Company Quick10K Filing
Gilat Satellite Networks
20-F 2020-12-31 Filed 2021-03-08
20-F 2019-12-31 Filed 2020-03-23
20-F 2018-12-31 Filed 2019-03-18
20-F 2017-12-31 Filed 2018-03-20
20-F 2016-12-31 Filed 2017-03-29
20-F 2015-12-31 Filed 2016-03-22
20-F 2014-12-31 Filed 2015-04-01
20-F 2013-12-31 Filed 2014-03-31
20-F 2012-12-31 Filed 2013-04-11
20-F 2011-12-31 Filed 2012-04-02
20-F 2010-12-31 Filed 2011-04-12
20-F 2009-12-31 Filed 2010-04-01

GILT 20F Annual Report

Item 17 O Item 18 O
Item 1: Identity of Directors, Senior Management and Advisors
Item 2: Offer Statistics and Expected Timetable
Item 3: Key Information
Item 4: Information on The Company
Item 4A: Unresolved Staff Comments
Item 5: Operating and Financial Review and Prospects
Item 6: Directors and Senior Management
Item 7: Major Shareholders and Related Party Transactions
Item 8: Financial Information
Item 9: The Offer and Listing
Item 10: Additional Information
Item 11: Quantitative and Qualitative Disclosures About Market Risk
Item 12: Description of Securities Other Than Equity Securities
Item 13: Defaults, Dividend Arrearages and Delinquencies
Item 14: Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15: Controls and Procedures
Item 16: Reserved
Item 16A: Audit Committee Financial Expert
Item 16B: Code of Ethics
Item 16C: Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E: Purchase of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F: Changes in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17: Financial Statements
Item 18: Financial Statements
Item 19: Exhibits
Note 1: General
Note 2:- Significant Accounting Policies
Note 3:- Inventories
Note 4:- Property and Equipment, Net
Note 5:- Intangible Assets, Net
Note 6:- Commitments and Contingencies
Note 7:- Hedging Instruments
Note 8:- Equity
Note 9:- Convertible Subordinated Notes
Note 10:- Restructuring Cost
Note 11:- Taxes on Income
Note 12:- Supplementary Balance Sheet Information
Note 13:- Selected Statements of Operations Data
Note 14:- Customers, Geographic and Segment Information
EX-1.2 exhibit_1-2.htm
EX-8.1 exhibit_8-1.htm
EX-12.1 exhibit_12-1.htm
EX-12.2 exhibit_12-2.htm
EX-13.1 exhibit_13-1.htm
EX-13.2 exhibit_13-2.htm
EX-15.1 exhibit_15-1.htm

Gilat Satellite Networks Earnings 2011-12-31

Balance SheetIncome StatementCash Flow

20-F 1 zk1211171.htm 20-F zk1211171.htm


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
or

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2011
 
or

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
or

o
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
GILAT SATELLITE NETWORKS LTD.
(Exact name of Registrant as specified in its charter)

ISRAEL
(Jurisdiction of incorporation or organization)

Gilat House, 21 Yegia Kapayim Street, Kiryat Arye, Petah Tikva, 49130 Israel
(Address of principal executive offices)

Alon Levy, +972-3- 9252908 (phone), +972-3-9252945 (fax)
Gilat House, 21 Yegia Kapayim Street, Kiryat Arye, Petah Tikva, 49130 Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class
Ordinary Shares, NIS 0.20 nominal value
Name of each exchange on which registered
NASDAQ Global Select 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
 
 
 

 

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:

41,182,011 Ordinary Shares, NIS 0.20 nominal value per share
(as of December 31, 2011)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes o   No x

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.

Yes o   No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes o   No o
 
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 o
Accelerated filer x
Non-accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP x
 
International Financial Reporting Standards as issued by
the International Accounting Standards Board o
Other o
 
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o   Item 18 o
 
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).

Yes o   No x
 
This report on Form 20-F is being incorporated by reference into our Registration Statements on Form F-3 (Registration Nos. 333-160683 and No. 333-174142) and the Registration Statements on Form S-8 (Registration Nos. 333-96630, 333-113932, 333-123410, 333-132649 and 333-158476).
 
 
2

 
 
 
INTRODUCTION
 
           We are a leading global provider of broadband satellite communication and networking products and services. We design, produce and market VSATs, or very small aperture terminals, solid-state power amplifiers and low-profile antennas.  VSATs are earth-based terminals that transmit and receive broadband, Internet, voice, data and video via satellite. VSAT networks have significant advantages over 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 one million VSAT units to customers in over 85 countries on six continents since 1989. We have 21 sales and support offices worldwide, six network operations centers and five R&D centers.  Our products are primarily sold to communication service providers and operators that use VSATs to serve enterprise, government and residential users or to system integrators that use our technology. We also provide services directly to end-users in various market segments in the United States and certain countries in Latin America.

Through 2011, we operated four complementary operational and reporting segments:

 
·
Gilat Worldwide, comprised of two segments:

 
o
Gilat International, a provider of VSAT-based networks and associated professional services, including turnkey and management services, to telecom operators worldwide. Since our acquisition of Raysat Antenna Systems, or RAS, Gilat International is also a provider of low-profile antennas, used for satellite-on-the-move communications, or Satcom-On-The-Move, antenna solutions.

 
o
Gilat Peru & Colombia, a provider of telephony, Internet and data services primarily for rural communities in Peru and Colombia under projects that are subsidized by government entities;

 
·
Spacenet Inc., a provider of managed network communications services, utilizing satellite wireline and wireless networks and associated technology, to enterprises, government, small office/home office, or SOHOs, and residential customers primarily in the United States, but also in locations throughout North America;

 
·
Wavestream, a provider of high power solid state power amplifiers, or SSPAs, Block Upconverters, or BUCs, with field-proven, high performance solutions designed for mobile and fixed satellite communication, or SATCOM, systems worldwide, primarily in the defense market.

Starting in 2012, due to management and organizational changes, we will operate three  complementary businesses, comprised of our newly named Commercial Satcom, Defense Satcom and Services Divisions:  Commercial SatCom includes broadband satellite network equipment and professional services for enterprises, consumers and governments worldwide, as well as our consumer Ka-band initiatives.  Defense SatCom provides satellite communication equipment for defense and homeland security organizations worldwide. Services, which includes Spacenet, provides managed network services for business, government and residential customers in North America, as well as our service businesses in Colombia and Peru.

Our ordinary shares are traded on the NASDAQ Global Select Market and on the Tel Aviv Stock Exchange under the symbol “GILT”.  As used in this annual report, the terms “we”, “us”, “Gilat” and “our” mean Gilat Satellite Networks Ltd. and its subsidiaries, unless otherwise indicated.

The name "Gilat®" and the names "Connexstar™," "SkyAbis™," "SkyEdge™," "Spacenet™," Wavestream® and "StarBand™" appearing in this annual report on Form 20-F are trademarks of our company and its subsidiaries. The name Raysat™ is a trademark used under license by our company. Other trademarks appearing in this annual report on Form 20-F are owned by their respective holders.
 
 
3

 
 
This Annual Report on Form 20-F contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and within the Private Securities Litigation Reform Act of 1995, as amended.  Such forward-looking statements reflect our current view with respect to future events and, financial results of operations.  Forward-looking statements usually include the verbs, “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “understands" and other verbs suggesting uncertainty.  We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual` results, performance, levels of activity, or our achievements, or industry results to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof.  We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.  We have attempted to identify additional significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section which appears in Item 3D: “Key Information–Risk Factors”.
 
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 March 30, 2012  was NIS 3.715 per $1.00.
 
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 of its terms.
 
 
4

 

TABLE OF CONTENTS
 
   
Page
 
 
  7  
       
7
 
7
 
7
 
 
A.   Selected Consolidated Financial Data
7
 
 
B.   Capitalization and Indebtedness
8
 
 
C.   Reasons for the Offer and Use of Proceeds
8
 
 
D.   Risk Factors
8
 
26
 
 
A.   History and Development of the Company.
26
 
 
B.   Business Overview.
26
 
 
C.   Organizational Structure
45
 
 
D.   Property, Plants and Equipment
45
 
46
 
46
 
 
A.   Operating Results
46
 
 
B.   Liquidity and Capital Resources
63
 
 
C.   Research and Development
65
 
 
D.   Trend Information
66
 
 
E.    Off-Balance Sheet Arrangements
66
 
 
F.   Tabular Disclosure of Contractual Obligations
66
 
67
 
 
A.   Directors and Senior Management
67
 
 
B.   Compensation
71
 
 
C.   Board Practices
71
 
 
D.   Employees
79
 
 
E.   Share Ownership
80
 
82
 
 
A.   Major Shareholders
82
 
 
B.   Related Party Transactions.
84
 
 
C.   Interests of Experts and Counsel.
84
 
84
 
86
 
 
A.   Offer and Listing Details
86
 
 
B.   Plan of Distribution
87
 
 
C.   Markets
87
 
 
D.   Selling Shareholders
87
 
 
E.   Dilution
87
 
 
F.   Expense of the Issue
87
 
87
 
 
A.   Share Capital
87
 
 
B.   Memorandum and Articles of Association
87
 
 
C.   Material Contracts
93
 
 
D.   Exchange Controls
93
 
 
E.   Taxation
93
 
 
F.   Dividend and Paying Agents
100
 
 
G.   Statement by Experts
100
 
 
H.   Documents on Display
100
 
 
I.     Subsidiary Information
101
 
101
 
 
 
5

 
 
103
 
       
 
103  
       
103
 
103
 
103
 
105
 
105
 
105
 
105
 
106
 
106
 
106
 
107
 
MINE SAFETY DISCLOSURE 107  
       
 
108
 
       
108
 
108
 
109
 
 
110
 
 
 
6

 
 
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
 
A.             Selected Consolidated Financial Data
 
The selected consolidated statement of operations data set forth below for the years ended December 31, 2011, 2010 and 2009, and the selected consolidated balance sheet data as of December 31, 2011 and 2010 are derived from our audited consolidated financial statements that are included elsewhere in this Annual Report. These financial statements have been prepared in accordance with U.S. GAAP. The selected consolidated statement of operations data set forth below for the years ended December 31, 2008 and 2007 and the selected consolidated balance sheet data as of December 31, 2009, 2008, and 2007 are derived from our audited consolidated financial statements that are not included in this Annual Report.

The selected consolidated financial data set forth below should be read in conjunction with and is qualified entirely by reference to 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.
 
   Year ended December 31,
                             
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
U.S. Dollars in thousands, except for share data
 
Statement of Operations Data:
                             
Revenues:
                             
Products
    201,697       120,255       91,407       150,351       156,798  
Services
    137,504       112,730       136,652       117,175       125,821  
Total
    339,201       232,985       228,059       267,526       282,619  
Cost of revenues:
                                       
Products
    114,510       61,975       56,672       80,424       82,822  
Services
    103,064       91,156       100,956       101,150       97,952  
Total
    217,574       153,131       157,628       181,574       180,774  
Gross profit
    121,627       79,854       70,431       85,952       101,845  
Operating expenses:
                                       
Research and development, net
    31,701       18,945       13,970       16,942       15,030  
Selling and marketing
    46,523       33,396       29,138       35,783       38,374  
General and administrative
    36,005       29,844       27,987       29,819       31,052  
Costs related to acquisition transactions
    256       3,842                    
Impairment of long lived assets, goodwill, restructuring costs and other charges
    19,478                   5,020       12,218  
Operating income (loss)
    (12,336 )     (6,173 )     (664 )     (1,612 )     5,171  
Financial income (expenses), net
    (1,931 )     (557 )     1,050       1,300       5,998  
Expenses related to aborted merger transaction
                            (2,350 )        
Other income (expenses)
    8,074       37,360       2,396       2,983       (116 )
Income (loss) before taxes on income
    (6,193 )     30,630       2,782       321       11,053  
Taxes on income (tax benefit)
    (343 )     11       904       1,445       963  
                                         
Net income (loss)
    (5,850 )     30,619       1,878       (1,124 )     10,090  
Net earnings (loss) per share
                                       
Basic
    (0.14 )     0.76       0.05       (0.03 )     0.26  
Diluted
    (0.14 )     0.73       0.04       (0.03 )     0.24  
Weighted average number of shares used in computing net earnings (loss) per share:
                                       
Basic
    40,929       40,467       40,159       39,901       39,141  
Diluted
    40,929       41,985       41,474       39,901       41,576  
 
 
7

 
 
As of December 31,
         
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
U.S. dollars in thousands
 
Balance Sheet Data:
                             
Working capital                                              
    62,704       78,808       164,280       152,806       151,367  
Total assets.                                              .
    446,678       455,378       357,228       410,639       430,102  
Short-term bank credit and current maturities
    22,063       4,315       5,220       10,846       11,177  
Convertible subordinated notes, net of current maturities
    -       14,379       15,220       16,315       16,315  
Long term loan, net of current maturities
    36,000       40,000                          
Other long-term liabilities                                              
    39,139       49,034       37,297       45,414       61,130  
Shareholders’ equity                                              
    260,075       264,113       232,295       230,224       227,810  
 
B.           Capitalization and Indebtedness
 
       Not applicable.

C.           Reasons for the Offer and Use of Proceeds
      
       Not applicable.

D.           Risk Factors

Investing in our ordinary shares involves a high degree of risk and uncertainty.  You should carefully consider the risks and uncertainties described below before investing in our ordinary shares.  If any of the following risks actually occurs, our business, prospects, financial condition and results of operations could be materially harmed.  In that case, the value of our ordinary shares could decline substantially, and you could lose all or part of your investment.
 
 
8

 
 
Risks Relating to Our Business

We have incurred major losses in past years and may not sustain profitable operations in the future.

We reported an operating loss of $12.3 million and a net loss of approximately $5.9 million in the year ended December 31, 2011, compared to net income of approximately $ 30.6 million in 2010 and approximately $1.9 million in 2009. Our 2011 net loss is primarily attributable to a $17.9 million goodwill impairment charge related to our 2010 acquisition of Wavestream, as well as certain restructuring costs, which were offset by other income from the proceeds of the settlement of litigation related to the termination of a 2008 merger agreement with a consortium of private equity investors, a portion of which is payable in the future. We incurred major losses in prior years and currently have an accumulated deficit of $609 million. We cannot assure you that we can operate profitably in the future. If we do not maintain profitable operations, the viability of our company will be in question and our share price will decline.
 
Our available cash balance may decrease in the future if we cannot generate cash from operations.
 
Our total cash balance as of December 31, 2011 was $63.9 million.  Our positive cash flow from operating activities of approximately $8.6 million and $12.9 million in the last two years, respectively, was primarily attributable to the one-time proceeds of the sale of an investment and the settlement of a litigation. We cannot assure you that we will be able to generate cash from operations in the future. We have a current maturity of long term loans of $19.1 million which is payable in 2012. If we do not generate cash from operations, our cash balance will decline and the unavailability of cash could have a material adverse effect on our business, operating results and financial condition.
 
If commercial satellite communications markets fail to grow, 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 emerged 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 our business could be materially harmed. Conversely, growth in these markets could result in satellite capacity limitations which in turn could materially harm our business and impair the value of our shares. Specifically, we derive virtually all of our revenues from sales of satellite based communications networks and related equipment and provision of services related to these networks and products. A significant decline in this market or the replacement of VSAT and other satellite based technologies by an alternative technology could materially harm our business and impair the value of our shares.
 
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 acting as the supplier of networks based on VSATs and other satellite-based communication equipment, under large scale contracts that we are awarded from time to time in competitive bidding processes. These large-scale contracts sometimes involve the installation of thousands of VSATs. The number of major bids for these large-scale contracts for satellite-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.

We operate in a highly competitive network communications industry. We may be unsuccessful in competing effectively against 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 greater financial resources, providing them with greater research and development and marketing capabilities. Our 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. or Viasat, and iDirect Technologies, or iDirect. Most of our competitors have developed or adopted different technology standards for their VSAT products.
 
 
9

 

Our low-profile in-motion antennas target a market that has not yet matured and we compete with products from competitors such as Cobham, ERA, Panasonic, Orbit and Thinkom. Wavestream’s competitors are Comtech (which acquired Xicom in 2008), CPI, Codan, GD Satcom and Paradise.

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. More recently, Spacenet's primary competitors in the enterprise WAN market are large terrestrial carriers such as AT&T, Verizon and Qwest.

In addition, the launch of the Wild Blue 1 and ViaSat-1 satellites by ViaSat and of the SpaceWAY3 satellite by HNS (as well as HNS’s announced intention to launch an additional satellite (Jupiter)) ,  enables HNS and ViaSat  to offer vertically integrated solutions to their customers, which  may further change the competitive environment in which we operate and could have an adverse effect on our business.

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). In addition, as competing technologies such as cellular telephones become available in areas where not previously available, such as in rural communities of Peru and Colombia, our business can be adversely affected.

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. In the past, we have seen longer sales cycles in all of the regions in which we do business. In addition, we have seen projects delayed or even canceled, which would also have an adverse impact on our sales cycles.

We may engage in acquisitions that could harm our business, results of operations and financial condition, and dilute our shareholders' equity.

We may pursue new business through internal development and through the acquisition of complementary businesses, products and technologies. 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 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.
 
In 2010, we completed the acquisition of RAS, a leading provider of Satcom-On-The-Move antenna solutions, of RaySat BG, a Bulgarian research and development center, and of Wavestream, a provider of SSPAs and BUCs, with high performance solutions designed for mobile and fixed satellite communication, or SATCOM, systems worldwide.  In April 2011, we completed the acquisition of CICAT Networks Inc., a provider of terrestrial access and network services to enterprises with multi-site locations. We may not be able to successfully integrate the businesses or  exploit the solutions that we acquired. 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.
 
 
10

 

The risks associated with acquisitions by us include the following, any of which could seriously harm our results of operations or the price of our shares:

 
·
issuance of equity securities that would dilute our current shareholders' percentages of ownership;

 
·
significant acquisition costs;

 
·
decrease of our cash balance;

 
·
the incurrence of debt and contingent liabilities;

 
·
difficulties in the assimilation and integration of operations, personnel, technologies, products and information systems of the acquired companies;

 
·
diversion of management's attention from other business concerns;

 
·
contractual disputes;

 
·
risks of entering geographic and business markets in which we have no or only limited prior experience;

 
·
potential loss of key employees of acquired organizations.

 
·
the possibility the business cultures will not be compatible;

 
·
the difficulty of incorporating acquired technology and rights into our products and services;

 
·
unanticipated expenses related to integration of the acquired companies;

 
·
difficulties in implementing and maintaining uniform standards, controls and policies;

 
·
the impairment of relationships with employees and customers as a result of integration of new personnel;

 
·
potential inability to retain, integrate and motivate key management, marketing, technical sales and customer support personnel;

 
·
loss of significant customers or markets;

 
·
potential unknown liabilities associated with acquired businesses; and

 
·
impairment of goodwill and other assets acquired.

In 2011, we recorded an impairment of goodwill charge of $17.9 million in connection with the goodwill incurred in connection with our acquisition of Wavestream due to a decrease in Wavestream revenues compared to our 2011 forecast and 2010 revenues.

Our failure to manage growth effectively could impair our business, financial condition and results of operations.
 
 
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Many of our large scale contracts are with governments or large governmental agencies in Latin America and other parts of the world, so that any volatility 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, Colombia, and Australia. Agreements with the governments in these countries typically include unilateral early termination clauses and involve 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 our business in any of the aforementioned countries or any volatility in the exchange rates could have a significant adverse impact on our business.

In December 2011, the Ministry of Communications in Colombia amended and extended our agreements for the provision of services for an additional nine-month term, through September 2012. In 2011 our revenues derived from these projects in Colombia generated 6% of our total revenues.  We may not be able to operate our business in Colombia at a profit in any of the following circumstances:  the Colombian authorities do not continue the projects or if we are not successful in winning any rebid for the projects; or if the terms under which any new agreements we enter into are not favorable; or if we are unable to generate new business in Colombia.

If we are unable to develop, introduce and market new innovative products, applications and services on a cost effective and timely basis, our business could be adversely affected.

The network communications market, which our products and services target, 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. Our success is dependent upon our ability to continue to develop new innovative 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. Competitors in the low-profile antenna market are introducing new and improved products and our ability to remain competitive in this field will depend in part on our ability to advance our own technology. New products and technologies for power amplifiers, such as Gallium Nitride, or GAN, may compete with our current Wavstream SSPA offerings, and may reduce the market prices and success of our products. 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.  A decrease in the selling prices of our products and services could have a material adverse effect on our business.
 
Competition of Ka-Band satellite services

In some markets, such as in the United States and Europe, 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 user as well as the increased integration of the VSAT technology in the satellite solution. Although we have entered the Ka-band market with responsive Ka-band VSAT technology, our penetration into that market will be gradual and our success is not assured.  In addition, our competitors, who are producing large numbers of Ka-band VSATs, benefit from the resulting cost advantages.  If we are unable to reduce our Ka-band VSAT costs sufficiently, we may not be competitive in the international market. We also expect that competition in this industry will continue to increase.  Due to the nature of the Ka-band solution at present, where the initial investment in ground segment gateway equipment is relatively high, ground segment equipment effectively becomes tightly coupled to the specific satellite technology.  As such , there may be circumstances where it is difficult for competitors to compete with the incumbent VSAT vendor using the particular Ka-band satellite. If this occurs, the market dynamics may change to one of the VSAT vendor partnering with the satellite service provider which may decrease the number of vendors who may be able to succeed. If we are unable to forge such a partnership our business could be adversely affected.
 
 
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If we lose existing contracts and orders for our products are not renewed, our ability to generate revenues will be harmed.

A significant part of our business in 2011 was generated from recurring customers. 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:

·
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;

·
customers' default on payments due;

·
our failure to comply with financial covenants in our contracts;

·
the cancellation of the underlying project by the government-sponsoring body; or

·
the loss of existing contracts or a decrease in the number of renewals of orders or in 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 rate, or if Gilat Peru & Colombia does not win new government related contracts, this could materially adversely affect our financial position.

Our business focus on defense  and related defense markets is dependent on defense spending and may be adversely affected if the pace of spending by the U.S. Departments of Defense and Homeland Security and other government and security organizations internationally is slower than anticipated.

The market for our VSAT, satellite-on-the-move antennas and SSPAs for defense, public safety and law enforcement is highly dependent on the spending cycle and spending scope of the U.S. Departments of Defense, or DoD, and Homeland Security, as well as of local, state and municipal governments and security organizations in international markets. The funding of programs for which our products are being marketed is subject to government budgeting decisions affected by numerous factors, including geo-political events and macro-economic conditions that are beyond our control. We cannot be sure that the spending cycles will materialize as we expect and that we will be positioned to benefit from the potential opportunities, especially in light of the current unfavorable economic and market conditions.  Reduced government spending in the U.S. and other countries may negatively affect demand for our defense-related products which could materially adversely affect our business and operating results.

Our failure to obtain or maintain authorizations under the U.S. export control and trade sanctions laws and regulations could have a material adverse effect on our business.
 
The export of satellite communication equipment and technical information related to satellites, VSATs and other satellite-based communication equipment and services to certain countries are subject to U.S. State Department, Commerce Department and Treasury Department regulations, including International Traffic in Arms Regulations, or ITAR. If we do not maintain our existing authorizations or obtain necessary future authorizations under the export control laws and regulations of the United States, including by entering into technical assistance agreements to disclose technical data or provide services to foreign persons, we may be unable to export technical information or equipment to non-U.S. persons and companies, including to our own non-U.S. employees, as may be required to fulfill contracts we may enter into.  In addition, to participate in classified U.S. government programs, we would have to obtain security clearances from the DoD, for one or more of our subsidiaries that would want to participate.  Such clearance may require that we enter into a proxy agreement with the U.S. government, which would limit our ability to control the operations of the subsidiary and which may impose on us substantial administrative burdens in order to comply.  Further, if we materially violate the terms of any proxy agreement, the subsidiary holding the security clearances may be suspended or debarred from performing any government contracts, whether classified or unclassified.  If we fail to maintain or obtain the necessary authorizations under the U.S. export control laws and regulations, we may not be able to realize our market focus and our business could be materially adversely affected. 
 
 
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If we are unable to comply with Israel’s enhanced export control regulations our ability to export our products from Israel could be negatively impacted.

    The export of military equipment and technical information related to our military products is subject to Israeli Ministry of Defense regulations regarding enhanced defense export controls and the export of “dual use” items (items that are typically sold in the commercial market but that may also be used in the defense market). If we do not maintain our existing authorizations or obtain necessary future authorizations under the export control laws and regulations of Israel, including export licenses for the sale of our equipment, we may be unable to export technical information or equipment outside of Israel, we may not be able to realize our market focus and our business could be materially adversely affected. 

Wavestream is dependent on business with the defense market.

    Our revenues from Wavestream are dependent on business from the defense market, being derived directly or indirectly from sales to government agencies, mainly the DoD, pursuant to contracts awarded to system integrators under defense-related programs. Government spending under such contracts may cease or may be reduced, which would cause a negative effect on our revenues, results of operations, cash flow and financial condition. We experienced a reduction in revenues from such customers in 2011 and we cannot assure that there will not be a further reduction in the future. Although we have begun to move into additional markets, we may not be successful in our plans for Wavestream to penetrate into broadcast and international markets, which are relatively new and untried for our SSPA product line and will require additional expenditures for research and development.  We may not be able to develop new technologies for those markets on a timely basis. Barriers to entry into those markets or delays in our development programs could have a material adverse affect on our business and operating results.
 
A decline or reprioritization of funding in the U.S. defense budget, or delays in the budget process could adversely affect the business of Wavestream and our business in the defense market generally, and our ability to grow or maintain sales, earnings, and cash flow.
 
Wavestream is heavily dependent on sales to government defense agencies for its revenues, mainly the DoD, pursuant to contracts awarded to system integrators under defense-related programs. We expect that Wavestream will continue to derive most of its sales from the U.S. Government for the foreseeable future.
 
Government purchasing is conditioned upon the continuing availability of Congressional appropriations. The programs in which Wavestream participates must compete with other programs and policy imperatives for consideration during the budget and appropriation process. Concerns about increased deficit spending, along with continued economic challenges, continue to place pressure on U.S. and international customer budgets. Efforts to reduce government spending have and may continue to result in reduced demand for Wavestream's products, resulting in a reduction in its revenues, and an adverse effect on its business and  results of operations.  In 2011, Wavestream’s revenues derived from government agencies decreased compared to our 2011 forecast and to 2010 revenues, and the continuing pressure on DoD budgets in the U.S., along with uncertainties surrounding future spending of the defense budget and thus future demand in both commercial and governmental markets, led to an impairment of goodwill charge related to our investment of $17.9 million. Uncertainties in governmental spending may also adversely affect our efforts to further penetrate the defense market with our defense-related products which may adversely affect our business.
 
 
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If demand for our Satcom-On-The-Move  products declines or if we are unable to develop products to meet demand, our business could be adversely affected.

Our low-profile in-motion antennas and SSPAs are intended for mobile Satcom-On-The-Move applications.  If the demand for such products declines, or if we are unable to develop products that are competitive in technology and pricing, we may not be able to realize our market focus and our business could be materially adversely affected.

We are dependent on contracts with governments around the world for a significant portion of our revenue. These contracts may expose us to additional business risks and compliance obligations.

Since 2009, we have focused on expanding our business to include contracts with or for various governments around the world, including US federal, state, and local government agencies. Our business generated from government contracts may be materially adversely affected if:
 
 
·
our reputation or relationship with government agencies is impaired;

 
·
we are suspended or otherwise prohibited from contracting with a domestic or foreign government or any significant law enforcement agency;

 
·
levels of government expenditures and authorizations for law enforcement and security related programs decrease or shift to programs in areas where we do not provide products and services;

 
·
we are prevented from entering into new government contracts or extending existing government contracts based on violations or suspected violations of laws or regulations, including those related to procurement;

 
·
we are not granted security clearances that are required to sell our products to domestic or foreign governments or such security clearances are deactivated;

 
·
there is a change in government procurement procedures; or
 
 
·
there is a change in political climate that adversely affects our existing or prospective relationships.

 We depend on our main facility in Israel and are susceptible to any event that could adversely affect its condition as well as the condition of our facilities elsewhere.

Most of our laboratory capacity, our principal offices and principal research and development facilities are primarily concentrated in a single location in Israel.  We also have facilities for research and development and manufacturing of components for our low profile antennas at a single location in Bulgaria as well as a new research and development center in Moldova. Wavestream’s principal offices, research and development and engineering and manufacturing facilities are located at a single location in California. Fire, natural disaster or any other cause of material disruption in our operation in any of these locations could have a material adverse effect on our business, financial condition and operating results.

We are dependent upon a limited number of suppliers for key components that are incorporated in our products, including those used to build our hubs and VSATs,  and may be significantly harmed if we are unable to obtain such components on favorable terms or on a timely basis.  We are also dependent upon a limited number of suppliers of space segment, or transponder,  capacity, and may be significantly harmed if we are unable to obtain the space segment  for the provision of services 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 suppliers 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 sufficiently favorable terms or prices, we may be unable to produce our products at competitive 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. In addition, our suppliers are not always able to meet our requested lead times. If we are unable to satisfy customers' needs on time, we could lose their business.
 
 
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In 2007 we entered into an outsourcing manufacturing agreement with a single source manufacturer for almost all of our VSAT 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.

There are only a limited number of suppliers of satellite transponder capacity and a limited amount of space segment available. We are dependent on these suppliers for our provision of services in Peru, Colombia and the United States. While we do secure long term agreements with our satellite transponder providers, we cannot assure the continuous availability of space segment, the pricing upon renewals of space segment and the continuous availability and coverage in the regions where we supply services. If we are unable to secure contracts with satellite transponder providers with reliable service at competitive prices, our services business could be adversely affected.

Natural disasters, terrorist attacks or breaches of network or information technology security could have an adverse effect on our business.

Natural disasters, terrorist acts, acts of war, cyber-attacks or other breaches of network or information technology (IT) security may cause equipment failures or disrupt our systems and operations. While we maintain insurance coverage for some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain. Our inability to operate our facilities as a result of such events, even for a limited period of time, may result in significant expenses and/or loss of market share to other competitors in the markets we operate.  In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network or IT security could result in damage to our reputation. Any of these occurrences could result in a material adverse effect on our results of operations and financial condition.

We would be adversely affected if we are unable to retain key employees.

Our success depends in part on key management, sales, marketing and development personnel and our continuing ability to attract and retain highly qualified personnel. There is competition for the services of such personnel. The loss of the services of key personnel, and the failure to attract highly qualified personnel in the future, may have a negative impact on our business. Moreover, our competitors may hire and gain access to the expertise of our former employees.

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 influenced by trends of that industry, which are beyond our control and may affect our operations. These trends include:

 
·
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;

 
·
adverse changes in the credit ratings of our customers and suppliers;
 
 
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·
adverse changes in the market conditions in our industry and the specific markets for our products;

 
·
access to, and the actual size and timing of, capital expenditures by our customers;

 
·
inventory practices, including the timing of product and service deployment, of our customers;

 
·
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;

 
·
the overall trend toward industry consolidation and rationalization among our customers, competitors, and suppliers;

 
·
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 or limit the availability of satellite capacity for use with our VSAT systems;

 
·
conditions in the broader market for communications products, including data networking products and computerized information access equipment and services;

 
·
governmental regulation or intervention affecting communications or data networking;

 
·
monetary stability in the countries where we operate; and

 
·
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.

Unfavorable global economic conditions could have a material adverse effect on our business, operating results and financial condition

Although economic conditions in many countries have stabilized somewhat following the widespread contraction in late 2008 and 2009 and into 2010, there has been a downturn in the European economic environment  and the revenues of many of our customers decreased substantially compared to recent years. As a result, our customers reduced their spending starting in late 2008 and may continue to reduce or postpone their spending significantly. This resulted in reductions in sales of our products and services in some markets, longer sales cycles, slower adoption of new technologies and increased price competition. In addition, weakness in the end-user market could negatively affect the cash flow of our customers who could, in turn, delay paying their obligations to us or ask us for vendor financing. This could increase our credit risk exposure and cause delays in our recognition of revenues on future sales to these customers. Specific economic trends, such as declines in the demand for telecommunications products and services, the tightening of credit markets, or weakness in corporate spending, could have a direct impact on our business. Any of these events would likely harm our business, operating results and financial condition. If global economic and market conditions do not improve, or weaken further, it may have a material adverse effect on our business, operating results and financial condition.
 
 
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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 United States, Latin America, Asia, Asia Pacific, Africa and Europe. A component of our strategy is to continue to expand into new international markets, including China. Our operations can be limited or disrupted by various factors known to affect international trade. These factors include the following:

 
·
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;

 
·
government regulations that may prevent us from choosing our business partners or restrict our activities. For example, a particular 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;

 
·
tax exposures in various jurisdictions relating to our activities throughout the world;

 
·
political and/or economic instability in countries in which we do or desire to do business. Such unexpected changes have had an adverse affect on the gross margin of some of our projects. We also face similar risks from potential or current political and economic instability as well as volatility of foreign currencies in countries such as Colombia, Brazil, Venezuela and certain countries in East Asia.
 
 
·
difficulties in staffing and managing foreign operations that might mandate employing staff in various countries to manage foreign operations. This requirement could have an adverse effect on the profitability of certain projects;

 
·
longer payment cycles and difficulties in collecting accounts receivable;

 
·
foreign exchange risks due to fluctuations in local currencies relative to the dollar; and

 
·
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 may 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 and private companies will find it more difficult to finance the purchase or upgrade of our technology. 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 and products, which could adversely affect our operations.

Our telecommunication services require licenses and approvals by the Federal Communications Commission, or FCC, in the United States, and by regulatory bodies in other countries. In the United States, the operation of satellite earth station facilities and VSAT systems such as ours are prohibited except under licenses issued by the FCC. We must also obtain approval of the regulatory authority in each country in which we propose to provide network services or operate VSATs. The approval process in Latin America and elsewhere can often take a substantial amount of time and require substantial resources.
 
 
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In addition, any licenses and 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 licenses and 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 products are also subject to certain homologation requirements – certification of compliance with local regulatory standards. Delays in receiving such certification could adversely affect our operations.

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 have and may continue to vary significantly from quarter to quarter. The causes of fluctuations include, among other things:

 
·
the timing, size and composition of orders from customers;

 
·
the timing of introducing new products and product enhancements by us and the level of their market acceptance;

 
·
the mix of products and services we offer; and

 
·
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:

 
·
economic instability;

 
·
announcements of technological innovations;

 
·
customer orders or new products or contracts;

 
·
competitors' positions in the market;

 
·
changes in financial estimates by securities analysts;

 
·
conditions and trends in the VSAT and other technology industries relevant to our businesses;

 
·
our earnings releases and the earnings releases of our competitors; and

 
·
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 during and following periods of volatility.

Our actions to protect our proprietary ground segment equipment  technology may be insufficient to prevent others from developing products similar to our products.

Our business is based mainly on our proprietary ground segment equipment technology and related products and services. We establish and protect proprietary rights and technology used in our products by the use of patents, trade secrets, copyrights and trademarks. We also utilize non-disclosure and intellectual property assignment agreements. Because of the rapid technological changes and innovation that characterize the network communications industry, our success will depend in large part on our ability to protect and defend our intellectual property rights. Our actions to protect our proprietary rights in our VSAT technology and related products may be insufficient to prevent others from developing products similar to our products. In addition, the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. If we are unable to protect our intellectual property, our ability to operate our business and generate expected revenues may be harmed.
 
 
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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 infringed in the past or are infringing at present on any intellectual property rights of third parties, we cannot assure you that we will not be subject to such claims.

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 or infringement. 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 non-infringing 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 contractual limitation of liability may be rejected or limited in certain jurisdiction and 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.

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 against us could result in substantial costs and a diversion of our management's attention and resources.
 
 
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If U.S. tax authorities were to treat us as a “passive foreign investment company”, that could have an adverse consequences on U.S. holders.
 
Holders of our ordinary shares who are United States residents may face income tax risks. There is a risk that we will be treated as a “passive foreign investment company” or PFIC.  Our treatment as a PFIC could result in a reduction in the after-tax return to the holders of our ordinary shares and would likely cause a reduction in the value of such shares. A foreign corporation will be treated as a PFIC for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive income,” or (2) at least 50% of the average value of the corporation’s gross assets produce, or are held for the production of, such types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income.” Those holders of shares in a PFIC who are citizens or residents of the United States or domestic entities would alternatively be subject to a special adverse U.S. federal income tax regime with respect to the income derived by the PFIC , the distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC. In particular, any dividends paid by us would not be treated as “qualified dividend income” eligible for preferential tax rates in the hands of non-corporate U.S. shareholders.  United States residents should carefully read Item 10E. Additional Information – Taxation, of this annual report on Form 20-F for a more complete discussion of the U.S. federal income tax risks related to owning and disposing of our ordinary shares.

The concentration of our ordinary share ownership may limit our shareholders’ ability to influence corporate matters.

As of March 30, 2012, York Capital Management, or York, and entities affiliated with York beneficially own 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. 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 significant shareholders, or the availability for future sale of our ordinary shares, including shares issuable upon the exercise of our options, will have on the market price of our ordinary shares. Pursuant to a registration rights agreement with York, we filed a registration statement with the Securities and Exchange Commission allowing for the disposition of 8,121,651 shares by York from time to time. In addition, in May 2011 we filed a shelf registration statement with the Securities and Exchange Commission allowing for our issuance and sale of up to $50 million in ordinary shares, warrants to purchase ordinary shares or debt securities, or debt securities consisting of debentures, notes or other evidences of indebtedness. Sales of substantial amounts of our ordinary shares in the public market by our company or our significant 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.
 
 
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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.  Any future dividend distributions are subject to the discretion of our board of directors and will depend on various factors, including our operating results, future earnings, capital requirements, financial condition, tax implications of dividend distributions on our income, future prospects and any other factors deemed relevant by our board of directors.  The distribution of dividends also may be limited by Israeli law, which permits the distribution of dividends only out of retained earnings or otherwise upon the permission of the court.  You should not rely on an investment in our company if you require dividend income from your investment.
 
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 Select 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 Select 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 United States 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.

Risks Related To Regulatory Matters

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, or the OCS. We may be subject to certain restrictions under the terms of the OCS 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. Such approvals, if granted, would involve increased payments to the OCS. These restrictions do not apply to the sale or export from Israel of our products developed with this technology.

Your rights and responsibilities as a shareholder are governed by Israeli law and differ in some respects from those under Delaware law.

Because we are an Israeli company, the rights and responsibilities of our shareholders 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 a Delaware corporation. In particular, a shareholder of an Israeli company has a duty to act in good faith towards the company and other shareholders and to refrain from abusing his, her or its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable to shareholder votes 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 shareholders’ vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revisions in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
 
 
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As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements, which may not afford shareholders with the same protections that shareholders of domestic companies have. We follow Israeli law and practice instead of NASDAQ rules regarding the director nominations process, the composition of our audit committee, compensation of executive officers and the requirement to obtain shareholder approval for the establishment or amendment of certain equity-based compensation plans and arrangements.

As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of The NASDAQ Marketplace Rules.  We follow Israeli law and practice instead of The NASDAQ Marketplace Rules with respect to the director nominations process, the composition of our audit and compensation committee, compensation of executive officers and the requirement to obtain shareholder approval for the establishment or material amendment of certain equity-based compensation plans and arrangements.  As a foreign private issuer listed on the NASDAQ Global Select Market, we may also follow home country practice with regard to, among other things, the requirement to obtain shareholder approval for certain dilutive events (such as for an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.
 
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 on 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 an 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 Sarbanes-Oxley Act requires us to provide management’s annual review and evaluation of our internal control over financial reporting. Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, the independent registered public accounting firm that audited and reported on our financial statements as of and for the year ended December 31, 2011 included in this Form 20-F, as stated in their report which is included herein, issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2011.  The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation to meet the detailed standards under the rules.  During the course of its testing, our management may identify material weaknesses or significant deficiencies, which may not be remedied prior to the deadline imposed by the Sarbanes-Oxley Act.  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.
 
 
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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.  Recent political unrest in the Middle East may also impact the relationship between Israel and its neighboring countries. 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.

There has been unrest and terrorist activity in Israel, which began in September 2000 and which has continued with varying levels of severity through 2011 and into 2012. The future effect of this deterioration and violence on the Israeli economy and our operations is unclear.  During 2011, riots and uprisings in several countries in the Middle East and neighboring regions have led to severe political instability in several neighboring states and to a decline in the regional security situation. Such instability may affect the local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations. To date, these matters have not had any material effect on our business and results of operations; however, the regional security situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future. Ongoing violence between Israel and the Palestinians as well as tension between Israel and other countries in the Middle East may have a material adverse effect on our business, financial condition 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 directly from Israel. 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 U.S. dollars or are linked to the U.S. 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 U.S. 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.  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 U.S. 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.  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 U.S. dollar.  If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected.  See Item 5: Operating and Financial Review and Prospects - Impact of Inflation and Currency Fluctuations.
 
 
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You may not be able to enforce civil liabilities in the United States against our officers and directors.

Most of our executive officers and the Israeli experts named in this annual report reside outside the United States, and a significant portion of our assets and the personal assets of most of our directors and executive officers are located outside the United States. Therefore, it may be difficult to effect service of process upon any of these persons within the United States. In addition, a judgment obtained in the United States against us, or against such individuals, including but not limited to judgments based on the civil liability provisions of the United States federal securities laws, may not be collectible within the United States.

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:

 
·
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;

 
·
adequate service of process was effected and the defendant had a reasonable opportunity to be heard;

 
·
the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;

 
·
the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties;

 
·
the judgment is no longer appealable; and

 
·
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.

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.
 
 
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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 substantially 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 labor 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

A.           History and Development of the Company

We were incorporated in Israel in 1987 and are subject to the laws of the State of Israel. We are a public limited liability company under the Israeli Companies Law, 5759-1999 and operate under that law and associated legislation. Our corporate headquarters, executive offices and main research and development and engineering facilities, as well as facilities for some manufacturing and product assembly are located at Gilat House, 21 Yegia Kapayim Street, Kiryat Arye, Petah Tikva 49130, Israel. Our address in the United States is c/o Gilat Satellite Networks Inc. at 1750 Old Meadow Road, McLean, VA. Our telephone number is (972) 3-925-2000. Our web-site address is www.gilat.com. The information on our website is not incorporated by reference into this annual report.

We are a leading global provider of broadband satellite communication equipment and networking products and services. We design, produce and market VSATs, SSPAs, BUCs, and low-profile antennas. We have a large installed customer base and have shipped more than one million VSAT units to customers in over 85 countries on six continents.
 
We shipped our first generation VSAT in 1989 and 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 products and our intellectual property portfolio includes 46 issued patents (32 U.S. and 14 foreign) relating to our VSAT and other systems as well as 8 issued patents relating to our Satcom-On-The-Move antenna solutions (U.S.) and 6 issued patents (3 U.S. and 3 foreign) for our high power solid state amplifiers. As of December 31, 2011, we had 1,356 employees, including approximately 342 persons engaged in research, development and engineering activities.

We have 21 sales and support offices worldwide, six network operations centers and five R&D centers.  Our products are primarily sold to communication service providers and operators that use VSATs for their customers and to government organizations and system integrators that use our technology. We also provide services directly to end-users in various market segments in the United States and certain countries in Latin America.
 
In July and August 2010, respectively, we completed the acquisition of Raysat Antenna Systems LLC, or RAS, a leading provider of Satcom-On-The-Move antenna solutions, and Raysat BG, a Bulgarian research and development center. In November 2010, we completed the acquisition of Wavestream, a provider of SSPAs and BUCs, with field-proven, high performance solutions designed for mobile and fixed satellite communication, or satcom, systems worldwide. In April 2011, we acquired CICAT NetworksInc., a provider of terrestrial access and network services to enterprises with multi-site locations.
 
In 2011, 2010 and 2009, our property and equipment purchases amounted to approximately $8.9 million, $7.6 million, and $4.5 million, respectively.  These amounts do not include the reclassification of inventory to property and equipment made during 2011, 2010, and 2009 in the amount of approximately $2 million, $0.7 million, and $0.8 million, respectively.
 
 
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B.           Business Overview

We are a leading provider of satellite ground segment and other network communications products and services. We design and manufacture satellite ground segment and networking communications equipment, which we sell to our customers either as network components or as complete or turnkey network solutions. The equipment that we develop includes VSAT systems, defense and security satcom systems, solid state power amplifiers and low-profile antennas. Our equipment is used by service providers, system integrators, government and defense organizations, large corporations and enterprises. We also provide connectivity services, including managed network services, Internet access and telephony, to enterprise, government and residential customers in the United States, Peru and Colombia over our own networks which are built using our own equipment. We also provide managed network services in Australia, over a VSAT network owned by Optus.
 
         In 2011, we operated as three separate businesses – Gilat Worldwide (which had two operating segments: Gilat International and Gilat Peru & Colombia), Spacenet and Wavestream.  Commencing in 2012, in line with our efforts to refine our business structure and organization for our target markets, our business is being operated from the beginning of 2012 as three complementary and reporting segments: (i) Commercial Satcom, providing VSAT networks, satellite communication products  and associated professional services to service providers and operators worldwide, including consumer Ka-band initiatives worldwide; (ii) Defense Satcom, providing satellite communication products and solutions to defense and homeland security organizations worldwide; and (iii) Services, including Spacenet Inc., providing  managed network services in North America, and Gilat's service businesses in Peru and Colombia, offering rural telephony and Internet access solutions.
 
Gilat International is a provider of VSAT-based communications network systems, in-motion, low-profile antenna systems and associated professional services, including turnkey and management services, to telecom operators, defense organizations and enterprises worldwide.
 
Representative customers of Gilat International include Brazil Telecom, Optus in Australia, Bharti in India, ICE in Costa Rica, Nepal Telecom, Telkom in South Africa and Telefonica in Latin America.

Gilat Peru & Colombia provides services in Peru and Colombia through our subsidiaries there. These services are primarily telephony, Internet and data services for rural areas under projects that are subsidized by governmental entities. In Peru we also provide Internet and data services to public institutions and to the private sector, generally awarded by means of public bids.

According to the latest COMSYS VSAT Report, published in 2011by a leading satellite industry research firm - Communications Systems Limited, or COMSYS (which refers to a market study from 2010),  we are the second-largest manufacturer of VSATs to the enterprise market, with a 24.7%  market share of shipped VSATs.  We also provide industry specific solutions for cellular backhaul, business continuity and disaster recovery.
 
In the year ended December 31, 2011, we derived approximately  38% of our revenues from our Gilat International VSAT operations and approximately 14% of our revenues from our Gilat Peru & Colombia operations.
 
Spacenet Inc., or Spacenet, provides managed network communications services utilizing satellite wireline and wireless networks and associated technology.  Spacenet serves enterprise, government, industrial small office/home office, or SOHO, and residential customers primarily in the United States, but also in locations throughout North America. Spacenet provides three primary lines of service:  custom commercial grade networks for large enterprise and government customers; Connexstar networks, which are standardized commercial grade services; and StarBand services, which are typically geared towards SOHO and residential users.  According to the 2011 COMSYS report, we have a 26.7% market share of U.S. VSAT enterprise sites.
 
        Spacenet Integrated Government Solutions, Inc., or SIGS, a subsidiary of Spacenet, addresses the growing market for government solutions and services in the United States with targeted product offerings for new government customers in the DoD and other federal agencies such as the Department of Homeland Security, FEMA and others. Commencing in 2012, in line with our efforts to refine our organization for our target markets, we are incorporating the SIGS operations into Spacenet.
 
 
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In the year ended December 31, 2011, we derived approximately 31% of our revenues from Spacenet. Representative customers of Spacenet include Dollar General, Regis Corporation, Goodyear, Verizon/USPS, Scientific Games, Intralot, GTECH, Boston Market, Target, Centerpoint Energy, PG&E, Detroit Edison, Devon Energy, Cumberland Farms, Sunoco and Valero.

Wavestream Corporation, or Wavestream, provides high-power SSPAs mainly to system integrators that serve various defense and homeland security agencies. Wavestream is an independent designer and manufacturer of SSPAs and BUCs for mission-critical satellite communications worldwide.

Wavestream’s patented, leading-edge Spatial Power Combining technology enables higher output power from smaller packages with greater efficiency, reliability and lower cost than other existing technologies in high frequency bands like Ka. Wavestream provides product solutions for multiple applications targeting defense, commercial and broadcast satellite communications systems.

In the year ended December 31, 2011, we derived approximately 17% of our revenues from Wavestream. Representative customers of  Wavestream  include General Dynamics, TCS, L-3, Globecomm, , Cobham and Harris.

Gilat has diversified revenue streams that result from both sales of products and services. In the year ended December 31, 2011, approximately 59% of our revenues were derived from product sales and 41% from services. Our enterprise service revenues are typically derived from long-term contracts of three to six years, which provide stability and visibility into future revenues. During the same period, we derived 46% of our revenues from the United States, 30% from Latin America, 15% from Asia and Asia Pacific, 3% from Africa and 6% from Europe.  As of December 31, 2011, we had a backlog of $265 million for equipment and multi-year service contracts.

Industry Overview

There is global demand for satellite-based communications solutions for a number of reasons. Primarily, this is still the only truly ubiquitous networking solution. Secondly, satellite communications are more readily available as compared to alternative terrestrial communications networks. Lastly, satellite communications solutions offer rapidly deployed secure broadband connectivity and broadband communications on the move.

A 2-way broadband satellite communications solution is comprised of the following elements:

 
·
Communications satellite – Typically a satellite in geostationary orbit (synchronized with the earth’s orbit) with a fixed coverage of a portion of the earth (up to approximately one third).
 
 
·
Satellite communications ground station equipment – These are devices that have a combination of datacom and RF (Radio Frequency) elements designed to deliver data via communication satellites. Examples of ground station equipment are remote site terminals, such as VSATs, and central hub station systems. Gilat is a leading provider of VSAT ground station equipment. Ground station equipment is typically comprised of the following elements:  modem, microwave front end and amplifiers and BUCs.

·     Modem -- This is the device that modulates the digital data into an analog RF signal for delivery to the upconverter, and demodulates the analog signals from the downconverter back into digital data. The modem, which is typically located indoors, performs data processing functions such as traffic management and prioritization and provides the digital interfaces (Ethernet port/s) for connecting to the user’s equipment (PC, switch, etc.).
 
 
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·     Amplifiers and BUCs – These are the components that connect the ground station equipment with the antenna. The purpose of the amplifiers and BUCs is to amplify the power and convert the frequency of the transmitted RF signal. Wavestream  is a leading provider of high power SSPAs and BUCs.

 
·
Antenna  – These can vary quite significantly in size, power and complexity depending on the ground equipment they are connected to, and their application. For example, antennas connected to VSATs generally are in the range of one meter in diameter while those connected to the central hub system can be in the range of ten meters in diameter. Antennas used on moving vehicles need to be compact and have an auto-pointing mechanism so that they can remain locked onto the satellite during motion. Gilat is a leading provider of low-profile in-motion satellite antennas.

Broadband satellite networks are comprised of ground stations at multiple locations that communicate through a satellite in geostationary orbit, providing continent-wide wireless connectivity. Satellite broadband networks are used to provide a variety of traffic types such as broadband data, video and voice. The value chain of satellite network services consists of the following four main elements:


 
Satellite operators provide satellite transponder capacity on satellites positioned in geostationary orbit above the equator. A typical satellite can cover a geographic area the size of the continental U.S. or larger. The satellite receives information from the ground station equipment, 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 which usually operates on a multi-beam configuration. 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 network equipment for both VSAT networks and broadcast markets. VSAT systems connect a large central earth station, called a hub, with multiple remote sites (ranging from tens to thousands of sites), which communicate via satellite.  Gilat is a leading ground station equipment provider for VSAT systems, high-power amplifiers and low-profile antennas for Satcom-on-the-move.
 
 
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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 Gilat Peru & Colombia are leading communication service providers in the United States, Peru and Colombia, respectively.

End users are customers that use equipment and satellite communication services. Examples of end users range from enterprises, to government ministries and defense organizations, to residential consumers.

System integrators are companies that provide customized solutions to end users by integrating the necessary equipment and services. For example, defense organizations often work with specialized system integrators that integrate various components, such as power amplifiers and low profile antennas, into a satellite terminal.

Satellite broadband networks are typically VSAT systems deployed in a hub-and-spoke configuration, with remote locations connecting via satellite to a central hub station. VSAT networks have a diverse range of uses and applications, and provide communication services as a stand-alone, alternative, or complementary service to terrestrial networks.

We believe that the advantages of VSAT networks include:

 
·
Universal availability - VSATs provide service to any location within a satellite footprint.
 
·
Timely implementation - Large VSAT networks with thousands of remote sites can be deployed within a few weeks.
 
·
Broadcast and multicast capabilities - Satellite is an optimal solution for broadcast and multicast transmission 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 the satellite and ground equipment reliability, the small number of components in the network and terrestrial infrastructure independence.
 
·
Scalability - VSAT networks scale easily from a single site to thousands of locations.
 
·
Cost-effectiveness - The cost of VSAT networks is independent of distance and therefore it is a cost-effective solution for networks comprised of multiple sites in remote locations.
 
·
Applications delivery – VSAT networks offer a wide variety of customer applications such as e-mail, virtual private networks, video, voice, Internet access, distance learning, cellular backhaul and financial transactions.
 
·
Portability and Mobility - VSAT solutions can be mounted on vehicles for communications on the move, or deployed rapidly for communications in fixed locations and 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. In particular, according to a 2011 report from NSR, a leading international telecom market research and consulting firm, the number of broadband satellite sites and subscribers is expected to grow at a compounded annual growth rate, or CAGR, of 9.7% through 2020.

In addition, the availability of auto-pointing satellite antennas designed for in-motion two way communications has created market demand particularly from the defense and first responders, such as emergency services, segments. These antennas are usually mounted on the roof of a vehicle and connected to a satellite terminal within the vehicle. An important requirement that defense organizations have in this mission-critical application is for low-profile antennas, to avoid drawing unnecessary attention to the vehicle. We believe that the demand for light-weight, low-profile antenna systems will increase as well.
 
 
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There are five primary categories of markets that require broadband satellite products and services:

Enterprise and Business.  These end-users include large companies and organizations, small- medium enterprises, or SMEs, and SOHO end users. For enterprises, VSAT networks offer network connectivity and deliver voice, data and video within corporations (known as corporate intranets), Internet access, 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.

High-End. The high-end market consists of customers that have more demanding network performance requirements. These requirements usually include higher level of Quality of Service, or QoS, than the typical user, higher speed connectivity, segregation of their traffic from other users’ traffic and more control over the network. Some examples of customers belonging to the high-end market are industrial energy organizations such as oil & gas and mining companies, Digital Satellite News gathering, or DSNG, maritime companies and mobile operators.

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 sector 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. In other instances, local communications operators have universal service obligations, or 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, which operates it for a certain period of time and then it is transferred to the operator.

Consumer.  The consumer market consists of residential users. These users require a high-speed internet connection similar to a digital subscriber line, or DSL, or cable modem service. According to the NSR forecast in the 2011 report, North America is expected to see the biggest increase in satellite broadband access subscribers and Western Europe will be the region with one of the fastest rates of growth.
 
Government.  The government sector consists of homeland security and military users. The versatility, reliability, and resiliency of satellite broadband networks, the in-motion low profile antennas and the lightweight SSPAs are a perfect fit for security and armed forces. Spatial-combining technology implemented on the Wavestream SSPAs introduces significant efficiency, size and weight advantages. For example, satcom systems with low power lightweight amplifiers can be quickly deployed in disaster areas, as a replacement for destroyed wireless or wire line networks, providing communication services to emergency personnel and law enforcement units. In military applications, satcom networks can be used as a reliable overlay to manage the entire battlefield communications, serve as communication backup infrastructure, and be used for primary tactical communications offering communications from a moving vehicle. In these cases the low-profile antennas provide additional benefit to the end-user.

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 one million VSATs, over 2,500 low profile antennas and 10,000 SSPAs to customers in over 85 countries. Our customer base includes a large number of satellite-based communications service providers, system integrators and operators worldwide. In addition, we provide satellite-based communication services primarily to enterprises in the United States and we are one of the largest satellite communications service providers to rural communities in Latin America.
 
The large installed base of our equipment also provides opportunities for new and incremental sales to existing customers. According to the last COMSYS report published in 2011, our global market share to the enterprise market is approximately 24.7%, based on the number of terminals shipped, making us the second largest VSAT manufacturer in the world for this segment.
 
 
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Our installed base for low profile Satcom-On-The-Move antennas provides us opportunities for new and incremental sales to existing customers. Specifically, we are focused on the DoD market and China.

We have a large installed base of SSPAs in the DoD, based on power amplifiers sold to the system integrators, who then provided a complete satellite terminal based on our equipment. Our SSPAs are widely used in the DoD, for both Ka Band and Ku Band terminals.

Technology leadership.  We have been at the forefront of VSAT technology and services for over 24 years and continue to be an innovator and developer of new satellite technologies. Our highly customizable VSAT technology enables us to provide our customers with a wide range of broadband, Internet, voice, data and video solutions.  Our product and operations infrastructure is capable of running hubs with greater than 99.8% availability while rolling out thousands of new VSAT site locations each month. Our SkyEdge II, state-of-the-art solution, provides high performance and excellent space segment efficiency. Our legacy product lines are known for their durability and resilience.  Our low-profile, Satcom-On-The-Move, antennas provide reliable broadband communications for defense and security applications. Our state-of-the-art SSPAs provide excellent performance, even at the extreme end of temperature and environmental performance specifications. Our research, development and engineering team is comprised of approximately 342 persons, enabling us to rapidly develop new features and applications. Moreover, 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.

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 21 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 for turnkey solutions.  With Gilat Worldwide, Spacenet and Wavestream, we are able to provide a full turnkey solution to our customers by integrating a diverse range of value-added products and services. Our product and service offerings -- VSAT network equipment, power amplifiers, low-profile  Satcom-On-The-Move antennas, installation, operation and maintenance --  provide communication services ranging from broadband, Internet, voice, data and video to managed solutions that can be customized and are highly flexible. 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, 2011, approximately 59% of our revenues were generated from products and 41% 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, 2011, our three businesses - Gilat Worldwide (Gilat International and Gilat Peru & Colombia), Spacenet and Wavestream accounted for 52%, 31%, and 17% of our revenues, respectively.  We are not overly dependent on any single customer, project, or geographic region.
 
Financial position.  As of December 31, 2011, our cash balance was $63.9 million (including cash and cash equivalents, short and long term restricted cash, restricted cash held by trustees and short bank credits), and our debt was $59.4 million.

Delivery Capabilities.  Over the years we have demonstrated our ability to deploy communication networks in the most remote areas, which are difficult both to reach and service. This experience enhances both our ability to plan and implement sophisticated communication networks in remote areas, as well as in challenging terrain, and our ability to meet technological challenges like a lack of electrical power infrastructure or a lack of any physical infrastructure. Our teams are proficient in delivering solutions in these areas, with a high success rate.
 
 
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Experienced management team.  Our CEO, Erez Antebi, has been with the company for over 19 years in various executive positions and now leads our highly experienced executive team of satellite industry veterans.  Amiram Levinberg, our Chairman, is a co-founder of our company and was CEO until December 31, 2011. Our Board of Directors is comprised of senior professionals with a broad range of business and financial experience.

Our Growth Strategy

Our objective is to leverage our advanced technology and capabilities to:

Expand our presence in the defense  satcom market. Building on our technology leadership and growing presence with armed forces around the world, we are increasing our focus on this growing market segment both in the United States and globally. We acquired RAS and Wavestream, whose customers are mostly in the defense and security markets. We have also developed products with specific capabilities required by armed forces and homeland security agencies globally. We are investing in this market segment as we believe its global growth will contribute to our business.

Increase our presence in the Ka-band market. Ka-band technology is expanding to more regions in the world, and offering new opportunities for satellite broadband with much higher capacities and at lower prices to subscribers. We are focused on the Ka-band market as one of the growth drivers for our company. We have been developing a new VSAT platform based on the SkyEdge II, including a hub and remote terminals, that is designed to operate with new Ka-band spot-beam satellites and to deliver high-throughput service speeds and high-speed browsing using advanced web acceleration technologies.

Strengthen and expand our technology leadership. We are strengthening our technology leadership by our continuing investment in research and development and have increased our research and development budget for 2012, with a view of expanding our product portfolio with new product offerings and new capabilities. Our flagship product, SkyEdge II, has cutting edge space segment utilization and performance. Our new offerings, such as SkyEdge II, WebEnhance and additional new products planned to be released such as the Accent, enable our customers new opportunities in deploying communication networks suited to their needs.  We have developed a VSAT platform that is designed for Ka-band and multi-spot beam satellites.  In addition, have developed modems and man-packs designed for defense and homeland security applications and we are focusing on developments for enhanced performance and capabilities of our SSPAs, and Satcom-On-The-Move antenna offerings.

Focus on emerging markets.  We have expanded our focus on 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 Universal Service Funds or USFs to subsidize the provision of these services. We focus our sales efforts on offering solutions to service providers that are either being required by USOs to facilitate the rural expansion, or on offering solutions to service providers that are utilizing the subsidies created through USFs.

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 continue to proactively, but selectively, evaluate opportunities to expand our business.
 
 
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Our Businesses in 2011
 
        Gilat Worldwide (Gilat International and Gilat Peru & Colombia)

Overview

Gilat International

Gilat International is a leading global provider of VSAT-based network systems, low-profile satcom-on-the-move antennas and associated professional services to telecom operators worldwide. Our operational experience in deploying large VSAT networks together with our global network of local offices enable us to work closely and directly with those providers. We provide equipment and solutions to the commercial, government and consumer markets.

Our SkyEdge product family, including the SkyEdge and SkyEdge II products, allows us to deliver efficient, reliable and affordable broadband connectivity such as Internet, voice, data and video.

We 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.
 
Gilat International is headquartered in Petah Tikva, Israel with 460 employees, and has 14 offices worldwide. In the year ended December 31, 2011, Gilat International had revenues of $149.1 million, including sales of $ 21.7 million to Spacenet and Gilat Peru & Colombia.
 
Products and Solutions

        Broadband Satellite Network System

Our SkyEdge II product family is based on a single hub with multiple VSATs to support a variety of services and applications. The products were designed using advanced technology to enable them to process different types of user traffic such as voice, critical data, Internet traffic and video, to handle each type of traffic in an efficient manner and provide the necessary quality of service for each traffic stream. The SkyEdge II system also includes advanced mechanisms which ensure that the transmissions via the satellite utilize the available satellite bandwidth efficiently and enhance the user experience.

Below is a table that shows the main VSAT products Gilat International offers. All of these products are connected to an outdoor RF unit which is mounted on a dish antenna:
 

 
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NetEdge is a high-performance satellite communications solution, specifically designed to meet the requirements of multi-star (a network topology which consists of remote sites connected to a regional gateway and also to the main hub, also called star-within-star networks) private networks for corporations as well as for cellular backhaul applications. The NetEdge solution is composed of remote sites using SkyEdge II Access/Pro VSATs, NetEdge Gateways, and a SkyEdge II hub. Single-hop connectivity is provided network-wide between the NetEdge components. This enhances the user experience and application performance for all intra-corporation, cellular backhaul and Internet traffic. NetEdge is installed as an expansion of a SkyEdge II hub making it simple to add multi-star functionality to an existing SkyEdge II hub.
 
 
Low-Profile SatCom-On-The-Move Antenna Systems

Gilat’s low-profile, in-motion, broadband 2-way antennas are specifically designed for the needs of the satCom-On-The-Move market and provide advanced solutions for a variety of mobile applications:

Military - strategic military advantage by supporting the transfer of real-time intelligence while on-the-move with a small, low profile, hard to track antenna;
• 
Digital satellite news gathering – always on, no set up time, real-time streaming video;
First responders – supports vehicles’ mobility, agility and stability required for teams to be the first to reach the scene; and
• 
Search and exploration teams, close-to-shore vessels etc.
 
 
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The following table describes the low-profile antennas:
 
 
Gilat International Pre-Packaged 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 over satellite.

Our end-to-end solutions include government communication infrastructure solutions for emergency response, defense and security and rapid VSAT deployment. We also provide turnkey solutions that include installation, operation and third-party peripheral equipment.
 
 
 
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        System Integration and Turnkey Implementation

We have expanded our business beyond core VSAT networks to deliver our customers complete and comprehensive solutions to their needs even where VSAT is not the main part of that solution. We see a growth in market demand for vendors capable of fully delivering integrated solutions for interdisciplinary, communication based projects.

In other situations we are required to provide our VSAT solution in a turnkey mode whereby we are responsible for the complete end-to-end solution.

In the case of turnkey solutions, and occasionally in projects requiring system integrations, we provide our customers with a full and comprehensive solution including:

 
·
Project management – accompanying the customer through all stages of a project and ensuring that the project objectives are within the predefined scope, time and budget;

 
·
Network design – translating the customer’s requirements into a system to be deployed, performing the sizing and dimensioning of the system and evaluating the available solutions;

 
·
Deployment logistics – transportation and rapid installation of equipment in all of the network sites;

 
·
Implementation and integration – combining our equipment with third party equipment such as solar panel systems and surveillance systems as well as developing tools to allow the customer to monitor and control the system;

 
·
Operational services – providing professional services, program management, network operations and field services; and

 
·
Maintenance and support – providing 24/7 helpdesk services, on-site technician support and equipment repairs and updates.
 
We began expanding our presence in the U.S. government market through SIGS, established in 2009 to address the growing market for government solutions and services.  We have launched targeted product offerings for new government customers in the DoD and other federal agencies such as the Department of Homeland Security, FEMA and others. Our initial government offerings are based on our ability to support critical first response satellite solutions.
 
Manufacturing, Customer Support and Warranty

Our products are designed and tested at our facilities in Israel as well as our four additional R&D facilities around the world. We outsource a significant portion of the VSAT manufacturing of our products to third parties. Raysat antenna products are designed at our facilities in Bulgaria where we also manufacture components, with assembly at our facilities in Israel.  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 for our VSAT products, 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:

 
·
Outsourced operations such as VSAT installation, service commissioning and hub operations:

 
·
Proactive troubleshooting, such as periodic network analysis, to identify symptoms in advance; and

 
·
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.
 
 
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Gilat International 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 equipment sales division has organized its marketing activities by geographic areas, with groups or subsidiaries covering most regions of the world. Our sales teams are comprised of account managers and sales engineers who establish account relationships and determine technical and business requirements for the customer’s 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 and even more, 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 gaining an understanding of customer needs, several network design iterations and network demonstrations.

Gilat Peru & Colombia
 
Through our operations in Peru and Colombia, we are service providers for public telephony and Internet services to rural areas there. In these countries, we have built the infrastructure and act as a licensed 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, Gilat Peru use its infrastructure to provide services to enterprise, SME, SOHO and residential customers. Gilat Peru & Colombia also provide outsourcing of VSAT network implementation and operation to other operators in the region.
 
Gilat Peru & Colombia has local offices in Lima Peru and Bogota Colombia and employs 243 persons on a permanent basis. In the year ended December 31, 2011, revenues from Gilat Peru & Colombia were $ 48.9 million.

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 most rural communications projects launched by the Peruvian government and have won, either wholly or partially, seven projects. Overall, we operate almost 8,700 telephony sites in Peru, of which approximately 1,000 have Internet connectivity, and have been awarded over $45 million in government subsidies to build and operate these networks. We have won our eighth project for additional 770 sites with subsidies of approximately $14.5 million. In addition, we have developed services for financial sector 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, deployment of the network in Peru has reduced the distance between rural phone locations from 50km to 5km.

Gilat Colombia started operations in 1999 by winning the government's Compartel I project focused on rural telephony. Since then we were awarded two additional projects with over $100 million in government subsidies in the aggregate – Rural Communitarian Telephony (TRC I and TRC II) and Telecentros.  Currently, Gilat Colombia operates a network of approximately 2,000 rural sites spread throughout the country, serving over a million persons. The services for those rural sites include telephony, Internet, data, fax and other services. In 2008, the Ministry of Communications in Colombia renegotiated new agreements with us through December 2009.  Following our successful fulfillment of the new agreements with the Colombian Government, the Ministry of Communications in Colombia extended and amended the agreements for the provision of services under these agreements for additional one-year terms, through December 2010 and December 2011, respectively.  The agreements were again amended and extended for an additional nine months, until September 30, 2012.  In December 2011, Gilat Colombia also entered into a contract with the Colombian Ministry of Information Technology and Telecommunication (MINTIC) to provide broadband Internet connectivity to over 1,600 schools throughout the country’s rural regions.
 
 
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During 2011, both Gilat Colombia and Peru implemented integrated VSAT-Wireless solutions for the local government of Bolivar in Colombia and for FITEL in Peru.

Customer Support Operations

Gilat Peru & Colombia complement their 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.

Gilat Worldwide Customers and Markets

Gilat International.  We sell VSAT communications networks and solutions primarily to service providers that mostly serve the enterprise market. We have more than 200 such customers worldwide.

Enterprise and service provider customers use our networks for Internet access, broadband data, voice and video connectivity and 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.

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 Telefonica in Peru, ETC in Ethiopia, and ICE in Costa Rica.

Service providers for the consumer Ka-band market are typically telecom operators planning to expand Internet service to the consumer markets.  While this is a new market, we have signed an agreement with SES for the delivery of network equipment and Ka-band end-user terminals for their European satellite-based consumer Internet service - SES Broadband Services (formerly known as ASTRA2Connect). In addition, we have signed agreements with RTComm, the satellite service arm of Rostelecom Group, Russia's national telecommunications operator, for the supply of Ka-band end-user terminals for their future constellation of multi spot-beam satellites for the Russian market, as well as for local manufacture and market by RTComm of Ka-band end-user terminals and gateways in Russia, which includes a cooperation with the Russian governmental institute for technology advancement.

Our VSAT networks also provide underserved areas with a high-speed Internet connection similar to DSL service provided to residential users. An example of such a customer is Optus in Australia.

Gilat Peru & Colombia

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.
 
 
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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 the Ministry of Information Technologies and Communication/Fonade  in Colombia and FITEL in Peru.

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 Gilat’s first "Build-Operate-Transfer" customer.

Enterprise and Government Agencies:

We also provide private network services to selected enterprises and government agencies. These customers contract directly with Gilat Peru & Colombia 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.

Sales and Marketing
 
In Peru and Colombia, we use direct and indirect 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.

Spacenet Inc.

Overview

Spacenet provides managed network communications solutions that leverage satellite, wireline and wireless technologies.  Spacenet serves enterprise, government, industrial, SOHO, and residential customers primarily in the United States, but also in locations throughout North America. Spacenet provides three primary lines of service:  (i) custom commercial grade networks for large enterprise, industrial and government customers, (ii) Connexstar networks, which are standardized commercial grade satellite services, and (iii) StarBand satellite Internet services, which are typically geared toward small office and residential users.

Spacenet's equipment and services are currently deployed at more than 141,000 business, government, industrial and residential locations in the United States. Our customers include Regis Corporation, Dollar General, Goodyear, Intercontinental Hotels Group, USPS/Verizon, Scientific Games, Intralot, GTECH, Boston Market, Centerpoint Energy, PG&E, Cumberland Farms, Sunoco and Valero.  The latest COMSYS report, published in 2011, ranked Spacenet as the second largest satellite network service provider in North America for the enterprise  market, with a 26.7% market share at the time of the report. Our market includes WAN services for retail, energy, oil and gas, financial services, hospitality and government customers, as well as Internet access services for SOHO and residential customers.  Through its StarBand broadband-over-satellite service, Spacenet is offering broadband service to rural unserved markets in Alaska and Hawaii following a federal grant from the Rural Utility Service under the American Recovery and Reinvestment Act.
 
 
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We have increased our ability to serve the managed network services market in the United States.  In April 2011, we  acquired a Virginia based company, CICAT Networks Inc. CICAT, a provider of broadband managed services, is now a subsidiary of Spacenet with complementary services. Spacenet has created a new set of standard Managed Network Service products that is being introduced to the market in 2012.
 
Spacenet is based in McLean, Virginia, and has 230 employees, including those of CICAT, as of December 31, 2011. In the year ended December 31, 2011, Spacenet had revenues of $104.5 million.
 
Services

Spacenet offers custom and standardized, pre-packaged 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:
 

Spacenet’s custom network services for large enterprise, industrial and government customers include the design, development, and management of satellite, wireline and wireless broadband managed network solutions. Spacenet can provide secure private networks specifically sized and tuned to a customer’s application, protocol support, QoS and bandwidth needs. These networks may be delivered as a “private hub” (each set of hub baseband 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 and satellite or wireless networks in which Spacenet provides management of both network components, integrating them as a single WAN.

Spacenet’s standard Connexstar satellite 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 business continuity use.

These services are also available in fixed site or transportable configurations for on-the-go communications.  Many 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.

Network Operations and Customer Support

We operate teleport facilities with network operation centers, or NOCs, in 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 for our largest enterprise and government customers. The Marietta NOC facility operates our managed network, Connexstar and StarBand services as well as first and second-level call centers. The McLean headquarters facility provides pilot and disaster recovery hub operations, fourth-tier network escalation and advanced network management and engineering services.
 
 
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For many enterprise, industrial and government networks, we offer service level agreements 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, industrial and government services directly through a team of account executives as well as through a network of approximately 30 authorized enterprise, industrial and/or government service resellers, primarily telecom carriers, IT integrators and value-added resellers focused on specific industries. With the addition of CICAT, we have added three large channel partners through whom our products and services are sold -- IBM, Time Warner and Comcast.

Our StarBand SOHO services are sold both directly and through approximately 100 sales agents, that are typically direct-to-home satellite TV resellers and/or satellite Internet service resellers. Our distribution channel strategy is shown below:
 
 
Wavestream

Overview

Wavestream, founded in 2001, designs and manufactures next generation solid-state power amplifiers for mission-critical defense and broadcast satellite communications systems. Wavestream’s innovative, patented Spatial Power advantage™ technology provides higher output power, greater reliability and lower energy usage in more compact packages than traditional amplifier solutions. Wavestream’s proven family of products meet the growing demand for greater efficiency and significant lifecycle cost reductions for satellite communications systems worldwide. Since 2005, Wavestream has built and deployed over 10,000 SSPAs worldwide. We acquired Wavestream in November 2010.
 
 
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Wavestream’s headquarters, research and development, engineering and manufacturing facilities are located in San Dimas, California, with a design center in Singapore. Wavestream has 155employees.

In the year ended December 31, 2011, Wavestream had revenues of $ 59.2 million, including sales of $ 0.9 million to Gilat International.
 
Wavestream Market and Customers

Wavestream addresses the following applications and/or markets:

 
·
Defense Communications -  satellite-based airborne and highly secure point-to-point.  This market is typically categorized by customers requiring high quality products – at times for mission critical communications in extreme environmental conditions. The satellite terminals (e.g., VSAT, Single Channel Per Carrier, or SCPC) are usually provided to the defense agencies via system integrators, and not directly from the power amplifier suppliers.

 
·
Government - public safety, emergency response and disaster recovery.  Similar to the market for defense agencies, though usually less demanding in terms of environmental conditions, these terminals are provided to various local, state and federal agencies that need to manage emergency communications. The satellite terminals (e.g., VSAT, SCPC) are usually provided via system integrators or service providers and not directly from the power amplifier suppliers.

 
·
Commercial terminals - A high power amplifier is used with high-end VSAT terminals for various applications where there is the requirement to transmit large amounts of data. Examples include Satellite News Gathering for video transmission, as well as airborne terminals in commercial airplanes for Internet access.

 
·
Commercial broadcast - Broadcast providers and teleport operators require high power amplifiers in order to transmit large carriers, such as for TV broadcast, multicast of video and high-speed IP connectivity.

Wavestream’s customers include General Dynamics, TCS, L-3, Globecomm, Cobham and Harris.

Wavestream Products

We believe that Wavestream has established market leadership with its compact, highly efficient SSPAs with a field-proven family of Ka, Ku, X and C-band products.  Wavestream’s products are designed and tested to meet strenuous requirements for temperature, shock and vibration, as well as over the full range of frequency and temperature.

The following presentation describes the Wavestream products:
 
 
 
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Competition

The telecommunications industry operates in a competitive market. In the equipment market, we face competition from other VSAT manufacturers, such as Hughes, ViaSat, iDirect and a few other smaller manufacturers.

We compete in some Ka-band markets with competitors such as Hughes and ViaSat who have launched Ka-band satellites (with announced plans by Hughes to launch another Ka-band satellite).  Although we have entered the Ka-band market with responsive Ka-band VSAT technology, our penetration into that market will be gradual and our success is not assured.  We also expect that competition in this industry will continue to increase.  Due to the nature of the Ka-band solution, where the VSAT technology is sometimes commercially tied to the satellite technology itself, there may be circumstances where it is difficult for competitors to compete with the incumbent VSAT vendor using the particular Ka-band satellite.

Our low-profile in-motion antennas compete with products from competitors such as Cobham, ERA, Panasonic, Orbit and Thinkom. This market is nascent, and not as mature as the fixed VSAT or satellite services markets.

Wavestream’s competitors are Comtech (which acquired Xicom in 2008), CPI, Codan, GD Satcom and Paradise.

In Peru and Colombia, where we primarily operate public rural telecom services, we typically encounter competition on bids for projects subsidized by the government or other public entities 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 Gilat Peru & Colombia regions, they compete with our VSAT solutions. Examples of such competitors are Telefonica Peru, Empresas Telefonicas de Bogota, Internet Por Colombia and SkyNet.

The U.S. enterprise VSAT market is primarily served by HNS and Spacenet.  In addition, more recently, Spacenet's primary competitors in the Managed Services market are large terrestrial carriers such as AT&T, Verizon, Centurylink and Megapath as well as smaller managed service providers like Cyberra, IRG and iPass.
 
 
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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,
 
   
2011
   
2010
   
2009
 
United States
    46 %     35.8 %     37.1 %
South America and Central America
    30 %     36.2 %     39.1 %
Asia and Asia Pacific
    15 %     15.5 %     15.9 %
Africa
    3 %     7.0 %     4.9 %
Europe
    6 %     5.5 %     3.0 %
Total  
    100.0 %     100 %     100.0 %

Backlog
 
On December 31, 2011, our backlog for equipment sales and revenues from multi-year service contracts for our VSAT products was approximately $ 265 million, up from approximately $232 million at year-end 2010. Backlog does not include revenues from future traffic on our rural networks, future revenues from subscribers, from our consumer 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.

C.           Organizational Structure
 
Significant Subsidiaries
 
Country/State                       
  % ownership
   
of Incorporation
   
         
1.   Spacenet Inc.  
Delaware
  100%
2.   StarBand Communications Inc.  
Delaware
 
100%
3.   Gilat Satellite Networks (Holland) B.V.  
Netherlands
 
100%
4.   Gilat Colombia S.A. E.S.P  
Colombia
 
100%
5.   Gilat to Home Peru S.A  
Peru
 
100%
6.   Gilat do Brazil Ltda.  
Brazil
 
100%
7.   Gilat Satellite Networks (Mexico) S.A. de C.V.  
Mexico
 
100%
8.   Wavestream Corporation  
Delaware
 
100%
9.   Raysat Antenna Systems LLC  
Delaware
 
100%
10. Raysat Antenna Systems Ltd.   Israel   100%
 
D.           Property, Plants and Equipment

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, out of which approximately 222,500 square feet are currently used by us and approximately 157,000 square feet are subleased to third parties.

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.
 
 
45

 

We lease approximately 137,000 square feet of office space in McLean, Virginia. These offices house our personnel and also contain a stand by disaster recovery facility. 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 own approximately 13,347 square feet of research and development and manufacturing facilities in Sofia, Bulgaria, and rent approximately 4,300 square feet in Moldova for research and development activities.  Wavestream currently occupies approximately 32,500 square feet of facilities for office space, research and development and manufacturing in San Dimas, California under a lease which will expire on November 30, 2016.

We also maintain facilities in Chicago, Illinois, Marietta, Georgia and in Brazil, Colombia, Mexico, China, Singapore, San Diego and Peru, along with representative offices in 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.
 
ITEM 4A:
UNRESOLVED STAFF COMMENTS
 
There are no unresolved staff comments.

ITEM 5:
OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.           Operating Results

The following discussion of our results of operations should be read together with our audited consolidated financial statements and the related notes, which appear elsewhere in this annual report.  The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report.

Introduction

We were incorporated in 1987 and began trading on the NASDAQ Stock Market in 1993. We are a leading global provider of broadband satellite communication and networking products and services. We design, produce and market VSAT systems, defense  satcom systems, SSPAs, BUCs and low-profile antennas. Our equipment is used by service providers, system integrators, government and defense organizations, large corporations and enterprises. We also provide connectivity services, including managed network services, Internet access and telephony, to enterprise, government and residential customers in the United States, Peru and Colombia over our own networks which are built using our own equipment. We also provide managed network services in Australia, over a VSAT network owned by Optus.

We have a large installed customer base and have shipped more than one million VSAT units to customers in over 85 countries on six continents since 1989. We have 21 sales and support offices worldwide, six network operations centers and five R&D centers. Our products are primarily sold to communication service providers and operators that use VSATs to serve enterprise, government and residential users. We also provide services directly to end-users in various market segments in the United States and certain countries in Latin America. Commencing in 2010, following the acquisitions of Raysat Antenna Systems, or RAS, and Wavestream, we develop and provide Satcom-on-the-move antenna solutions SSPAs anc BUCs, for defense and commercial broadband communications, radar and imaging.

In 2011 we operated in four complementary, operational and reportable segments:

 
·
Gilat Worldwide, which is comprised of two reportable segments:

 
o
Gilat International, a provider of VSAT-based networks and associated professional services, including turnkey and management services, to telecom operators worldwide. Since our acquisition of RAS, Gilat International is also a provider of low-profile antennas, used for Satcom-On-The-Move antenna solutions.
 
 
46

 
 
 
o
Gilat Peru & Colombia, a provider of telephony, Internet and data services primarily for rural communities in Peru and Colombia under projects that are subsidized by government entities;

 
·
Spacenet Inc., a provider of managed network communications services utilizing satellite wireline and wireless networks and associated technology and serving enterprises, government, small office/home office, or SOHOs, and residential customers in the United States;

 
·
Wavestream, a provider of high power SSPAs, BUCs with field-proven, high performance solutions designed for mobile and fixed SATCOM systems worldwide, primarily in the defense market.

Commencing in 2012, in line with our organizational changes from the beginning of 2012, our business will be managed and reported as three separate business activities and reporting segments, comprised of our newly named Commercial Satcom, Defense Satcom and Services Divisions:  Commercial Satcom provides VSAT networks, satellite communication products  and associated professional services to service providers and operators worldwide, including consumer Ka-band initiatives worldwide. Defense Satcom provides satellite communication products and solutions to defense and homeland security organizations worldwide. Services, which includes Spacenet Inc., provides managed network services for business, government and residential customers  in North America, and Gilat's service businesses in Peru and Colombia, offering rural telephony and Internet access solutions.

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.  The assets and liabilities of these subsidiaries 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 ongoing basis, we evaluate our estimates, mainly related to account receivables, inventories, deferred charges, long-lived assets, intangible and goodwill, revenues, stock based compensation relating to options and contingencies. We base our estimates on historical experience and on various 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 the financial information included in this annual report.
 
 
47

 

Consolidation.  Our consolidated financial statements include the accounts of our company and those of our subsidiaries, in which we have a controlling voting interest, as well as entities consolidated under the variable interest entities or VIE provisions of ASC 810, "Consolidation", or ASC 810. Inter-company balances and transactions have been eliminated upon consolidation.

We apply the provisions of ASC 810, which provides a framework for identifying Variable Interest Entities , or VIEs, and determining when a company should include the assets, liabilities, non-controlling interests and results of activities of a VIE in our consolidated financial statements.

In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either (i) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (ii) has a group of equity owners that is unable to make significant decisions about its activities, (iii) has a group of equity owners that does not have the obligation to absorb losses or the right to receive returns generated by its operations or (iv) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both, and substantially all of the entity’s activities (for example, providing financing or buying assets) either involve or are conducted on behalf of an investor that has disproportionately few voting rights.

ASC 810 requires a VIE to be consolidated by the party with an ownership, contractual or other financial interest in the VIE (a variable interest holder) that has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impacts the VIE’s economic performance; (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could be potentially be significant to the VIE.

A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE's assets, liabilities and non-controlling interests at fair value and subsequently account for the VIE as if it were consolidated based on a majority voting interest. ASC 810 also requires disclosures about VIEs in which the variable interest holder is not required to consolidate but in which it has a significant variable interest.

Most of the activity of Gilat Colombia consists of operating subsidized projects for the government, or the Compartel Projects. The Compartel projects were originally awarded to our Colombian subsidiaries in 1999 and 2002.

As required in the bid documents for the Compartel Projects, we established trusts, or the Trusts, and entered into a governing trust agreement for each project, or collectively the Trust Agreements. The Trusts were established for the purpose of holding the network equipment, processing payments to subcontractors, and holding the funds received through the subsidy from the government until they are released in accordance with the terms of the subsidy and paid to us. The Trusts are a mechanism to allow the government to review amounts to be paid with the subsidy and to verify that such funds are used in accordance with the transaction document of the project and the terms of the subsidy. We generate revenues both from the subsidy, as well as from the use of the network that Gilat Colombia operates.

The Trusts are considered VIEs and we are identified as the primary beneficiary of the Trusts. As such, the Trusts were consolidated in our financial statements since their inception.

Under ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a variable interest entity. As our assessment provides that we have the power to direct the activities of a VIE that most significantly impacts the VIE’s activities (we are responsible for establishing and operating the networks), the obligation to absorb losses of the VIE that could potentially be significant to the VIE and the right to receive benefits from the VIE that could potentially be significant to the VIE economic performance, we therefore concluded that we are the primary beneficiary of the Trusts. As such, the Trusts were consolidated in our financial statements since their inception.
 
 
48

 

As of December 31, 2011 and 2010, the Trusts’ total assets (mainly classified as "Restricted cash held by trustees") and total liabilities (mainly classified as "Short-term advances from customers held by trustees") consolidated within the financial statements of the Company amounted to approximately $1.55 million and $1 million, respectively.

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, hubs, SSPAs and low-profile antennas. 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", 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 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.

In October 2009, the FASB issued Accounting Standards Update, or ASU, No. 2009-13, ‘‘Multiple-Deliverable Revenue Arrangements’’, or ASU 2009-13. The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price.

We adopted this standard as of the beginning of fiscal 2011 on a prospective basis for new and materially modified deals originating after January 1, 2011; the effect of the adoption of the new standard on the financial results of the Company for the year ended December 31, 2011, was immaterial. We are not able to reasonably estimate the effect of adopting this standard on future financial periods as the impact will vary based on the nature and volume of new or materially modified deals in any given period.

For 2011 and future periods, pursuant to the guidance of ASU 2009-13, when a sales arrangement contains multiple elements, such as equipment and services,  we allocate revenues to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence, or VSOE, if available, third party evidence, or TPE,  if VSOE is not available, or estimated selling price, or ESP, if neither VSOE nor TPE is available. In multiple element arrangements, revenues are allocated to each separate unit of accounting for each of the deliverables using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy.

Revenues from products under sales-type-lease contracts are recognized in accordance with ASC 840 "Leases", or ASC 840 (formerly 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 ASC 840.

Deferred revenue represent amounts received by our company when the criteria for revenue recognition as described above are not met and are included in "Other current liabilities" and "Other long term liabilities". In general, when deferred revenue is recognized as revenue, the associated deferred costs are also recognized as cost of sales.
 
 
49

 

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. We account for uncertain tax position in accordance with ASC 740-10, "Income Taxes", or ASC 740-10 , as amended by FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109", or FIN 48. ASC 740-10 clarifies the accounting for income taxes by prescribing the minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. ASC 740-10 also provides guidance on derecognition of tax positions, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition. ASC 740-10 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 our company.

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 allowances for receivables relating to customers that were specifically identified by our management as having difficulties paying their respective receivables. 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 pertaining to these customers. 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 and Long-Lived Assets.  We periodically evaluate our intangible assets and long-lived assets (mainly property and equipment) for potential impairment indicators in accordance with ASC 360, “Property, Plant and Equipment or ASC 360.  Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions, operational performance and prospects 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 future cash flows which derive from 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 employed to assess the recoverability of our long-lived assets include estimates of future short-term and long-term growth rates, useful lives of assets, 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 annual report. In accordance with ASC 360, we assessed whether there has been an impairment of our intangible assets during 2011 due to certain indicators of impairment, mainly the goodwill impairment related to Wavestream.  Based on the assessment described above, as of December 31, 2011 no impairment losses have been identified.  If these estimates or the related assumptions change in the future, we may be required to record impairment charges for our long-lived assets.
 
 
50

 

Future events could cause us to conclude that impairment indicators exist and that additional intangible assets associated with our acquired businesses and our long-lived assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
 
Business Combination. We apply the provisions of ASC 805 "Business Combination” and accordingly, we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquire , liabilities assumed, as well as in-process research and development, based on their estimated fair values. In allocating the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, we determined the required assumptions underlying the valuation work. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts, customer lists, and acquired developed technologies; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, utilizing a market participant approach, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. We were assisted by a third party appraiser in applying the required economic models (such as income approach), in order to estimate the fair value of assets acquired and liabilities assumed in the business combination.
 
Goodwill. Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350 "Intangibles - Goodwill and Others", or ASC 350, goodwill is not amortized, but rather is subject to an annual impairment test. ASC 350 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value is determined using discounted cash flows. Significant estimates used in the fair value methodologies include estimates of future cash flows, future growth rates and the weighted average cost of capital of the reporting units.

In 2011, we identified certain indicators that affected the carrying value of the goodwill and/or other tangible assets of Wavestream.  The continuing pressure on the DoD, budget along with some uncertainties regarding the DoD’s future spending is  reflected in the reduction of Wavestream revenues in 2011 compared to our 2011 forecast and to 2010 revenues.  We performed an analysis of Wavestream’s  implied carrying value in accordance with ASC 350. As a result of the impairment test, we determined that the implied carrying value attributable to Wavestream goodwill should be lower by $17.9 million. This amount was recorded as part of “Impairment of goodwill and restructuring costs” in our 2011 Statement of Operations in the consolidated financial statements included in this annual report on Form 20-F.

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 or contingencies has been assessed and provided in accordance with ASC 740, "Income Taxes", or ASC 740.   ASC 740-10 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.

Liabilities related to legal proceedings, demands and claims are recorded in accordance with  ASC 450, "Contingencies" ("ASC 450"), or ASC 450, which 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 ASC 450, 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.

Accounting for Stock-Based Compensation.   We account for stock based compensation in accordance with ASC 718, "Compensation-Stock Compensation”, or ASC 718, 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 ASC 718 using the modified prospective transition method. We estimate the fair value of stock options granted using the Black-Scholes option pricing model, and the fair value of Restricted Share Units, or RSU, based on the market stock price on the date of grant. Non-cash share-based compensation of $2 million was recorded in 2011. As of December 31, 2011, we had $4.7 million of total unrecognized compensation costs 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 1.5 years.
 
 
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Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
 
Revenues. Revenues for the years ended December 31, 2011 and 2010 for our four reportable segments were as follows:
 
      Year Ended
December 31,
          Year Ended
December 31,
 
      2011     2010     Percentage     2011     2010  
      U.S. dollars in thousands     change     Percentage of revenues  
                                 
Gilat Worldwide
                             
     Gilat International                              
       Equipment     123,656       115,024       7.50 %     36.46 %     49.37 %
       Services     25,492       15,763       61.72 %     7.52 %     6.77 %
        149,148       130,787       14.04 %     43.97 %     56.14 %
                                           
     Gilat Peru & Colombia                                        
      Equipment     5,782       69       8279.71 %     1.70 %     0.03 %
      Services     43,166       35,793       20.60 %     12.73 %     15.36 %
      48,948       35,862       36.49 %     14.43 %     15.39 %
                                           
Spacenet
                                       
 Equipment
    35,607       18,185       95.80 %     10.50 %     7.80 %
 Services
    68,846       61,174       12.54 %     20.30 %     26.26 %
        104,453       79,359       31.62 %     30.79 %     34.06 %
                                           
Wavestream
                                       
 Equipment
    59,223       4,041       1365.55 %     17.46 %     1.73 %
        59,223       4,041       1365.55 %     17.46 %     1.73 %
                                           
Intercompany Adjustments
                                       
 Equipment
    (22,571 )     (17,064 )     32.27 %     (6.65 )%     (7.32 )%
        (22,571 )     (17,064 )     32.27 %     (6.65 )%     (7.32 )%
Total
                                         
 Equipment
    201,697       120,255       67.72 %     59.46 %     51.61 %
 Services
    137,504       112,730       21.98 %     40.54 %     48.39 %
Total
      339,201       232,985       45.59 %     100.00 %     100.00 %

Revenues in 2011 increased by approximately $106 million compared to 2010, representing an increase of 45.6%.

Gilat International revenues increased by approximately $18 million of which $7.4 million of the increase was derived from Europe, mainly related to awards in the Ka-band market there, $11.8 million was derived from Asia and Asia Pacific, and $1 million was derived from Latin America,  offset by a decrease of $6.6 million in Africa. Intercompany sales increased by approximately $5.5 million, mainly attributable to Gilat International sales to Spacenet to support the deployment of gaming sector networks.
 
 
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The increase in 2011 revenues in Peru and Colombia as compared to 2010 was mainly attributable to the extension of our agreements with the Colombian Ministry of Communications for providing telephony and public data access to remote communities throughout Colombia for an additional year in the amount of approximately $21 million compared to the 2010 extension that amounted to approximately $12 million. In addition, the new contract awarded in Peru during 2011, to provide Internet access and telephony services throughout the country's rural regions valued at approximately $14.5 million was partially reflected in revenues in the second half of 2011.
 
Spacenet revenues increased by approximately $25 million, attributable mainly to completion of the rollout of gaming sector networks. In addition, Spacenet continues to focus and expand its Managed Network Services business supported by the April 2011 acquisition of CICAT.

Wavestream revenues in 2011 were $59.2 million compared to $4 million in 2010.  In 2010 Wavestream revenues represented only one month of operations as the acquisition was closed on November 29, 2010.

Revenues in 2011 were derived approximately 59% from equipment and 41% from services. In 2010, our revenues were derived approximately 52% from equipment and 48% from services. The increase in the equipment portion of our revenues in 2011 is mainly attributable to the full year effect of the consolidation of the operations of Wavestream and RAS, which was characterized by a high portion of revenues from equipment, along with a higher portion of equipment revenue generated by Spacenet as part of the deployment gaming sector networks.

Gross profit. The gross profit of our four reportable segments for the years ended December 31, 2011 and 2010 was as follows:

   
Year Ended
   
Year Ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
   
U.S. dollars in thousands
   
Percentage of revenues per segment
 
Gilat Worldwide
                       
Gilat International
                       
 Equipment
    55,678       53,815       45.03 %     46.79 %
 Services
    9,049       2,264       35.50 %     14.36 %
      64,727       56,079       43.40 %     42.88 %
                                 
Gilat Peru & Colombia
                               
 Equipment
    1,670       (17 )     28.88 %     (24.64 %)
 Services
    12,671       8,598       29.35 %     24.02 %
      14,341       8,581       29.30 %     23.93 %
                                 
Spacenet
                               
            Equipment
    8,385       3,725       23.55 %     20.48 %
             Services
    11,167       10,708       16.22 %     17.50 %
      19,552       14,433       18.72 %     18.19 %
                                 
Wavestream
                               
             Equipment
    20,997       653       35.45 %     16.16 %
      20,997       653       35.45 %     16.16 %
                                 
Intercompany Adjustments
    2,010       108       8.91 %     0.63 %
                                 
Total Gross Profit
    121,627       79,854       35.86 %     34.27 %
 
 
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Our gross profit margin increased to approximately 36% in 2011 from 34% in 2010.  Our gross profit margin is affected by the regions in which we operate and the type of transactions we consummate. The improvement in our gross profit margin in 2011 is attributable mainly to the full year consolidation of Wavestream in 2011 compared to one month of operation in 2010, along with the increase in revenues in Peru and Colombia during 2011 compared to 2010, while maintaining a similar level of fixed expenses.
 
        The gross margin increase was partially offset by a higher amortization expense of approximately $7.1 million in 2011 compared to $1.7 million in 2010 which is attributable to the amortization of intangible assets acquired in connection with the acquisitions of Wavestream and RAS.

 Our gross profit is affected year-to-year by the mix between equipment and services, the regions in which we operate, the size of our deals and the timing in which transactions are consummated. As such, we are subject to year-to-year fluctuation in our business profits.

When reported by segments, the results of Spacenet, Peru and Colombia and Wavestream are presented based on intercompany transfer prices. The intercompany adjustments line reflects the intercompany profits that were realized in order to adjust the transfer price to our cost.

Research and development expenses.  Our research and development expenses are incurred by our Gilat International and Wavestream segments. Our research and development expenses for the years ended December 31, 2011 and 2010 were as follows:
 
   
Year Ended
         
Year Ended
 
   
December 31,
         
December 31,
 
   
2011
   
2010
   
Percentage
   
2011
   
2010
 
   
U.S. dollars in thousands
   
change
   
Percentage of revenues per segment
 
                               
Gilat International
                             
Expenses incurred
    27,390       21,638       26.58 %     18.36 %     16.54 %
Less - grants
    3,375       3,249       3.88 %     2.26 %     2.48 %
Total
    24,015       18,389       30.59 %     16.10 %     14.06 %
                                         
Wavestream -
                                       
Expenses incurred
    7,686       556       1,282.37 %     12.98 %     13.76 %
Total, net
    31,701       18,945       67.33 %     15.21 %     14.05 %

Net research and development expenses increased by approximately $12.8 million in 2011 compared to 2010. The increase in research and development expenses is mainly due to the acquisitions of Wavestream and RAS in 2010. In addition, research and development expenses increased as a result of increased spending to support our strategy to develop new products for the defense markets, to the continuing development of Ka-band technology for the consumer markets and to enhance our current product offering for other commercial markets.
 
 
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Selling and marketing expenses. The selling and marketing expenses of our four reportable segments for the years ended December 31, 2011 and 2010 were as follows:
 
   
Year Ended
         
Year Ended
 
   
December 31,
         
December 31,
 
   
2011
   
2010
   
Percentage
   
2011