective Time. From and after the Effective Time, the holders of Certificates or Book-Entry Shares that evidence ownership of Company Shares
outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Company Shares, except as otherwise provided
herein or by applicable Law. If valid Certificates or Book-Entry Shares are presented to the Surviving Company for transfer following the Effective Time,
they shall be cancelled against delivery of the applicable Merger Consideration, as provided for in Section 3.1(b) hereof, for each Company Share
formerly represented by such Certificates.
(b)
If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement to vest the
Purchaser with control over, and to vest the Surviving Company with full right, title and possession to, all assets, property, rights, privileges, powers and
franchises of the Company, the officers and directors of the Surviving Company and the Purchaser shall, in the name of their respective corporations or
otherwise, be fully authorized to take all such lawful and necessary action to the extent not inconsistent with the terms of this Agreement or the rights of
the holders of Company Shares or Company Stock Options.
Section 3.6 Withholding Tax.
Each of the Purchaser, the Surviving Company, the 102 Trustee, the Paying Agent and Subsidiaries of the Surviving Company shall be entitled to
deduct and withhold from the consideration otherwise payable to any holder of Company Shares or Company Stock Options pursuant to this Agreement
the amounts required to be deducted and withheld from any payment pursuant to this Agreement under the Code, the Israeli Income Tax Ordinance New
Version, 1961, as amended and the rules and regulations promulgated thereunder (the “Ordinance”), or any other applicable state or local Tax Law, or
Israeli or foreign Tax Law, provided, however, that (i) in the event the Israeli Withholding Tax Ruling and/or the Israeli Options Tax Ruling, as applicable
is obtained, deduction and withholding of any amounts under the Ordinance or any other provision of Israeli Law or requirement, if any, shall be made
only in accordance with the provisions of such rulings, (ii) in the event the Israeli Withholding Tax Extension is obtained, the parties shall fully comply
with the provisions of any such Israeli Withholding Tax Extension, and (iii) in the event any holder of record of Company Shares or Book-Entry Shares
provides the Purchaser or the Surviving Company with a valid approval or ruling issued by the applicable Governmental Authority regarding the
withholding (or exemption from withholding) of Israeli Tax from the Merger Consideration in a form reasonably satisfactory to the Purchaser, then the
deduction and withholding of any amounts under the Ordinance or any other provision of Israeli law or requirement, if any, from the Merger
Consideration payable to such holder of record of Company Shares shall be made only in accordance with the provisions of the applicable approval. To
the extent that amounts are withheld by the Paying Agent, the Surviving Company, the 102 Trustee, applicable plan administrator or the Purchaser, as the
case may be, such withheld amounts (i) shall be remitted by the Purchaser, the Surviving Company, the Paying Agent, the 102 Trustee, applicable plan
administrator or Subsidiaries of the Surviving Company, as applicable, to the applicable Governmental Authority, and (ii) shall be treated for all purposes
of this Agreement as having been paid to the holder of Company Shares in respect of which such deduction and withholding was made by the Purchaser,
the Surviving Company, the Paying Agent, the 102 Trustee, applicable plan administrator or Subsidiaries of the Surviving Company, as the case may be.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser and the Merger Sub that, except as set forth in the disclosure schedule (the “Company
Disclosure Schedule”) delivered by the Company to the Purchaser prior to the execution and delivery of this Agreement (such disclosures being
considered to be made for purposes of the specific Section of the Company Disclosure Schedule in which they are made and for purposes of all other
Sections to the extent the relevance of such disclosure is reasonably apparent on its face):
Section 4.1 Organization; Qualification.
(a)
The Company and each of its Subsidiaries is a corporation or a limited liability company, duly organized, validly existing and, in jurisdictions
where such concept is recognized, in good standing under the laws of the jurisdiction of its organization and has all requisite corporate or limited liability
company power and authority to own, license, use, lease and operate its assets and properties and to carry on its business as it is now being conducted and
as currently proposed by management to be conducted. The Company has made available to the Purchaser true and complete copies of its Memorandum of
Association and Articles of Association (together, the “Company Charter Documents”) and the certificate of incorporation and bylaws (or similar
organizational documents) of Spacenet Inc. The Company Charter Documents and the certificate of incorporation and bylaws (or similar organizational
documents) of each of its Subsidiaries are in full force and effect and neither the Company nor any of its Subsidiaries is in violation of any of their
respective provisions. The Company has made available to the Purchaser correct and complete copies of the minutes of all meetings of shareholders, the
Board of Directors and each committee of the Board of Directors of the Company and Spacenet Inc. in each case since January 1, 2005, other than any
such minutes related to the Transactions.
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(b)
The Company and each of its Subsidiaries is duly qualified or licensed to do business and in good standing (in jurisdictions where such concept
is recognized) in each jurisdiction in which failure to be so duly qualified or licensed and in good standing would have a Material Adverse Effect.
Section 4.2 Capitalization.
(a)
The registered and authorized share capital of the Company consists of 60,000,000 Company Shares. As of March 27, 2008, (i) 39,749,429
Company Shares were issued and outstanding, (ii) 2,062,407 Company Shares were available for issuance under the Company Stock Option Plans and
4,089,010 Company Shares were issuable upon the exercise of outstanding Company Stock Options to purchase Shares under the Company Stock Option
Plans, and (iii) 866,161 Company Shares were issuable upon the conversion of outstanding convertible notes. Each of the issued and outstanding
Company Shares have been duly authorized and validly issued and are fully paid and nonassessable, have not been issued in violation of any preemptive
or similar rights and were issued in compliance in all material respects with applicable Law. Except as set forth above in this Section 4.2(a), and except for
changes since the above date resulting from the exercise of Company Options or the conversion of convertible notes of the Company outstanding on such
date, there are no outstanding (i) shares of registered authorized share capital or other voting securities of the Company, (ii) securities of the Company
convertible into or exchangeable for shares of registered and authorized share capital or other securities of the Company, or (iii) subscriptions, options,
warrants, puts, calls, phantom stock rights, stock appreciation rights, stock-based performance units, agreements, understandings, claims or other
commitments or rights of any type granted or entered into by the Company or any of its Subsidiaries relating to the issuance, sale, repurchase or transfer of
any securities of the Company or that give any Person the right to receive any economic benefit or right similar to or derived from the economic benefits
and rights of securities of the Company. There are no outstanding obligations of the Company or any of the Company’s Subsidiaries to repurchase, redeem
or otherwise acquire any securities of the Company or any of the Company’s Subsidiaries or to vote or to dispose of any shares of registered and
authorized share capital of the Company or any of the Company’s Subsidiaries.
(b)
Section 4.2(b) of the Company Disclosure Schedule lists each outstanding Company Option, the Plan under which such Options were granted,
the holder thereof, the number of Company Shares issuable thereunder and the exercise price thereof. Except as disclosed in Section 4.2(b) of the
Company Disclosure Schedule, neither the Company nor any Subsidiary has agreed to register any securities under the Securities Act, any state securities
Law or any other applicable securities Law or granted registration rights to any individual or entity.
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(c)
Section 4.2(c) of the Company Disclosure Schedule lists each Subsidiary of the Company, and its shareholders, directors and officers. Each of
the issued and outstanding shares of capital stock of each of the Subsidiaries (the “Subsidiary Shares”) has been duly authorized and validly issued and are
fully paid and nonassessable, have not been issued in violation of any preemptive or similar rights and were issued in compliance in all material respects
with applicable Law, and, except as set forth in Section 4.2(c) of the Company Disclosure Schedule, the Company owns, directly or indirectly, one
hundred percent (100%) of all Subsidiary Shares. Except as disclosed in Section 4.2(c) of the Company Disclosure Schedule, there are no (i) securities
convertible into or exchangeable for shares of share capital or other securities of any Subsidiary of the Company, or (ii) subscriptions, options, warrants,
puts, calls, phantom stock rights, stock appreciation rights, stock-based performance units, agreements, understandings, claims or other commitments or
rights of any type granted or entered into by the Company or any of its Subsidiaries relating to the issuance, sale, repurchase or transfer of any securities of
any Subsidiary of the Company or that give any Person the right to receive any economic benefit or right similar to or derived from the economic benefits
and rights of securities of any Subsidiary of the Company. Except for the capital stock of its Subsidiaries, the Company does not own, directly or
indirectly, any ownership interest in any Person other than investments having a carrying amount, in each case, less than $250,000. The Company is not
subject to any obligation or requirement to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise), in any
Person except its Subsidiaries.
Section 4.3 Authority.
The Company has all requisite corporate power and authority to execute and deliver this Agreement and to perform and consummate this Agreement,
the Merger and the Transactions. The execution, delivery and performance of this Agreement and the consummation by the Company of the Merger and
the Transactions have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of
the Company are necessary to authorize this Agreement or to consummate the Transactions, other than the Company Shareholder Approval. This
Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors’ rights and to general principles of equity.
Section 4.4 Consents and Approvals; No Violations; Voting.
(a)
The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Merger and the
Transactions do not and will not require any filing or registration with, notification to, or authorization, permit, consent or approval of, or other action by
or in respect of, any foreign, domestic, state or local governmental body, self-regulatory organization, court, agency, commission, official or regulatory or
other authority (collectively, “Governmental Authority”) other than (i) filing of the Merger Certificate, (ii) notice to the Office of the Chief Scientist of the
Israeli Ministry of Trade, Industry & Labor (“OCS”) of the change in ownership of the Company to be effected by the Merger, (iii) filings with, and
approval by, the Investment Center of the Israeli Ministry of Trade, Industry & Labor (the “Investment Center”) of the change in ownership of the
Company to be effected by the Merger, (iv) compliance with the rules and regulations of NASDAQ, (v) obtaining the Israeli Withholding Tax Ruling and
the Israeli Options Tax Ruling, (vi) notices to the Israeli Ministry of Defense, (vii) any consent, approval, authorization, waiver or permit of, or filing with
or notification to, any Governmental Authority under applicable U.S. or foreign competition, antitrust, merger control or investment laws (“Antitrust
Requirements”) (clauses (i) through (vii), collectively, the “Governmental Consents”), (viii) those consents set forth in Section 4.4(a) of the Company
Disclosure Schedule, and (ix) where failure to obtain or make such filing or registration with, notification to, or authorization, permit, consent or approval
of, or other action by, or in respect of any Governmental Authority would not have, individually or in the aggregate, a Material Adverse Effect. No
Subsidiary of the Company is required to make any independent filings with the U.S. Securities and Exchange Commission (the “SEC”), NASDAQ or any
other stock exchange.
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(b)
The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Merger and the
Transactions do not and will not (i) conflict with or result in any breach of any provision of the Company Charter Documents or any similar organizational
documents of any of its Subsidiaries, (ii) except as set forth in Section 4.4(b) of the Company Disclosure Schedule, result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default under, or give rise to any right of termination, amendment, cancellation or
acceleration or the creation or acceleration of any right or obligation under, or result in the creation of any Encumbrance upon, any of the properties or
assets of the Company or any of its Subsidiaries under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
loan, credit agreement, lease, license, permit, concession, franchise, purchase order, sales order Contract, agreement or other instrument, understanding or
obligation, whether written or oral, to which the Company or any of its Subsidiaries is a party or by which any of their properties or assets may be bound,
or (iii) violate any judgment, order, writ, preliminary or permanent injunction or decree or any Law applicable to the Company, any of its Subsidiaries or
any of their properties or assets, except in the case of clauses (ii) and (iii) for violations, breaches, defaults, terminations, amendments, cancellations or
accelerations that would not have a Material Adverse Effect.
(c)
Assuming the accuracy of the representations set forth in Section 5.5 below, the affirmative vote (in person or by proxy) of the holders of the
majority of the Company Shares present and voting at the Company Shareholders’ Meeting, or any adjournment or postponement thereof, in favor of the
approval of this Agreement, the Merger and the Transactions (the “Company Shareholder Approval”) is the only vote or approval of the holders of any
class or series of shares of the Company or any of its Subsidiaries that is necessary to approve this Agreement, the Merger and the Transactions. If the
Purchaser, the Merger Sub or any person or entity holding twenty-five percent (25%) or more of either the voting rights or the right to appoint directors of
the Purchaser or the Merger Sub (any such person or entity is described in this paragraph as a “Purchaser Affiliate”) holds shares in the Company (as set
forth in Section 5.5 of the Purchaser Disclosure Schedule), then the Company Shareholder Approval shall also include the additional requirement that a
majority of the voting power present and voting at the Company Shareholders’ Meeting in person or by proxy (excluding abstentions, the Purchaser, the
Merger Sub, the Purchaser’s Affiliates, or anyone acting on their behalf, including their family members or entities under their control) shall not have
voted against the Merger.
Section 4.5 SEC Reports and Financial Statements.
(a)
The Company has filed with, or furnished to, the SEC, on a timely basis, all forms, reports, schedules, statements and other documents required
to be filed by it since January 1, 2006 (collectively, the “Company SEC Documents”). The Company SEC Documents, as of their respective dates (or if
amended prior to the date of this Agreement, as of the date of such amendment) (i) do not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made,
not misleading, and (ii) comply in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be,
and the applicable rules and regulations of the SEC thereunder.
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(b)
As of their respective dates (or if amended prior to the date of this Agreement, as of the date of such amendment), the financial statements of the
Company included in the Company SEC Documents, including any related notes thereto, (i) comply in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with respect thereto, (ii) have been prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be set forth in the notes thereto and subject, in the case of the unaudited statements, to normal,
recurring audit adjustments not material in amount), and (iii) fairly present in all material respects the consolidated financial position of the Company and
its consolidated Subsidiaries as at the dates thereof and the consolidated results of their operations and cash flows for the periods indicated.
(c)
Solely as applicable to a foreign private issuer, the Company has established and maintains internal controls over financial reporting and
disclosure controls and procedures (as such terms are defined in Rule 13a-15 and Rule 15d-15 under the Exchange Act). Such disclosure controls and
procedures are designed to ensure that material information relating to the Company, including its Subsidiaries, required to be disclosed by the Company
in the reports that it files or furnishes under the Exchange Act is accumulated and communicated to the Company’s chief executive officer and chief
financial officer as appropriate to allow timely decisions regarding required disclosure and to make the certifications required pursuant to Sections 302 and
906 of the Sarbanes-Oxley Act of 2002, as amended, and such disclosure controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms promulgated by the SEC. Such internal controls over financial reporting are effective in providing reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP,
including policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company and its Subsidiaries, (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company and its Subsidiaries are being made only
in accordance with appropriate authorizations of management and the board of directors of the Company, and (iii) 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 of the Company and its Subsidiaries. As of the date hereof, the Company has not identified any material weaknesses in the design or operation
of the internal controls over financial reporting except as disclosed in the Company SEC Documents filed prior to the date hereof.
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(d)
Except (i) as reflected or reserved against in the Company’s financial statements (or the notes thereto) included in the Company SEC
Documents filed with or furnished to the SEC and publicly available prior to the date of this Agreement, (ii) for liabilities or obligations incurred in the
ordinary course of business since the date of such financial statements that would not have a Material Adverse Effect, (iii) for liabilities permitted or
contemplated by this Agreement in connection with the Merger and the Transactions, or (iv) as disclosed in Section 4.5(d) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries has any material liabilities or obligations of any nature, whether or not accrued, contingent or
otherwise.
Section 4.6 Absence of Certain Changes or Events.
Except as set forth in Section 4.6 of the Company Disclosure Schedule, (a) from January 1, 2007 through the date of this Agreement, there has not
been any Material Adverse Effect, and (b) since September 30, 2007, (i) except for the Merger and the Transactions, the business of the Company and its
Subsidiaries has been conducted in all material respects in the ordinary course, consistent with past practice, and (ii) neither the Company nor any of its
Subsidiaries has taken any action described in Section 6.2 hereof that if taken after the date hereof and prior to the Effective Time without the prior written
consent of the Purchaser would violate such provision. Without limiting the foregoing, since September 30, 2007, there has not occurred any damage,
destruction or loss (whether or not covered by insurance) of any material asset of the Company or any of its Subsidiaries which materially affects the use
thereof.
Section 4.7 Information Supplied.
None of the information supplied by the Company for inclusion or incorporation by reference in any document to be sent to the Company’s
shareholders in connection with the Company Shareholders’ Meeting at the time furnished (as amended or supplemented) or at the time of the Company
Shareholders’ Meeting in connection with the Transactions will contain any untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no
representation is made by the Company with respect to statements made therein based on information supplied by the Purchaser or the Merger Sub in
writing for inclusion in any such document.
Section 4.8 Employee Matters and Benefit Plans.
(a)
Section 4.8(a)(i) of the Company Disclosure Schedule contains an accurate and complete list, as of the date hereof, of each Company Employee
Plan relating to employees of the Company in Israel, the United States, Colombia and Peru, and Section 4.8(a)(ii) of the Company Disclosure Schedule
contains an accurate and complete list, as of the date hereof, of each Employment Agreement providing for total compensation of $200,000 or more per
year in the year ended December 31, 2007. The Company does not have any plan or commitment to establish any new Company Employee Plan, or to
modify any such Plan.
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(b)
The Company has provided or made available to the Purchaser copies of (i) each Company Employee Plan and each Employment Agreement
identified in Section 4.8(a)(i) and Section 4.8(a)(ii) of the Company Disclosure Schedule, including all amendments thereto and all related documents,
including the form of each representative stock option agreement evidencing any outstanding Company Stock Options, (ii) the most recent annual actuarial
valuations, if any, prepared for each Company Employee Plan identified in Section 4.8(a)(i), (iii) the most recent annual report (e.g. Form Series 5500 and
all schedules and financial statements attached thereto), if any, required under ERISA, the Code or other applicable Laws in connection with each
Company Employee Plan, (iv) the most recent summary plan description together with the summaries of material modifications thereto, if any, with
respect to each Company Employee Plan identified in Section 4.8(a)(i), (v) all determination, opinion, notification and advisory letters from the United
States Internal Revenue Service (the “IRS”) or similar non-U.S. Governmental Authority in respect of any U.S. Company Employee Plan, (vi) all
correspondence since January 1, 2005 to or from any Governmental Authority relating to any Company Employee Plan that alleges a violation of any
Laws in any material respect or relates to a material amendment to any such Plan, (vii) all prospectuses prepared in connection with each Company
Employee Plan identified in Section 4.8(a)(i) or Stock Option Plan, and (viii) any approvals held by the Company or its Subsidiaries that enable them to
employ foreign employees or employees from “territories” currently administered by Israel.
(c)
The Company and its Subsidiaries have performed in all material respects all obligations required to be performed by it under, are not in default
or violation of, and have no Knowledge of any material default or violation by any other party to, each Company Employee Plan, Employment Agreement
and consulting agreement, and each Company Employee Plan, Employment Agreement or consulting agreement has been established and maintained in
all material respects in accordance with its terms and in material compliance with applicable Laws. Except as disclosed in Section 4.5(d) of the Company
Disclosure Schedule, as of the date hereof, (i) there are no actions, suits or claims pending, or, to the Company’s Knowledge, threatened or reasonably
anticipated against any Company Employee Plan, the Company or its Subsidiaries with respect to any Employment Agreement or against the assets of any
Company Employee Plan, except for claims that would not reasonably be expected to be material to the Company and its Subsidiaries, and (ii) there are no
audits, inquiries or proceedings pending or, to the Company’s Knowledge, threatened by the IRS, United States Department of Labor or any other
Governmental Authority with respect to any Company Employee Plan. Except as disclosed in Section 4.8(c) of the Company Disclosure Schedule and
except as required by Law, no condition exists that would prevent the Surviving Company, its Subsidiaries or the Purchaser from terminating or amending
any Company Employee Plan at any time for any reason without liability to the Surviving Company (other than ordinary administration expenses or
routine claims for benefits).
(d)
None of the Company, its Subsidiaries or their respective ERISA Affiliates has ever maintained, established, sponsored, participated in,
contributed to, or is obligated to contribute to, or otherwise incurred any obligation or liability (including any contingent liability) under any
“multiemployer plan,” as defined in Section 3(37) of ERISA, any plan subject to Title IV of ERISA or Section 412 of the Code, any multiple employer
plan (as defined in ERISA or the Code), or any “funded welfare plan” within the meaning of Section 419 of the Code. Any Company Employee Plan
intended to be qualified under Section 401(a) of the Code and each trust intended to qualify under Section 501(a) of the Code has either timely applied for
or obtained a favorable determination, notification, advisory and/or opinion letter, as applicable, as to its qualified status from the IRS. For each Company
Employee Plan that is intended to be qualified under Section 401(a) of the Code, to the Company’s Knowledge, there has been no event, condition or
circumstance that has adversely affected or is likely to adversely affect such qualified status, except such events, conditions or circumstances which could
be corrected without the Company incurring a material liability.
22
(e)
No Company Employee Plan provides, or reflects or represents any liability material to the Company or its Subsidiaries, taken as a whole, to
provide post-termination life, health or other welfare benefits to any Person for any reason, except as may be required by Section 601 through 608 of
ERISA or other applicable Law.
(f)
The Company and its Subsidiaries (i) are not liable for any arrears of wages or penalties with respect thereto, and (ii) are not liable for any
payment to any trust or other fund governed by or maintained by or on behalf of any Governmental Authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for individuals who perform or who have performed services for the Company or its
Subsidiaries (other than routine payments to be made in the ordinary course of business and consistent with past practice). Except as set forth in Sections
4.5(d) and 4.8(f) of the Company Disclosure Schedule, there are no complaints, charges or claims against the Company or its Subsidiaries pending, or to
the Knowledge of the Company, threatened to be brought, with any Governmental Authority, arbitrator or court based on, arising out of, in connection
with, or otherwise relating to the employment or termination of employment or failure to employ by the Company or its Subsidiaries of any individual that
would be material to the Company and its Subsidiaries taken as a whole. The Company and its Subsidiaries are in compliance in all material respects with
all Laws relating to the employment of labor, including all such Laws relating to wages, hours, the Fair Labor Standards Act, the Worker Adjustment and
Retraining Notification Act and any similar state of local “mass layoff” or “plant closing” law, collective bargaining, extension orders, discrimination,
civil rights, safety and health, workers’ compensation and the collection and payment of withholding and/or social security Taxes and any similar Tax.
(g)
As of the date hereof, no work stoppage or labor strike against the Company or its Subsidiaries is pending, or to the Knowledge of the
Company, threatened. The Company does not have Knowledge of any material activities or proceedings of any labor union to organize any Employees.
None of the Company or its Subsidiaries has engaged in any material unfair labor practices within the meaning of the National Labor Relations Act.
Except as set forth in Section 4.8(g) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is presently, and has not in the
preceding five years been, a party to, or bound by, any collective bargaining agreement, extension order or union contract and no collective bargaining
agreement is being negotiated by the Company or any of its Subsidiaries.
(h)
Each International Employee Plan has been established, maintained and administered in material compliance with its terms and conditions and
with the requirements prescribed by Laws that are applicable to such International Employee Plan. Except as disclosed in Section 4.8(h) of the Company
Disclosure Schedule, no International Employee Plan has unfunded liabilities, with respect to all current or former participants in such plan according to
the actuarial assumptions and valuations most recently used to determine employer contributions to such International Employee Plan, that as of the
Effective Time, will not be offset by insurance or fully accrued, in accordance with normal accounting practices, except such liabilities for severance
payments required under local Law in the event of a non-voluntary termination of employment.
23
(i)
Solely with respect to Employees who reside or work in Israel or whose employment is otherwise subject to Israeli Law (“Israeli Employees”)
and except as set forth in Section 4.8(i) of the Company Disclosure Schedule, (i) the Company is not a party to any collective bargaining contract,
collective labor agreement or other contract or arrangement with a labor union, trade union or other organization or body involving any of its Israeli
Employees, or is otherwise required under any legal requirement (except as set forth in personal Employment Agreements) to provide benefits or working
conditions beyond the minimum benefits and working conditions required by Israeli Law or pursuant to extension orders applicable to all employees in
Israel, which have not been accrued by the Company and which, if paid, could have a Material Adverse Effect; (ii) the Company has not recognized or
received a demand for recognition from any collective bargaining representative with respect to any of its Israeli Employees; (iii) the Company is not
subject to, and no Israeli Employee of the Company benefits from, any extension order (tzavei harchava) except for extension orders applicable to all
employees in Israel; (iv) all of the Israeli Employees are “at will” employees subject to the termination notice provisions included in the respective
Employment Agreements or applicable Law, and all Contracts between the Company and any of its Israeli Employees or directors can be terminated by
the Company by up to ninety (90) days notice without giving rise to a claim for damages or compensation (except for statutory payments); (v) all amounts
that the Company is legally or contractually required to pay to Employees and/or to Governmental Authorities (whether under (vii) below or otherwise)
are fully funded or accrued on the Financial Statements as of the date of such Financial Statements, and the Company is in compliance with the
requirements of the general authorization (heter) given by the Ministry of Labor in connection with Section 14 of the Severance Pay Law, (vi) except as
disclosed in Section 4.5(d) of the Company Disclosure Schedule, there is no pending or, to the Company’s Knowledge, threatened claim by a current or
former Israeli Employee for compensation due to termination of employment (beyond the statutory payments to which employees are entitled); (vii) all
amounts that the Company is legally or contractually required to either (A) deduct from its Israeli Employees’ salaries or to transfer to such Israeli
Employees’ pension or provident, life insurance, incapacity insurance, continuing education fund or other similar funds, or (B) withhold from their Israeli
Employees’ salaries and benefits and to pay to any Governmental Authority as required by the Israeli Income Tax Ordinance and/or Israeli National
Insurance Law or otherwise, in either case, have been duly deducted, transferred, withheld and paid, and the Company does not have any outstanding
obligation to make any such deduction, transfer, withholding or payment (other than routine payments, deductions or withholdings to be timely made in
the ordinary course of business and consistent with past practice); (viii) the Company is in compliance in all material respects with all applicable legal
requirements and contracts relating to employment, employment practices, wages, bonuses and other compensation matters and terms and conditions of
employment related to its Israeli Employees, including the Israeli Prior Notice to the Employee Law 2002, the Israeli Notice to Employee (Terms of
Employment) Law 2002, the Israeli Prevention of Sexual Harassment Law 1998, and the Israeli Employment by Human Resource Contractors Law 1996;
and (ix) as of the date hereof, the Company has not engaged any Israeli Employees whose employment would require special licenses or permits, and there
are no unwritten Company policies or customs which, by extension, could entitle Israeli Employees to benefits in addition to what they are entitled by Law
or contract.
24
(j)
Consultants providing services to the Company or its Subsidiaries are subject to agreements that state that there is no employer-employee
relationship between the Company or any of its Subsidiaries, on the one hand, and a consultant, on the other hand.
Section 4.9 Contracts.
(a)
Except as disclosed in Section 4.9(a) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party to or is
bound by any of the following Contracts:
(i)
any Contract whereby the Company or any of its Subsidiaries has assumed any obligation of, or duty to warrant, indemnify, reimburse,
hold harmless or guarantee any obligation or liability of any other Person (including with respect to the infringement or misappropriation by the
Company or any of its Subsidiaries or such other Person of the Intellectual Property Rights of any Person other than the Company or any of its
Subsidiaries) in excess of $1,000,000, other than any Contract entered into in connection with the sale or license of products or services, or
Intellectual Property Rights related thereto, or any Contract with advisors entered into in the ordinary course of business consistent with past
practice;
(ii)
any Contract containing any covenant limiting in any respect the right of the Company or any of its Subsidiaries to engage in any line of
business or to compete with any Person, granting any exclusive rights (including any exclusive license or right to use any Intellectual Property
Rights) or “most favored nation” status or limiting, in any material respect, the Company’s right to acquire material assets, securities or services of
any third parties;
(iii)
any Contract relating to the disposition or acquisition by the Company or any of its Subsidiaries of assets having a fair market value or
a purchase price in excess of $1,000,000 not in the ordinary course of business or pursuant to which the Company or any of its Subsidiaries has or
will have any ownership interest in any corporation, partnership, joint venture or other business enterprise other than the Company’s Subsidiaries,
in each case, containing material covenants, indemnities or other obligations that are still in effect;
(iv)
any Contract involving payments in excess of $1,000,000 with any third party to manufacture, reproduce, sell or distribute any
Company Products, except Contracts with manufacturers, distributors, customers or sales representatives in the ordinary course of business
cancelable by the Company or the applicable Subsidiary without penalty upon ninety (90) days’ notice or less;
(v)
any mortgages, indentures, bank guarantees, loans or credit agreements, security agreements or other Contracts relating to the borrowing
of money or extension of credit in excess of $1,000,000, other than trade payables or extensions of credit by or to the Company incurred in the
ordinary course of business consistent with past practice, or any Contract under which the Company or any of its Subsidiaries acts as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation for borrowed money or other indebtedness of any Person
(other than the Company or its Subsidiaries);
25
(vi)
any settlement agreement requiring payment of a sum in excess of $1,000,000 under which the Company or any of its Subsidiaries has
ongoing obligations;
(vii)
each real property lease and each lease for personal property in each case involving payments by the Company or any of its
Subsidiaries in excess of $250,000 annually (including capitalized leases);
(viii)
any royalty Contracts, Intellectual Property Licenses and other Contracts relating to any Intellectual Property Rights that are integral
to the business of the Company and its Subsidiaries taken as a whole (excluding any shrink-wrap, click-through or other end-user license
agreements on reasonable terms for Software available through commercial distributors or in consumer retail stores for a license fee of no more
than $50,000) or pursuant to which the Company’s commitment for future payment is in excess of $500,000 in the aggregate or any settlement
agreement related to Intellectual Property Rights entered into since January 1, 2001;
(ix)
any other Contract pursuant to which the Company and its Subsidiaries have aggregate remaining payment obligations in excess of
$500,000, other than Contracts entered into in the ordinary course of business consistent with past practice; and
(x)
any commitment or agreement to enter into any of the foregoing.
(b)
None of the Company, any of its Subsidiaries, or, to the Company’s Knowledge, any other party to any Contract required to be disclosed in
Section 4.9(a) or 4.17 of the Company Disclosure Schedule (any such Contract, a “Company Contract”), is in material breach, violation or default under,
and neither the Company nor any of its Subsidiaries has received written notice that it has materially breached, violated or defaulted under, any Company
Contract. Each Company Contract is a legal, valid and binding obligation of the Company or the Subsidiary that is a party thereto, enforceable against the
Company and such Subsidiary, and to the Company’s Knowledge, the other parties thereto in accordance with its terms. The Company has made available
to the Purchaser true and complete copies of all Company Contracts and all other Contracts that are material to the Company and its Subsidiaries, taken as
a whole, that are in effect on the date of this Agreement.
(c)
Solely with respect to Government Contracts to which a U.S. Governmental Authority is a party:
(i)
Neither the Company nor any of its controlling shareholders, officers or directors has been debarred, suspended, deemed non-responsible
or otherwise excluded from participation in any Government Contract or for any reason listed on the List of Parties Excluded from Federal
Procurement and Nonprocurement Programs or any similar list nor, to the Knowledge of the Company, has any debarment, suspension or
exclusion proceeding been initiated against the Company or any of its predecessors, controlling shareholders, officers or directors.
(ii)
There have been no legal proceedings involving or related to the Company or, to the Knowledge of the Company, any of its
predecessors, controlling shareholders, officers or directors with respect to an alleged or potential violation of a Contract requirement or any
applicable Law pertaining to any Government Contract. No Person has filed or, to the Knowledge of the Company, threatened to file a protest with
any Governmental Authority challenging a Government Contract award to the Company.
26
(iii)
Except as set forth on Section 4.9(c)(iii) of the Company Disclosure Schedule, there have been no audits, there are no ongoing audits
and, to the Knowledge of the Company, there are no audits impending or expected under or related to any Government Contract. The Company
maintains systems of internal controls that are in material compliance with all requirements of all Government Contracts and of applicable Law.
(iv)
The Company has not conducted any internal investigation in connection with which the Company has engaged any outside legal
counsel, auditor, accountant or investigator, or has made any disclosure to any Governmental Authority or other customer or contractor or
subcontractor related to any suspected, alleged or possible violation of a contract requirement or violation of any Law with respect to any
Government Contract.
(v)
All representations, certifications and statements executed, acknowledged or submitted by or on behalf of the Company to a
Governmental Authority, contractor or subcontractor in connection with any Government Contract (or change or modification thereto) were true,
complete and correct in all material respects as of their respective effective dates and, to the Knowledge of the Company, with respect only to any
such representations or certifications (or the portion thereof) that are continuing in nature, are true, complete and correct as of the date hereof.
(vi)
The Company does not have any pending or anticipated claims, requests for equitable adjustment or requests for waiver or deviation
from Contract requirements with respect to any Government Contract, and the Company has no Knowledge of any material claim or threatened
claim against the Company by any customer agency with respect to any Government Contract, including any claim for a reduction in price under
any Government Contract.
(vii)
Except as set forth in Section 4.9(c)(iii) of the Company Disclosure Schedule, with respect to any Government Contracts, there is no
request by any Governmental Authority for a Contract price adjustment.
Section 4.10 Litigation.
Except as provided in Section 4.10 of the Company Disclosure Schedule, as of the date of this Agreement, there is no suit, claim, action, proceeding
or investigation pending before any Governmental Authority or arbitrator or, to the Knowledge of the Company, threatened by or against the Company or
any of its Subsidiaries that seeks to enjoin any activities of the Company or any of its Subsidiaries, restrain the consummation of the Merger or which
could, if adversely determined, reasonably be expected to result in losses, damages or liabilities incurred by the Company or any of its Subsidiaries in
excess of $500,000 individually. Neither the Company nor any of its Subsidiaries is (a) subject to any outstanding order, writ, judgment, decree or
injunction of, or settlement with, any Governmental Authority or (b) engaged in any suit, claim, action or proceeding to recover monies due to it or for
damages or losses sustained by it that, if the Company failed to collect such monies due it, would have a Material Adverse Effect.
27
Section 4.11 Compliance with Applicable Law.
The Company and its Subsidiaries hold all permits, licenses, authorizations, certificates, variances, exemptions, orders and approvals of all
Governmental Authorities necessary for the lawful conduct of their respective businesses as presently conducted and to own their assets and properties
(the “Company Permits”), except for failures to hold any such Company Permits that would not be material to the Company and its Subsidiaries taken as a
whole. The Company and its Subsidiaries are in material compliance with the terms of the Company Permits. The businesses, properties and operations of
the Company and its Subsidiaries have not been and are not being conducted in violation of any Law applicable to the Company and its Subsidiaries,
except for any violations which would not reasonably be expected to result in losses, damages or liabilities incurred by the Company or any of its
Subsidiaries in excess of $500,000, individually. Neither the Company nor any of its Subsidiaries has received written notice to the effect that a
Governmental Authority (a) claimed or alleged that the businesses, properties or operations of the Company or any of its Subsidiaries were not in
compliance with all applicable Laws or (b) was considering the amendment, termination, revocation or cancellation of any Company Permit. The
consummation of the Merger and the Transactions, in and of themselves, will not cause the revocation or cancellation of any Company Permit.
Section 4.12 Taxes.
Except as disclosed in Section 4.12 of the Company Disclosure Schedule,
(a)
the Company and each of its Subsidiaries has filed, or has caused to be filed on its behalf, all material U.S. federal, state or local returns, or
Israeli and other foreign returns, estimates, declarations, information statements and reports relating to Taxes (“Returns”) required to be filed by the
Company and each of its Subsidiaries with any Tax authority, and such Returns are true and correct in all material respects. The Company and each of its
Subsidiaries have paid all material Taxes shown on such Returns that are due;
(b)
the Company and each of its Subsidiaries (i) has paid or accrued all material Taxes it is required to pay or accrue and (ii) has withheld from each
payment or deemed payment made to its past or present employees, officers, directors and independent contractors, suppliers, creditors, shareholders or
other third parties all material Taxes and other material deductions required to be withheld and has, within the time and in the manner required by law,
paid such withheld amounts to the proper Governmental Authorities;
(c)
no material Tax deficiency is outstanding, proposed or assessed in writing against the Company or any of its Subsidiaries, nor has the Company
or any of its Subsidiaries executed any waiver of any statute of limitations on or extensions of the period for the assessment or collection of any material
Tax;
(d)
no audit or other examination of any material Return of the Company or any of its Subsidiaries is currently in progress, neither the Company nor
any of its Subsidiaries has been notified in writing of any request for such an audit or other examination, and no Tax authority (including for these
purposes the Investment Center with respect to the Company’s status as an “Approved Enterprise” under the Israeli Law for the Encouragement of Capital
Investment, 5719-1959) has asserted in writing, or to the Company’s Knowledge, threatened in writing to assert, against the Company or any of its
Subsidiaries any claim for material Taxes;
28
(e)
no material adjustment that is still pending relating to any Returns filed by the Company or any of its Subsidiaries has been proposed in writing
by any Tax authority. No written claim that could give rise to material Taxes has been made within the last five (5) years in a jurisdiction in which the
Company or any of its Subsidiaries does not file Returns that the Company or any of its Subsidiaries may be subject to taxation in that jurisdiction;
(f)
neither the Company nor any of its Subsidiaries (i) has ever been a member of an affiliated group filing a consolidated Return, (ii) is a party to
any Tax sharing or Tax allocation agreement, arrangement or understanding (other than customary tax indemnifications contained in credit or other
commercial agreements the primary purpose of which agreements does not relate to Taxes), or (iii) is liable for the Taxes of any other Person under United
States Treasury Regulation Section 1.1502-6 (or any similar provision of state or local Laws, or Israeli or other foreign Laws), as a transferee or successor,
by Contract or otherwise;
(g)
there are no Encumbrances on the assets of the Company or any of its Subsidiaries relating to or attributable to Taxes, except for Encumbrances
for Taxes not yet due and payable or the amount or validity of which is being contested in good faith by appropriate proceedings;
(h)
neither the Company nor any of its Subsidiaries has constituted either a “distributing corporation” or a “controlled corporation” in a distribution
of shares qualifying for tax-free treatment under Section 355 of the Code (i) in the two (2) years prior to the date of this Agreement, or (ii) in a distribution
which could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) in conjunction with
the Merger;
(i)
certain facilities of the Company have been granted Approved Enterprise status under the Israeli Law for the Encouragement of Capital
Investment, (5719-1959) in the “alternative route.” To the Company’s Knowledge, such facilities are in compliance in all material respects with all terms
and conditions stipulated by such Law, regulations published thereunder and the instruments of approval for the specific investments in the “approved
enterprise”; and
(j)
Section 4.12(j) of the Company Disclosure Schedule lists each Tax incentive, subsidy or benefit granted to and currently enjoyed by the
Company and its Subsidiaries under the Laws of the State of Israel, the period for which such Tax incentive, subsidy or benefit applies, and the nature of
such Tax incentive. The Company and its Subsidiaries have complied in all material respects with all Israeli Laws to be entitled to claim such incentives,
subsidies or benefits. To the Company’s Knowledge, subject to receipt of the approval of the Investment Center and other Governmental Consents
required as explicitly set forth herein, consummation of the Merger will not in any material respect affect the continued qualification for the incentives,
subsidies or benefits or the terms or duration thereof or except as set forth in Section 4.12(j) of the Company Disclosure Schedule, require any recapture of
any previously claimed tax incentive, subsidy or benefit, and no consent or approval of any Governmental Authority is required prior to the consummation
of the Merger in order to preserve the rights of the Surviving Company or its Subsidiaries to any such incentive, subsidy or benefit currently enjoyed by
the Company and its Subsidiaries under the Laws of the State of Israel, other than such rights the scope of which depends on the identity of the beneficial
owners of the Purchaser.
29
Section 4.13 Property.
(a)
The Company and each of its Subsidiaries has marketable title to, or in the case of leased properties and assets, valid leasehold interests in, all of
their properties and assets that are material to the Company and its Subsidiaries taken as a whole, free and clear of all Encumbrances except for Permitted
Encumbrances. The representations and warranties set forth in this Section 4.13 do not apply to Intellectual Property Rights or other intellectual property
assets or rights. All leases pursuant to which the Company or any of its Subsidiaries leases from others material real or personal property are valid and
effective in accordance with their respective terms, and there is not, under any of such leases, any existing material default or event of default of the
Company or any of its Subsidiaries or, to the Company’s Knowledge, any other party (or any event which with notice or the lapse of time, or both, would
constitute a default and in respect of which the Company or any of its Subsidiaries has not taken adequate measures to prevent such default from
occurring) that, in each case would be material to the Company and its Subsidiaries taken as a whole.
(b)
The Company has the sole right to be registered at the Land Registry as the owner of premises of 29,851 square meters located in Block 6640,
Parcel 115 in Kiryat Arye (the “Property”), such registration to occur upon the registration of such premises as a condominium. The manner of such
registration is currently disputed and such dispute will not have a Material Adverse Effect.
(c)
Section 4.13(c) of the Company Disclosure Schedule sets forth a true and complete list of (i) each interest in real property owned by the
Company or any of its Subsidiaries and identifies the owner thereof and (ii) each lease under which the Company or any of its Subsidiaries is a lessee of
real property.
Section 4.14 Environmental.
(a)
Except for those matters that, individually or in the aggregate, have not had and could not reasonably be expected to have a Material Adverse
Effect, (i) the Company and each of its Subsidiaries are in compliance with applicable Environmental Law, (ii) no Hazardous Substances are present at, or
have been disposed on, or released or discharged from, onto or under, any of the properties currently owned, leased, operated or otherwise used by the
Company or its Subsidiaries (including soils, groundwater, surface water, buildings or other structures), (iii) no Hazardous Substances were present at or
disposed on, or released or discharged from, onto or under, any of the properties formerly owned, leased, operated or otherwise used by the Company or
its Subsidiaries during the period of ownership, lease, operation or use by Company or its Subsidiaries, (iv) neither the Company nor any of its
Subsidiaries is subject to any liability or obligation in connection with Hazardous Substances present at any location owned, leased, operated or otherwise
used by any third party, (v) neither the Company nor any of its Subsidiaries has received any written notice, demand, letter, claim or request for
information alleging that the Company or any of its Subsidiaries is or may be in violation of or liable under any Environmental Law, (vi) there is no
investigation, suit, claim, action or proceeding relating to or arising under any Environmental Law that is pending or, to the Knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries or any real property currently or, to the Knowledge of the Company, formerly
owned, operated or leased by the Company or any of its Subsidiaries, and (vii) neither the Company nor any of its Subsidiaries is subject to any order,
decree, injunction or other directive of any Governmental Authority or is subject to any indemnity agreement with any Person relating to Hazardous
Substances.
30
(b)
As used herein, the term “Environmental Law” means any international, national, provincial, regional, federal, state, municipal or local law,
regulation, order, judgment, decree, permit, authorization, opinion, common or decisional law (including principles of negligence and strict liability) or
agency requirement relating to the protection, investigation or restoration of the environment (including natural resources) or the health of human or other
living organisms, including the manufacture, introduction into commerce, export, import, handling, use, presence, disposal, release or threatened release of
any Hazardous Substance or noise, odor, wetlands, pollution, contamination or any injury or threat of injury to Persons or property.
(c)
As used herein, the term “Hazardous Substance” has the same meaning as such term is defined in the U.S. Comprehensive Environmental
Response Compensation and Liability Act, 42 U.S.C. Section 9601(14).
Section 4.15 Insurance.
Section 4.15 of the Company Disclosure Schedule sets forth a list of all insurance policies held by or on behalf of the Company, Spacenet Inc. and all
the entities within the Spacenet Rural business unit, and a brief description of such policies, including the names of the insurers, the principal insured and
each named insured, the policy number and period of coverage, the annual premiums and a brief description of the interests insured by such policies. The
insurance policies listed in Section 4.15 of the Company Disclosure Schedule include all policies of insurance that are required by applicable Law and
Contracts relating to the Company, Spacenet Inc, and all the entities within the Spacenet Rural business unit in the amounts required thereby. Each
Subsidiary of the Company has insurance policies in place which are sufficient to comply with applicable Law and any Contract to which it is a party. The
insurance policies listed in Section 4.15 of the Company Disclosure Schedule (a) have been issued by insurers which, to the Knowledge of the Company,
are reputable and financially sound, (b) provide coverage for the operations conducted by the Company and its Subsidiaries of a scope and coverage
consistent with customary practice in the industries in which the Company and its Subsidiaries operate, and (c) are in full force and effect. All premiums
due and payable on the insurance policies listed in Section 4.15 of the Company Disclosure Schedule have been paid and no written notice of cancellation
or termination has been received with respect to any such policy. With the exception of the directors’ and officers’ insurance policy, which will be
amended prior to Closing, the insurance policies referred to in this Section 4.15 will remain in full force and effect and will not in any way be affected by
or terminate by reason of the Merger or any of the Transactions.
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Section 4.16 Intellectual Property.
(a)
Section 4.16(a) of the Company Disclosure Schedule sets forth a true and complete list as of the date of this Agreement of all Registered
Intellectual Property Rights owned by the Company or any of its Subsidiaries.
(b)
Except as set forth in Section 4.16(b) of the Company Disclosure Schedule, the Company or one of its Subsidiaries, as applicable, is the sole
and exclusive owner of, or has valid and continuing rights (pursuant to written Intellectual Property Licenses) to use and otherwise exploit, the Company
Intellectual Property Rights, free and clear of all Encumbrances other than Permitted Encumbrances or any obligations under the Intellectual Property
Licenses set forth in Section 4.9(a)(viii) of the Company Disclosure Schedule. The Company Intellectual Property Rights include all Intellectual Property
Rights necessary and sufficient to enable the Company and each of its Subsidiaries to conduct its business. To the Knowledge of the Company, the
Company Intellectual Property Rights are valid and enforceable.
(c)
Section 4.16(c) of the Company Disclosure Schedule sets forth a true and complete list of all Intellectual Property Rights jointly owned by the
Company or any of its Subsidiaries and any other Person(s) (“Jointly Owned Intellectual Property”), and specifies with respect to each item of Jointly
Owned Intellectual Property the joint owners of such item. Except as set forth in Section 4.16(c) of the Company Disclosure Schedule with respect to
Jointly Owned Intellectual Property, (i) all Intellectual Property Rights in works of authorship and all other materials subject to copyright protection (A)
were either created by employees of the Company or its Subsidiaries within the scope of their employment or are otherwise works made for hire, or all
right, title and interest in and to such works of authorship or other materials subject to copyright protection have been legally and fully assigned and
transferred in writing to the Company or one of its Subsidiaries, as applicable, or (B) are licensed from third parties pursuant to a written Intellectual
Property License for use and other exploitation as currently used and otherwise exploited by the Company and its Subsidiaries, (ii) all Intellectual Property
Rights in all inventions and discoveries made, developed, created, conceived and/or reduced to practice by any employee, consultant or independent
contractor of the Company or any of its Subsidiaries within the scope of their employment (or other retention) by the Company or such Subsidiary, as
applicable, or that are the subject of one or more issued Patents or pending Patent applications, have been assigned in writing to the Company or such
Subsidiary, as applicable, to the extent that sole and exclusive ownership of any such Intellectual Property Rights does not vest automatically in the
Company or such Subsidiary, as applicable, by operation of Law, and (iii) all employees, consultants and independent contractors of the Company or any
of its Subsidiaries involved in the creation or development of any products, services, technology or Intellectual Property Rights or in other material
development activities have signed written documents assigning to the Company or such Subsidiary, as applicable, all Intellectual Property Rights made,
written, developed, created, conceived and/or reduced to practice by them within the scope of their employment (or other retention) by the Company or
such Subsidiary, as applicable, to the extent that sole and exclusive ownership of any such Intellectual Property Rights does not automatically vest in the
Company or such Subsidiary, as applicable, by operation of Law.
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(d)
The Company and each of its Subsidiaries have taken reasonable precautions to protect the secrecy, confidentiality and value of material Trade
Secrets, and no such Trade Secrets have been authorized to be disclosed or have been actually disclosed by the Company or any of its Subsidiaries other
than pursuant to a written non-disclosure agreement restricting the disclosure and use of such Trade Secrets. Former and current employees, consultants
and independent contractors of the Company and its Subsidiaries involved in the creation or development of any products, services, technology or
Intellectual Property Rights or in other material development activities have executed written agreements with the Company or one of its Subsidiaries
designed to protect the confidentiality of the Company Intellectual Property Rights, and, to the Company’s Knowledge, no employee, consultant or
independent contractor of the Company or any of its Subsidiaries is in violation or breach of any term of any such written agreement that would impair
any of the Company Intellectual Property Rights.
(e)
To the Company’s Knowledge, none of the Intellectual Property Rights owned by the Company or any of its Subsidiaries, the use by the
Company or any of its Subsidiaries of any of the Company Intellectual Property Rights or the conduct of the business of the Company or any of its
Subsidiaries (including the manufacturing, licensing, marketing, importation, exportation, offer for sale, sale or use of any products or services in
connection with such business) infringes, constitutes the misappropriation of or violates any valid Intellectual Property Rights of any other Person or, to
the extent that any such claims of infringement, misappropriation or violation are made or asserted against the Company or any of its Subsidiaries, the
Company has valid and reasonable counterclaims thereto of infringement of a material Patent(s) that the Company has the valid right to assert or enforce.
Except as set forth in Section 4.16(e) of the Company Disclosure Schedule, none of the Company Intellectual Property Rights is being infringed,
misappropriated or violated by any other Person or its property. Neither the Company nor any of its Subsidiaries has received during the past twelve (12)
months any written claim, any cease and desist or equivalent letter or any other written notice of any allegation that any of the Company Intellectual
Property Rights, the use by the Company or any of its Subsidiaries of any of the Company Intellectual Property Rights or the conduct of the business of
the Company or any of its Subsidiaries (including the manufacturing, licensing, marketing, importation, exportation, offer for sale, sale or use of any
products or services in connection with such business) infringes, constitutes the misappropriation of or violates the Intellectual Property Rights of any
third party. To the Company’s Knowledge, except as set forth in Section 4.16(e) of the Company Disclosure Schedule, there has been no unauthorized use
by, unauthorized disclosure by or to, or infringement, misappropriation or other violation by any third party and/or any current or former officer,
employee, independent contractor, consultant or any other agent of the Company or any of its Subsidiaries of any of the Company Intellectual Property
Rights. No written claims of such unauthorized use, unauthorized disclosure or infringement, misappropriation or other violation of any of the Company
Intellectual Property Rights have been made against any Person by the Company or any of its Subsidiaries. (A) None of the Company Intellectual Property
Rights is currently the subject of any suit, action, or written claim or demand of any third party and no action or proceeding, whether judicial,
administrative, before an arbitration panel, a dispute resolution proceeding or otherwise, has been instituted and is pending or, to the Company’s
Knowledge, threatened, that challenges or affects the Intellectual Property Rights of the Company or any of its Subsidiaries or the ownership, use, validity
or enforceability of any such Intellectual Property Rights and, to the Company’s Knowledge, there is no such claim, demand, action, suit or proceeding by
a third party that is pending but unasserted against the Company or any of its Subsidiaries with respect to any of the Company Intellectual Property Rights,
and (B) neither the Company nor any of its Subsidiaries has requested or received during the past two (2) years any formal written opinions of counsel
(outside or inside) relating to infringement, invalidity or unenforceability of any Intellectual Property Rights.
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(f)
(i) All registrations with and applications to Governmental Authorities in respect of the Registered Intellectual Property Rights owned, filed or
applied for by the Company or any of its Subsidiaries that are material to the Company or any of its Subsidiaries are in full force and effect and, to the
Knowledge of the Company, valid, (ii) the Company and each of its Subsidiaries is in compliance with all material applicable government regulations
regarding the manufacture, advertising, sale, import and export of the Company Intellectual Property Rights and products incorporating or made using the
Company Intellectual Property Rights, and (iii) except as set forth in Section 4.16(f) of the Company Disclosure Schedule, there are no restrictions on the
direct or indirect transfer of any Intellectual Property License, or other Contract or agreement pursuant to which the Company or any of its Subsidiaries
has been granted a right, to use Company Intellectual Property Rights, or any interest therein, held by and material to the Company and its Subsidiaries.
(g)
Except as set forth in Section 4.16(g) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries (i) has licensed or
provided to any third party, or otherwise permitted any third party to access or use, any source code or related materials for any Software developed by or
for the Company or any of its Subsidiaries or (ii) is currently a party to any source code escrow Contract or any other Contract (or a party to any Contract
obligating the Company or any of its Subsidiaries to enter into a source code escrow Contract or other Contract) requiring the deposit of source code or
related materials for any such Software. Except as set forth in Section 4.16(g) of the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries has incorporated any “open source,” “freeware,” “shareware” or other Software having similar licensing or distribution models (“Open
Source”) in, or used any Open Source in connection with, any Software developed, licensed, distributed or otherwise exploited by or for the Company or
any of its Subsidiaries in a manner that requires the contribution or disclosure to any third party, including the Open Source community, of any portion or
source code of such Software developed, licensed, distributed or otherwise exploited by or for the Company or any of its Subsidiaries.
(h)
The consummation of the transactions contemplated hereby will not result in the loss or impairment of the right of Purchaser, Merger Sub, the
Company or any of its Subsidiaries to own or use any Company Intellectual Property Rights. Neither this Agreement nor any transaction contemplated by
this Agreement will result in the grant by the Company or any of its Subsidiaries to any third party of any license or right with respect to any Company
Intellectual Property Rights pursuant to any Contract to which the Company or any of its Subsidiaries is a party or by which any assets or properties of the
Company or any of its Subsidiaries are bound.
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Section 4.17 Affiliate Transactions.
Except as set forth in Section 4.17 of the Company Disclosure Schedule, no material relationship, agreements or arrangements, direct or indirect,
exist between or among the Company or its Subsidiaries on the one hand and the directors, officers, or shareholders of the Company or their Affiliates, on
the other hand, other than in the ordinary course of the Company’s business. No office holder, executive officer or director of the Company or its
Subsidiaries or member of his or her immediate family is indebted to the Company or its Subsidiaries, nor is the Company or its Subsidiaries indebted (or
committed to make loans or extend or guarantee credit) to any of them. Neither the Company’s nor its Subsidiaries’ office holders, executive officers or
directors or any member of their family or their Affiliates has any direct or indirect ownership interest in any firm or corporation that competes directly
with the Company its Subsidiaries or the Company’s or its Subsidiaries’ business as currently conducted or as proposed to be conducted. No office holder,
executive officer or director of the Company or its Subsidiaries, or any of their family or their Affiliates, is, or has been, directly or indirectly interested in
any Contract with the Company or its Subsidiaries, or has derived, received, or was entitled to, any interest, incentive, or other form of benefit in
connection with the Company’s or its Subsidiaries’ business, or any of the Contracts and/or commercial arrangements to which the Company or any of its
Subsidiaries is a party.
Section 4.18 Brokers.
No broker, investment banker or financial advisor or other Person, other than UBS Securities LLC (“UBS”), the fees and expenses of which will be
paid by the Company pursuant to the engagement letter dated May 21, 2007, a true and correct copy of which has been provided to the Purchaser, is
entitled to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with the Transactions based upon arrangements
made by or on behalf of the Company or any of its Subsidiaries.
Section 4.19 Opinion of Financial Advisor.
The Board of Directors has received the opinion of UBS, dated as of the date hereof (a true and correct copy of which will be made available to the
Purchaser by the Company solely for informational purposes promptly following its receipt by the Company), to the effect that, as of the date of such
opinion, and subject to the various assumptions and qualifications set forth therein, the Merger Consideration to be received by the holders of Company
Shares (other than as set forth in such opinion) pursuant to the Merger is fair, from a financial point of view, to such holders.
Section 4.20 Board of Directors and Audit Committee Approval.
(a)
The Board of Directors has (i) determined that this Agreement, the Merger and the Transactions are fair to, and in the best interests of, the
Company and its shareholders, and that, considering the financial position of the merging companies, no reasonable concern exists that the Surviving
Company will be unable to fulfill the obligations of the Company to its creditors, (ii) approved this Agreement, the Merger and the Transactions, and (iii)
subject to the provisions of this Agreement, determined to recommend that the shareholders of the Company approve this Agreement, the Merger and the
Transactions (the “Recommendation”).
(b)
The audit committee of the Board of Directors has approved this Agreement, the Merger and the Transactions prior to the approval of the Board
of Directors.
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Section 4.21 Inapplicability of Certain Statutes.
Other than as set forth in the Companies Law and as required under any applicable Antitrust Requirement, the Company is not subject to any business
combination, control share acquisition, fair price or similar statute that applies to the Merger or any other Transaction.
Section 4.22 Grants, Incentives and Subsidies.
The Company has made available to the Purchaser copies of all documents evidencing all material pending and outstanding grants, incentives,
exemptions and subsidies from the government of the State of Israel or any agency thereof, or from any other Governmental Authority, granted to the
Company or any of its Subsidiaries, including the grant of Approved Enterprise Status from the Investment Center and grants from the OCS (collectively,
“Grants”) and of all related material letters of approval, certificates of completion, and supplements and amendments thereto, granted to the Company, and
all material correspondence related thereto for the period after January 1, 2006. Each of the Company and the applicable Subsidiaries is in compliance, in
all material respects, with the terms and conditions of all Grants which have been approved and has duly fulfilled, in all material respects, all the
undertakings required thereby.
Section 4.23 Encryption and Other Restricted Technology.
Except as disclosed in Section 4.23 of the Company Disclosure Schedule, the Company’s and its Subsidiaries’ businesses as currently conducted do
not involve the use or development of, or engagement in, encryption technology, or other technology whose development, commercialization or export,
requires the Company or any of its Subsidiaries to obtain a license from the Israeli Ministry of Defense or an authorized body thereof pursuant to Section 2
(a) of the Declaration Regarding the Control of Commodities and Services (Engagement in Encryption Means), 1974, as amended, or other legislation
regulating the development, commercialization or export of technology.
Section 4.24 Effect of Transaction.
(a)
Except as set forth in Section 4.24(a) of the Company Disclosure Schedule, the execution of this Agreement and the consummation of the
Transactions (either alone or together with any other event) will not (i) constitute an event under any Company Employee Plan, Employment Agreement,
consulting agreement, trust, loan or other agreement or arrangement that will or might result in any severance payments or any acceleration of vesting,
forgiveness of indebtedness, distribution, increase in benefits or obligation to fund benefits with respect to any Employee or consultant, or (ii) result in any
payment, acceleration or vesting with respect to any other security issued by the Company or any of its Subsidiaries.
(b)
Except as set forth in Section 4.24(b) of the Company Disclosure Schedule, no payment or benefit which will or may be made by the Company,
its Subsidiaries or any of their respective Affiliates with respect to any Employee will be characterized as excess “parachute payment,” within the meaning
of Section 280G(b)(2) of the Code. None of the Company, its Subsidiaries or any of their respective Affiliates has an obligation to make any tax gross up
payments with respect to any such excess parachute payments.
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Section 4.25 Customers and Suppliers.
(a)
Section 4.25 of the Company Disclosure Schedule sets forth a list of the twenty (20) largest customers of the Company and its Subsidiaries and
the five (5) largest suppliers of each of the Company’s business units, as measured by the dollar amount of purchases therefrom or thereby, for the twelve
(12) month period ended September 30, 2007, showing the approximate total sales by the Company and its Subsidiaries to each such customer and the
approximate total purchases by the Company and its Subsidiaries from each such supplier, during such period.
(b)
No customer or supplier listed in Section 4.25 of the Company Disclosure Schedule has terminated its relationship with the Company or any of
its Subsidiaries and, to the Knowledge of the Company, (i) no customer or supplier listed in Section 4.25 of the Company Disclosure Schedule has
delivered notice to the Company or its Subsidiaries that it intends to terminate its business with the Company or any of its Subsidiaries and (ii) no supplier
listed in Section 4.25 of the Company Disclosure Schedule has delivered notice to the Company or its Subsidiaries of a material increase in pricing outside
of the ordinary course of business.
Section 4.26 Warranties.
Except for the customary warranties of the Company and its Subsidiaries or as set forth in Section 4.26 of the Company Disclosure Schedule, neither
the Company nor any of its Subsidiaries has given any written warranties that are currently in effect with respect to their products and services. Except as
set forth in Section 4.26 of the Company Disclosure Schedule, there have not been any material deviations from or material modifications to the customary
warranties.
Section 4.27 Foreign Corrupt Practices Act; Certain Business Practices.
Neither the Company nor any of its Subsidiaries nor, to the Company’s Knowledge, any director, officer, agent, employee or other person acting on
behalf of the Company or any of its Subsidiaries, has, in any material respect (a) violated any provision of the Foreign Corrupt Practices Act of 1977, as
amended, (b) is currently targeted by any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department, (c) used
any corporate or other funds for unlawful contributions, payments, gifts or entertainment, or made any unlawful expenditures relating to political activity
to foreign or domestic government officials, employees or others or established or maintained any unlawful or unrecorded funds in violation of Section
30A of the Exchange Act, (d) accepted or received any unlawful contributions, payments, gifts or expenditures or (e) made, offered or authorized any
unlawful bribe, rebate, payoff, influence payment, kickback or other similar unlawful payment.
Section 4.28 No Other Representations or Warranties.
Except for the representations and warranties contained in this Article IV, neither the Company nor any other Person on behalf of the Company
makes any express or implied representation or warranty with respect to the Company or its Subsidiaries or their respective business, operations, assets,
liabilities, condition (financial or otherwise) or prospects, notwithstanding the delivery or disclosure to the Purchaser or any of its Affiliates or
Representatives of any documentation, forecasts, projections or other information with respect to any one or more of the foregoing.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
THE PURCHASER AND THE MERGER SUB
The Purchaser and the Merger Sub, jointly and severally, hereby represent and warrant to the Company that, except as set forth in the disclosure
schedule (the “Purchaser Disclosure Schedule”) delivered by the Purchaser to the Company prior to the execution and delivery of this Agreement (such
disclosures being considered to be made for purposes of the specific section of the Purchaser Disclosure Schedule in which they are made and for purposes
of all other sections to the extent the relevance of such disclosure is reasonably apparent on its face):
Section 5.1 Organization, Good Standing and Qualification.
Each of the Purchaser and the Merger Sub is a legal entity duly organized, validly existing and, in jurisdictions where such concept is recognized, in
good standing under the Laws of its respective jurisdiction of organization and has requisite corporate power and authority to own, lease and operate its
properties and assets and to carry on its business as presently conducted. Neither the Purchaser nor the Merger Sub is in violation of any provision of its
respective organizational documents.
Section 5.2 The Purchaser and the Merger Sub.
All of the issued and outstanding shares of the Merger Sub are owned by the Purchaser. Each of the Purchaser and the Merger Sub were formed
solely for the purpose of engaging in the transactions contemplated by this Agreement, and neither the Purchaser nor the Merger Sub, nor any of their
respective Subsidiaries, has conducted any business prior to the date hereof and neither has any, and prior to the Effective Time neither will have any,
assets, liabilities or obligations of any nature other than those immaterial assets, liabilities or obligations incident to its formation and pursuant to this
Agreement, the Merger and the Transactions.
Section 5.3 Corporate Authority.
Each of the Purchaser and the Merger Sub has all requisite corporate power and authority and has taken all corporate action necessary to execute,
deliver and perform its obligations under this Agreement. This Agreement has been duly executed and delivered by each of the Purchaser and the Merger
Sub and is a valid and binding agreement of the Purchaser and the Merger Sub, enforceable against each of the Purchaser and the Merger Sub in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors’ rights and to general principles of equity. The execution and delivery of this Agreement by the Purchaser and the Merger
Sub and the consummation by the Purchaser and the Merger Sub of the Merger and the Transactions contemplated hereby, including the Financing, have
been duly and validly authorized by all necessary corporate action of the Purchaser and the Merger Sub.
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Section 5.4 The Merger Sub Board Approval.
The board of directors of the Merger Sub has unanimously (a) determined that the Merger is fair to, and in the best interest of, the Merger Sub and its
shareholders, and that, considering the financial position of the merging companies, no reasonable concern exists that the Surviving Company will be
unable to fulfill the obligations of the Merger Sub to its creditors, (b) approved this Agreement, the Merger and the Transactions, and (c) resolved to
recommend that the sole shareholder of the Merger Sub approve this Agreement, the Merger and the Transactions pursuant to the terms hereof (which
approval has been obtained simultaneously with the execution of this Agreement).
Section 5.5 Share Ownership.
Except as set forth in Section 5.5 of the Purchaser Disclosure Schedule, as of the date of this Agreement, none of the Purchaser, the Merger Sub or
any Person referred to in Section 320(c) of the Companies Law with respect to the Purchaser or the Merger Sub owns any Company Shares.
Section 5.6 Governmental Filings; No Violations; Etc.
(a)
Other than with respect to procedures under the Companies Law, the necessary filings and clearance, if any, under applicable Antitrust
Requirements and as set forth in Section 5.6(a) of the Purchaser Disclosure Schedule, no notices, reports or other filings are required to be made by the
Purchaser or the Merger Sub with, and no consents, registrations, approvals, permits or authorizations are required to be obtained by the Purchaser or the
Merger Sub from, any Governmental Authority in connection with the execution and delivery of this Agreement by the Purchaser and the Merger Sub and
the consummation of the Merger and the Transactions or in connection with the continuing operation of the business of the Purchaser following the
Effective Time.
(b)
The execution, delivery and performance of this Agreement by the Purchaser and the Merger Sub do not, and the consummation of the Merger
and the Transactions will not, (i) constitute or result in (A) a breach or violation of, or a default under, the certificate of incorporation or bylaws or
comparable organizational documents of the Purchaser and the Merger Sub, (B) with or without notice, lapse of time or both, a breach or violation of, a
termination (or right of termination) or a default under, the creation or acceleration of any material obligation or the creation of any Encumbrance on any
of the assets of the Purchaser or the Merger Sub pursuant to, any material Contracts binding on the Purchaser or the Merger Sub, or (C) any material
change in the rights or obligations of any party under any Contract binding on the Purchaser or the Merger Sub, or (ii) violate any judgment, order, writ,
preliminary or permanent injunction or decree or any Law applicable to the Purchaser, the Merger Sub or any of their respective Affiliates or any of their
properties or assets, except in each case, for such breaches, violations, defaults or changes that would not have a material adverse effect on the Purchaser
or the Merger Sub’s ability to timely consummate the Merger and the Transactions.
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Section 5.7 Brokers and Finders.
Except as set forth in Section 5.7 of the Purchaser Disclosure Schedule, no broker, investment banker, financial advisor or other Person is entitled to
any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with the Transactions based upon arrangements made by or on
behalf of the Purchaser or the Merger Sub or any of their respective Affiliates.
Section 5.8 Available Funds.
(a)
Attached to Section 5.8(a) of the Purchaser Disclosure Schedule is a copy of the executed commitment letter from Bank Hapoalim (the “Debt
Commitment Letter”), pursuant to which, and subject to the terms and conditions thereof, the lender party thereto has committed to provide the debt
financing set forth therein to the Purchaser for the purpose of funding the Transactions (the “Debt Financing”). Attached to Section 5.8(a) of the Purchaser
Disclosure Schedule is a copy of the executed commitment letter (the “Equity Commitment Letter” and, together with the Debt Commitment Letter, the
“Financing Commitments”) from the Sponsors pursuant to which, and subject to the terms and conditions thereof, such Sponsors have committed to the
Purchaser to invest the amounts set forth therein (the “Equity Financing” and together with the Debt Financing, the “Financing”).
(b)
The Financing Commitments have been executed in the forms attached to Section 5.8(a) of the Purchaser Disclosure Schedule and, as of the
date hereof, have not been amended or modified in any respect or supplemented and are in full force and effect. Each of the Financing Commitments, in
the form so delivered, is a legal, valid and binding obligation of the Purchaser and the Merger Sub and, to the Knowledge of the Purchaser, the other
parties thereto. As of the date hereof, there are no other agreements, side letters or arrangements relating to the Financing Commitments. As of the date
hereof, no event has occurred that, with or without notice, lapse of time or both, would constitute a default or breach on part of the Purchaser or the Merger
Sub under any term or condition of the Financing Commitments, and neither the Purchaser nor the Merger Sub has reason to believe that it will be unable
to satisfy on a timely basis any term or condition of closing to be satisfied by it contained in the Financing Commitments. The Purchaser or the Merger
Sub has fully paid any and all commitment fees or other fees required by the Financing Commitments to be paid on or prior to the date hereof. The
aggregate proceeds from the Financing constitute all of the funds necessary for the consummation by the Purchaser and the Merger Sub of the
Transactions contemplated hereby. The Financing Commitments set forth all of the conditions precedent to the obligations of the parties thereunder to
make the Financing, to the extent contemplated to be provided at or prior to the consummation by the Purchaser and the Merger Sub of the Transactions
contemplated hereby, available to borrowers thereunder on the terms therein.
Section 5.9 Interest in Competitors.
Except as set forth in Section 5.9 of the Purchaser Disclosure Schedule, none of the Purchaser, the Merger Sub or any of their respective Affiliates
insofar as such affiliate-owned interests would be attributed to the Purchaser or the Merger Sub under any Antitrust Requirements, owns any interest in
any entity or Person that derives a substantial portion of its revenues from a line of business within the Company’s principal lines of business.
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Section 5.10 Information Supplied.
None of the information supplied by the Purchaser for inclusion in any document to be sent to the Company’s shareholders in connection with the
Company Shareholders’ Meeting at the time furnished (as amended or supplemented) or at the time of the Company Shareholders’ Meeting in connection
with the Transactions will contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation is made by the Purchaser or
the Merger Sub with respect to statements made therein based on information supplied by the Company in writing for inclusion in any such document.
Section 5.11 Acknowledgement of Disclaimer of Other Representations and Warranties.
The Purchaser and the Merger Sub each acknowledges and agrees that it (a) has had an opportunity to discuss the business of the Company and its
Subsidiaries with the management of the Company, (b) has had access to (i) the books and records of the Company and its Subsidiaries, and (ii) the
electronic data room maintained by the Company through IntraLinks for purposes of the Transactions, (c) it has been afforded the opportunity to ask
questions of, and receive answers from, officers of the Company, and (d) has conducted its own independent investigation of the Company and its
Subsidiaries, their respective businesses and the Transactions, and has not relied on any representation, warranty or other statement by any Person on
behalf of the Company or any of its Subsidiaries or any other documentation, forecasts or other information, other than the representations and warranties
of the Company expressly contained in this Agreement.
ARTICLE VI
CONDUCT PRIOR TO THE EFFECTIVE TIME
AND ADDITIONAL AGREEMENTS
Section 6.1 Conduct of Business by the Company.
Except as otherwise expressly contemplated by this Agreement and as required by applicable Law, as set forth in Section 6.1 of the Company
Disclosure Schedule or as consented to in writing by the Purchaser (which consent shall not be unreasonably withheld, delayed or conditioned), during the
period from the date of this Agreement until the earlier to occur of the Effective Time or termination of this Agreement pursuant to Article VIII, the
Company shall, and shall cause its Subsidiaries to, carry on their respective businesses in all material respects in the ordinary course consistent with past
practice. To the extent consistent with the foregoing, the Company shall, and shall cause its Subsidiaries to, use commercially reasonable efforts to (i)
preserve intact their current business organizations (except that any of the Company’s wholly-owned Subsidiaries may be merged with or into, or be
consolidated with any of the Company’s other wholly-owned Subsidiaries or may be liquidated into the Company or any of its Subsidiaries), (ii) keep
available the services of their current officers and key employees who are integral to the operation of their businesses as presently conducted, and (iii)
preserve their relationships with those Persons having business relations with them; provided, however, that no action by the Company or its Subsidiaries
with respect to matters specifically addressed by any provision of Section 6.2 shall be deemed a breach of this Section 6.1 unless such action would
constitute a breach of such specific provision of Section 6.2.
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Section 6.2 Specific Activities.
Without limiting the generality of Section 6.1, during the period from the date of this Agreement until the earlier to occur of the Effective Time or
termination of this Agreement pursuant to Article VIII, except as otherwise expressly contemplated by this Agreement, as set forth in Section 6.2 of the
Company Disclosure Schedule and as required by applicable Law, or as consented to in writing by the Purchaser (which consent shall not be unreasonably
withheld, delayed or conditioned), provided that the Purchaser shall be deemed to have consented if the Purchaser does not object within three (3)
Business Days in Los Angeles, California, after a request for such consent is delivered by the Company to the individuals set forth in Section 6.2 of the
Purchaser Disclosure Schedule), the Company shall not, and shall not permit any of its Subsidiaries to:
(a)
cause, permit or propose any amendments to the Company Charter Documents;
(b)
(i) except for transactions among the Company and its wholly-owned Subsidiaries or among the Company’s wholly-owned Subsidiaries, declare
or pay any dividends on or make other distributions in respect of any of its share capital, (ii) adopt a plan of complete or partial liquidation or
reorganization, or a resolution providing for or authorizing such liquidation or reorganization, (iii) split, combine or reclassify any of its shares or any
other security or interest therein, or (iv) repurchase, redeem or otherwise acquire any shares, or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities other than the acquisition of restricted shares upon forfeiture thereof;
(c)
issue, deliver, sell, pledge or encumber, or authorize or propose the issuance, delivery, sale, pledge or Encumbrance of, any shares or any other
security or interest therein, including any rights, warrants or options to purchase any shares of capital stock, or any securities or rights convertible into,
exchangeable or exercisable for, or evidencing the right to subscribe for, any shares of capital stock other than the issuance of Company Shares upon the
exercise of Company Stock Options outstanding on the date of this Agreement and in accordance with the existing terms of such Company Stock Options
or upon conversion of the Company’s convertible notes;
(d)
acquire or agree to acquire any material assets of (including securities), or merge or consolidate with, any Person or engage in any similar
transaction;
(e)
make any loans, advances or capital contributions to, or investments in, any other Person outside of the ordinary course of business consistent
with past practice other than any amounts expressly reflected in the Company’s budgets for 2007and 2008 provided to the Purchaser;
42
(f)
sell, lease, license, pledge, encumber or otherwise dispose of any of its material assets or any interest therein, other than in the ordinary course of
business consistent with past practice;
(g)
incur or suffer to exist any indebtedness for borrowed money or guarantee any such indebtedness, guarantee any debt of others, enter into any
“keep-well” or other agreement to maintain any financial statement condition of another Person or enter into any arrangement having the economic effect
of any of the foregoing, except for working capital borrowings incurred in the ordinary course of business consistent with past practice pursuant to credit
agreements or facilities in existence on the date hereof;
(h)
make or rescind any material Tax election, or agree to pay, settle or compromise any material Tax liability or consent to any extension or waiver
of any limitation period with respect to Taxes, or request, negotiate or agree to any Tax rulings, or Tax sharing arrangement or agreement (except as
provided herein);
(i)
amend, in any material respect, any Tax return, change an annual Tax accounting period, adopt or change any material Tax accounting method
(except as required by applicable Law or, solely with respect to accounting periods or methods, as required by GAAP) or execute or consent to any
waivers extending the statutory period of limitations with respect to the collection or assessment of any material Taxes;
(j)
make or agree to make any capital expenditures in excess of the amount contemplated by the Company’s budgets for 2007 or 2008 provided to
the Purchaser;
(k)
pay, discharge, settle or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), or
propose to pay, discharge, settle or satisfy such claims, liabilities or obligations, in each case outside of the ordinary course of business that (i) involve
non-monetary relief that would materially restrict the operations of the Company, or (ii) requires the payment of amounts after the Closing in excess of
$500,000 individually;
(l)
(i) modify or amend in any material respect any credit agreement or facility, or (ii) modify or amend in any material respect or terminate any
Company Contract or any other Contract that is material to the Company and its Subsidiaries, taken as a whole;
(m)
terminate or otherwise discontinue the services without cause of the Company’s and its Subsidiaries current officers and key employees who
are integral to the operation of their businesses as presently conducted;
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(n)
except (i) as required pursuant to existing written agreements in effect on the date hereof, Company Employee Plans in effect as of the date
hereof, or written agreements for newly hired employees or extensions of employment agreements (on substantially similar terms as in effect on the date
hereof), all in the ordinary course of business consistent with past practice, (ii) as otherwise required by Law, (iii) as provided pursuant to existing
Employment Agreements or in compensation committee directives in effect on the date hereof, or (iv) as set forth in Section 6.2 of the Company
Disclosure Schedule, (A) increase the compensation or benefits of any director, officer or employee, except for, in the cases of non-officer employees,
increases in the ordinary course of business that are consistent with past practice (including, for this purpose, the normal salary, bonus and equity
compensation review process conducted each year and changes relating to positions or title), (B) adopt or amend in any material respect any Company
Employee Plan (any such amendment being required to comply in all respects with the other provisions of this Section 6.2), (C) amend or modify in any
material respect any Employment Agreement or enter into any Employment Agreement with an Employee providing for compensation and benefits in
excess of $200,000 per year;
(o)
make any material change in accounting methods, principles or practices, except as required (i) by GAAP, Regulation S-X of the Exchange Act,
any Governmental Authority or the Financial Accounting Standards Board (or similar organization), or (ii) by change in applicable Law;
(p)
enter into any transaction with any of its Affiliates other than pursuant to arrangements in effect on the date hereof or in connection with
transactions between or among the Company and wholly-owned Subsidiaries or Affiliates of the Company controlled by the Company;
(q)
transfer or license to any Person (other than with respect to inter-company transactions) or otherwise extend, amend or modify in any material
respect, any material rights of such other Person or entity to Company Intellectual Property Rights, or enter into any agreements or make other
commitments or arrangements to grant, transfer or license, to any Person future patent right, in each case other than non-exclusive licenses the granting of
which are advisable in connection with, or to the sale or distribution of, any product by the Company or any of its Subsidiaries, in each case in the ordinary
course of business consistent with past practice; provided that in no event shall the Company or any Subsidiary of the Company (i) license on an exclusive
basis (other than supply and distribution agreements in the ordinary course of business consistent with past practice) or sell any Company Intellectual
Property Rights that are material to the Company or any of its Subsidiaries, or (ii) enter into any agreement limiting in any material respect the right of the
Surviving Company or any of its Subsidiaries to engage in any line of business or to compete with any Person;
(r)
enter into any Company Contract or series of related Contracts outside the ordinary course of business (except as expressly permitted under
other provisions of this Agreement); or
(s)
authorize any of, or commit or agree to take any of, the foregoing actions.
Section 6.3 No Control of Other Party's Business.
Nothing contained in this Agreement is intended to give the Purchaser, directly or indirectly, the right to control or direct the Company’s or its
Subsidiaries’ operations prior to the Effective Time, and to give the Company, directly or indirectly, the right to control or direct the Purchaser’s
operations. Prior to the Effective Time, each of the Purchaser and the Company shall exercise, consistent with the terms and conditions of this Agreement,
complete control and supervision over its and its Subsidiaries respective operations.
44
Section 6.4 Access to Information; Confidentiality; Financing.
(a)
Prior to the Effective Time, except as required by applicable Law, the Company shall, and shall cause each of its Subsidiaries to, afford the
Purchaser and its officers, employees, accountants, counsel, financial advisors and other representatives (collectively, “Representatives”) at their own
expense, with reasonable access during normal business hours and upon reasonable notice to all the properties, books, Contracts, commitments, personnel
(including management team) and records of the Company and its Subsidiaries so that the Purchaser and the Merger Sub may obtain all information
concerning the business as they may reasonably request; provided that, the Purchaser and its Representatives shall conduct any such activities in such a
manner as not to unreasonably interfere with the business or operations of the Company, and during such period, the Company shall, and shall cause each
of its Subsidiaries to, furnish promptly to the Purchaser and the Merger Sub:
(i)
a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of
U.S. federal or state or Israeli securities Laws; and
(ii)
all other information concerning its business, properties and personnel as the Purchaser may reasonably request; provided, however, that
the Company shall not be required to provide access to any information or documents which would, in the reasonable judgment of the Company,
(A) breach any agreement with any third party, or (B) constitute a waiver of, or result in an impairment of, the attorney-client or other privilege
held by the Company.
(b)
Any information obtained by any Person pursuant to this Section 6.4 shall be subject to the Confidentiality Agreement. Without limiting the
generality of the foregoing, the Purchaser and the Merger Sub shall not, and shall cause their Representatives not to, use information obtained pursuant to
this Section 6.4 for any purpose unrelated to the consummation of the Merger and the Transactions. No review or information obtained pursuant to this
Section 6.4 shall limit the Purchaser’s or the Merger Sub’s reliance on or the enforceability of any representation or warranty made by the Company
herein.
(c)
Subject to Section 6.4(d), the Company shall and shall cause its Subsidiaries to, at the Purchaser’s sole expense, cooperate in connection with
the arrangement of the Financing (or any alternative financing) as may be reasonably requested by the Purchaser (provided that, such requested
cooperation is not prohibited by applicable Law and does not unreasonably interfere with the ongoing operations of the Company and its Subsidiaries).
Such cooperation by the Company shall include, at the reasonable request of the Purchaser, subject to Sections 6.4(a) and 6.4(b), (i) using reasonable best
efforts to provide any lenders or other sources providing such Financing (or any alternative financing) with financial and other information regarding the
Company, requested by the Purchaser or its lenders including all financial statements and financial and other data of the type required by Regulation S-X
(other than Item 3-10 of Regulation S-X) and Regulation S-K under the Securities Act for registered offerings of debt securities, and of the type and form
customarily included in offering documents used in private placements under Rule 144A of the Securities Act, to consummate the offerings of any debt
securities contemplated by such Financing (or any alternative financing) at the time during the Company’s fiscal year any such offerings will be made, (ii)
making the Company’s senior executive officers available to reasonably assist any lenders or other sources participating in such Financing (or any
alternative financing), (iii) assisting with the preparation of materials for prospective lenders and other financing sources, rating agencies, road shows and
similar documents and presentations, (iv) causing the Company’s Representatives to cooperate with the reasonable requests of the Purchaser and its
Representatives in connection with any such Financing (or any alternative financing), (v) executing and delivering, or causing to be executed and
delivered, certain agreements and certificates related to any such Financing (or any alternative financing) and (vi) otherwise reasonably cooperating in
connection with the consummation of any such Financing (or any alternative financing).
45
(d)
Each of the Purchaser and the Merger Sub shall use, and shall cause their Affiliates to use, their reasonable best efforts to (i) obtain the
Financing on the terms and conditions described in the Financing Commitments (or terms no less favorable to the Purchaser or the Company), and (ii)
enter into definitive agreements with respect thereto on the terms and conditions contained in the Financing Commitments (or terms no less favorable to
the Purchaser or the Company), and to satisfy the conditions thereto that are within its control. In the event that the Purchaser or the Merger Sub become
aware that any portion of the Financing has become unavailable in the manner or from the sources contemplated in the Financing Commitments, (A) the
Purchaser shall promptly notify the Company, and (B) the Purchaser and the Merger Sub shall use their reasonable best efforts to arrange to obtain any
such unavailable portion from alternative sources as promptly as reasonably practicable following the occurrence of such event, including entering into
definitive agreements with respect thereto (such definitive agreements entered into pursuant to the first or second sentence of this Section 6.4(d) being
referred to as the “Financing Agreements”). Any Financing contemplated by the foregoing sentence shall not cause the Board of Directors of the Company
to reasonably determine that such Financing would prevent it from approving the Transactions pursuant to Section 315 of the Companies Law, such
determination to be made after consultation with counsel and an internationally recognized investment bank regarding the Company’s ability to fulfill its
financial obligations. The Purchaser shall (1) furnish executed copies of the Financing Agreements to the Company promptly upon their execution, and (2)
otherwise keep the Company reasonably informed of the status of its efforts to arrange the Financing (or any replacement thereof).
(e)
The Company hereby consents to the use of its and its Subsidiaries’ logos in connection with the Financing (or any alternative financing);
provided, however, that such logos are used solely in a manner that is not intended to or reasonably likely to harm or disparage the Company or any of its
Subsidiaries. The Purchaser shall promptly, upon request by the Company, reimburse the Company for all reasonable out-of-pocket costs and expenses
incurred by the Company or any of its Subsidiaries in connection with the cooperation of the Company and its Subsidiaries as contemplated by this
Section 6.4. The Purchaser acknowledges and agrees that the Company and its Affiliates and their respective directors, officers, employees, agents and
Representatives shall not have any responsibility for, or incur any liability to, any Person under the Financing or any cooperation provided pursuant to this
Section 6.4 and that the Purchaser and the Merger Sub shall indemnify and hold harmless the Company and its Affiliates and their respective directors,
officers and employees from and against any and all losses, damages, claims, costs or expenses suffered or incurred by any of them as a result of any
action carried out by them under Section 6.4(d) prior to the Effective Time.
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Section 6.5 No Solicitation.
(a)
Subject to Section 6.5(c) through (e), the Company agrees that, neither it nor any of its Subsidiaries shall, and that it shall cause its and their
respective Representatives not to, directly or indirectly, (i) solicit, initiate, propose or encourage or take any other action to facilitate any inquiry,
discussion, offer or request that constitutes, or may reasonably be expected to lead to, an Acquisition Proposal, or the making, submission or
announcement of, any Acquisition Proposal, (ii) participate or otherwise engage in any negotiations regarding an Acquisition Proposal with, or furnish any
nonpublic information to, or afford access to the property, books or records of the Company or its Subsidiaries to, any person that has made or, to the
Company’s Knowledge, is considering making an Acquisition Proposal or grant any waiver or release under any standstill agreement, (iii) engage in
discussions regarding an Acquisition Proposal with any Person that has made or, to the Company’s Knowledge, is considering making an Acquisition
Proposal, except to notify such Person as to the existence of the provisions of this Section 6.5, (iv) approve, endorse or recommend any Acquisition
Proposal, or (v) enter into any letter of intent or agreement in principle or any agreement or other arrangement providing for any Acquisition Proposal
(except for confidentiality agreements permitted under Section 6.5(c)). The Company shall, and shall cause its Representatives to, immediately cease and
cause to be terminated any existing discussions with any Person that relate to any Acquisition Proposal as of the date of this Agreement.
(b)
The Company shall promptly (and in any event within twenty-four (24) hours after receipt) notify the Purchaser, orally and in writing, of the
receipt of any Acquisition Proposal, or of any inquiries, proposals or offers received by, any request for information from, or any negotiations sought to be
initiated or continued with, either the Company or its Representatives concerning an Acquisition Proposal or that would reasonably be expected to lead to
an Acquisition Proposal and disclose the identity of the other party and the material terms of such inquiry, offer, proposal or request and, in the case of
written materials provided to the Company provide the Purchaser copies of such materials as promptly as reasonably practicable. The Company shall keep
the Purchaser informed on a prompt basis of the status, terms and substance of any discussions or negotiations (including amendments and proposed
amendments) of any such Acquisition Proposal or other inquiry, offer, proposal or request concerning an Acquisition Proposal.
(c)
Notwithstanding the limitations set forth in Section 6.5(a), if at any time prior to obtaining the Company Stockholder Approval, the Company
receives an Acquisition Proposal which (i) constitutes a Superior Proposal or (ii) the Board of Directors determines in good faith could reasonably be
expected to result in a Superior Proposal, the Company may take the following actions (A) furnish nonpublic information to the third party making such
Acquisition Proposal, if, and only if, prior to so furnishing such information, the Company receives from the third party an executed confidentiality
agreement on terms no less favorable in any material respect to the Company than the terms of the Confidentiality Agreement and provided that, any such
information must be provided to the Purchaser as promptly as is reasonably practicable after its provision to such third party to the extent not previously
made available to the Purchaser and (B) engage in discussions or negotiations with the third party with respect to the Acquisition Proposal, if, but only if,
in the case of both clause (A) and (B) if the Board of Directors has concluded in good faith, after consultation with the Company’s outside legal advisors,
that the failure of the Board of Directors to furnish such information or engage in such discussions or negotiations would be inconsistent with the
directors’ exercise of their fiduciary obligations to the Company’s shareholders under applicable Law.
47
(d)
Subject to compliance with the other terms of this Section 6.5(d), in response to the receipt of a Superior Proposal that has not been withdrawn,
prior to obtaining the Company Stockholder Approval, the Board of Directors may withdraw, modify or qualify the Recommendation (a “Change of
Recommendation”) or approve or recommend a Superior Proposal if the Board of Directors has concluded in good faith, after consultation with the
Company’s outside legal advisors, that the failure of the Board of Directors to effect a Change of Recommendation or approve or recommend a Superior
Proposal, as applicable, would be inconsistent with the directors’ exercise of their fiduciary obligations to the Company’s shareholders under applicable
Law. The Company shall not be entitled to effect a Change in Recommendation with respect to a Superior Proposal or approve or recommend a Superior
Proposal unless and until (i) after the third Business Day following the Purchaser’s receipt of a written notice (a “Notice of Superior Proposal”) from the
Company advising the Purchaser that the Company intends to take such action and describing the material terms and conditions of the Superior Proposal
that is the basis of such action in such Notice of Superior Proposal and as promptly as practicable thereafter providing a copy of the relevant proposed
transaction agreements with the party making such Superior Proposal and other material documents, and stating that the Company intends to effect a
Change in Recommendation (it being understood and agreed that (A) the Company shall, and shall cause its financial and legal advisors to, during such
three (3) – Business Day period, negotiate with the Purchaser and Merger Sub in good faith (to the extent the Purchaser and Merger Sub desire to
negotiate) to make such adjustments in the terms and conditions of this Agreement so that such Acquisition Proposal ceases to constitute a Superior
Proposal, (B) in determining whether to cause or permit the Company to effect a Change in Recommendation or approve or recommend a Superior
Proposal, the board of directors of the Company shall take into account any changes to the financial terms of this Agreement proposed by the Purchaser to
the Company in any bona fide written proposal in response to a Notice of Superior Proposal or otherwise, and (C) any material amendment to the financial
terms of such Superior Proposal shall require a new Notice of Superior Proposal and a new three (3) – Business Day period), and (ii) the Company has
complied in all material respects with this Section 6.5. In addition, the Board of Directors shall not approve or recommend a Superior Proposal unless the
Company immediately terminates this Agreement pursuant to Section 8.1(g). Except as expressly permitted by this Section 6.5, the Board of Directors
shall not (i) effect a Change of Recommendation or publicly propose to withdraw, modify or qualify the Company Recommendation or (ii) approve,
recommend or adopt or publicly propose to approve, recommend or adopt any Superior Proposal.
(e)
Nothing contained in this Agreement shall prohibit the Company or its Board of Directors from disclosing to its shareholders a position
contemplated by Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act; provided, however, that any such disclosure (other than (i) a “stop, look
and listen” communication or similar communication of the type contemplated by Rule 14d-9(f) under the Exchange Act or (ii) a negative
recommendation of such tender offer) shall be deemed to be an Change of Recommendation; provided, further, however, that the Board of Directors shall
not (A) recommend that the shareholders of the Company tender their Company Shares in connection with such tender or exchange offer (or otherwise
approve or recommend any Acquisition Proposal) or (B) effect a Change of Recommendation, unless, in each case, the applicable requirements of Section
6.5(d) shall have been satisfied.
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(f)
For the purposes of this Agreement, “Acquisition Proposal” shall mean, with respect to the Company, any unsolicited offer or proposal (other
than an offer or proposal made or submitted by the Purchaser or any of its Subsidiaries) contemplating or otherwise relating to any transaction or series of
related transactions involving (i) any merger, consolidation, amalgamation, share exchange, business combination, issuance of securities, acquisition of
securities, reorganization, recapitalization, exchange offer or other similar transaction in which (A) the Company or any Subsidiary is a constituent
corporation, (B) a Person or “group” (as defined in the Exchange Act and the rules promulgated thereunder) directly or indirectly acquires beneficial or
record ownership of securities representing more than twenty percent (20%) of the outstanding Company Shares, or (C) the Company or any Subsidiary
issues securities representing more than twenty percent (20%) of the outstanding Company Shares, (ii) any sale, lease, exchange, transfer, license,
acquisition or disposition of any business or businesses or assets that constitute or account for twenty percent (20%) or more of the fair market value of the
assets of the Company and the Subsidiaries, taken as a whole, or (iii) any liquidation or dissolution of the Company.
(g)
For the purposes of this Agreement, “Superior Proposal” shall mean an offer or proposal to enter into (i) a merger, consolidation, amalgamation,
share exchange, business combination, issuance of securities, acquisition of securities, reorganization, recapitalization, exchange offer or other similar
transaction as a result of which either (A) the shareholders of the Company prior to such transaction in the aggregate cease to own at least fifty percent
(50%) of the voting securities of the entity surviving or resulting from such transaction (or the ultimate parent entity thereof) or (B) a Person or
“group” (as defined in the Exchange Act and the rules promulgated thereunder) directly or indirectly acquires beneficial or record ownership of securities
representing fifty percent (50%) or more of the Company Shares or (ii) a sale, lease, exchange transfer, license, acquisition or disposition of any business
or businesses or assets that constitute or account for fifty percent (50%) or more of the fair market value of the assets of the Company and the Subsidiaries,
taken as a whole, in the case of clauses (i) and (ii), in a single transaction or a series of related transactions that (1) was not obtained or made as a direct or
indirect result of a breach of (or in violation of) this Agreement, and (2) is on terms that the board of directors of the Company determines in good faith,
after consultation with the Company’s outside legal and financial advisors, would if consummated, result in a transaction that is more favorable to the
Company and its shareholders from a financial point of view than the transactions contemplated by this Agreement (including any adjustment to the terms
and conditions proposed by the Purchaser in response to such proposal), taking into account all of the terms and conditions of such proposal and this
Agreement, including any break-up and reverse break-up fees, expense reimbursement or similar provisions, and is reasonably capable of being
consummated in a timely manner on the terms proposed, in each case, taking into account all financial (including the financing terms of such proposal),
regulatory, legal and other aspects of such proposal.
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Section 6.6 Merger Proposal.
Each of the Company and, if applicable, the Merger Sub, shall take the following actions within the time frames set forth herein; provided, however,
that any such actions or the time frame for taking such action shall be subject to any amendment in the applicable provisions of the Companies Law and
the regulations promulgated thereunder (and in case of an amendment thereto, such amendment shall automatically apply so as to amend this Section 6.6
accordingly):
(a)
As promptly as reasonably practicable after the execution and delivery of this Agreement:
(i)
each of the Company and the Merger Sub shall cause a merger proposal (in the Hebrew language) in substantially the form attached
hereto as Exhibit C (a “Merger Proposal”) to be executed in accordance with Section 316 of the Companies Law;
(ii)
the Company shall call the Company Shareholders’ Meeting, it being understood that the sole shareholder of the Merger Sub has
approved the Merger contemporaneously with the execution of this Agreement; and
(iii)
within three (3) days from the date that the Company Shareholders’ Meeting has been convened as aforesaid, the Company and the
Merger Sub shall jointly deliver the applicable Merger Proposal to the Companies Registrar. Each of the Company and the Merger Sub shall cause
a copy of its Merger Proposal to be delivered to its secured creditors, if any, not later than three (3) days after the date on which the Merger
Proposal is delivered to the Companies Registrar and shall promptly inform its respective non-secured creditors, if any, of its Merger Proposal and
its contents in accordance with Section 318 of the Companies Law and the regulations promulgated thereunder.
(b)
Promptly after the Company and the Merger Sub shall have complied with the provisions of Section 6.6(a) above and with subsections (i) and
(ii) of this Section 6.6(b), but in any event not later than three (3) Business Days (as defined in the Companies Law) following the date on which such
notice was sent to the creditors, each of the Company and the Merger Sub shall inform the Companies Registrar, in accordance with Section 317(b) of the
Companies Law, that notice was submitted to their respective secured and non-secured creditors in accordance with Section 318 of the Companies Law
and the regulations promulgated thereunder. In addition to the above, each of the Company and, if applicable, the Merger Sub, shall:
(i)
publish a notice to its creditors, stating that a Merger Proposal has been submitted to the Companies Registrar and that the creditors may
review the Merger Proposal at the offices of the Companies Registrar, the Company’s registered offices or the Merger Sub’s registered offices, as
applicable, and at such other locations as the Company or the Merger Sub, as applicable, may determine, in (A) two (2) daily Hebrew newspapers
circulated in Israel, on the day that the Merger Proposal is submitted to the Companies Registrar, (B) a newspaper circulated in the United States,
not later than three (3) Business Days following the day on which the Merger Proposal was submitted to the Companies Registrar, and (C) if
required, in such other manner as may be required by any applicable Law;
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(ii)
within four (4) Business Days from the date of submitting the Merger Proposal to the Companies Registrar, send a notice, by registered
mail, to all of the “Substantial Creditors” (as such term is defined in the regulations promulgated under the Companies Law), in which it shall state
that a Merger Proposal was submitted to the Companies Registrar and that the creditors may review the Merger Proposal at such additional
locations, as specified in the notice referred to in subsection (i) above; and
(iii)
send to the Company “employees committee” (Va’ad Ovdim) or display in a prominent place at the Company premises, a copy of the
notice published in a daily Hebrew newspaper (as referred to in subsection (i)(A) above), not later than three (3) Business Days following the day
on which the Merger Proposal has been submitted to the Companies Registrar.
Section 6.7 Shareholders Approval.
(a)
The Company will take, in accordance with applicable Law and its Articles of Association, all action necessary to convene a general meeting of
its shareholders (the “Company Shareholders’ Meeting”) as promptly as reasonably practicable to consider and vote for the approval of this Agreement,
the Merger and the Transactions. The Board of Directors shall recommend such approval subject to the notice requirements of the Companies Law and the
rules and regulations promulgated thereunder and the Articles of Association of the Company. The Company Shareholders’ Meeting shall be held as
promptly as reasonably practicable after the date hereof. The Company shall call, notice, convene, hold and conduct the Company Shareholders’ Meeting
in compliance with applicable Laws including the Companies Law, the Articles of Association of the Company and the rules of NASDAQ. Subject to the
provisions of Section 320(c) of the Companies Law, the approval of the Merger requires the Company Shareholder Approval. The quorum required for the
shareholders’ meeting is at least two (2) shareholders, present in person or by proxy, holding at least thirty-three and one-third percent (33 1/3%) of the
issued and outstanding share capital of the Company. The Company may adjourn or postpone the Company Shareholders’ Meeting (i) if and to the extent
necessary to provide any necessary supplement or amendment of the notice to the Company’s shareholders in advance of a vote on this Agreement, and
the Merger and the Transactions; or (ii) if, as of the time for which the Company Shareholders’ Meeting is originally scheduled (as set forth in the notice
for the Company Shareholders’ Meeting), the number of Company Shares present at the Company Shareholders’ Meeting (either in person or by proxy) is
insufficient to constitute the required quorum necessary to conduct the business of the Company Shareholders’ Meeting. The Company shall include the
Recommendation in any materials sent to the shareholders of the Company in connection with the Company Shareholders’ Meeting. In the event that the
Purchaser or any of its Affiliates casts any votes in respect of the Merger, the Purchaser shall disclose to the Company in writing the number of shares and
how voted.
(b)
The sole shareholder of the Merger Sub has approved the Merger subject to the satisfaction or waiver (to the extent permitted hereunder) of all
the conditions to Closing (other than those that by their nature may only be satisfied or waived at Closing). Not later than three (3) days after the date of
such approval, the Merger Sub shall (in accordance with Section 317(b) of the Companies Law and the regulations thereunder) inform the Companies
Registrar of such approval. In accordance with the customary practice of the Companies Registrar, the Merger Sub shall request, following coordination
with Company, that the Companies Registrar declare the Merger effective and issue the Certificate of Merger upon such date as the Merger Sub shall
advise the Companies Registrar, which date shall be not later than the second Business Day immediately following the Closing.
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Section 6.8 Filings; Other Actions; Notification.
(a)
Subject to the terms and conditions set forth in this Agreement, the Company and the Purchaser shall cooperate with each other and use, and
shall cause their respective Subsidiaries and Affiliates to use, their respective reasonable best efforts to take or cause to be taken all actions, and do or
cause to be done all things, reasonably necessary, proper or advisable on their part under this Agreement and applicable Law to consummate and make
effective the Merger and the Transactions as soon as practicable, including (i) obtaining all necessary actions, consents and approvals from Governmental
Authorities, or other Persons necessary in connection with the consummation of the Transactions and the making of all necessary registrations and filings
(including filings with Governmental Authorities, if any, required or recommended under all applicable Antitrust Requirements) and taking all reasonable
steps as may be necessary to obtain an approval from, or to avoid an action or proceeding by, any Governmental Authority or other Persons necessary in
connection with the consummation of the Transactions, (ii) defending any lawsuits or other legal proceedings, whether judicial or administrative,
challenging this Agreement or the consummation of the Transactions performed or consummated by such Party in accordance with the terms of this
Agreement, including seeking to have any stay or temporary restraining order entered by any Governmental Authority vacated or reversed, (iii) the
execution and delivery of any additional instruments necessary to consummate the Merger and Transactions in accordance with the terms of this
Agreement and to fully carry out the purposes of this Agreement, and (iv) the execution by the Purchaser and/or its Affiliates of an undertaking in
customary form in favor of the OCS to comply with the applicable Law, if required.
(b)
In furtherance and not in limitation of the foregoing, (i) each party hereto agrees to make all appropriate filings with any applicable
Governmental Authority set forth on Section 7.1(b) of the Company Disclosure Schedule as promptly as practicable and in any event within fifteen (15)
Business Days from the date hereof, or such other time as mutually agreed to by the parties, and to supply as promptly as practicable any additional
information and documentary material that may be required with respect to such filings and use its reasonable best efforts to take, or cause to be taken, all
other actions consistent with this Section 6.8 necessary to cause the expiration or termination of the applicable waiting periods with respect to such filings
(including any extensions thereof), if any, as soon as practicable and (ii) the Company and the Purchaser shall each use its reasonable best efforts to (A)
take all action necessary to ensure that no state takeover statute or similar Law is or becomes applicable to the Merger or the Transactions and (B) if any
state takeover statute or similar Law becomes applicable to the Merger or the Transactions, take all action necessary to ensure that the Merger and the
Transactions may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise minimize the effect of such
Law on the Merger and the Transactions.
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(c)
Subject to applicable Law and the instructions of any Governmental Authority, each of the Company and the Purchaser shall keep the other
reasonably apprised of the status of matters relating to completion of the Transactions, including promptly furnishing the other with copies of material
notices or other communications received by the Purchaser or the Company, as the case may be, or any of their Subsidiaries from any third party and/or
any Governmental Authority with respect to the Transactions. Neither the Company nor the Purchaser shall permit any of its officers or any other
Representatives to participate in any meeting with any Governmental Authority in respect of any filings, investigation or other inquiry relating to the
Transactions unless it consults with the other Party in advance and shall, to the extent permitted by such Governmental Authority, give the other Party the
opportunity to attend and participate thereat.
(d)
Each of the Company and the Purchaser hereby agrees to pay or commit to pay fifty percent (50%) of all fees in connection with the filings with
Governmental Authorities contemplated by this Section 6.8 and Section 6.10 of this Agreement. Each of the Parties hereto will furnish to the other such
necessary information and reasonable assistance as the other may request in connection with the preparation of any required governmental filings or
submissions and will cooperate in responding to any inquiry from a Governmental Authority, including immediately informing the other Party of such
inquiry, consulting in advance before making any presentations or submissions to a Governmental Authority, and supplying each other with copies of all
material correspondence, filings or communications between such Party and any Governmental Authority with respect to this Agreement.
Section 6.9 Publicity.
The initial press release with respect to the execution of this Agreement shall be a joint press release to be reasonably agreed upon by the Purchaser
and the Company. Thereafter, neither the Company nor the Purchaser shall issue or cause the publication of any press release or other public
announcement (to the extent not previously issued or made in accordance with this Agreement) with respect to this Agreement, the Merger or the other
Transactions without the prior consent of the other Party (which consent shall not be unreasonably withheld), except as may be required by Law or by any
listing agreement with or rules of any national securities exchange or NASDAQ or by the request of any Governmental Authority. Each of the Purchaser
and the Company may make any public statement in response to specific questions presented by the press, analysts, investors or those attending industry
conferences or financial analyst conference calls, so long as such statements are substantially similar to previous press releases, public disclosures or
public statements made by the Purchaser or the Company in accordance with this Section 6.9.
Section 6.10 Israeli Tax Ruling.
As soon as reasonably practicable after the execution of this Agreement, the Company shall instruct its Israeli counsel, advisors and/or accountants to
prepare and file with the Israeli Tax Authority applications for:
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(a)
a ruling providing, among other things (i) with respect to holders of Company Shares that are non-Israeli residents (as defined in the Ordinance),
that the Purchaser will be exempt from any obligation to withhold Israeli Tax at source from any consideration payable or otherwise deliverable pursuant
to this Agreement, including the Merger Consideration, or clarifying that no such obligation exists, and (ii) with respect to holders of Company Shares that
are Israeli residents (as defined in the Ordinance), clearly instructing the Purchaser, in the absence of an exemption from Tax withholding to be provided
by any such holder prior to the Closing Date, the manner in which such withholding at source is to be executed, and in particular the rate or rates of
withholding to be applied (the “Israeli Withholding Tax Ruling”). In the event that the Israeli Withholding Tax Ruling is not obtained prior to the Closing
Date, the Company shall instruct its Israeli counsel, advisors and/or accountants to promptly apply to the Israeli Tax Authority for an extension of time
with respect to the obligation to deduct or withhold Israeli Tax at source from any consideration payable or otherwise deliverable pursuant to this
Agreement (such extension, if granted by the Israeli Tax Authority, an “Israeli Withholding Tax Extension”); and
(b)
a ruling providing, among other things, that the treatment of Company 102 Securities contemplated by Section 3.3, prior to the lapse of the
minimum trust period required by Section 102 of the Ordinance (the “102 Trust Period”), will not be treated as a breach of the provisions of Section 102
of the Ordinance, provided that, the applicable Option Consideration paid to holders of said Company 102 Securities is deposited for the duration of the
102 Trust Period with the 102 Trustee (the “Israeli Options Tax Ruling”).
Each of the Company and the Purchaser shall cause their respective Israeli counsel, advisors and/or accountants to coordinate all activities, and to
cooperate with each other, with respect to the preparation and filing of such applications and in the preparation of any written or oral submissions that may
be necessary, proper or advisable to obtain the Israeli Withholding Tax Ruling and the Israeli Options Tax Ruling.
Section 6.11 Notification of Certain Matters.
The Company shall give prompt notice to the Purchaser, and the Purchaser shall give prompt notice to the Company, of (a) any notice or other
communication received by such Party from any Governmental Authority in connection with the Merger or the Transactions or from any Person alleging
that the consent of such person is or may be required in connection with the Transactions, if the subject matter of such communication or the failure of
such Party to obtain such consent could be material to the Company, the Surviving Company or the Purchaser, (b) any actions, suits, claims, investigations
or proceedings commenced or, to such Party’s Knowledge, threatened against, relating to or involving or otherwise affecting such Party or any of its
Subsidiaries which relate to the Merger or the Transactions, (c) the discovery of any fact or circumstance that, or the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which, would cause any representation or warranty made by such Party contained in this Agreement (i) that is
qualified as to materiality or Material Adverse Effect to be untrue and (ii) that is not so qualified to be untrue in any material respect, and (d) any material
failure of such Party to comply with or satisfy any covenant or agreement to be complied with or satisfied by it hereunder; provided, however, that the
delivery of any notice pursuant to this Section 6.11 shall not (A) cure any breach of, or non-compliance with, any other provision of this Agreement or (B)
limit the remedies available to the Party receiving such notice.
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Section 6.12 Directors' and Officers' Insurance; Indemnification Agreements.
(a)
From and after the Effective Time, the Purchaser shall cause the Surviving Company to fulfill and honor all the obligations of the Company
pursuant to the indemnification agreements listed in Section 6.12(a) of the Company Disclosure Schedule, with each individual who at the Effective Time
is, or at any time prior to the Effective Time was, a director or officer of the Company or of any current or former Subsidiary of the Company (each, an
“Indemnitee” and, collectively, the “Indemnitees”), which agreements shall survive the Transactions and continue in full force and effect in accordance
with their respective terms. Without limiting the foregoing, the Purchaser, from and after the Effective Time until seven (7) years from the Effective Time,
shall cause, unless otherwise required by Law, the articles of association, certificate of incorporation and by-laws (as applicable) and comparable
organizational documents of the Surviving Company and each of its Subsidiaries to contain provisions no less favorable to the Indemnitees with respect to
exculpation and limitation of liabilities of directors and officers, insurance and indemnification than are set forth as of the date of this Agreement in the
Company Charter Documents and comparable organizational documents of the relevant Subsidiaries, which provisions shall not be amended, repealed or
otherwise modified in a manner that would adversely affect the rights thereunder of the Indemnitees with respect to exculpation and limitation of liabilities
or insurance and indemnification.
(b)
The Company shall, after reasonable consultation with the Purchaser in good faith, purchase at the Effective Time, a “tail” policy (the “Tail
Policy”), which policy shall be exclusively “A side”, “B side” and “C side” coverage, from an insurer with a Standard & Poor’s rating of at least A or from
a licensed insurance company registered in Israel, which (i) has an effective term of seven (7) years from the Effective Time, (ii) covers each Indemnitee,
(iii) contains terms that are no less favorable than those of the Company’s directors’ and officers’ insurance policy in effect on the date of this Agreement
and on terms comparable to companies similarly situated in the industries in which the Company operates and (iv) is at a cost not in excess of $1,200,000.
If and to the extent such a policy has been purchased prior to the Effective Time, the Purchaser shall, and shall cause the Surviving Company to, maintain
such policy in effect and continue to honor the obligations thereunder.
(c)
The Indemnitees to whom this Section 6.12 applies shall be intended third party beneficiaries of this Section 6.12. The provisions of this Section
6.12 are intended to be for the benefit of each Indemnitee, his or her successors, heirs or representatives. All reasonable expenses, including reasonable
attorneys’ fees, and all other obligations provided in this Section 6.11 that may be incurred by (i) any Indemnitee in enforcing the indemnity and (ii) the
Purchaser, the Surviving Company or their respective successors and assigns, as the case may be, in defending the indemnity shall be the responsibility of
the Party who does not prevail in such enforcement action.
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(d)
This Section 6.12 shall be binding upon the Purchaser and the Surviving Company and their respective successors and assigns. In the event that
the Purchaser, the Surviving Company or any of their respective successors or assigns consolidates with, or merges into, any other Person and is not the
continuing or surviving corporation or entity of such consolidation or merger, or transfers or conveys all or a majority of its properties and assets to any
Person, then, and in each such case, proper provisions shall be made so that the successors and assigns of the Purchaser or the Surviving Company, as
applicable, shall succeed to the obligations set forth in this Section 6.12. If the Tail Policy is not purchased, for the seven-year period commencing
immediately after the Effective Time, the Purchaser shall maintain in effect the Company’s current directors’ and officers’ liability insurance covering acts
or omissions occurring at or prior to the Effective Time with respect to those Persons who are currently (and any additional persons who prior to the
Effective Time become) covered by the Company’s directors’ and officers’ liability insurance policy on terms and scope with respect to such coverage,
and in amount, not less favorable to such individuals than those of such policy in effect on the date hereof (or the Purchaser may substitute therefor
policies, issued by reputable insurers, of at least the same coverage with respect to matters occurring prior to the Effective Time, including a “tail” policy);
provided, however, that in no event shall the Purchaser be required to expend per year of coverage more than two hundred percent (200%) of the amount
currently expended by the Company per year of coverage as of the date of this Agreement (the “Maximum Amount”) to maintain or procure insurance
coverage pursuant hereto. If notwithstanding the use of reasonable best efforts to do so, the Purchaser is unable to maintain or obtain the insurance called
for by this Section 6.12(d), the Purchaser shall obtain as much comparable insurance as available for the Maximum Amount.
(e)
If Surviving Company or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any Person,
then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Company or the Surviving
Corporation, as the case may be, shall assume the obligations set forth in this provision.
Section 6.13 The Merger Sub Obligations.
The Purchaser shall cause the Merger Sub to comply with all of its obligations under this Agreement. During the period from the date of this
Agreement through the Effective Time, except as expressly provided in this Agreement, the Merger Sub shall not, and the Purchaser shall not permit the
Merger Sub to, conduct any business or undertake any activities except as required in performing its express obligations hereunder.
Section 6.14 Employee Matters.
(a)
During the eighteen (18) month period commencing on the Closing Date, the Purchaser shall provide or shall cause the Surviving Company to
provide to each then current Employee (“Company Employees”) compensation and benefits (other than equity based compensation plans and transactional
and change in control bonuses) that are, in the aggregate, to any such employee, substantially comparable to the compensation and benefits being provided
to Company Employees immediately prior to the Effective Time. Notwithstanding any other provision of this Agreement to the contrary, the Purchaser
shall or shall cause the Surviving Company to provide Company Employees whose employment is terminated by the Company during the eighteen (18)
month period following the Effective Time with severance benefits in an amount that is equal to the severance benefits that such Company Employee
would have been entitled to pursuant to and under circumstances consistent with the terms of the Company’s severance plan applicable to such Company
Employee as set forth in Section 6.14(a) of the Company Disclosure Schedule; provided that, such severance benefits shall be determined without taking
into account any reduction after the Effective Time in compensation and benefits paid to Company Employees and shall take into account the service
crediting provisions set forth in Section 6.14(a) of the Company Disclosure Schedule.
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(b)
For purposes of eligibility under any employee benefit plans established by the Purchaser, the Company, the Company Subsidiaries and their
respective Affiliates providing benefits to any Company Employees after the Closing (the “New Plans”), and for purposes of accrual of vacation and other
paid time off and severance benefits under the New Plans, in addition to such Company employees’ years of service after the Closing, each Company
Employee shall be credited with his or her years of service with the Company, the Company Subsidiaries and their respective Affiliates (and any
additional service with any predecessor employer) before the Closing, to the same extent as such Company Employee was entitled, before the Closing, to
credit for such service under any similar Company Employee Plan. In addition, and without limiting the generality of the foregoing (i) each Company
Employee shall be immediately eligible to participate, without any waiting time, in any and all New Plans to the extent coverage under such New Plan
replaces coverage under a comparable, in the aggregate, Company Employee Plan in which such Company Employee participated immediately before the
replacement, and (ii) for purposes of each New Plan providing medical, dental, pharmaceutical and/or vision benefits to any Company Employee, the
Purchaser shall cause all pre-existing condition exclusions and actively-at-work requirements of such New Plan to be waived for such employee and his or
her covered dependents, and the Purchaser shall cause any eligible expenses incurred by such employee and his or her covered dependents under an
Company Employee Plan during the portion of the plan year of the New Plan ending on the date such employee’s participation in the corresponding New
Plan begins to be taken into account under such New Plan for purposes of satisfying all deductible, coinsurance and maximum out-of-pocket requirements
applicable to such employee and his or her covered dependents for the applicable plan year as if such amounts had been paid in accordance with such New
Plan.
(c)
From and after the Effective Time, the Purchaser shall cause the Surviving Company and its Subsidiaries to honor all obligations under the
Company Employee Plans and compensation and severance arrangements and agreements in accordance with their terms as in effect immediately prior to
the Effective Time, provided that, subject to the requirements of Section 6.14(a), nothing herein shall prohibit the Surviving Company from amending or
terminating any particular Company Employee Plan to the extent permitted by its terms or applicable Law.
(d)
The provisions of this Section 6.14 are solely for the benefit of the parties to this Agreement, and no current or former employee or any other
individual associate therewith shall be regarded for any purpose as a third-party beneficiary of the Agreement and nothing herein shall be construed as an
amendment to any Company Employee Plan for any purpose.
Section 6.15 Property.
Prior to the Effective Time, the Company shall use its reasonable best efforts to obtain any and all approvals and permits (including all Tax
approvals) which may be required in order to lawfully effect the registration of its rights in the Property. The Company shall promptly inform the
Purchaser of any claim or legal proceeding commenced against it or any of its officers or directors in connection with the Property.
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ARTICLE VII
CONDITIONS PRECEDENT
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each Party to effect the Merger is subject to the satisfaction (or waiver, if permissible under applicable Law) on or prior
to the Closing Date of the following conditions:
(a)
Company Shareholder Approval. The Company Shareholder Approval shall have been obtained in accordance with applicable Law and
the Articles of Association of the Company.
(b)
Governmental Consents. The Governmental Consents listed in Section 7.1(b) of the Company Disclosure Schedule shall have been
obtained or the applicable waiting periods shall have expired or been terminated.
(c)
Israeli Statutory Waiting Periods. At least fifty (50) days shall have elapsed after the filing of the Merger Proposals with the Companies
Registrar and at least thirty (30) days shall have elapsed after receipt of the Company Shareholder Approval and the approval of the Merger by the
shareholders of the Merger Sub.
(d)
Certificate of Merger. The Company and the Merger Sub shall have received the Merger Certificate from the Companies Registrar.
(e)
Injunction. No injunction, judgment, order, decree, statute, Law, ordinance, rule or regulation, entered, enacted, promulgated, enforced
or issued by any court or other Governmental Authority of competent jurisdiction or other similar legal restraint or prohibition (collectively,
“Restraints”) preventing, enjoining, restraining, prohibiting or making illegal the consummation of the Merger shall be in effect.
Section 7.2 Conditions to Obligations of the Purchaser and the Merger Sub to Effect the Merger.
The obligations of the Purchaser and the Merger Sub to effect the Merger are further subject to the satisfaction (or waiver, if permissible under
applicable Law) on or prior to the Closing Date of the following conditions:
(a)
The representations and warranties of the Company set forth in this Agreement, disregarding for this purpose any Material Adverse
Effect or materiality qualification, shall be true and correct at and as of the date of this Agreement and at and as of the Closing Date as though
made at and as of the Closing Date, except for such failures to be true and correct as would not have, individually or in the aggregate, a Material
Adverse Effect (except that the representations and warranties contained in Section 4.2 and Section 4.18 shall be true and correct in all material
respects); provided, however, that, with respect to representations and warranties that are made as of a particular date or period shall be true and
correct (in the manner set forth above) only as of such date or period.
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(b)
The Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or
prior to the Closing Date, and the Purchaser shall have received a certificate signed on behalf of the Company by the chief executive officer of the
Company to such effect.
(c)
Between the date of this Agreement and the Closing Date, there shall not have been any Material Adverse Effect.
Section 7.3 Conditions to Obligations of the Company to Effect the Merger.
The obligation of the Company to effect the Merger is further subject to the satisfaction (or waiver, if permissible under applicable Law) on or prior
to the Closing Date of the following conditions:
(a)
The representations and warranties of the Purchaser set forth in this Agreement, disregarding for this purpose any materiality
qualification, shall be true and correct at and as of the date of this Agreement and at and as of the Closing Date as though made at and as of the
Closing Date, except for such failures to be true and correct as would not have and would not reasonably be expected to have, individually or in the
aggregate, a material adverse effect on the Purchaser; provided, however, that, with respect to representations and warranties that are made as of a
particular date or period shall be true and correct (in the manner set forth above) only as of such date or period.
(b)
The Purchaser shall have performed in all material respects all obligations required to be performed by it under this Agreement at or
prior to the Closing Date, and the Company shall have received a certificate signed on behalf of the Purchaser by the chief executive officer of the
Purchaser to such effect.
Section 7.4 Frustration of Closing Conditions.
None of the Company, the Purchaser or the Merger Sub may rely on the failure of any condition set forth in Section 7.1, 7.2 or 7.3, as the case may
be, to be satisfied if such failure was caused by such Party’s failure to use its reasonable best efforts to consummate the Merger and the other Transactions.
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ARTICLE VIII
TERMINATION
Section 8.1 Termination or Abandonment.
Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and abandoned at any time prior to the
Effective Time, whether before or after receipt of the Company Shareholder Approval:
(a)
by the mutual written consent of the Company and the Purchaser;
(b)
by either the Company or the Purchaser by notice to the other, if (i) the Effective Time shall not have occurred on or before September
28, 2008 (the “End Date”) and (ii) the Party seeking to terminate this Agreement pursuant to this Section 8.1(b) shall not have breached in any
material respect its obligations under this Agreement in any manner that shall have proximately caused the failure of the Effective Date to occur on
or before such date;
(c)
by either the Company or the Purchaser by notice to the other, if a Restraint shall have been entered permanently preventing, enjoining
or otherwise prohibiting the consummation of the Merger and such Restraint shall have become final and non-appealable; provided that, the Party
seeking to terminate this Agreement pursuant to this Section 8.1(c) (i) shall have used its reasonable best efforts to remove such Restraint, and (ii)
shall not have breached in any material respect its obligations under this Agreement in any manner that shall have proximately caused such
injunction to be issued;
(d)
by either the Company or the Purchaser by notice to the other, if the Company Shareholders’ Meeting (including any adjournments
thereof) shall have been convened and concluded and the Company Shareholder Approval shall not have been obtained;
(e)
by the Company by notice to the Purchaser, if (i) the Purchaser shall have breached or failed to perform in any material respect any of its
representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform, (A) would result in a
failure of a condition set forth in Section 7.1 or Section 7.3 and (B) is not capable of being cured by the End Date or, if capable of being cured, is
not cured within thirty (30) days following receipt of notice from the Company stating the Company’s intention to terminate this Agreement
pursuant to this Section 8.1(e) or (ii) the conditions to closing set forth in Section 7.1 and Section 7.2 have been satisfied and the Purchaser has
failed to consummate the Merger within ten (10) Business Days (or such longer period specified by the Company in a notice to the Purchaser
scheduling the Closing) after the later of (A) the first day that the conditions set forth in Section 7.1 and Section 7.2 have been satisfied and (B) the
date on which the Company provides such notice to the Purchaser irrevocably undertaking to close the Merger in accordance with this Agreement
on the date specified in such notice;
(f)
by the Purchaser by notice to the Company, if the Company shall have breached or failed to perform in any material respect any of its
representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform (i) would result in a
failure of a condition set forth in Section 7.1 or Section 7.2 and (ii) is not capable of being cured by the End Date or, if capable of being cured, is
not cured within thirty (30) days following receipt of notice from the Purchaser stating the Purchaser’s intention to terminate this Agreement
pursuant to this Section 8.1(f);
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(g)
by the Company by notice to the Purchaser, at any time prior to the receipt of the Company Shareholder Approval, if the board of
directors of the Company has approved or recommended a Superior Proposal in accordance with Section 6.5(d); provided that, any termination
pursuant to this Section 8.1(g) shall be conditioned on and subject to the payment of the Company Termination Fee pursuant to Section 8.2(a)(i);
or
(h)
by the Purchaser by notice to the Company, if the Board of Directors shall have (i) made or resolved to make a Change of
Recommendation, (ii) failed to recommend against a tender or exchange offer constituting an Acquisition Proposal in any publicly disclosed
position taken pursuant to Rules 14d-9 and 14e-2 under the Exchange Act, except to the extent permitted pursuant to Section 6.5(e), (iii)
recommended to the shareholders of the Company or approved any Acquisition Proposal or (iv) failed to include the Recommendation in any
materials sent to the shareholders of the Company in connection with the Company Shareholders’ Meeting.
In the event of termination of this Agreement pursuant to this Section 8.1, this Agreement shall terminate and be of no further force or effect (except for
the Confidentiality Agreement, the provisions of Section 8.2 and Article IX), and there shall be no other liability on the part of the Company or the
Purchaser and the Merger Sub to the other; provided that, nothing herein shall relieve any Party from liability arising out of fraud prior to the date on
which this Agreement is terminated, in which case the aggrieved Party shall, subject to the terms of this Agreement, be entitled to all rights and remedies
available at law or in equity.
Section 8.2 Termination Fees and Expenses.
(a)
Notwithstanding any provision in this Agreement to the contrary, if:
(i)
this Agreement is terminated by the Company pursuant to Section 8.1(g), the Company shall pay the Purchaser or an Affiliate of the
Purchaser designated by the Purchaser a fee of $ 14,239,000 in cash (the “Company Termination Fee”) prior to or simultaneous with such
termination;
(ii)
this Agreement is terminated by the Purchaser pursuant to Section 8.1(h) , the Company shall pay the Purchaser or an Affiliate of the
Purchaser designated by the Purchaser the Company Termination Fee no later than two (2) Business Days after such termination;
(iii)
this Agreement is terminated by the Purchaser pursuant to Section 8.1(f), the Company shall pay the Purchaser or an Affiliate of the
Purchaser designated by the Purchaser the Purchaser Expenses (as defined below) no later than two (2) Business Days after such termination; and
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(iv)
prior to the termination of this Agreement, (A) any bona fide Acquisition Proposal (provided that for the purpose of this Section 8.2(a)
(iv) any reference in the definition of Acquisition Proposal to twenty percent (20%) shall be deemed to be a reference to fifty percent (50%)) is
publicly proposed or otherwise privately communicated to the Board of Directors, (B) this Agreement is terminated by the Purchaser or the
Company pursuant to Section 8.1(b) or Section 8.1(d) or by the Purchaser pursuant to Section 8.1(f) and (C) no later than nine (9) months after
such termination, any definitive agreement providing for any Acquisition Proposal shall have been entered into or any Acquisition Proposal
consummated (in each case which need not be the same Acquisition Proposal), then in any such event the Company shall pay to the Purchaser the
Company Termination Fee, simultaneously with the consummation of such Acquisition Proposal or any Acquisition Proposal relating thereto.
(b)
Notwithstanding any provision in this Agreement to the contrary, if:
(i)
this Agreement is terminated by the Company pursuant to Section 8.1(e)(i) and the Purchaser’s breach or failure to perform is not
intentional, the Purchaser shall pay the Company or an Affiliate of the Company designated by the Company the Company Expenses (as defined
below) no later than ten (10) Business Days after such termination;
(ii)
if this Agreement is terminated by the Company pursuant to Section 8.1(e)(i) and the Purchaser’s breach or failure to perform is
intentional, and as of the date of termination the conditions to closing set forth in Section 7.1 and 7.2 have been satisfied, the Purchaser shall pay
the Company or an Affiliate of the Company designated by the Company $ $47,463,000 in cash (the “Purchaser Termination Fee”) no later than
ten (10) Business Days after such termination; provided, that for the purposes of this Section 8.2(b)(ii) if the Purchaser obtains Financing that does
not comply with the third sentence of Section 6.4(d) such action shall be deemed an intentional breach; and
(iii)
this Agreement is terminated by the Company pursuant to Section 8.1(e)(ii), the Purchaser shall pay the Company or an Affiliate of the
Company designated by the Company the Purchaser Termination Fee no later than ten (10) Business Days after such termination.
(c)
For the purposes of this Agreement, “Company Expenses” shall mean all reasonable, actual and documented out-of-pocket costs and expenses
incurred prior to the termination of this Agreement by or on behalf of the Company and its Subsidiaries in connection with entering into this Agreement
and the carrying out of any and all acts contemplated hereunder, including reasonable fees and expenses of counsel, investment banking firms, lenders or
financial advisors, accountants, and consultants, up to an aggregate maximum amount of $5,000,000, and “Purchaser Expenses” shall mean all reasonable,
actual and documented out-of-pocket costs and expenses incurred prior to the termination of this Agreement by or on behalf of the Purchaser, the Merger
Sub or their Affiliates in connection with the entering into this Agreement and the carrying out of any and all acts contemplated hereunder, including
reasonable fees and expenses of counsel, investment banking firms, lenders or financial advisors, accountants, and consultants, up to an aggregate
maximum amount of $5,000,000.
(d)
Notwithstanding anything to the contrary in this Agreement, in the event of a termination of this Agreement in connection with which the
Purchaser Termination Fee or the Company Expenses are payable to the Company, payment of such Purchaser Termination Fee or Company Expenses by
the Purchaser pursuant to this Section 8.2 or the Sponsors pursuant to the Limited Guaranty shall be the sole and exclusive remedy of the Company, and
its Subsidiaries and Affiliates against the Sponsors, the Purchaser, the Merger Sub, their Subsidiaries and any of their respective former, current, or future
general or limited partners, shareholders, managers, members, directors, officers, Affiliates or agents for the loss suffered as a result of the failure of the
Merger to be consummated, and upon payment of such amounts, none of the Sponsors, the Purchaser, the Merger Sub, their Subsidiaries or any of their
respective former, current, or future general or limited partners, shareholders, managers, members, directors, officers, Affiliates or agents shall have any
further liability or obligation relating to or arising out of this Agreement or the transactions contemplated by this Agreement.
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(e)
Notwithstanding anything to the contrary in this Agreement, in the event of a termination of this Agreement in connection with which a
Company Termination Fee or the Purchaser Expenses are payable to the Purchaser, payment of such Company Termination Fee or the Purchaser
Expenses, as the case may be, by the Company pursuant to and in accordance with this Section 8.2 shall be the sole and exclusive remedy of the
Purchaser, the Merger Sub and their Subsidiaries and Affiliates against the Company, its Subsidiaries and any of their respective former, current, or future
general or limited partners, shareholders, managers, members, directors, officers, Affiliates or agents for the loss suffered as a result of the failure of the
Merger to be consummated, and upon payment of such amounts, none of the Company, its Subsidiaries or any of their respective former, current, or future
general or limited partners, shareholders, managers, members, directors, officers, Affiliates or agents shall have any further liability or obligation relating
to or arising out of this Agreement or the transactions contemplated by this Agreement.
(f)
Any payment of the Company Termination Fee, the Purchaser Expenses, the Purchaser Termination Fee or the Company Expenses hereunder
shall be net of any amounts as may be required to be deducted or withheld therefrom under the Code or under any provision of state, local or foreign tax
Law.
(g)
Each of the Company, the Purchaser and the Merger Sub acknowledges and agrees that the agreements contained in this Section 8.2 are an
integral part of the transactions contemplated by this Agreement, and that, without these agreements, the Company, the Purchaser and the Merger Sub
would not have entered into this Agreement, and that the Company Termination Fee and the Purchaser Termination Fee, as the case may be, do not
constitute a penalty but rather are liquidated damages in a reasonable amount to compensate the receiving Party for efforts and resources expended and
opportunities foregone while negotiating this Agreement and in reliance on this Agreement and on the expectation of the consummation of the transactions
contemplated hereby. Accordingly, if a Party fails to pay the Company Termination Fee, the Purchaser Expenses, the Purchaser Termination Fee or the
Company Expenses, as the case may be, pursuant to this Section 8.2, and the receiving Party commences a suit to obtain such payments, which results in a
judgment against the paying Party for the applicable amount due under this Section 8.2, such paying Party shall pay the receiving Party its costs and
expenses (including reasonable attorneys’ fees) in connection with such suit, together with interest on such amount at the prime rate of Citibank N.A. in
effect on the date such payment was required to be made through the date of payment.
63
ARTICLE IX
MISCELLANEOUS
Section 9.1 Amendment.
This Agreement may be amended, supplemented or modified only by a written instrument duly executed by or on behalf of each Party to this
Agreement; provided, however, that, after the approval of the Merger by shareholders of the Company, any amendment that by Law or the rules of any
stock exchange requires further approval by the shareholders of the Company, this Agreement may not be amended, supplemented or modified without
such further approval of shareholders.
Section 9.2 Governing Law; Jurisdiction; Service of Process.
(a)
This Agreement, and all claims of causes of action (whether in contract or tort) that may be based upon, arise out of or relate to this Agreement
or the negotiation, execution or performance of this Agreement (including any claim or cause of action based upon, arising out of or related to any
representation or warranty made in or in connection with this Agreement or as an inducement to enter into this Agreement) shall be governed by, and
construed, interpreted and enforced in accordance with, the Laws of the State of Israel, without regard to conflict of laws principles.
(b)
Any legal action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby shall be heard and
determined in, and the sole and exclusive jurisdiction shall be of, the competent court for Tel Aviv-Jaffa district, and each of the parties hereby submits
irrevocably to the jurisdiction of such court in respect of any legal action, suit or proceeding arising out of or relating to this Agreement and waives, and
agrees not to assert, as a defense in any such action, suit or proceeding, any claim that it is not subject personally to the jurisdiction of such courts, that its
property is exempt or immune from attachment or execution, that the action, suit or proceeding is brought in an inconvenient forum, that the venue of
action, suit or proceeding is improper or that this Agreement or the transactions contemplated hereby may not be enforced in or by such courts.
(c)
Each Party agrees that notice or the service of process in any action, suit or proceeding arising out of or relating to this Agreement shall be
properly served or delivered if delivered in the manner contemplated by Section 9.4.
(d)
The consents to jurisdiction set forth in this Section 9.2 shall not constitute general consents to service of process in the State of Israel and shall
have no effect for any purpose except as provided in this Section 9.2 and shall not be deemed to confer rights on any Person other than the Parties. The
Parties agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment
or in any other manner provided by applicable law.
64
Section 9.3 Extension; Waiver.
At any time prior to the Effective Time, a Party may (a) extend the time for the performance of any of the obligations or other acts of the other
Parties, (b) waive any inaccuracies in the representations and warranties of the other Parties contained in this Agreement or in any document delivered
pursuant to this Agreement or (c) waive compliance by the other Party with any of the agreements or conditions contained in this Agreement. Any
agreement by a Party to such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such Party. The failure of
any Party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights.
Section 9.4 Notices.
All notices, claims, demands and other communications hereunder shall be in writing and shall be deemed given when delivered personally or by
internationally recognized overnight courier (providing proof of delivery), or sent via fax or electronic email to the Parties at the following addresses,
email addresses or fax numbers (or at such other address, email address or fax numbers as shall be specified by like notice):
(a)
If to the Purchaser or the Merger Sub, to:
Galactic Holdings Ltd.
c/o The Gores Group, LLC
10877 Wilshire Boulevard, 18th Floor
Los Angeles, CA 90024
Attention: General Counsel
Fax: (310) 443-2149
With a copy to:
Weil, Gotshal & Manges LLP
201 Redwood Shores Parkway
Redwood Shores, California 94065
Attention: Kyle C. Krpata
Fax: (650) 802-3100
E-mail: [email protected]
and to:
Zellermayer Pelossof & Co.
The Rubinstein House, 20 Lincoln Street
Tel Aviv, Israel 67134
Attention: Doni Toledano, Adv.
Fax: (972) (3) 625-5500
65
and to:
Gross, Kleinhendler, Hodak, Berkman $ Co.
One Azrieli Center
Tel Aviv, Israel 67021
Attention: Richard Mann
Fax: (972) (3) 607-4442
(b)
If to the Company, to:
Gilat Satellite Networks Ltd.
21 Yegia Kapayim St., Kiryat Arye
Petah Tikva 49130, Israel
Attention: Rachel Prishkolnik, Adv.
Fax: (972) (3) 925-2945
With a copy to:
Carter Ledyard & Milburn LLP
2 Wall Street
New York, New York 10005
Fax No.: (212) 732-3232
Attention: Steven Glusband, Esq.
and to:
Goldfarb, Levy, Eran, Meiri & Co.
2 Weizmann Street
Tel Aviv 64239, Israel
Fax No.: (972) (3) 608-9909
Attention: Ashok Chandrasekhar, Adv.
66
Section 9.5 Interpretation.
Any reference in this Agreement to $ shall mean U.S. dollars. When a reference is made in this Agreement to a Section or Article, such reference
shall be to a Section or Article of this Agreement, unless otherwise clearly indicated to the contrary. Whenever the words “include,” “includes” or
including are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” The words “hereof,” “herein” and “herewith”
and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this
Agreement, and annex, article, section, paragraph, exhibit and schedule references are references to the annex, articles, sections, paragraphs, exhibits and
schedules of this Agreement, unless otherwise specified. The plural of any defined term shall have a meaning correlative to such defined term and words
denoting any gender shall include all genders and the neuter. Where a word or phrase is defined herein, each of its other grammatical forms shall have a
corresponding meaning. Any reference to a Party to this Agreement or any other agreement or document contemplated hereby shall include such Party’s
successors and permitted assigns. A reference to any legislation or to any provision of any legislation shall include any modification, amendment, reenactment thereof, any legislative provision substituted therefore and all rules, regulations and statutory instruments issued or related to such legislation.
The headings and captions in this Agreement are for reference only and shall not be used in the construction or interpretation of this Agreement. The
Parties have participated jointly in the negotiation and drafting of this Agreement. If any ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the Parties, and no presumption or burden of proof shall arise favoring or disfavoring any Party by
virtue of the authorship of any provision of this Agreement. No prior draft of this Agreement or any course of performance or course of dealing shall be
used in the interpretation or construction of this Agreement. No parol evidence shall be introduced in the construction or interpretation of this Agreement
unless the ambiguity or uncertainty in issue is plainly discernable from a reading of this Agreement without consideration of any extrinsic evidence.
Section 9.6 Counterparts.
This Agreement may be executed in multiple counterparts, all of which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the Parties and delivered to the other Parties.
Section 9.7 Entire Agreement: Third-Party Beneficiaries.
This Agreement and the documents and instruments and other agreements among the Parties hereto as contemplated by or referred to herein,
including the Confidentiality Agreement, the Company Disclosure Schedule and the Purchaser Disclosure Schedule:
(a)
constitutes the entire agreement among the Parties with respect to the subject matter hereof, and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the subject matter of this Agreement; and
(b)
except for the provisions of Section 6.12 hereof, this Agreement is not intended to, and shall not confer upon, any Person other than the
Parties hereto any rights or remedies hereunder.
Section 9.8 Severability.
If any term or other provision of this Agreement or the application hereof is declared invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect as long as the economic or legal
substance of the Merger is not affected in any manner materially adverse to any Party. If the final judgment of a court of competent jurisdiction or other
authority declares that any term or provision hereof is invalid, void or unenforceable, the Parties agree that they shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the Parties as closely as possible in a mutually acceptable manner in order that the Merger be consummated
as originally contemplated to the fullest extent possible.
67
Section 9.9 Other Remedies; Specific Performance.
Except as otherwise provided herein, any and all remedies herein expressly conferred upon a Party will be deemed cumulative with and not exclusive
of any other remedy conferred hereby, or by Law or equity upon such Party, and the exercise by a Party of any remedy will not preclude the exercise of
any other remedy. The Company agrees that irreparable damage would occur to the Purchaser in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the Purchaser (and not the Company)
shall be entitled (without any requirement to post a bond or other security) to seek one or more injunction or other equitable remedies to prevent breaches
of this Agreement and to enforce specifically the terms and provisions hereof against the Company, this being in addition to any other remedy to which
they are entitled at Law or in equity.
Section 9.10 Assignment.
Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of Law
or otherwise by any of the Parties hereto without the prior written consent of the other Parties. No duties under this Agreement may be delegated, in whole
or in part, by operation of Law or otherwise by any of the Parties hereto without the prior written consent of the other Parties. Any assignment or
delegation in violation of this Section 9.10 shall be void. Subject to the aforesaid in this Section 9.10, this Agreement will be binding upon, inure to the
benefit of, and be enforceable by, the Parties and their respective successors and permitted assigns. Notwithstanding the foregoing, the Purchaser may at
the time of the Closing or thereafter, without the consent of the Company, collaterally assign its rights hereunder to one or more of its lenders (or any
administrative or collateral agent for such lenders).
Section 9.11 Non-Survival of Representations, Warranties and Agreements.
Except as set forth in Section 8.2, the representations, warranties and agreements in this Agreement and any certificate delivered pursuant hereto by
any Person shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Article VIII of this Agreement, as the case may be,
except that this Section 9.11 shall not limit any covenant or agreement of the Parties which by its terms contemplates performance after the Effective Time
or after termination of this Agreement, including those contained in Section 6.12.
[The remainder of this page is intentionally left blank.]
68
IN WITNESS WHEREOF, the Purchaser, the Merger Sub and the Company have caused this Agreement to be duly executed and delivered as of the
date first written.
GALACTIC HOLDINGS LTD.
By: /s/ Meir Shamir
——————————————
Meir Shamir
Officer
GALACTIC ACQUISITION COMPANY LTD.
By: /s/ Meir Shamir
——————————————
Meir Shamir
Officer
By: /s/ Amiram Levinberg and Tal Payne
—————————————————
Amiram Levinberg and Tal Payne
Chief Executive Officer and Chief Financial Officer
69
Exhibit 10.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements Forms S-8 (Registrations Nos. 333-113932, 333-132649, 333-123410, 33308826, 333-10092, 333-12466 and 333-12988) of our report dated April 9, 2008, with respect to the consolidated financial statements, and the
effectiveness of internal control over financial reporting of Gilat Satellite Networks Ltd. included in its Annual Report on Form 20-F for the year ended
December 31, 2007.
Tel-Aviv, Israel
April 9, 2008
Exhibit 10.2
INDEPENDENT AUDITORS’ CONSENT
Gilat Satellite Networks Ltd.
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Nos. 333-113932, 333-123649, 333-123410, 33308826, 333-10092, 333-12466 and 333-12988) of our report dated January 19, 2006 on StarBand Communications, Inc., which is a wholly owned
subsidiary, with respect to the consolidated financial statements of Gilat Satellite Networks Ltd. included in this Annual Report on Form 20-F for the year
ended December 31, 2007.
MAYER HOFFMAN MCCANN P.C.
Plymouth Meeting, Pennsylvania
April 8, 2008
Exhibit 12.1
CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Amiram Levinberg, Chief Executive Officer, certify that:
1.
I have reviewed this annual report on Form 20-F of Gilat Satellite Networks Ltd. (the “Company”);
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects
the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the Company and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
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;
c. Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee
of Company’s board of directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the Company’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over
financial reporting.
Date: April 9, 2008
*
/s/ Amiram Levinberg
Amiram Levinberg
Chief Executive Officer
The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
Exhibit 12.2
CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Tal Payne, the chief financial officer of Gilat Satellite Networks Ltd., certify that:
1.
I have reviewed this annual report on Form 20-F of Gilat Satellite Networks Ltd. (the “Company”);
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects
the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the Company and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
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;
c. Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee
of Company’s board of directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the Company’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over
financial reporting.
Date: April 9, 2008
*
/s/ Tal Payne
Tal Payne
The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
Exhibit 13.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Annual Report of Gilat Satellite Networks Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2007 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Amiram Levinberg, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted § 906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Amiram Levinberg
Amiram Levinberg
Chief Executive Officer
April 9, 2008
Exhibit 13.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Annual report of Gilat Satellite Networks Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2007 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tal Payne, principal financial officer of the Company, certify, pursuant
to 18 U.S.C. § 1350, as adopted § 906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Tal Payne
Tal Payne
April 9, 2008

GILAT SATELLITE NETWORKS LTD.

Transcription

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