SecProbe.io

CORRESP
1
filename1.htm

     CORRESP

Carter Ledyard & Milburn LLP

Counselors at Law

November 17, 2005

VIA EDGAR AND HAND
DELIVERY

Mr. Larry Spirgel
Assistant Director
Division of Corporation
Finance
Securities and Exchange Commission
100 F Street N.E.
Washington D.C. 20549

Re:
Gilat Satellite Networks Ltd.

Form 20-F for Fiscal Year Ended December 31, 2004

File No. 0-21218

Dear Mr. Spirgel:

        On
behalf of our client, Gilat Satellite Networks Ltd. (the “Company”), we are
submitting this letter in response to the conference call with Staff of the Securities and
Exchange Commission (the “Commission”), held on Thursday, November 10, with
respect to the Company’s Annual Report on Form 20-F for the fiscal year ended
December 31, 2004.

        The
Company was awarded two public tenders for the provision of basic public telephony and
internet services (the “Compartel Projects”). The bids, which were divided into
a total of seven different regions, awarded the Company a subsidy (the
“Subsidy”) for the installation, operation and maintenance of network
infrastructure (for telephony or internet access, depending on the project and the region)
and for the provision of telecommunication services in rural municipal centers for a
period of six years.

        As
discussed in our call, the Staff is advised there is nothing in the agreements for the
Compartel Projects that specifically allocates any particular portion of the Subsidy to
the creation of the network or otherwise. In addition, no portion of the Subsidy is
specifically allocated to development costs. Rather, despite the operational milestones
pursuant to which money is received and released to the Company, all of the Subsidy is
intended for the overall subsidization of the project, based on the premise that the rural
telephony in Colombia serves underprivileged and needy communities that will not be able
to pay for the services at levels that would justify a private entity such as the Company
to establish and operate a network.

        As
required by the Compartel Projects’ bid documents, the Company established the Trusts
and entered into governing Trust Agreements (one for each project awarded) (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 until they are released in accordance with the terms of the
Subsidy and paid to the Company as described below. The Trusts are a mechanism to allow
the Government to review amounts to be paid with the Subsidy and verify that such funds
are used in accordance with the transaction document for the project and the terms of the
Subsidy. The Company operates the network and generates revenues from the Subsidy (and,
once the network is operational, directly from users of the network).

        Pursuant
to the Trust Agreements, the Subsidy is transferred by the government directly to the
Company, and the Company is obligated to immediately transfer the Subsidy funds to the
Trust. The Subsidy is not equity in the trust that is equity in legal form. The Trust and
the Company can use the Subsidy only for the Compartel Projects.

        In
creating the networks and operating them, the Company is committed to selling equipment to
the Trust and to hiring and paying subcontractors for work they provide relating thereto.
The Trust then pays invoices (whether to the Company or to subcontractors) for the
equipment and services rendered. The assets are booked as the Trust’s fixed assets,
and related depreciation is recognized as expenses in the Trust.

        Release
of the Subsidy from the Trusts as payment to the Company or to the Company’s
subcontractors can only occur as certain operational milestones are reached. Once these
milestones are met, the Trust releases funds based upon payment requests presented by the
Company (either for its own equipment and services or for those of subcontractors). At the
end of the project, the Company assumes the ownership of the assets in the Trust and is
entitled to all remaining amounts in the Trust.

The
Trust Agreements provide that:

1.
The
initial payment of the Subsidy is to be made to the Company. The Company is to
automatically contribute those funds to the Trust (through a direct assignment of the
government funds by the Company to the Trust).

2.
The
Company is the sole beneficiary of the Trust, except upon unilateral termination of the
project, which can only take place under remote circumstances. In that case, if the
Company is responsible for such termination, the assets of the Trust will be transferred
to the government.

3.
The
Company is the Trustor of the Trust.

2

4.
The
Trust makes payments solely according to instructions from the Trustor.

5
A
Trust Committee oversees payments made by the Trust so that they are made in accordance
with the bid guidelines. The Committee is comprised of the following six members:

a.
Two
representatives from the Company;

b.
One
representative from the Government; and

c.
Three
unrelated parties – an Auditor, a delegate from the trust company and an engineer
appointed by the trust company.

The
Company’s representatives are the only members of the committee with voting
rights. The government representative may raise issue with the way in which the funds in
the Trust are being spent, to the extent the expenditures do not contribute to the goals
of the Compartel project. The government representative has never raised such issues,
however, in this remote event, even if they were to raise such issue, this does not affect
beneficial ownership of the funds which remain with the Company.

6.
The
Trustor (the Company) is responsible for the selection of all subcontractors and for the
timely payment of all expenses related to the Compartel Projects. Payments to such
subcontractors are made from the funds in the Trust. If the Trust is unable to pay
expenses for any reason, the Company is directly liable for such payments.

7.
The
Company is responsible for execution of all service agreements necessary for execution of
the Compartel Projects.

8.
The
Company bares all responsibilities relating to payment to third parties, cost of
litigation and fulfillment of the Compartel Projects. Fines, interest, sanctions and
costs, if relevant, will be paid by the Company (and not reduced from funds in the
Trust).

     Paragraph 5(a)
          of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable
          Interest Entities, an interpretation of ARB 51 (“FIN 46(R)”)
          provides that:

o

An entity is a variable interest entity (“VIE”) if its total equity investment
at risk is not sufficient to permit entity to finance its activities without additional
subordinated financial support, and

o

Investments in the Entity are only considered equity if they are reported as equity in
entity’s financial statements.

As discussed above, the Subsidies
that are transferred to the Trusts are not equity in the Trusts that is equity in legal
form. As there are no other equity contributions to the Trusts, the Trusts’ equity
can not be considered sufficient to permit the Trusts to finance their activities without
subordinated financial support (as defined in FIN 46(R). Thus the Trusts are VIEs.

3

        The
Company has determined that the Company is the FIN 46 primary beneficiary of the
Trusts and is therefore required to consolidate the Trusts based on the following

1.
The
Company will absorb the majority (in fact, substantially all) of the Trusts’ expected
loss and return, which results from:

a.
Changes
in the fair value of the equipment held by the Trust (assigned to the Company at the end
of the 6 years term of the contract),

b.
Increases
and/or decreases in its costs related to the fixed price contract for           the
construction, maintenance and operation of the network, which will
          significantly affect the Company’s income from the Compartel Projects and
          the variability of the related cash flows.

The
Company considered the possibility of the failure of the project, which would result in
the absorption of variability by both the Company and the Government, but considered it
remote based on the history of similar projects. In the event of such a failure, the
Government would not receive the benefits (i.e., providing working phone service for its
people) that it bargained for in exchange for its payment of the Subsidy.

2.
If
the Trust is unable to pay for expenses for any reason, the Company is directly liable
for such payments.

3.
All
the funds released from the Trust are released only to the Company or subcontractors of
the Company as instructed by the Company. The Trust’s responsibilities are limited
to ensuring that the resources contributed to the Trust are used in accordance with the
Compartel project agreement.

4.
The
Company is subject to penalties under the agreement governing the Compartel project. If
such penalties would be applied, they would not be taken from the Trust funds but
rather, they would be charged to the Company entity that was awarded the project.

5.
The
Company is the beneficiary of the Trust.

6.
On
top of the government subsidy, the Company also exercises its right to generate revenues
from the use of the Compartel network it operates. Those revenues are being managed and
recognized in the Company’s books, and the collection for those revenues is being
made directly form other third party customers.

        In
summary, the Company is the entity that that will absorb a majority of the entity’s
expected losses if they occur, receive a majority of the entity’s expected residual
returns if they occur, or both, and as such, is the primary beneficiary as described in
FIN 46, and therefore has consolidated the Trusts.

4

        Please
do not hesitate to contact me at (212)238-8605 or Rachel Prishkolnik, Corporate Secretary
and Legal Counsel at (972) 3 929-3020 with any questions or comments you may have.

Very
truly yours,

Steven J. Glusband

SJG:sr

Attachments

cc:
          Ms. Tal Payne, Chief Financial Officer, Gilat Satellite Networks Ltd.

              Rachel Prishkolnik, Corporate Secretary and Legal Counsel, Gilat Satellite Networks Ltd.

5