Salomon Smith Barney Analysis

Gilat Satellite Networks [GILTF] only recently reported its third-quarter results. Its quarterly revenue of $43 million was below expectations. This was the seventh consecutive quarter Gilat’s revenue has fallen. It is now at 1998 levels. Management attributed this shortfall to “restructuring perceptions and timing issues,” adding that new deals accelerated after the company announced its proposed restructuring in November.

Gilat’s operating losses for the quarter came to $66.2 million, including several charges: inventory write-down, one-time expenses related to rStar, a provision for doubtful accounts, and a write-down of intangible assets. Below the operating line, the company had write-downs for asset impairment and losses for Starband and SatLynx, resulting in net losses for the quarter of $108.4 million, or $4.58 per share.

On a more positive note, Gilat announced that it had reached an agreement with its major bank creditors and a majority of its bondholders to restructure its balance sheet. As a result, the company expects to reduce its total debt to $190 million and lower its annual financing to less than $5 million in 2003 and 2004, and to less than $8 million in 2005 and beyond. However, we estimate that common shareholders will be diluted by about 90 percent based on a projected 245 million shares post deal.

We have little visibility on Gilat’s prospects going forward. The company’s rate of signing new deals has picked up recently, but it is not clear to us if this will halt the decline in its revenues. As a result, it is hard to say whether the company has any fundamental equity value. Assuming a multiple of 1.5 times expected 2003 revenues of $200 million, minus net debt of $150 million, we get an equity valuation of about $150 million. If we divide that by 245 million shares outstanding, we end up with a target price for Gilat of less than $1 per share.

Armand Musey is a satellite communications analyst at Salomon Smith Barney (SSB). Part of the information provided herein includes excerpts, abstracts, and other summary material derived from research reports or notes published by Armand Musey as a member of the firm’s Global Equity Research Department. For a copy of the full research reports or notes or to view the research-report disclosure required by the NYSE and NASD rules relating to analyst independence and conflicts of interests, please visit http://www.ssbaccess.com or contact a SSB Financial Consultant. Valuation methodologies and associated risks pertaining to price targets, as well as other important disclosures, are contained in research reports and notes published on or after July 8,2002. Salomon Smith Barney or its affiliates beneficially owns 1% or more of any class of common equity of EchoStar Communications Corp.